Thursday, September 29, 2005

Time Warner & Microsoft- Strange Bedfellows Indeed

Yesterday's piece by Lee Gomes in the Wall Street Journal regarding technology company M&A activity was quite good. The title of this post borrows part of Mr. Gomes' title, referring to how some strange hookups have come to pass in the sector, to the regret of all but the investment bankers, who were paid regardless of the deals' outcomes.

However, the reason I'm writing this piece is that Mr. Gomes mentioned the current TimeWarner-Microsoft talks regarding sharing control and ownership of AOL.

Can you imagine Bill Gates and Steve Ballmer settling for less than controlling interest in AOL? Do you believe Dick Parsons wants those two controlling one of his major assets? The one which most seriously derailed his company over the past five years? Why are these two companies even considering trying to share control of AOL? TW has mismanaged it since the merger, yet won't spin it off. Would Microsoft seriously pay billions to run AOL without control? This strikes me as a recipe for further disaster for all involved.

I find the whole idea of these two aged titans, TimeWarner and Microsoft, struggling over control of a faded name in the internet product/market space, to be demonstrative of mediocre management. Both Microsoft and AOL were in my equity portfolio of consistently superior-performing large-cap companies in the late '90s. But neither has returned to that level of performance in this decade. Microsoft became predictable and less dynamic. AOL chose its peak market value, based on consistently superior performance, to unload itself to TimeWarner for a share of the latter's more tangible assets, at least on paper.

Gomes is right to point out that rarely do a combination of lesser-ranked competitors in technology sectors ever dethrone a market leader. That is because second-best tech companies are just that, and no amount of critical mass of their products will make them better than the leaders in terms of features, performance, etc.

It didn't happen in mainframes (Sperry, Univac, Honeywell, Nor mini-computers. Nor PCs (how could we forget Carly Fiorina already? Compaq/Dec and HP). Nor software. It is unlikely to happen in online networks.

The prospect should make for some entertaining business news and corporate comedy in the months to come. But I doubt it will create any business which has a chance of attaining the sort of consistently excellent performance we look for in our equity portfolio holdings.

In Everyone’s Backyard

Is anyone in this country who votes and has a college education surprised at all with the Tom DeLay mess? And am I the only one who wonders how Texans have time for this nonsense right now? I thought they are supposed to be busy trying to convince the rest of us Americans, except for those next door in Louisiana, how badly they need help, a/k/a federal money, from the other states to recover from hurricane Rita? C’mon guys, get your scripts straight and stay on point!

All Politics is Local
First, let’s admit that US Representatives are about the most “normal” national-level politicians of the lot. They have to convince you every two years to let them go back to that hellish job they said they wanted, “representing” you in our lower Congressional house. Sort of like paying to be allowed into a kindergarten free-for-all every two years.

In the pecking order of Presidents, Senators, and Supreme Court Justices, these Representatives are most definitely the least polished, most unvarnished of the political breed. Everybody knows the seamy stories about US Reps from their district. All politics “is” local, and the same “constituent servicing” goes on in every district in every state in the country.

So What Else is New?
So I was bemused to learn that Tom DeLay allegedly was explicit in trading his support of a colleague’s son for a House seat, in exchange for the colleague’s vote on the medicare prescription drug benefit. This was evidently only one of a handful of times that the House “ethics,” and I use the word very loosely, committee has spoken out on Mr. DeLay’s actions.

I’m reminded that Texas has been most generous in delivering this type of political comedy to the nation. Remember Jim Wright’s heavily accented, “I will comply” with the House’s ethics committee’s demand that he come clean on his infamous book-buying-cum-campaign-financing scandal? Or Bobby Baker’s vegetable oil hoax?

By now, I'm old enough to consider the phrase "House Ethics Committee" an oxymoron. Who are they kidding? It's a political club with which to bash the other party's most effective leader.

We Get What We Deserve
Seriously, though, I think the true lesson in the Tom DeLay affair is the continuing stupidity in Washington with respect to campaign finance “reform” and regulation. When will we voters learn that these guys and gals we elect are just using our money to try to hamstring each other with so-called “campaign finance reforms” as they attempt to remain in office forever?

Let’s just admit that money is fungible. What DeLay and his colleagues evidently did seems perfectly sane and reasonable, given funding regulations. They took donations which were apparently illegal in Texas, sent them to their National Committee, and received funds back from said Committee. It may be laundering, but I can’t see how you could possibly write legislation that would make all and only such transactions illegal. If the people we elect to the House and Senate weren’t this clever, would we even want them there in the first place?

A Better Idea
You and I, as taxpayers, would be far better off if the pols we send to Washington would rescind all the current campaign finance laws and replace them with one. It’s a great idea which I read in the editorial pages of the Wall Street Journal during the Clinton years. Simply require that any funds donated to a campaign must be publicly reported, both at an electronic/internet site, and in a paper-based document, within 24 hours. The information required would be the amount, the donor, and the donor’s contact information. Then let the press have at it. I frankly don’t care if the head of the Chinese army donates money to Bill Clinton (wasn’t that rumored during his campaigns?), Tom DeLay or John Kerry. I just want to know about it. It would say far more about the candidate than many of his or her words and actions ever could.

Wednesday, September 28, 2005

The Hurricane Zone

A friend of mine and I were watching the news last week as coverage focused on hurricane Rita. The news story focused on the Galveston seawall, and how it would probably not be adequate to prevent flooding of the town, should Rita come ashore there.

This in a city famous for having been leveled in 1900 by a severe hurricane.

What is it about the Carolinas, Florida and the Gulf Coast? Living in a hurricane belt, you would think that the business owners and residents of the region would have shown more foresight regarding the potential damage from these storms when they build their facilities, homes and cities.

Take oil refineries, for example. I saw an interview with Lee Raymond of ExxonMobil on CNBC this week. He opined how until the past few weeks, he had never known how many experts on oil refineries there were in the US. That’s a pretty funny remark, until you let it sink in a bit.

You don’t have to be an expert at building or operating an oil refinery to realize that concentrating so much evidently unprotected, vulnerable capacity in a hurricane zone seems like inept business planning. The oil industry executives bemoan over-zealous environmental regulations, but the net effect of their decisions on refining capacity and locations over the years is to be unable to keep pace with the growth of their customers’ demands for refined petroleum products.

It’s easy to get lost in the thickets of how hard it is to build new refineries, pipelines, etc, thanks to various regulatory barriers. But from my perspective, it seems that the energy sector’s major mistake has simply been to underestimate demand, leaving them with barely adequate capacity at present, before the hurricanes affected the 25% or so of oil and gas production and refining that we are told are located in the Gulf region.

It’s not some evil conspiracy to drive up prices. Many, though not all, of these executives missed the boat on how Chinese and Indian demand would affect the global balance of supply and demand for carbon-based energy. I doubt they are happy to have unmet demand in this country right now.

As with many other business snafus, the real issue seems to be a simple deficit of capable business strategy and execution which take into account the realities of factors affecting supply and demand.

I’ll be touching on this subject again soon- how mediocrity in business management touches us all in unrealized ways.