Book SummaryDead Companies Walking, by Scott Fearon

1-Page Summary1-Page Book Summary of Dead Companies Walking

Risks of Overreliance on Historical Data and Conventional Wisdom in Entrepreneurship and Investment

Many investors and business leaders are overly dependent on recent successes or past performance when making decisions. This can lead to a miscalculation of risk and a failure to adapt when market conditions shift or customer behavior changes. Instead of assuming the future will always unfold as it has in the past, always be wary of predictions and models and stay open to new information.

Flawed Assumptions Made by Executives and Investors Based On History

Past performance does not always indicate future results, and trusting in historical trends or quick returns could lead to catastrophe. The most intelligent, expert analysts are frequently wrong about their calls, and as Fearon has found, it is much safer to base decisions on an organization's basic strengths and long-term outlook instead of recent data.

Failure to Recognize Obsolete Business Models Led To the Downfall of Global Marine, Value Merchants, and Idearc

Fearon gives three examples of firms in different sectors that went bankrupt because their leadership didn't adjust to major changes in their fields. Global Marine thought its offshore oil rig leasing business was immune to the same types of price swings that plagued other oil-related industries in the 1980s. Jerry, Global Marine's CFO, assured Fearon that a "rig utilization rate" of 70% had always served as a "magic number," a dependable floor, and that even though the company's stock had fallen, it would rebound once that magic number was reached. But Global Marine's leadership failed to examine history thoroughly. Jerry's so-called "magic" utilization number only reflected this recent trend, not the far more volatile history of oil production and consumption over the last century. Consequently, the company's share value quickly sank to zero when oil prices plummeted in 1986.

Value Merchants had a business model of doubling its store count each year. They were a discount retailer that sold cheap items for $1, and the CEO believed that more stores would automatically lead to bigger profits. Fearon recognized that their profit margins were insufficient to support this rapid expansion and that the company, having no means to return unsold merchandise, had adopted an inventory rotation scheme in which unwanted items from one location were sent to another. He shorted the stock, which went bankrupt within a year. Value Merchants failed due to its fixation on expanding its locations, forgetting the essential role of consumer choice in any retail business. It assumed people would buy its products just because they were cheap, even if they didn't need them.

Finally, Fearon recounts his visit to the headquarters of the Yellow Pages publisher Idearc in late 2008, when its obsolete business model should have been apparent to anyone in finance. The CEO attempted to convince Fearon to invest by asserting that people in central areas of the U.S. would keep relying on their print version of the directory, despite the spread of internet usage and smartphone penetration across the nation. The CEO admitted that the company's online platform had failed to gain many users because, as he said, people in places like Kansas and Arkansas "just do things differently'' and preferred using the company's traditional printed directory. Fearon, after living in Houston, Chicago, and San Francisco, balked at this classist and inaccurate assumption and sold the stock short when it reemerged after bankruptcy in 2010 under the name SuperMedia. The firm’s absurdly high valuation, fueled by Wall Street's fondness for its EBITDA figures, collapsed within a year.

Practical Tips

• You can develop a keen eye for financial red flags by practicing with historical data. Start by reviewing the financial statements of companies that have gone bankrupt in the past five years. Look for common indicators such as declining revenue, increasing debt, and negative cash flow. By identifying these patterns, you'll be better equipped to spot potential investment risks in real-time.

Other Perspectives

• The reliance on the "rig utilization rate" as a "magic number" might have been a simplified communication tool for stakeholders rather than a reflection of the company's entire strategic outlook, and other, more nuanced strategies could have been in place but failed for reasons unrelated to the understanding of oil price history.
• The assumption that cheap items will automatically sell can be valid in certain economic conditions where consumers are more price-sensitive, which suggests that the timing and external economic factors could also have played a role in the bankruptcy.
• The company's valuation and subsequent collapse could be partly attributed to Wall Street's overemphasis on EBITDA figures and not just the company's business model, indicating a potential misalignment between financial market expectations and the company's operational realities.
• The assumption that the CEOs made flawed assumptions is based on hindsight; decisions that seem obviously flawed in retrospect may not have been clear at the time given the information and trends available then.

Investors, Such as the Author's Past Boss and the Researcher Who Hyped Consilium's Shares, Overestimated Their Future Prediction Abilities Based on Limited Past Information

Fearon witnessed many examples of investors and executives being overly reliant on their own, often false, predictions of the future. For example, his supervisor there purchased several stocks with clearly flawed underlying business fundamentals. The boss believed he had allies on Wall Street who would have his back by tipping him off to good investment opportunities. Fearon spotted the danger signs in those companies immediately but, as he recounts, his boss dismissed his concerns and eventually squandered a fortune on those bad picks.

In a...

Dead Companies Walking Summary Understanding Customer Needs, Risks of Conformity and Exuberance

Customer tastes evolve, and even the most meticulously crunched numbers and financial data are practically worthless without taking into account the essential truth that people, not balance sheets, generate revenues. Furthermore, managements may fail to see their companies' shortcomings when they believe that their personal preferences are representative of the wider market they serve. Similarly, it's common for investors to fall into confirmation bias, which is trusting their own, and other’s, predictions over real-life data.

Ignoring Customer Needs Can Doom Even Thriving Companies

Fearon urges executives to constantly be mindful of their clients' needs and desires. He also stresses that smart managers must always be open to the reality that they might be wrong, or at least have failed to recognize or adapt to changes in the behavior of the consumers who generate their incomes.

The Author's Initial Restaurant Was Unsuccessful Due to Assumption Marin County Customers Would Embrace Cajun Cuisine

Fearon recounts his own disastrous foray into owning and operating his first Cajun-style eatery. As an ardent admirer of the cuisine for his entire life, he assumed that...

Dead Companies Walking Summary Disconnected Leadership Risks and Skillful Management to Rescue Failing Companies

Savvy leaders identify difficulties and take action to remedy the situation. During troubled periods, it’s important to do more than just be "hands-on"; you also must be mindful of your own potential culpability in creating the problem. Also crucial is the ability to engage with, and motivate, the employees who perform the work of operating a business.

Disconnected Leaders Can Ruin Their Companies

Rob from BMHC exemplifies how investors and business leaders should maintain an appropriate lifestyle to sustain the morale of employees, who are responsible for the actual work of creating and growing a successful enterprise.

BMHC's Robert Mellor and JCPenney's Ron Johnson Made Decisions Ignoring Core Customers

While BMHC’s finances were crumbling beneath an ocean of debt and collapsing demand for its low-margin products, its CEO, Mellor, had the audacity to keep its corporate headquarters on San Francisco’s waterfront in a highly expensive location. By maintaining this imperial corporate lifestyle, and continuing to pay himself a seven-figure salary, Mellor demonstrated his disconnect from economic realities and unwillingness to make the necessary sacrifices to prevent...