Good News for Growth Companies

Advertisement

While most business pundits are delighted by the fact that the economy bested expectations and grew at 3.9 percent in the third quarter, I think that there was even better news on page B6 of today's Wall Street Journal. According to data by Grubb & Ellis, the Chicago commercial real estate brokerage, the inventory of office space available for sublease increased for the first time in five years, to 77 million square feet up from 73 million square feet in the previous quarter. Though the Journal notes that office rents remain high and may continue to rise, this is a promising development, I think. The market for subleased space is well-suited to the needs of fast-growing firms and fledgling businesses, particularly in the service sector— companies that are more likely than established businesses to move frequently and generally require less customization in terms of buildout than other types of firms.

And make no mistake: real estate woes often play an outsize role in the lives of dynamic companies, distracting management at pivotal moments and hobbling expansion plans. Fast-growing companies experience an office space crunch early and often. Over the years, a number of CEOs have told me that their biggest headache was not customer service or quality control but finding adequete parking or trying to convince a team of workers to set up shop in a converted storage closet. Cramped office space causes entrepreneurs to delay hiring, which can slow their companies' growth and/or lead to higher turnover among existing staff who grow to dislike being treated like calves raised for veal. And in a tight market, companies looking for office space face longer search times, which can take key staff away from more meaningful, profit-producing endeavors.

***

So the A-Rod situation. The New York Times published an article yesterday, quoting numerous investment bankers cheering Yankees' third-baseman Alex Rodriguez's decision to opt out of his contract and test the market as a free agent. Fair enough. In assessing the various teams and their interest in A-Rod, I've been struck by the fact that everyone is looking at whether he could help a club win the World Series. I know that George Steinbrenner, John Henry and others have popularized the notion that their goal is to win championships. But let's face facts: that's not their only goal, not by a long shot. Team owners are just as interested in making money, and while championships certainly prime the pump, they are only one way to goose income. Any team that signs A-Rod, regardless of its prospects on the field, will enjoy a spike in ticket sales, merchandise sales, and sponsorship revenue. In a large market like Chicago or New York (I'm talking about Queens rather than the Bronx), that kind of boost could translate into real dollars. The jury's still out on whether A-Rod has the chops to perform at the height of his abilities in October. Even though he had an MVP-caliber season with 54 homeruns and 156 RBIs, he went 4 for 15 with only one RBI in the playoffs this year. But as a driver of interest in a team, A-Rod is probably without peer—and worth a lot more than Mike Lowell. Business is like that. Adam Smith's invisible hand can seem as unfair as an ump with an amorphous strike zone.

***

All the papers are writing about Stan O'Neal's ouster, and what's next for Merrill Lynch. I was asked about the situation at Merrill Lynch when I appeared on "America's Nightly Scorecard," a new show on the Fox Business Network, on Monday night. As I said on the show, most of the press coverage is playing this as a story of a guy who was aloof in the office, made enemies by shaking up a once-clubby culture, and ran afoul of his handpicked board one too many times. But there's another narrative in there that I find intriguing. According to the Wall Street Journal, O'Neal was real aggressive in getting his management team to focus on the goal of maintaining their No. 1 ranking in the market for collaterilzed debt obligations. All in, the company's pool of CDOs topped $30 billion. Since CDOs are secured with assets such as mortgages, the subprime meltdown left Merrill in a terrible position. O'Neal informed directors that a $4.5 billion writedown was imminent. The real figure turned out to be $8.4 billion, which stunned the board, and set off a chain of events that resulted in O'Neal's not-so-bon voyage.

As a CEO, you are often measured by whether you meet your goals. But another measure—an equally important measure—is whether the goals you set are worthy. If reports are correct, and O'Neal pushed to ensure that Merrill remained the leader in the CDO market, then the problem wasn't execution. The problem was the fundamental mission.

Last updated: Oct 31, 2007




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: