Smith Corona grossly misjudged the public's preference for PCs, contends one former company executive. "It was a decision made without a lot of vision as to what the computer was going to be," says Mike Chernago, former vice president of operations, who believes the Acer machine could have saved the company. "People screamed like crazy when they killed that deal. But at the time, the executives thought that Smith Corona was never going to be put out of business. It was hard to imagine that the typewriter would be annihilated in just 10 years."
In contrast, Remington Rand acted on the next big thing. The company, which produced the first commercially available typewriter in 1873, also made the first business computer, the 409 (sold as the Univac), in 1949. After merging with Sperry Corp. to form Sperry Rand in 1955, the company sold off the Remington Rand typewriter division in 1975, years before the PC was a threat. It was a fortuitous move: Remington Rand Corp. went bankrupt in 1981. Meanwhile, Sperry Rand thrives in its latest incarnation—as computer-services giant Unisys.
A Checkered Approach
Smith Corona illustrates that insight into a changing industry is useless unless it is followed by preemptive, definitive action—even if shareholders seem unimpressed.
Like typewriters, the paper-check industry has been under fire for decades, as consumers turn to electronic banking. But only in recent years have the biggest players begun to react. In fact, industry leader Deluxe made 90 percent of its revenues from checks up until fiscal-year 2003, and continues to unveil paper-check-related services.
In the mid-1990s, the company made a Smith Corona-like stab at acquiring companies in the electronic-payments field. But Deluxe CFO Doug Treff, who was not with the company at the time, says that shareholders were not enamored of the strategy. "Our shareholders are value-oriented, and the electronic companies were more growth-oriented," says Treff. Lack of sell-side coverage made it hard to get the word out that the acquisitions were part of a long-term strategy, he adds. So, instead of tolerating short-term stock pressure in order to diversify, the company consolidated the acquisitions and spun some of them off as a tax-free distribution to shareholders (called eFunds).
"Check printing was such a large contributor to profitability and cash flow," says Treff, that the company was ultimately unwilling to contribute to the demise of the sector by embracing electronic-fund technology. But, he admits, "the spin offs left us with a company focused on the paper check." In other words, back at square one with no long-term diversification plan.
Deluxe then made the traditional moves to boost earnings per share: it cut costs, closed manufacturing facilities, and bought back shares. Finally, in June 2004, Deluxe purchased New England Business Service (NEBS), a forms, office-supply, and stationery manufacturer. As a result, in the third and fourth quarters of 2004, print-check revenues accounted for 75 percent of total 2004 revenues, and the firm posted an 18.8 percent increase in its fourth-quarter profits.
Still, 75 percent amounts to a dangerously high portion of revenue dependent upon a vanishing consumer activity. In 2003, according to the Federal Reserve Board, Americans for the first time conducted more transactions using debit cards, credit cards, and E-billing than they did using paper checks. Although NEBS may prove a sound acquisition from a shareholder-value standpoint, it might not ultimately guarantee Deluxe as a going concern.
Treff, it seems, is OK with that. Yet, while he may hold shareholder value in the highest regard, the CFO, who joined Deluxe in late 2000, maintains that it "has to be looked at in the long term." And, he adds, "We do make investments that don't pay off right away." Meanwhile, eFunds is trading at 23, double its opening share price.
In comparison, Deluxe's main competitor, Atlanta-based John H. Harland Co., has spent the past few years acquiring electronic-funds and data-processing, testing, and software companies, and reinventing itself as a software and services provider. Its shareholders have supported the acquisitions, which led to reduced earnings in 2004. Harland's stock has jumped 30 percent in the past three years, compared with Deluxe's, which dropped about 15 percent over the same period.
Ultimately, a Crapshoot
In the immediacy of the moment, no one can tell which choices are sound and which fatal. In the DVD-rental market, this uncertainty is compounded by the fact that the two category leaders, Blockbuster and Netflix, are betting on what a feeder industry—in this case, the movie studios—will do.
Currently, those studios make 50 percent of their gross profits on DVD sales and $2.5 billion annually from DVD rentals, a revenue stream guaranteed by well-guarded distribution channels. Once a movie has ended theatrical release, for example, it is sold or rented via Wal-Mart, Blockbuster, Netflix, or similar outlets for between 30 and 60 days or more. Only after that does the film go to pay-per-view and pay VOD. The film moves into the cable film channels and free VOD after that channel has gone cold, and finally ends up on regular TV. "The studios are very good at adding distribution channels," says Dennis McAlpine, an entertainment-industry analyst. "They don't eliminate channels when something new comes along."
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