Fighting Your Opponent’s Fight
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Matthew Buckley Check6-llc.com |
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As a fighter pilot, I always wanted to maximize my strengths and exploit my opponent’s weaknesses. I knew how I’d fight each potential adversary. By the time I went to meet the enemy, I’d studied their aircraft backward and forward. I could recite their training regimen. I strived to know their weapons systems better than they did. I knew what motivated them to fight. Sun Tzu said, “If you know the enemy and know yourself, you need not fear the results of a hundred battles.”
For example, I didn’t want to fight a Mig-29 “Fulcrum” (the NATO call sign) on the “deck,” meaning close to the ground, and “get slow.” He had a major advantage in this area, and I wasn’t going to let him get into an offensive position. He could turn tighter than my Hornet in this regime, get nose on first, and with a helmet-mounted site, (which I didn’t have), fire a missile, and kill me. I wasn’t going to fight his fight; I was going to fight mine. We call it “driving the fight.”
On Monday, Dell (DELL) announced it was acquiring Perot Systems (PER) for $3.9 billion. This ‘me too’ acquisition is a little late, and way overpriced. For the past couple of years Dell has been reacting to their enemy as opposed to executing to a proactive, offensive strategy.
Dell needs to do a better job at what I call ‘driving the fight.’
For years, Dell had cornered the personal computer sales market. They owned the online and over-the-phone sales channels. They appealed to younger users with their “Dude, you’re getting a Dell” ad campaign strategy, and dominated the business PC market.
For years, Hewlett Packard (HPQ) went head-to-head with poor results. In 2005, they hired an external executive to improve results, and he decided to stop fighting Dell in its strongholds. Instead, he turned the focus to maximizing HP’s strengths and playing off Dell’s weaknesses.
He “redefined” the fight.
HP experienced extraordinary success selling its printers and ink cartridges in retail stores. Why not do the same with their PCs? Put them in front of customers like their other products. Put them on the shelves where people could touch and feel them, and see how they operated.
It worked. By 2007, HP dominated PC sales in North America, and Dell’s founder came out of the bullpen to reassume the duties of CEO. Even with Michael Dell at the helm, by the end of 2008, Dell was reporting lower revenue and smaller profit margins, while HP announced an increase in sales and revenue. They redefined the fight, and it paid off.
Dell has been asleep at the helm. Last year, HP bought EDS to beef up its services division and Oracle bought Sun Microsystems earlier this year. 7 years ago IBM bought PriceWaterhouseCoopers consulting. These tech giants, along with Cisco, have moved beyond their core strategies to diversify and do battle in the other guys’ backyard.
Being the last to the party will hit Dell in the wallet. Dell is paying 29 times consensus 2010 estimates and a 68% premium to Perot Systems Friday close. The cost of reacting to the fight can be high.
I’m bearish on Dell. I sold the Oct 17-18 bear call spread last month for other bearish reasons and this deal put this trade even further in the green. I’ll ride this bear trade until I see Dell start driving the fight. I like HP. It looks like they’ve found support around $44 and I’m considering selling the Nov 39/44 bull put spread for .80. A bull put spread means I sell the Nov 44 put for 1.05 and buy the 39 put for .25 as a hedge and to help fund selling the 44 put. The breakeven for the trade is 42.95, or the price of the short put minus the premium received. Using ATM volatility of 27.09%, there’s a 77% chance of HPQ being above the breakeven by November expiration.
Bottom line: If you’re up against what seems an insurmountable challenge, redefine the fight. The key is timing, and the time to redefine the fight is before you find yourself in a defensive position. That’s how you maintain your advantage. That’s how you win.
Matthew "Whiz" Buckley is the Managing Partner of Check6 LLC, a business-consulting firm specializing in leadership development, risk management, and strategic planning for Fortune 500 companies and related organizations. Whiz flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings, and flew 44 combat sorties over Iraq. He transitioned to the business world after he was scheduled to fly his first flight as an airline pilot on 9/11. Instead, he ended up flying combat air patrol over the U.S. He rose rapidly though corporate America, starting as Managing Director of Strategy at PEAK6 Investments, to CEO of the Options News Network. He is an internationally recognized speaker and combined his unprecedented experiences in the military and corporate America in the writing of From Sea Level to C Level. You can follow Whiz on Twitter.