Seeing the Emperor without a Switch
So was all of this unforeseeable? As a matter of fact, it was foreseen. Carley Cunniff, an officer of Sequoia (since retired), answered my cousin on the morning of April 14, 2000. “I’m not a technology analyst,” Cunniff volunteered, “but I did go through Lucent’s annual report….As a financial analyst, I can tell you that you need to be Sherlock Holmes in order to figure out what the heck Lucent’s earning.” Those earnings were not, she said, what a casual reader of Lucent’s press releases would have guessed. “For example,” she continued, “Lucent is considered a great growth stock. Let me ask you in this room, what rate would you guess Lucent’s domestic revenues are growing at – [bearing in mind that] this is one of the great technology boom periods of all time?”
The number Cunniff proposed wasn’t McGinn’s magical 20 percent; it was half that rate. She went on to detail how Lucent was financing its customers, many of them overseas (where some of its dubious sales were occurring). “[Lucent’s] balance sheet is starting to explode,” she said. “Its receivables are going way up….So they’re not getting that cash back.” Needless to say, Lucent’s $41 stock price, considered depressed at the time, didn’t strike her as undervalued. Two and a half years later, Lucent’s share price was worth less than a dollar.
Even after the Sequoia meeting, McGinn kept promising 20 percent annual growth. Remarkably, after McGinn was fired, Henry Schact, who succeeded him, continued to “call out quarters,” Endlich observes. “Each time he set a target date, a specific quarter, and each time he missed the mark.”
The lessons of Lucent haven’t been learned. Public companies continue to give Wall Street guidance in advance of each quarter, then labor furiously to match expectations. The ritual is so ingrained that we have forgotten that it serves no useful purpose. Endlich notes that predictability is valued by investors, and that “one can only speculate” what might befall a company that refuses to play the game. But Berkshire Hathaway doesn’t play it, nor does Google – both tolerably successful companies.
Roger Lowenstein is the author of Origins of the Crash: The Great Bubble and Its Undoing and When Genius Failed: The Rise and Fall of Long-Term Capital Management.