March 2023 - Mindset: The New Psychology of Success

This month we check out Satya Nadella’s favorite book - Mindset, by Carol Dweck. The book has become an international sensation and we find out why!

Tech Themes

1. Growth vs. Fixed Mindset. The book’s main argument is about the distinction between a growth mindset vs. a fixed mindset. A fixed mindset supposes that one’s abilities are fixed in nature - “I am smart because my parents were smart,” “I am good at sports without trying,” “I am good at tests because I just am.” People with fixed mindsets, who believe that people’s abilities largely can’t change, find themselves frequently feeling scared to make mistakes or be wrong. In contrast, a growth mindset supposes that people can drastically alter their abilities through challenge, hard work, perserverance, and the mental attitude that growth is attainable. Each person has some growth and some fixed mindset beliefs. Its important to understand that the fixed mindset is normally adopted because it benefits the person. As Dweck laments: “It told them who they were or who they wanted to be (a smart, talented child) and it told them how to be that (perform well). In this way it provided a formula for self-esteem and path to love and respect from others.” Often people can fall into the trap of results, whereby succeeding in something makes me good at it and failing makes me bad vs. praising and focusing on effort and improvement. For people that become hyperfocused on results, effort can be viewed as lowly. “If you are considered a genius, a talent, or a natural - then you have a lot to lose. Effort can reduce you. The idea of trying and still failing - of leaving yourself without any excuses - is the worst fear within the fixed mindset.” As someone who has put in significant effort into things like sports, only to lose in critical games, this sentence really resonated with me. Often you believe the effort should be rewarded with results, that is the dream described by coaches. But sometimes its not, and you have to wonder whether the effort is really worth it. However, this is a fixed mindset approach. The effort you put in is what establishes the long-term habit of success. Failures can occur from randomness. Failures could also signal that a change in approach is necessary, and often highlights an issue that had been papered over for one reason or another. The effort and the grind and the process are the fun part.

2. Managing and Teaching. One of the craziest things about mindsets is how easily they can be primed. Several studies discussed in the book place participants into a growth or fixed mindset with simple prompts. “Joseph Martocchio conducted a study of employees who were taking a short computing training course. Half of the employees were put into a fixed mindset. He told them it was all a matter of how much ability they possessed. The other half were put in a growth mindset. He told them that computer skills could be developed through practice. Those in the growth mindset gained considerable confidence in their computer skills as they learned, despite the many mistakes they inevitably made. But because of those mistakes, those with the fixed mindset actually lost confidence in their computer skills as they learned!” All day, every day, we are slipping in and out of different mindsets, often at the prompting of others. And frequently, these mindsets are little conversations going on in the back of our heads! Its important to try to recognize when you are slipping into a fixed mindset, and reframe the thought as a growth mindset one! Changing one’s perception of their own abilities is difficult, but that didn’t stop Marva Collins. “Collins took inner-city Chicago kids who had failed in the public schools and treated them like geniuses. Many of them had been labled ‘learning disabled’ or ‘emotionally disturbed.’..By June, they reached the middle of the fifth grade reader, studying Aristotle, Aesop, Tolstoy, Shakespeare along the way.” Collins set a strong upfront contract with her students: “None of you has ever failed. School may have failed yhou. Well, goodbye to failure, children. Welcome to success. You will read hard books in here and understand what you read. You will write every day…But you must help me to help you. If you don’t give anyhting, don’t expect anything. Success is not coming to you, you must come to it.” Collins raised the kids’ standard, while maintaining a compassionate and nurturing environment. This combination of challenge and nurture can produce wonderful growth. Its important that people don’t feel judged, but rather like someone is pushing them and trying to help them improve.

3. Motivation, Talent, and Mindset. Many people believe in naturals, indiviudals that simply rolled out of bed and became unbelievable athletes, leaders, business people, etc. They often miss the painstaking process of growth that led up to their eventual success. People often correlate talent with prior successes, forgetting the ways in which systems can produce mediocre talent from renowned systems. And frequently, society, parents, friends, and companions praise eachother for talent or success, rather than effort. In his book Malcolm Gladwell discusses the role that talent plays in an individual’s mindset. “Gladwell concludes that when people live in an environment that esteems them for their innate talent, they have grave difficult when their image is threatened. ‘They will not take the remedial course. They will not stand up to investors and the public and admit that they were wrong. They’d sooner lie.’” When we understand the basis of motivation, we can see why people feel threatened when they hold a fixed mindset about their “innate talent.” Self-determination theory speculates that motivation exists on a spectrum from amotivation (or complete lack of motivation) to extrinsic to intrinsic. There are several types of extrinsic motivation as you move along the spectrum to more internalized motivation: External regulation is motivation based on external rewards like compliance or money; Introjected motivation is based on approval from others and social acceptance; Identified motivation is based on consciously valuing the activity; and Integrated motivation is based on self-congruence, or I do this activity because this is the person I am. Lastly, we have full intrinsic motivation, where we pursue things solely because we enjoy doing that activity. For many high performing individuals, their passions seem to fluctuate between extrinsic motivators and intrinsic motivators. The reason we may feel threatened when we have a fixed mindset and our talent comes into question could stem from maintaining an identified or integrated motivation with an activity. For example, if you believe yourself to be a shrewd business person, and the motivation you feel to execute a business strategy comes from that belief that you are excellent, when you make a terrible decision you are faced with a view that sits in direct contrast to how you viewed yourself. This cognitive dissonance can cause severe depression. A growth mindset may reframe the terrible decision as a learning opportunity. Furthermore, a growth mindset may mean laughing at the decision, and getting excited about the challenge caused by it, placing more of the motivation on just executing the business strategy vs. the results of the strategy.

Business Themes

1. Lou Gerstner and IBM turnaround. IBM is currently facing challenges. Despite spinning off its services unit Kyndryl in November 2021, IBM’s stock remains at a negative return since June 2018. This isn’t the first time IBM’s business has gone off the rails. The 1970s and early 80s were so prosperous for IBM that their culture had gone sideways. A pervasive sense of entitlement filled the air. A 1990 Washington Post article discussed their challenges: “Since 1986, IBM has cut its work force three times. Its no-layoff policy (honored even in the Depression) seems vulnerable. So far all reductions have occurred through voluntary retirements. IBM has lagged in some new computer markets; workstations (souped-up personal computers) are an example. Profits have faltered. In 1988 they were nearly $800 million less than in 1984, despite a $13 billion rise in revenues. IBM's stock is trading around 100, down from the 1987 peak of 175 .” The company even came under antitrust investigation for monopolistic behavior (cough, sound familiar?). When all was lost, the board of directors turned to Lou Gerstner, who had successfully run the Travel Services division of American Express and led RJR Nabisco after KKR’s massive $25B buyout in 1989. Gerstner opened the channels of communication, disbanded the management committee, and tried to dismantle IBM’s hierarchical culture. He shifted bonus measures to broader measures like IBM’s overall performance, instead of narrow measures like a division’s EBITDA. The bonus structure change fostered teamwork across the company. By the time Gerstner stepped down in 2002, its market cap had risen from $29B to $168B. However, what’s excluded from the story is Gerstner’s tactics, he laid off 60,000 workers, including 35,000 in 1994. Gerstner was also handsomely rewarded for this turnaround, netting hundreds of millions in stock through option plans. Laying off workers and making money aren’t inherently bad, and Gerstner’s leadership is still commendable - but its important to note that it likely wasn’t just a mindset shift that led to his success at IBM.

2. Jack Welch - the Best or the Worst. Jack Welch is another executive lauded throughout the book. Long praised for his aggressive management style and focus on performance, Welch was considered an unquestionable genius when he was CEO of GE. Welch became CEO of GE in 1981 and embarked on a 20 year run filled with cost-cutting, layoffs, and countless acquisitions. Under Welch, GE made 600 acquisitions and pushed the company into every aspect of business, including owning TV station NBC and investment bank Kidder Peabody at one point. Kidder Peabody went through two famous trading scandals. In 1987, it was involved in Ivan Boesky’s insider trading scheme, and several years later (under GE’s ownership) it was the subject of another, more egregious trading scandal, whereby a trader placed fake trades and was paid bonuses based on fake results. Dweck uses this as a way to show Welch’s growth mindset: “There is a whole chapter titled ‘Too Full of Myself’ about the time he was on an acquisition roll and felt he could do no wrong. ‘The Kidder experience never left me’ It taught him that ‘there’s only a razor’s edge between self-confidence and hubris. This time hubris won and taught me a lesson I would never forget.” GE’s market value increased from $12B in 1981 to $410B in 2001. In 1999, Fortune named him manager of the century. He launched GE Capital, which would peak around 40% of its business: “But blue-chip G.E. had none of those burdens, which meant that, when it came to making money, Welch’s non-bank bank could put real banks to shame. He then used the proceeds from G.E. Capital to acquire hundreds of companies. In the warm glow of G.E.’s riches, Welch articulated a series of principles that captivated his peers. Fire nonperformers without regret. Shed any business that isn’t first or second in its market category. Your duty is always to enrich your shareholders.” But let’s dig into the not so bright side of Jack Welch. When he became CEO, Welch laid off hundreds of thousands of employees, taking GE’s total from 411,000 in 1980 to 299,000 at the end of 1985. He championed an Enron like approach of ranking employees and firing the bottom 10% every year. He was married three times, and had an extra-marital affair with a Harvard Business Review reporter, who eventually became his third wife. After Welch left GE, its stock fell precipitously, as it tried to unwind GE Capital and all of the other 600 acquisitions it had made during the conglomerate era of the 1980s. Welch’s retirement package was absolutely egregious: “After Welch left G.E., the details of his retirement package were made public. It included a pension of $7.4 million a year and a mountain of perks. He got the use of a company Boeing 737, at an estimated cost of $3.5 million a year. He got an apartment in Donald Trump’s 1 Central Park West, plus deals at the restaurant Jean-Georges downstairs, courtside seats at Knicks games, a subsidy for a car and driver, box seats at the Metropolitan Opera, discounts on diamond and jewelry settings, and on and on—all this for someone worth an estimated nine hundred million dollars. And then, finally, G.E. agreed to pay the monthly dues at the four golf clubs where he played.” If we can learn anything from Jack Welch about growth mindset, its that you can be both a fixed mindset person and a growth mindset person, judging and communicating.

3. Sports Mindset. Sports provide an excellent training ground to explore mindset. According to Dweck, growth mindset athletes tend to find success in doing their best, in learning and improving. They also find setbacks motivating and informative, digesting them as a wake-up call. Lastly, growth mindset athletes take more control of their process. Here Dweck discusses Tiger Wood’s Dad’s approach to toughening his son: “Tiger’s dad made sure to teach him how to manage his attention and his course strategy. Mr. Woods would make loud noises or throw things just as little Tiger was about to swing.” Woods would often envision a younger rival, pouring himself into learning shots” I have to give myself a reason to work so hard. He’s out there somewhere. He’s twelve.” While this psychological manipulation produced an amazing golfer, it also caused a lot of trauma. Tiger’s complicated relationship with his father and subsequent extra-marital affairs and DUIs have somewhat overshadowed his amazing golf achievements. Another reputationally poor example in the book is Lenny Dykstra. Dykstra, a man who has been charged with well over 25 misdemeanor and felony accounts and who personally filed for bankruptcy, is said to have had a growth mindset by Billy Beane, who claimed, “He had no concept of failure…And I was the opposite.” Beane eventually became GM of the Oakland Athletics, and focused their scouting and recruiting efforts on statistically sound and collegial players, rather than popular stars. Dykstra’s lack of failure concept was recently echoed by soccer star Kevin De Bruyne. “A lot of times when people make mistakes, they don't do it anymore. When I make a mistake, I try to do it twice more and if I make it twice more I'll do it again. I think in in one kind of way [its] learning where you go wrong and I think you understand more out of it if you make errors.” Kevin clearly displays a growth mindset and love for soccer.

   Dig Deeper

• 60 Minutes: Marva Collins 1995 Part 1

• From the archives: Jack Welch on 60 Minutes (2001)

• KEVIN DE BRUYNE MASTERCLASS! | Learn from the assist king himself

• Promoting Motivation, Health, and Excellence: Ed Deci at TEDxFlourCity

• Developing a Growth Mindset with Carol Dweck

January 2023 - Ride of a Lifetime by Bob Iger

This month we look at the recent history of Disney and its famous leader, Bob Iger.

Tech Themes

1. Creative Trust. Bob began his career at ABC Television, eventually working his way into ABC Sports and their newly acquired Entertainment and Sports Programming Network (ESPN). Their Bob came under the toutalege of Roone Arledge, a famous broadcast executive known for his commitment to storytelling, and his lack of compassion for sub-par work. Bob saw first hand how Roone would get close to the start of production, only to make several last minute tweaks to the overall program, sometimes throwing out all of the work that had been done to offer the audience a better program. Bob understood this creative process was messy and inefficient, but crucial to producing high quality programming. After ABC was acquired by Capital Cities, Tom Murphy and Dan Burke promoted Iger into a new role as head of ABC entertainment. Upon being handed a stack of 40 scripts on his first day, Bob wondered what he was even supposed to be looking for in a script. “I started to realize over time, though, that I’d internalized a lot by watching Roone tell stories all those years.” In his first season as president, Iger decided to go ahead with an off-putting, creepy drama directed by David Lynch called Twin Peaks. At one point, Murphy was so concerned about airing the show, that he told Bob, “You can’t air this. If we put it on television, it will kill our company’s reputation.” Iger pushed back, enthralled that the creative community love the risk the network was taking. A 1990 New York Times article spells out the risky show’s language: “The offending usage was in a Wall Street Journal story about Robert Iger, a bold television producer: ''Even if 'Twin Peaks' caves in, it has already won ABC new cache in Hollywood as the hands-off network, eager for ideas that are daring and different.'' Iger learned early, it pays to take big and bold risks, especially with the creative community.

2. Bob Iger and Steve Jobs. One of the first things Bob Iger did when he became CEO of Disney was call Steve Jobs. Disney’s prior CEO, Michael Eisner, had spent years arguing a battle for who had the better legal position in the Disney-Pixar distribution relationship. Pixar had succeeded everyone’s wildest dreams with films like Toy Story, A Bug’s Life, and Finding Nemo, but Disney wanted full control of Pixar’s characters and the rights to film sequels. Iger describeds the kerfuffle: “Steve’s animosity toward Disney was too deep-rooted. The rift that had opened between Steve and Michael [Eisner] was a clash between two strong-willed people whose companies’ fortunes were going in different directions. When Disney Animation began to slip even further, Steve became more haughty with Michael because he flet we needed him more, and Michael hated that Steve had the upper hand.” Iger, ever the flatterer discussed with Jobs how he loved his iPod and wanted to put Disney shows on future generations of the device. Steve responded by showing Iger the new iPhone prototype they were developing. They agreed on a deal and Iger strode on stage at the iPod video launch in 2005. In his first board meeting as official CEO, Iger proposed buying Pixar. The company was half owned by Steve Jobs, who had bought it from his friend and Star Wars creator George Lucas for a measly $5 million (plus several $20-30m equity checks). After receiving approval from the board to look at an acquisition, Iger called Jobs from his car phone: “I’ve been thinking about our respective futures, What do you think about the idea of Disney buying Pixar?” Jobs responded - “You know, that’s not the craziest idea in the world.” A few weeks later, the two sat in the Apple boardroom sketching a simple pros and cons list on the whiteboard. For all of the math and financial analysis that goes into an acquisition, its hilariously to envision Steve and Bob doing what anyone would do to analyze an acquisition. “Two hours later, the pros were meager and the cons were abundant, even if a few of them, in my estimation were quite petty…’A few solid pros are more powerful than dozens of cons,’ Steve said." The agreement was negotiated an in 2006, Disney acquired Pixar for a $7.4B equity value. Right before the merger was announced, Steve took Bob for a walk around Apple’s campus, and told him that his cancer had returned. “He told me the cancer was now in his liver and he talked about the odds of beating it. He was going to do whatever it took to be at his son Reed’s high school graduation, he said. When he told me that was four years away, I felt devestated. It was impossible to be having these two conversations - about Steve facing his impending death and about the deal we were supposed to be closing in minutes - at the same time.” The deal ultimately closed and Jobs became Disney’s largest shareholder and a board member at the company, during which Disney’s stock performed very well.

3. BamTECH. When Iger became CEO, he launched a three part plan to return Disney to the top of media and creativity. The plan was clear: “1) We needed to devote most of our time and capital to the creation of high quality branded content. 2) We needed to embrace technology to the fullest extent, first by using it to enable the creation of higher quality products, and then to reach more consumers in amore modern, more relevant ways. 3) We needed to become a truly global company.” If Pixar, Marvel, and Lucasfilm were an answer to part one, BAMTech was the answer to part two. Baseball Advanced Media Technologies was a company founded by Major League Baseball in 2000 to build out a digital radio streaming service for overseas listeners to the MLB playoffs. MLB Advanced Media was funded by a $1 million investment by each of its 30 teams for four consecutive years. Following a successful launch, BAMTech decided to try streaming live video of baseball games and launched MLB.tv, which soon became a major leader in streaming. Other leagues began to pay attention and soon the NHL had signed up BAMTech as its streaming partner, taking a 10% stake in the company. Soon ESPN, HBO, and the PGA Tour all signed on too. Disney used BAMTech as a back-end partner for the launch of its WatchESPN platform in 2010. So it was a natural extension for Iger, fresh off the massive success of the Pixar, Marvel, and Lucasfilm acquisitions, to try to buy the company. In 2015, BAMTech was officially spun out of the MLB, and in August 2016, Walt Disney acquired 33% of the company in August 2016 for $1B, valuing the streaming platform at $3B. In 2017, it upped its stake to 75% for another $1.58B, then in August 2021 it acquired the NHL’s 10% interest. Finally, it bought the remaining 15% interest from the MLB for $828m in October 2022. Amazing companies can come from anywhere. Based on some simple rough math, the MLB earned a 23% IRR on initial $120m investment from 2000 to 2022, a 28x return.

Business Themes

1. The Guide of Experience. Its clear that Bob Iger was molded into an incredible businessman through a series of experiences that almost no one could predict would create to such a compelling leader. Because Iger began in the TV industry at ABC, he began the habit of waking up absurdly early, a trait shared by many successful leaders. “To this day, I wake nearly every morning at four-fifteen, though now I do it for selfish reasons: to have time to think and read and exercise before the demands of the day take over.” After moving over to sports, Bob learned the importance of high quality from Roone Arledge, but he also developed one of his greatest traits, finding compromise among competing interests. “In 1979, the World Table Tennis Championships were being held in Pyongyang, North Korea. Roone called me into his office one day and said, ‘This is going to be interesting. Let’s cover it on Wide World of Sports.’ I thought he was joking. He surely knew it would be impossible to secure the rights to an event in North Korea. He wasn’t joking. I then embarked on a worldwide pursuit to secure the rights. After a few months of intense negotiations, we were on the eve of closing the deal when I received a call from someone on the Asian desk in the U.S. State Department. ‘Everything you are doing with them is illegal,’ he said. ‘You’re in violation of strict U.S. Sanctions against doing any business with North Korea…’ I eventually arrived at a workoaround that involved securing the rights not through the host country but through the World Table Tennis Federation. The North Korean government, though we were no longer paying them, still agreed to let us in, and we became the first U.S. media team to enter North Korea in decades - a historic moment in sports broadcasting.” When ABC was purchased by Capital Cities, Bob began his relationship with Dan Burke and Tom Murphy. Warren Buffett famously praised the pair: “Tom Murphy and [his long-time business partner] Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see.” Iger learned tons about business, acquisitions, budgeting, and decentralized management from Tom and Dan. They also gave Iger numerous opportunities to prove himself and take risks, like the Twin Peaks launch. Later, when Cap Cities was acquired by Disney, Iger gained a front-row seat to Michael Eisner’s leadership style. Eisner was once regarded as one of the best CEOs in the world, but languished as the stress of managing a massive company caused him to become increasingly defensive and depressed. Despite sharing a complicated relationship, Iger learned a lot about managing Disney from Eisner, including what he didn’t want to do once he got the role. In hindsight, its no surprise that Iger became the leader he became, even though it wasn’t clear as it was unfolding.

2. A tale of M&A. Although Disney sticks in people’s minds as a family friendly media company, its sprawling empire has grown to include ABC, ESPN, Marvel, the Simpsons, Star Wars, Pixar, Marvel, Hotstar, National Geographic, Hulu, 20th Century Studios, X-Men, Deadpool, Fx, Disney World, Disney Cruise Line, and Disney+. This empire was constructed through many M&A deals. The first major M&A deal was the 1995 $19B Disney, Capital Cities merger, which was the second largest corporate takeover (to KKR’s RJR Nabisco LBO) ever. Warren Buffett became one of the largest shareholders of Disney, which he sold over the next few years, only to massively miss out on the growth of ESPN and eventually the content domination that Iger began. The deal took a while to digest, and vastly expanded Disney’s operations. Eisner’s legendarily poor hire of talent agent Michael Ovitz compounded pressures, and Eisner relied even more heavily on Disney’s Strategic Planning group to make corporate decisions. From 1995 to 2005, Disney’s stock increased only 25%, and Eisner was forced out in a brutal, public proxy battle. Once Iger took over, he collapsed the Strat Planning department under rising star Kevin Mayer, and began the series of acquisitions that marked his tenure. After Pixar, Iger turned to Marvel, which was stumbling along as a comic book and toy producer to a shrinking population of interested buyers. Despite its relatively small size, Marvel had a fascinating corporate history. In the late 80’s, Ron Perelman, billionaire businessman, bought Marvel for a mere $82m. However, after the comic book boom faded, Marvel fell into bankruptcy, and Icahn stepped in to buy Marvel’s distressed debt eventually becoming chairman of the board through a protracted legal process. At the last second, Ike Perlmutter and Avi Arad, managers of the largest susidiary of Marvel, Toy Biz, proposed a better offer to the bankruptcy court, and eventually wrestled control away from both Perelman and Icahn. By the time Disney came knocking in 2008, Marvel was beginning to produce its own films, after several successful Spider-Man and X-men films. While a lot of Disney executives believed Marvel was too edgy for Disney, Iger took a longer term view and bought the company for $4B, which has clearly paid off. Alongside the acquisition of Marvel, Disney invested about $100m for a 30% stake in a new streaming service created by NBC and News Corp called Hulu. Next, Iger turned to Lucasfilm, the maker of Star Wars. George Lucas was very reluctant to sell to Disney, and it took four and half years of convincing: “We went over and over the same ground - George saying he couldn’t just hand over his legacy, me saying we couldn’t buy it and not control it - and twice walked away from the table and called the deal off. (We walked the first time and George walked the second).” Eventually, Disney acquired Lucasfilm for $4.05B, another great content acquisition that has worked out well. While Iger is credited with these amazing acquisitions, his latest and biggest acquisition has raised the most questions for Disney. In 2017, Disney announced it would buy 20th Century Fox for $52B in stock, and the assumption of $13.7B of Fox’s net debt. However, the deal faced a long regulatory approval process, during which the US Justice Department ruled in favor of AT&T buying Time Warner. With what seemed like a favorable M&A environment, Comcast entered the fray, proposing an all cash bid at $35 a share or $64B. Disney upped its offer to $38 a share, half in cash and half in stock. Fox accepted Disney’s new bid (of $71B), and Disney closed the deal in March of 2019. While the deal did bring X-men, Deadpool, Fantastic Four, the Simpsons, Family Guy, it added $19B of debt to its balance sheet. In addition, Disney spent time selling Fox’s Sky ownership to Comcast, and the regional sports networks owned by Fox. These divestitures were necessary for the regulatory approval of the deal and netted Disney $24B ($15B from Sky and $9.6B from the sports networks). Covid through Disney for a loop, and its higher leverage from the Fox deal, caused the elimination of its dividend, and an obvious massive reduction to its parks business. Time will tell if the Fox Deal yields the same great results that Pixar, Marvel, and Lucasfilm produced - I wonder if this wasn’t too big for the integration risk entailed.

3. Walt Proxy. Disney has a rich history in not only animated characters but business characters as well. The company has repeatedly been subject to proxy battles. Iger’s first proxy battle began slowly then grew into a massive public boardroom debate. In 2002, Roy E. Disney and Stanley Gold, expressed their disappointment in Michael Eisner’s choices as CEO of Disney, sending a letter to the board demanding his removal. Eisner retailiated, “turning to the company’s governance guidlines regarding board member tenure, which stipulated that board members had to retire at age seventy-two. Rather than telling Roy himself, though, Michael had the chairman of the board’s nominating committee inform him that he would not be allowed to stand for reeelection and would be retired as of the next shareholders meeting in March 2004.” Roy began a public campaign called “Save Disney” where he called for Michael’s retirement and for him to rejoin the board. At the same time, Comcast launched a hostile bid for Disney. While Comcast would eventually find its content companion in NBC/Universal years later, this bid added heat to the situation. Comcast was unable to complete its bid, but the shareholder vote still turned out poorly for Eisner, with 43% of shareholders withholding support for him as CEO. He was promptly stripped of his chairman title, and in the fall of 2004, announced his resignation at the end of his contract in 2006. Fast forward to 2023, and Disney is back in the proxy battle world, this time facing up against Nelson Peltz, the famous activist investor. Under scrutiny are Disney’s acquisition of Fox, its exorbitant streaming losses, the cancellation of its dividend, the massive debt load it carries, and its large Netflix-competing content spend. The board recently announced that Iger would come back as CEO, despite clearly saying his time was over in the book. Iger’s successor, Bob Chapek, had a terrible run as Disney CEO, including shutting down the company, a public row with the State of Florida and Scarlett Johansson, and a centralization process that took control away from the creatives. I guess the Ride of a Lifetime is not over.

   Dig Deeper

• The Complete History Of Walt Disney World, Part 1 (1960s-1996)

• Bob Iger: I felt a sense of obligation to return to Disney as CEO

• Steve Jobs and John Lasseter interview on Pixar (1996)

• Tom Murphy Interview | Michael Eisner Interview | Bob Iger Interview 2011

• Restore the Magic Trian Partners Presentation

May 2022 - Play Nice, But Win by Michael Dell and James Kaplan

This month we dive into the history of Dell Computer Corporation, one of the biggest PC and server companies in the world! Michael Dell gives a first-hand perspective of all of Dell’s big successes and failures throughout the years and his intense battle with Carl Icahn, over the biggest management buyout in history.

Tech Themes

1. Be a Tinkerer. When he was in seventh grade, Michael Dell begged his parents to buy an Apple II computer (which costs ~$5,000 in today's dollars). Immediately after the computer arrived, he took the entire thing apart to see exactly how the system worked. After diving deep into each component, Dell started attending Apple user groups. During one, he met a young and tattered Steve Jobs. Dell began tutoring people on the Apple II's components and how they could get the most out of it. When IBM entered the market in 1980 with the 5150 computer, he did the same thing - took it apart, and examined the components. He realized that almost everything IBM made came from other companies (not IBM) and that the total value of its components was well below the IBM price tag. From this simple insight, he had a business. He started fixing up a couple of computers for local business people in Austin. Dell's machines cost less and delivered more performance. The company got so big (50k - 80k revenue per month) that during his freshman year at UT Austin, Dell decided to drop out, much to his parent's dismay. On May 3rd, 1984, Dell incorporated his company and never returned to school.

2. Lower Prices and Better Service - a Powerful Combination. Dell Computer Corporation was the original DTC business. Rather than selling in big box retail stores, Dell carried out orders via mail request. When the internet became prominent in the late 90s, Dell started taking orders online. After his insight that the cost of components was significantly lower than the selling price, he flew to the far east to meet his suppliers. He started placing big deals and getting better and better prices. This strategy is the classic low-end disruption pattern that we learned about in Clayton Christensen's, The Innovator's Dilemma – a lowered-priced competitor that offers better service, customizability starts to crush the competition. Christensen is important to note that the internet itself was a sustaining innovation to Dell, but very disruptive to the market as a whole: "Usually, the technology simply is an enabler of the disruptive business model. For example, is the Internet a disruptive technology? You can't say that. If you bring it to Dell, it's a sustaining technology to what Dell's business model was in 1996. It made their processes work better; it helped them meet Dell's customers' needs at lower cost. But when you bring the very same Internet to Compaq, it is very disruptive [to the company's then dealer-only sales model]. So how do we treat that? We praise [CEO Michael] Dell, and we fire Eckhard Pfeiffer [Compaq's former CEO]. In reality, those two managers are probably equally competent." If competitors lowered prices, Dell could find better components and continually lower prices. Dell's strategy led to many departures from the personal PC market – IBM left, HP acquired Compaq in a disastrous deal for HP, and many others never made it back.

3. Layoffs, Crises, and Opportunities. Dell IPO'd in 1988 and joined the Fortune 500 in 1991 as they hit $800m in sales for the year. So you would think the company would be humming when it hit $2B in sales in 1993, right? Wrong. Everything was breaking. When a company scales that quickly, it doesn't have time to create processes and systems. Personnel issues began to happen more frequently. As Dell recalls, the head of sales had a drinking problem, and the head of HR had a stripper girlfriend on the payroll. The company was late to market with notebooks, and it had to institute a recall on its notebooks which could catch fire in some instances. During that time, Dell hired Bain to do an internal report about how it should change its processes for its new scale – Kevin Rollins of the Bain team knew the business super well and thought incredibly strategically. After the Bain assignment, Rollins joined the company as Vice-chairman, ultimately becoming CEO for a brief period in 2004. One of his first recommendations was to cease its experiment selling through department stores and to stay DTC-focused. During the internet bubble, Dell faced another crisis – its stock had risen precipitously for many years, but once the bubble burst, in a matter of months, it fell from $50 to $17 a share. The company missed its earnings estimates for five quarters in a row and had to do two layoffs – one with 1,700 people and another with 4,000. During this time, an internal poll showed that 50% of Dell team members would leave if another company paid them the same rate. Dell realized that the values statement he had written in 1988 was no longer resonating and needed updating – he refreshed the value statement and focused the company on its role in the global IT economy. Dell understands that you should never waste a great crisis, and always find the opportunity for growth and improvement when things aren't going well.

Business Themes

1. Carl Icahn and Dell. No one in business represents a corporate nemesis quite like Carl Icahn. Icahn was born in Rockaway, NY, and earned his tuition money at Princeton playing poker against the rich kids. Icahn is an activist investor and popularized the field of activist investing with some big, bold battles against companies in the early 1980s. Icahn got his start in 1968 by purchasing a seat on the New York Stock Exchange. He completed his first major takeover attempt in 1978, and the rest was history. Icahn takes an intense stance against companies, typically around big mergers, acquisitions, or divestitures. He 1) buys up a lot of shares, like 5-10% of a company, 2) accuses the company and usually the management of incompetence or a lousy strategy 3) argues for some action - a sale of a division, a change in management, a special dividend 4) sues the company in a variety of ways around shareholder negligence 5) sends letters to shareholders and the company detailing his findings/claims 6) puts up a new slate of board members at the company 7) waits to profit or gets paid to go away (also called greenmail). Icahn used these exact tactics when he took on Michael Dell. Icahn issued several scathing letters about Dell, criticizing the company's poor performance, highlighting Michael Dell's obvious conflicts of interest as CEO, and demanding the special committee evaluate the deal fairly. Icahn normally makes money when he gets involved, and he is essentially a gnat that doesn't go away until he makes money one way or another. After the fight, Icahn still made a profit of 10s of millions, and his fight with Dell was just beginning.

2. Take Privates and Transformation. Michael Dell had thought a couple of times about taking the company private when he was approached by Egon Durban of Silver Lake Partners, a large tech private equity firm. Dell and Zender went on a walk in Hawaii and worked out what a transaction might be. The issue with Dell at that time was that the PC market was under siege. People thought tablets were the future, and their questions found confirmation in the PC market's declining volumes. Dell had spent $14B on an acquisition spree, acquiring a string of enterprise software companies, including Quest Software, SonicWall, Boomi, Secureworks, and more, as it redirected its strategy. But these companies had yet to kick into gear, and most of Dell's business was still PCs and servers. The stock price had fallen about 45% since Michael Dell had rejoined as CEO in 2007. Dell had thought about taking the company private a couple of other times, but now seemed like a great time - they needed to transform, and fast. Enacting a transformation in the public markets is tough because wall street focuses on quarter-to-quarter metrics over long-term vision. He first considered the idea in June 2012 when talking with the then largest shareholder Southeastern Asset Management. After letting the idea percolate, Dell held discussions with Silver Lake and KKR. Silver Lake and Dell submitted a bid at $12.70, then $12.90, then $13.25, then $13.60, then $13.65. On February 4th, 2013, the special committee accepted Silver Lake's offer. On March 5th, Carl Icahn entered the fray, saying he owned about $1b of shares. Icahn submitted a half proposal suggesting the company pay a one-time special dividend, he would acquire a substantial part of the stock and it would remain public, under different leadership. On July 18th, the special committee delayed a vote on the acquisition because it became clear that Dell couldn't get enough of the "majority of the minority" votes needed to close the acquisition. A few weeks later, Silver Lake and Dell raised their bid to $13.75 (the original asking price of the committee), and the committee agreed to remove the voting standard, allowing the SL/Dell combo to win the deal. After various lawsuits, Icahn gave up in September 2013, when it became clear he had no strategy to convince shareholders to his side. It was an absolute whirlwind of a deal process, and Dell escaped with his company.

3. Big Deals. After Dell went private, Michael Dell and Egon Durban started scouring the world for enticing tech acquisitions. They closed on a small $1.4B storage acquisition, which reaffirmed Michael Dell's interest in the storage market. After the deal, Dell reconsidered something that almost happened in 2008/09 – a merger with EMC. EMC was the premier enterprise storage company with a dominant market share. On top of that, EMC owned VMware, a software company that had successfully virtualized the x86 architecture so servers could run multiple operating systems simultaneously. Throughout 2008 and 2009, Dell and EMC had deeply considered a merger – to the point that its boards held joint discussions about integration plans and deal price. The boards scrapped the deal during the financial crisis, and in the ensuing years, EMC grew and grew. By 2014 it was a $59B public company and the largest company in Massachusetts. In mid-2014, Dell started to consider the idea. He pondered the strategic and competitive implications of the deal everywhere he went. Little did he know that he was already late to the party – it later came out that both HP and Cisco had looked at acquiring EMC in 2013. HP got down to the wire, with the deal being championed by Meg Whitman, as a way to move past the Autonomy debacle and board room in-fighting. HP had a handshake agreement to merge with EMC in a 1:1 deal, but at the last minute, HP re-traded and demanded a more advantageous split (i.e. HP would own 55% of the combined company) and EMC said no. When EMC then turned to Dell, Whitman slammed the deal. While the only remaining competitor of size was Dell, there was still a question of how they could finance the deal, especially as a private company. Dell's ultimate package was a pretty crazy mix of considerations: Dell issued a tracking stock related specifically to Dell's business, it then took out some $40b in loans against its newly acquired VMWare equity and the cash flow of Dell's underlying business, Michael Dell and Silver lake also put in an additional $5B of equity capital. After Silver Lake and Dell determined the financing structure, Dell faced a grueling interrogation session in front of the EMC board as final approval for the deal. The deal was announced on October 12th, 2015, and it closed a year later. By all measures, it appears the deal was a success – the company has undergone a complete transformation – shedding some acquired assets, spinning off VMWare, and going public again by acquiring its own tracking stock. Michael Dell took some huge risks - taking his company private and completing the biggest tech merger in history. It seems to have paid off handsomely.

Dig Deeper

• Michael Dell, Dell Technologies | Dell Technologies World 2022

• Steve Jobs hammers Michael Dell (1997)

• Michael Dell interview - 7/23/1991

• Background of the Merger - the full SEC timeline of the EMC-Dell Merger

• Carl Icahn's First Ever Interview | 1985