Barrick Gold and Apple: the perils of growth
There is almost a palpable sense of satisfaction — however grim it may be — when the mighty are humbled. As the saying goes, the bigger they are, the harder they fall.
That’s certainly been true of Barrick Gold. The company has long been exalted for its strong performance, disciplined management and steady international expansion. But its recent sequence of stumbles has dramatically and unequivocally changed all that.
Much of the negative attention has focused on Barrick’s decision to pay an astonishing $11.9 million signing bonus to the company’s newly recruited co-chairman, John Thornton. It’s just part of an even bigger $17 million compensation package.
Although company founder and chairman Peter Munk valiantly defended the payment, Barrick certainly tied a pork chop around its own neck. There’s no way the board could have expected shareholders not to start barking in outrage.
But the howls of outrage and indignation have obscured a bigger issue, one that Apple and many other corporations are grappling with: how to manage growth past a certain size and point of maturity.
It may seem obvious that companies, like people, grow quickly in the early stages of life and level off over time. But when it comes to Barrick, Apple and scores of others, the culture of growth and the expectations of shareholders make the transition from growth stock to value stock an awkward — and potentially dangerous — phase.
Historically, Barrick has had an enviable record of growth and management of its growth. Pursuing it past a certain point, however, has been fraught in the extreme.
In its relentless pursuit of growth, Barrick spent $10 billion to acquire Placer Dome in 2006. Then, it bolted down the rocky road of diversification: In 2011, when copper prices were peaking, it spent $7.3 billion on a disastrous takeover of copper miner Equinox Minerals. It has taken a $3.8 billion writedown on Equinox and is also trying to sell off oil assets it acquired.
The future of its biggest project, a combined gold and silver mine on the border of Argentina and Chile, is now uncertain because massive overruns have seen costs soar while commodity prices have fallen. Projects in the Dominican Republic and Pakistan have run into political problems and with 25 mines in 10 countries, that’s not likely to change anytime soon.
When he became CEO last summer, Jamie Sokalsky promised to maximize the growth from existing mines and curb the hyper-aggressive approach to growth that has characterized Barrick for so long. But it’s not a mindset — or an expectation — that can stop on a dime.
On the Apple side of things, new CEO Tim Cook has been working steadily to adjust the way markets look at Apple. Part of that strategy was his recent announcement that the company plans to return $100 billion to shareholders by the end of 2015, in part by raising its dividend 15 per cent and in part by increasing its share buyback program six-fold to $60 billion.
He has also made the rare admission to analysts that Apple’s growth has slowed and margins have decreased as it matures. With sales of $100 billion, sustaining growth at all is — it has to be noted — no small accomplishment.
The issue of corporate growth and how aggressively to pursue it is an issue that’s receiving extreme scrutiny these days. That’s because so many companies are sitting on record levels of cash, reluctant to commit to expansion at a time of economic and market uncertainty.
Sitting on cash seems to be the prudent approach, especially in the aftermath of the 2009 financial crisis.
The amount of cash accumulating on the sidelines is certainly significant: According to Statistics Canada, Canadian non-financial corporations held $526 billion at the end of the first quarter of 2012, an increase of 43 per cent since the recession ended in 2009.
In the U.S., non-financial companies are currently sitting on almost $2 trillion, the highest level in 50 years.
Last year, Bank of Canada Governor Mark Carney piled on, declaring that this “dead money” should be invested productively or returned to investors. In his view, overly cautious Canadian firms aren’t doing enough to drive economic growth and create new jobs.
The catch, of course, is that sustainable growth isn’t just about spending money.
Every company has unique circumstances and challenges, global markets can suddenly distort prices, and the expectation of shareholders — and central bankers — can add pressure to take measures — any measures — to demonstrate action.
Maybe it’s about time that the whole notion of growth for the sake of growth and growth as a constant benchmark of performance be re-considered.
It’s a sure bet that the senior executives of Barrick Gold would be on board for that.
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