Review of Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years

Review: 4/5

Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years, written by Paul B. Carroll and Chunka Mui, is an underrated book for investors. Written primarily for CEOs and management teams, the authors examined the most significant business failures from 1981-2006, with failures defined by write-offs of significant investments, the closing down of unprofitable businesses, or bankruptcy. A lot of the findings were nothing new, but the breadth and depth of the case studies make this book a worthwhile read. The first half of the book details these failure case studies across seven categories: 1) Synergy, 2) Financial engineering, 3) Rollups, 4) Staying the course, 5) Adjacencies, 6) Riding technology, and 7) Consolidation. The second half of the book, while useful to companies interested in avoiding the same mistakes, can be skipped for those who want the useful bits for investing and nothing else.

The business failures detailed in Part One are far-reaching and broad, taking the reader through cases that they have probably never heard of. The best chapters, in my opinion, were Faulty Financial Engineering, Deflated Rollups, and Staying the Misguided Course. The Faulty Financial Engineering chapter describes the rise and fall of Green Tree Financial, proving that there is nothing new under the sun. The similarities of Green Tree providing long-term loans on short-term assets to today's recent financial engineering disasters are striking. Green Tree was selling 30 year loans on home trailers with a 15 year useful life - and they were booking all the revenue up-front! My favorite chapter was Deflated Rollups, as my interest in j2 Global might show. A couple of quotes I liked from that chapter:

As great as the concept is on paper, however, rollups, like athletic contests, don’t happen on paper. In the real world, rollups haven’t worked so well. Sometimes, rollups look like an attempt to stitch together a bunch of rock groups to form an orchestra.  

Research says more than two-thirds of rollups fail to create any value for investors. A Booz Allen study of rollups found that almost half had lost more than 50 percent of their market value between 1998 and early 2000, despite the stock-market boom during those years. The study found that companies tended to outperform the S&P 500 until they reached $500 million in annual revenue, at which point investors began probing more deeply and the concept fell apart. 

A certain amount of skepticism is, of course, called for when investing, but that’s especially the case with rollups, because - much to our surprise - we found that many rollups end in fraud. 

The author's conclusion is that while there are rollups that succeed, failed rollups are not due to bad execution - in fact, the rollup strategy is structurally flawed from the outset and generally produces diseconomies, rather than economies, of scale.

Staying the (Misguided) Course was another good chapter, especially given the modern innovation cycles taking everyone down. The chapter focuses on Kodak, and it was amazing to me that they knew that their traditional film would be threatened by digital (they sponsored a study in the 80s), they just underestimated the speed at which the quality of digital would improve.  

As Kodak demonstrated ably, companies that face a looming threat...tend to consider whether to adopt a new technology or business practice based on how the economics compare with those of existing business-not accounting for the possibility that the new technology or approach to business will eventually kill the economics of the existing business and require an entirely new business model.

Overall, great book - would highly recommend reading the first half as a fresh, structured look into business failures.