Eight Companies Ruined By Their Founders

Story first appeared on USA Today -

For every Sergey Brin, there is a Michael Dell. While the Google co-founder and CEO made his company one of the most valuable in the world with its shares trading near an all-time high, Dell has laid waste to his namesake. Dell and financial supporters offered to buy the company for $13.65 a share, 40% lower than what it was worth when Dell returned to the company as CEO in early 2007.

Investors who bought Dell shares a year ago have taken a haircut of more than 20%. Dell's failure is not unique. He belongs to a group of founders of large public companies that showed great promise but were ultimately wrecked by poor decisions, legal problems, and a lack of innovation.

Perhaps the greatest hallmark of founders who ruin their companies is that they appear to look out mostly for No. 1 rather than the interests of the company and its shareholders. For starters, they accept excessive compensation.

Steve Jobs of Apple, earned $1 in salary and bonus in 2010. By contrast, Aubrey McClendon, who was recently ousted as CEO of Chesapeake Energy, made over $100 million in 2008, and remarkably large sums in the years since then. Some of his other actions, such as allegedly borrowing against assets that he co-owned with Chesapeake, raised concerns of conflict of interest.

Martha Stewart recently received a new contract from her company, Martha Stewart Living Omnimedia, which has lost money four years in a row. Under the arrangement, she will continue as founder and chief creative officer at the firm until 2017. That is in addition to the more than $20 million she made over the three years that ended in 2011.

Dov Charney, who drove the company he founded, American Apparel, to the brink of bankruptcy in 2011, made $11.6 million that year. Michael Dell, who in 2010 settled Securities and Exchange Commission charges that he helped misrepresent Dell's financials, made more than $21 million during the company's last three combined fiscal years.

A more complex measurement of these founders' performance is their lack of vision to transform their companies as the markets in which they operate change. None have shown the foresight Brin did when he moved Google beyond search and into mobile operating systems. And his company is also the dominant force in online video.

Dell did not drive any comparable revolution at his company, which never stepped aggressively into the new age of personal computing— tablets and smartphones. The same holds true for Mike Lazaridis, the co-founder of BlackBerry, which did not transform its market share in the corporate smartphone industry into a lead in the consumer sector.

Richard M. Schulze, who was the founder, largest shareholder, and de facto head of Best Buy oversaw a period in which the retailer failed to move into e-commerce quickly. In the meantime, Amazon has nearly bulldozed Best Buy under.

The most often damaging problem with founders is that they cannot be pushed out. Martha Stewart owns the controlling interest in her company. Groupon founder Andrew Mason and two other shareholders control that company. Schulze and Dell own commanding portions of the shares in the companies they founded.

24/7 Wall St.'s review of large, U.S. publicly traded companies included an analysis of company financials, as well as share price changes over time. We reviewed company documents filed with the SEC to identify voting share of the founders. If that could not be determined, we used the founder's total share ownership. In Dell's case, the voting share reflects his ownership before the completion of the company's pending leveraged buyout.

Eight Companies Ruined by Their Founders:

1. Dell, founded 1984
Founder: Michael Dell, 13.97% voting share
Dell started his company when he was 19 years old. By 2001, the company he founded as a college student was the largest computer systems provider in the world. In 2004, Dell resigned as CEO but returned to the position in February 2007. By then, the company had already begun to lose its appeal with consumers in the competitive PC business. Despite Dell's return, the company continued to struggle in its core business. Dell's worldwide PC market share fell from 15.9% in 2006 to 10.7% in 2012. Consumers' growing preferences for tablets and smartphones over PCs and regulatory scrutiny have hurt the company. In 2010, the SEC fined Dell $100 million, and Michael Dell $4 million, alleging the company engaged in accounting fraud intended to mislead investors about financial performance. On Feb. 5, Dell reached a deal with a group of investors that included Michael Dell to go private for $24.4 billion, the largest leveraged buyout since the 2008 financial crisis.

2. Chesapeake Energy, founded 1989
Founder: Aubrey McClendon, under 1% voting share
McClendon, Chesapeake's CEO since he helped co-found it has become known for his lavish compensation packages and extreme bets on his company's performance. In 2008, McClendon lost much of his personal fortune after borrowing money to buy massive stakes in Chesapeake. McClendon was paid $100 million that year. Between 2009 and 2011, McClendon's earned more than $57 million in total compensation. In April 2012, Reuters reported that McClendon had again borrowed a large amount of money, in this case, $1.1 billion, using his stake in the company's natural gas and oil wells as collateral. Reuters also discovered McClendon was running a $200 million hedge fund from within company headquarters that speculatively traded in "the same commodities Chesapeake produces." Within weeks, McClendon gave up his position as chairman due to concerns over potential conflicts of interest. He is scheduled to resign as CEO April 1.

3. Martha Stewart Living Omnimedia, founded 1997
Founder: Martha Stewart, 86.7% voting share
Stewart's company continues to struggle while she remains chairman. Stewart's audience is aging and the company relies too much on it's print magazine revenue. Stewart's image took a serious hit in 2004, when she was found guilty of conspiracy, obstruction of justice, and making false statements to a federal investigator after she was indicted for insider trading. Although Stewart launched a high-profile "comeback" campaign after her release from prison, her efforts have not paid off for the company. It has not turned an annual profit since 2007. The company's stock price is down more than 58% the past five years. Part of the problem is executive turnover. There have been at least five CEOs and five CFOs since the company's start. Many executives argue that Stewart's excessive involvement has hampered their ability to make change. The sixth CEO, Lisa Gersh, announced in December that she was leaving the company after serving in the position for just five months. Despite the company's struggles, Stewart was paid more than $21 million between 2009 and 2011.

4.BlackBerry, founded 1984
Founder: Mike Lazaridis, 5.7% voting share (outstanding shares)
Lazaridis co-founded BlackBerry, formerly known as Research In Motion, in 1984 and served as co-CEO of the company, alongside Jim Balsillie, through January 2012. The two pioneered the smartphone revolution. Lazaridis, however, failed to prepare BlackBerry for the upcoming competition from consumer-facing rivals. Among the largest mistakes marking the end of Lazaridis' tenure were the failed BlackBerry PlayBook tablet, a four-day global service outage — which left phones unable to browse the Internet or access emails and texts — and a focus on business professionals even as iPhones and Androids absorbed market share. In the third quarter of 2012, BlackBerry's worldwide market share of mobile device sales, by operating system, was just 5.3%, down from 11% in the third quarter of 2011, according to Gartner research firm.

5. Countrywide Financial, founder 1968
Founder: Angelo Mozilo, less than1.5% voting share
Mozilo, former Countrywide CEO, became the face of the subprime mortgage mess after that market collapsed. Under his watch, his company began financing mortgages to high-risk borrowers, which during the housing boom drove the company's spectacular growth. In 2006, Countrywide financed about 20% of all mortgages in the U.S., more than any other mortgage lender in the country. But the company fell apart when the housing market tanked and borrowers defaulted on their high-interest loans. Countrywide was eventually sold to Bank of America in 2008 for $4 billion, with Mozilo forced out a few months later. The company faced a barrage of lawsuits, arguing that Countrywide had used deceptive practices to get people to apply for mortgages they could not afford. Mozilo's integrity was also called into question when it was reported that several government officials and politicians, such as then-U.S. Sen. Chris Dodd, received favorable mortgage deals simply by being "friends of Angelo." In 2010, Mozilo settled an insider trading charge with the SEC for about $67 million. He is permanently banned from serving as an officer and director of a public company, under the terms of the settlement.

6. Groupon, founder 2008
Founder: Andrew Mason, 19.5% voting share
Mason, Groupon's quirky founder and CEO, has stumbled repeatedly the past couple years. His company, which provides discounts and daily deals online, had to revise its financial reports in August 2011 after regulators and analysts took issue with its accounting methods. Groupon issued another revision to its financials in early 2012 as the company overstated its 2011 profit by more than $20 million. Because of these problems, along with general concern that the daily deal fad — the company's core business — may be slowing, the stock price has been declining. It is now roughly a quarter of its initial public offering price of $20 a share, with the company's market capitalization at $3.3 billion. It didn't have to be this way. In 2010, Groupon rebuffed Google's offer to buy the company for up to $6 billion. There has been talk that Mason isn't mature enough to run a company of this size. For instance, he was criticized for drinking beer at the company's annual meeting and for his public gaffes commenting on why it turned down buyouts.

7. American Apparel, founded 1989
Founder: Dov Charney, 43.3% voting share
Charney started and ran American Apparel from his dorm room at Tufts University in the late 1980s. Twenty years later, in 2008, the apparel company had more than 6,700 employees and 197 stores worldwide. But provocative ads and rapid expansion did little to address problems plaguing the company. In 2009, the Immigration and Customs Enforcement agency said that a quarter of workers at the company's downtown Los Angeles manufacturing facility were illegal immigrants. In 2011, two sexual harassment lawsuits were filed against Charney. In December, a former store manager accused Charney of choking him and rubbing dirt in his face. Charney has denied all allegations of misconduct. The company has also struggled to stay afloat financially, running an operating loss in the last 12 months for which financial statements have been released.

8. Best Buy, founded in 1966
Founder: Richard Schulze, 20.24% voting share
Schulze has presided over a company that has struggled to stay relevant in a sector that is increasingly moving online. Best Buy's business has taken a sizable hit from online retailers such as Amazon.com. Some industry experts and analysts point out that Best Buy is increasingly becoming a showroom for electronics consumers — meaning that people go to the store to check out the product and then buy it cheaper online. In the most recent quarter, Best Buy lost $10 million as revenue fell 4% compared to the previous year. The company's share price is approximately one third of what it was five years ago. Schulze also found himself embroiled in a company sex scandal. A Schulze lieutenant, former CEO Brian Dunn, was forced to resign from the company after it was discovered he had an affair with another staffer. The founder received criticism after an internal investigation found that he had knowledge of the affair and did not report it to the board. Schulze announced his retirement from the board shortly after the investigation.

Blackberry Maker RIM Headed for a Cliff

Story first appeared in USA Today.

Research In Motion Ltd., the maker of the BlackBerry, is in steep decline. The company, once the crown jewel of the Canadian technology industry, is now worth 1% of Apple's market capitalization. One way for RIM to stop the downward tailspin: It could sell itself to a competitor or financial firm. But who would step up to buy RIM — and why?

Late Tuesday, the company said it expects to post an operating loss for the current quarter, a sign that BlackBerry sales are falling even faster than analysts expected. On Wednesday, the company's stock hit its lowest level since 2003, the year RIM went from making two-way e-mail pagers to smartphones.

The stock has fallen 93% since their peak in 2008. Since then, the BlackBerry's dominance as the smartphone for on-the-go business people has been eviscerated by Apple Inc.'s iPhone, and more recently, by phones running Google Inc.'s Android software. Research firm IDC says BlackBerrys now account for 6.4% of the global smartphone market, a third of what they had two years ago.

In that time, the company's financial performance has suffered. RIM reported a 25% revenue decline in the latest fiscal quarter, to $4.2 billion from $5.6 billion. For the full fiscal year that ended on March 3, it earned $1.2 billion, or $2.22 per share, on revenue of $18.4 billion. That's down from net income of $3.4 billion, or $6.34 a share, on revenue of $19.9 billion in fiscal 2011.

RIM issued the dire warning about its business Tuesday, adding that it will lay off a "significant" number of employees.

Still, the company is defiant. The Chief executive says he can turn things around with the help of fresh smartphone software. He joined RIM four years ago and was most recently its chief operating officer. He replaced co-CEOs in January after the company lost tens of billions in market value.

Analysts give RIM only a slight chance of coming out of the crisis. To hedge its bets, the company has hired bankers to look at its options. It's not actively looking to sell itself, but it wants to be prepared.

As RIM's prospects worsened, last year marked a turning point in the way analysts assess RIMs value. Instead of treating it like a company with a future, they started looking at it as a collection of parts that could be split up and sold separately to the highest bidder.

Most of the company's value lies in the monthly fees it gets from phone companies in exchange for running the systems that deliver email and Web pages to BlackBerrys.

RIM has 78 million users connected to this system, but estimates show only 20 million are corporate and government users who are likely to stick around because of the communications security RIM provides. The rest are consumers who will jump to competing phones. That business is worth about $2.75 billion to a competitor.

The other major component of RIM's value is its patent portfolio. The company had an early scare in U.S. patent courts in 2006, when it was forced to pay $612.5 million to a small company founded by an inventor who had patents on wireless e-mail delivery. Since then, it's filed for thousands of patents to use as a defense against future suits.

Patents on wireless technologies exploded in value last year, as Apple and Microsoft Corp. started suing makers of phones that run Google's Android software. Countersuits followed. A consortium that included Apple and RIM bought the patents of a defunct Canadian maker of telecommunications gear, Nortel, for $4.5 billion last year. That compares with the $1.13 billion Nortel's once-prominent wireless networks business fetched in 2009.

As a counter-move, Google bolstered its own patent portfolio by buying Motorola Mobility Holdings Inc., a U.S. phone maker with only slightly better prospects than RIM, for $12.5 billion.

Where does that leave RIM? The CEO of MDB Capital, said RIM's patents are worth more than $1 billion, and could be worth as much as $4 billion if a bidding war develops between Apple, Google, Microsoft Corp. and perhaps Samsung Electronics Co.

The value of RIM's portfolio is placde at $2.5 billion, excluding the patents RIM bought from Nortel and shares with Apple, Microsoft and other buyers.

RIM has $2.1 billion in cash, but Walkley discounts this completely, since the phone business will likely start using up cash soon, and downsizing will require severance payments. That means the email network and the patents comprise RIM's entire value at $5.25 billion, by his estimate.

That's very close to RIM's current market capitalization, at $5.4 billion, though a buyer could be expected to pay a premium.
The cash cushion also means that RIM is in no imminent danger of going bankrupt. But as the shares decline, RIM is likely to face increasing pressure from shareholders to unlock the company's value through a sale, and to abandon the comeback plan.

A possible middle ground would be to sell the patent portfolio while keeping the rest of the company. Two months ago, AOL, once a pioneering Internet service provider, sold and licensed its patents —which are more modest than RIM's for $1 billion— to Microsoft.
Microsoft is one company that's been suggested as a potential RIM buyer. The software juggernaut is trying to get back into smartphone software, but its Windows Phones haven't been popular so far. Buying RIM could give it a chance to establish itself as a provider of trusted wireless email services, though moving subscribers from BlackBerry to Windows could be challenging.

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Saudi Telecoms test Fix to Avert BlackBerry Ban

Reuters

Saudi Arabia told the kingdom's telecom operators on Saturday to test a proposed fix to the perceived national security threat posed by Research In Motion's (RIM.TO) BlackBerry smartphones, and said it would not ban service if the test was successful.

The government had threatened to cut off BlackBerry's Messenger function to Saudi users on Friday, but so far has allowed the service to continue.

RIM has come under increasing scrutiny from countries including India, the United Arab Emirates, Lebanon and Algeria that want access to the Canadian company's encrypted network so they can monitor messages they say might signal a potential security threat. RIM had said earlier in the week that third-party access to its network was impossible.

On Saturday, the Saudi Communications and Information Technology Commission said it gave the three telecom operators -- state-controlled Saudi Telecom 7010.SE, Mobily 7020.SE and Zain Saudi Arabia 7030.SE -- 48 hours to try out "the proposed solutions and fulfill the requested regulatory requirements."

CITC said it would decide whether to allow the service to continue or not "depending on the results achieved by the service providers."

The regulator's brief statement did not say what the solution was, but a source told Reuters on Friday that RIM was testing the use of servers in Saudi Arabia to address government concerns. [ID:nLDE6750Q7]

Using local servers would give the Saudi authorities better access to messages that have been handled exclusively through servers in Canada and the United Kingdom.

With about 700,000 BlackBerry users, Saudi Arabia is RIM's biggest Middle East market.

Neighboring UAE, with 500,000 users, has proposed a ban starting Oct. 11 targeting email and Web browsing, as well as the Messenger service, on the device.

The U.S. and Canadian governments have expressed concern about the implications of banning such services.