November 04, 2011
Law & The Business About-Face
Posted by Christine Hurt

This Fall, several well-known publicly-held firms have announced major changes to its business model, received negative feedback, then abruptly reversed direction.  I'm thinking of the Netflix/Quixster debacle, The H-P aborted spinoff of its PC business, and BofA's retreat from charging a debit card fee.  The reversals seemed as surprising as the original announcements.  Particularly the Netflix announcement, which was not couched in language of examining options, but was an annoucement of a final decision.  Can firms really just change their minds?  Had they not already invested significant amount of time in reorganizing, restructuring, hiring or firing to make the changes happen?  Had they not thought the original change through?  Does the change buyback any good will that was lost?  Or, are shareholders left with wondering what bozos are running this ship?

If you look at the Netflix stock chart (available here, courtesy of Netflix), you'll see that the stock price had been trending downward this summer, but plummeted on September 14, when the company announced a price increase for its DVD/streaming services.  Then, on the 19th, Netflix announced it would split its streaming services and put them into a new company, Qwikster, so that customers who just wanted DVDs or streaming would put for that service only, but customers who wanted both would have to have two separate services.  The price had fallen from $208.71 to $143.75 in five days, and then kept on going.  When Netflix announced that the plan was off on October 10, none of that fall was regained.  Prices fell once more a few days later when Netflix's earnings were announced.

Likewise, the H-P stock price tells a similar story.  The stock price took a huge plunge around August 17, when H-P announced that it would, among other things, spinoff its PC business.  Over the summer, H-P replaced the CEO with Meg Whitman, hardly affecting the flattening price trend.  The stock price did increase two days before and a few days after the death of Steve Jobs, but the October 27 annoucement that H-P would not spinoff its PC business did not significantly move the price, where it stays below the pre-original announcement price.

Some are saying that these quick reversals are the result of social media making customer outrage quick, immediate and amplified.  However, at least for Netflix and H-P, these lead trial balloons seem fairly costly.  Particularly for Netflix, who has all of their customers' emails and could have done a fairly inexpensive survey prior to announcing any drastic change.  As a corporate lawyer, I'm also wondering about securities law problems.  Trial balloons under corporate law probably aren't fraud unless the speaker knows that it is untrue.  However, if a firm isn't internally committed to a plan, but announces it to the media as a decisive plan of action, depending on what happens to the price, this might open the door.

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