Billion-Dollar Lessons: What You Can
Learn from the Most Inexcusable
Business Failures of the Last 25
Years by Chunka Mui
Excellent Business Book
Welcome to Business Failure 101
In the 1960s, IBM CEO Tom Watson called an executive into his office
after his venture lost $10 million. Watson asked the man if he knew why
he’d been called in. The man said he assumed he was being fired. Watson
told him, “Fired? Hell, I spent $10 million educating you. I just want to be
sure you learned the right lessons.”

In Billion-Dollar Lessons, Paul Carroll and Chunka Mui draw on research
into more than 750 business failures to reveal the misguided tactics that
mire companies again and again. There are thousands of books about
successful companies but virtually none about the lessons to be learned
from those that crash and burn.
Lesson One: The Cold Hard Facts
Between 1981 and 2006, 423 major publicly held U.S. companies with
combined assets totaling $1.5 trillion filed for bankruptcy. Hundreds more
took huge write-offs, discontinued major operations, or were acquired
under duress. Again and again, companies follow the same wrong-headed
strategies that brought down businesses in the past. The sub-prime
mortgage crisis that cost companies tens of billions of dollars in 2007 and
2008 echoes the ill-conceived strategies that pushed Green Tree Financial
and Conseco into bankruptcy years earlier. Tom Watson’s executive’s $10
million lesson seems cheap by comparison.
Lesson Two: Failure Patterns
Carroll and Mui found that the number one cause of failure was misguided
strategy—not sloppy execution, poor leadership, or bad luck. These
strategic errors fall into seven categories, including:
* Pursuing nonexistent synergies: Quaker Oats’ purchase of Snapple
was supposed to capitalize on distribution synergies but instead led to a
$1.7 billion write-off.
* Moving into an “adjacent” market that isn’t really adjacent: Avon
decided its “culture of caring” qualified it to operate retirement homes.
Subsequent write-offs totaled $545 million.
* Buying more problems than efficiencies through misguided
consolidation: Despite pioneering the discount department store years
before Sam Walton came along, Ames Department Stores flubbed
consolidation efforts, landing in bankruptcy twice before eventually
liquidating.
Lesson Three: Avoid Making the Same Mistakes

But there’s light at the end of the tunnel: Billion-Dollar Lessons provides
proven methods that managers, boards, and even investors can adopt to
avoid making the same mistakes. While there’s no way to guarantee
success, this book draws on vivid, off-the-beaten-track examples to help
you avoid failure by showing you how to thoroughly assess potentially
disastrous strategies before they bring your company down.
Required Reading
Think of Billion-Dollar Lessons as the flip side of Good to Great, but just
as eye- opening and essential as that business classic. There’s enormous
value in learning from companies that lost millions (if not billions) in pursuit
of strategies that led to spectacular flameouts. Everyone makes mistakes,
but why make the same mistakes over and over?
Personal Review: Billion-Dollar Lessons: What You Can Learn
from the Most Inexcusable Business Failures of the Last 25
Years by Chunka Mui
The authors researched over 750 business failures to reveal misguided
tactics that mire companies. They concluded that the number one cause of
failure was misguided strategy - not sloppy execution, poor leadership, or
bad luck.
These strategic errors fall into at least five categories: 1)Pursuing non-
existent synergies. 2)Moving into an "adjacent" market that isn't. 3)Buying
more problems than efficiencies through misguided consolidation.
4)Aggressive financial reporting, eventually leading to illegality or "fairy
tale" businesses. 5)Staying the course - riding a dying technology into the
sunset.
A Bain study of 250 executives responsible for M&A found that 90%
believed data showing 2/3+ of takeovers reduced the value of the acquiring
company. Yet, almost none were deterred. A BCG study found over 80%
of companies don't do detailed work in advance of an acquisition to verify
imagined synergies.
The bulk of "Billion Dollar Lessons" consists of mini-cases of strategies
that failed. For example, the Unum Provident merger planned to
consolidate duplicate information systems - six years later, just 4 of 34
information systems had been eliminated. Another problem was
differences in selling and rating between individual disability vs. group

policies. Result - a $1 billion write-off, lower stock price, and operating
losses.
UAL in the 1970s anticipated synergies from also owning Hertz and Westin
Hotels - one call for all. Unfortunately, it didn't work out and they were both
sold in the 1980s. Sears added Dean Witter and Coldwell Banker in the
early 1980s; several years later they divested both, but could not regain
the time not devoted to concentrating on Wal-Mart. J.C. Penney bought
five drugstore chains in 1996-97 for $4.4 billion, intent on stocking a limited
range of each others' products - result was about a $2 billion loss and
another series of divestments. Quaker Oats bought Snapple for $1.7 billion
(some thought they overpaid about $1 billion) in 1994. New Snapple
competitors appeared, while synergies did not - Quaker sold Snapple for
$300 million three years later. Federated (Macy's) bought Fingerhut for
$1.7 billion in 1999, excited tot add their expertise and capabilities in
cataloging and e-commerce. Belatedly, Federated found that Fingerhut's e-
commerce move was just a ploy to boost P/E ratios, and that it had
pumped its numbers simply by offering credit cards to riskier customers.
Write-downs and losses totaled $2 billion. IBM bought numerous small
software companies to complement its PC business, ran scores of their
salespeople through its training, and lost $2 billion on its $100 million initial
investment before exiting (lack of compatibility?).
The financial sector accounts for 31% of corporate earnings, up from 20%
in 1990, and 8% in 1950. Barings collapsed in 1995 because of $1.4 billion
in losses from one rogue trader - ING bought it for one British pound.
LTCM dazzled with 40%+ annual returns in its first few years, before losing
$4.6 billion in 1998. Arnaranth hedge fund lost almost $6 billion in 2006
and was liquidated because of highly leveraged bets on weather.
Green Tree Financial fueled a boom in trailer-home ownership, loaning
almost $5 billion in 1996. It's "innovation" was to extend typical 15-year
mobile home loans to 30. Conseco bought it for $7.6 billion in 1998
($53/share, vs. market $29). Green Tree also used aggressive accounting
- booking profits at time of sale, using estimates of future delinquencies,
interest rates, refundings. Conseco had to write off almost all Green Tree's
profits as interest rates fell, buyers refinanced or walked away after finding
themselves "underwater."
Revco's 1986 LBO at $1.4 billion (48% over its average share price the
prior 12 months) assumed 8% profits margins (35% greater than the
industry average over the past 12 years, and almost twice its own average
the last 2 years), and a high growth rate. Bankrupted in 18 months.
Tyco spent over $60 billion acquiring 1,000+ companies from 1992-2001.
In 2006 it paid a $50 million SEC penalty for overvaluing acquired
liabilities, undervaluing assets, and manipulating reserves.

And yet, the pace of M&A activity continues, slowed only by the latest
trillion-dollar lessons in sub-prime mortgages and CDS.
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