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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (49176)	6/27/1998 9:52:00 AM
From: Geoff Nunn	Read Replies (2) \| Respond to of 176387

Hi Chuz, Here could be an rational explanation for fighting for market share in which profit maximization is not the objective. As a corporation grows larger, it's management gains job security. Why? Because it is more difficult for outsiders to mount a hostile takeover against a large corporation than a small one. If you accept that premise, then it follows that CPQ management would benefit from market share growth whether it is profitable or not. As a rule when a corporation grows, its management becomes more entrenched. The same thing can also be said for CPQ's acquisition of DEC. Don't forget, BTW, the stock market did not like that merger. The price of CPQ shares fell sharply on the day the news came out. It is also worth noting what M. Dell said when he was asked to comment on the merger. He said he expected the merger would lead to higher costs for CPQ. He also said that to do well in this business you need to keep your costs low. MD didn't think the merger would benefit CPQ. (He saw an opportunity in it for Dell!) Regarding your suggestion on how to reward managers: If management is paid on a percentage of total profits rather than a formula based on earnings per share, that means that they look fovorably on any acquistion where there is positive earnings from the acquired company. Sorry, but I'm not convinved it would work. I can see it as an invitation for firms to engage in accounting legerdemain. Let me suggest an alternative. Why not reward them based on the performance of their stock? Presumably you could have a formula that would consider such things as how well the stock performs relative to those in the same industry, relative to the overall stock market, the stock's beta, and so on. Actually, no formula - yours or mine - will work if the firm has weak stockholder control. It's lack of stockholder control, after all, that is the fundamental problem. When stockholders control management in principle will be kept on a short tether. Shareholders have both the means and the incentive to elect members to the BOD who will reflect their interests. If on the other hand you have management control, then no formulistic approach is likely to work IMO. Management can be expected to exploit its autonomy, including naming its friends to the Board. Here is a particularly egregious example of management control. During the mid-eighties Sir James Goldsmith accumulated shares in Goodyear, and made a tender offer for the remaining shares at a nice premium to market. What did Goodyear's management do? It didn't fight the offer by debating it on its merits. Instead it went to the Ohio legislature and induced it to enact a law making it more difficult for large corporations to be taken over. According to Goldsmith, Goodyear lawyers actually drafted the law that was eventually enacted! What say did Goodyear shareholders have to say about all this? Answer: none - they weren't <even given a chance to vote on the tender offer. Goodyear ultimately ended up agreeing to buy Goldsmith's shares, at a premium to his cost, and he entered into an agreement with them not to pursue matters further. (and not to buy any more Goodyear shares!). Geoff