3 Companies Trying to Regain Their Focus
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Lose your focus, lose your shirt,” is what my marketing professor used to say. When a company focuses on what it does best, it stays lean and beats all competitors. Yet all too often, a successful company begins to grow fat.
It gets distracted by new products or services and starts buying up noncore assets. Those extras divert funds away from growing the company’s profitable core specialties. That’s how a company loses focus.
Suddenly, the company sails into rough economic weather and discovers it has excess cargo. In the business world, refocusing means identifying expenses, debt, and unhelpful assets, and throwing them overboard to regain profitability.
Step two is cutting expenses and selling off unnecessary assets. Chesapeake made plans to sell $4 to $7 billion in assets during 2013, and is right on track. On July 3, Chesapeake sold Texas natural gas shale assets for roughly $1 billion, bringing total assets sold this year to around $3 billion.
Step three is using the new funds to pay off all that dastardly debt and invest in production. Selling natural gas assets will allow Chesapeake to increase profitability by focusing on oil production, where prices are higher.
2. The spinoff
Back in 1996, AT&T needed cash in order to focus on the competitive telecommunications sector. So AT&T offered an IPO for Lucent, its former manufacturing arm, raising over $3 billion cash. Focusing on telecommunications worked.
Today, AT&T is the second largest U.S. wireless service provider and continues to grow. Adding 1.2 million postpaid smartphone subscribers last quarter resulted in a diluted EPS of $0.67, above $0.60 a year ago.
Fast forward a decade. In 2006, Lucent merged with the French company Alcatel to create Alcatel-Lucent (NYSE: ALU). The joint company is badly in need of a refocus. Since the merger, Alcatel-Lucent made a profit exactly once. One time, in six years!
In former CEO Ben Verwaayen’s defense, he did unite the French and American companies, reducing overlap and increasing their joint competitiveness. But Alcatel-Lucent now looks to Michel Combs to restructure and bring profitability. The plan is to lay off unnecessary jobs and sell off unnecessary business units. Figuring out which ones are unnecessary is the tricky part of refocusing.
Alcatel-Lucent divested its Genesys contact center business in the first quarter of 2012. Perhaps the rest of Alcatel-Lucent’s small, unprofitable Enterprise segment should follow, allowing it to regain profitability in Networks, its largest segment.
Sprint Nextel (NYSE: S) needs cash for its own refocusing efforts. The U.S. wireless company falls into a distant third place behind Verizon and AT&T. Sprint needs the cash to improve its network and pay off some of its $20 billion of debt. The plan is to sell itself to a company with cash.
Dish Network offered to buy all of Sprint for $25.5 billion, but that wasn’t enough. According to the Denver Post, “Dish is the country's No. 2 satellite-TV company, and Sprint is the No. 3 wireless carrier. Dish had aimed to create the first nationwide provider of pay-TV and wireless services.” Interesting idea, but my gut tells me that’s a problem waiting to happen.
The Japanese telecommunications company SoftBank offered $21.6 billion for a 78% stake in Sprint. The deal included $16.6 billion in cash – just what Sprint needs most. But there are some concerns.
When Softbank first confirmed the bidding talks in October 2012, Softbank’s shares dropped almost 17%. That’s because Softbank was focusing on increasing its competitiveness in Japan and paying off debt, and investors feared that Sprint would be a distraction from that focus.
Up or down vote?
I like the fact that each of these companies are taking serious steps forward – but they also don’t really have a choice. Lose your focus, lose your shirt. I’m leaning bullish on Chesapeake Energy, neutral on Alcatel-Lucent, and bearish on Sprint Nextel. But it’s too early to tell.
Will Chesapeake profitably increase oil production after selling off natural gas assets? Will Alcatel-Lucent trim the fat but keep the meat? Will Sprint use its new cash effectively to pay off debt and build the network?
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This article was written by John James and edited by Marie Palumbo and Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. None has a position in any stocks mentioned. The Motley Fool owns shares of Apache. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!