By Ian Matthews – June 1 2013 – Last updated June 2, 2013
Mehdi Ali started working for Commodore in 1986 as a “special advisor” and by 1994 President Ali and his team had:
In 1983/4 Commodore started on a financial slide as the ‘Home Computer Wars’ went into overdrive. This war with Atari, Apple, Sinclair and even IBM forced computer companies to sell computers below cost in an effort to keep market share. The hope was that the ‘production curve’ (the theory that as volumes increase, manufacturing cost decrease because of increased efficiencies in assembly, distribution, and parts purchasing power) would substantially reduce costs and return them to profitability and while production costs did decrease it was not enough.
By 1985 the financial situation of these companies was bleak.
Commodore International reported a loss of $20.8 million for the third quarter ended March 31, compared to net income of $36.3 million in the same period last year. Sales for the quarter declined 48.5% to $168.3 million.
Irving Gould, Commodore’s money man and Chairman of the Board, knew he had to do something and so he continued a line of short lived CEO’s.
Irving Gould, 69, Commodore chairman and a Toronto investor, took over the chief executive’s post and continues to hold it. Commodore had been in turmoil and close to bankruptcy. Mr. Gould forced out its founder, Jack Tramiel, in 1984 and named Marshall F. Smith as chief executive, who in turn was replaced by Mr. Rattigan.
LA Times – February 2 1989
Ali had some impressive credentials for a 40 year old:
Mr. Ali, a Yale graduate, worked for Morgan Guaranty from 1969 to 1976 before joining General Motors as a vice president on the financial staff. He then went to Pepsico Inc. in the same capacity in 1980 and to Dillon, Read in 1984.
LA Times – February 2 1989
So it was in 1986 that Ali began his time with Commodore. Over the next three years he proved his worth to Gould. In August 1988, Ali became a member of the Board. In 1989 Gould had fired his second last CEO. Ali, now just 43 years old, was promoted as the man to steer the Commodore ship, serious cost cutting was the order of the day.
Most pundits put the blame for Commodores eventual failure on Ali. He and the team he assembled in the coming years were not well respected by staff:
When a company’s engineers don’t just hold their executive team in contempt, but feel actual, bona-fide loathing for their chieftains, something’s wrong. By the time Commodore went bankrupt, Commodore’s engineers really didn’t like the last executive team, led by CEO Mehdi Ali. It could be said some of them hated him. In Dave Haynie’s Deathbed Vigil video, they burn an effigy of him.
Mehdi Ali was the last CEO to be appointed by Commodore’s board of directors. Some of the blunders he and his highly paid (Ali was said in the video to have been paid something like $2 million a year)…
While it is critically important for a President provide investor confidence, it is even more critical that staff believe you know what you are doing and follow your lead. Investors were initially happy with Ali but the staff were not. Commodore staff derided Ali and his management team. Moral steadily fell, good staff left the company and the business really started to unravel.
In particular Ali decided cut the one cost center that technology companies can’t live without, R&D. With R&D slashed, new products languished, sometimes for years. The much discussed Amiga AAA chipset was started in 1989 but still wasn’t complete in 1994. Engineers were forced to rehash old and limited technologies, so products like the never to be released Commodore 65, a modestly upgraded C64 running in 8 bit mode (in a 16 bit and soon to be 32 bit world) was scares resources were spent.
Beyond killing moral and misdirected cost cutting, there was also an inability to close corporate deals. Commodore had so very many opportunities to return to profitability and regain its rightful juggernaut status but Ali’s decisions kept the company is disarray:
The brutal slaughter of a deal with Sun Microsystems that would have made Sun an OEM for Amiga computers. Sun wanted to use Amiga’s version of Unix for Sun’s low-end Unix solution. Medhi Ali and his team sabotaged the deal twice by demanding a fortune in licensing fees. Sun eventually gave up and Amiga’s chances to expand into the Unix market dried up forever.
Beyond all of these errors, there is Ali’s inability to appreciate the potential of existing products, in particular the Amiga line. Mehdi Ali thought of Amiga as some sort or next generation Commodore 64 rather than an a ground breaking business machine with potential to kill IBM’s PC business.
Commodore were not interested in the Amiga, it was simply their next product… it would have been cast aside just like the C64 was, as soon as the next gen machine was ready.
Ali’s 6+ years at Commodore left it in ruin and they filed for Bankruptcy protection in 1994.
Today, in 2013, Mehdi Ali and his son run Stone Ridge Partners, which is a private equity firm that buys struggling companies. He also sits on the “advisory board of “American Industrial” which is another private equity firm. These types of firms are nearly always focused on short term gain with a 6 month to two year time horizon. Oddly, Mehdi takes ‘credit’ for his time at Commodore on his site:
Mehdi has been a principal of the firm since its inception in 1996. Mehdi’s background includes more than twenty years of operating experience. His prior experience includes serving as the President of Commodore International, where he accomplished a major operational turnaround.
Ultimately, the blame for any corporate failure goes to the large shareholders and Board of Directors. In this case I think it can be safely said that Irving Gould, Commodore’s financier and Chairman of the Board, sholders the most blame for Commodore failure, if for no other reason than for keeping Ali’s management team in place. However, Gould’s failure to remove Ali does not improve Ali’s ugly legacy.
I think this story would make an excellent case study for a University level business course. The moral of the Commodore / Ali story can be summed up in an old business adage “you can’t cut your way to growth”. Cost cutting is a short term periodic requirement in all companies but it is also the way to guarantee failure in the long run. Many investors (especially in 2010 era) are interested in a short one year or less horizon but companies must think long term if they wish to prosper and a President needs to balance these competing interests. Cutting marketing and R&D in a technology companies dealing in the retail space is a sure formula for disaster.
Post Script: When writing this article I found a telling comment from a reader:
Mehdi helped destroy the next project he was involved in… a company I was the CFO in until he became involved and “created profits for the short run”…not for the future of the company.