One of the lessons we learned at business school is that there can still be money to be made in a declining business. Today's case in point: AOL. The butt of much Internet-related humor, did you know that AOL still has 3.9 million US subscribers? To give a sense of scale, that makes its subscriber base about as large as Charter Communications, a not insignificant 6th place player in the cable TV market. Its income statements are a total mess, cluttered with enough special charges and unusual income items to scare me off from touching the stock, but it looks like it is still making about $50 million a quarter on about $500 million in sales. Not what it once was, but not an awful business either.
A company like this run for cash flow could do well for quite a while for shareholders. Of course, companies like that are seldom run for cash flow -- that is not how corporate management incentives work. Corporate managers are going to want to take the cash flow from the declining business and try to build some new kind of empire on the corpse of the old one. Shareholders can reasonably ask why they are not just dividended the cash to make their own reinvestment, but insiders benefit much more if the cash is reinvested within the company. And sure enough, AOL seems to be buying a ton of small companies.