8. Boston Scientific
Boston Scientific was one of the leading medical device companies in the world with a huge market share in the “less invasive medical device market.” It was also highly profitable. The company posted earnings of $1.6 billion on revenue of $5.6 billion in 2005.
In early 2006, the Boston Scientific board and executives implemented a strategy. If it bought another company within its industry, it would increase its size and margins tremendously. Boston Scientific paid $27.2 billion in cash and stock for Guidant, outbidding Johnson & Johnson. The buyout increased the Boston Scientific debt eight-fold to $6 billion. To compound the problems with the buyout, Guidant products began to have quality-related problems, which made the acquisition even more troublesome. Boston Scientific also hit some bumps as government studies questioned the the effectiveness of its own products. Guidant became a tremendous burden less than two years after the transaction. As Morningstar pointed out at the time, “Lingering quality problems and more product recalls from the acquisition of Guidant could amount to more bumpiness through 2008.”
From 2006 to 2008, Boston Scientific posted total losses of $4.5 billion. The combined company also showed no growth in revenue or meaningful expense savings. Boston Scientific has taken a large, successful business and in a bid to become the single dominant corporation in the medical device industry it ruined its own balance sheet and bought a firm with significant product problems.
Boston Scientific shares were above $25 before the Guidant deal. They now change hands for well under $7.
9. Abercrombie & Fitch
The specialty retailer did a poor job of judging its market beginning in early 2009. Its clothes were aimed at older teens and college aged customers. Abercrombie & Fitch kept margins high because it had built a powerful brand which allowed it to charge premium prices for its products. Although it had competition, Abercrombie believed its brand could overcome the need to ease prices when same-store sales began to drop. The plunge was unprecedented.
Same-store sales dropped nearly 30% in 2008 and in 2009 and have only just begun to recover. Abercrombie & Fitch’s stock traded between $60 and $80 from 2005 to the summer of 2008. At that point, it became clear to Wall St. that consumers may have viewed the retailer as a merchant of premium clothing, but that the teen buyer was not willing to pay a premium price for similar products available elsewhere. And lower priced retailers had begun to copy Abercrombie styles and marketing practices. Shares fell to $15 in late 2008.
Abercrombie is a clear example of a company which misread the willingness of its customer to stay with the brand when the brand became too expensive.
10. Office Depot
There are three major companies in the retail office supply business: Office Depot, Office Max, and Staples. Over the last five years, the share price of Staples has been relatively flat. The share price of Office Max is down about 35%. Office Depot’s stock is down over 80%.
Office Depot never took advantage of its brand or retail experience to develop a beachhead overseas. In contrast, almost a quarter of Staple’s sales are from outside the US. This failure cost Office Depot dearly.
The margins at all three of the office supply retailers were pressed by the recession. More importantly, big-box retailers like Sam’s Club and Costco moved into office supplies and used their broad purchasing power to offer low prices. Office Depot could not turn to overseas operations which have helped a number of companies like Walmart in recent years, to offset a slowdown in its home market.
By deciding that the US market was the only one that really mattered, Office Depot almost guaranteed that its growth rate would turn to a sales contraction.
Douglas A. McIntyre