The Company When It's Young: Long on expectations and short on experience. Can grow very fast and High Risk.

The young company is full of energy, bright ideas, and hope for the future.  It is long on expectations and short on experience. 

It has the cash that was raised in the offering, so chances are it doesn't have to worry about paying its bills at this point.  It expects to be earning a living before the original cash runs out, but there's no guarantee of that.

In its formative years, a company's survival is far from assured.  A lot of bad things can happen. 

• It may have a great idea for a product but spend all its money before the product is manufactured and shipped to the stores. 
• Or maybe the great idea turns out not to have been so great after all. 
• Or maybe the company gets sued by people who say they had the great idea first, and the company stole it.  If the jury agrees with the plaintiffs, the company could be forced to pay millions of dollars it doesn't have. 
• Or maybe the great idea becomes a great product that fails a government test and can't be sold in this country. 
• Or maybe another company comes along with an even greater product that does the job better, or cheaper, or both.

In industries where the competition is fierce, companies knock each other off all the time.  Electronics is a good example. 

• Some genius in a lab in Singapore invents a better relay switch, and six months later it's on the market, leaving the other manufacturers with obsolete relay switches that nobody wants.

It is easy to see why 1/2 of all new businesses are dissolved within 5 years, and why the most bankruptcies happen in competitive industries.

Because of the variety of calamities that can befall a company in the high-risk juvenile phase of its life, the people who own the shares have to protect their investment by paying close attention to the company's progress. 

• You can't afford to buy any stock and then go to sleep and forget about it, but young companies, especially, must be followed every step of the way. 
• They are often in the precarious position where one false step can put them into bankruptcy and out of business. 
• It's especially important to assess their financial strength - the biggest problem with young companies is that they run out of cash.

When people go on vacation, they tend to take twice as many clothes as they're going to need, and half as much money.  Young companies make the same mistake about money.  They start out with too little.

Now for the good part: 

• Starting from scratch, a young company can grow very fast. 
• It's small and its restless, and it has plenty of room to expand in all directions. 

That's the key reason young companies on the move can outdistance the middle-aged companies that have had their growth spurt and are past their prime.

The Company in Middle Age (2): Midlife crisis of Apple

The company in middle age can have a midlife crisis. 

Whatever it's been doing doesn't seem to be working anymore.  It abandons the old routines and thrashes around looking for a new identity.  This sort of crisis happens all the time.  It happened to Apple.

1980:  In late 1980, just after Apple went public, it came out with a lemon:  the Apple III.  Production was halted while the problems were ironed out, but then it was too late.  Consumers had lost faith in Apple III.  They lost faith in the whole company.

There's nothing more important to a business than its reputation.  A restaurant can be 100 years old and have a wall full of awards, but all it takes is one case of food poisoning or a new chef who botches the orders, and a century's worth of success goes out the window.  So to recover from its Apple III fiasco, Apple had to act fast.  Heads rolled in the front office, where several executives were demoted.

The company developed new software programs, opened offices in Europe, installed hard disks in some of its computers.  On the plus side, Apple reached $1 billion in annual sales in 1982, but on the minus side, it was losing business to IBM, its chief rival.  IBM was cutting into Apple's territory: personal computers.

Instead of concentrating on what it knew best, Apple tried to fight back by cutting in on IBM's territory:  business computers.  It created the Lisa, a snazzy machine that came with a new gadget:  the mouse.  But in spite of the muse, the Lisa didn't sell.  Apple's earnings took a tumble, and so did the stock price - down 50% in a year.

Apple was less than 10 years old, but it was having a full-blown midlife crisis.  Investors were dismayed, and the company's management were feeling the heat.  Employees got the jitters and looked for other jobs.  Mike Markkula, Apple's president, resigned.  John Sculley, former president of Pepsi-Co, was brought in for the rescue attempt.  Sculley was no computer experts, but he knew marketing.  Marketing is what Apple needed.

Apple was split into 2 dividsions, Lisa and Macintosh.  There was spirited rivalry between the two.  The Macintosh had a mouse like the Lisa and was similar in other respects, but it cost much less and was easier to use.  Soon, the company abandoned the Lisa and put all its resources into the Macintosh.  It bought TV ads and made an incredible offer:  Take one home and try it out for twenty-four hours, for free.

The orders poured in and Apple sold 75,000 Macintoshes in 3 months.  The company was back on track with this great new product.  There was still turmoil in the office, and Jobs had a falling out with Sculley.

This is another intersting aspect of corporate democracy:  Once the shares are in public hands, the founder of the company doesn't necessarily get what he wants.

Sculley changed a few things around and solved a few more problems, and the Macintosh ended up doing what the Lisa was supposed to do:  It caught on with the business crowd.  New software made it eary to link one Macintosh to another in a network of computers.  By 1988, more than a million Macintoshes had been sold.

A company's midlife crisis puts investors in a quantdary.  If the stock has already dropped in price, investors have to decide whether

• to sell it and avoid even bigger losses or
• hold on to it and hoe that the company can launch a comeback. 

In hindsight, it's easy to see Apple recovered, but at the time of the crisis, the recoverry was far from assured.

The Company in Middle Age (1): Still growing but not as fast. Occasional Midlife crisis

Companies that manage to reach middle age are more stable than young companies.

They have made a name for themselves and they've learned from their mistakes.  They have a good business going, or they wouldn't have gotten this far.  They've got a proven record of reliability.  Chances are they've got money in the bank and they've developed a good relationship with the bankers, which comes in handy if they need to borrow more.

In other words, they have setled into a comfortable routine.  They're still growing, but not as fast as before.  They have to struggle to stay in shape, just as the rest of us do when we reach middle age.  If they allow themselves to relax too much, leaner and meaner competitors will come along to challenge the. 

A company can have a midlife crisis, the same as a person.  Whatever it's been doing doesn't seem to be working anymore.  It abandons the old routines and thrashes around looking for a new identity.  This sort of crisis happens all the time. It happened to Apple.

A company's midlife crisis puts investors in a quandary.  If the stock has already dropped in price, investors have to decide whether

• to sell it and avoid even bigger losses or
• hold on to it and hope that the company can launch a comeback. 

In hindsight, it's easy to see that Apple recovered, but at the time of the crisis, the recovery was far from assured.

The Company when It's Old (3): Why you might invest in these?

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

There are several reasons you might do this. 

• First, big companies are less risky, in that they generally are in no danger of going out of business.
• Second, they are likely to pay dividend.
• Third, they have valuable assets that might be sold off at a profit.

These corporate codgers have been everywhere and seen it all, and they've picked up all sorts of valuable property along the way.  In fact, studying an old company and delving into its finances can be as exciting as rummaging through the attic of a rich and elderly aunt.  You never know what amazing stuff you'll find stuck in a dark corner.

Whether it's land, buildings, equipment, the stocks and bonds they keep in the bank, or the smaller companies they've acquired along the way, old companies have a substantial "break-up value."  Shareholders act like the relatives of that aged rich aunt, waiting to find out who will get what.

There's always the chance an old company can turn itself around, as Xerox and American Express have been doing in the past couple of years.

On the other hand, when an old company falters or stumbles as badly as these companies did, it may take 20 or 30 years before it can get itself back on track.  Patience is a virtue, but it's not well rewarded when you own stock in a company that's past its prime.

The Company when It's Old (2): Alcoa, GM & IBM

There's a lesson here that may save you some grief in the future.  No matter how powerful it may be today, a company won't stay on top forever.  Being called a "blue-chip" or a "world-class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name.

Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.

International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar.  Johns-Manville, once number one in insulation and building supplies, topped out in 1971. 

The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.

General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years.  Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable.  Sometime in the 1960s, its reflexes began to slow.

The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas.  The attack was aimed directly at Detroit and GM was slow to react.  A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.

It continued to make big cars when it could see that small foreign cars were selling like crazy.  Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories.  This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.

For three decades the largest industrial company in the US has not been largely profitable.  Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you.  People would sooner have believed that Elvis was lip-synching.

Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline.  Since the early 1950s, IBM was a spectacular performer and a great stock to own.  It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle.  The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations.  As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.

The stock was recommended by stockbrokers everywhere as the bluest of the blue chips.  To mutual fund managers, IBM was a "must" investment.  You had to be a maverick not to own IBM.

But the same thing happened to IBM that happened to GM.  Investors were so impressed with its past performance that they did not notice what was going on in the present.  People stopped buying the big mainframe computers that wer the core of IBM;s business.  The mainframe market wasn't growing anymore.  IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product.  IBM's earnings sank, and as you probably can guess by now, so did the stock price.

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

The Company when It's Old (1): Woolworth & US Steel

Companies that are 20, 30, 50 years old have put their best years behind them. 

You can't blame them for getting tired.  They'd done it all and seen it all, and there's hardly a place they can go that they haven't already been.

Take Woolworth.  It's been around for more than 100 years - several generations of Americans grew up shopping at Woolworth's.  At one point, there was a Woolworth's outlet in every city and town in America.  That's when the company ran out of room to grow.

Recently, Woolworth has suffered a couple of unprofitable years.  It can still make a profit, but it will never be the spectacular performer it was when it was younger.  Old companies that were great earners in the past can't be expected to keep up the momentum.  A few of them have - Wrigley's, Coca-Cola, Emerson Electric, and McDonald's come to mind.  But these are exceptions.

US Steel, General Motors, and IBM are 3 prime examples of former champions whose most exciting days are behind them - although IBM and GM are having a rebound.  US Steel was once an incredible hulk, the first billion-dollar company on earth.  Railroads needed steel, cars needed steel, skyscrapers needed steel, and US Steel provided 60% of it.  At the turn of this century, no company dominated its industry the way US Steel dominated steel, and no stock was as popular as US Steel stock. It was the most actively traded issue on Wall Street.

When a magazine wanted to illustrate America's power and glory, it ran a picture of a steel mill, with the fire in the furnaces and the liquid metal poureing like hot lava into the waiting molds.  We are a nation of factories then, and a good deal of our wealth and power came from the mill towns of the East and the Midwest.

The steel business was a fantastic business to be in, and US Steel prospered through both world wars and six different presidents.  The stock hit an all-time high of $108 7/8 in August 1950.

This was the beginning of the electronic age and the end of the industrial age and the glory of steel, and it would ahve been the perfect time for investors to sell their US Steel shares and buy shares in IBM.  But you had to be very farsighted and unsentimental investor to realize this.  After all, US Steel was classed as a blue chip, Wall Street's term of endearment for pretigious companies that are expected to excel forever.  Hardly anyone would have predicted that in 1995, US Steel stock would be selling for less than it sold for in 1959.

To put this decline in perspective, the DJIA was bumping up against the 500 level in 1959, and it's gone up more than 4000 points since.  So while stocks in the Dow have increased in value more than 8 times over, US Steel has gone downhill.  Loyal shareholders have died and gone to heaven waiting for US Steel to reclaim its lost glory.

Extinct Companies: Some die young, some in middle age. Bankruptcies and Takeovers

Companies die every year. 

Some die young.  They try to go too far too fast on borrowed money they can't pay back, and they crash. 

Some die in middle age because their products turn out to be defective, or too old-fashioned, and people stop buying.  Maybe they're in:

• the wrong business, or
• the right business at the wrong time, or
• worst of all, the wrong business at the wrong time.

Big companies can die right along with smaller and younger companies.

American Cotton, Laclede Gas, American Spirits, Baldwin Locomotive, Victor Talking Machine, and WRight Aeronautical were once big enough and important enough to be included in the Dow Jones Industrial Average, but they're gone now, and who remembers them?  The same goes for Studebaker, Nash, and Hudson Motors, Remington Typewriter, and Central Leather.

Takeover

There's one way a company can cease to exist without actually dying.  It can be swallowed up by some other company in a takeover. 


Bankruptcy:  Chapter 11 protection and Chapter 7

Chapter 11:  And often, a company can avoid dying a quick death by seeking protection in a bankruptcy court. Bankruptcy court is the place where companies go when they can't pay their bills, and they need time to work things out.  So they file for Chapter 11, a form of bankruptcy that allows them to stay in business and gradually pay off their debts.  The court appoints a trustee to oversee this effort and make sure everyone involved is treated fairly.

Chapter 7:  If it's a terminal case and the company has no hope of restoring itself to profitability, it may file for Chapter 7.  That's when the doors are closed, the employees sent home, and the desks, lamps and word processors are carted off to be sold.

Often in these bankruptcies, the various groups that have a stake in the company (workers, vendors, suppliers, investors) fight each other over who gets what. 

• These warring factions hire expensive lawyers to argue their cases. 
• The lawyers are well-paid, but rarely do the creditors get back everything they're owed. 

There are no funerals for bankrupt companies, but there can be a lot of sorrow and grief, especially among workers, who lose their jobs and bondholders and stockholders, who lose money on their investments.

Companies are so important to the health and prosperity of the country that it is too bad there isn't a memorial someplace to the ones that have passed away.  Or perhaps the state historic preservation deparments should put up plaques on the sites where these extinct companies once did business.  There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism.