Stick to the knitting: Philip Morris’s expensive mistake
The Marlboro manufacturer’s mistake is characteristic of those running industries thought to be in decline.
It’s the slogan that every chief executive should have pasted on the wall in front of him. The existing business is the one with the best corporate memory, the one where the workforce says: “This is what our company does, where the expertise of the employees is concentrated”. Yet so many CEOs seem to think there are better things to do with the assets, and expanding into new activities or taking over another company is much more exciting than merely running the existing one better.
The siren voices are all around: you will be running a bigger company, with correspondingly bigger pay. The press will be asking for interviews. You may have the ear of politicians, who will pretend to listen to your suggestions. You will look far-sighted in arguing that the existing business has limited prospects. You may even be right.
Unfortunately, the odds are against you. Defining success or failure after several years is not an exact science, but sometimes a diversification looks so ill-judged at the time that failure is almost guaranteed. A tobacco company taking over a drug discovery business, for example, looked doomed from the start, and so it has proved when Philip Morris International paid £1bn for Vectura in 2021. The cultures could hardly be more different, the business has struggled, and last week Marlboro Man admitted his expensive mistake, selling the business for £150m.
This is an extreme example of value destruction, but it is characteristic of those running industries which are thought to be in decline. Oil is the poster boy here, led by BP and its forays into green energy. The synergies between windmills and oil platforms have proven illusory, and learning this has meant multi-billion dollar losses. Exxon, by contrast, has stuck to oil and gas, and its shares have far outperformed those of BP. Indeed, had Exxon not just spent $60 billion buying a US exploration company, it may well have decided to go for BP instead.
Acquisitions are exciting. The CEO gets feted by the fee-hungry boys from the banks, and if it all goes wrong, she exits with a life-changing payoff. The interests of the shareholders are some way down the list. Shares in BAT, another pariah stock, currently yield 8.3 per cent at £27.40. At that price, buying in the shares instead of paying the dividend would extinguish the entire share capital in under nine years. Unless, of course, the management forgot to stick to the knitting.