Sunday, October 07, 2007

Learning From Mistakes

This week's Economist had this article about Meg Whitman, CEO of Ebay, and also her purchase of Skype:

Among the many lessons that Margaret (“Meg”) Whitman has picked up during her three decades as a businesswoman, three stand out, she told an audience at Stanford's business school last year...

The first lesson, which she learned in 1979, was that attention to detail is all important. At the time, she was fresh out of Harvard Business School and just starting her first job at Procter & Gamble. She was charged with figuring out whether the nozzle on shampoo bottles should be half or three-eighths of an inch wide. Despite the tediousness of the task, “I decided I was going to do the very best job that had ever been done at the Procter & Gamble company”

Well, this lesson is not necessarily bad. Attention to detail is usually very good, although I would argue it is much better to focus your attention on things that add or affect value, and not on whether a nozzle should be an eight of an inch different.

The second lesson occurred in 2002. As boss of eBay, she had noticed that a lot of the sellers and buyers on its site were using an online-payment service called PayPal as a sort of virtual wallet, so she decided to buy it. She negotiated for a year, during which the price kept rising. She concluded that in the internet industry one bids early, boldly and pre-emptively high.

Again, which part of that philosophy focuses on the value of what you are getting? Her statement seems to best resemble that of someone who is victim to the wild mood swings of Mr. Market. Just because you see prices rising does not mean you should be jumping in.

The third lesson was that in such a fast-moving realm “the price of inaction is far greater than the cost of a mistake.” In any case, mistakes can always be corrected. In other words, it did not matter that the “synergies” between a telephone service and an online flea-market seemed few and far between. In her view, eBay was right to buy first and look for the answers to such concerns later.

Well this one has its own Buffett counter-quote which I happen to like a lot:

"In investments, there's no such thing as a called strike. You can stand there at the plate and the pitcher can throw a ball right down the middle; and if it's General Motors at 47 and you don't know enough to decide on General Motors at 47, you let it go right on by and no one's going to call a strike. The only way you can have a strike is to swing and miss."

I think somewhere along the way Meg Whitman learned the wrong set of investing rules. She bought first and asked questions later, and she completely ignored the intrinsic value of the companies she was purchasing. The outcome:

Collectively, these three lessons have led to disaster. On October 1st eBay conceded, in the language of book-keepers, that the purchase of Skype was just that. It had paid $2.6 billion up front, and agreed to cough up yet more if Skype met certain targets. It did not. This week eBay said that it would take a $1.4 billion charge in relation to the purchase.

A 55% loss. Swing and a miss, Strike!

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