BEWARE KILLER BUGS What do Alan Sugar, Tony Berry, George Davies and the Saatchi brothers have in common--apart from a fair amount of loose change? As the Financial Times pointed out recently, with some acerbity, all are the founders of companies that were once growth wonders and have since 'underperformed the market by at least a third since its peak in 1987'.
The implication is easy come, easy go: that some deadly common factor is at work to explain such falls from grace. But the FTs own choice, heavy reliance fro growth on 'the more adventurous forms of acquisition accounting' won't wash. Had the underlying businesses not underperformed, the fancy accounting would undoubtedly have been safely outgrown.
In any event, the virus can't be an irresistible onslaught on the body corporate's immune system. With few exceptions, all the great companies of today were founded by striplings under 50--usually well under. But not all the Sugar and Saatchi contemporaries have fallen from the sky. Michael Green's Carlton Communications is now valued by the stock market at 2.5 times the Saatchi score, and 4.4 times WPP's. Martin Sorrell's creation, while it still had enough star status to collar Ogilvy & Mather, is scarred by the ill-timed issue of WPP equity that financed the JWT takeover.
In other cases, too, the stars may have digested their huge purchases, but the stock markets haven't. More virulent, deeper-seated strains are at work, however. The first is so familiar a disease of the entrepreneur that a street-wise trader like Sugar should never have succumbed: failure to grow management to match the growth of the business. That puts companies in poor shape to resist the second virus inside every star: what goes up must come down.
The rationale (hardly the mot juste) for bidding up the price of hot growth stocks is the erroneous belief that they must soar for ever. When, inevitably, they don't, disillusion is bound to be doubly, trebly severe. But what ignites this burning of old false hopes? Enter then yet another virus, the bridge-too-far temptation.
This isn't, as it happens, a sickness confined to companies founded by business infants. The egregious drive by Tony Berry at Blue Arrow was fed by the excessive ambitions and careless raptures of the corpocrats in National Westminster's empire -- one which had expanded far move unwisely than Berry's. But the essence of high-flying entrepreneurs must be to aim for the top, which naturally increases the chances of rashness. The risk is compounded by the workings of the fourth attacker: hubris, the pride that goeth before a fall.
The victims are super-successful, possibly super-rich, lionised by the Press and feted by the City, dominant within the companies they have taken from nothing to stardom, or from dulness into light -- as Davies took the also-ran J. Hepworth into the wonders of Next. It's no surprise if the business superstar becomes far more aware of his own wonders than his limitations.
The first such limit, mentioned in this column in the context of Compaq, is that sustaining super-growth, after a certain point, becomes mathematically impossible. Double earnings every two years after attaining your first million and you might well keep up the pace for eight years to the 16 [pound sterling] million level. But the odds mounts increasingly heavily against topping 1 [pound sterling] billion by year 22.
At some time the growth rate is thus sure to droop, and with it the price-earnings ratio, and with that the share price and the superstar's reputation. …