The recent resignation by Neil Gaydon from UK set top box (STB) maker Pace, after five years as chief executive and 16 with the company, highlights the corrosive effect of failing to meet expectations even by a small amount; and even when the business remains successful. But, Gaydon’s position had become untenable after a year dogged by failures to communicate both the company’s strategy and its response to immediate problems, with calamitous results on confidence in the financial community.
Pace began 2011 on a high, having risen from being a medium-sized loss making company (when Gaydon took the reins as chief executive in 2006) to overtake powerful rivals Motorola and Technicolor as the world’s number one set top box maker by volume. But, then came the Japanese Tsunami in March 2011, disrupting Pace’s supply chain and causing a subsequent warning that profits would be between £97m and £110m for the full-year, compared with previous forecasts of £128m ($210 million). The supply chain issue was amplified at that time by the deferment until 2012 of a major U.S. STB order.
Further profit warnings, four in total, followed, the third triggered by the massive floods in Thailand during October and into November, particularly affecting disk drive manufacturer Western Digital, whose products are used by two-thirds of Pace’s set top boxes and Digital Video Recorders (DVRs). Each profit warning was followed by a slump in the share price, which at one point was below £50. It stood last week at £63, after peaking at £227 in Feb. 2011 before the Japanese Tsunami.
The year’s events provided two lessons for Pace. The first was that careful attention needs to be paid to the supply chain in order to avoid being too dependent on any single supplier or locality. The second is that bad news has to be handled carefully, and in such a way that the company appears to be the master rather than the victim of events. This was patently not the case for Pace, where the profit warnings were clumsily handled and gave the impression of communications malfunction with customers, shareholders and the financial community.
Strategically the company remained on course, with a review designed to identify future opportunities and changes needed to improve profitability and reduce risk. This review led to a business plan stretching forward for the next four years or so, and Pace seems to have decided that it wanted a new chief executive free from the baggage of 2011 to see it through. Accordingly, Mike Pulli, previously head of Pace Americas, was appointed chief executive in Gaydon’s place, and the move seemed to reassure the markets, with Pace shares jumping 5 percent on the news.
Some analysts believe that reality will now overcome the negative sentiment, since Pace remains on course for revenues of $2.3 billion for 2011, and will still make around $140 million profit, despite losing some orders it was unable to meet. But, such sentiment allied to a low share price can itself weaken a company, reducing the value of its assets and making it harder to raise money, as well as affecting morale and deterring potential customers. Therefore, Pace is hoping it will not be another example of negative sentiment, however unjustified, translating into reality.