San Diego San Diego's saplings creaked and twisted in some howling winds last year. These sons of sturdy patriarchs may not have balmy weather this year, either.
Last year, Paul Jacobs took control of a magnificent fief: Qualcomm, the powerhouse that could well dominate the third generation of wireless technology. Paul's father, Irwin Jacobs, founded the company in 1985 and pushed its code division multiple access technology on a telecom industry that had been skeptical. The company succeeded brilliantly, and it now rakes in money from strong chip-set revenues and royalties on its technology. Sales and profits are surging more than 20 percent a year. Although Irwin controls only 3 percent of Qualcomm stock, he was still able to name his son as his successor.
Standard & Poor's says that as an investment, Qualcomm rates better than 96 percent of the stocks the rating service follows. "The company is extraordinarily profitable. Qualcomm's balance sheet is rock-solid," raves Morningstar, Inc., another rating company.
But Paul Jacobs is getting some poor reviews. As soon as his father anointed him to the top post early last year, Business Week Online pointed out that the younger Jacobs had spearheaded many initiatives that "were decidedly out there" and, profitwise, are still out in the cold.
On November 28, Forbes lowered the boom. A cover story featuring Paul's mug asked, "Is Paul Jacobs as good as Dad?" The story pointed to his "low success rate" on various projects and said he "had no experience running the two businesses that provide 90 percent of Qualcomm's $5.7 billion in sales." It went on to say that he had flopped in some Internet projects and bungled a handset joint venture with Sony. The big blunder: putting a plant in high-cost La Jolla while competitors located their plants in low-wage countries overseas. Qualcomm took a bath on the deal before selling out.
Although some within the company have qualms, the scion has his supporters. "Paul Jacobs grew up in the family business, and, in our view, has the necessary tools to steer Qualcomm through its current challenges," says Argus Research.
"No one has proved the son can't do the job, despite the negative article in Forbes," says David Allen of Fallbrook's Palomar Equity Research.
"Paul needs to prove himself as a leader. It will take several quarters. It's hopeful, but the jury is still out," says Bud Leedom of California Stock Report. Qualcomm refuses to comment.
Like Irwin Jacobs, San Diego's Sol Price is internationally known for his vision. He founded San Diego discounter Fed-Mart in 1954. None other than Wal-Mart founder Sam Walton confessed in his autobiography, "I guess I've stolen -- I prefer the word 'borrowed' -- as many ideas from Sol Price as from anybody else in the business."
Sol Price sold Fed-Mart to a German retailer in 1975. It was a mismatch. Sol and his son Robert departed and in 1976 pioneered the concept of the membership warehouse store, the Price Company. It stumbled early, then caught fire, and within three years had 900 employees and a profit of a million dollars. It went public in 1980 and was soon a Wall Street darling. By 1986 it had 22 locations, 7294 employees, and Forbes's title of "best-managed company."
But in 1982, Sol Price lost a longtime protégé, Jim Sinegal, who had done well at both Fed-Mart and Price Company. In 1983, Sinegal and a partner launched Costco Wholesale, another membership warehouse chain that began to grow rapidly, employing many of the ideas Sinegal had learned from Sol Price, such as selling a limited number of items for a low price, keeping costs down, relying on high volume, and paying decent wages. Costco pays employees 42 percent more than Sam's Club, an offshoot of Wal-Mart, and offers a good worker health plan.
In 1993, Price Company and Costco merged. Price had $7.5 billion in sales and Costco $6.6 billion at the time. It was to be a marriage of equals with joint headquarters in San Diego and a Seattle suburb. It didn't last long. The Prices shortly went their own way with a company named Price Enterprises that eventually morphed into Price-Smart. It owns warehouse clubs in Central America and the Caribbean, among other places.
Sinegal has become celebrated for paying employees well and himself little. Costco has half the membership warehouse market. Last July, the New York Times called Costco "the anti-Wal-Mart." Fortune Magazine has been laudatory, as have labor unions, although Wall Street with typical avarice complains that Costco is friendlier to employees and customers than to investors. Wall Street's contempt makes Sinegal a populists' hero -- and Costco's stock has done well, thank you, down only about $10 from its precrash 2000 high of $60.50.
The same can't be said for PriceSmart. Its stock trades at one-sixth its 2000 high. Robert Price has been interim chief executive since 2003. That year, the accounting firm Ernst & Young concluded that the company suffered "material weakness" in its internal controls. PriceSmart overstated revenues during seven quarters of 2002 and 2003 and had to restate profits downward. Shareholders sued and got a $2.35 million settlement in August 2005. The Securities and Exchange Commission is looking into the matter.
The company has lost money for three years in a row. As an investment, Standard & Poor's says 93 percent of the companies it follows rank higher. Morningstar, Inc., a stock-rating company, gives PriceSmart's growth rate a grade of D, its profitability a D-minus, and its financial position a C-minus.
"The Prices were the pioneers, the visionaries, but Costco had strong management throughout the company," says Leedom. PriceSmart? "It's an entrepreneurial nonentity. As an investment it hasn't proven itself, and I don't see it improving itself soon. It's a mess, and they have shown nothing to Wall Street other than that the mess will continue."
Wall Street continues to scratch its head at Cubic Corporation, which specializes in defense systems and mass-transit-fare collection systems. The chairman, chief executive, and president is Walter J. Zable. He founded the company in 1951. He is 90 years old and controls 40 percent of the stock. In this case, the stripling, his son Walter C. Zable, is vice chairman and 58 years old -- too old, in some people's eyes, to succeed his father as chief executive. And he has only 1.6 percent of the stock.