4 companies failed by their founders

MIchael Dell has made a mess of the company he built, so it's now set to go private. He's not alone, though. Here's a look at the computer maker and three other businesses ruined by the people who built them.

By 247 Wall St. Feb 6, 2013 7:08PM

Image: Arrow Down (© Kyu Oh/Photodisc/Getty Images)

By Douglas A. McIntyre, Alexander E.M. Hess and Samuel Weigley, 24/7 Wall St.24/7 Wall St.

 

For every Sergey Brin, there is a Michael Dell. While the Google (GOOG) co-founder and CEO has made his company one of the most valuable in the world, Dell has laid waste to his company.

 

Michael Dell and his financial supporters have offered to buy Dell (DELL) for $13.65 a share, 40% lower than what it was when Dell re-took the CEO job in early 2007. Investors who bought shares a year ago have taken a haircut of more than 20%.

 

But Dell is not alone in his failure. He belongs to a group of founders of large public companies that showed great promise for a time, and then were wrecked by poor decisions, serious legal problems, and lack of innovation.

 

Perhaps the greatest hallmark of founders who ruin their companies is that they at least appear to look out mostly for number one rather than the interests of the company and its shareholders. This is reflected largely in their generally excessive compensation. By contrast, it is worth remembering that Steve Jobs of Apple (AAPL) earned only $1 in salary and bonus in 2010.

 

Aubrey McClendon, who was recently ousted as CEO of Chesapeake Energy (CHK), made over $100 million in 2008, and remarkably large sums in the years since then. Some of his other actions, such as allegedly borrowing against assets that he co-owned with Chesapeake, raised concerns of conflict of interest.

 

Dov Charney, who drove the company he founded, American Apparel (APP), to the brink of bankruptcy in 2011, made $11.6 million that year. Michael Dell, who in 2010 settled SEC charges that he helped misrepresent Dell’s financials, made more than $21 million during the company’s last three combined fiscal years.

 

The vision thing

A more complex measurement of these founders' performance is their lack of vision to transform their companies as the markets in which they operate change. None have shown the foresight Brin did when he moved Google beyond search and into mobile operating systems. And his company is also the dominant force in online video.

 

 

Michael Dell did not drive any comparable revolution at Dell. The company never stepped aggressively into the new age of personal computing -- tablets and smartphones. The same holds true for Mike Lazaridis, the co-founder of BlackBerry (BBRY), which did not transform its market share in the corporate smartphone industry into a lead in the consumer sector.

 

Finally, the most maddening, and often damaging, problem with these founders is that they cannot be pushed out because they own such large numbers of shares. Martha Stewart owns the controlling interest in her company, Martha Stewart Living Omnimedia (MSO). Dell owns a commanding portion of his shares.

 

24/7 Wall St. reviewed large, U.S., publicly traded companies to find those that have been irrevocably damaged by their founders or co-founders. We included in our analysis a review of company financials, as well as share price change over time. To reflect the amount of control these individuals have, we reviewed company documents filed with the U.S. Securities and Exchange Commission to identify voting share of the founders. If the voting share could not be determined, the total share ownership of the founder was used instead. In the case of Dell, Michael Dell’s voting share reflects his ownership before the completion of the pending move to go private.

 

Here are four giants ruined by their founders. (You'll find the full report, and four more, at  24/7 Wall St.)

1. Dell
> Founder: Michael Dell
> Percent voting share: 13.97%
> Year founded: 1984

 

Michael Dell started his company in 1984, when he was just 19 years old. By 2001, the company he founded as a college student was the largest computer systems provider in the world. In 2004, Dell resigned as CEO but returned to the position in February 2007. By then, the company had already begun to lose its appeal with consumers in the competitive PC business.

 

Despite Dell’s return, the company continued to struggle in its core business. Dell’s worldwide PC market share fell from 15.9% in 2006 to just 10.7% in 2012. Consumers’ growing preferences for tablets and smartphones over PCs have also hurt the company. In addition to losing ground to competitors, the company also caught the attention of regulators. In 2010, the SEC fined Dell $100 million, and Michael Dell $4 million, alleging the company engaged in accounting fraud intended to mislead investors about its performance.

 

On Feb. 5, 2013 Dell reached a deal with a group of investors that included Michael Dell to go private for $24.4 billion, the largest leveraged buyout since the financial crisis, according to The New York Times.

 

2. Chesapeake Energy
> Founder: Aubrey McClendon
> Percent voting share: Less than 1%
> Year founded: 1989

 

Aubrey McClendon, CEO of Chesapeake Energy since he helped co-found it in 1989, has become known for his lavish compensation packages and extreme bets on his company's performance. In 2008, McClendon had lost much of his personal fortune after borrowing money to buy massive stakes in his own company. That same year, Chesapeake paid McClendon $100 million. Between 2009 and 2011, Chesapeake paid McClendon more than $57 million in total compensation. In April 2012, Reuters reported  that McClendon had again borrowed a large amount of money, in this case $1.1 billion, using his stake in the company’s natural gas and oil wells as collateral. Reuters also uncovered that McClendon was running a $200 million hedge fund that speculatively traded in "the same commodities Chesapeake produces" from within company headquarters.

 

That same month, McClendon gave up his position as chairman due to concerns over potential conflicts of interest with shareholders. He is scheduled to resign as CEO on April 1, 2013.

 

3. Martha Stewart Living Omnimedia
> Founder: Martha Stewart
> Percent voting share: 86.7%
> Year founded: 1997

 

Martha Stewart remains chairman of Martha Stewart Living Omnimedia even as the company continues to struggle. Stewart's audience is aging and the company relies too much on the its print magazines.

 

Martha Stewart’s image took a serious hit in 2004 when she was found guilty of conspiracy, obstruction of justice, and making false statements to a federal investigator after she was indicted for insider trading. Although Martha Stewart launched a high-profile "comeback" campaign after her release, her efforts have not paid off for the company, which has not turned a profit in any year since 2007. The company's stock price is down more than 58% in the last five years. Part of the problem is executive turnover. There have been at least five CEOs and five CFOs since the company’s inception.

 

Many executives argue that Stewart’s excessive involvement has hampered their ability to make change. The sixth CEO, Lisa Gersh, announced in December that she was leaving the company after serving in the position for just five months. Despite the company's struggles, Martha Stewart was paid more than $21 million between 2009 and 2011.

 

4. Blackberry

> Founder: Mike Lazaridis
> Percent voting share: 5.7% (of outstanding shares)
> Year founded: 1984

 

Mike Lazaridis co-founded BlackBerry, formerly known as Research In Motion, in 1984 and served as co-CEO of the company, alongside Jim Balsillie, through January 2012. The two pioneered the smartphone revolution. Lazaridis, however, failed to prepare BlackBerry for the upcoming competition from consumer-facing rivals including Apple (AAPL).

 

Among the largest mistakes that marked the end of Lazaridis’ tenure were the BlackBerry PlayBook tablet, a four day global service outage -- which left phones unable to browse the Internet or access emails or instant messages -- and a focus on business professionals even as consumer-centric products such as the iPhone absorbed market share. In the third quarter of 2012, BlackBerry’s worldwide market share of mobile device sales, by operating system, was just 5.3%, down from 11% in the third quarter of 2011 according to Gartner.

 

Find four more companies ruined by their founders at 24/7 Wall St.

 

More at 24/7 Wall St.

 

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7Comments
Feb 7, 2013 2:17PM
avatar

WHERE'S AL GORES COMPANY? WHERE'S SOYLANDRA AND ALL THE FAILED BIG GREEN

COMPANIES OBAMA MADE US PAY FOR? WHERE'S GMC TOXIC LIGHT BULBS? WHERE'S

GMC CHEVY VOLT? WHERE'S ALL THE STIMULUS MONEY? BIGGEST FAILURE IS OBAMA'S

TAX PAYERS NIGHTMARE LIBERAL AMERICA! MSN? NEWS? MY ****! OH DONT' FORGET NOW

WE HAVE OBAMA DEATHCARE! YOU THINK SOYLANDRA WAS A FAILURE!

Feb 7, 2013 1:22PM
avatar
Dells demise came on 2 fronts. First, they were caught with Intel in trying to put AMD out of business with that pay to play scheme for cheaper Intel chips. Secondly, they were caught using subpar caps and trying like hell to get out of their warranty obligations. Dell deserves to die (the company, not the man). Your neighborhood nerd could build you a better computer for a lot less. They are an irrelevant company. You can get everything you need from Newegg or TigerDirect and save a couple hundred off the top, plus still build a killer rig for less than a thousand. 
Feb 7, 2013 10:22AM
avatar
What about Steve Ballmer at Microsoft?  The stock is flat for 12 years, even though Microsoft is basically a legal monopoly.  At Dell, they were good until about 2000.  But then they started to make hardware for more of the consumer market, and the cases were not only difficult, but expensive, to upgrade.  I've hated both companies for quite awhile.
Feb 7, 2013 7:04PM
avatar
It's interesting how critics criticize these brilliant people. Have any of you started a company
that is worth 34B? Why don't you talk about something that is useful to the common investor.

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