Friday, September 28, 2007

More on GM's & The UAW's Recent Settlement

In my very first post on this blog, roughly two years ago, I suggested that unions had committed a grievous error back in the 1950s by agreeing to accept corporate financial promises, in lieu of cash on the barrelhead.

As I reflect further on this week's GM-UAW settlement, featuring the transfer of the former's healthcare liabilities to the former, in the shape of a $51B trust fund, described here, I believe that, once again, one of my contentions is being proven correct by realities of the marketplace.

As I reread yesterday's Wall Street Journal articles on the tentative pact, still to be approved by the UAW membership, I noticed a brief description of the failure of a similar provision, established between Caterpillar and the very same UAW in a recent contract. The healthcare trust fund is already bankrupt, and the union and Caterpillar are now locked in a legal battle over it.

Frankly, I'm surprised by three things. First, that Gettelfinger would resurrect this approach after it failed at Cat. Second, that Gettelfinger would try to somehow justify how the GM trust fund will be different, and not fail, where the Caterpillar one did, i.e., what has changed in two years? Third, that the UAW-Cat healthcare trust fund debacle was not a page one story on the day of the GM-UAW pact, as well as the featured story on CNBC.

Instead, I read it in the latter part of the Journal's long piece on the strike and pact, buried in the final columns of an inside page.

The more I think about this GM-UAW settlement, and the apparently-failed Cat-UAW 2005 settlement, of a similar nature, the more I see big labor slowly being forced to move in the direction of my post of two years ago- take cash, not promises.

Sure, right now, it's a lump sum, special/single-purpose trust fund. But how long is it until the companies lobby to give individuals a tax deduction on healthcare, and simply execute a one-time swap of policies for dollars, thus safely exiting the health insurance business?

With one fell swoop, they can argue for consistency, i.e., why pay today's employee's healthcare, when we just offloaded yesterday's to you in a trust fund? Let us just pay you what we pay for your healthcare, and you, the interested party, can, say, band together with your union buddies and all present as a single group to some insurer.

It's funny how policy sometimes occurs from the strangest sources. After all, our current third-party payer medical insurance is the unanticipated result of Harry Truman's Senate Committee freezing wages during WWII. This necessitated non-cash compensation competition by firms, in the form of 'fringe benefit,' i.e., non-cash promises- pensions, medical care, vacations, etc.

Who knew that this sort of wacky compensation would take root and completely warp American usage of healthcare, not to mention taking responsibility for their own health to begin with?

If for no other reason than perhaps sparking a trend that will make HillaryCare 2.0 irrelevant, the GM-UAW tentative agreement might just be a landmark deal, and we don't even know it yet. Would it not be ironic if, twenty years on, both the company and the union are shrunken remnants of their former selves, but the revolution in healthcare insurance payment arrangements they forged near the end of their influential phases becomes the legacy for which they are best known?

Thursday, September 27, 2007

GM: The Strike and The Settlement

I would be remiss if I let the week pass without commenting on one of the biggest news stories about corporate America- the GM-UAW strike and subsequent contract.

A few weeks ago, I wrote about GM's stock price surge, here, suggesting that it is the product of speculation, rather than consistently excellent performance.
As the nearby Yahoo-sourced price chart of GM and the S&P500 for the last three months clearly shows, even the recent spike in GM's price, due to the UAW contract, only brings it to rough parity with the Index. For much longer periods, such as more than 2 years, the picture still looks even worse, as in that prior post.
However, leaving aside the immediate ramifications of the contract on GM's market value, there are two other aspects to this deal I wish to discuss.
The first comes by way of Wall Street Journal editorialist Holman Jenkin's excellent piece in yesterday's edition. He notes that the brief strike of the UAW GM workers called by Ron Gettelfinger may well have been so he could get them in the right head space regarding the sacrifices they are going to be asked to make in the new contract. Rather than it being a product of the negotiations, Jenkins reasonably theorizes that Gettelfinger, presiding over an ever-shrinking, less-important union, is worried that they won't accept the new contract, sending the near-term status and health of the union, with GM, into free fall.
That alone tells you something about the severity of the situation in Detroit right now.
But there's so much more to it. Many articles and pundits are trumpeting the new pact as a sea change in the American worker's situation.
This is because of the key element of the new contract, wherein GM finally exits the employee medical care guarantee business, in which it, and other firms, have been since WWII, by way of a $51B payout to a new union healthcare trust find.
Sure, GM is out of the business of yet another benefit provision. Along with defined contribution plans, rather than the older, now nearly-extinct defined benefit pension plans, healthcare is returning to its rightful place- as the province of the worker, paid for with cash from his own pocket.
However, given the context of the GM deal, instead of going right to the worker, the UAW-administered trust fund idea was used. It's necessary because of the mixed durations of claims by so many former and current GM workers on the company for healthcare.
Look at what this does. It now makes the workers' own union, the UAW, responsible for any healthcare shortfalls, service gaps, funding shortages, etc. Responsibility has hit the union movement at last. It's as if they returned to an ancient medieval guild structure, wherein they have provided in common for their retirement and healthcare.
I have several observations on this. First, the $51B number seems suspect to me. If the same minds that usually mess up healthcare cost management and estimation were involved, and it's hard to imagine who else would have been, it stands to reason that this amount will, ultimately, prove unequal to the claims made on it. Look out if you happen to succeed Ron Gettelfinger as UAW chief.
Second, there's a subtle, but important, aspect to the timing of this change. Right in the middle of a Presidential campaign featuring many Democratic candidates calling for more government-run universal healthcare, you have the major US union, the UAW, reverse course and take on the responsibility for its own healthcare insurance provision.
Will a major, blue-collar Democratic voting bloc now get a taste of individual control of their own health insurance, and lose their appetites for HillaryCare 2.0, as well as other Democratic health insurance plans which promote socialism?
It's an interesting thought.
Jenkins mentioned another interesting aspect of the deal. By moving the union's healthcare administration to .....the union.....the UAW has assured its existence and relevance for a little while longer, assuming they can get the contract passed by the membership. Because, now, the union has to exist to administer the healthcare benefits.
Otherwise, the UAW was in danger of simply being outsourced out of existence, as GM, Ford and Chrysler slowly lose market share and jobs in the US.
Finally, there's GM itself. What does this UAW pact do for it? Is it now going to soar like an eagle, with the dreaded healthcare burden about which Rick Wagoner has complained for his entire tenure as CEO finally lifted?
Well, first, as some have pointed out, GM has to actually fund the new UAW healthcare trust fund. Then there's the sad fact that being quit of some legacy expense base bears no relationship to an inability of GM to design and build cars which sell at prices for which a sufficient number of people will pay the sticker, in order to make the necessary profit per vehicle to stay in business for the long run.
Like draining a swamp, and still having to wrestle the alligators, this healthcare trust fund deal may simplify matters for GM, but it by no means solves its toughest market-related survival issues.
It will still take several years of consistently superior total return performance for me to judge GM as having "turned around." And, frankly, I just don't see that coming down the road for many years- UAW contract, or not.

Wednesday, September 26, 2007

Microsoft Tries New Online/Ad Strategies- Again

Yesterday, I wrote this post regarding a Wall Street Journal article which harkened back to GeoCities, the very first online networking site, and discussed today's landscape in that product space.

I suppose the timing of Dennis Berman's piece was no accident, appearing, as it did, as Microsoft is in talks to buy up to 5% of Facebook for a reported $300-500MM.

Tuesday's Journal carried a front-page article describing Microsoft's many, failed attempts to break into online businesses, from browsers to ad placement businesses. As I wrote here, in May of last year, I think the only way Microsoft will realize consistently superior returns for its shareholders is to break itself up into three pieces, each focusing on one business: applications software, operating software, and internet-related businesses. As it stands now, and for some years, Microsoft's diversified structure has simply led the software giant to become a veritable Gulliver, tied down in competition with many, more nimble adversaries in each of the niches in which it does business.

According to the Journal article, this time around, Microsoft is pinning everything on one Brian McAndrews, an executive whom it acquired in the deal to buy aQuantive, Inc., an online ad company, for $6B.

Of course, as the article also details,

"Just 17 months ago Microsoft hired Steve Berkowitz, from Internet search company, as a vice president in its online group. Much as Mr. McAndrews is seen today, Mr. Berkowitz was positioned as the outsider needed to lead a cultural change at a company strong on technology but short on experience in the advertising industry.

A lack of political chops in working within the huge company and a clash with a highly respected engineering manager have hampered Mr. Berkowitz, say people familiar with the matter. Several of Mr. Berkowitz's duties were recently ceded to Mr. McAndrews."

So, once more, Microsoft has thrown money at a business in which it lags, without really re-orienting the company to address the fundamental strategic shift such actions implicitly acknowledge.

As I've written before, I don't think Microsoft truly understands, nor is currently capable, of competing totally all-out to win in the online business arena. It's still a software company trying to re-ignite growth by viewing online as a distribution platform, rather than a do-or-die business.

It seems to me, per Mr. Berman's article, that Facebook is the big winner here. Microsoft will, as usual, pay up but cede control. It won't seriously change to address the new business. And Facebook will reap a huge payday simply for carrying Microsoft ads.

If there's any downside for Facebook, it would be these: it's not selling enough of itself while the premium is stratospheric, and; it may, as Yahoo did with its payments from ATT years ago, grow fat and lazy on the passive revenue stream, only to wake up in a few years behind its competitors.

Time will tell. However, I cannot help but think that, once again, Microsoft's unfocused, half-hearted attempts to 'beat Google,' simply to do so, will enrich third parties, further impoverish its own shareholders, and continue the software giant's slide into relative unimportance as a leader in the technology product/market.

Tuesday, September 25, 2007

Online Communities: The GeoCities Story

Today's Wall Street Journal featured, on the front page of its Money & Investing section, one of the best analytical, staff-written articles I've read in the paper in ages.

Dennis Berman provides a timely and fascinating look back at the very first, now almost-forgotten online social networking site, GeoCities. Back in 1994, before, as Berman reminds us, high-speed cable or DSL, full motion video, etc., GeoCities, created by David Bohnett, contained the essential elements which today characterize FaceBook, MySpace, et. al.

To summarize the GeoCities story, it rose rapidly among then-popular websites, becoming the "third most-visited site on the Web" in August, 1998. In early 2000, amidst the dot com craze, Yahoo paid $4.7B to buy GeoCities. Bohnett and his team received his payday, and, as Berman writes,

"...their creation would soon wither before their eyes."

He further describes the wrenching, profound changes for GeoCities under Yahoo,

"Life inside Yahoo was smothering for GeoCities, say a number of people familiar with the transition. Developing new technologies for GeoCities' communities slowed to a crawl, as its staff of 30 software developers was cut to a skeleton crew. Yahoo focused instead of building traffic, not necessarily on the programming for improving person-to-person interaction. "Had they done things right with GeoCities, there would be no Facebook, YouTube or MySpace," says one. "

With my own posts regarding Terry Semel's 'leadership' of Yahoo, as may be found by searching on that label on this blog, the following passage almost made me laugh,

"Yahoo's treatment of GeoCities is particularly relevant for Mr. Zuckerberg, who reportedly rebuffed a $1 billion buyout from former Yahoo CEO Terry Semel."

So, having bungled the purchase, integration and management of the internet's very first social networking site, Yahoo was going back for a second bite of this hideously expensive apple? Amazing!

What intrigued me about Berman's article, and the GeoCities/Facebook story, is how perfectly it showcases the basics of Joseph Schumpeter's now long-ago vision of the dynamics of industry and competition. Note that GeoCities was sold to the one firm, Yahoo, which, at the time, could have capitalized its new acquisition and buried all comers with innovation, expansion of services and scale, etc.

Instead, Yahoo thought small, cut costs, and opened itself up to competition, and mismanaged this expensive beachhead into what has become a very hot online business. Talking to Bohnett about this, Berman writes,

"But if he could give advice to Mr. Zuckerberg, he'd recommend heavy investment in new technology to "stay true to what the user experience is." And he stressed the importance of keeping a young audience: "Those kids tend to get older and maintain some connection with an online community. You've got to capture that early adopter, young audience." "

At this point, Mr. Berman had already written a great article. But, next, he further probed the Schumpeterian nature of this product/market space, without explicitly acknowledging the famed dynamic.

In the final paragraphs of his article, Berman reviews Zuckerberg's (Facebook's founder) options and risks,

"Mr. Zuckerberg is in an especially good place right now. His site has developed a patina of invincibility, which in 2006 enabled him to wrangle an especially good advertising deal with Microsoft. Ever the Net-laggard, Microsoft is now guaranteeing about $75 million in revenue this year, which could become as much as $300 million by 2011 if traffic grows rapidly.

Alas, advertisers have found Facebook users to be a huge audience -- that could care less about ads. The percentage of users clicking onto site advertisements on Facebook and MySpace are lower than typical Web sites. That means it's essentially sucking up a subsidy from Microsoft, which wants to get its hooks into Facebook the best it can."

Which leads Berman to what I feel makes this an outstanding article. Rather than stopping short with an excellent review of GeoCities, a comparison of it and its fate with today's Facebook, and leaving it at that, he goes one step further. Berman risks alienating the entire business, i.e., Facebook and MySpace, by noting how dependent it is upon advertising, and how horribly, traditionally difficult it has been to make this work,

""It's not that easy to monetize social media," says Eric Hippeau, a managing partner of Softbank Capital that made more than 20 times its investment in GeoCities. He also sits on Yahoo's board. "Once Microsoft's deal with Facebook expires, as does Google's deal with MySpace, they're going to have to sell advertising for themselves and it's going to be a challenge." So far, he says, "it's not that easy to match the right advertising with the right audience."

That squares with the experience of Thomas R. Evans, GeoCities' former chief executive. "When you're as successful as GeoCities, everyone tells you how wonderful you are. It causes you to miss opportunities." Now the CEO of Web site, he added that, "People at the time were dismissive of old media experience. But it turned out looking exactly like the old media business. You have to execute and provide both the consumer and the advertiser with significant value."

At some point, the questions about Facebook the business will eclipse the praise of Facebook the social phenomenon. And once that point hits, Mr. Zuckerberg will be less able to dictate the terms of how fresh capital is put to use."

Mr. Berman pulls no punches. From his initial description of the now-essentially-defunct GeoCities, to the likely fate of Facebook, his superb writing uncovers a wonderful, timeless story of business innovation, absorption, mismanagement, the rise of new competitors, and the continuing weakness of the underlying business model.

Aside from the marvelous business strategy expose, Mr. Berman makes it hard for the reader to avoid asking the question,

"If no other, larger firm, had bought, or bought stakes in, GeoCities, or was trying to buy or invest in Facebook, would Bohnett and Zuckerberger realize millions in wealth simply from the profitability of their businesses and business model? Or would they become, like Amazon, long on initial market value gains, but short on realized profits?"

Thus, leading to the ultimate question,

"Were/are the acquiring giants of these online social networking businesses the greater fools?"

Monday, September 24, 2007

Greenspan's Book & A Week of Reactions

Last week's business media was filled with news of and interviews with Alan Greenspan, retired Chairman of the Federal Reserve.

Appearing on CBS' 60 Minutes, NBC's Monday morning talk show, and numerous CNBC interviews, Greenspan was plugging his just-published book, "The Age of Turbulence."

Monday's Wall Street Journal had an 'official' staff article reviewing the book. It was pretty standard fare, recounting Greenspan's comments concerning various Presidents, how he handled the 1987 and 1998 market crises, his views on the current President and various economic affairs.

I think it's fair to say that the initial 48 hours of 'shock and awe' at Greenspan's apparently magisterial disrobing of his past obfuscations contained an almost-uniform measure of reverence. As if the various pundits and interviewing heads were saying,

"Alan said it, so it must be so. He was so awesome as Fed Chairman, we're lucky to get these nuggets of wisdom for only $35."

Then James Grant, editor of Grant's Interest Rate Observer, and noted monetary conservative, weighed in on Tuesday. In a Wall Street Journal review of the book, he panned Greenspan's consistency, credentials, and motives.

This passage aptly illustrates Mr. Grant's tone and perspective on Greenspan, and his book,

"The fantastic irony of Mr. Greenspan's career path -- from gold-standard libertarian to federal interest-rate fixer -- seems hardly to have registered on Mr. Greenspan himself. The closest he comes to acknowledging it is his description of how the Fed looked to him from the outside. It was, he writes, a "black box." Having watched his mentor, Arthur Burns, struggle with the chairmanship, Mr. Greenspan notes, "it did not seem like a job I felt equipped to do; setting interest rates for an entire economy seemed to involve so much more than I knew." A deeper kind of libertarian might have added: "Maybe nobody can know enough to set interest rates for an entire economy." "

He goes on to write,

"So Mr. Greenspan, a consulting economist of no special attainments (on the eve of the 1974 stock-market collapse, he was quoted in the New York Times saying "it is rare that you can be as unqualifiedly bullish as you can now"), agreed to perform the impossible. Succeeding Paul A. Volcker, he became America's monetary central-planner-in-all-but-name. Mr. Greenspan ruled the roost in 74 fiscal quarters, of which recession darkened only five.

Nobody can identify a bubble as it is inflating, Mr. Greenspan has long insisted -- though, as you will not read in these pages, Mr. Greenspan was so certain that he detected a stock-market bubble in 1994 that he tried to prick it by pushing interest rates up. Strangely, the author's bubble-sensor failed him later in the decade. He did, in 1997, utter the innocuous phrase "irrational exuberance," but that was as far as he went in attacking sky-high equity valuations.
Mr. Greenspan now writes that the enlightened central banker will let speculation take its course. Following the inevitable blow-up, he will clean up the mess with low interest rates and lots of freshly printed dollar bills -- thereby gassing up a new bubble.

Only one of the troubles with this prescription is that it requires an enlightened central banker to carry it out. Nowhere in this book does Mr. Greenspan own up to his role of underestimating the severity of the credit troubles of 1990, or of cheering on the tech-stock frenzy in 1998-2000, or of dangling the most beguiling teaser rate of all during the mortgage frolics of 2004 -- i.e., that 1% federal-funds rate. In February 2004, only months before the Fed started to raise its rate, in a speech titled "Understanding Household Debt Obligations," Mr. Greenspan demonstrated next to no understanding. His advice to American homeowners was not that they lock in a fixed-rate mortgage while the locking was good, but rather that they consider an adjustable-rate model. He who set the rates got it backward."

Grant pulls no punches in questioning Greenspan's consistency as a libertarian, and acolyte of Ayn Rand, by ending up as the sole determiner of the economy's key interest rate. He makes clear Greenspan's lack of significant accomplishment as an economist or equity savant, prior to his role as Fed Chairman, and his misunderstanding of housing finance, after he took the position.

As Joe Kernen, an anchor on CNBC, articulated, Grant also seems to question Greenspan's motive in writing this book. Whereas Kernen opined that Greenspan wants back in the limelight, Grant suggests it's about trying to write his own legacy, before someone else writes a less flattering one.

As the week went on, the Fed cut rates half a point, and the market surged, more people were beginning to wonder if perhaps Greenspan was being rather too self-important by writing his book.

By comparison, Greenspan's predecessor, Paul Volcker had a much harder job to do, and left things in far better shape than he found them. Yet, in over twenty years, Volcker has never spoken out about his Fed tenure, told tales out of school, nor, to my knowledge, even remarked on either Greenspan's or Bernanke's performances and policies as Fed Chairmen.

Instead, being, obviously, incredibly secure, Volcker moved on and continued his career of public service, assisting in cleaning up the Arthur Andersen mess, and hunting out graft and corruption in the recently-retired UN Secretary General Kofi Annan's troubled administration.

Were that Alan Greenspan were possessed of similar self-esteem, that he would not have needed to attempt another run into the public spotlight which he so recently left, when he retired as Fed Chairman. In some sense, he reminds me of Jack Welch, now-retired CEO of GE, who seems to have to pop up on business talk shows with now-annoying regularity, spouting little of current relevance.

I've always thought that Paul Volcker received far too little acclaim or gratitude for the heroic, difficult job he performed, taming the roaring inflation of the 1970s, left to us by Lyndon Johnson's fiscal policies during the Vietnam War, and compounded by economic mismanagement and taxation policies during the ensuing decade.

Compared to him, Greenspan seems to have performed capably, steering a large ship on, for the most part, calm seas. However, this summer's debt market troubles suggest that perhaps Greenspan's legacy won't be sterling, because it's now becoming evident that he owns the source of this latest marke.....ahhh.... turbulence.