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Carroll and Mui's article provides lessons from the most inexcusable business failures of the past 25 years, taken from a study of 750 of the most significant failures of that period. Hundreds of billions were lost, and nearly half the failures could have been avoided; in most cases they resulted from flawed strategies. The following summarizes the "Seven Ways."
1)The Synergy Mirage: Often a company seeks growth by joining forces with another having complementary strengths. The '99 merger of disability insurers Unum and Provident, which respectively operated in the group and individual markets, took place because it was thought each company's salespeople would be able to sell the other's products. But Unum's salespeople called on corporations to sell group policies, and Provident's crafted pitches for individuals. The merger just ended up producing higher prices for all. Unum eventually undid the merger and exited the individual market in 2007; its stock price is still less than half that in 1999. The authors also caution against using aggressive accounting - something they see as addictive and inherently destructive.
2)Faulty Financial Engineering: If subprime mortgage lenders and their supporting banks had paid attention to Green Tree Financial, they might have realized how dangerous faulty financial engineering could b e. Green Tree offered 30-year-mortgages on trailer homes which depreciate rapidly and can have a life span as short as ten years. Three years after a $50,000 purchase, an owner might have an asset worth $25,000, while still owing over $49,000 in principal. Meanwhile, Green Tree used aggressive 'gain on sale' accounting with unrealistic assumptions on defaults and prepayments.Read more ›
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