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Friday, March 17, 2006

Let the Dogs Out 

If you manage multiple media properties, or plan to, then this article from Booz Allen Hamilton's Strategy+Business ("Love Your "Dogs") is worth a read.

We all tend to invest time, effort and resources in our biggest and best performing assets, and shortchange those properties that we see as dogs. But as the authors conclude, that's not the best way to create maximum return.

Using the tools of behavioral finance, which "is founded on the precept, as economist James Montier puts it, that 'not only do investors make mistakes, but they do so in a predictable fashion,'" the article analyzes the stock market and finds:

Investors overvalue “glamour stocks,” those in vogue as evidenced by their high market-to-book value ratios or high price-to-cash-flow ratios. And they undervalue “value stocks” — identified by such measures as low market-to-book value ratios or low price-to-cash-flow ratios — even though a vast amount of research conducted over the past few years has shown conclusively that a portfolio of “value” stocks will consistently outperform their more popular “glamorous” counterparts.

and

Automatically directing resources to businesses with the highest accounting returns, for example, may not be the best strategy. Selling your dogs may be counterproductive. Instead, resources should be allocated to those businesses that offer the greatest future increase in shareholder value.

I find two interesting connections here. One is to an excellent post by Kathy Sierra on "How to be an expert."

She summarizes:

Most of us want to practice the things we're already good at, and avoid the things we suck at. We stay average or intermediate amateurs forever.

While Kathy is focused on the dedication required if we want to rise above amateur status in anything we do, I think there's a lesson here for corporate strategists and investors, and some strong support for the theory that you should love your "dogs" and focus effort and time on them.

Another connection is to the tendency of larger media companies to avoid making smaller M&A deals, under the theory that tiny acquisitions take as much time, effort and pain as larger ones (I've felt this way, as well) but aren't as rewarding. See my recent post on "Little Deals." In this era of front-page b2b media deals, maybe we'd all be better served by looking for those deals that fly way under the radar horizon?

As the Strategy+Business article finds:

• Buying and fixing someone else’s dogs will produce more shareholder value than buying stars

Adding value to an overvalued business is a tall feat, especially on top of the premium that acquirers typically pay for a controlling interest in an enterprise. It is no wonder that two-thirds of acquisitions fail to add value for the acquiring shareholder. The right dogs, on the other hand, could offer a company focused on operations wonderful acquisition opportunities.

Far too often, senior executives attempt to diversify out of their core businesses, selling underperforming business units and buying their way into businesses that appear to be more attractive. The beneficiaries tend to be the private equity firms that are usually the buyers of these “unattractive” businesses. Those companies that have done the opposite — concentrated on their underperforming core business units — have tended to perform much better.

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