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

To: Chuzzlewit who wrote (49193)	6/27/1998 10:22:00 PM
From: Geoff Nunn	Read Replies (2) \| Respond to of 176387

Chuz, Your point is well taken about the perversity of letting management rewards be dependent on total profit when two firms are merged. Sorry I misread you earlier. I left San Jose by car late Thurs. and have been driving long hours. When I read that post I think my eyes had glazed over. Returning to the issue of CPQ, I think we need more facts. What I would like to know is, who controls this company? We know who manages it, but who controls it? Is it controlled by its owners -the shareholders, or is it controlled by its managers? Is shareholder ownership concentrated (large block ownership, e.g., Dell) or is it fragmented? If shareholder ownership is concentrated, that bodes ill for my hypothesis that CPQ is management controlled. Also, how much stock do the top managers own, and how much do the directors own? Are the directors genuine outsiders, or are they cosy with management? Unfortunately, some of this info is hard to come by unless you follow the company closely, and have access to proxy statements and annual reports. I believe the answers to these questions would help shed light on CPQ's growth strategy. In connection with DEC, even the optimists must concede the merger is a big-time roll of the dice. But the real question is, is DEC a calculated risk with a favorable risk/return tradeoff, and therefore in the interests of shareholders? Or is CPQ merely gambling large stakes with shareholder funds, with the only likely payoff being that managers will receive greater immunity from takeover. The possibility that CPQ's management is interested in making the company too big for takeover, in order to obtain for itself lifetime job tenure, cannot be ruled out. Geoff El Paso TX P.S. Regarding the heat, it's quite a change from San Jose, where Feb-Mar seem to extend into June. Last week, from what I heard, some residents were using their furnaces and wearing sweaters. P.S. You made a reference to the fact that GAAP accounting differs from accounting used for tax purposes. Please explain why the difference exists. Does it bother you that firms keep "two sets of books"? It's my impression that accounting required for tax purposes may better depict actual cash flow. Is this true?

To: Chuzzlewit who wrote (49193)	6/29/1998 8:30:00 PM
From: Geoff Nunn	Read Replies (2) \| Respond to of 176387

Chuz, Let's assume CPQ has embarked on a program of sales maximization. This assumption is only for purposes of discussion (although I happen to believe it probably is true given CPQ's 37% increase in worldwide shipments last yr). Anyway, it is my contention that this would be bad for shareholders but good for CPQ management. It would be bad for shareholders because sales maximization squanders valuable resources. I suspect this indeed is what happened at CPQ. In order to boost sales CPQ had to build additional plants. How does CPQ's rate of return on these plants compare to CPQ's cost of capital? Given the precipitous decline in CPQ's profits since these plants have come on stream, I think we know the answer. From every indication, these plants are not profitable and may never be profitable. Meanwhile, management has gained. When the new plants were built, some amount of equity financing was very likely employed. The issuance of new shares of stock would benefit management because of dilution of the existing shareholder base. As a result, the largest shareholders, who previously may have owned enough stock to control the corporation, would find their voting strength weakened, and would no longer so easily be able to best management on crucial issues such as election of directors. CPQ's management would gain because there would be greater diffusion in the ownership of CPQ shares. Let's keep in mind several things: 1. If you hold shares in a large corporation, it is to your benefit that ownership of the firm's stock be concentrated (large blocks exist) rather than diffused. If someone owns a large block, it is in his interest to monitor the firm, to vote for directors who will maintain an arm's length relationship with mgt, and who will continually press the goal of profit maximization. The burden of imposing the will of the stockholders on management falls on the shoulders of the largest shareholders. Smaller shareholders haven't the incentive to perform this monitoring function. When the largest shareholders do their job right (acting as a watchdog) all shareholders will benefit. If there are no dominant shareholders, what is to prevent management from spending shareholder funds foolishly, or lavishly on itself, etc? 2. As any corporation grows, it is only natural for ownership of the shares to become more diffused. Consequently, you have weaker and weaker stockholder control until eventually management wrests control by default. Management becomes autonomous, and this is the worst possible outcome. Take, for example, ATT. At the time of the divesture of the Bells, ATT had more shareholders than any other U.S. Corp. None of them owned even 1% of the stock. I'm not sure the situation is any different today. ATT has 1.6b shares. If the stock is priced at $58, that's a market cap of $92.8b, and 1% is $928m. Does anyone own $928m ATT? ATT has all the signs of a pure management controlled company. It exhibits many of the pathologies you would expect from one. BTW, that was quite a number ATT management did on ATT shareholders last week, don't you think? ATT shares have fallen 10.7% since the merger with TCI was announced last week, according to the WSJ. That means about $11b has been taken out of ATT's market cap. ATT management could have gone out and blown up some office buildings and not inflicted that much damage! Yet, despite this disaster, USA Today has a picture of a smiling M. Armstrong, the ATT CEO, saying he has no 'buyer's remorse.' You know what, he may be right. He was only recently placed in the top job, maybe he doesn't own any stock yet. Anyone who remembers the ATT purchase of NCR may see the TCI deal as deji vu. When ATT announced the NCR purchase, ATT's share price similarly fell sharply. We all know how that turned out. ATT eventually took a multibillion $$ writeoff and divested (perhaps in order to quiet members of the financial press who kept raising embarrassing questions). 3. An extreme example of management control is Occidental Pet. back in the days when the late Armand Hammer was CEO. Hammer apparently never did own much OXY stock but he ran the company like it belonged to him. He was a master of controlling and manipulating the proxy process. Anyway, he built a $100m art museum using corporate funds, and he named it after himself! When he was in his prime he would have made a good fit for ATT. <gg> Geoff