Thorny business twists confront us as the new year opens. Healthcare scrambles to save affordability. Volkswagen struggles to restore its image. The Myth Buster will deal with these issues. This first entry, filed under “A Day Late and a Dollar Short” looks at two glaring instances of companies that move slowly in environments that call for quick wits and swift action.
Long-term investors remember miserable times, as Airbus did battle with delays and doubtful quality. Then, Airbus surged forward (pardon the pun) rivaling its older American competitor Boeing. But, the last two years reveal a sharp split between Airbus (EADSY) and Boeing (BA). Despite modest military spending, the mother of the jumbo jet has moved ahead dramatically. Boeing’s market cap exceeds $98 billion (mid-December, 2015), compared to Airbus’s $50 billion. Airbus reports a total order backlog of 6,837 planes as of November, 30. Boeing stands at 5,648. The 1,189 difference is significant, but it actually only reveals the tip of the iceberg.
Three issues spell serious trouble for Airbus. First, its lag in delivering planes on time irritates customers. Their predicament offers a good test for the myth. The A320 family, one of the world’s most popular, has racked up 12,000 total orders. Smart investors will note that Airbus is now manufacturing in Alabama, an open-shop state. The world was their apple (no reference to the company). Underneath the stir of fat contracts and new models, some deals stalled and some models got into trouble, such as the A380 superjumbo. Its size is out of step with the preferences of most airlines. Last summer, Emirates airlines cancelled an order for 70 A350s. The A-350 also dragged its launch date. Even if Airbus had delivered to Emirates in 2014 or early 2015, they would have enjoyed a windfall.
The sour global economy chops off bull-market decisions: the second reason comes into play. The euro zone faces a stubborn economic malaise. These developments push Airbus to depend more and more on customers outside Europe and the US. The slowdown of the BRICS (Brazil, Russia, India, China and South Africa), which led to Goldman Sachs (GS) shutting down its separate BRIC fund, symbolizes the economic stagnation outside of the major economic centers. Airbus will slip further, and Airbus has plenty of competition in these markets. After cancelling the A-350 order, Emirates airlines decided to purchase 150 Boeing 777Xs.
Additional forces will widen the gap between the airplane manufacturing giants. Smart investors will note that the European airline industry is going through a consolidation, much like the industry in the US. Lufthansa and other majors are eating up older, smaller airlines. This means fewer airline companies, more routes for the survivors and many older, less expensive airplanes (because part of the cost has already been paid) added to the asset base of the big carriers. These older planes will make the airline companies more profitable and reduce the need to purchase new planes. So, Airbus has been hit with three body blows: its sizeable backlog, sluggish economies outside the US and Europe and airline consolidation in Europe.
Yahoo! Makes a Comeback?
The second example is more obvious than the Federal Reserve interest rate rise and nearly amounts to piling on. Recently, Yahoo! (YHOO) announced plans to move aggressively in the mobile arena. Immediately, financial discussions opened – where is the stock going, who will lend them money, who might buy Yahoo! and what about its Alibaba (BABA) stock? Let’s consider the strategic issues. There’s no secret that Yahoo! has shrunk to a withering vine next to the larger, cash-laden tech giants. It no longer competes with Google (GOOG), which seized advertising revenue and acquired many companies. Had Yahoo! made the announcement five years ago, it might have carried weight.
Three things are wrong with this announcement. First, mobile revenue is no longer growing exponentially. The smartphone market finds itself on the downside of a large bubble. The smartphone giants have already branched out beyond handheld devices, using revenue generated from selling smart phones and related advertizing to move into new areas of technology. As discussed in a previous Myth Buster entry, Microsoft (MSFT) is moving cautiously into the mobile arena. So, tiny Yahoo! would have to battle Google, Facebook (FB), Amazon (AMZN) and Microsoft at the same time.
Companies like Yahoo! tend to look backwards. They seek partners to compete with giants. Investors love to hear about a company that once shone trying to get back into the game. Could Blockbuster make a comeback? Anyone for MySpace going toe-to-toe with Facebook? How about Chrysler? (All of Cerberus’s cash could not propel Chrysler.) Despite high hopes, things never really work out. But the planning goes on. Maybe a phone company (T-Mobile (TMUS)?) could help Yahoo? A small social media company might partner with Yahoo! to bite into Facebook’s prowess? How about jumping into online shopping? Note that they have planned to sell their hefty Alibaba stake. And so the arguments continue.
The giants – Facebook, Amazon and Google – will continue to expand and will battle viciously against new entrants. As a single example, according to DMR, YouTube uploads 300 hours of new video every minute. Could Yahoo! really compete?
So far – only two examples – this myth is showing itself to be a good yardstick for success. An underlying aspect of the myth is that strategic thinking is more powerful than marketing or finance. Had Airbus only seen conditions worsening, they might have ramped up their efforts to catch up to Boeing earlier. Lowly Yahoo! might have partnered with a Google competitor to restore its lost prowess much earlier. Next month, we will look at more examples of A Day Late and a Dollar Short at work.
**********************Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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