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TMFHelical (99.12)

Embracing change can be a bad thing

Recs

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March 14, 2008 – Comments (0)

No, this isn't political.

Instead it is a more a commentary on disruptive innovation - and how and whether companies embrace it.  If you haven't read Clayton Christensen's 'The Innovators Dilemma', then go buy it - it will provide an important mindset essential to investors in technology based companies.  In a nutshell, it details how difficult it is for companies to embrace innovation, as doing so is speculative in the long term, and will hurt your current markets now.  If you don't do it sometime, you die out (Wang, DEC), but changing the course of a company that is selling products NOW, based on an existing technology is a very hard thing to do.

It is even harder to do for a public company.  Try convincing your shareholders that such a move is in the best long term interest of the company.  Even if you can, will they care??  Next quarters and next years earnings will take a hit, and while it may benefit long-term, will investors stick around for the transition?  Should they?

Earlier this week this dilemma was addressed by one of my CAPs picks, Immucor (BLUD).  They are arguably the market leader in blood testing.  I blogged about this one a couple of months ago here, and at the time noted:

"This company does make good money and has very solid profitability metrics (ROA, ROE, profit margin, etc.) and the balance sheet is solid as well.  But with a P/E of 32, it isn't exactly cheap, and the market today is looking to make everything cheap.  I also can't help but feel I'm missing some emerging disruptive innovation on the competitive front (ABAX?)."

Well, the company is embracing innovation.  This week they announced a buyout of Bioarray. Bioarray's technology is also for blood testing but is more PCR based.  It is likely how blood testing  will be assayed moving forward, as more tests can be run in parallel from a single sample.  Immucors traditional products are predominantly antibody based.  Assuming a transition can be made, it can be managed.  Not all testing will change from antibody based to high throughput PCR, but many will eventually transition, which will require a whole new approval process.  It will also discourage customers from buying / building out their labs with existing tech, when new tech is on the horizon.

The AP coverage of the buyout included the phrase: "..the company said its buyout of BioArray Solutions Ltd. will likely come with a 20 cents-per-share charge for the next several years.".  That is a tough pill to ask current shareholders to swallow.  Private companies can make these transitions much easier than public ones (which get punished by short-term mentality, then become attractive takeover candidates themselves).

Rich Duprey covered this for TMF thusly.  He argues that company was unjustly punished.  I tend to agree, but as a CAPS player, I'm still ending my outperform on BLUD.  This is a company in transition for the next year or so, and such belongs on the watchlist.  The stock is likely to be driven by factors other than fundamentals for the coming year.  It goes to the watchlist and will be revisited next year or later.  Good for BLUD for attempting to embrace innovation, they perhaps had to at some point, but it will likely be a tough ride.

Zz 

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