Much ink has been spilled on the perils of allowing some companies to become “too big to fail.” This assumes that governments, hence taxpayers, must foot the bill when these whales become seriously ill, while reinforcing a view that the top dogs, whose failure might do systemic damage, should be regulated or constrained to mitigate the damage that they might cause.1
The flip side of this view—indeed, perhaps supported by the “too big to fail” ethos—receives scant attention: companies can become “too big to succeed.”
When you’re #1, you have a bright target painted on your back. Indeed, in a world of fierce competition and serial witch hunts in Washington, that bull’s-eye is probably painted on your front and sides, too. Competitors are gunning for you. Governments and pundits are gunning for you. In a world that generally roots for the underdog, hardly anyone outside of your own enterprise is cheering for you to rise from world-beating success to still-loftier success!
Was Goldman Sachs targeted with civil and criminal fraud charges because they have criminal intent to defraud their clients, while their competition is pure as the driven snow? Or have they become a symbol of success-to-excess, to an extent that prompts populists and pundits to want them to suffer?
Is Exxon Mobil regularly pilloried in Washington because their business practices are monopolistic, their profit margins obscene, and their product is viewed as polluting and distasteful (never mind that we all buy it)? Or is it because their relentless business success makes them a popular target?
Of course, none of this is new.
Initially, Bank of America management thought they’d be lauded by the political elite for buying (and saving!) Merrill Lynch during the disastrous weekend when Lehman imploded. Instead, they found themselves on the proverbial horns of a dilemma when Merrill disclosed an extra $20 billion of losses before the deal closed. Bank of America could have cancelled the deal by invoking the material adverse conditions clause or they could have proceeded and sought additional sources of capital. Ultimately, Bank of America chose to proceed and, instead of being lauded for stepping up, they were pilloried for needing an infusion of capital (which they repaid) and sued for not cancelling the deal.
How much of this controversy was linked to the fact that Bank of America was the largest bank in the United States, by most measures? How much of Citi’s “moments in the spotlight” have been due to the fact that it was Bank of America’s predecessor in the #1 spot?
Microsoft’s opportunity in the spotlight came a decade ago, when they were attacked on the grounds of “monopolistic” business practices, as was IBM in the prior decade. The decade before that, AT&T was successfully dismantled on the same basis.
The very business practices that propel an organization to #1—aggressiveness, focus, canny outmaneuvering of the competition—become unacceptable if you’re wearing the yellow jersey. Being #1 means always having to say you’re sorry!2
Too Big to Succeed?
Does our tendency to punish our winners hurt their investors? Yes. In fact, we find the leader in any sector underperforms the average stock in its own sector by 3.5% in the next year ... and the next year … and the next year. As Table 1 shows, the damage doesn’t really slow down for at least a decade, as the top dog in each sector lags its own sector by 3.3% per year for the next decade! With compounding, the top stock in the 12 market sectors declined 28% in value relative to the average stock in its respective sector.