The primary problem was that UCBS was caught in a vise between debts coming due and deflation—falling prices for their primary products. Had it been just the debts, maybe the company could have survived anyhow. It would have paid off the debts with the cash flow from revenues. Plus, the company would have borrowed from Peter to pay Paul.
Had it been just the deflation—the falling sales and falling prices—UCBS might have been able to get by as well. It would have eliminated tens of thousands of jobs, sold off hundreds of subsidiaries and joint ventures, and even shrunk back to the small, one-plant manufacturing company where it all began.
But no. The two forces—debts and deflation—collided in one time and place. UCBS had close to $1 billion in accounts payable and commercial paper (short-term corporate IOUs) coming due before year-end. At the same time, the revenues it hoped to use to cover those debts had disappeared.
Indeed, the three primary industries that impacted UCBS’s largest divisions—PCs, telecom, and wireless—were all sinking like a rock.
Regarding the PC industry, Johnston read an Associated Press story on the Web about a Goldman Sachs survey. Goldman had surveyed 100 IT executives of Fortune 1000 companies, finding that more than half expected to underspend their already-slashed IT budgets. Only 8 percent were going to upgrade their companies’ computers, and 44 percent were postponing computer upgrades until the following year. Johnston sent the article in an e-mail to his VP of sales and asked for his feedback.
“No wonder our PC sales are falling apart!” the VP said later that day over lunch. “Here, look at these global sales figure we’re tracking! Look at this chart—down nonstop for five quarters in a row! Damn. Every time we think the PC market is about to hit bottom, it sinks again. No one wants to upgrade anymore. I can’t blame ’em. My own computer is already at least 10 times faster than I need it to be. What am I going to do with a computer that’s another ten times faster than that? I need it like a hole in the head.” Johnston, again playing dumb, sought to strike an upbeat note.
“You’re too negative. Look at the positive side. Look at . . .” The VP of sales shrugged and laughed nervously. “Hah! You think I’m negative. I’m going to quote Brian Gammage—the guy’s an analyst for Gartner Dataquest. Here’s what he says: ‘This is the worsening of a worsening result, the worst since the third quarter of last year, which was the nadir of a bad year.’ Tell me: Doesn’t that sound like he’s sitting right here in our PC division, talking about our business?”
“Let’s talk about our telecom division.” “Oh no. Please don’t make me talk about the telecom division. Must I? OK, if you insist. The fact is, the telecom sales folks would gladly change places with the PC sales people. Sure, the PC business may be falling into a valley, but the telecom business is getting sucked into a giant black hole of debt, overexpansion, and even fraud. You already know about the megabankruptcies at Global Crossing, WorldCom, and soon, possibly, Qwest. But did you know that at least 82 telecom firms filed for bankruptcy between 2000 and 2002? Did you realize that so much of the telecom industry is on the verge of financial collapse that it could paralyze key segments of the U.S. economy?” “That bad?” “Worse!” “What about our cellular equipment subsidiary?” queried the CEO still playing dumb.
“The cellular industry is on a collision course with a five-car pileup on the freeway. The people running our cell division thought they were smart, spending billions on rights to the socalled Third Generation airwaves. The rights may be worth something in a sci-fi movie or some future techno-era. But today, they’re one of the greatest white elephants in the history of mankind. Our wireless subsidiary spent a fortune—almost a quarter billion just for a small piece of the pie. You want to hear how much other companies around the world spent on 3G rights? Yes? OK, here it goes: Telecoms in Europe alone—$260 billion; in the U.S.—$1 trillion. Total profits from these investments: zero. A big, fat, round zero.” The CEO had heard these figures before from various other sources. “That’s why I encouraged them to focus back on ordinary low-speed cell phone business,” he said.
“Good move! But sales are drying up there too. There are just too many manufacturers pouring out too many different models at cutthroat prices. There are too many service providers, too many overlapping networks, too many deals and bargains. It’s a classic case of a massive, worldwide glut! That’s why six of America’s nationwide service providers cut capital spending by more than 20 percent in the first quarter of 2002! That’s why Nokia and Ericsson are floundering. That’s why I’ve been telling you to dump that subsidiary before it’s too late.”
Johnston stared, stone-faced, at the VP for a few long seconds. He wasn’t sure whether he should confess his innermost fears about the company, as he might with a shrink, or try to put up a solid defense, as he might when talking to Wall Street analysts. He decided to try a mix of the two. “Look, I admit we’ve made serious mistakes in the high-tech areas. I admit we didn’t stop and ask even the most basic questions: Does this company make money? Does this company have real, tangible assets? But that was part of the euphoria. Did we get caught up in it too? Yes, of course. Fortunately, however, we’re a broadly diversified company and . . .” The VP interrupted, shaking his head. “I have just one question,” he said. “Go ahead,” replied Johnston. “They say the recession last year was short and mild, right?” “Yes.” “They say we’re in a recovery now, right?” “Right.” “Well, if we’re running into so much trouble—if almost everyone in our industry is running into so much trouble all over the world, even during a recovery—then can you tell me what is going to happen to us if we fall back into just an average recession? Can you tell me what is going to befall us if, God forbid, we get a severe or long recession?”
The meeting ended, and Johnston was not sure what to do next. He felt like an alcoholic trying to find the right moment to go to an AA meeting. But he finally took the first step.
He called the auditors, apologizing—to no one in particular—for any disdain he had expressed or implied in the previous meeting for the auditing process. Plus, he did something that he had never done before: He called in consultants and auditors to the same meeting at the same time. With everyone assembled, he requested a sweeping internal study of every possible accounting gray area: executive pay and options, the subsidiaries, the pension funds, the derivatives.
Once the report came back, he called a new press conference with Wall Street research analysts—this time open to the public, as required by new SEC regulations.
Later, commenting on a CNBC talk show, one analyst described the conference this way: “I felt like a priest sitting in a confessional, hearing a long litany of corporate sins. Item by item, piece by piece, the CEO told us what they had done wrong. Then he told us how they were going to fix it. Did it shock the market? Of course. No one had any inkling that UCBS was that far into the accounting gimmicks.
Did the stock plunge? Of course. But it cleared the air. If investors can survive today’s conference, they can survive anything. As to the company’s own financial survival, though, that’s another matter. No one knows.” Johnston’s second step: to clean house. He finalized his timeline to unravel the derivatives transactions, to sell off or consolidate the subsidiaries, and more.
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