Also in C&EN, this letter:
The DuPont-Trian controversy had far more substance than you reported in your editorial (C&EN, May 25, page 5). You should reexamine two premises: first, that R&D performance is measured by R&D spending, and second, that long-term performance is independent from short-term performance.
Other venerable companies have had great R&D reputations but have been unable to adequately monetize R&D spending. Bell Labs, 3M, Merck & Co., and Pfizer come to mind. I think you recognize that DuPont’s migration to life sciences is a business activity where the DuPont know-how has been acquired rather than developed in-house at DuPont’s labs. DuPont has been on a long-term acquisition spree precisely because its labs haven’t delivered adequate results.
Poorly performing companies always complain that investors focus on short-term results when the companies in question have performed poorly in the short term. These same companies have been challenged because they have not only per-formed poorly short term but also performed poorly long term. A company performing well long term is invariably performing well also in the short term. You can’t succeed in the long term without also succeeding in the short term.
I praise Ellen Kullman for substantially improving DuPont’s long-term performance. Whether that success has been adequate remains a fair question.
Tony PavoneI've spent nearly 30 minutes puzzling over it, and I still don't know what it means. Is it a critique of corporate internal R&D?
Half Moon Bay, Calif.
Hmmm, I wonder why so many smaller companies with products based on their own R&D sell out. If their R&D was successful why not just keep repeating it and multiply the output?
ReplyDeleteOn the other side, how come DuPont was able to make a profitable acquisition that exceeded the return on their in-house R&D? If the R&D effort was so productive in the purchased company wouldn't their fair market value increase and diminish DuPont's return on investment?
I have a feeling (i.e. this is my pure conjecture) that these are not separate questions and the answers are in how we evaluate R&D investment. DuPont with big R&D can see the cost of, say, 100 projects of which 1 was successful and entered production. The gain from that 1 product is offset by the cost of 100 projects. A set of 100 small companies each focused on one project experience the cost of 1 project each. One of the companies is successful and 99 companies fail. The one successful company is purchased by DuPont and all of a sudden the productivity of that myopic version of R&D is 100 times higher than DuPont's internal R&D.
In the case of the internal R&D the risk and cost is carried by DuPont and their shareholders. In the case of the 99 failed companies the cost is carried partially by their investors and to a large extent by the entire society as the cost of layoffs, waste, shutdown cost, site reclamation, loss of local tax revenue etc.
There is nothing creative about this destruction of value and I do hope I am completely wrong here. Please, someone tell me I am wrong....
Some reasons why smaller R&D-focused companies sell out:
Delete1) The road to a successful product or process was too long - too many costs incurred, other opportunities foregone, etc.
2) Impediments to scaling up (most significantly - competitive market conditions and the heavy hand of government regulation)
3) Recognition that they cannot provide adequate protection for their IP (I've seen this one - incapacity to protect IP does in a lot of small inventors)
4) Lack of funding
5) Impediments to marketing/developing applications for the product
...
"A company performing well long term is invariably performing well also in the short term. You can’t succeed in the long term without also succeeding in the short term." These are obvious fallacies.
ReplyDeleteThe "quick-and-dirty" assessment is, ostensibly this is about "old culture" vs. "new culture" - or in this case, development and maintenance of a well-established and reasonably funded R&D program, vs. a more market-oriented and investor-responsive corporation. The reality is that this is about a corporation that is in the process of redirecting/realigning its foci, *and beating the market in the process* vs. an activist hedge fund for whose investors (and those investors in DuPont that sided with them) it is not enough to have beaten the market over the last six years. For the hedge fund and their proponents the edifice must be entirely dismantled and spun-off (read: cannibalized) for even higher stock prices.
ReplyDeleteCharacteristic of these latter "investors" (although to my absurdly outdated way of thinking, they behave more like clerks at a fire sale) are the comments made by a California State Teachers' Retirement System spokesperson in a recent WSJ article. Market-beating returns and a stable development philosophy are not enough - short-term profits must be maximized for institutional investors like CalSTRS, already in trouble for spending money to prop up property development that it didn't have, constructing a brand-new "energy-efficient" building, and for these and other reasons including political spending (e.g. $1.3 million they didn't have, to help elect Gray Davis) and *blatantly unreal revenue projections coupled with totally unrealistic ideas about how the stock market actually functions,* now facing a $71 BILLION shortfall. For such entities, a fire sale is the only option, for all investments, to bail themselves out of their self-created holes.
Questions:
To what extent does investor ineptitude, like that displayed by CalSTRS and other fiscally irresponsible public entities, drive destructive impulses in the market?
Is this behavior likely to promote accommodation responses by companies seeking to ward off investor activism?
What is the future, then, for long-term investment including R&D?
Where such activist investor efforts succeed, are they failures of capitalism, or socialist failures exploiting capitalist institutions to pay the bills for their own profligacy?
By way of comparison, Puerto Rico decided that the timing was propitious to default on its $72 billion debt to the US. CalSTRS is a mere $71 billion in the hole.
Delete"... (e.g. $1.3 million they didn't have, to help elect Gray Davis)..."
ReplyDeleteBoy, was THAT a bad decision.