Friday, July 11, 2008

The Media Begins To Catch On To Immelt's GE's Failures

Monday's Wall Street Journal featured an article about GE by Carol Hymowitz in her "In The Lead" column entitled, "Immelt Defends GE's Wide Reach."

I found this article revealing and noteworthy for two reasons.

First, Carol Hymowitz is one of the heavier-weight writers on the Journal's staff, in my opinion. For her to deal with GE and Immelt suggests real trouble at the ailing diversified conglomerate.

Second, she entitled her article in such a way as to portray Immelt on the defense, with something to prove.


After nearly seven years of mismanaging GE, which, by the way, is either near or beyond the current average large-cap CEO tenure, a noted journalist at a name business publication is publicly calling into question Immelt's performance and judgment.

Specifically, Ms. Hymowitz notes,

"GE closed at $26.91 a share Thursday, about 32% lower than it was when Mr. Immelt became CEO in September 2001. In that same period, the Dow Jones Industrial Average has climbed about 15%. Being the Journal, Ms. Hymowitz isn't about to compare the industrial conglomerate to the more appropriate S&P 500 Index. But the effect would be similar.
The nearby Yahoo-sourced price chart for GE and the S&P500 Index clearly shows that, since 2000, GE peaked and has slid in value, while the S&P has remained flat to modestly up.

I've written so many pieces on GE that it's pointless at this juncture for me to link to any one of them, rather than another. Just click on the GE or Immelt labels to see my prior thoughts.

Suffice to say, I'm way ahead of Ms. Hymowitz in believing that Immelt's GE no longer has a reason to exist.

Other than to fund Immelt's lifestyle and retirement, and those of his immediate staff. The nearby 5-year price chart for GE and the S&P reinforces how badly the industrial giant has performed since late last year. It's been a one-way trip downward since late 2007, with one brief spike, resulting in near total destruction of any value created for shareholders of the firm beginning back in mid-2003.

Ms. Hymowitz characterizes Immelt as trying to shed GE's slower-growing businesses, in favor of "faster-growth technology businesses."

Good luck with that, Jeff.

Because GE has never been more than an average revenue growth company for the past several decades. A firm so broadly diversified and large just isn't going to magically become a tech-company-like fast growing enterprise.

For that, you need to be a single-purpose startup, like Google, that simply mines a rich, undiscovered lode of value.

Instead, GE is sort of like a large, mature mining operation, trying to swap this property for that one, hoping to squeeze out a little more growth and profit in the trade.

I see the very beginnings of the sort of sea change in investor sentiment, read 'selling pressure,' according to Ms. Hymowitz, that could, very belatedly, lead to GE's breakup and more value for its shareholders,

"In any case, to gain more support on Wall Street, the 52-year-old Mr. Immelt will have to do more than dispose of the slower-growth businesses that are identified with the GE that Mr. Welch ran. He also will have to convince investors that GE's vast portfolio, which includes everything from NBC Universal to biosciences, can be managed under one corporate roof and that the company doesn't need to be broken up or even dramatically streamlined."

I would quibble with Ms. Hymowitz's choice of words, substituting "managed to provide better, and consistently superior shareholder returns," rather than just "managed."

But the point is clear. Now, even Ms. Hymowitz is sounding cautionary notes about the need for GE to exist, and the need for its inept CEO, Jeff Immelt, to prove why the company should exist, not why those who call for its breakup should prove their case.

GM Should Be Put To Death

This past week has seen a flurry of GM-related articles in the Wall Street Journal.

On Tuesday, my old squash partner, Paul Ingrassia, wrote "That 70s Show: Detroit," focusing on why GM might go Chapter 11. He, like the crowd, dwell on GM's need for about $10-15B in new equity at a time when it only has about $6-8B.

Much is made of the need to cut costs, grow, import the production of overseas-designed smaller vehicles.

But I have a different idea. My partner says it can't happen, at least due to political ramifications.

Here is what should happen. GM's inept CEO, Rick Wagoner, should send the following letter to shareholders,

"Dear Shareholders,

This is a tough letter to write. It's an admission of failure. My and my management team's failure of you, our owners.

We just can't see a future in which we'll be a fitting investment for you anymore. We've lost too much market share, have too high a cost structure in the US, and just too many problems to overcome before the economy returns to a higher growth phase.

I could tell you we'll be trying really hard to fix things. Sell Hummer- but who would be stupid enough to buy it now?

Winnow our brands and focus on the profitable cars. Hope to get more clawback in costs from the unions....again.

But honestly, we'd just be bleeding you of your cash on our balance sheet, to no good end.

We should not even file for Chapter 11 bankruptcy.

Instead, I'm going to dissolve the firm.

First, we'll package the models and brands GM owns which actually make money and have growth potential, and auction them off to the highest bidder. We'll sell our remaining stake in GMAC, as well as hire bankers to sell whatever attractive real estate we still own.

After that, we'll dismiss our workers- salaried and hourly- and hold a board meeting to hire a closing specialist to assist us in shutting GM down.

Our objective will be to raise the most cash, then distribute it among our creditors and other claimants. If anything is left, you, our owners, will receive it.

We will also offer for sale the GM name and stock market ticker. Whatever will raise money, we'll do.

I am sure the union leaders and various elected political officials will try to stop us from closing GM down. They'll argue for jobs, the effects of our closure on various vendors, cities, etc.

But really, this is all nonsense. Employees deserve to work at a firm with a future. GM is no longer that firm. Governmental entities need to let private enterprise conduct its business as it sees fit.

And the board, my managers, and I all agree, it is time for GM to die.

Thank you for allowing me to serve you these past years as CEO. I am sorry I failed.


-Rick Wagoner,
(The Last) CEO, GM"

That is what I think would be best for GM's owners and the economy.

Then the CEOs of MBIA and AMBAC could learn a lesson and follow suit.

Thursday, July 10, 2008

From The Road-What Recession?

I'm on the road this week. My posts were pre-written and are being published daily thanks to Blogger's scheduled publishing feature.

But, as luck would have it, I have a 'live' post that dovetails with today's pre-written one.

This morning, I'm in Morgantown, West Virginia.

Now, I don't normally associate West Virginia with the sort of populace and state that normally floats above recessions. It's a state with ample sources of coal, much natural beauty, but not known for a balanced economy.

So, if there's a recession, shouldn't I be seeing it in the state of the Mountaineers?

Well, here's what I've seen in the last 20 hours.

First, I will admit, the University of West Virginia is located in Morgantown.

That said, I don't see any sign of economic trouble in this hilly mecca.

First, people are smiling! And spending...and spending....and spending!

My daughter and I had two light afternoon/evening meals, and in both cases, the restaurants were busy for the hour at which we visited.

We dropped by a Darden chain's Olive Garden around 8PM, and the parking lot was full. There was a 10 minute wait....on a Wednesday night!

We chose to order take-out instead, and, so people-watched for about 20 minutes. It was instructive.

Older couples, young couples on dates, young families....all streaming in and out. Taking food OUT.

Yes, people so well off they ordered more than they could eat. Some didn't look like that could be possible, but consider the implication. These diners were not skimping. No, they bought more than they could finish.

The big box stores plaza was busy, too. Wal-Mart was bustling. Traffic on the roads is brisk and busy. People are well-dressed and clearly living ordinary, busy, spending-oriented lives.

The teens are sporting new-looking, attractive clothing, accessories, and cell-phones, of course, are everywhere.

The Hampton Inn at which we are staying was busy for the lobby breakfast this morning. Last night, the lot was full.

Sound like a recession in the Appalachians to you? No, me neither.

Nobody was going through garbage cans for food. Cars are newish. People are well-fed and -clothed, including whole families dining out.

Just a datapoint from the road.....

It's A New Economy Now!

Almost two weeks ago, in the Monday, June 30 edition, the Wall Street Journal published an editorial entitled "There Is No 'The Economy,'" by Zachary Karabell, President of River Twice Research.

Perhaps the most interesting example of Mr. Karabell's point is this passage,

"To begin with, someone in the upper-income brackets is living a different life than those in the lower-income brackets. The top 20% of income earners spend more than the lower 60% combined. The wealthiest 400 people have more than $1 trillion in net worth, which exceeds the discretionary spending of the entire federal government. These groups are all American, yet it would be stretching the facts to the breaking point to assert that they share an economic reality. On the upper end, the soaring price of food and fuel hardly matter; on the other end, they matter above all else. The upper end does matter quantitatively, but the group of people on the lower end is vastly larger and therefore has more resonance in our public and electoral debate.

Look at housing, widely regarded as a national calamity. The regional variations depict something different. In Stockton, Calif., one in 75 households are in foreclosure; in Nebraska, the figure is one in every 1,459; and the greater Omaha area is thriving. Similar contrasts could be made between Houston and Tampa, or between Las Vegas and Manhattan. Home prices have plunged in certain regions such as Miami-Dade, and stayed stable in others such as San Francisco and Silicon Valley. Houston, bolstered by soaring oil prices, has a 3.9% unemployment rate; the rate in Detroit, depressed by a collapsing U.S. auto industry, is 6.9%. The notion that these disparate areas share a common housing malaise or similar employment challenges is a fiction."

Doesn't this explain why we don't seem to be in a recession? As Mr. Karabell points out, it would take a major economic problem to plunge enough of us, as consumers, into an American-wide recession. Sure, pockets are hit hard, income-wise and geographically. But hardly the entire nation.

He goes on to note,

"We hear continual stories of the subprime economy and its fallout on Main Street and Wall Street. All true. Yet there is also an iPhone economy and a Blackberry economy. Ten million iPhones were sold last year at up to $499 a pop, and estimates are for 20 million iPhones sold this year, many at $199 each. That's billions of dollars worth of iPhones. Add in the sales of millions of Blackberrys, GPS devices, game consoles and so on, and you get tens of billions more.

The economy that supports the purchases of these electronic devices is by and large not the same economy that is seeing rampant foreclosures. The economy of the central valley of California is not the same economy of Silicon Valley, any more than the economy of Buffalo is the same as the economy of greater New York City. Yet in our national discussion, it is as if those utterly crucial distinctions simply don't exist. Corn-producing states are doing just fine; car-producing states aren't.

The notion that the U.S. can be viewed as one national economy makes increasingly less sense. More than half the profits of the S&P 500 companies last year came from outside the country, yet in indirect ways those profits did add to the economic growth in the U.S. None of that was captured in our economic statistics, because the way we collect data – sophisticated as it is – has not caught up to the complicated web of capital flows and reimportation of goods by U.S.-listed entities for sale here."

To me, this seems crucial as we read and hear about various companies thriving or doing poorly in the last twelve months, or the next twelve. Different sectors of our economy are, in fact, seeing different conditions and having different financial performances.

Finally, to conclude and reinforce his point, Karabell writes,

"In truth, what used to be "the economy" is just one part of a global chess board, and the data we have is incomplete, misleading, and simultaneously right and wrong. It is right given what it measures, and wrong given what most people conclude on the basis of it.

The world is composed of hundreds of economies that interact with one another in unpredictable and unexpected ways. We cling to the notion of one economy because it creates an illusion of shared experiences. As comforting as that illusion is, it will not restore a simplicity that no longer exists, and clinging to it will not lead to viable solutions for pressing problems.

So let's welcome this new world and discard familiar guideposts, inadequate data and outmoded frameworks. That may be unsettling, but it is a better foundation for wise analysis and sound solutions than clinging to a myth."

As business people, Mr. Karabell's viewpoint is enormously important to understand. Simply reading US macroeconomic statistics doesn't really capture what is happening to the wealth and incomes of our country anymore. So much of our economic welfare is intentionally tied to other people in other parts of the globe.

What, in my youth, was taught as a sort of minor external 'leakage,' foreign investment, sales and purchases, is now critical to a US economy which deliberately constructs supply chains across the globe.

It also means we should be wary of declaring recessions, or even widespread US economic trouble, on the basis of economic measures which, as Mr. Karabell observes, reflect a now-vanished, insular US economy in which personal incomes and wealth are closely aligned with those of domestic production activity.

Wednesday, July 09, 2008

Ted Forstmann Interview

Last weekend's Wall Street Journal's "The Weekend Interview" featured remarks by Ted Forstmann, an early pioneer in the private equity field.

I wish I could say it was an enlightening interview, but it's really not.

Forstmann's apparent big idea is that low interest rates earlier this decade spurred commercial and investment banks to do bad things with money which they would not have done, had the hurdle rates been higher.

Is this really news? Do we actually need Ted Forstmann to tell us this in a special interview?

Honestly, this is the story of every financial services bubble for the past thirty years, beginning with the 'purchased money' bank borrowing problems of the 1970s that drove John Bunting's First Pennsylvania Bank under.

Whether it's cheap money or just a banker's desire for faster growth, the underlying risk in all financial services businesses is that above-average growth must, over time, come from greater risk-taking.

Yes, this time investment and commercial banks have added to the mess with CDOs. But these instruments had to be bought by somebody, as I noted in this post.

Then Forstmann solemnly tells us,

"There's trillions and trillions of dollars that slosh around between all these places and if one fails..." He doesn't finish the thought."

Yes, Ted. That's called our 'fractional reserve' banking system. Bankers are allowed to reserve only a portion of deposits and lend the rest out. That is how banks make money.

Obviously, as investment banks added trading and asset management, they both underwrite and hold the same sorts of instruments.

Oddly, what Forstmann fails to suggest is moving the trading in all these bad instruments to regulated exchanges. Which, by the way, is what Treasury Secretary and former Goldman Sachs CEO Hank Paulsen has already begun to engineer.

Forstmann thinks that "we're in about the second inning of this."

What, specifically, is "this?"

Forstmann doesn't provide a metric by which to measure and indicate when the credit market abnormalities will have abated. So, I guess when you can't really measure something, your call is likely to be right, because you can point to whatever convenient measure fits your assessment at the moment.

Given Forstmann's prior success with leveraged buyouts in the private equity business, I wish he had bestowed upon us some wisdom involving how someone, and who that someone would have been, could have prevented the current credit market debacle.

How would Forstmann have ideally prevented CDOs and SIVs from being created? How would he have halted the lending of cheap money during the "Greenspan put" years early in this decade?

How does Forstmann reconcile our capital markets, such that people like him were free to make literally billions of dollars in creative financial deals, yet, now, he implicitly calls for curbs on, and criticizes, the financial creativity of others?

Ted Forstmann was a successful private equity pioneer, no question. He is a wealthy man- you can't argue that he isn't. He clearly did some clever things which created value for somebody, and certainly, for Ted Forstmann.

Does this give him special insight into today's capital markets? Or how to prevent them ever being cyclical? How to prevent other financiers from engaging in excess?

Do we know that Ted Forstmann, if he were 30 years younger, would not be embroiled in the middle of the current capital markets mess? Did her perhaps do things with private equity which, when he did them, due to smaller scale and impact, worked, but, now when others emulate his creativity, fail due to larger scale and impact on financial markets?

These seem to me to be the interesting questions that went unasked and unanswered in the Journal's interview with the wealthy proto-private equity tycoon.

Tuesday, July 08, 2008

More Details On Jerry Yang's Bungled Negotiations with Microsoft

Wednesday's Wall Street Journal article on Microsoft's second act in pursuing Yahoo was most enlightening.

If you've ever wondered whether some large company CEOs are operating way over their heads, this article answers your question.


The details regarding the extent of Jerry Yang's blunders in the initial discussions of Microsoft's bid, about which I first wrote here, are staggering. That Yang, after driving Yahoo further downhill after Terry Semel's departure last year, would hold out for a higher price than Microsoft's already-insanely generous offer, was unbelievable. As I wrote in that prior post,

"'s been at least March of last year before the stock's price was, even for short periods, routinely above Microsoft's offer price. Jerry Yang's resumption of the CEO role last summer has cratered his firm's stock decisively since then."

But Yang isn't alone. I also wrote in that post,

"As for Microsoft, I pity their shareholders. If they didn't have half of this offer in cash on their balance sheet already, would any bank lend them all of the money for this takeover bid? Could even Goldman float a bond issue to fund this for them at reasonable rates?

If anything, I think it reminds us, per my many posts on Microsoft, Gates and Ballmer (see appropriate labels), that the company has been very sloppily managed in a financial sense."

Yang's arrogance managed to save Ballmer's shareholders- so far.

Now Ballmer thinks he can go back, with new partners, and dismember Yahoo, keeping the search engine for himself and letting his acquisition partners take their respective pieces of the ailing Yahoo.

Interestingly, though, the Yahoo senior people who dealt with Ballmer and heard his ideas referred to his plan as,

"filling his Internet hole," simply to compete with Google.

Yang's stubbornness on price robbed his shareholders of their just dessert of an overpriced offer by Ballmer to let them exit their misery at the hands of Jerry Yang and his inept management team. This is a great example of how someone who may have been instrumental, long ago, in dreaming up and implementing a value-creating idea, such as Yang, a Yahoo co-founder, can become not only useless, but counter-productive to value creation and realization in the firm's later life.

Ballmer is in a similar situation. He obviously added some value to Gates as they initially created the PC software industry in the 1980s.

But since 2000, Ballmer has been a liability for Microsoft, doing nothing to improve his shareholders' situation, either.

Ballmer escaped making a big mistake once, already, thank to Yang's stupidity and arrogance, thinking he and his team could seriously create more value than the Microsoft offer.

However, now it looks like he won't necessarily escape a second time. The complexity of the deal he now envisions could well make buying all of Yahoo look good by comparison when the dust settles.

Should be an interesting summer to watch these two firms.

Monday, July 07, 2008

Starbucks' Latest Move- Retrenching!

I've written nine labeled posts about Starbucks over the past nearly-three years. Perhaps more, since some are still awaiting labels.

This one, from just last May, suggested that returned Starbucks CEO Howard Schultz and his handpicked strategist, Michelle Gass, had it all wrong in predicting a sharp uptick in the coffee giant's imminent performance.

As I scan the headline of the Marketplace section of last Wednesday's Wall Street Journal, "Starbucks to Shut 500 More Stores, Cut Jobs," I see I was right.
If you go back through either the Starbucks- or Schultz-labeled posts, you will note the strong theme of continued growth at the coffee roaster. One of the recent posts observed that Schultz viewed new segmentation strategies as the key to continued growth amidst a weakening US economy.
And now this. The firm currently has 11,000 US stores. I had no idea its footprint was so large. According to the Journal article, 70% of them, or more than 7,000, have opened in the past three years.
Easy come, easy go, Howard and Michelle?
Two problems he didn't have a while ago now plague Schultz- Nelson Pelz and a customer revolt to the new signature brewed coffee at the firm. Seeking to broaden their appeal beyond espresso-based coffees, the new, more mainstream flavor is, of course, quite different and missing the robust cache of the former featured coffee.
I think I was on the mark when I noted, simply, that Starbucks is feeling the effects of Schumpeterian dynamics, and there's really not much they can do to mitigate the consequences, try as they might.