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Wednesday, October 27, 2010

Can we please stop talking about running government like a business?
Posted by Jill | 6:04 AM
I live in a town that has had one-party government for the last 30 years. Last year we finally had a contested election, and the Democratic candidate, who was related to one of the biggest hacks in New Jersey politics, said in a debate that he would run the town like a business. Given that this guy already had no chance in a town full of incurious, ignorant people who don't keep any tabs on what local government does with their money, I knew right then that he wasn't going to get my vote, that I'd vote for our local gadfly, who at least had a document record of caring how our money was spent.

George W. Bush ran for president in 2000 on a platform of running government like a business; this despite his own management record of squandering his father's friends' money digging dry holes, trading Sammy Sosa as co-owner of the Texas Rangers baseball team, and other similarly undistinguished "accomplishments". Carly Fiorina is running for Senate on her "record" running a business, despite the fact that her "record" includes offshoring tens of thousands of jobs, a Compaq merger that caused the company's stock price to plummet for years afterwards, offshore sheltering of HP profits, a series of embarrassing leaks, and seeking to do business with Iran.

Meg Whitman's tenure at eBay is less well-known, but no more distinguished:
Whitman's fabled $1 billion in wealth was acquired in the first few months of her tenure, well before she could muck the company's bottom line up. That billion-plus that eBay's directors handed Whitman was perhaps the easiest billion anyone has ever been handed in corporate history: eBay hired Whitman in March 1998, when the company was already the tech world's darling. Just six months after she joined, eBay went public, making Meg Whitman an overnight billionaire thanks to stock options that allowed her to buy eBay stock at just 7 cents a share, and sell them on the market for as high as $170 per share.

That was in 1998-'99, long before Whitman could screw the company up -- when the worst she could do was work out a scheme with Goldman Sachs to kick back to her personal account a couple million more in exchange for making Goldman Sachs the lead investment bank for eBay's stock offering.

So Whitman made her eBay billion not by building the firm up, but rather by lucking into the right place at the right time. Over the next few years, as she started to put her own stamp on the firm, eBay's fortunes went into decline and finally into full-scale tailspin.

Now cut to 2005, when Whitman is fully in control of eBay. By now, in the middle of the last bull market, eBay's stock is floundering thanks to a series of poorly executed decisions, bad investments and frustrated eBay users. This was the moment when Whitman went from incompetent to reckless: she bet the eBay house on a grossly overpriced $4.1 billion takeover of Skype, a startup internet phone company with almost no revenues to speak of. Even normally friendly analysts were confused, not just by the price but also the business logic.

Two years later, as the grim results trickled in, analysts were still scratching their heads. CNBC's Silicon Valley bureau chief wrote in October 2007, at the peak of the bull market, "I remember when eBay bought Skype for that staggering $3.1 billion and scratching my head, wondering what the connection was. I remember talking to CEO Meg Whitman soon after the deal was announced, listening to her tell me that Skype would make as much sense and be as important to eBay as PayPal was. I remember nodding, listening. And I remember still scratching my head." Today, investors are scratching their collective heads: eBay de-valuing the Skype asset by 46 percent or about $1.6 billion.

So already by October 7, the grossly inflated price resulted in a $1.6 billion writedown of losses to tack onto the buy price. And this was before things got really bad. See, as it turned out, Whitman didn't just overpay for Skype--she overpaid, and didn't even own Skype.

That's right, when Whitman signed on the dotted line and plunked down $4.1 billions, she did not buy the technology that made Skype work, but instead leased it from Skype's original creators--who were under no obligation to continue the lease.

But by October 7, 2007, investors were already getting fed up with Whitman's helmsmanship. This was the high-point of the last bull market bubble, and yet eBay's stock on this day was slightly lower than where it was in September 2005, when the Skype deal was first announced. Meanwhile, eBay's biggest competitor, Amazon.com, saw its stock price soar 122 percent over the same two-year period as Amazon made smart investments and wooed clients and customers away from eBay in droves.

[snip]

It's no wonder then that Whitman "retired" from eBay when she did in early 2008: She had failed the company miserably, leaving eBay in ruins. A year after Whitman bailed on eBay, the stock had sunk so low that employees were left holding onto stock options that would actually cost more than than eBay's market stock price, making them worse than worthless. That's a far cry from the 7 cents per share that Whitman was handed after just a few months on the job -- but as any economics student knows, the laws of scarcity dictate that there's a limited number of 7-cent stock options to be had, and to make up for that, others -- every other, in fact -- have to take stock options that are worthless. And it's a far cry from the tens or hundreds of millions more in stock options profits Whitman cashed in between February 2007 and February 2008,when she unloaded another 6.4 million shares of eBay between February 2007 and February 2008, in a move some criticized as legally questionable and in possible violation of insider trading rules.

The question we should ask ourselves is, was this failure at eBay a one-off thing, or was it part of a pattern in Whitman's executive resume? The answer isn't pretty, assuming she wins the governor's race.

In the years before Meg Whitman settled into her eBay gig, she bounced around from one corporate disaster to the next, showing neither loyalty nor follow-through and commitment: Think Sarah Palin of the corporate world. In 1992, Whitman headed up a children's shoe division at Stride Rite, including Keds brands -- and just about exactly one year later, several states filed lawsuits against Stride Rite accusing the firm of price-fixing its products, in particular, Keds. The company was forced to pay millions in fines and cover retailers' losses as part of the settlements.

With that disaster out of the way, Whitman failed her way into the CEO spot at FTD.com, the online florist shop. It should have been a cinch: Whitman was handed a 75-year-old non-profit florist association that had been a virtual monopoly business with an international presence, but was convinced by an ex-Goldman Sachs executive to convert into a private for-profit company, with the Goldman Sachs exec's hedge fund as the investor. It might have worked out well, but for Meg Whitman's leadership. In 1997, just two years into her tenure, Whitman bailed on FTD. The florist company's business had fallen almost by half, posting a new low of 12 million orders in 1997, down from 22 million orders a decade earlier.

And there's much, much more, for anyone who cares to look.

The problem with these "businesspeople" running for office is that most people don't pay enough attention to scrutinize the actual record these people leave. "Running a business" seems to be synonymous with "running it competently", which are two radically different concepts. People know HP and they know eBay, so they think that whoever is behind the scenes knows what they're doing. But we've seen during eight years of George Bush what happens when business executives "run the country like a business." And if voters would only look at the record of these executives' tenure, they'd know to run in the opposite direction as fast as they can.

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6 Comments:
Anonymous Charlie O said...
Good post Jill. Not a Californian (anymore. I lived there when Brown was Guv Moonbeam), so I wasn't aware of Whitman's complete background. Good to point out that running a business does not equate to running a business well. Government is not a business and shouldn't not be run like one. There is something known as "the public good." Businesses do not take the public into account. Nor, apparently do our current crop Tea Bag enthusiasts. All this crap about restoring freedom is really about throwing the havenots under the bus.
10/27/10, 8:54 AM  
Anonymous Anonymous said...
1. Really, the next time some idiot starts yammering on about "government should be run like a business," someone should point out, "yes, and look how businesses have been run in the last two years. Straight into the ground. Is that what you really want?"

2. Of course, the other thing which should be pointed out is that government and business have to entirely different goals: One is solely out to make a profit for itself, and the other is out to provide for the general welfare.

Being a businessperson is therefore hardly a qualification in itself for election to office--why people think that someone's being a business person means they're extra smart and extra qualified for government is beyond me.

3. Finally, Meg comes from that stratospheric, insular and insulated world the CEO class has created for themselves (Thanks, Ronald Reagan!)where no ever suffers any real penalty for failure and in fact make even more money when they do fail. No wonder Meg's ego is so huge she thinks God has called on her to "run California like a business."
10/27/10, 3:55 PM  
Blogger Cujo359 said...
I think the only person who benefited from Carly Fiorina's tenure at HP was Fiorina. She made out pretty well in the Compaq merger, as I recall.

In any event, anyone who remembered what HP was like before she ran it and what it was like after would find her business experience a plus.
10/27/10, 3:58 PM  
Anonymous newbroom said...
Here's an idea! Let's socialize the gawdamned VOTE!
10/28/10, 6:09 AM  
Blogger Pangolin said...
The GOP truly does intend to run the government like a business; a clear-cut logging operation.
10/28/10, 12:59 PM  
Blogger dianedp said...
like gwbush all over again.
Where DO republicans get these people?
10/28/10, 3:56 PM  
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