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.

Dell's Plan to Sell Plants Causes Jitters in Ireland

Limerick Facility Gave Region Boost; A Shift to Poland

Dell Inc.'s plan to sell its assembly plants could pose problems for cities that count the tech giant as a major employer. Nowhere have worries been greater than in Limerick, Ireland, where a Dell facility with about 3,000 workers helped revitalize the economy.

"It would be dreadful news if something were to happen to Dell," said John Gilligan, who earlier this year became the 812th mayor of Limerick, a city of almost 91,000.

Dell opened its plant in Limerick, Ireland, in 1991, but rising labor costs have diminished the country's attractiveness as a manufacturing hub.

Mr. Gilligan, whose son-in-law works at the Dell plant, said the city hasn't received any recent word from Dell on the plant's future.

There's reason for concern: Dell has approached contract computer manufacturers with offers to sell its plants, according to people familiar with the matter. One person briefed on the strategy, which was reported in the Sept. 5 Wall Street Journal, said some factories Dell doesn't sell could be closed.

As for Limerick, Dell executives have privately discussed closing the plant for two years, said two people with knowledge of those discussions. One of those people said Dell executives early last year decided to close the factory, though they didn't establish a firm timeline.

This person said the goal is to move production capacity from Ireland to Poland, where Dell opened a factory early last year -- though the company is moving cautiously to limit any disruption of manufacturing and defections of sales and operations staff Dell wants to retain. In addition to factory workers, Dell has more than 1,000 office workers who will likely remain in Ireland, that person said.

A Dell spokesman declined to comment on the future of the Ireland plant. "It's clear from our regulatory filings that we're continuing to evaluate and optimize our global manufacturing and distribution network," said spokesman David Frink.

Dell, of Round Rock, Texas, is trying to cut manufacturing costs because of increasing pressure to improve its profitability. While Dell's factories in India, China, Brazil and Malaysia should be relatively easy to sell, these people said Dell may simply close facilities in the U.S. and Ireland, where high labor costs make them less desirable to buyers. Dell already closed a plant in Texas earlier this year.

Dell opened its Ireland plant in 1991, joining a wave of U.S. tech companies that needed a base in Europe to avoid import tariffs and control costs for transporting finished goods. Many chose Ireland because of a low corporate tax rate -- estimated by the country's Industrial Development agency at 12.5% compared with 30% in Germany and 39.5% in the U.S. The Irish government also gave Dell grants totaling €55 million ($78.2 million), according to a spokeswoman for the development agency.

Limerick saw the benefits. In addition to factory jobs, companies supplying components to Dell have provided several thousand more jobs, said Mr. Gilligan. Limerick -- once-known as "stab city" for its high crime rates -- has begun redeveloping its decrepit public housing, and the city recently approved a €350 million downtown redevelopment project, he added.

Local uncertainty has grown in recent years, though, as rising labor costs have diminished Ireland's attractiveness as a manufacturing hub. Dell, meanwhile, ran into its own problems as a company that grew around sales of commercial desktop computers shifted to consumer laptops, particularly used Dell laptops.

While Apple Inc. and Hewlett-Packard Co. saved costs over the past decade by selling many of their factories and shipping some computers directly from contract manufacturers' plants, Dell produced laptops through a two-step process in which a contract manufacturer partially builds a PC and ships it for completion to a Dell factory like the one in Limerick. Many of these laptops are then later sold as used Dell notebooks and discount Dell notebooks.

The company's problems led Michael Dell, its founder, to return as chief executive early last year. He subsequently hired Mike Cannon, the former CEO of contract PC manufacturer Solectron Inc., to head Dell's manufacturing, and ordered a review of the company's production system.

Executives working with Mr. Cannon decided the company should sell as many of its plants as possible, said people briefed on those plans. But that process could take years, they said. So in the meantime, Dell has considered shorter-term solutions.

Closing or scaling back the Ireland plant could help, those people said, because the factory in Lodz, Poland, is large enough to absorb much of the laptop production being done in Ireland -- and PCs can be built in Poland less expensively.

Chris Van Egeraat, a researcher at the National University of Ireland who studies the PC industry, said Poland also has a low corporate tax rate and easy shipping routes to much of Europe, but its labor costs are much lower following recent rises in Ireland. "Ireland is not the same economy it was when these plants arrived," he said.

Recently, though, Ireland's growth has faltered amid a slowdown that could tip the 15-nation euro zone into recession. In addition to global financial turmoil and high commodity prices, Ireland faces a collapsing housing market. House prices, which quadrupled over the past decade, have been falling since last year and slipped 9.4% in July from a year earlier, according to the most recent permanent tsb/ESRI house-price index.

Since construction accounts for 10% of the 4.4 million-person Irish economy, the real-estate crash has had an outsize impact. Irish unemployment in August rose to 6.1%, its highest since November 1998 and up from July's 5.8%. Recent surveys predicted continued slowing in Ireland's manufacturing sector.

By: Justin Scheck and Joellen Perry
Wall Street Journal; September 15, 2008

Dell's Net Slips Amid Push Into Asia

Computer Giant's Drive Into Emerging Markets Leads to Discounting, Toll on Profit Margins

Dell Inc. reported a 17% drop in quarterly profit, raising questions about the company's 18-month turnaround effort and whether a slowdown in business spending is spreading to Europe and Asia.

The results sent shares down 14%, or $3.48, to $21.73 at 4 p.m. Friday on the Nasdaq Stock Market.

Dell's declining profitability was a negative counterpoint to rival Hewlett-Packard Co., which last week reported a 14% jump in quarterly profit.

While Dell's report is likely to renew worries about business spending, the Round Rock, Texas, computer giant acknowledged that some of its woes were the result of its effort to reignite growth, something Chief Executive Michael Dell called "an imprecise process" in a conference call with analysts. He said that the company was "a bit too aggressive" in some of its businesses. Profit margins fell during the quarter.

Dell showed signs of solid demand, reporting an 11% jump in revenue for its fiscal second quarter ended Aug. 1 from a year earlier. The company, best known for business PCs, said shipments of consumer machines rose 53%.

But much of that growth didn't translate into new profit, as the company has faced falling PC prices and heavier spending on marketing. Chief Financial Officer Brian Gladden added that Dell also is seeing a slowdown in tech spending that is beginning to metastasize.

"It really started with big corporations, and we've seen slowing in state and local government spending, small to medium sized businesses as well," Mr. Gladden said in a conference call with reporters.

The company expects "continued conservatism" in business tech spending in the U.S. as well as Europe and "several countries in Asia."

Dell has lagged H-P in exploiting sales to Asian countries, but has been moving to catch up in markets that include China and India.

While commercial sales in the Asia-Pacific region and Japan have been brisk -- rising 16% in the period -- Dell has had to sell lower-priced PCs in those markets and spend heavily on advertising.

Bill Kreher, an analyst at Edward Jones, said he didn't expect such poor results, and said he is concerned that Dell will continue having trouble in emerging markets. "The weakness in Asia came as a big surprise," he said. "We didn't hear that type of disclosure from other companies like H-P."

Dell, one of the most consistent performers during the early part of the decade, ran into a series of problems that led Mr. Dell early last year to return to the CEO post after a three-year hiatus.

While he was away, the company lost the No. 1 position in global PC sales to H-P, and had some highly publicized problems with customer service.

The company, once known for selling exclusively through the Web and via telephone orders, subsequently moved into retail stores, and has begun emphasizing style and color in its consumer notebook PCs. Such efforts resulted in increased market share and a 28% jump in revenue from consumer PC shipments in the second quarter from a year earlier, but "profitability was roughly break even" in the consumer division, the company said.

Discount laptop sales remained strong, advancing 26% in the quarter from a year earlier. But sales of desktop computers declined 2%.

Unlike H-P, which makes money on software and technical services in addition to computers, Dell is almost entirely dependent on hardware. That means dropping PC prices have had a particularly big impact on its business in recent months, said Lou Miscioscia, an analyst at Cowen & Co. Dell's marketing spending also impacted its profitability. The company's gross profit margin declined to 17.2% in the recent quarter from 18.4% for the quarter ended in May and 19.9% in the year-earlier period.

Since Mr. Dell's return, the company has started revamping its manufacturing, increasing its reliance on contract PC makers and shutting down a factory in Texas. So far, though, such changes have been offset by rising expenses in marketing and investments in new product development.

Mr. Gladden said he holds meetings every other week to discuss Dell's expenses and said the company will continue a cost-cutting effort that began last year. He said Dell should hit its target of eliminating more than 8,800 jobs later this year. Investors will be paying close attention to ongoing cuts, said Mr. Kreher of Edward Jones. If PC and server prices continue falling, profit margins could be squeezed even more.

Investors will be paying close attention to ongoing cuts, said Mr. Kreher of Edward Jones, since PC and server prices are expected to continue falling, further squeezing profit margins.

The company said net income for the fiscal second period was $616 million, or 31 cents a share, compared with profit in the year-earlier period of $746 million, or 33 cents. Revenue rose to $16.43 billion from $14.78 billion.

By: Justin Scheck
Wall Street Journal; August 29, 2008

Dell Still in Need of Cost Control

It has been more than a year since Michael Dell returned to Dell, Inc., but the company doesn't seem to be rebooting very quickly.

Mr. Dell, founder of the computer-making giant, has been overseeing a restructuring since he returned as CEO in January 2007 after a three-year hiatus.

Mr. Dell has replaced executives, pursued new product lines and cut more than 5,300 employees, with at least 3,500 more to go.

Yet as of the end of January, costs were still a problem. Dell's selling, general and administrative expenses were up 50% at the end of the last quarter compared with two years ago, while revenue was up less than 10% over that period. Some of this may be due to current economic conditions, in which many people have turned to buying discount laptops from a variety of online sellers.

Analysts don't expect much better in the current quarter, which Dell will announce after Thursday's close of trading. They forecast net income of 32 cents a share, off about 6% from last year, due to stubbornly high costs, competitive pricing and weaker U.S. business and consumer spending.

“Dell is a show-me story,” says Toni Sacconaghi Jr., a Sanford Bernstein analyst. While he likes it in the long run, it hasn't shown yet.

By: Karen Richardson
Wall Street Journal