Saturday, May 30, 2009

Carol Bartz Pushes Back!

In this post about Yahoo from just over two years ago, I wrote,

"As I discussed this with my business partner, it became clear what Yahoo's continuing vulnerability is. He described what he thinks Semel's vision of Yahoo is as 'a place to form groups,' or 'a place users go to find groups and information.' The trouble with this is that it is, for the most part, free. I have never paid a dime for any Yahoo service, although I use their portfolio tracking Finance page for my daily portfolio performance monitoring.

What I think Yahoo should have done, back in 2001, is to have immediately retained a few senior consulting partners from McKinsey and Bain to provide the Yahoo senior managers with anecdotal evidence of how other companies survived and prospered in highly-competitive, technologically-oriented business situations, when they had no clear, salient competitive advantage.

My own opinion is that Yahoo should have begun to take the things it is good at, such as information redistribution, presentation, and online groups management, and offered to private-label them to various companies which need these services, but can't get adequate results from their internal IT departments. Online brokerage services came to mind, as my partner and I discussed this. He and I both deplore Schwab's useless online portfolio performance reporting and "analysis," if you can call it that. Why didn't Yahoo provide them with a portal directly taking the Schwab customer to a Yahoo-provided, but Schwab-labeled customizable portfolio performance site/page? Or provide online retail companies with customer group-management facilities cloned from the very large, successful, but free Yahoo Groups offerings?

Such a strategy would cement Yahoo into corporate marketing and customer service functions, while, for once, actually getting paid by someone for what they do. I maintain that, with its largely free services for consumers, Yahoo continues to be the "used car" of internet information providers. It's got no software, hardware, superior search engine, or actual proprietary information for which to charge fees. Thus, I believe its hold on consumer loyalty is tenuous, at best."

In an interview on CNBC Thursday morning, Carol Bartz repeated, almost verbatim, my partner's description of Yahoo as a place users go to find groups and/or information. Only, as Bartz said it, it sounded a lot more promising.

Her attitude during the interview was both combative of some rather condescending questions from the interviewer, Jim Goldman, and dismissive of Google as an online giant with different strengths- search- in a different sphere.

Bartz didn't explain how she's going to get Yahoo to finally monetize its core strengths, but at least she can articulate some focus, and you know she understands the financial necessities facing Yahoo.
Just viewing the nearby price chart of Yahoo and the S&P500 Index shows that, shortly after Bartz' arrival at the company, investors have begun to return, too. The company's equity price has outpaced the index's since early January, rising some 20%, while the index has remained flat.

It's very refreshing to see her speak positively about Yahoo's capabilities and potential in a more informed way than I ever heard Jerry Yang or Terry Semel express themselves.

Friday, May 29, 2009

The Credit Card Business' New Inefficiencies

With the recent, hurriedly-passed legislation involving credit cards now law, it's reasonable to expect some major changes in the way that the providers of revolving, installment credit will do business.

Of course, the biggest change is going to be the rationing of credit at the high-risk end of the spectrum. Since the legislation limits the degree to which installment credit providers can recoup losses and offset risk with fees and interest rate changes, many lower-income or poor credit-risk consumers will simply be denied this source of credit at any price.

To those who would argue that this 'protects' such low-end consumers, let me remind them that nobody put a gun to anyone's head and forced them to accept and use installment credit. Charge-offs by banks of balances on excessively-risky accounts were the banks fault. But the incurring of the debt, and related fees for delinquency, etc., were the responsibility of adult consumers.

As an aside, this would seem to be an odd governmental policy in the midst of a recession, since consumer spending will, as usual, be a major engine of growth at some point. With less credit, there'll be less spending sooner.

At the other end of the spectrum, lower-risk credit customers now may see the return of annual fees on bank cards, as well as the disappearance of the 'grace' period. In return for harsher regulation of riskier credit consumers, the issuers were given leeway to eliminate that free 30 days in which a card user may carry a balance that is paid off in full by the required statement date.

I discussed this with a colleague recently, comparing thoughts about how this will cause unintended, currently-unforeseen consequences, as legislation like this typically does.

For example, in the last few years, probably like many of my readers, I've agreed to let some vendors apply a monthly charge to my credit card. Services such as a fitness club, TiVo, an online service provider, and Netflix, to name a few, use this business model.

Consequently, I would have an average monthly balance of over $200, which is currently paid in full, since I'd just as gladly write checks for these recurring expenses. In a world with no grace period, and a 20% annual interest rate, these charges will result in roughly $40 of additional financial fees. Add a $50+ annual fee, times two cards, and I might be looking at an additional $150/year of installment credit-related fees, with no change in my own financial behavior.

Multiply my experience by a few million consumers, and there'll be impetus for change.

My colleague thinks that several of these monthly services will quickly move to an annual, check-paid discounted fee option. The larger vendors, such as the fitness club, will probably offer a private-label credit card on which to charge their own service, at no annual fee.

Either way, though, there will be inefficiencies. In the case of the discounted annual fee, the funding is simply being moved back to me, with a small interest rate paid, via discount, for me funding the vendor for an extra eleven months.

In the case of the fitness club and any other vendor large enough to offer a private credit card, there's the added time and expense of writing another monthly check, plus stamps, which are no longer trivial.

Having worked at Chase Manhattan Bank for many years, I've always been leery of allowing direct access to my DDA account by vendors. If there is any problem whatsoever, the bank employees have zero motivation to make sure it is resolved. Any resulting damage to my credit rating will be borne by me, not the bank, nor its employees, and I'll have to spend my time to clear that up.

Thus, the net effect of this new installment credit legislation is likely to be substantially less credit extended, at any price, and a much more inefficient use of, and payment for credit by those still possessing revolving charge cards.

Hardly economic progress, is it?

Thursday, May 28, 2009

Treasury's Direction of the GM Bond Offer

Today's Wall Street Journal reported on the failure of GM bondholders to accept the proposed exchange rate leaving them with just 10% of the equity of the resulting firm, in sufficient numbers to constitute acceptance.

According to the article,

"the company was prohibited by the Treasury from offering these investors a larger GM stake."

Curiously, the Treasury must have then mandated the UAW's 17.5% share, and the government's retention of the remainder, in conjunction with various Canadian government and union interests.

Once again, we see the heavy hand of federal coercion, once it gets its hands on private property. Treasury quite obviously played favorites, by giving the UAW, a key political ally of the president's party, a larger share of the resulting GM than that allotted to bondholders.

More to the point, the bondholders' failure to accept the proposal sends GM into bankruptcy court, which is where it could have been way back in the fall of 2008, or sooner, had obstinate, now-departed CEO Rick Wagoner faced up to reality a year or so ago.

In the meantime, GM has consumed north of $15B of taxpayer funding, all while careening toward Chapter 11.

In decision theory terms, this makes both Wagoner's reluctance to file Chapter 11 in 2007 or 2008, and the Bush administration's decision to provide a bridge loan in late 2008, mistakes.

Since GM will ultimately land in bankruptcy court, all of that time and money was, in effect, wasted. Other people's, i.e., taxpayers, money was used to propagate a dead, value-destroying enterprise.

This was never a wise idea. Surely checks could have been written to individual hourly workers for less than the total current outlay of money to GM, since the stated concern by then-President Bush was Depression-scale unemployment, should GM have gone bankrupt.

Instead, we have government coercion in and mismanagement of a private sector firm, using taxpayer money. It's the complete opposite of Schumpeterian dynamics, which is pretty much a requirement for releasing and recycling economic resources from failing businesses to new opportunities.

By continuing to prop up dead, poorly-managed firms like Chrysler and GM, our government is impeding the efficient workings of the capitalist, free market economy which has been the hallmark of US economic success for generations.

Wednesday, May 27, 2009

The Supreme Court's Effect on Business

Home Depot's co-founder, Bernie Marcus, wrote an insightful piece in yesterday's Wall Street Journal concerning coming rulings from the Supreme Court with the replacement of retiring Justice David Souter.

Marcus goes beyond the mainstream media focus on cases of social policy and focuses on potential changes due to Souter's tendencies to vote on the side of free enterprise. Marcus directly identifies this as an anti-labor stance, thus begging the obvious question.

Will the nominee to replace Souter respect the Constitution and our laws, or will s/he rule based on "empathy" and one's own personal life experiences?

To do the latter, Marcus argues, will be to damage our economic system severely. Especially the ability of small- and medium-sized companies to raise capital. If our courts, particularly the Supreme Court, are seen as anti-business, then investors will correctly revisit and revise their sense of risks associated with business investment.

Moving from a clear-cut tendency to apply the rule of law on the Supreme Court, to a preference to apply each and every Justice's personal life experiences as lenses through which to view the merits of plaintiffs and defendants, is to invite a completely capricious and inconsistent approach to the country's legal system.

Surely, this will be bad for everyone's economic health, as such an injection of uncertainty regarding the interpretation of our laws will inevitably lead to less investment due to the resulting implied risks. That will eventually lead to less employment and economic activity all around.

Hardly what most of our society would seem to want, nor attributes for which our country's economic system is known.

Tuesday, May 26, 2009

Changing of the Guard at Xerox: Who Cares?

Ann Mulcahy, CEO of Xerox, is retiring. Replacing her will be Ursula Burns.
Who cares?
As the nearby price chart of Xerox and the S&P500 Index displays, and a Wall Street Journal article on the subject noted, Mulcahy's tenure has been undistinguished.
Yes, I'm sure there will be those who assert that Mulcahy fended off bankruptcy and a difficult situation she inherited from her predecessor.
But that's not the measure of a successful CEO. Consistent outperformance of the always-and inexpensively available S&P500 is.
If an investor had bought Xerox stock upon Mulcahy's appointment as CEO in 2001, s/he would have been rewarded with a stagnant equity price, a performance only marginally better than the index, and not in a consistent manner.
Despite accolades for righting Xerox's financial condition and fostering printer technologies, her management of the company didn't really deliver any form of outsized returns to shareholders. It's not clear that Xerox shouldn't have died in 2001, its better-performing units sold to better-managed competitors or private equity shops.
Mulcahy's replacement, Ursula Burns has received publicity because of her gender and race. Again, so what? Noting those only propagates gender and racial bias. If she's qualified to be CEO of Xerox, why trumpet them? If not, do those attributes serve as special qualifiers?

It doesn't take a genius to see that a company that mainly focuses on print technology in an increasingly virtual, online technology world is probably not going to become a consistently superior performer again. If it did, it would be a true exception.

As the price chart shows, Xerox hasn't had a sustained period of market outperformance in the period from 1978 to the present. This is a company whose 'go-go' years were the 1960s. That's 40 years ago.

When I think of Xerox, I think of the company that punted away truly promising technologies in its once-famed Palo Alto Research Center. You know, those ideas which Apple's Steve Jobs incorporated into his firm's breakthrough personal computers.

Why anyone would pay special attention to a changing of stewards of a once-dynamic, now merely-average, backwater technology firm, is unclear to me.