Bankruptcy and Commercial Real Estate and Lauth Property Group and Finances and Real Estate & Retail

Lauth Group's collapse offers a lesson in hubris

August 17, 2009

Since key Lauth Group subsidiaries landed in bankruptcy in May, the company has described its misfortune almost as if it were an act of God.

In court papers, Lauth blames its downfall on the “global credit tsunami” and says “even the most sophisticated economists in the country have been stunned by the extent of the global credit crunch.”

But a closer examination of the developer reveals there were troubling signs long before last fall’s economic meltdown.

Way back in 2007, when an IBJ reporter asked CEO Bob Lauth about any weaknesses in the company, he said he couldn’t think of any.

It sure sounds as if hubris had set in—a trait that has dragged down more than a few once-thriving companies here and across the nation.

“A good case could be made for the argument that hubris is at the root of most of the ills that have plagued business in recent years,” Mathew Hayward, an associate professor of management at the University of Colorado Boulder, wrote in an essay in BizEd.

“Overconfident CEOs have overpaid for acquisitions, overstepped their legal bounds, and overlooked signs that their companies might be in trouble,” wrote Hayward, author of the book “Ego Check: Why Executive Hubris is Wrecking Companies and Careers and How to Avoid the Trap.”

To be sure, Lauth brass grew their company at a clip that would exceed the comfort zone of most executives. The company doubled its revenue from 2004 to 2005, then doubled it again from 2005 to 2006. During the same period, its project lineup jumped from $143 million to $592 million.

By it 2008 peak, Lauth employed more than 420 people. It ranked among Indiana’s 30 largest privately held businesses and as the 13th-largest developer in the United States.

But those days are long gone. The company has cut its work force to almost nothing, and top executives are fighting to keep the business afloat and retain control of properties.

It’s easy to see how such turnabouts happen. Confidence normally is a positive attribute in businesspeople, and success breeds more of it. But the risk is that executives come to believe they can do no wrong.

Analysts widely believe that’s what did in Stephen Hilbert at Conseco Inc. He co-founded the insurer in 1979 and racked up stellar returns until he decided to buy Minnesota-based Green Tree Financial Corp.—the nation’s largest mobile-home lender—for $6.5 billion in 1998.

The move into a totally different business perplexed investors, sending the stock down sharply. But Hilbert was unfazed.

“Wall Street sometimes takes a day or two to be enlightened,” he said at the time. “The new Conseco will be an absolute consumer marketing juggernaut.”

Skeptical investors ended up with the satisfaction of being right, but with little else.

Hilbert resigned under pressure in 2000. And higher-than-expected losses on mobile-home loans helped propel the company into bankruptcy court two years later, wiping out the stock’s remaining value.

Taking the pulse of retail
The latest economic data suggests the recession is nearing an end. But experts say whether the rebound is robust or sluggish will depend in large part on what happens with consumer spending, which accounts for 70 percent of economic activity.

David Simon, the CEO of Simon Property Group Inc., doesn’t see shoppers yanking out their credit cards yet. He struck a cautious tone during an Aug. 4 conference call discussing second-quarter results for the company, the nation’s biggest mall operator.

“Even though the economy … seems to be shifting in the right direction, it’s safe to say retail is somewhat lagging in that,” Simon said on the call. “So, we haven’t seen that pick up.”

Simon reported that same-store sales in its regional malls were $442 per square foot in the second quarter, a whopping 10.5-percent decrease from the same quarter a year earlier. Occupancy in the latest quarter was 90.9, down from 91.8.

During the slump, the company’s “middle-market malls have been relatively stable and kind of benign,” Simon said on the call, while the malls filled with high-end retailers have fared the worst.

WellPoint plays down profits
WellPoint Inc.’s earnings have been depressed lately, which might not be such a bad thing for the company at a time health care reform is wending its way through Congress.

Just last month, House Speaker Nancy Pelosi, D-Calif., lashed out at what she described as “villainous” health insurers making “immoral profits.”

WellPoint Chief Financial Officer Wayne DeVeydt last month set low expectations for 2010, saying, “I would not expect operating earnings growth next year.” Other major health insurers have sent a similar message.

In a report, J.P. Morgan analyst John Rex suggested companies are talking conservatively in part because of “the challenging political environment, with a seemingly ready nationally televised ‘call-out’ for any health insurer reporting better earnings.”•

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