Wall Street History: Michael Milken, New Coke And Bad Business Decisions

It's always nice when financial history conspires to provide a theme to a given calendar week. This week has seen some of the worst business decisions in history, as well as a scandal or two.
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New Coke Gets Old Quick
On April 23, 1985, Coca Cola Co. (NYSE:KO) announced that it had changed its traditional formula as part of a three-year secret project. Because of a strong preference for New Coke in consumer taste tests, Coca Cola decided to pull the old Coke formula from the shelves. Essentially, the company was throwing away a century of branding by favoring the new, relatively unknown formula over the one that consumers had grown up with.

This made sense to Coca Cola executives, because they didn't want their old product line to keep consumers from buying their new one, much like software companies pulling old versions from the shelf when a new one is released. Unfortunately, this bold move backfired horribly.

Consumers rebelled and flooded Coca Cola with angry letters and phone calls. Coke's stock and market share took multiple hits. On July 11, mere months after its sudden exit, the old formula was re-introduced with "Classic" added to the title (probably better than "Old Coke"). The fiasco left Coca Cola with a solid product – something they had before they started tampering – and an undervalued stock. During this time, Warren Buffet scooped up shares, making one of his many prescient buys of Wall Street wallflowers. (For diversification and profit potential, add a different kind of "liquidity" to your portfolio. Learn how, in Parched For Profits? Try Beverage Stocks.)

Worst PR Pitch Ever
On April 23, 1991, Gerald Ratner, the chairman of jewelery company Ratners, nearly sank his own company by describing their retail jewelry as, "total crap." Ratner assumed his comments at the private function would not be reported widely when he summed up the successful company's business model: "People say, 'how can you sell this for such a low price?' I say, 'because it's total crap.'"

This comment dropped the company $850 million in valuation. Ratner "left" Ratners in the aftermath of his gaffe, and his name was also removed as the company was renamed Signet. The "total crap" branding campaign is now as dead as New Coke. (This investment alternative may seem glamorous, but it's not for the faint of heart. Find out more in Introduction To Gemology.)

Perp Walking the Dotcom's Darkside
On April 23, 2003, Former Credit Suisse First Boston (CFSB) banker, Frank Quattrone, was given a perp walk in front of the media, as the fallout from the dotcom crash continued to expose the corruption within investment banks. Frank Quattrone was one of the most powerful figures during the dotcom bubble. At CFSB, he brought in more internet IPOs than any other bank, garnering huge fees for the bank. Quattrone also ran roughshod over the Chinese Wall. He controlled the bonuses for analysts and used that as a lever to guarantee all IPO shares coming out of CFSB a glowing recommendation.

Quattrone did not bring about the internet boom all by himself, but every other investment bank mimicked his strong arm tactics with their analysts. Investors, sadly, took many of the analysts on their word. The total cost to investors on the internet bubble has been estimated as high as $5 trillion. There is also the general loss of faith in Wall Street that followed the "revelation" that analysts were far from impartial. (Find out more in The Dotcom Crash.)

Milken Pleads Guilty
Once famous for hosting investment galas known as The Predator's Ball, Michael Milken pleaded guilty to six felonies on April 24, 1990. Three of those counts had to do with helping Ivan Boesky conceal his buying of takeover targets – something that should have been revealed on Schedule 13-D. The other three were a hodge podge of tax and securities violations.

Interestingly, Milken was never charged for his financial innovation of using junk bonds and leveraged buyouts (LBO) to shake up undervalued firms, as many people assume. Surprisingly, many of the companies Milken restructured through junk bonds went on to outperform the market in the 1990s. If only Milken's financial innovations hadn't been overshadowed by his self-dealing and collusion with Boesky to line his own pockets. The Junk Bond King left junk bonds and LBOs with a worse reputation than they deserved. (Find out how these Wall Street high-rollers landed themselves in hot water, in 4 History-Making Wall Street Crooks.)

May Day is Coming
That's all for this week. Next week, we'll look at some serious cooking of the books, a massive securities settlement and one of the greatest days in the history of individual investing.

(Missed last weeks article? Wall Street History: GE, McDomination And J.P. Morgan.)





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