Products, marketing and financial reporting, take back seat to stock prices
With the technology-laced NASDAQ exchange celebrating the one-year anniversary of its all-time high -- down close to sixty per cent from that level, -- many investors are headed for the hills.
Most, but not all. "I'm thinking about buying some (Oracle Systems Corp.) shares," said Luc, a partner in a management-consulting firm. "It's down more than 20 per cent in the last couple of days. But I think it will bounce back."
Public interest in the business world has never been greater. Stock ownership is at all time high levels, and the demand for information has fueled an explosion in business news media. But these trends have created a serious problem for corporate executives. Almost all the public interest is directed at how their companies' stock prices are performing.
Luc (not his real name) is a pretty bright guy. He has a host of prestigious clients, who rely on his expertise in corporate acquisitions, strategic alliances, training and human resources. But he knows next-to-nothing about Oracle, except its stock price.
Sure, he could probably tell you that Oracle is one of the world's largest software companies and that its part owner Larry Ellison, is one of the world's richest men. Luc could also recite Oracle's boilerplate slogans about its products "powering the Internet."
But the applications and database software that Oracle sells is extremely complicated. Introductory books explaining how the software works typically run to 1,000 pages. Companies installing Oracle software typically have to revise their entire workflow.
With thousands of programmers working on newer versions of that complex software, it's almost impossible to say whether upcoming Oracle releases will be major successes, or plugged with security holes that could set the company back years. In other words, its almost impossible -- even for senior Oracle executives -- to say with any certainty how the company is going to perform over the next two or three years.
But that does not stop thousands of investors like Luc from trading Oracle shares, as well as those of hundreds of other companies they know little about. The fact that managers like Luc - whose company charges its consultants out at $1,000 a day, is sitting around worrying about Oracle's business, when he would be much better off worrying about his own, is one of the biggest consequences of NASDAQ's recent roller coaster ride.
But public interest in share prices is not the only problem. Corporate executives are also at fault. Many were so distracted by the prospect of striking it rich on the IPO market and the surging value of their stock options that share prices have long taken precedence over their companies' underlying businesses.
While investors like Luc - and many professional money managers for that matter -- don't have a clue how to evaluate Oracle's products, its competitive position, its management, or its marketing strategy, anyone can follow a share price's ups and downs.
Investors with limited knowledge of a few statistics like price/earnings ratios and growth rates, and easy theories like "if a company is growing 30 per cent a year, it should be trading at 30 times earnings," are pressuring executives to focus on stock appreciation, rather than on excelling in operations.
There is an old Wall Street expression that when the cab driver starts giving you stock tips, that's when its time to sell. But cab drivers made a lot of much money on the NASDAQ run-up.
Interest is so high, that even in today's depressed bear market, prices are clearly out of touch with reality. For example even the Coca-Cola Company - a non-NASDAQ blue chip -- trades at 58.52 times trailing 12-month earnings, and at 13.74 times its book value.
The dialogue has changed. Discussions and news stories about companies have been reduced to their lowest common denominator and now inevitably begin with an analysis of their stock prices.
Executives have responded by engaging in short term strategies such as acquisitions and layoffs - often at the same time -- that maximize share price in the short term, but may actually hurt the underlying businesses. Marketing and product development expenditures that are incurred now, but will only show benefits far down the line, are discouraged.
One of the few benefits of the dampening public enthusiasm resulting from the U.S. $3.5 trillion in paper losses that investors lost on NASDAQ traded companies, is that executives may now get a chance to refocus attention on their underlying business models.
Companies need to refocus on bread-and-butter issues like making better products, establishing effective reporting systems and doing efficient, cost-effective marketing. And guys like Luc need to worry more about their making money from their own businesses, and let Larry Ellison take care of Oracle.
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