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Monday, September 18, 2006

The Ten Worst Managed Companies In America

From 24/7 Wall St.

We set out to pick the ten worst managed companies in America for the year that began June 2005 and ended June 2007. At this point virtually all companies have reported their June financials and filed their 10-Qs.

We looked only at companies with market capitalizations of over $1 billion. Most of the companies on the list are much larger. We looked at several financial measurements: return on invested, return on asset, return on equity, gross margins, sales growth over one, three and five years and operating income growth over the same period. To be fair, we made the comparisons within industries so we would not be comparing airlines with banks.

The other important aspect to our evaluation, and the most difficult, is picking companies where management was responsible for decisions that went wrong. In an industry where all companies are doing very poorly, management may not be the single most important key to financial and stock market performance. Even in strong industries bad management may cripple a company. We looked for a combination of poor long-term strategic decisions and tactical mistakes in areas like marketing, operations, or manufacturing.

The companies are not presented in any particularly order. The first company on the list is not considered more poorly managed than the company presented in the sixth or seventh place. We will cover two companies each day for the week so that by Friday the full list of ten will have been posted.

The Ford Motor Company (F). As Jerry Flint, long-time car industry expert at Forbes said recently, “Costs Aren’t The Real Problem”. In 1999, Ford had a US market share of 24.8%. Today that share stands at just above 17%, and the company has warned it could drop below 14%. Flint’s most damning statement about Ford is: “Yet from what I know, it may not be until 2010 before Ford has much in the way of brand new vehicles. That is a long time off.” A long time in fact, for a company that was too slow to cut costs and personnel.

Most of this has to be laid at the feet of Bill Ford. He has been Chairman at the company since 1999 and CEO since 2001. Under his management, the company focused its efforts on selling big pick-ups and SUVs. The company made very little effort to expand or improve the quality of its smaller cars. In Fitch’s recent comments on Ford’s debt and its likely negative cash for of $8 billion for 2006, part of the rating’s agencies concern was “a relatively sparse new product lineup”.

The other cardinal sin committed by Ford management is that its “The Way Forward Program” did not cut enough cost, and those that it did plan did not come fast enough. Some of the expense reduction programs in the plan were not scheduled to take place until 2012.

And, of course, if you had owned the stock at over $14 in January 2005, you could still be holding those shares at $8 now.

Affymetrix (AFFX). Affymetrix makes chips which contain genetic information. The products help R&D facilities and pharma companies to look at the human genetic code to help design treatments for serious diseases. By mapping these against the genetic profile of individuals, treatment can be targeted in a way which had not precedent just a few years ago. The company was the first to introduce these products over 10 years ago, and certainly was the industry leader until recently.

Recently, Affymetrix has cut guidance and the company’s shares have dropped as its prospects have dimmed. AFFX is a tremendous example of a company with an early lead in a market that stumbled and lost it. Revenue grew from $12 million in 1996 to $266 million in 1995. Last year, the company had operating income of $57 million. After posting revenue of $112 million in Q4 05, and net income of $24.8 million, revenue fell to $86 million in Q1 06, and net income to $1.8 million.

The company’s shares reached nearly $60 in July 2005. They now trade at $21. The stock in Affymetrix’s smaller but more successful competitor, Illumin (ILMN) traded at just above $10 in July 2005. They now change hands at $36. That tells the whole story.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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