For Jim Balsillie, this has been a bitter year. Research In Motion’s share price has been sawed into bits; he was knocked off Forbes’s billionaires ranking; some shareholders have called for him to give up a portion of his power to new management; he’s been forced into the biggest reduction in RIM’s workforce in its history, some 2,000 people, after a series of profit warnings; the PlayBook tablet looks like an expensive flop. To add insult, the National Hockey League finally added a seventh Canadian team this fall—and he had nothing to do with it.
Some Balsillie-haters draw a link between the first set of woes and the last one. RIM’s co-CEO, they argue, lost his focus when he spent three years trying to buy and move foundering U.S. hockey teams. While Steve Jobs and the Apple crew were polishing their plans for the iPhone in 2006 and 2007, Balsillie was flitting between Pittsburgh and Nashville in his futile quest to Make It Seven. If only he’d been paying better attention, RIM wouldn’t be in these straits. That’s the theory, anyway, and it’s an entertaining one.
But it’s rubbish. Sure, the RIM boys messed up. They allowed competitors (not just Apple, but Google, Samsung and HTC) to make products that surpass the BlackBerry in cool factor. The consequences of that mistake—declining market share, weak earnings and legions of discontented investors—are humbling, but they merely place RIM in a not-very-exclusive club.
Techland is full of wrecks right now. In fact, when it comes to value destruction, Balsillie & Co. look like amateurs. RIM’s share price was down about 40% over the five years ended Sept. 30. Nokia shares declined by 71% over the same period, and it will likely seek shelter in a larger company (just as ailing Motorola Mobility sold out to Google this year).
Who might buy Nokia? Probably Microsoft, whose annualized five-year return to shareholders, all dividends included, is 0.09%. Point-zero-nine. No wonder gazillionaire hedge fund manager David Einhorn and other investors are calling for Microsoft CEO Steve Ballmer’s head. But just think how much worse Microsoft’s performance would have been had Yahoo’s board not been so stupid as to turn down Ballmer’s $45-billion (U.S.) takeover bid in 2008.
Yahoo, at press time, was worth about $20 billion (U.S.) and the subject of new takeover rumours. It can’t blame its troubles on the Apple monster. Neither can Dell Computer. Then there’s Hewlett-Packard, now on its fourth CEO since the tech crash a decade ago—one Meg Whitman, who presided over amazing growth at eBay before resigning in 2008. EBay, too, has stalled. Total annualized return to shareholders over the past five years: 0.78%.
Why are so many big tech firms such poor investments? Several years ago, Jeremy Siegel, the Wharton finance professor who wrote Stocks for the Long Run, published a long-term study of the Standard & Poor’s 500 Index of U.S. stocks. Siegel went back to 1957, the year the index was established, and tracked the returns for each company, including all spinoffs, mergers and bankruptcies. The best investments? Consumer products makers like Philip Morris, Coca-Cola, H.J. Heinz and Wrigley, and big-name health care or drug companies. No technology companies cracked the top 20.
Siegel concluded that the biggest returns come from buying the shares of good companies at reasonable prices, and from dividends. Fast-growing technology firms miss on both counts. They usually trade at high price multiples and rarely pay dividends, even when they can afford it. The money earned from advances in technology, he said, is made primarily by “innovators and founders, the venture capitalists who fund the projects, the investment bankers who sell shares, and ultimately the consumer, who buys better products at lower prices.” Investors who buy in later don’t benefit as much. Siegel called this phenomenon the “growth trap.”
Add to that the nature of technological innovation itself, which is often quick, disruptive and surprising. This process causes the most upheaval in long-standing, lower-tech businesses—think of what the digital camera did to Kodak. But it also happens to relative newcomers. Two guys from Stanford University invented Yahoo in 1994 as a way to organize the Internet. The company took off, then—boom!—along came two other guys from Stanford with something called Google. That was in 1998. The must-own gadget at the time was the PalmPilot. Whatever happened to Palm? Oh, yeah, it was careening toward bankruptcy—until it was bought by HP.
RIM’s problems are nothing like Palm’s. They’re nothing like Nortel’s, either. RIM is just another tech company that made something unique, amazing and profitable, then discovered that others could emulate it and improve on it. So, pin it all on Jim Balsillie and his hockey obsession if you want. But investors who’ve lost a bundle on RIM should mostly blame themselves, for believing that a great thing could last forever.
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