Friday, May 23, 2008

Some Perspective on Yahoo, Microsoft, Icahn & Google

On Tuesday, Dennis Berman of the Wall Street Journal wrote a wonderfully insightful and succinct assessment of the latest chapter of the Yahoo/Microsoft/Carl Icahn/Steve Ballmer/Google dance.

In the piece, entitled "Why Yahoo Should Strike as Iron Is Hot," he noted, in closing,

"But the question for Yahoo's board shouldn't be whether it can increase its cash flow. It is whether it can improve its stock price, over a reasonable period of time, greater than a Microsoft offer. A growing chorus of shareholders think it can't.

So, the basics: AOL can't succeed at being Yahoo; Yahoo can't succeed at being Google; Microsoft can't succeed at being any of them. Nonetheless, Microsoft has the fantasy it wants to be Google. How could Yahoo's board do anything but take a decent offer and bank it?"

Berman makes a key point here. Really, despite the much longer verbiage preceding these final paragraphs, the only crucial points in his article.
Yahoo is no longer an investment equity. Neither, really, is Microsoft. Forget AOL/TimeWarner entirely.
With Carl Icahn prowling about to encourage the Yahoo-Microsoft deal, you know that this is now just about short-term speculative gains. Not long-term strategy.
I haven't owned Microsoft in over a decade, or Yahoo since the 1990s. Now, both have simply become opportunities for arbitrage as Icahn maneuvers to recover the value Jerry Yang kicked away.
As the nearby Yahoo-sourced price chart of the past week illustrates, Yahoo's value has held up nicely due to continued betting that something will eventually happen to realize some of the premium of the original Microsoft offer.
But don't bet on any sort of long-term potential for consistently superior total returns from either Microsoft or Yahoo, in any sort of combination, or absent it.
Yahoo's fundamental strategy failed long ago, in terms of consistently superior total return performance. Microsoft's performance stalled before that.
I remain convinced that the only way Microsoft can re-ignite consistently superior return performance is to split itself up into an operating system business, desktop applications, online, and gaming. Then the gaming business can take off and reward shareholders for a few years.
But for now, all of this fuss is about betting that by owning Yahoo, you can benefit from Carl Icahn's ability to recover some value for its shareholders while ringing down the final curtain on Yang.

Thursday, May 22, 2008

More Trouble at Howard Schultz' Starbucks

Monday's Wall Street Journal provided some additional information regarding Howard Schultz's attempt to revive the firm he founded, Starbucks.

In this recent post addressing returning CEOs, I wrote,

"In Dell's and Starbuck's cases, I question if they ever will (return to consistently superior total return performance). I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

I still feel that way. The nearby Yahoo-sourced price chart of the coffee seller and the S&P500 Index for the past five years portrays a brand that has run its course.
Typically, a firm once successful at earning consistently superior total returns will fade from either: lack of growth opportunities; competition; regulation, or; investor expectations finally catching up with performance.
Ironically, as I noted in this post, Schultz had been alleging competition had nothing to do with the firm's slumping fortunes,
Perhaps the most amazing comment Schultz uttered in the rather surreal interview this morning on CNBC was, in response to Bartiromo's question about McDonald's,
'Competition- they're just noise,'or words very close to those.
Well, as I noted in this post, regarding Schultz's recent, hand-picked strategist, Michelle Gass, contended,
"She says she hasn't been focused on competitors in developing the new plans. "I think we'd all readily admit that a lot of the situation we're in is self-induced." Sounds familiar, right? At least Gass and Schultz are reading from the same page in the same playbook.
But in that prior post, I went on to note,
"Thus, I find Ms. Gass' comment to be dangerously short-sighted and internally-focused.
Instead, she might wake up to the reality of Schumpeterian dynamics. Between Starbucks' own prior expansion into lower-income segments, and McDonalds' search for growth in kindred products, the former's market dominance was almost certainly going to come to an end, one way or another.
As it is, Starbucks is being bracketed by another coffee retailer on one side, and a fast-food giant on the other. This has less to do with Starbucks' 'self-induced' troubles than it does with recent targeting of the coffee giant's business by two very large, savvy food retailers.
I hope, for Howard Schultz' and Starbucks' sake, that Ms. Gass begins to become aware of this reality."
In this week's Journal piece, however, it reported,
"Reflecting his urgency, Mr. Schultz told workers he no longer wanted to hear about projects that would take as long as 18 months. "We have to defend our position," he said to a few hundred employees shortly after the March annual meeting. "We have lots of companies small and large who want to take a piece of our business away."
Wow. That's some fast reversal of strategic diagnosis, isn't it?
But what is truly disturbing is how personally Schultz is taking Starbuck's natural decline. As the Journal article describes,
But early last year, Starbucks seemed to be losing its edge, a complaint Mr. Schultz himself voiced in a leaked memo. It wasn't setting the agenda with new products but just adding drink flavors and ordinary items like breakfast sandwiches. Stores had grown cluttered with stuffed animals and other noncoffee items. Price boosts were starting to annoy customers.

"I was just depressed," Mr. Schultz says. He launched a personal turnaround routine, consisting of what are now six gym workouts a week and a daily health shake of fruit and cottage cheese.
In public, he appeared humbled. At the annual meeting in March, Mr. Schultz told the crowd to stop applauding when he walked on stage. "I thought I could start crying," he says.
Schultz is so personally invested in the attempt to reverse the age-old forces of Schumpeterian dynamics that he seems to simply deny their existence.
The article cites, through the recounting of many examples, how Schultz has gathered to himself the power to make even the most trivial decisions. It's reminiscent of Steve Jobs, with one big difference.
Jobs' Apple is in a business which creates new products. The best Schultz can now do, having already created a modern version of the old, original Dutch coffee house, is to introduce some marginal new beverage flavors each year.
Hardly the same thing.
It seems to me that people spend a certain amount of money on coffee and beverage purchases at places like Starbucks. Once the firm has penetrated sufficient markets, as I noted in this post, it really has little room for growth. Perhaps growing economies such as India and China provide some opportunities. But if that were all that was needed, the company would have already been growing with those countries' own growth rates.
No, it seems the problems for Starbucks lie more in the realm of simply having been successful long enough to have attracted competition while saturating its primary and secondary market segments.
I doubt Schultz' micromanagement of the firm he created will really change those facts.
But, as always, time will tell.

Wednesday, May 21, 2008

Ken Lewis' Awful Bank: Another Tale from the Frontline at BofA

Last week, I wrote this post about my recent experience with Ken Lewis' BofA. It seems they had a rather significant disclosure of sensitive account information which required them to attempt damage control in their Debit Card division.

I visited my local bank branch for more information, but learned that this form letter from one Gordon Rains, a BofA national-level executive, was news to my branch's manager and platform officers.

Fast forward to today. It's been a week, and I had heard nothing from Ms. Gonzalez, the platform officer who promised to expeditiously contact me with information last Tuesday.

As you can guess, what follows won't be pretty. After all, I'm discussing the retail bank branch customer interface of one of America's largest three banks. A sprawling, gigantic behemoth of a financial utility.

Ms. Gonzalez, upon seeing me stride to her desk, immediately registered a mixture of resignation and displeasure. With good reason.

She provided me with the explanation that my debit card, along with many, many other bank customers' cards, had been compromised by some unspecified problem "in Maine."

According to the bank officer, this 'problem' necessitated BofA replacing many ATMs, and, apparently, although this part was not explained, many debit cards, as well.

When I asked why Ms. Gonzalez had not called or emailed me last week to notify me that she was working on my issue, she simply ignored me. When I asked her why some effort was not made to convert a problem with compromised customer information into an opportunity for the local branches to get ahead of the issue and directly contact their local branch customers to explain the safety-oriented steps being taken by BofA, although those customers' data was not compromised, she gave me some nonsensical, difficult-to-understand doublespeak about it being the province of some national business unit, and each branch couldn't know the full extent of the problem.

At this point, I reminded Ms. Gonzalez of my initial request for a meeting with the branch's manager to learn more about the issue. She, in turn, informed me that she had just given me the explanation. Period.

When I politely expressed dissatisfaction with her slow, uncommunicative response to me for over a week, and that I now would probably walk down the block and re-open an account at the smallest local bank in town, of which I had been a customer in a nearby town years ago, she simply noted that I was free to do so, and that it was fine with her if I chose to do so.

As a last effort at provoking some sort of responsible customer service from Ms. Gonzalez or her branch manager, I promised her that, if I did not hear promptly from the branch manager about this issue, I would call BofA's headquarters in Charlotte, NC, in search of whatever ombudsman's office the firm's CEO, Ken Lewis, might have.

Again, Ms. Gonzalez invited me to take that action if I so chose.
By the way, I don't wish to suggest Ms. Gonzalez is a bad person or bears ill-will toward BofA customers. Judging by her change in demeanor from my first meeting with her last week, I'd say she was 'talked to' by her branch manager. She is mostly likely poorly led, rather than badly behaved on her own.

I did open that account at the other bank. And, by the way, among the benefits instantly accruing to me was free wire transfers. Imagine, in this day and age, free inbound wire transfers!

And, upon returning home and not having heard from the BofA branch manager, I called the bank's main office in Charlotte.

There, I spoke with the most gracious, helpful telephone receptionist in my memory. She asked the reason for my call, explained that Ken Lewis has no such office or assistant, but that she would like to put me on the line with the manager of her own function. This she did, and Amanda, her manager, politely and apologetically took the details of my story, which she promised to move up the bank's management hierarchy.

At least, down in Charlotte, even the frontline troops practice the region's trademark courtesy and sense of concern with regard to customer service. I honestly could not have asked for more accommodating attitudes from the two BofA employees with whom I spoke this afternoon.

Poor Ken Lewis. No wonder his bank is in such trouble. As the nearby Yahoo-sourced price chart of BofA and the S&P500 Index for the past five years illustrates, Lewis has managed to barely keep shareholders in neutral for the period. Meanwhile, simply buying the index would have netted investors about a 50% gain over the same period.
Perhaps Lewis mistakes his fellow Charlotte-based employees' attitudes and service ethics for those of his widespread retail banking empire. Believe me, they vary widely.
The staff at my local Summit, NJ BofA branch couldn't have been much less concerned with my welfare, as their customer, nor much less indifferent to whether I remained a customer or not.
We often hear of the description of America's large financial institutions 'as too big to fail.'
Now, however, I think I've discovered a more appropriate phase which described Ken Lewis' BofA and its ilk:
'too big to work.'

Tuesday, May 20, 2008

Moonves' CBS Buys CNET ???

Since CBS's most recent spinoff, from Viacom, Les Moonves hasn't distinguished himself in providing superior total returns to shareholders. Granted, he's been at it just over two years. But the trend since the stock's peak in mid-2007, as the nearby Yahoo-sourced price chart for the network and the S&P500 Index, has been discouraging.

Thus, Moonves is apparently aiming to fix that with an acquisition of CNET.

Yahoo's profile of CNET portrays it as a rather widespread media content provider. On the surface, it at least seems connected to businesses which CBS ought to understand.

However, Friday's Wall Street Journal article about the proposed acquisition casts doubt on the wisdom of Moonves' latest plan.

According to the Journal,

"CBS's $1.8 billion cash acquisition of Web site operator
CNET Networks Inc. is reminiscent of the tech-stock bubble. The CBS offer values CNET at a whopping 22 times Ebitda, according to Capital IQ data. CBS trades at about seven times. What's more, CBS is paying this fat premium when the advertising market is slowing.

Why is CBS overpaying for an asset with a questionable outlook? Look no further than CBS's share price. CBS shares have fallen nearly 30% from their peak last summer. (Fortunately for Mr. Moonves, who took home $36.8 million last year, his compensation has only been recently linked to CBS's share-price performance.)"

The article pulls no punches, does it? Comparing this acquisition to a tech-bubble, all-cash deal is no blessing. Further, if you look at the nearby Yahoo-sourced price chart for CBS, CNET and the S&P500 Index for the past five years, it's clear that, as mediocre as Moonves has performed with CBS, CNET has done even worse in the past 2+ years. Its peak was clearly over two years ago.
On the subject of compensation, I can readily agree with the Journal writer's sentiments. Having banked over $30MM, I would now assign Moonves no motivation whatsoever to enrich his shareholders. He's likely just in this for ego and pride.
For example, the article continues,
"To jumpstart CBS's share price Mr. Moonves wants to create some Internet buzz. He tried the same trick a few years ago, buying CSTV Networks Inc., which operates a college-sports cable channel and numerous Web sites, for $325 million. The network was supposed to complement CBS's other sports operations but was unable to get sufficient distribution and has languished.

Beyond the high price for CNET, it's difficult to see any real synergies between CNET and CBS's existing portfolio of Web properties. CNET is based in San Francisco and CBS's Web operations are concentrated in New York. So there's not much room to save on overhead. It's difficult to see why CBS, which is at its core a broadcaster, will have better luck in monetizing CNET's Web properties than CNET did."
I would concur. While the online media business, per se, is at least close to CBS's broadcast businesses, it's not quite the same thing. And, if anything, the internet argues, as I've written before, for the destruction of any broadcast value beyond local news and information. The actual value of a broadcast network like CBS is rapidly falling.
As such, Moonves seems to be engaging in the sort of game in which a CEO, seeing a dying market for his business, uses a form of sleight-of-hand to trade his shareholders' cash for other assets, the better with which to prolong his own corporate life as a CEO.
Shameful, but it happens all the time. Moonves isn't the first CEO to try this trick, and, sadly, thanks to the modern publicly-held corporation, he most assuredly won't be the last.

Monday, May 19, 2008

More Economists Recant on Recession Call

As I wrote here recently, the US is not currently in a recession.

Now we learn from last Wednesday's Wall Street Journal that more economists are retracting their earlier insistence that the US is, or shortly will be in a recession. The article begins,

"A funny thing happened to the economy on its way to recession: It's taken a detour.
That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected."

It figures. The mass of mediocre economists, having rushed to pre-guess evolving economic data, now see that GDP growth has yet to go negative. Usually not ones to let facts get in the way of a gloomy economic story, now these less-than-first-rate economists are reversing course.

For instance, as the Journal continues,

"In February, Global Insight joined Goldman Sachs, Morgan Stanley, UBS and Merrill Lynch in declaring the U.S. to be in recession. Now, Global Insight's Brian Bethune says that while the firm is still forecasting a recession, "it's conceivable we could avoid it," thanks to "the massive policy response we've seen" since he and others began warning about the risks facing the U.S. economy.
Bruce Kasman, chief economist at J.P. Morgan, said while earlier this year it seemed like momentum was carrying the economy into a clear recession, there's only "a slightly better than even chance" of a recession now. "Even though there are meaningful drags from the credit crisis and energy costs, the economy is showing resiliency," he said.

Even Alan Greenspan, who in early April said the U.S. was in the "throes of recession" and is going through the "most wrenching" crisis since World War II, has more recently toned down the warnings, saying the U.S. is in an "awfully pale recession." George Soros, who has long argued the U.S. is headed for a major crisis, also recently remarked that the "acute phase" of the crisis has now passed."

It's beginning to look like only Brian Wesbury and perhaps David Malpas, late of Bear Stearns, got this one right. The US economy has certainly softened, but is yet to actually go into reverse.

Still, even the Journal hesitates, as the article concludes,

"The question remains open, since recessions typically aren't officially diagnosed until some time after pain hits consumers. A common definition of a recession is at least two consecutive quarters of negative GDP. But the National Bureau of Economic Research -- the nonprofit group that is the official arbiter of when recessions begin and end -- defines a recession as a period of significant decline in economic activity across GDP, income, employment and retail sales that lasts more than a few months.

John Lonski, Moody's chief economist, said recent labor market data and signs the credit crunch is easing on Wall Street have made him less gloomy than he was a few months ago. In the latest survey of economists, conducted in May, he said the likelihood of a recession was 60% -- down from the 90% he predicted in the April survey.

"Recent evidence suggests there's a chance the economy might stabilize before this summer," he said. On average, the 55 economists in the survey, conducted earlier this month, said the likelihood of a recession was 62.7%, down from 70%."

Maybe the mark of a good economist is that s/he doesn't change her/his mind during the period when s/he calls an economic turn, and is correct.

This whole drama regarding the forecast recession that hasn't, and probably won't, arrive, simply gives more credence to the boatload of economist jokes- like how, if laid end to end, they still wouldn't reach a conclusion......