It’s not like we didn’t see this coming. Two years ago I said that HMV’s management was no longer working for shareholders, but the banks. And I said it would be a good idea to short the stock. It certainly was.
But that’s enough gloating. Today I want to show you the real reason for HMV’s demise.
And I think there’s a very important lesson to be learned here. Because there are hundreds of quoted companies on the stock exchange walking the same path. Staving off insolvency on the one hand and promising shareholders everything is fine and dandy on the other. Oh, and how about a little bonus too… In short, this really should be a wake-up call for investors.
The media pundits have given their reasons for HMV’s collapse – and pretty obvious they are. But changing consumer habits needn’t have led to HMV’s crack up – and certainly not so soon.
HMV is a lesson in how not to manage a business in an industry facing change.
In fact, only last week, I flagged Enterprise Inns as a business in an industry similarly devastated by change. And yet my Enterprise bonds have done fantastically well, and as for the shares… well, they’re up over 300% in the last year.
Let’s look at what really went wrong with HMV. Because I can tell you, the root cause runs far deeper than the superficial musings of the media. I mean, did you know that in 2006, management turned down a bid offering shareholders £762m (£1.90 a share!) for the company?
Management said it was an insufficient valuation for the company. And then they went on to destroy the whole darned thing…
What were they thinking?
The wise guys saw the writing on the wall for HMV as early as the nineties. Back then EMI, the owner, hived it off into a separate business. By 1998, the company was dumped on an unsuspecting public in a public flotation.
We’ve seen this trick hundreds of times. Woolworths and Comet were spun out of Kingfisher group and Kesa (respectively), allowing the stronger group to survive. Think about our once famous car industry too. The stronger marques like Jaguar, Land Rover and Mini were agglomerated into successful foreign enterprises… the rubbish ended up in Rover group and bankrupted by inept management.
During the mid-noughties, Richard Branson’s Virgin group sold the UK megastores business and they were rebranded under the banner Zavvi.
What I’m saying is that the music retail business was recognised as a bad one way back when. And in many ways, the industry was restructuring all by itself. Record stores (I still call them that!) were going bust left, right and centre.
Now, rather than welcome what economist Joseph Schumpeter terms “creative destruction”, HMV management fought it. Remember those stores that Branson had dumped and were now labelled Zavvi – well, Zavvi folded on Christmas Eve 2008. Now, guess who decided to pick up nearly half the stores? HMV of course!
They bought stores from failed music chain Fopp too.
But for these guys it clearly wasn’t sufficient to double down on music retailing. Oh no… in 2006, HMV bought failing bookstore group Ottakars and merged it with its own Waterstones. Of course, you don’t need me to tell you that the book industry was soon to follow the record industry into creative destruction!
What were these guys thinking? Where others feared to tread, they boldly flashed shareholder cash. And as they did, the shares fell from over £2.50 to nearer £1.50. By 2006, private equity group Permeira offered shareholders a get-out card. They offered £1.90 a share. But management said “take a hike!”
From there, HMV headed into even more muddled acquisitions. And more pain for shareholders.
Getting away with murder
Having finally caught on to the plight of the book and music retailing industry, management decided to take bold action. By the end of 2009, HMV bought MAMA group in a deal worth £46m. MAMA manages music artists and live events. It owns plenty of fantastic venues and bars in central London too.
So, HMV changed tack. Of course it all led to more costs and more management time absorbed with the new non-core businesses.
Management forgot what business they were in. And I don’t mean the music retailing business. I mean the business of gradually running down retail units and adapting the business model to the new times. Yes, I know they tried. But frankly their web presence wasn’t nearly good enough. And they were too late in following competitors that were selling out of tax-free zones.
In the end, it was a mad scramble to introduce t-shirts, calendars, electronics, etc to their stores. It was, of course, too little, too late. By now, they’d built up mountains of debt.
Frankly, the private equity guys couldn’t have done much worse with HMV than the management did… and they offered what now looks like an incredibly generous £762m for the business.
Now, had HMV folded under private equity ownership, you can be sure the media would have had the knives out for the private equity boys.
But when it comes to the stock market, management can get away with murder. So beware!
What do we learn from this?
Far too many investors run shy of industries in decline. But we have to remember, it’s not the plight of the industry that matters, but how management deals with creative destruction.
Because destruction clears the path for new growth. I’ve banged the drum for Supergroup, a clothes retailer that’s found the sweet spot between bricks and clicks. Now, if I had a quid for everyone that’s told me they wouldn’t touch any stock in the retail sector…
I’ve also talked about Enterprise Inns – the UK’s largest pub landlord – another industry in decline. But to deliver fantastic shareholder value, all it’s done is to gradually trim its pub portfolio and manage the debt position.
So let me leave you with today’s take away. It’s a business lesson that comes from way back in the old days when record shops were as popular on the high street as a bookie is today. It’s from the band (and business guru) Bananarama…
“It ain’t what you do, it’s the way that you do it. And that’s what gets results.”
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