In this article titled – Decoding A Company’s DNA, Mohnish Pabrai explains how a business’s foundational DNA is set in its first 90 days, making later changes difficult.
This genetic code dictates how a company handles challenges. Investors can gain insights by understanding a company’s early-stage DNA, predicting future performance. Lucent, formerly Bell Labs of AT&T, exemplifies this.
As a regulated monopoly, AT&T’s incentives led to a robust, costly network. Post-deregulation, Lucent struggled to compete against nimble rivals like Cisco. Predictably, Lucent’s bureaucratic roots hindered its competitiveness.
Investors who understood Lucent’s DNA would have avoided its stock’s dramatic rise and fall.
Here’s an excerpt from the article:
The DNA structure of a business usually gets set in stone during the first 90 days of its life, and trying to reprogram this genetic code after a few years is excruciatingly difficult. The DNA structure dictates how a company will respond to various business challenges over time.
From an investment perspective, a lot of useful information can be gained from decoding this genetic blueprint and understanding what transpired during the very early stage of a given business. If you’re able to decode, you can extrapolate business performance far into the future.
Let’s start with a study of Lucent. It used to be called Bell Labs, the research and development division of AT&T.
Before 1984, AT&T was a regulated monopoly with a cost-plus pricing model. Regulators allowed AT&T to earn a reasonable return on invested capital. The more the capital invested, the higher the return.
Thus, incentives to spend a lot of money and build a “gold-plated” network infrastructure were in place. This resulted in a telephone network with extremely high redundancy and fault tolerance. Price was never a priority.
Lucent was where this bulletproof telecom gear was designed and built. With the onset of deregulation and the spinoff of Lucent, a big change occurred. Now Lucent needed to compete. AT&T wouldn’t necessarily be buying Lucent gear, but choosing the best solutions from various vendors.
You can’t reprogram the bureaucratic R&D arm of a lethargic, regulated monopoly to suddenly become as nimble and competitive as Cisco or Qualcomm. It violates fundamental laws of genetics.
What transpired at Lucent since its spinoff was totally predictable. Had investors studied its DNA, they wouldn’t have taken the stock from $20 to $60 in the late ‘90s. More importantly, they wouldn’t have ridden it down to $1 today.
You can find the entire article here:
Mohnish Pabrai – Decoding A Company’s DNA
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