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"Panasonic tells how a typical Japanese multinational learned to restructure itself according to this flexible "American" approach while preserving some essential Japanese attributes. Panasonic is the main brand name for Matsushita Electric Industrial Company; author Francis McInerney consulted for Matsushita's American subsidiary in the late 1990s—when the firm's troubles became most apparent."
TAKING STOCK The tech merger-and-acquisition sinkhole
The Globe and Mail, February 16, 2008
BRIAN MILNER
BMILNER@GLOBEANDMAIL.COM
The tech sector is rife with stock-goosing merger rumblings.
Yahoo has shot up more than 50 per cent since becoming the $44.6-billion (U.S.) object of Microsoft's affections. And even miserable Motorola managed a small gain in the wake of reports that it was talking to Nortel Networks about combining their wireless infrastructure businesses.
The pursuers and the pursued are the companies to stay away from, because they are typically the ones with the dimmest prospects in a fast-changing sector where yesterday's darling can turn into tomorrow's stiff in the click of a mouse.
Buying Yahoo won't restore Microsoft's fading lustre. And Yahoo can't possibly think it has a hope of thriving by acquiring another struggling Internet business like AOL. As for Motorola and Nortel, they're just trying to fend off the morticians as long as possible.
All of them have fallen into the dreaded Edison Gap, the quicksand of the high-tech landscape. The phrase was coined by Francis McInerney, the erudite managing director of North River Ventures in NewYork and a consultant to tech and telecom companies.
Last fall, we talked about this Canadian expatriate's focus on cash velocity - the speed at which
companies turn sales into cash - as a simple way of assessing how efficient they are at managing working capital.
Those that do it best get faster, more accurate information from their customers on the marketplace, spend their research money smartly on what their customers want and are better able to sustain profits. Ultimately, they eat their competitors' lunch.
Yahoo doesn't fare at all well in this measure, and once mighty Microsoft has slipped badly in recent years.
The Edison Gap is a related performance measure that refers to the financial hole technology companies dig for themselves when they allow spending on research and development to outstrip operating profits.
That's likely to happen when cash velocity is low and the flow of information slow.
Yahoo "fell into Gap hell two years ago and shows no indication that it knows the way out," Mr. McInerney wrote in a harsh assessment of Microsoft's proposed deal. The latter "has its own Gap issues and is spending about half its operating income on R&D, an unhealthy ratio."
He predicts Microsoft would have to write off its entire Yahoo investment in five years.
As for Motorola and Nortel, "both are seriously Gap-challenged and no amount of deal making will solvethis," he said by e-mail from Tokyo, where he is involved in the restructuring of a $7-billion (U.S.) tech company. Mr. McInerney named the Edison Gap after the famous inventor whose most important innovation may well have been the centralized research and development model that has been used by industry for over a century. It's a model that no longer works in today's era of high-speed information.
"The Gap opens when the cost of the R&D runs way ahead of operating earnings. The more you spend on R&D, say to gain market share or recover technological advantage, the worse your position, as earnings do not recover."
What happens to Gap-mired companies is bad news for shareholders. "The earnings engine seizes up. The more gas you give it, the slower it goes. Typically, these companies see gross margins, market share and cash velocity all shrink at the same time."
The way out of the quagmire is to follow Apple's model of tight control over cash velocity, Mr.
McInerney said. "Cash velocity control has the wonderful benefit of driving customer information into a company. Used properly, this information allows a firm to decide what it needs to spend its own R&D dollars on and what it can outsource, or open source."
In Apple's case, it owns almost nothing, relying on others to supply everything from its operating system to software and content. So it can focus its research solely on areas where it can add value. The iPod people spend proportionately half what Microsoft does.
Want to know if your company is wallowing in the Gap? Just check the R&D spending on the profit-and-loss statement and see if the operating earnings cover the cost.
If they don't, Mr. McInerney's advice is simple: "Run like hell."
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