Warren Buffett has an investing approach he calls the "Cigar Butt" approach to investing.
"A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the bargain price will make that puff all profit."
Many shrewd investors have made small fortunes by finding cigar butt companies on their way to the extinction list, buying them, and liquidating the assets for slightly more than the purchase price of the whole company. Detractors call these types of investors corporate raiders or vulture capitalists.
Running a company that has become a cigar butt is probably the most difficult job in Corporate America. New competitors, technologies, business models have made your business nearly obsolete. What do you do?
There aren't that many choices and they can be mnemonically memorized.
1. (Puff) You can find a Warren Buffett or some other loaded financier and partner with them to take that last puff. Liquidate the assets piecemeal and walk away. In some respects, this is the most efficient way to reallocate capital. Shut down the laggard and invest the proceeds in investments with a brighter future.
2. (Puff) - Seek a corporate buyer to buy the whole enchilada at a bargain price. Your company is a cigar butt, no one is going to pay a premium price. There are legions of investment banks on Wall Street that would be glad to help you find a buyer.
3. (Pass) - Act like a startup. The whole company is slowly marching to its death. Why prolong the inevitable? Why not change course in a revolutionary direction? This is probably the most risky and least effective use of capital or resources. Startups fail even more regularly than old cigar butts, but for different reasons. This is the one choice that's probably the path least taken.
- Cut every ounce of fat and go lean like a startup
- Devote every remaining resource to innovation and sales, even if that innovation means you no longer play in the same industry and need to find brand new customers you've never sold to before
- Change the culture completely - everyone who is just waiting around for the last puff needs to go
There is a whole professional organization called the Turnaround Management Association filled with people who focus on turning around troubled companies. Not every troubled company is a Cigar Butt company but I bet that most Cigar Butt companies that bring on someone from TMA end up being sold in a fire sale or dismantled.
Why don't more companies and managers take the Pass choice and make a revolutionary change to the business? It's the more difficult choice and requires bravery, imagination, and renewed commitment.
This is such a fascinating corner of the business world.