Why Companies Like Verizon Buy Companies Like AOL
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.