Friday, January 16, 2009

Carol Bartz Assumes Command at Yahoo

Yesterday's Wall Street Journal carried a very flattering, supportive article describing a more favorable reaction by most interested parties to Carol Bartz' elevation to CEO of Yahoo than prior pieces had been.

The Journal piece noted,

"In a call with analysts Tuesday, Ms. Bartz said, "I don't expect it's going to take an extraordinary amount of time" to examine Yahoo's strategic options, but she indicated she is unwilling to cave in to outside pressure to act. "More than anything, let's give this company some frickin' breathing room. It's been too crazy -- everybody on the outside deciding what Yahoo should do, shouldn't do, what's best for them. That's going to stop." "

You have to love Bartz' attitude. Somehow, you just envision dozens of investment bankers, analysts and related onlookers collectively shutting up and watching while Bartz sorts out the ailing company's fortunes in the next month.

For what it's worth, per my earlier Bartz-focused post, I found my 2006 Yahoo chart comparing GE and Autodesk. Then updated it to the present.

Bartz served as CEO of the cad/cam company from 1192-2006.

As mediocre as GE looked back in 2006 compared to Autodesk, it's even worse now, not even outperforming the S&P.

By viewing the slopes of the price curves, even allowing for GE's dividend, you can see that Bartz outperformed Immelt and, over her tenure, significantly outperformed the S&P. To a degree, I believe, that would work out to a higher rate per annum than Welch's, but I'll have to go to my Compustat data to confirm that.

In any case, Bartz is already taking charge and making it clear she'll be the one running Yahoo and doing the talking. And more than likely, her counterparts elsewhere realize the days of pushing the hapless internet company around are over.

Thursday, January 15, 2009

BYD As Auto "Manufacturer"

Amidst the hue and cry over whether and how GM, Chrysler and, in time, Ford might survive and perhaps even prosper again, a mention was made in a recent Wall Street Journal article of battery manufacturer BYD.

This Chinese firm specializes in lithium ion batteries, but is showing its plug-in hybrid at the upcoming Detroit Auto Show.

What I find remarkable is the implication for the three remaining US auto makers which is going largely unheralded.

Part of the recent and, so they hope, upcoming bailout of GM and Chrysler by the US Treasury is an expectation that the companies' new minority partners, Uncle Sam, will mandate 'green' car technology- hybrids, electric cars, and that sort of thing.

But it would seem to be a troubling omen that a Chinese battery-maker is already showing a complete and functioning electric hybrid vehicle. Specifically, given that so much automotive technology is provided by suppliers to the 'manufacturers,' i.e., assemblers, even a simple batter maker can toss a hybrid car together.

This would seem to spell serious doom for the UAW and its employers in America. Not even having marketed production quantities of hybrids yet, these firms and the union depending on them will have to contend with a vehicle built by non-union Chinese workers. Something so simple, evidently, that it would presumably be tough for US auto makers to add sufficient value to make their cars more salable. Yet, the vehicle doesn't emanate from a vehicle manufacturer.

Does this not suggest that hybrids are going to be so easy to make that Detroit producers, with their high legacy costs and union employees, have basically zero chance of making the hoped-for bonanza on this type of vehicle?

So much for throwing tens of billions of taxpayer money into GM and Chrysler so they can make it all back, and then some, with so-called world beating hybrids and other non-gasoline cars and trucks. It's looking like they'll once more be late to market and competing with much more nimble, imaginative and dangerous competitors.

Wednesday, January 14, 2009

Yahoo Gets An Adult CEO: Carol Bartz

Finally, after years of mistakes, the board of Yahoo did something right. They've attracted veteran technology CEO Carol Bartz to replace hapless Jerry Wang as the CEO of Yahoo.

I have written two posts involving Bartz, here and here. The second linked post, from October of 2006, lauded Bartz as an unheralded, effective CEO. I wrote,

"In my opinion, however, Carol Bartz is the class of the class. She has created value consistently at Autodesk for 14 years, with the exception of some rough years in the late '90s. Even then, however, the company tended to tread water, and not lose substantial value for long time periods.

I think it does seem unfair that Bartz is not accorded the type of press that GE's Jack Welch received for his long-term performance. Blogger is not cooperating with the uploading of a price chart comparing GE and Autodesk over many years, but suffice to say, Bartz looks as good as Welch, when the two companies' performances are compared for the years in which they both were CEOs of their respective companies.

If Bartz is being ignored because of her gender, then that's even more bad news to add to Alan Murray's contentions. Not only do poorly performing female CEOs, like Jill Barad, get spotlighted, but the rare excellent performers, like Bartz, are conveniently forgotten."

The nearby price chart of Yahoo for today indicates that there was initial disappointment by Yahoo investors at the news, even allowing for the S&P500's down opening.

Additionally, the Wall Street Journal ran at least one piece critical or questioning of Bartz' ability to sort the Yahoo mess out.

I disagree. Emphatically.

I don't know what Carol Bartz will decide to do to create or extract maximum value from Yahoo for its shareholders. But I am confident that, whatever it is, it will be as good as, or better than others would have done.

To her credit, Bartz was quoted as saying she had,"a lot of ideas " regarding what to do at Yahoo, but "It would be very presumptuous for me to do so on my first day on the job and I am not going to do so."

How very adult and professional! Yahoo shareholders must be shocked at the new quality of management at the firm. If I were one, I'd feel very comfortable with the image of Bartz across a table from the hulking Steve Ballmer in any upcoming discussions regarding search businesses, joint ventures, et. al.

At the same time, the firm is finally rid of Susan Decker. It didn't seem that she ever made a significant difference at Yahoo. Of the two, there's no question Bartz is the better choice to salvage whatever value can be at Yahoo at this very, very late date.

Tuesday, January 13, 2009

Deleveraging vs. Recession: Recognizing The Effects

I have noted with increasing concern a confusion in the general business media regarding what are the sources of our current economic difficulties. They are not just a bad recession. In fact, the recession, on its own, is probably simply of average depth and duration.

However, mixed in with the recession is a heretofore unseen deleveraging of the global economy. I first called attention to this phenomenon in this post in late November of last year. In it, I wrote,

"Since leverage, a function of debt, implies confidence in the future returns of loans placed with various enterprises, its unwinding corresponds to a loss of such confidence. The forced reduction in this leverage began, understandably, with the short-term borrowing instruments of both financial and non-financial instruments- commercial paper, most notably.

As this massive de-leveraging of fixed income instruments occurred, the simultaneous drop in real estate values and equity market values caused several consequences.

First, large-scale losses in US, and other nation's market, i.e., societal capital stocks, valued notionally, plunged. Those who previously owned the capital suffered large losses.

The second major consequence of the calamitous drop in price of many stores of value- real property, equity, debt- coupled with the deleveraging, was the cessation of bank lending. Thus, a financial crisis, partially unleashed by a narrowly-defined 'mark to market' rule in a single US law, Sarbanes-Oxley, led to the real effects on non-financial sectors of the US economy. As banks struggled to deleverage their assets in order to both conserve remaining equity from further losses, and abide by regulatory capital requirements, lending suffered. This became a self-fulfilling act, as, starved of normal, short-term operating liquidity, more and more businesses began to reduce operations and cut staff.

The third unforeseen consequence, then, to complete the circle, was the rising joblessness as the economy was already softening, of its own accord, by early 2008.

This last link in the circle of economic causes and effects has now driven a dramatic drop in consumer spending, due to: rising unemployment, lower home values as a source of personal household net worths, and lower financial asset portfolios as a source of personal household net worths."

Probably not since the 1950s have we seen such a secular deleveraging of American capital. I vividly recall, while in graduate school, reading articles on the Treasury's attempts to tax gains of foreign bond holders in the 1960s, which led to the creation of the Eurobond market.

I discussed with my business partner recently the evolution of capital formation, beginning with our early ancestors storing extra wood or food in caves. Early barter systems represented market-clearing mechanisms for surplus food or other primitive goods, allowing specialization to develop. With specialization came production for others, rather than mere personal survival consumption. In time, one person's surplus became another's borrowed capital for further expansion of production.

Somehow, through the centuries, capital creation became increasingly dependent not upon hard assets or saved money, but some analyst's or banker's estimation of the forward earnings power of an entity issuing debt or offering equity subscriptions.

Culminating in events including the famed technology equity 'bubble' of the late 1990s and the recent real estate bubble of the late 2000s, the financial community's allowance of increased leverage, via lending on ever-smaller equity bases, resulted in economic expansion which has to have been secularly due to that higher leverage.

This is important right now, because many people, businessmen and politicians alike, are running around declaring the coming of a second Great Depression any moment.

The President-elect has been engaging in economic scare tactics and fear mongering since this past summer's election campaign. Thus his reason for requesting- no, demanding- a $1T stimulus package.

But, in reality, the economic difficulties we currently face are a combination of two very different phenomenon.

On one hand, there is, based upon the NBER's December statement based upon job losses, a US recession which began in late 2007.

However, within this recession is a secular trend of economic shrinkage that will not be reversed by anything but a return to higher leverage. Thus, no amount of unleveraged economic 'help' will reverse these losses and the accompanying fall in GDP growth.

Seen from this perspective, the only way in which a new, massive Federal stimulus package can provide 'recovery' is to substitute government-issued obligations to return US societal economic leverage back to the dangerous, unsustainable levels at which it was before the current crisis.

How is it that leverage undertaken by the private sector, and judged imprudent, can now be replaced with government-sourced leverage, in the form of either: 1) more printed money, or 2) increased sale of government debt, without creating even more risk by spending the money in less accountable, measurable ways through political channels?

The simple fact is that, for the US economy to lower its capital leverage, and adjust to that lower leverage level, some jobs and business activity will have to simply vanish and not return. Whatever economic level we enjoyed, from which our current recession guideposts are measured, it logically follows that we cannot return there anytime soon unless we collectively decide, as a society, to try to raise financial leverage back to what it was.

If we decide this is unwise, then we have to accept that unemployment will be higher, and business activity levels lower, as the marginal, leveraged activities have been eliminated with the fall in financial leverage.

There is no other way around this fact.

Thus, the component of the current US economic weakness which represents simple, normal cyclicality is smaller than the overall, measured recession which includes the results of this deleveraging process. Any Federal programs which seek to, in a carefully identified and measured way, "fix" the economy beyond this normal cyclical impact, will be a disguised attempt to reflate our economy with added leverage through public debt and spending, rather than private resources and channels.

Monday, January 12, 2009

Citigroup Finally Considers Largescale Change

Today's business news is all a-twitter over the Citigroup-Morgan Stanley brokerage joint venture.

Forgive me if I yawn.

What, exactly, is all the excitement about? Two has-been financial giants with huge long term viability issues toss both their mundane, yesteryear personal retail, full-service brokerage businesses into a common pot?

For Vik Pandit, it's too little, too late. As the price chart for Citigroup in yesterday's post illustrated, the bank has lost nearly 80% of its equity price in the past twelve months. Surely, as others have also noted, Pandit would have gotten much more value for his shareholders had he done this early last year, rather than now.

This is precisely the sort of long term damage that results from in-denial, head-in-the-sand approaches to the actual condition of a business. By insisting on keeping Citigroup's unwieldy, difficult-to-effectively-manage business assortment intact, Pandit simply destroyed more shareholder value faster than he would have otherwise.

For this, alone, it should be time for him to go. And what more convenient time for the board, than in tandem with the guy who mistakenly hired Pandit, Bob Rubin.

Yes, there's also talk of selling Citigroup's Banamex unit. But with Citigroup effectively owned by the Federal government, dismantling it any further is probably academic.

With both Morgan Stanley and Citigroup having significant Federal government ownership stakes, I have trouble understanding how the brokerage joint venture is much different than two related businesses reorganizing units serving similar markets. This is one of the effects of Treasury's actions.

If anything, it probably argues that such combinations and consolidations should continue, until wholesale banking, retail banking, etc., are centrally managed, but dispensed to Americans via different old, familiar brands, e.g., Morgan Stanley, Goldman Sachs, BofA, Wells Fargo, Citigroup and Chase.

The names might differ, but the credit allocation policies, interest rates and such will be unvaried.

It's simply hard for me to take seriously the notion that two government-dependent commercial banks, each unable to prosper, let alone survive on its own, can effect much exciting, useful change for their shareholders anymore.

Let's be honest, even if the Wall Street Journal and CNBC won't. This is a government-owned sector now. It's no longer truly private enterprise.

Citigroup's actions are, at least, explained as being coerced by government officials who are now more owners than regulators.

How do you report that and still believe there's any private enterprise angle to these stories anymore?

Sunday, January 11, 2009

Bob Rubin Finally Leaves CitiGroup- In Ruins

Finally, after assisting in wrecking the firm to which he was recruited as non-executive Chairman not quite ten years ago, with unusual powers, Bob Rubin has resigned.

The nearby chart shows the effects of Rubin's last major act at Citigroup, the hiring of CEO Vikram Pandit. Compared to the S&P500 Index, which suffered its worst year ever, the large money-center bank performed even worse under its novice CEO.

In the Wall Street Journal article this weekend discussing Rubin's gift to his erstwhile shareholders, he is reported as having excused the damage he caused at Citigroup by citing the fact that Alan Greenspan, among others, had failed to forsee the totality of the financial sector crisis which crippled the bank this past year.

Where was the Citigroup board all these years? Didn't they ever consider the losses to shareholders brought on by following Rubin's 'counsel?'

Allegedly, Rubin's letter of resignation expressed his desire to "intensify my engagement with public policy."

Seeing as how Rubin presided over a loss of some 70% in Citigroup's share price over the time he served as chairman, one wonders just what benefits Rubin imagines he now can add to public policy debates.

Instead, one wishes he would have written,

'Because my leadership at Citigroup was so disastrous, my counsel on risk-taking and entering the mortgage finance business so wrong, I have decided to retire permanently from any work, private or public, involving finance. I have clearly caused far more damage than could ever be corrected by my further involvement in this sector, and it is debatable that my future decisions or advice would be any better than that of the last decade.'

But we all know Rubin wrote, nor will express, anything of the kind. Sadly, he may, in fact, go on to badly advise the incoming administration in Washington.