CEO Daily: Tuesday, January 26
Regular readers of CEO Daily know I’m no fan of the Dow-DuPont merge-then-break-into-three-companies plan, because it will result in less research and development and represents a shrinking of American corporate ambition. While in Davos, I spent some time with Dow CEO Andrew Liveris, architect of the merger, who made a vigorous counter-argument. Liveris says the materials company that emerges will not see any reduction in R&D spend, and the new biology company will see only a small reduction. For the most part, he says, cuts will come from eliminating duplicative work.
But it’s also clear that if Liveris ran the world – absent pressure from impatient investors – he’d probably keep the two companies together. He acknowledges there is something lost from the ability to explore science at the intersection of disciplines – a biology-based polymer, for example. He calls that a “moon shot” – one that could take a decade to pay off – and says today’s capital markets will no longer tolerate such long-term projects. “We are all living short-cycles,” he says. “The fate of the publicly-owned, diversified company may well be doomed.”
There’s plenty of evidence to back that up. A recent study from BCG found a seven percent decline among S&P 500 companies in what it called “exploration” – or investment in long-term growth options. The largest 125 companies saw an even steeper decline of ten percent. The study concludes that the stock market rally of the last decade was fueled by current earnings, share buy backs, and dividends, rather than creation of long-term value.
The striking exceptions to the trend, of course, are found on the West Coast, where Elon Musk and Jeff Bezos are quite literally pursuing moon shots (read the latest on their space race here), and where Alphabet is assembling a portfolio of companies chasing decade-long challenges. But while corporate commitment to the future may be thriving in a few choice tech hot spots, it is shrinking elsewhere.
More news below.
• Sprint cuts at least 2,500 jobs
The fourth-largest U.S. wireless carrier is cutting jobs across six customer care centers and its Kansas headquarters as part of a plan to slash $2.5 billion in costs. The company, which had a total workforce of 33,000 employees at the start of the year, had been looking at areas such as labor costs and administrative expenses to reduce costs. There had been worries that Sprint was burning through cash too quickly as it sought to acquire users and boost its network. Reuters
• China stocks plunge to 13-month low
China's stocks tumbled sharply on Tuesday amid worries that capital outflows will accelerate as the economy slows, with all industry groups slumping. Perhaps more worrisome, some of the nation's most accurate forecasters say the stock index may not bottom until it falls to the 2,500 level – it dropped 6.4% to 2,749.79 at the close. Data showed outflows hit an estimated $1 trillion last year and investors are also worried about a possible liquidity squeeze even as the central bank floods the financial system with cash before the upcoming Chinese new year holiday. Bloomberg
• America Apparel founder loses bid
A bankruptcy-court judge approved the Chapter 11 exit plan for retailer American Apparel, a move that hands over the company to its bondholders and ends former Chief Executive Dov Charney's bid to regain control of the company he founded. The plan will swap $230 million in debt for equity with bondholders – in the process wiping out Charney's stake. The retailer, which was stung by a string of annual losses, is expected to exit bankruptcy shortly after the confirmation of the plan. Wall Street Journal (subscription required)
• Musk: Cheap oil will hurt electric car sales
It isn't exactly a surprise that customers would feel less of an incentive to buy pricy electric vehicles at a time when oil prices are so low. Elon Musk, CEO of Tesla, concedes this fact and expects the suffering will continue, saying it "just makes economic sense." Musk did tell CNN in an interview on Monday that Tesla's luxury vehicles would better withstand the effect of cheap oil prices than its lower-prices rivals. He further asserted models that come in gas or electric will face the biggest challenges because consumers wouldn't have a compelling reason to buy the electric version. Fortune
• Staples lays off hundreds of employees
The office-supplies retailer reported laid off hundreds of corporate employees, Fortune reports, citing multiple sources familiar with the situation. A spokesman declined to confirm or deny the layoffs, instead pointing to a press release that announced various leadership changes and signaling Staples was "streamlining its structure." Staples has been in the news lately fighting to win regulatory approval to buy rival Office Depot, a deal the Federal Trade Commission opposes. Fortune
Around the Water Cooler
• Amazon, Netflix are top Sundance buyers
Amazon and Netflix – two big behemoths in the world of streaming services – have made a big splash at the 2016 Sundance Film Festival, scooping up seven films in total and hunting for more. Most traditional distributors haven't yet made a purchase. There are a few reasons why this trend has emerged today. Netflix is focusing on building a global, unique catalog, while Amazon is aiming to make inroads with filmmakers. And filmmakers want to get their work in front of a wide audience, especially as art-house theaters struggle to win over the masses. New York Times (subscription required)
• Behind the McDonald's turnaround
On Monday, much of the media attention focused on the success of McDonald's move to sell an all-day breakfast, which helped the restaurant chain report its best quarter in nearly four years as it comes off two years of declines. But CEO Steve Easterbrook stressed that wasn't all, saying breakfast was the "headline grabber" but a streamlined menu and investments in food quality were also paying off. We don’t want it to be a single initiative turnaround,” he said. The stock hit a record high on Monday, so investors liked what they heard. Fortune
• Berkshire's (almost) bear market blues
Warren Buffett's Berkshire Hathaway generally commands pretty impressive bragging rights. It is legendary for outperforming the S&P 500 but is facing some woes in the most recent downturn. The stock is trading nearly 18.5% below its high in December 2014, dangerously close to the bear market threshold that is generally defined as being down 20% from its peak. The woes come after Berkshire Hathaway shares dropped more than 12% in 2015, their worst annual performance since 2008. Fortune