The signs that a company is heading for disaster

When things look like they can't get any better for a company, they're probably about to get a lot worse. Matthew Lynn explains why that is your signal to sell.

There has always been a rough checklist for signs of impending corporate disaster: abig new headquarters by a prestigious architect;a place in the House of Lords for the chairman;a costly re-branding campaign or expensive acquisitions in industries the firm knows nothing about.

On any of those signs, savvy insiders have always dumped their shares. Now we can add another signal to the list: allegations of world domination. Once a firm gets to the size where everyone is accusing it of being too big, the game is probably up. It's time to get out of the shares.

The latest example came this month. Tesco's figures were shocking not because they were terrible in themselves, but because we're so used to the big beast from Cheshunt swatting aside its competitors and racking up bigger and bigger profits every year.

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Tesco reported that like-for-like sales dropped 2.3% over the Christmas period. Far from squeezing everyone else out of business, and although you can hardly move without bumping into a Tesco Extra, Tesco Metro, or Tesco Express, it seems the firm is getting squeezed by savvier rivals.

True, these are tough times for all retailers but they aren't that tough. Overall retail sales were up 4% over Christmas. If Tesco's sales are slipping, people are spending their money elsewhere. There is no positive way of spinning that. The shares were hammered and rightly so. This week, they were as low as 312p. Last year they were trading as high as 440p.

Yet over recent years, we've heard a chorus of complaints about the firm's overwhelming market power. Its 30% share of the British grocery market made it the country's largest employer andits dominant retailer. It was moving menacingly into new markets banking, insurance, law, and clothing. Its club card was an Orwellian identity trick, collecting data on us: whatever you did, the Tesco computer probably knew about it before anyone else.

Nothing seemed to be safe from the juggernaut. Friends of the Earth published a pamphlet called The Tesco Takeover, arguing the firm was too tough on suppliers, did nothing to help hard-pressed farmers, and had too much political clout. The Tescopoly website co-ordinated local campaigns against the company. In Bristol there were riots over the proposed opening of a new store. It was impossible to go to a dinner party without hearing a middle-class woman pronouncing smugly that she no longer shopped at Tesco because it was a bad thing'.

None of it made much difference. Perhaps Tesco found it a little harder to get the sites it wanted, and maybe the planning applications generated a little more heat. But the opposition didn't stop it. Tesco became the author of its own undoing.

It's a familiar story. An incredibly successful company grows too large, loses focus, and provokes a backlash. The business model gets confused as it tries to do too much. Maybe Tesco can return and reassert its position as Britain's most successful retailer. But it seems unlikely. Far more probable is a long, slow period of decline as hungrier, smarter and more focused rivals eat chunks out of its sprawling empire.

We've been here before. Every time a company gets to the stage where it is regarded as dangerously dominant, it is usually sitting on the edge of a steep decline. In the 1950s, General Motors was regarded as the acme of capitalist evil, with sales and profits that outstripped those of many countries. In the 1970s, IBM was viewed as a sinister behemoth likely to control the world with its supercomputers. In the 1990s, regulators spent years trying to tackle the power of Microsoft, desperate to bring it under control before we were all taking orders from Bill Gates.

And now? General Motors had to be bailed out by the US government - unless one of its cars runs into you, it isn't a threat to anyone. IBM is little more than a big IT consultancy; it might bore people to death, but nothing more. Microsoft is increasingly irrelevant to the computer industry the Xbox aside, nothing it has launched in the last decade has met with any real success.

But none of those firms were stopped by regulators, governments or protestors. In fact, a free market system never allows a single firm to accumulate too much power. Once it gets above a certain size, it becomes too unwieldy. It gets bogged down in red tape. Customers grow suspicious, with their innate sense that a monopoly is bad for us. We spread our spending around to ensure one business does not become too mighty. As that happens, the giant loses its grip.

Once you hear people who know nothing about business complaining that a firm is too powerful, it's a sure sign it's about to go into decline. Pretty soon you'll be hearing it about Apple and Google too. When you do, there will be no better sign that it's time to sell the shares.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.