Conference 7.286::digital

    re: .0
    
>                                                   maybe others don't see a
>    link between consistent profitability and long term increases in
>    the stock price.
    
    That much I understand.  I'm still waiting for someone to offer
    a convincing explanation as to why any employee, or customer for
    that matter, who does not own Digital stock should care what
    the stock price is.  If the price were to drop to $1/share tomorrow
    through no fault of our own, what DIRECT financial impact would
    it have on the company?  By "direct" I mean ignoring factors such
    as customer panicing and canceling orders, VPs jumping off the
    Mill tower, etc.
    
    	- Jerry
    

    re:	< Note 361.0 by SDSVAX::SWEENEY "Pat Sweeney" >
>
>            My assertion: The goal of Digital and indeed any corporation is
>    to produce a product or service which customers want in the expectation
>    that the value received exceeds the costs of production.
    
    
    Exactly - The goal is to make a profit.    So why do you contradict
    yourself with your next statement?
>    
>    Corporations exist to serve customers.
>
    
	Serving customers is a means to the end.  The "end" is the profit.
    No customers, no profit.  Obviously.   But since the converse is
    not true (No profit, no customers?  I think not.), the real goal
    is in fact the profit.   If I start a business selling widgets (sounds
    like Intro to Management), I want to make a profit.  EVERYthing
    I do is a means to that end.   True,  I can't make a profit without
    at least one `customer',  but I certainly could have plenty of
    customers and still lose money.  You're saying that as long as I
    have customers,  I'm successful.  I think it's pretty easy to see
    that even if every single person on the face of the Earth was my
    `customer',  and I `served' each and every one of them,  but still
    made no profit,  my company wouldn't continue to exist.
    
    Are you saying that you would continue running a money-losing
    corporation just because you've satisfied your stated goal of `serving
    customers'?
    
    Yes, corporations need customers.  Yes, corporations need labor
    and capital.  But the only reason they need customers, labor, and
    capital is as a means of making (hopefully) a profit.
    

>    Would anyone
>    argue that humans exist in order to increase carbon dioxide and
>    decrease oxygen?  
    
    Yes,  I (and many others I'm sure) would argue that.
    Perhaps that is one thing that humans do in their existence,  but
    I sure don't think that humans exist only to do that.  CO2 will
    be increased and oxygen decreased without humans here to do it.
    
    There are many many philosophies about "Why are we here?".  Whichever
    one you choose is your personal preference.  I personally don't
    think there is any reason whatsoever.
    
    -monty-

    re: 361.2
    
    We agree on everything except perhaps what meaning to impute to
    "goal", "purpose", and other philosophical concepts.  The breathing
    analogy isn't my own, by the way, either Ted Leviit or Tom Peters
    developed it in one of their books, I'll get the precise reference
    and perhaps quote the passage.

    I like the bumper sticker I JUST acquired....
    
    
    Customers are not an interruption of our work;
    but the purpose of it.         |d|i|g|i|t|a|l|
    
    
    where the background is blue, and the writing is white....
    
    GLK

>   Customers are not an interruption of our work;
>   but the purpose of it.         |d|i|g|i|t|a|l|

If it's real, it is too cerebral. By the time the guy tailgating you figures 
it out, he's hit you.

Besides, it leaves the impression that someone has accused us of not treating 
our customer right and this is a campaign to polish our image.

        :-) Keep Smiling

Oh, boy!  A chance to play economist, something I know next to
nothing about! What a perfect opportunity for a Noter 8^)


[.0]:
> As humans need air, corporations need labor and capital.  Would anyone
> argue that humans exist in order to increase carbon dioxide and
> decrease oxygen?

Yeah, plants would, if you asked them about it.  (Sorry -- I
couldn't resist 8^)

> Most of Digital's original capital came from American
> Research and Development.  Digital didn't then and doesn't know turn
> around to the shareholders and say "We exist to serve you, what do we
> do next?" 

If a corporation has a lot of stock outstanding, I think there is
more pressure to appease stockholders, yes.  I think IBM is very
conscious of trying to make its stock go up.  Too, the Honeywell
annual reports during the period when the corporation was selling
off its computer division spoke of trying to "improve the
stockholders' return on their investment." After each major
layoff, Honeywell stock rose (as happens with other corporations).

> My other assertion: The stock price of a consistently profitable
> company will rise _in_the_long_term_, especially in the case of a
> company that doesn't distribute cash dividends.

No argument there.

I think this is a benevolent view of corporations, and that you
could paint a darker picture.  I'm thinking of the Coca-Cola
Company, and Gillette, both of whom were founded, bluntly, to get
consumers hooked on their products.  (You object to the term
"hooked"?  Alright, "used to.") There isn't necessarily any
element of utility in some products.  Some companies (not Coca-
Cola or Gillette) exist to *take advantage* of their customers.
But I digress.


[.1]:
> That much I understand.  I'm still waiting for someone to offer
> a convincing explanation as to why any employee, or customer for
> that matter, who does not own Digital stock should care what
> the stock price is.  If the price were to drop to $1/share tomorrow
> through no fault of our own, what DIRECT financial impact would
> it have on the company?

If the stock fell to $1 today, AT&T (or even IBM!) would acquire
Digital by the end of the week, and dismember us, the former by
accident and the latter by design.

Conversely, buying back your stock makes you a more difficult
takeover target.

    re: .6
    
    Good point!  Let me try asking the question a different way.
    If suddenly, out of the blue, everyone decided to sell Digital
    stock and no one bought it, what direct impact would this have
    on the company.  As before, ignore second order effects such
    as customers panicing and canceling orders, etc.

    The stock market is a secondary trading environment.  This means
    that once upon a time DEC or another traded company sold a percentage
    of itself to an investor.  Since this share of DEC by itself does
    nothing (we do not disperse profits through dividends) this investor
    decides to sell their slice of DEC.
    
    Off to market.  In this case a common location where such used goods
    are bought and sold the NYSE.  The investor asks for $X and someone 
    offers $Y.  They agree on a price somewhere in the middle.  Some
    people view this as a good deal and offer to buy at that price others
    consider the price fair and sell.  This bargining goes on all day.
    
    Any direct effect on DEC.  Not really.  Its a lot like the used
    car market.  
    
    However, consider the case where DEC now want to make a new super
    computer with lots of memory, millions of MIPS and a low price tag.
    They need a billion dollars in investment money.  Banks offer some
    long term cash and DEC decides to offer a bit of itself for sale
    to get the rest.
    
    They work with an investment bank who places the cash for percentage
    of DEC offering.  No NYSE involved.  These investors consider the
    trading price so they can manage their liquidity position.  If DEC
    is trading like moldy bread they will not offer much if anything
    for DEC new issue.
    
    This means that if the stock is dropping then DECs potential for
    raising capital is diminished.  This drops its credit rating and
    makes short and long term financing more expensive and more difficult
    to obtain.  Vendors understand this and tolerate less delay in payment
    cycles or demand cash up front.
    
    If the confidence level is real low its a lot like a run on the
    bank.  everyone wants cash up front from a company with a 90 day
    cash flow.  Chapter 11.
    

    re .7;
    
    > everyone decided to sell Digital stock and no one bought it, .....

    Could someone explain how I can sell something if no one buys it?

There is no one reason why corporations exist.  Economics can tell you NOTHING
about why any given corporation exists.  There are corporations that lose
money every year, but provide other services that their owners consider valu-
able.  Associated Press is an example.  So are some newspapers and radio
stations.

A corporation has NO inherent obligations to its stockholders, beyond a
"fiduciary responsibility", which basically means some degree of honesty.
The corporation makes a statement of its goals when it goes public; it is
then up to potential shareholders to decide if this is a set of goals it is
interested in buying into.  I can (try to) go public with the goal of "making
Jerry Leichter wealthy.  To this end, all invested capitol will be turned over
to Jerry Leichter to dispose of as he sees fit."  If you go ahead and buy my
stock, well, that's your problem.

Different corporations have different statements of their goals.  The goals
tend to appear in every annual report.  Digital is quite consistent in saying
that our primary goal is to serve our customers.  We also say that growth as
such is not a goal, though we believe it will be a result.  IBM lists growth
as a primary goal.  HP lists providing employment for as many people as possible
as a goal!  I don't think ANY of these three companies list "profit" as a goal.

Look at it another way:  If I decide to create a corporation, profit FOR THE
CORPORATION, in itself, means nothing to me.  What means something to me is
what I get out of the corporation:  Salary, work I enjoy, power, whatever.
Profit is a means to an end:  Without profits, I can't get funding, and without
funding the whole thing collapses.

The same arguments that claim that profit is the raison d'�tre of a corporation
could be made to argue that maximum payoff to the shareholders is.  Then we
would have to conclude that we are under an OBLIGATION to pay dividends.

All of this ignores many subtleties:  Short or long term profits?  Short or
long term payoff?  What's short term?  What's long term?

							-- Jerry

    [Re: .10]:  Are you sure the Associated Press is a corporation?
    
    Some "companies" (say, the New England Patriots, or S. Jong, Inc.,
    freelance chimney sweeper) exist but lose money regularly.  But
    they are supported in some way by a benefactor.
    
    If an independent company regularly lost money, where do you think
    it would get money to pay its obligations?

I'm pretty sure AP is a corporation.  The reason it exists is clear when you
look closely at the name:  It's a joint effort of a lot of news organizations.
It is not intended to make a profit - it's intended to gather and distribute
news to its members/subscribers.

Of COURSE, a company that regularly lost money would need a "benefactor".
DEC MAKES money, but what in any real sense do its stockholders have to
show for it?  We pay no dividends.  The only way a "benefactor" - stock-
holder - makes money on DEC is by selling to some OTHER "benefactor".  If
he can't do that, he's in the position of having (indirectly) poured money
through a trap door into maynard.

Since we don't pay dividends, from our stockholder's point of view, what's
important about is isn't profits, except as a means; the only meaningly END
for a stockholder is rising prices for our shares.  If increased profits
lead to that, fine.  If splitting up the company and selling pieces of it,
that's fine, too.  (While this isn't a likely scenario for DEC, it's happened
to many other companies.)
							-- Jerry

    RE:  361.0 by SDSVAX::SWEENEY
                                                   
>    My other assertion: The stock price of a consistently profitable
>    company will rise _in_the_long_term_, especially in the case of a
>    company that doesn't distribute cash dividends.
    
    Like many things, the words "consistently profitable" should be
    qualified by "compared to what?"
    
    The only model I know of that estimates stock prices based on dividends
    says that the value of a share of stock in a company that is not
    expected to declare a dividend should be $0.
    
    DEC argues that it doesn't distribute dividends because it can invest
    the money more profitably in new product development, thereby ensuring
    future growth in the cash flow.  My stock entitles me to a proportional
    say in the distribution of that cash flow.  If I feel that this is not
    an adequate return on my investment, I can sell my stock.  If enough
    shareholders do so, the price will be reduced, thereby increasing the
    expected rate of return.  Alternatively, we could get together and use
    the voting power our stock grants us to pressure the board of directors
    to declare a dividend so that we can reinvest the money ourselves at
    presumably higher rates of return. 

    RE 361.9 by IND::BOWERS
    
    
>    re .7;
>    
>    > everyone decided to sell Digital stock and no one bought it, .....
>                                                               
>    Could someone explain how I can sell something if no one buys it?
 
    Note the original wording "decided to sell."  Not the same as actually
    selling.