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At the Money: Learning Lifecycles of Companies · Masters in Business

• 0:02
  Speaker 1: Deliver them live, the.
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  Speaker 2: Magnificent Seven, the nifty to fifty fang stocks. These describe
• 0:24
  Speaker 2: those must own, set and forget companies that absolutely have
• 0:29
  Speaker 2: to be in your portfolio. If you want to keep up,
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  Speaker 2: buy them, own them, put them away forever, and you're
• 0:37
  Speaker 2: set for life. Or are you. The list of once
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  Speaker 2: great companies that dominated their ears is Long, Sears, Woolworth,
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  Speaker 2: AT and T, General Motors, WorldCom, Remember Market, Darling, General Electric.
• 0:52
  Speaker 2: It dominated the nineteen nineties. It's now a fraction of
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  Speaker 2: its former glory. These stocks are not one offs. They're
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  Speaker 2: the normal fate of all companies. I'm Barry Ridoltson on
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  Speaker 2: today's edition of At the Money. We're going to explain
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  Speaker 2: what you need to understand. All companies go through a
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  Speaker 2: normal life cycle. To help us unpack all of this
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  Speaker 2: and what it means for your portfolio, let's bring in
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  Speaker 2: Professor Aswath Damaduran of NYU Stern School of Business. He
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  Speaker 2: has written numerous books on valuation and finance. His newest
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  Speaker 2: book is out this month, The Corporate life Cycle, Business,
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  Speaker 2: Investment and Management Implications. So Professor, let's start with your
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  Speaker 2: basic premise. Tell us about the concept of corporate life cycles,
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  Speaker 2: and how they're similar to human life cycles and go
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  Speaker 2: through specific stages of growth and decline.
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  Speaker 3: I mean, let's start with the similarities. I mean, aging
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  Speaker 3: brings its benefits and its costs. The benefits of aging
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  Speaker 3: is I now can get the senior discount at Denny's
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  Speaker 3: on the now, so that's a minor benefit. But I
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  Speaker 3: also going to bring the benefit of more financial security.
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  Speaker 3: You're not responding. I mean, you don't have the responsibilities
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  Speaker 3: you'd had when you're younger. But it does come with constraints.
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  Speaker 3: I can't jump out of bed anymore. So aging comes
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  Speaker 3: with pluses and minuses. And when I think about businesses,
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  Speaker 3: I think about it in the same way. A very
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  Speaker 3: young a startup is like a baby needs constant care
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  Speaker 3: and attention. In capital young company is like a toddler
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  Speaker 3: a very young company. You age, you become a corporate teenager,
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  Speaker 3: which means you have lots of potential, but you put
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  Speaker 3: it at risk every day, and then you move through
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  Speaker 3: the cycle, just like a human being does. And just
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  Speaker 3: like human beings, companies fight aging. They want to be
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  Speaker 3: young again. And you know what, there's an ecosystem out
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  Speaker 3: there that is designed to tell companies that can be
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  Speaker 3: young again. Consultants bankers selling them products saying you can
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  Speaker 3: be young again. I think more money is wasted by
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  Speaker 3: companies not acting their age than any other single action
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  Speaker 3: that companies take. And that's at the core of how
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  Speaker 3: I think about corporate life cycles.
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  Speaker 1: You have an age at that.
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  Speaker 2: Age, Huh, that's really fascinating. I love the five specific
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  Speaker 2: stages of that corporate life cycle. You describe startup growth,
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  Speaker 2: mature growth, mature, decline, and distress. Tell us a little
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  Speaker 2: bit about the distinct features of each of those stages.
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  Speaker 3: The challenge you face when you're a young company is survival.
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  Speaker 3: I mean two thirds of startups don't make it to
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  Speaker 3: year two. Forget about a year, five, year ten. So
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  Speaker 3: as a startup, you don't have a business yet. You've
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  Speaker 3: got a great idea, and most of these great ideas
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  Speaker 3: is crash and burned.
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  Speaker 1: They never make it to the business stage.
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  Speaker 3: So that stage you need somebody as an idea person
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  Speaker 3: who can come up with this great idea, convince employees,
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  Speaker 3: convince consumers that the idea can be converted to a product.
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  Speaker 3: It's all about story. You're telling a story. The second stage,
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  Speaker 3: you're building a business. Very different skill set right supply Chaine.
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  Speaker 3: You've got to manufacture your product. You've got to get
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  Speaker 3: it out there. Third stage, you're now an established business model,
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  Speaker 3: asking can I scale this up? Remember, most companies can't
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  Speaker 3: scale up. They hit a ceiling and then they stop.
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  Speaker 3: Some companies are special. They're able to keep growing even
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  Speaker 3: as they get bigger. You mentioned the fang Am the
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  Speaker 3: Mag seven, and if you look at what they share
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  Speaker 3: in common is they were able to grow even as
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  Speaker 3: they got bigger. That's what made them special. And then
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  Speaker 3: you become middle aged, a mature company. You're playing defense.
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  Speaker 3: Why because everybody's coming after your market. You could argue
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  Speaker 3: that even among the Mag seven, Apple is playing more
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  Speaker 3: defense and offense. They have the smartphone. It's at seventy
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  Speaker 3: five percent of their value. They've got to protect that
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  Speaker 3: smartphone business. And then you're going to decline. And companies
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  Speaker 3: don't like this. Managers don't like it.
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  Speaker 1: Decline.
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  Speaker 3: You're just managing your business as it gets smaller.
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  Speaker 1: It's not your fault.
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  Speaker 3: It's not because you're a bad manager, but because your
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  Speaker 3: business has started shrinking. So at each stage, the skill
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  Speaker 3: sets you need, the mindset you need, the challenges you
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  Speaker 3: face will be different, and that's why you often have
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  Speaker 3: to change management as you go through the life cycle.
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  Speaker 2: So let's talk about those transition points between each of
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  Speaker 2: those stages. They seem to be particularly dangerous for companies
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  Speaker 2: that don't adapt at least don't adapt well to that
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  Speaker 2: next stage. Tell us about those transition points.
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  Speaker 1: Transition points are painful.
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  Speaker 3: I mean, they're painful for humans, they're painful for companies.
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  Speaker 3: The transition point for an idea company becoming a young
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  Speaker 3: company is coming up with a business model. Doesn't happen overnight.
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  Speaker 3: You've got to try three or four or five before
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  Speaker 3: one works. The transition point for a young company becoming
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  Speaker 3: growth companies what I call in bar mits for a moment,
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  Speaker 3: because when you're young company, companies cut you slack. Now
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  Speaker 3: investors cut you slack. They let you grow. We talk
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  Speaker 3: about the number of users and the number of subscribers
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  Speaker 3: you have, and they push.
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  Speaker 1: Up your value.
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  Speaker 3: But there will be a point where those investors are
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  Speaker 3: going to turn to and say, how are you going
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  Speaker 3: to make money? You know how many young companies are
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  Speaker 3: not ready for that question. I mean that's what to
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  Speaker 3: me separated Facebook from Twitter, Facebook, whatever you think about
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  Speaker 3: Mark Zirckelberg was ready for that question when was asked.
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  Speaker 3: It had a model it could tell you how it meant.
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  Speaker 3: Twitter's never quite figured out how to make money, and
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  Speaker 3: it's not a young company anymore. It failed its bar
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  Speaker 3: Mitz for a moment because it wasn't ready for that question.
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  Speaker 3: So when I think about life cycles, I think about
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  Speaker 3: transition moments, and good Man is as ready for the
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  Speaker 3: next transition moment. They're not caught by surprise.
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  Speaker 1: But it's not easy to do.
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  Speaker 2: Do these life cycle stages vary across different industries or
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  Speaker 2: is it pretty much the same for all companies?
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  Speaker 3: Oh, and this is where corporate life cycles and human
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  Speaker 3: life cycles are different. A corporate life cycle can vary
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  Speaker 3: dramatically in terms of duration. The oldest company in history
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  Speaker 3: was a company called Congo Gumi.
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  Speaker 1: I'm sure you never I don't know whether you've heard
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  Speaker 1: of it.
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  Speaker 3: It's a Japanese business that have started in five seventy
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  Speaker 3: one eighty.
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  Speaker 1: It lasted fifteen.
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  Speaker 3: Hundred years and all it did was build Japanese shrines.
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  Speaker 3: That was its core business state in life for fifteen
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  Speaker 3: hundred years. Why because it stayed small it was family run.
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  Speaker 3: There was a succession plan and it never got distracted.
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  Speaker 3: If you look across publicly traded companies, now there are
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  Speaker 3: some companies. To become an established company, you have to
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  Speaker 3: spend decades in the wilderness.
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  Speaker 1: I mean you mentioned G and GM.
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  Speaker 3: Think how long it took those companies to go from
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  Speaker 3: being startups to being established companies because they had to
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  Speaker 3: build plants and factories. In contrast, we think about think
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  Speaker 3: of a company like Yahoo founded in nineteen ninety two,
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  Speaker 3: becomes one hundred billion dollar company in nineteen ninety nine.
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  Speaker 3: So what took for for seven decades to do? Yahoo
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  Speaker 3: did in seven But here's the catch, it took y'aho
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  Speaker 3: only seven years to get to the top. They stayed
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  Speaker 3: at the top for exactly four years. You can date
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  Speaker 3: their fall to en Google enter the market, and think
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  Speaker 3: how quickly Yahoo disappeared.
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  Speaker 1: So the capital.
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  Speaker 3: Intensity of your business matters, your business strategy matters. And
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  Speaker 3: one of the things I think we've kind of encouraged
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  Speaker 3: and pushed in the twenty first century, and I'm not
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  Speaker 3: sure that it's a good thing or a bad thing,
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  Speaker 3: is we've designed business models that can scale up quickly
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  Speaker 3: with very little capital. Think Uber, think Airbnb, intermediary businesses.
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  Speaker 3: But the challenge with these businesses is it's going to
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  Speaker 3: be very difficult for them to stay at the top
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  Speaker 3: for long, and when they go into.
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  Speaker 1: Decline, it's going to be precipitous.
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  Speaker 3: And I think that changes the way we think about
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  Speaker 3: the corporate life cycle of the twenty first century company
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  Speaker 3: versus the twentieth century company. And I'm afraid business schools
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  Speaker 3: are not ready. All of what we teach in business
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  Speaker 3: schools is for the twentieth century company, and the twenty
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  Speaker 3: first century company might have a much shorter life cycle
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  Speaker 3: and it will require a very different set of business
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  Speaker 3: strategies and decision making processes to the twentieth century companies.
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  Speaker 2: So let's talk about some of those decision making processes.
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  Speaker 2: If I'm an investor looking at companies in different life
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  Speaker 2: cycle stages, will that affect the type of valuation technique
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  Speaker 2: I should bring to analyzing that company.
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  Speaker 3: It's not so much evaluation technique, but the estimation processes
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  Speaker 3: are going to vary. I mean, let's take an example.
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  Speaker 3: Let's suppose your value Coca Cola. You have the benefit
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  Speaker 3: of one hundred years of history, you know the business
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  Speaker 3: model you can draw on just data and extrapola. You
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  Speaker 3: could be just a pure number currentch it's all about
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  Speaker 3: projecting the numbers out and you could be okay.
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  Speaker 1: But if I came to you.
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  Speaker 3: With zoom a peloton and I asked you to value
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  Speaker 3: now or palenteer, there's not a whole lot of historical
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  Speaker 3: days you can pull on, and that historical data is
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  Speaker 3: not that reliable. So the difference, I think is you
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  Speaker 3: have fewer crutches when you value young companies. You have
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  Speaker 3: less to draw on, and that's going to make you uncomfortable,
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  Speaker 3: and you've got to be willing to live with that
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  Speaker 3: discomfort and make your best estimates.
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  Speaker 1: One of my concerns.
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  Speaker 3: When I have students in my class is they're so
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  Speaker 3: concerned about getting things right, So how do I know
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  Speaker 3: I'm right? And I tell them you're definitely going to
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  Speaker 3: be wrong, accept it, and move on. With the young companies.
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  Speaker 3: You have to accept the premise that the numbers you're
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  Speaker 3: going to come up with are going to be estimates
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  Speaker 3: that are going to be wrong, and you've got to
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  Speaker 3: be willing to say I was wrong and revisit those estimates.
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  Speaker 3: And that's a mindset ship that some people can make,
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  Speaker 3: and some people have trouble with they're so caught up
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  Speaker 3: in being right they can never admit they're wrong.
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  Speaker 2: So let's talk about different investment strategies and philosophies, like
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  Speaker 2: growth or value investing. How do these align with different
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  Speaker 2: life cycle stages. I would imagine a young startup might
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  Speaker 2: be more attractive to a growth investor, and a mature
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  Speaker 2: company might be more attracted to a value investor.
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  Speaker 1: And we self select.
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  Speaker 3: Right, if you think about growth investing as including venture
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  Speaker 3: capital at one extreme to you know, the Magellans of
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  Speaker 3: the world, we buy, you know, high growth companies. Growth
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  Speaker 3: companies tend to be focused in on the younger stage
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  Speaker 3: companies you Value investing tends to be focused on more
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  Speaker 3: mature and declining companies. Now that's okay as long as
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  Speaker 3: you recognize that, because what it will do is create
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  Speaker 3: portfolios that are kind of loaded up with those kinds
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  Speaker 3: of companies. I mean, if you think about one of
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  Speaker 3: Warren Buffett's laments is that he never invested in technology
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  Speaker 3: companies early in the cycle until.
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  Speaker 1: Apple came along.
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  Speaker 3: We looked at Berkshire Hathaway's investments, they tend to be
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  Speaker 3: in mature companies.
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  Speaker 1: But that shouldn't be a lament the approach.
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  Speaker 3: That value investors, at least old time value investors took
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  Speaker 3: almost self selected those companies. It will be impossible for
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  Speaker 3: you to buy a young growth company because you're so
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  Speaker 3: caught up in buying stocks with low pe ratios or
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  Speaker 3: lots of book value, lots of cash that you essentially
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  Speaker 3: missed those companies because you were designed to miss them.
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  Speaker 3: So I think as long as people recognize that your
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  Speaker 3: investment philosophy will lead you to kind of cluster in
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  Speaker 3: one section of the life cycle, which will create risks
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  Speaker 3: and dangers for your portfolio, I think you're okay. But
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  Speaker 3: I think that people who tend to be blind to
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  Speaker 3: that often often miss the risk that come with their
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  Speaker 3: investment philosophy.
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  Speaker 2: So there are some companies that seem to successfully transition
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  Speaker 2: between the various stages you've identified. How should investors think
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  Speaker 2: about these companies? How can they identify when a management
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  Speaker 2: team has figured out how to transition from growth to
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  Speaker 2: mature growth.
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  Speaker 1: I'll give you very two examples.
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  Speaker 3: This year, both Google and Facebook initiated dividends for the
• 13:04
  Speaker 3: first time in their history, and I was happy. I
• 13:07
  Speaker 3: own both stocks, And the reason I was happy is
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  Speaker 3: let's face, Google and Facebook are not young growth companies anymore.
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  Speaker 3: They're trillion dollar companies which are looking at earning's growth
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  Speaker 3: in the long term, probably in the high single digits.
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  Speaker 3: And when people look at eight percent growth, they say, well,
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  Speaker 3: that's disappointing. You have to recognize if we're a trillion
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  Speaker 3: dollar company growing at eight percent, that's a.
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  Speaker 1: Healthy growth rate.
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  Speaker 3: And I think what impressed me about both Google and Facebook,
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  Speaker 3: and I call them by their old names not matter
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  Speaker 3: in alphabet, is the management seems to be realistic about
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  Speaker 3: where they're under life cycle. That's what paying dividends tells
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  Speaker 3: you is we understand we're no longer young growth companies.
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  Speaker 3: We're more mature, and we're going to behave like more
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  Speaker 3: mature companies. And I think that again reflects what I
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  Speaker 3: said earlier. If you act your age, it's a much
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  Speaker 3: healthier sign for your company. It doesn't mean you're not
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  Speaker 3: going to grow, but you're going to grow in a
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  Speaker 3: healthy way.
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  Speaker 2: It sounds like you're talking about both adaptability and then
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  Speaker 2: transformation between stages.
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  Speaker 3: Right, and a management team that recognizes that what you
• 14:12
  Speaker 3: need as a company will shift depending on where you're
• 14:14
  Speaker 3: in the life cycle.
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  Speaker 1: They're not overreaching.
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  Speaker 2: So to wrap up, all companies go through corporate life cycles.
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  Speaker 2: Their startups, they grow, they mature, and eventually they decline.
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  Speaker 2: Understanding this life cycle, identifying when management is transitioning appropriately
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  Speaker 2: identifying these companies at the right valuation is the key
• 14:38
  Speaker 2: for long term investing. If you're paying too much for
• 14:41
  Speaker 2: a company in a mature decline or even distress segment,
• 14:45
  Speaker 2: your portfolio is not going to be happy. I'm Barry Ridults.
• 14:50
  Speaker 2: You've been listening to Bloomberg's at the Money liver let.
• 15:02
  Speaker 1: In the Bad. How come I didn't any