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Why Companies Like Verizon Buy Companies Like AOL

by in Telecom

Ever since Verizon sold off most of their towers and then used the money to buy AOL (yes, really!) I have been trying to understand why.

I was talking with the CFO in a large company that is a friend of mine and he explained it. It now makes sense. He calls it the “Carly Fiorina effect.” (See https://en.wikipedia.org/wiki/Carly_Fiorina).

Let’s say that you are running Verizon and you are having troubles making the business work right. Your profitability is down, your subscribers are down, you have just taken on an enormous debt load buying your own stock back from chosen shareholders. In short, you aren’t managing the business and it is out of control. What do you do?

It turns out the answer is to reorganize or to make an acquisition. This is the perfect, and now standard cover-up for a grossly mis-managed business.

You see, when you lay off a lot of people you can take a “one-time charge” on your books. You can write off an awful lot to account for this one-time event. While supposedly the write-off is only the cost of dismissing employees and reorganizing and scaling down, the truth is that everything gets loaded into this reconfiguration. It’s treated as a one-time event in the financial community so it doesn’t affect your quarterly numbers. if you do it correctly, a lot of future expenses are included, so that future quarters will appear to be more profitable than reality.

You get to do this accounting magic every time you reconfigure your business. Verizon you can sell off its towers and get this one-time event and then a little later can buy AOL and it now has another one-time event.

If you manage these one-time events carefully enough they pick up a lot of the costs of your business and can make the core business look a lot more successful than it really is. It’s the perfect way to cover up declining profitability or other financial problems.

Of course there are strict rules about how things are to be accounted for. But the reality is that these one-time events are used to cover up a lot of mistakes and underlying problems.

Carly Fiorina at HP was certainly not the first to use this technique to mask non-performance. But she was certainly a master at it.

So when you see companies like Verizon doing what appears to be crazy things, you can bet that the Carly Fiorina effect is at play.

Common sense should be your guide.

If you owned Verizon would you want to own and control all of your towers, or would you want another company to own and control those towers and lease them as they please? (See, common sense works here.)

Let’s try that question again: If you could sell all of your towers for the same amount of money that you take in every two weeks, does that sound like a good business deal?

Perhaps what appears to be bad moves are cover-ups of bad management by utilizing accounting magic.

Enlightened?

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  • Simon Dudley

    Dave I think one of the most important considerations here is the longevity of the senior management team. Most of these companies have a revolving door of senior managers. Each needs to make their mark, but doesn’t want to actually do the hard work of improving the business. After all that would take both time and effort. Much easier for them to come in, throw everything in the air, cherry pick a few things they can say they did, then run off to the next opportunity.

    I strongly suspect that much of the problem lies in the quarterly orientation of business these days. It just magnifies the idea that all business opportunities and problems must be solved in 13 weeks or less. That’s just a ludicrous way to run any business, and the bigger the business the more stupid it becomes.

    Now if you’ll excuse me I’ve decided to to lose 40lbs this quarter and I’ve only got a few more days to do it. So I’m off to perform some radical self surgery. I’m sure everyone will be impressed with the results (briefly). Just my luck the human body seems to have a spare of almost everything. I think that spare lung, arm, kidney I’m presently lugging about will considerably lighten the load.

  • mjgraves

    Verizon will do whatever it can to make itself look good, regardless of the underlying reality. What concerns me is the trend in selling off mobile infrastructure then leasing it back as a service has essentially consolidated the carriers underpinnings in one or two places. Had the carriers tried to merge it might have accomplished something similar, but brought with it regulatory scrutiny. They way this has happened the network has been consolidated, without the regulator being any the wiser.

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Colin Berkshire is a highly technical HR executive in the Pulp and Paper Industry. Colin has an engineering and voice background, and is currently on assignment in Asia. NOTE: Colin does not respond to comments, and does not Tweet.

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