Lessons from Circuit City
In business, you need to make important decisions quickly and with the best information available.
Many decisions involve taking risks with variables that are impossible to control. However, fear should not paralyze us, since together with risks are opportunities, and when we don't make a call, someone else will do it for us.
A few months ago, I thought I could save Circuit City, the second largest electronics retailer in the United States, from bankruptcy. I believed that there was a great opportunity to turn the company around. Circuit City is a recognized and respected name and was in the market for over 60 years, with more than 30,000 employees.
I began to buy Circuit City stocks during the spring of 2008, with the goal of taking control, and eventually making it a profitable and growing company. However, we didn't make it.
My plan was to renegotiate the debt with suppliers and banks, delist the company from the New York Stock Exchange and resume its profitability. Delisting the company was an important part of the plan, since I don’t believe companies listed on U.S. stock exchanges have the freedom to make the rapid and effective decisions that are needed today. Instead of assuming leadership roles, managers of companies listed on the U.S. stock exchanges spend most of their time protecting themselves from their own decisions, with all the bureaucracy, expenses, and lost opportunities that this implies. The result is a sclerotic company, unable to create economic value (see my Corporate Governance posting).
When Circuit City, which has around US$2 billion in debt, entered into bankruptcy court, creditors had the option of renegotiating the debt or demanding immediate payment with a liquidation of the company’s assets. The company is now in liquidation.
The suppliers, who know us very well from our experience with Elektra in eight Latin American countries, were receptive to our plan. They also saw the opportunity to increase market competition. In the end, the bankers decided in favor of liquidation, taking the easy road, based on a short-term outlook. The banks will get back their capital faster (albeit at a steep discount), sacrificing the long-term opportunity for better returns, with a much higher cost for society than if they would have placed their trust in the future of Circuit City.
Its a shame to see a company with 60 years of history close its doors, along with the loss of an important employer and a serious competitor in U.S. retailing.
My personal loss was an expensive learning experience. I lost and that’s that.
However, as Warren Buffett said, you don't have to recover your money the same way that you lost it. In other words, there are still opportunities ahead, and we need to make the right calls to materialize them. What’s important is to not live by fear, to take advantage of experience, and look ahead to growth.