A few days ago, I received this email from a viewer of the segment on Bill O'Reilly's Fox News program on which I appeared last month.
It Seems Many Do Not Agree with You-see Times Article
From: Art Effron (email withheld for privacy reasons)
To: CNeul@aol.com
Date:Sun, 4 May 2008 9:47 pm
THIS E-MAIL WAS SENT TO BILL O'REILLY TODAY
Bill-
It seems your info relative to Jeff Immelt is quite flawed:
GE IS NOT losing money
GE IS rated very highly among most creditable business and financial institutions
GE has NEVER MISSED a dividend in the history of its existence.
Most business and financial experts recommend GE as a very reliable investment (call your broker).
Your expert,Charles Neul, hasn't the slightest idea about GE and his views have absolutely based on faulty input.
GE's stock has not performed as we would like but only missed its projection in the last quarter.
GE manufactures many medical electronic devices that has saved many lives (maybe some of your family).
Have you really checked on Mr. Murdock's business activities as it related to Iran ?
Jeff Immelt has proven to be one of GE's most successful CEOs(check his track record as to his many
accomplishments).
Bill, I really hope your E-Mail screeners show you my E-Mail.
You are way too smart to believe some of the background information passed to you as true.
Art Effron (email address and phone number withheld)
I wrote in reply,
Dear Mr. Effron-
It's evident from your ranting email that you understand little, if anything, about my approach to equity performance analysis, as expressed on my blog, or the manner in which most successful portfolio managers seek to outperform the market.
The bulk of your points have nothing to do with GE's, and Immelt's inability to earn a total return for its shareholders which is better than that one can achieve by simply buying and holding an inexpensive S&P500 Index fund from one of many fund complexes. Some of your points, while perhaps true, are irrelevant to the matter at hand, i.e., has GE, under Immelt, outperformed the S&P, or not? To paraphrase a business partner of mine,
'Just because we might want to buy a company's products does not mean we want to own it's stock.'
For your information, as I have noted in several posts on my blog regarding GE, my information source for data on GE's performance is from Compustat, which is considered to be the leading institutional-quality source for fundamental and technical data on publicly-held companies. My information regarding Immelt's compensation is either directly from the Wall Street Journal or Forbes, both considered reputable and unimpeachable information sources.
As I mentioned on Mr. O'Reilly's program, the reason many in the media or investment circles do not criticize GE involves their not wanting to see their share of GE's large volume of corporate spending evaporate.
You would probably do yourself a favor in terms of your own credibility if you first gained a better grasp of the issues which were discussed on O'Reilly's segment on GE. Until then, it might be prudent of you to cease broadcasting your naivete.
-CN
I'm not sharing this email and my reply just for fun. Mr. Effron's email provides at least one answer to Mr. O'Reilly's question of me about GE's equity,
"Who would own this stupid stock? Who would buy it?
People who think like Mr. Effron.
'Investors,' and I use the term here very loosely, who mistake profits and the nature of a company's businesses for its ultimate delivered benefit to shareholders- total return.
And, in an ironic way, the fact that people like Mr. Effron choose to continue holding GE is what helps it remain a mediocre performer.
You see, if a lot more investors sold the stock now, it's price would, of course plummet even further than it has in the past year or month. But as the price dropped, it would probably reach a level so cheap that some 'value' investors would begin to accumulate the equity.
Then, GE's continued so-so fundamental earnings performances might justify more investor interest, and, thus, a short-term rise in the stock's price and, with it, a higher total return.
That so many GE shareholders continue to hold it, in effect voting every day to 'not sell' the stock, supports its price in the face of mediocre earnings performances.
The smart money, as I wrote of the sellers of regional bank equities in this recent post, has already left the building in GE's case.
The remaining shareholders would seem to have motivations, valuation and performance criteria similar to those of Mr. Effron.
And that, my friends, is what makes markets. Different views of and valuations for the same instrument.
In this case, we're fortunate to have one of those, in Mr. O'Reilly's words, 'stupid enough to own this stock' actually tell us why he does.
Friday, May 09, 2008
Thursday, May 08, 2008
Microsoft Drops Its Pursuit of Yahoo
By now, you've probably read an armload of articles about Steve Ballmer's retraction of Microsoft's offer to buy Yahoo.
"Not that I'm a Microsoft shareholder. It hasn't been in my equity portfolio for nearly a decade.
But Ballmer made some sense in that he has acknowledged his own firm's risk in integrating Yahoo. Citing internal reasons for not increasing Microsoft's bid for Yahoo, the CEO gave shareholders some reason for sanity in the looming hostile phase of the firm's quest for the ailing internet portal player.
As miserably as Microsoft has performed for years, it will probably only do worse as it attempts to do several new things: integrate a large acquisition, deal with various staffing exits and other related issues, and then have to actually make good on the promise that the Yahoo acquisition will somehow solve all of the firm's ills."
How ironic, as I told my partner, that Jerry Yang wasn't paid for the value he saved Microsoft's shareholders with his obstinacy. Who knows how much Microsoft shareholder value would have been destroyed as Ballmer and his team tried to integrate Yahoo's mediocre platforms and organizations with its own?
Instead, Yang is now justifiably in hot water with his own shareholders for screwing them out of a nice exit premium, as portrayed in the nearby Yahoo-sourced price chart for the firm, Microsoft and the S&P500 Index over the past six months.Yahoo's price, depicted by the blue curve, soared on Microsoft's offer, but has now declined from its post-offer high.
Microsoft has steadily declined over the period, except for a brief pop a few weeks ago, when the rumors swirled that it might not pursue the deal. But even that rise has since evaporated.
So we are left where we started- two internet also-rans unable to prosper alone, or together. And Google having sagely played a gambit to poison the acquisition, without actually spending any significant money to do so, as it courted Yahoo with potential liason.
The Wall Street Journal published an editorial this week by Andy Kessler concerning the aborted acquisition. In the piece, Kessler argued that the internet is still wide open, and Microsoft has plenty of smart people and money with which it can push into new areas of success.
As I've written in prior posts about Microsoft, I think this is both unlikely and wrong. Microsoft's era as a firm which earn consistently superior total returns for its shareholders is over. It's time to split the company into several pieces- probably online, operating systems, desktop applications, and gaming. Each piece will likely have very disparate futures after being cast off from the smothering influence of the corporate umbrella.
It's not only unlikely that a Microsoft which remains substantially what it is today will return to consistently superior total return performance. Retaining its cash hoard to spend on new initiatives, in my opinion, is unfair and constitutes improper fiduciary behavior on the part of Microsoft's board and senior management.
Its time in the sun is past. Better to dividend the cash to shareholders, split the firm up into its logical pieces, and toast a once-great software technology icon.
Wednesday, May 07, 2008
Distrust, Hedge Funds & Citigroup
It's been a rough month for Citigroup's asset management groups.
In last Tuesday's Wall Street Journal, the bank's missteps with its Falcon and ASTA/MAT hedge funds were detailed. Rather than holding low risk securities for its investors, these two Citigroup funds actually held instruments which were savaged by the recent credit crunch.
According to the Journal article, the Falcon hedge funds lost about 80 cents on the dollar for investors, who are being offered between 45 and 54 cents on the dollar, if they promise not to sue the bank.
Moreover, only aggressive lobbying on behalf of the loss-plagued customers by Sallie Krawcheck brought the settlement offer to life. Other executives at Citigroup were willing to let their customers take the entire loss, despite the bank's probably misrepresentation of the hedge funds as being less risky than they in fact were.
Citi will spend about $250MM in payments to customers to partially compensate them for losses and allow them to exit the funds.
As if that isn't bad enough for the sprawling, mismanaged finanicial titan, this weekend's Wall Street Journal disclosed that nearly all outside investors in the bank's Old Lane hedge fund, which it purchased from Vikram Pandit and his partner John Havens. According to Jenny Strasburg's article entitled "Citigroup Lets Investors Bail From Old Lane,"
"In March, Citigroup gave Old Lane's outside investors, who have claims on about $3 billion of the fund's money, permission to withdraw early as a result of changes in the fund's senior management. The biggest: Old Lane co-founder Vikram Pandit became Citigroup's chief executive in December. John Havens, another co-founder, now runs Citigroup's investment bank.
According to a securities filing made Friday, "substantially all unaffiliated investors" -- meaning those who didn't help run Old Lane or work at Citigroup -- notified the bank they wanted out. The exodus will drain about $3 billion from Old Lane, according to people familiar with the fund. Investors have to wait until July 31 to get their money back."
Chalk up another shrewd move by non-executive Citigroup Chairman Bob Rubin, adding further luster to the record I described in this recent post. According to Ms. Strasburg, the ugly details of Rubin's hedge fund bet gone wrong include,
"After paying an estimated $800 million to acquire the hedge fund and bring in its management team last year, Citigroup last month wrote down the value of Old Lane by $202 million. Mr. Pandit got $165.2 million on a pretax basis from selling Old Lane to Citigroup, according to a securities filing in March.
Amid a string of hedge-fund blowups, Old Lane's returns weren't a disaster. But there wasn't much lure for investors to stick around. The multistrategy fund's returns are about flat since its 2006 inception, according to an investor. Founders boasted early on about raising $4 billion in less than nine months but gained little momentum after that.
In September, Citigroup closed its $2 billion Tribeca Global Investments LLC with plans to market Old Lane to bank clients as the company's flagship hedge fund. Those plans were scuttled."
This will result in Citigroup losing some $3B in assets which will be withdrawn from Old Lane, as it closes down.
Much as I prophesied in this post last year, Rubin made a colossal blunder which benefited the inexperienced hedge fund manager-cum-Citigroup CEO, Pandit. As I lampooned in that post about a fictional interview with the new Citigroup CEO,
"Pandit: And by asking me to head up alternative investments, I was able to shed any direct responsibility for Old Lane as soon as I had my picture laminated onto that Citi ID badge. Whew!
Talk about a tough business! In hedge funds, you have to perform. Back at Morgan Stanley, I always had lieutenants, or the market, or competition to blame if any of the areas under me messed up. But with a hedge fund, you're only as good as your last returns. And Old Lane's have really disappointed pretty much everybody."
Sadly, this has come true in spades. Now the original reason for bringing the ex Morgan Stanley investment banker into Citigroup has been totally discredited as an expensive mistake. What remains is Pandit's elevation into a job for which he has no obvious credentials or experience.
With management behavior like this at Citigroup- steering valued customers into too-risky hedge funds, arguing internally over compensating those customers for their losses due to the bank's misrepresentation of the funds, and buying a mediocre, untested hedge fund which has closed within two years of the purchase- its customers must wonder if the bank ever considers their long term needs and welfare.
All in all, not a good pair of outcomes for a bank in trouble across so many of its businesses.
In last Tuesday's Wall Street Journal, the bank's missteps with its Falcon and ASTA/MAT hedge funds were detailed. Rather than holding low risk securities for its investors, these two Citigroup funds actually held instruments which were savaged by the recent credit crunch.
According to the Journal article, the Falcon hedge funds lost about 80 cents on the dollar for investors, who are being offered between 45 and 54 cents on the dollar, if they promise not to sue the bank.
Moreover, only aggressive lobbying on behalf of the loss-plagued customers by Sallie Krawcheck brought the settlement offer to life. Other executives at Citigroup were willing to let their customers take the entire loss, despite the bank's probably misrepresentation of the hedge funds as being less risky than they in fact were.
Citi will spend about $250MM in payments to customers to partially compensate them for losses and allow them to exit the funds.
As if that isn't bad enough for the sprawling, mismanaged finanicial titan, this weekend's Wall Street Journal disclosed that nearly all outside investors in the bank's Old Lane hedge fund, which it purchased from Vikram Pandit and his partner John Havens. According to Jenny Strasburg's article entitled "Citigroup Lets Investors Bail From Old Lane,"
"In March, Citigroup gave Old Lane's outside investors, who have claims on about $3 billion of the fund's money, permission to withdraw early as a result of changes in the fund's senior management. The biggest: Old Lane co-founder Vikram Pandit became Citigroup's chief executive in December. John Havens, another co-founder, now runs Citigroup's investment bank.
According to a securities filing made Friday, "substantially all unaffiliated investors" -- meaning those who didn't help run Old Lane or work at Citigroup -- notified the bank they wanted out. The exodus will drain about $3 billion from Old Lane, according to people familiar with the fund. Investors have to wait until July 31 to get their money back."
Chalk up another shrewd move by non-executive Citigroup Chairman Bob Rubin, adding further luster to the record I described in this recent post. According to Ms. Strasburg, the ugly details of Rubin's hedge fund bet gone wrong include,
"After paying an estimated $800 million to acquire the hedge fund and bring in its management team last year, Citigroup last month wrote down the value of Old Lane by $202 million. Mr. Pandit got $165.2 million on a pretax basis from selling Old Lane to Citigroup, according to a securities filing in March.
Amid a string of hedge-fund blowups, Old Lane's returns weren't a disaster. But there wasn't much lure for investors to stick around. The multistrategy fund's returns are about flat since its 2006 inception, according to an investor. Founders boasted early on about raising $4 billion in less than nine months but gained little momentum after that.
In September, Citigroup closed its $2 billion Tribeca Global Investments LLC with plans to market Old Lane to bank clients as the company's flagship hedge fund. Those plans were scuttled."
This will result in Citigroup losing some $3B in assets which will be withdrawn from Old Lane, as it closes down.
Much as I prophesied in this post last year, Rubin made a colossal blunder which benefited the inexperienced hedge fund manager-cum-Citigroup CEO, Pandit. As I lampooned in that post about a fictional interview with the new Citigroup CEO,
"Pandit: And by asking me to head up alternative investments, I was able to shed any direct responsibility for Old Lane as soon as I had my picture laminated onto that Citi ID badge. Whew!
Talk about a tough business! In hedge funds, you have to perform. Back at Morgan Stanley, I always had lieutenants, or the market, or competition to blame if any of the areas under me messed up. But with a hedge fund, you're only as good as your last returns. And Old Lane's have really disappointed pretty much everybody."
Sadly, this has come true in spades. Now the original reason for bringing the ex Morgan Stanley investment banker into Citigroup has been totally discredited as an expensive mistake. What remains is Pandit's elevation into a job for which he has no obvious credentials or experience.
With management behavior like this at Citigroup- steering valued customers into too-risky hedge funds, arguing internally over compensating those customers for their losses due to the bank's misrepresentation of the funds, and buying a mediocre, untested hedge fund which has closed within two years of the purchase- its customers must wonder if the bank ever considers their long term needs and welfare.
All in all, not a good pair of outcomes for a bank in trouble across so many of its businesses.
Tuesday, May 06, 2008
Buffett's Undeserved Adulation
This past weekend provided Warren Buffett with his usual platform to expound to tens of thousands of investors and the business media. CNBC now sends Becky Quick, Buffett's personal favorite media representative, out to Omaha for the entire weekend and her unparalleled access to the billionaire.
Call me jaded, but I've finally had enough of Buffett. The accompanying Yahoo-sourced charts demonstrate part of the reason.
The first chart illustrates how, for the five years ending last May, Berkshire barely outperformed the S&P, but had been about even only six months prior, and was dead even in early 2006. As the chart shows, Berkshire effectively performed no better than the S&P from January 2005 until mid-2006.Berkshire only exceeded the index by as much as 20 percentage points of return briefly during the entire five year period.
Updating the chart for the latest year, it looks even more, well, mediocre. Berkshire only rose to significant outperformance of the index in the last six months, and even that ebbed a bit by early this year.By the way, since Berkshire pays no dividends, the slope of the curve, and differences of returns between dates for Berkshire are total returns.
For all of the adulation over Buffett's performance, I just don't see it for the past six years.
Then this quote from Buffett on Saturday appeared in the Wall Street Journal,
"Anyone who expects us to come close to replicating the past should sell their stock. It's not gonna happen," he said, "You may have something better to do with your money than buy Berkshire."
Now, that sure is an interesting statement coming from Buffett. A guy who is lauded on CNBC as some sort of modern-day Midas. The "Oracle of Omaha."
What's he saying, that his shareholders should just settle for even less than the usually-average total returns he's been giving them for the past six years? Because unless you are a market timer of extraordinary skill, you've mostly gotten a return from Buffett's management that is very close, for most of the years, to the S&P.
Berkshire had $44.3B in cash on its balance sheet as of its latest quarterly filing. The yearly cash thrown off by the businesses in its portfolio is $12-13B.
Should Buffett be dividending that cash hoard to shareholders? Maybe he's unable to deliver consistently superior returns to his shareholders going forward because he's keeping too many assets under management.
I never have completely understood the manner in which the business media and investors view Buffett and/or Berkshire, a sentiment which I expressed in this post from last December.
For example, if he's an investor, then Buffett's investments aren't coming through to shareholders as total returns that handily beat the market. However, if he's a corporate CEO, then Buffett's management results are, again, nothing to write home about on a consistent basis as one of many potential commercial enterprises in which people can invest.
My business partner joked when I articulated this conundrum, saying,
"Buffett...he's a wave, no, now he's a particle."
Funny, but actually on point. Is Buffett the portfolio manager of a very large, actively-managed, closed-end portfolio? Rather like, well, GE?
Or is Buffett just another conglomerate CEO?
Either way, I still just don't see the evidence that Buffett has rewarded his investors for most of this decade with superior total returns.
Monday, May 05, 2008
Bob Rubin Gives "Chutzpah" A New Meaning
My partner sent me an article from the NY Times on April 27th, entitled "Where Was The Wise Man?"
The piece is just an incredible saga of an arrogant, fawned-over ex-co-CEO from Goldman, and ex-Treasury Secretary who both killed the 30-year note, contracted the economy through his injudicious paying down of long term Federal debt, and silently acquiesced to the demise of Glass-Steagal. The latter event, of course, is one of the major reasons for our recent credit market debacle.
I'm referring, of course, to Citigroup's non-executive chairman, Bob Rubin. The Times piece reports,
"But now, closer to home, another financial crisis is creating a very different type of notoriety for Mr. Rubin. The housing and credit mess here has cost Citigroup nearly $40 billion, forced the exit of its chief executive, Charles O. Prince III, and led to persistent rumors inside the bank that Mr. Rubin might soon be stepping down as well.
Mr. Rubin and others at Citigroup are quick to dismiss any talk of departure, but one senior insider says Mr. Rubin may soon change his job title in order to clarify a clutch of duties that have always been ambiguous. He currently serves as chairman of the executive committee; his new title hasn’t been decided.
“It’s not under consideration,” Mr. Rubin insists."
At Citigroup’s annual meeting last week, Joe Condon, a retired Citibank regional manager in New York, posed a similar question. “What kind of advice did he give to Mr. Prince?” asked Mr. Condon, who spent 38 years at the bank. “Citigroup bankers are losing their jobs, and Bob Rubin is collecting $10 million, $15 million a year.”
Answers to these questions are complex and laced with contradictions, which neatly fits Mr. Rubin’s personality. Over the last 43 years, he has glided between Washington and Wall Street, emerging as an outspoken Democrat supporting liberal candidates like Walter F. Mondale and Michael S. Dukakis even as he earned tens of millions of dollars as a top executive of Goldman Sachs.
As an economic adviser to President Clinton in 1993 and 1994 and as Treasury secretary from 1995 to 1999, he supported tax hikes and spending cuts to reduce the deficit, pleasing investors but disappointing liberals who wanted more money for social programs. And as chairman of the executive committee of Citigroup, he’s played the incongruous role of official éminence grise, advising top executives and serving on the board while, he says, steering clear of day-to-day management.
“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” Mr. Rubin, 69, said during a two-hour interview in his office. Sitting in a red-cloth chair and propped against a thick book to support a bad back, he made it plain that responsibility for Citigroup’s staggering losses can’t be laid at his feet.
“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”
“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.
But did he make mistakes?
“I’ve thought a lot about that,” he responds. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Addressing the current round of criticism, Mr. Rubin makes a passionate defense without sounding the least bit defensive.
“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he says. “We had highly experienced, highly qualified people running the operation.”
That still doesn’t satisfy experts like Frank Partnoy, a former banker at Morgan Stanley who is now a law professor at the University of San Diego. He says he long admired Mr. Rubin as a “smart guy up against powerful forces in Washington who was consistently a voice of reason.” But he says Citigroup’s huge losses have shaken that faith.
Mr. Partnoy recently had his corporate finance students listen to a conference call from last November in which Mr. Rubin tried to explain Citigroup’s myriad financial woes and what role he played at the bank. “You could feel the air go out of the room as this incredibly well-respected guy struggled to answer,” Mr. Partnoy says of that class. “It was almost poignant.”
We'll never know if becoming Chairman of Citigroup was a quid pro quo for Rubin's remaining silent and, by doing so, implicitly supportive of Weill's demand that Congress abolish Glass-Steagal. I have at least one retired senior banking friend, B, who believes it was. I concur. But nobody has any proof to make this hypothesis ever become more than speculation.
Further on the subject of Rubin and financial services regulation, the Times pieces notes,
“He was consistently more skeptical that market discipline alone is sufficient and more often in favor of using regulation to get a better balance between innovation and stability,” says Timothy F. Geithner, president of the Federal Reserve Bank of New York, who served as a senior Treasury official under Mr. Rubin and Mr. Summers.
But on at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission that would have effectively moved many derivatives out of the shadows and made them subject to regulation."
According to the article,
"WHEN Mr. Rubin left Washington and returned to New York in 1999, he weighed the pros and cons of his next career move. “I’d had the ultimate responsibility both at Goldman Sachs and at Treasury, and I didn’t want that again,” he wrote in “In an Uncertain World,” his memoir. “I was at a stage in my life where I wanted to try to live a little differently.”
That meant, he says, a position that didn’t carry direct management responsibilities and allowed him to serve as elder financial statesman — albeit one who was lavishly paid. Since arriving at Citigroup, Mr. Rubin has been awarded compensation worth at least $126.1 million, according to Equilar, a research firm. That would place him firmly in the top 25 percent of earners if compared to the chief executives of Fortune 500 companies."
Great work if you can get it, eh? A company pays you over $100MM, but requires that you assume no substantial or significant responsibilities. Isn't this the sort of Wall Street fat cat against which Rubin's old boss, Clinton, would rail? Then the Times reports support for Rubin from none other than a CEO who has hardly distinguished himself by his ability to secure consistently superior returns for his shareholders,
“Bob has been unfairly taken to task, I really do believe that,” says Richard D. Parsons, the chairman of Time Warner and a Citigroup board member. “He made an explicit deal when he came aboard. You can’t say this happened on his watch because this wasn’t his watch.”
But others disagree with Parsons. The Times article provides details of how Rubin could become quite involved in details of Citi's operations when he wished, including the genesis of the growth strategies which ultimately brought about Prince's demise and the appalling losses of last year,
“He is like the Wizard of Oz behind Citigroup, he is the guy pulling on all the strings,” said one Citigroup banker who was not authorized to speak publicly about the situation. “He certainly was the guy deferred to on key strategic decisions and certain key business decisions vis-à-vis risk.”
Early in 2005, Citigroup’s board asked the C.E.O., Mr. Prince, and several top lieutenants to develop a growth strategy for its fixed-income business. Mr. Rubin peppered colleagues with questions as they formulated the plan, according to current and former Citigroup employees. With Citigroup falling behind Wall Street rivals like Morgan Stanley and Goldman Sachs, Mr. Rubin pushed for the bank to increase its activity in high-growth areas like structured credit.
He also encouraged Mr. Prince to raise the bank’s tolerance for risk, provided it also upgraded oversight. Then, according to current and former employees, he helped sell the proposal to his fellow directors."
Sounds like Bob could get very involved in Citi's management when he chose, doesn't it? And he apparently played a major role in pushing Prince, who wasn't even a banker, to 'raise the bank's tolerance for risk.' And then 'helped sell the proposal' to other directors.
What Citigroup director was going to object to taking more risk when Bob Rubin, Chairman, former Co-head of Goldman, former Treasury Secretary, said it was the right thing to do?
To say Rubin has led a very charmed adult life seems to be an understatement. The Times article closes with an observation suggesting how drole Rubin has now become,
"Between college and law school, Mr. Rubin briefly lived on the Left Bank in Paris, spending hours at cafes that were frequented by Jean-Paul Sartre and Albert Camus. Like them, he says, he remains something of an existentialist.
“It’ll be what it will be, like everything in life.”
The piece is just an incredible saga of an arrogant, fawned-over ex-co-CEO from Goldman, and ex-Treasury Secretary who both killed the 30-year note, contracted the economy through his injudicious paying down of long term Federal debt, and silently acquiesced to the demise of Glass-Steagal. The latter event, of course, is one of the major reasons for our recent credit market debacle.
I'm referring, of course, to Citigroup's non-executive chairman, Bob Rubin. The Times piece reports,
"But now, closer to home, another financial crisis is creating a very different type of notoriety for Mr. Rubin. The housing and credit mess here has cost Citigroup nearly $40 billion, forced the exit of its chief executive, Charles O. Prince III, and led to persistent rumors inside the bank that Mr. Rubin might soon be stepping down as well.
Mr. Rubin and others at Citigroup are quick to dismiss any talk of departure, but one senior insider says Mr. Rubin may soon change his job title in order to clarify a clutch of duties that have always been ambiguous. He currently serves as chairman of the executive committee; his new title hasn’t been decided.
“It’s not under consideration,” Mr. Rubin insists."
You sure can't beat Rubin for arrogance, can you? While watching the CEO over whom he titularly presided get canned for losing Citigroup some $40B, Rubin simply dismisses any talk of his own culpability.
The Times article continues,
"Titles aside, shareholders and analysts who have watched Citigroup run off the rails continue to ask a logical question about a financial statesman widely considered to be an astute judge of risk throughout a long and storied career: Where was Bob?
At Citigroup’s annual meeting last week, Joe Condon, a retired Citibank regional manager in New York, posed a similar question. “What kind of advice did he give to Mr. Prince?” asked Mr. Condon, who spent 38 years at the bank. “Citigroup bankers are losing their jobs, and Bob Rubin is collecting $10 million, $15 million a year.”
Answers to these questions are complex and laced with contradictions, which neatly fits Mr. Rubin’s personality. Over the last 43 years, he has glided between Washington and Wall Street, emerging as an outspoken Democrat supporting liberal candidates like Walter F. Mondale and Michael S. Dukakis even as he earned tens of millions of dollars as a top executive of Goldman Sachs.
As an economic adviser to President Clinton in 1993 and 1994 and as Treasury secretary from 1995 to 1999, he supported tax hikes and spending cuts to reduce the deficit, pleasing investors but disappointing liberals who wanted more money for social programs. And as chairman of the executive committee of Citigroup, he’s played the incongruous role of official éminence grise, advising top executives and serving on the board while, he says, steering clear of day-to-day management.
“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” Mr. Rubin, 69, said during a two-hour interview in his office. Sitting in a red-cloth chair and propped against a thick book to support a bad back, he made it plain that responsibility for Citigroup’s staggering losses can’t be laid at his feet.
“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”
“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.
But did he make mistakes?
“I’ve thought a lot about that,” he responds. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Addressing the current round of criticism, Mr. Rubin makes a passionate defense without sounding the least bit defensive.
“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he says. “We had highly experienced, highly qualified people running the operation.”
That still doesn’t satisfy experts like Frank Partnoy, a former banker at Morgan Stanley who is now a law professor at the University of San Diego. He says he long admired Mr. Rubin as a “smart guy up against powerful forces in Washington who was consistently a voice of reason.” But he says Citigroup’s huge losses have shaken that faith.
Mr. Partnoy recently had his corporate finance students listen to a conference call from last November in which Mr. Rubin tried to explain Citigroup’s myriad financial woes and what role he played at the bank. “You could feel the air go out of the room as this incredibly well-respected guy struggled to answer,” Mr. Partnoy says of that class. “It was almost poignant.”
It would be one thing if Rubin were simply paid board meeting fees and had little else to do with Citigroup. But Rubin is among the most highly-paid of Citi's executives. He was recruited as much for his ability to snare new institutional clients as for his executive skills.
Let's make no mistake- Bob Rubin is a very smart man. If he accepted the title of Chairman, non-executive or not, that's what he agreed to be. If all he wanted was to pocket several million dollars per year as a high-end 'finder' and 'rainmaker,' then maybe he should have had business cards portray him as CRO, or 'Chief Rainmaking Officer,' instead of Chairman. He had an office next to Chuck Prince's and chaired the bank's executive committee.
Regarding Rubin's Treasury activities, the Times reports,
"Mr. Rubin in theory supported the legislation to repeal the Glass-Steagall Act but was concerned that it would strengthen the Fed’s powers at the expense of the Treasury. It was passed and signed into law under his successor, Mr. Summers."
Of course, it was convenient that Rubin, as Bill Clinton's Treasury Secretary raised no objections to Sandy Weill's, then Citigroup CEO, plans to violate the law with his merger of Citibank and Travelers Insurance. And then left Treasury before the end of Clinton's administration to take his lucrative position as Chairman of.....Citigroup!We'll never know if becoming Chairman of Citigroup was a quid pro quo for Rubin's remaining silent and, by doing so, implicitly supportive of Weill's demand that Congress abolish Glass-Steagal. I have at least one retired senior banking friend, B, who believes it was. I concur. But nobody has any proof to make this hypothesis ever become more than speculation.
Further on the subject of Rubin and financial services regulation, the Times pieces notes,
“He was consistently more skeptical that market discipline alone is sufficient and more often in favor of using regulation to get a better balance between innovation and stability,” says Timothy F. Geithner, president of the Federal Reserve Bank of New York, who served as a senior Treasury official under Mr. Rubin and Mr. Summers.
But on at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission that would have effectively moved many derivatives out of the shadows and made them subject to regulation."
According to the article,
"WHEN Mr. Rubin left Washington and returned to New York in 1999, he weighed the pros and cons of his next career move. “I’d had the ultimate responsibility both at Goldman Sachs and at Treasury, and I didn’t want that again,” he wrote in “In an Uncertain World,” his memoir. “I was at a stage in my life where I wanted to try to live a little differently.”
That meant, he says, a position that didn’t carry direct management responsibilities and allowed him to serve as elder financial statesman — albeit one who was lavishly paid. Since arriving at Citigroup, Mr. Rubin has been awarded compensation worth at least $126.1 million, according to Equilar, a research firm. That would place him firmly in the top 25 percent of earners if compared to the chief executives of Fortune 500 companies."
Great work if you can get it, eh? A company pays you over $100MM, but requires that you assume no substantial or significant responsibilities. Isn't this the sort of Wall Street fat cat against which Rubin's old boss, Clinton, would rail? Then the Times reports support for Rubin from none other than a CEO who has hardly distinguished himself by his ability to secure consistently superior returns for his shareholders,
“Bob has been unfairly taken to task, I really do believe that,” says Richard D. Parsons, the chairman of Time Warner and a Citigroup board member. “He made an explicit deal when he came aboard. You can’t say this happened on his watch because this wasn’t his watch.”
But others disagree with Parsons. The Times article provides details of how Rubin could become quite involved in details of Citi's operations when he wished, including the genesis of the growth strategies which ultimately brought about Prince's demise and the appalling losses of last year,
“He is like the Wizard of Oz behind Citigroup, he is the guy pulling on all the strings,” said one Citigroup banker who was not authorized to speak publicly about the situation. “He certainly was the guy deferred to on key strategic decisions and certain key business decisions vis-à-vis risk.”
Early in 2005, Citigroup’s board asked the C.E.O., Mr. Prince, and several top lieutenants to develop a growth strategy for its fixed-income business. Mr. Rubin peppered colleagues with questions as they formulated the plan, according to current and former Citigroup employees. With Citigroup falling behind Wall Street rivals like Morgan Stanley and Goldman Sachs, Mr. Rubin pushed for the bank to increase its activity in high-growth areas like structured credit.
He also encouraged Mr. Prince to raise the bank’s tolerance for risk, provided it also upgraded oversight. Then, according to current and former employees, he helped sell the proposal to his fellow directors."
Sounds like Bob could get very involved in Citi's management when he chose, doesn't it? And he apparently played a major role in pushing Prince, who wasn't even a banker, to 'raise the bank's tolerance for risk.' And then 'helped sell the proposal' to other directors.
What Citigroup director was going to object to taking more risk when Bob Rubin, Chairman, former Co-head of Goldman, former Treasury Secretary, said it was the right thing to do?
To say Rubin has led a very charmed adult life seems to be an understatement. The Times article closes with an observation suggesting how drole Rubin has now become,
"Between college and law school, Mr. Rubin briefly lived on the Left Bank in Paris, spending hours at cafes that were frequented by Jean-Paul Sartre and Albert Camus. Like them, he says, he remains something of an existentialist.
“It’ll be what it will be, like everything in life.”
It's nice, when you've capped an already-impressive career with an essentially part-time job earning you more than $100MM over about a decade. To be so philosophical about presiding over Citi's $40BB in losses and dramatic loss of shareholder value, though, seems to me to border on reckless.
It's as if Rubin grew bored with the mechanics of 'managing' things and people, but relished the opportunity to pretend he was gambling at the tables at Monte Carlo, or maybe Rick's American Cafe in Cassablanca, with Citigroup shareholders' money. You can almost imagine him turning to Claude Rains after being wiped out on one spin of the roulette wheel, and wistfully intoning, as Rains laments Rubin's total loss of other people's money,
'It'll be what it will be, Claude, like everything in life.'
Friday, May 02, 2008
The Rockefeller Offspring Misunderstand the Oil Business
Wednesday's Wall Street Journal reported on the Rockefeller family's publicly calling on ExxonMobil to more actively invest in non-petroleum-based energy sources.
The article noted,
"The descendants of John D. Rockefeller -- the founder of Standard Oil, forerunner of today's Exxon Mobil Corp. -- are publicly calling on Exxon to change its corporate governance and take a hard look at the future of global energy supplies.
A majority of 300 adult members of the wealthy Rockefeller family, influential shareholders of Exxon, voted to support four shareholder resolutions at the company's annual meeting in late May. The proposals include urging the company to create an independent chairman post, cut greenhouse-gas emissions and examine whether Exxon should take a more active role in developing sustainable energy technologies.
While most of these issues have been raised before by shareholder activists, the addition of voices from the Rockefeller family, who are well known for supporting environmental causes, adds considerable weight to the calls for change. Several members of the family will be holding a news conference Wednesday to discuss their concerns about Exxon's direction."
Call me, well, sceptical, but isn't this all really beside the point? The Rockefeller family was directed to spin Standard Oil into pieces due to John D.'s overzealous competitive spirit. Not to mention business practices later seen as unfair.
ExxonMobil is now a public company. Isn't it the height of arrogance for the great-grandchildren of the company's founder to be dictating strategy to this very successful petroleum-based energy giant?
For the record, the Journal article notes,
"Rex Tillerson serves as both chief executive and chairman. Exxon management opposes all four resolutions.
According to people close to the family, the Rockefeller clan is generally pleased with Mr. Tillerson, who became chairman and chief executive in 2006 and has led Exxon, the largest U.S. company by market capitalization, to several quarters of record-breaking profit."
Indeed, as the nearby Yahoo-sourced price chart for ExxonMobil, BP, Chevron and the S&P500 Index demonstrates, ExxonMobil has outperformed the index and other majors over the timeframe from the 1970s to 2008. That's 38 years!
The Rockefeller family ought to be pleased with where Tillerson, his predecessor, Lee Raymond, and those before them led the largest shard of the once-unified Standard Oil Trust.
Then we read in the Journal piece,
"They are concerned Exxon's senior management has tunnel vision and is too absorbed with the challenges of daily management of multibillion dollar oil and natural-gas projects to ask hard questions about the future of fossil fuels. Mr. Tillerson and other Exxon executives have said they believe oil and gas will represent the vast majority of energy consumption for decades.
Ken Cohen, Exxon's vice president of public affairs, said senior management has held numerous meetings with Rockefeller members and disputes the view it isn't searching for new fuel sources. "We are focused on delivering the energy the world runs on today, reliably and safely and with a lower environment footprint. In addition, we are focused on research and development activity ... looking for the step-change breakthrough that would improve the economics of various alternatives."
Ms. Goodwin, co-director of an environmental research institute at Tufts University in Boston, is supporting a resolution calling on Exxon to set up a task force to examine the likely impact of global climate change and how Exxon could make a difference if it took "leadership in developing sustainable energy technologies." "
By now, on Friday morning, as I am writing this post, there have been several media responses similar to mine. The Journal published a fairly scathing editorial this morning calling the Rockefellers' demands into questions on several counts. Larry Kudlow and Joe Kernen of CNBC did the same last night and this morning.
I wrote this post in November of last year addressing this exact issue with respect to BP, a major competitor of ExxonMobil, and this one just this past February, addressing the changing dynamics of the oil industry.
To me, several themes seem relevant here.
First, of course, is the question of what would possibly give a group of inexperienced investors in ExxonMobil, who just happen to be descended from the company's founder, the gall and right to tell the current management how to run the company? None of these Rockefeller's have worked at ExxonMobil, or, it seems, anywhere in the oil sector. What gives them the basis to disenfranchise other, poorer shareholders and tell the company's management to run the firm according to the whims of the privileged offspring of the founder?
Isn't this precisely why Standard Oil was broken up in the first place? To dilute Rockefeller influence on the company?
Then there's the obvious alternative for the Rockefellers- sell their interest in the company and invest in some green energy enterprises elsewhere. Or start their own. Use their family's investment and venture capital arm to do this and let other shareholders continue to hold ExxonMobil while the latter is managed according to the judgment of its current CEO and his team.
Additionally, as I wrote in my BP post of last year, there's the question of why a current petroleum giant would have any particular advantage in wind or solar energy generation and transmission. It would seem that neither of these renewable energy sources share much of any technology with oil exploration, refining and distribution. Thus, it's a likely waste of shareholder resources for an oil firm to go chasing after other energy sources. This is precisely the type of mistake that Tillerson and his team should avoid, and prevent a small group of vocal environmentalists with an axe to grind, who happen to be the progeny of the company's founder, from forcing him to make, to the detriment of other shareholders.
Finally, there's Schumpeterian dynamics at work. As my February post noted, ExxonMobil is currently on the way to becoming more of a refiner and distributor of oil and its refined products, as it fails to find and own sufficient reserves to replace its recent production.
In the current environment of nationalistic lockups of oil reserves in the ground, it could well be that ExxonMobil pumps out its own petroleum assets, refines them and what it can buy on the open market, such as it will be, and perhaps even go out of business with one last large dividend, as its reason for being simply evaporates.
That's what happens to companies whose best operating environment and salient reason for being disappears. Then shareholders can use their proceeds to buy other equities which they feel may bring them consistently superior returns.
Why anyone thinks that ExxonMobil, in a return to its futile diversification of the 1970s, will have better luck this time as simply a rich investor in completely foreign technologies, is beyond me. But clearly, the Rockefeller kids don't understand this, and probably aren't even old enough to remember how Lee Raymond, Tillerson's predecessor, shut down those wasteful experiments thirty years ago.
And, by the way, among the Exxon Enterprise businesses were solar, with which I consulted, as part of the Wharton Applied Research Center team. It was a waste of time and money then. So were the many information services businesses which were supposed to replace oil-intensive activities in the new age of the 1980s and beyond.
Maybe some of these Rockefeller offspring should go back to school and learn some history about the last time their family founder's company tried the route for which they are now agitating.
The article noted,
"The descendants of John D. Rockefeller -- the founder of Standard Oil, forerunner of today's Exxon Mobil Corp. -- are publicly calling on Exxon to change its corporate governance and take a hard look at the future of global energy supplies.
A majority of 300 adult members of the wealthy Rockefeller family, influential shareholders of Exxon, voted to support four shareholder resolutions at the company's annual meeting in late May. The proposals include urging the company to create an independent chairman post, cut greenhouse-gas emissions and examine whether Exxon should take a more active role in developing sustainable energy technologies.
While most of these issues have been raised before by shareholder activists, the addition of voices from the Rockefeller family, who are well known for supporting environmental causes, adds considerable weight to the calls for change. Several members of the family will be holding a news conference Wednesday to discuss their concerns about Exxon's direction."
Call me, well, sceptical, but isn't this all really beside the point? The Rockefeller family was directed to spin Standard Oil into pieces due to John D.'s overzealous competitive spirit. Not to mention business practices later seen as unfair.
ExxonMobil is now a public company. Isn't it the height of arrogance for the great-grandchildren of the company's founder to be dictating strategy to this very successful petroleum-based energy giant?
For the record, the Journal article notes,
"Rex Tillerson serves as both chief executive and chairman. Exxon management opposes all four resolutions.
According to people close to the family, the Rockefeller clan is generally pleased with Mr. Tillerson, who became chairman and chief executive in 2006 and has led Exxon, the largest U.S. company by market capitalization, to several quarters of record-breaking profit."
Indeed, as the nearby Yahoo-sourced price chart for ExxonMobil, BP, Chevron and the S&P500 Index demonstrates, ExxonMobil has outperformed the index and other majors over the timeframe from the 1970s to 2008. That's 38 years!
The Rockefeller family ought to be pleased with where Tillerson, his predecessor, Lee Raymond, and those before them led the largest shard of the once-unified Standard Oil Trust.
Then we read in the Journal piece,
"They are concerned Exxon's senior management has tunnel vision and is too absorbed with the challenges of daily management of multibillion dollar oil and natural-gas projects to ask hard questions about the future of fossil fuels. Mr. Tillerson and other Exxon executives have said they believe oil and gas will represent the vast majority of energy consumption for decades.
Ken Cohen, Exxon's vice president of public affairs, said senior management has held numerous meetings with Rockefeller members and disputes the view it isn't searching for new fuel sources. "We are focused on delivering the energy the world runs on today, reliably and safely and with a lower environment footprint. In addition, we are focused on research and development activity ... looking for the step-change breakthrough that would improve the economics of various alternatives."
Ms. Goodwin, co-director of an environmental research institute at Tufts University in Boston, is supporting a resolution calling on Exxon to set up a task force to examine the likely impact of global climate change and how Exxon could make a difference if it took "leadership in developing sustainable energy technologies." "
By now, on Friday morning, as I am writing this post, there have been several media responses similar to mine. The Journal published a fairly scathing editorial this morning calling the Rockefellers' demands into questions on several counts. Larry Kudlow and Joe Kernen of CNBC did the same last night and this morning.
I wrote this post in November of last year addressing this exact issue with respect to BP, a major competitor of ExxonMobil, and this one just this past February, addressing the changing dynamics of the oil industry.
To me, several themes seem relevant here.
First, of course, is the question of what would possibly give a group of inexperienced investors in ExxonMobil, who just happen to be descended from the company's founder, the gall and right to tell the current management how to run the company? None of these Rockefeller's have worked at ExxonMobil, or, it seems, anywhere in the oil sector. What gives them the basis to disenfranchise other, poorer shareholders and tell the company's management to run the firm according to the whims of the privileged offspring of the founder?
Isn't this precisely why Standard Oil was broken up in the first place? To dilute Rockefeller influence on the company?
Then there's the obvious alternative for the Rockefellers- sell their interest in the company and invest in some green energy enterprises elsewhere. Or start their own. Use their family's investment and venture capital arm to do this and let other shareholders continue to hold ExxonMobil while the latter is managed according to the judgment of its current CEO and his team.
Additionally, as I wrote in my BP post of last year, there's the question of why a current petroleum giant would have any particular advantage in wind or solar energy generation and transmission. It would seem that neither of these renewable energy sources share much of any technology with oil exploration, refining and distribution. Thus, it's a likely waste of shareholder resources for an oil firm to go chasing after other energy sources. This is precisely the type of mistake that Tillerson and his team should avoid, and prevent a small group of vocal environmentalists with an axe to grind, who happen to be the progeny of the company's founder, from forcing him to make, to the detriment of other shareholders.
Finally, there's Schumpeterian dynamics at work. As my February post noted, ExxonMobil is currently on the way to becoming more of a refiner and distributor of oil and its refined products, as it fails to find and own sufficient reserves to replace its recent production.
In the current environment of nationalistic lockups of oil reserves in the ground, it could well be that ExxonMobil pumps out its own petroleum assets, refines them and what it can buy on the open market, such as it will be, and perhaps even go out of business with one last large dividend, as its reason for being simply evaporates.
That's what happens to companies whose best operating environment and salient reason for being disappears. Then shareholders can use their proceeds to buy other equities which they feel may bring them consistently superior returns.
Why anyone thinks that ExxonMobil, in a return to its futile diversification of the 1970s, will have better luck this time as simply a rich investor in completely foreign technologies, is beyond me. But clearly, the Rockefeller kids don't understand this, and probably aren't even old enough to remember how Lee Raymond, Tillerson's predecessor, shut down those wasteful experiments thirty years ago.
And, by the way, among the Exxon Enterprise businesses were solar, with which I consulted, as part of the Wharton Applied Research Center team. It was a waste of time and money then. So were the many information services businesses which were supposed to replace oil-intensive activities in the new age of the 1980s and beyond.
Maybe some of these Rockefeller offspring should go back to school and learn some history about the last time their family founder's company tried the route for which they are now agitating.
Commercial Bank Problems, CEO Firings, & Total Returns
Earlier this week, in Monday's Wall Street Journal, the paper's minority-owned analytic shop, breakingviews.com, made a big deal out of how Chuck Prince, Stan O'Neal and Marcel Ospel were kicked out of Citi, Merrill and UBS, respectively.
But the CEOs of badly performing WaMu, Countrywide, National City and RBS, the authors complained, remain in power.
What gives?
The article's authors say that the composition of these banks' boards tends to be local, and such familiarity breeds an unwillingness to fire the CEO.
Instead, I would opine that local business figures' presences on these boards explains the appalling lack of oversight and inability to feel sufficiently powerful to oust these CEOs. I would guess it's a case of the CEOs recruiting local businesspeople whom they can intimidate, influence and control. That is, it's much less a sense of social discomfort than feelings of inferiority and insecurity on the part of the carefully-chosen local business lapdogs.
But something else has already happened, and breakingviews, and we, should not overlook what it is.
Stock prices at these institutions are off big time. Some by more than 60% in a year, others by as much as 80%.
The important phenomenon, if you are like me, is already evident. Shareholders who finally had had enough simply sold the stock. Enough of them, relative to buyers, it appears, to push prices down so low as to create the large negative total returns over the last year.
Isn't this in itself a statement of capital markets efficiency? Sure, it doesn't speak well for 'corporate governance,' but I don't believe in that anyway. That's for Congress to legislate and some accounting firm to audit compliance thereto. It doesn't really affect the operations of these banks. And it never will.
The CEOs and senior management of these smaller, but well-known financial service firms still made bad risk decisions, lost tons of money and have therefore seen shareholders vote with their feet/dollars.
As to the CEOs? I don't think you're ever going to see the perfect corporate world where failing CEOs get axed, with loss of tremendous amounts of compensation, when their decisions go wrong.
That's fantasy. Not reality.
But the CEOs of badly performing WaMu, Countrywide, National City and RBS, the authors complained, remain in power.
What gives?
The article's authors say that the composition of these banks' boards tends to be local, and such familiarity breeds an unwillingness to fire the CEO.
Instead, I would opine that local business figures' presences on these boards explains the appalling lack of oversight and inability to feel sufficiently powerful to oust these CEOs. I would guess it's a case of the CEOs recruiting local businesspeople whom they can intimidate, influence and control. That is, it's much less a sense of social discomfort than feelings of inferiority and insecurity on the part of the carefully-chosen local business lapdogs.
But something else has already happened, and breakingviews, and we, should not overlook what it is.
Stock prices at these institutions are off big time. Some by more than 60% in a year, others by as much as 80%.
The important phenomenon, if you are like me, is already evident. Shareholders who finally had had enough simply sold the stock. Enough of them, relative to buyers, it appears, to push prices down so low as to create the large negative total returns over the last year.
Isn't this in itself a statement of capital markets efficiency? Sure, it doesn't speak well for 'corporate governance,' but I don't believe in that anyway. That's for Congress to legislate and some accounting firm to audit compliance thereto. It doesn't really affect the operations of these banks. And it never will.
The CEOs and senior management of these smaller, but well-known financial service firms still made bad risk decisions, lost tons of money and have therefore seen shareholders vote with their feet/dollars.
As to the CEOs? I don't think you're ever going to see the perfect corporate world where failing CEOs get axed, with loss of tremendous amounts of compensation, when their decisions go wrong.
That's fantasy. Not reality.
Thursday, May 01, 2008
Kerkorian & Buffett Are Back On The Investment Trail
The beginning of this week saw evidence of a return to big capital moves and investments capable of triggering later, or funding current megers.
First, Kirk Kerkorian has bought up just under 5% of Ford, with a tender, at a premium, for about as much additional equity in the firm.
Kerkorian, as you can read from my prior labelled posts, most recently this one, involving GM, has been around the auto maker investment track twice already. He triggered Chrysler's sale to Daimler, and fought unsuccessfully, through his emissary, Jerry York, to help GM retrench and deliver more shareholder value in a more timely manner.
My guess is that Kerkorian likes what he sees in Alan Mullaly's efforts at Ford, but correctly realizes that, on its own, Ford will never be a long term provider of consistently superior returns for shareholders. Thus, Kerkorian is probably positioning for either an exit at a 'local' top, before the stock price plunges again, or to participate in his J.P. Morgan-style sector-based investment banking activity by marrying Ford with Carlos Ghosn's Nissan.
Either way, I wouldn't bet against Kerkorian reaching his own investing objectives with Ford. And, for what it's worth, we learned this week that York has already met with Mulally to assure him of Kerkorian's support and satisfaction with his efforts to date at the automaker.
First, Kirk Kerkorian has bought up just under 5% of Ford, with a tender, at a premium, for about as much additional equity in the firm.
Kerkorian, as you can read from my prior labelled posts, most recently this one, involving GM, has been around the auto maker investment track twice already. He triggered Chrysler's sale to Daimler, and fought unsuccessfully, through his emissary, Jerry York, to help GM retrench and deliver more shareholder value in a more timely manner.
My guess is that Kerkorian likes what he sees in Alan Mullaly's efforts at Ford, but correctly realizes that, on its own, Ford will never be a long term provider of consistently superior returns for shareholders. Thus, Kerkorian is probably positioning for either an exit at a 'local' top, before the stock price plunges again, or to participate in his J.P. Morgan-style sector-based investment banking activity by marrying Ford with Carlos Ghosn's Nissan.
Either way, I wouldn't bet against Kerkorian reaching his own investing objectives with Ford. And, for what it's worth, we learned this week that York has already met with Mulally to assure him of Kerkorian's support and satisfaction with his efforts to date at the automaker.
Then we have Warren Buffett joining Mars to buy Wrigley. Due to Wrigley's relative scale deficiency, and the temporary stock price depression due to margin pressures caused by commodity price inflation, Mars moved quickly to secure this acquisition. By using Buffett, it avoided both a bidding war and the need for a protracted campaign to convince lenders to fund the acquisition.
Buffett is usually fairly astute at these sorts of deals, and probably, as a price for his participation, got nice terms, too.
So it would seem that large, sophisticated private investors are demonstrating that it's safe to go back to investing in companies and betting on longer term expansion and business health.
Hopefully, the more publicly-held segments of the financial services sector will be following soon, in a considered and intelligent fashion.
Wednesday, April 30, 2008
Recession? What Recession?
Well, it's official! This morning's first quarter GDP number is 0.6%.
As it happens, according to economist Brian Wesbury, who appeared on CNBC's Squawkbox to discuss the number, it is just where he forecast that it would fall.
So, let's see, it takes two negative quarters of GDP growth to define the economy as being 'in a recession.'
Fourth quarter of 2007's GDP change was positive. Now, so is the first quarter of this year.
No recession yet.
Wow! What about all the doomsayers and gloomsters, led by the two Democratic Presidential candidates?
I guess they are just plain wrong.
There were two other notable occurrences on the CNBC program this morning.
First, resident 'senior economic idiot' Steve Liesman tried to call Brian Wesbury a 'two-handed economist' and nearly had his head bitten off by the well-regarded economist. It was quite humorous, actually, watching an economics reporter try to tangle with a real economist with some actual academic training and experience.
The point at issue was Wesbury's contention that the Fed's interest rate moves had, indeed, goosed retail sales and overall spending, but that, since it also has stoked inflation, it has been a two-edged sword.
The other interesting exchange was between Wesbury and Diane Swonk, also a Chicago-based economist.
Diane agreed that economic data did not qualify the US as being in a recession. Then she immediately launched into a variety of 'soft' explanations and conjectures- income inequality, consumer confidence surveys, etc.- to allege that we really are in a recession.
Diane's specious logic and grasping at unproven, anecdotal, and, in the case of her allegation of greater changes in US income inequality, just plain wrong information, demonstrates why some people think there is a recession.
There's a reason why recessions are defined by a simple measure. That's because we define recessions by an output measure, or result, GDP change, not an input measure, or cause, such as consumer confidence, or incorrectly alleged incomes inequality or other soft data.
And now, this morning, we know the US is not in a recession.
As it happens, according to economist Brian Wesbury, who appeared on CNBC's Squawkbox to discuss the number, it is just where he forecast that it would fall.
So, let's see, it takes two negative quarters of GDP growth to define the economy as being 'in a recession.'
Fourth quarter of 2007's GDP change was positive. Now, so is the first quarter of this year.
No recession yet.
Wow! What about all the doomsayers and gloomsters, led by the two Democratic Presidential candidates?
I guess they are just plain wrong.
There were two other notable occurrences on the CNBC program this morning.
First, resident 'senior economic idiot' Steve Liesman tried to call Brian Wesbury a 'two-handed economist' and nearly had his head bitten off by the well-regarded economist. It was quite humorous, actually, watching an economics reporter try to tangle with a real economist with some actual academic training and experience.
The point at issue was Wesbury's contention that the Fed's interest rate moves had, indeed, goosed retail sales and overall spending, but that, since it also has stoked inflation, it has been a two-edged sword.
The other interesting exchange was between Wesbury and Diane Swonk, also a Chicago-based economist.
Diane agreed that economic data did not qualify the US as being in a recession. Then she immediately launched into a variety of 'soft' explanations and conjectures- income inequality, consumer confidence surveys, etc.- to allege that we really are in a recession.
Diane's specious logic and grasping at unproven, anecdotal, and, in the case of her allegation of greater changes in US income inequality, just plain wrong information, demonstrates why some people think there is a recession.
There's a reason why recessions are defined by a simple measure. That's because we define recessions by an output measure, or result, GDP change, not an input measure, or cause, such as consumer confidence, or incorrectly alleged incomes inequality or other soft data.
And now, this morning, we know the US is not in a recession.
A Refreshing View of Customer Service
Friday's Wall Street Journal carried an interesting review of the book "The Best Service is No Service," by Bill Price and David Jaffe. The book was reviewed by David A. Price.
I really loved this part of the review. It was very eye-opening, if not completely surprising. I can personally attest to receiving many post-sales or customer service event emails which, by their design, obscure the real issue and will serve no useful purpose, in my opinion, in helping the companies' managements truly understand what went wrong, if it was properly addressed, and how 'satisfied' I now am.
Think about that second italicized paragraph. Only managements which have virtually zero identification with the long term healthy growth of their companies could behave this way. Rather than consider how to use the customer contact to their companies' benefits, these managers look for ways to simply make the contacts go away or appear minimal.
Instead of these inept approaches to customer service, the authors draw on the experiences of one of them, Mr. Price, at Amazon, to suggest at least one better approach,
"The authors contrast these crude metrics with Amazon.com's focus on "CPX" – contacts per order, contacts per unit shipped, contacts per transaction and contacts per customer. In other words: Don't just ask how long it took to help the customer, ask how often the customer needed help and why. The goal is to avoid creating a need for a customer to contact the company in the first place."
I found this hint of the book's meatier parts very encouraging. These sound like great ideas for describing what is actually occurring in the post-sale information-gathering and expectation-management phase of the sale. The authors further describe some Amazon practices,
"In contrast with writers who offer platitudes so general as to be nearly useless ("Listen to the customer!"), Messrs. Price and Jaffe lay out specific recommendations. Among these: Hold weekly operations meetings to go over CPX scores. At Amazon.com, Mr. Price recounts of his tenure there, chief executive Jeff Bezos would often show up and join in the discussion. Teams would then work between meetings to zero in on "root causes" and solve problems. The authors also recommend charging the costs of customer support back to the product teams that created the need for it; make them feel the pain."
These, too, sound very useful. Especially fully-costing customer service back to the product group which engendered the need for the costs. The fact that Bezos would attend and participate in these meetings tells you that he felt, and wanted to communicate, how vital it was to fully understand and make use of customer service events. Not just to minimize them, but to understand what they told Amazon's managers about the actual provision of the initial products, and how to address whatever was going on that caused the need for the post-sales service activity.
I found this to be a thoroughly refreshing approach to customer service that harks back to the original marketing philosophy of creating long term customer value and company profitability. Rather than try to simply minimize the effects of product policies by reducing the cost of customer service, it just makes so much more sense to use the function as the information-rich opportunity it is to provide necessary feedback to a company's operating groups on how their efforts are ultimately perceived by their customers.
Being academically trained in marketing, I was interested in what the authors had to add on this important topic. After-sale experience by the customer is, of course, critically important for a number of reasons- rebuy probabilities and word-of-mouth advertising, to name just two.
Mr. Price begins his review by stating,
"In theory, we should be living in a golden age of customer support. Blogs and Web sites make it easier than ever for consumers to reward good service and punish bad. Companies, for their part, can avail themselves of sophisticated customer-service technology and, thanks to the rise of Indian call centers, less-expensive workers.
But reality hasn't seemed to follow theory. When calling an 800 number, we expect to find ourselves in voice-response hell. We dutifully follow instructions to key in a 10-digit policy number – only to be asked by the customer-service rep for the same darn number. Waiting on hold for 25 minutes? Well, that's what speakerphones are for. A simple email query languishes for days. When it comes to service, entire industries – cable-television operators, cellphone companies, airlines, health insurers – are regarded with the disdain once reserved for used-car dealers."
So true. Already we see that the authors correctly observe that many US companies use automation to cut the costs of customer service, as if it were some unwanted, but necessary function, like garbage removal. Thus, opportunities to use technology to wring more precious customer information from these contacts, as well as leave customers with a positive feeling toward the company and its brands, is irretrievably lost.
Price further reports that the authors define customer service narrowly and pragmatically,
"They consider customer service in its narrow sense of customer assistance – taking orders, answering help-desk questions, resolving complaints, handling billing inquiries. Mr. Price (the author, not the reviewer) is a former senior customer-service executive at Amazon.com, the company from which the book draws many of its most compelling positive examples."
The authors report how most businesses actually perceive and track the function,
Messrs. Price and Jaffe note that three-quarters of chief executives in an Accenture study believed that their firms provided "above average" service. Yet almost 60% of those same firms' customers were upset with their most recent service experience. Senior executives at most companies, the authors believe, are simply in the dark. "The standard across most service operations is to report and track how quickly things were done," they write, "not how well they were done or how often, or why they needed to be done at all.
Thus typical measures like "pickup within three rings" or "email response within 24 hours" hide more about customer service than they reveal. And the measuring is easily gamed. At one company where managers imposed a target "average handle time" (call time) of 12 minutes, phone calls miraculously shortened to just under 12 minutes: As the 12-minute mark approached, agents simply said whatever it took to get the caller off the phone. The call center at another company hit on the idea of reducing the number of phone lines so that excess callers simply got a busy signal – and went unmeasured."I really loved this part of the review. It was very eye-opening, if not completely surprising. I can personally attest to receiving many post-sales or customer service event emails which, by their design, obscure the real issue and will serve no useful purpose, in my opinion, in helping the companies' managements truly understand what went wrong, if it was properly addressed, and how 'satisfied' I now am.
Think about that second italicized paragraph. Only managements which have virtually zero identification with the long term healthy growth of their companies could behave this way. Rather than consider how to use the customer contact to their companies' benefits, these managers look for ways to simply make the contacts go away or appear minimal.
Instead of these inept approaches to customer service, the authors draw on the experiences of one of them, Mr. Price, at Amazon, to suggest at least one better approach,
"The authors contrast these crude metrics with Amazon.com's focus on "CPX" – contacts per order, contacts per unit shipped, contacts per transaction and contacts per customer. In other words: Don't just ask how long it took to help the customer, ask how often the customer needed help and why. The goal is to avoid creating a need for a customer to contact the company in the first place."
I found this hint of the book's meatier parts very encouraging. These sound like great ideas for describing what is actually occurring in the post-sale information-gathering and expectation-management phase of the sale. The authors further describe some Amazon practices,
"In contrast with writers who offer platitudes so general as to be nearly useless ("Listen to the customer!"), Messrs. Price and Jaffe lay out specific recommendations. Among these: Hold weekly operations meetings to go over CPX scores. At Amazon.com, Mr. Price recounts of his tenure there, chief executive Jeff Bezos would often show up and join in the discussion. Teams would then work between meetings to zero in on "root causes" and solve problems. The authors also recommend charging the costs of customer support back to the product teams that created the need for it; make them feel the pain."
These, too, sound very useful. Especially fully-costing customer service back to the product group which engendered the need for the costs. The fact that Bezos would attend and participate in these meetings tells you that he felt, and wanted to communicate, how vital it was to fully understand and make use of customer service events. Not just to minimize them, but to understand what they told Amazon's managers about the actual provision of the initial products, and how to address whatever was going on that caused the need for the post-sales service activity.
I found this to be a thoroughly refreshing approach to customer service that harks back to the original marketing philosophy of creating long term customer value and company profitability. Rather than try to simply minimize the effects of product policies by reducing the cost of customer service, it just makes so much more sense to use the function as the information-rich opportunity it is to provide necessary feedback to a company's operating groups on how their efforts are ultimately perceived by their customers.
Tuesday, April 29, 2008
Rare Common Sense: Continental Airline's Kellner
Continental Airlines shareholders should be very pleased to have such a sane, reasonable, pragmatic CEO in Larry Kellner. Succeeding Gordon Bethune on January 1, 2005, Kellner seems to have continued Continental's relatively good performance among other US airlines.
The nearby two-year price chart for Continental (CAL), UAL (UAUA), Delta (DAL), and Northwestern (NWA) and the S&P500 Index shows that, of a badly performing bunch, Kellner's Continental is the best. By a lot. His airline declined nearly 40%, which is bad, but much better than the other three, which all fell by nearly 60%.
Regarding the putative UAL merger, it was reported that Kellner explained,
“The best course for Continental is to not merge with another airline at this time,” Larry Kellner, chief executive, and Jeff Smisek, president, said in a message to employees. “The board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards.”How refreshing! Kellner avoided the temptation which so often sways CEOs- instantly growing larger - in favor of remaining in the best operating shape he can under currently difficult conditions.
All of the airlines have felt the effects of higher fuel costs, as portrayed in these additional Yahoo-sourced price charts for the past six and three month timeframes.According to the Wall Street Journal piece on the prospective merger with UAL, Continental's Kellner was
"obsessing over the calculations around synergies, the costs savings and revenue enhancements central to a merger."
The Journal also reported in Monday's edition that,
"Mr. Kellner has publicly questioned whether mergers would create service problems and labor tensions, and until recently said Continental preferred to remain independent."
Airline total return performance hasn't been a pretty picture of late- not for years, in fact. But at least Kellner's management team is sanguine about complicating an already tough situation by adding the difficulties of merging with another carrier, UAL, which isn't really even finished resolving all of its Chapter 11 issues.
It appears that Gordon Bethune performed well as CEO of Continental for so many years. He recruited and developed his successor, Kellner, in a manner that continued Bethune's own sense of restraint and focus on performance for shareholders, not just his own ego.
GE On The "Raging Bull"- What Don't They Get?
I have received quite a few visits from this referring site lately. Evidently, due to my posts over the past several years regarding GE, its current CEO, Jeff Immelt, and the man who selected him for this role, retired GE CEO Jack Welch, some of the denizens of this stock message board found my blog and those related posts.
Over the past few months I would see this referring URL occasionally. However, with the recent frenzy over GE's missed earnings number, Jack Welch's comments on the event, my appearance on Bill O'Reilly's program dealing with GE, Immelt and Iran, and the company's recent annual meeting, the number of visits from this message board have picked up in frequency.
Here is what the latest linked page of comments between various posting readers on the message board says (my emphasis in bold),
"Your post got me thinking about a link that I posted not too long ago. It is "The Reasoned Sceptic". I will add the link a little further on. When GE went down, I thought The Reasoned Sceptic would do a writeup on GE/Immelt/Welch. Think I checked too soon after 4/11/2008 and found nothing new. With your post, I checked The Reasoned Sceptic today and found some rather interesting and uncomplimentary information about GE/Immelt/Welch. When you go to the link, scroll down the right side and look for these listings:
GE (25 writeups)
Immelt (19 writeups)
Jack Welch (5 writeups)
- The writeups at The Reasoned Sceptic, the last time I linked to the site, sounded believable. With GE coasting along, you might not really know what to believe about GE. With the miss by GE the writeups seem to have more weight! - The newer writeups were also troubling. You will have to go to the link and do some reading...you really do not want me to explain...this post may get long as it is. It will take some time...but worth reading. As Naz mentioned, read when you get your coffee or tea or whatever you like on the weekends.
- After reading "The Reasoned Sceptic", looking at the YAHOO chart of the GE/funds and the Excel chart of data...here are some thoughts on GE:
1. GE is in a predicament for this year. What will happen if GE "does not" do better than the S&P 500 or get back to last year closing price of $37.07? GE "just might" be the best place to be this year?
2. You would expect Jeff and the board to be pulling out all the stops to make GE move. If not, GE will come under much "greater" pressure! No excuses will fly this year if the market goes up and GE does not!
3. "IF" GE does well this year, maybe Jeff will save his job for another few years? If a CEO change is going to happen, it will take some time. For now, expect GE to continue in its current form.
4. If GE were to finally break up its current structure, "that" will also take some time. Whatever "might" happen to GE, you are looking at one to two years... All depends on how high Jeff can make GE jump this year...in more ways than one.
5. GE is moving very well as of Friday! They lag the market and need to first "catch up" to the market. After that, will GE continue to $42.12 like last year or better? GE needs to make a statement this year and finish with a "BANG"...and I do not mean Jack with the "gun"...then again...
6. It is easy to follow GE on the YAHOO chart with the five funds. I have added all the funds from the GE 401K for more detail and they all are "index funds" or represent the market. GE needs to mix with the funds or "lead" some...if not all going forward.
7. GE has not really been strong through the middle of the year...and last year is questionable to me. It does try to finish the year up. Will there be a run up from here going forward or a year end run up? Just have to look each day!!!
Hope all the links work and "don't" miss "THE REASONED SCEPTIC". May "rattle your cage" on GE, but says a lot that slowly got to me over the years. As mentioned, GE is just a choice...that I have not used very often. It would be a surprise to see GE do very little this year... Look at the links and do some reading. Any and all information on GE is a help if you are in GE or plan to be in GE. "
Here's what I don't understand.
First, how can these readers use terms like 'sounds believable,' or 'interesting and uncomplimentary information,' and 'may rattle your cage on GE?'
All of my posts are based on real performance numbers in the market- total returns and/or price changes of GE, the S&P500, or United Technologies. None use forward-estimates.
One or two have used GE fundamental information from its income statement, in order to compare its performance with benchmarks from my own proprietary research, as well as with the S&P500.
Of course, I do include Immelt's compensation numbers from the Wall Street Journal and, on perhaps one or two occasions, Forbes.
What's not to believe? And be upset? Why? It is what it is. GE has performed badly for shareholders under Immelt, who has been paid more than $20MM in cash, plus another $100MM or more in deferred compensation, and there's just no getting away from that fact.
Second, in what alternative universe are these 'investors' living? They write comments about Immelt and the board really having to 'pull out all the stops,' or makeup in one year for all of Immelt's prior mediocre performance. They toss numbers which I assume are hypothetical GE stock prices around like they have magical properties. As if Immelt or the board can make the buyers and sellers of the company's stock arrive at some magic number, to the penny.
As if, indeed.
Finally, these people chat about GE stock like it's the only investment vehicle in the world. For God's sake, people, have any of you heard of the S&P500?
Quit wasting your time kvetching about the stock of some low-growth industrial conglomerate has-been, and, if nothing else, go put your money into the S&P. On the basis of nearly seven years of data, chances are you'll earn a better total return there than in Immelt's GE.
But, what do I know? I just stick to the numbers and write about what I see.
Over the past few months I would see this referring URL occasionally. However, with the recent frenzy over GE's missed earnings number, Jack Welch's comments on the event, my appearance on Bill O'Reilly's program dealing with GE, Immelt and Iran, and the company's recent annual meeting, the number of visits from this message board have picked up in frequency.
Here is what the latest linked page of comments between various posting readers on the message board says (my emphasis in bold),
"Your post got me thinking about a link that I posted not too long ago. It is "The Reasoned Sceptic". I will add the link a little further on. When GE went down, I thought The Reasoned Sceptic would do a writeup on GE/Immelt/Welch. Think I checked too soon after 4/11/2008 and found nothing new. With your post, I checked The Reasoned Sceptic today and found some rather interesting and uncomplimentary information about GE/Immelt/Welch. When you go to the link, scroll down the right side and look for these listings:
GE (25 writeups)
Immelt (19 writeups)
Jack Welch (5 writeups)
- The writeups at The Reasoned Sceptic, the last time I linked to the site, sounded believable. With GE coasting along, you might not really know what to believe about GE. With the miss by GE the writeups seem to have more weight! - The newer writeups were also troubling. You will have to go to the link and do some reading...you really do not want me to explain...this post may get long as it is. It will take some time...but worth reading. As Naz mentioned, read when you get your coffee or tea or whatever you like on the weekends.
- After reading "The Reasoned Sceptic", looking at the YAHOO chart of the GE/funds and the Excel chart of data...here are some thoughts on GE:
1. GE is in a predicament for this year. What will happen if GE "does not" do better than the S&P 500 or get back to last year closing price of $37.07? GE "just might" be the best place to be this year?
2. You would expect Jeff and the board to be pulling out all the stops to make GE move. If not, GE will come under much "greater" pressure! No excuses will fly this year if the market goes up and GE does not!
3. "IF" GE does well this year, maybe Jeff will save his job for another few years? If a CEO change is going to happen, it will take some time. For now, expect GE to continue in its current form.
4. If GE were to finally break up its current structure, "that" will also take some time. Whatever "might" happen to GE, you are looking at one to two years... All depends on how high Jeff can make GE jump this year...in more ways than one.
5. GE is moving very well as of Friday! They lag the market and need to first "catch up" to the market. After that, will GE continue to $42.12 like last year or better? GE needs to make a statement this year and finish with a "BANG"...and I do not mean Jack with the "gun"...then again...
6. It is easy to follow GE on the YAHOO chart with the five funds. I have added all the funds from the GE 401K for more detail and they all are "index funds" or represent the market. GE needs to mix with the funds or "lead" some...if not all going forward.
7. GE has not really been strong through the middle of the year...and last year is questionable to me. It does try to finish the year up. Will there be a run up from here going forward or a year end run up? Just have to look each day!!!
Hope all the links work and "don't" miss "THE REASONED SCEPTIC". May "rattle your cage" on GE, but says a lot that slowly got to me over the years. As mentioned, GE is just a choice...that I have not used very often. It would be a surprise to see GE do very little this year... Look at the links and do some reading. Any and all information on GE is a help if you are in GE or plan to be in GE. "
Here's what I don't understand.
First, how can these readers use terms like 'sounds believable,' or 'interesting and uncomplimentary information,' and 'may rattle your cage on GE?'
All of my posts are based on real performance numbers in the market- total returns and/or price changes of GE, the S&P500, or United Technologies. None use forward-estimates.
One or two have used GE fundamental information from its income statement, in order to compare its performance with benchmarks from my own proprietary research, as well as with the S&P500.
Of course, I do include Immelt's compensation numbers from the Wall Street Journal and, on perhaps one or two occasions, Forbes.
What's not to believe? And be upset? Why? It is what it is. GE has performed badly for shareholders under Immelt, who has been paid more than $20MM in cash, plus another $100MM or more in deferred compensation, and there's just no getting away from that fact.
Second, in what alternative universe are these 'investors' living? They write comments about Immelt and the board really having to 'pull out all the stops,' or makeup in one year for all of Immelt's prior mediocre performance. They toss numbers which I assume are hypothetical GE stock prices around like they have magical properties. As if Immelt or the board can make the buyers and sellers of the company's stock arrive at some magic number, to the penny.
As if, indeed.
Finally, these people chat about GE stock like it's the only investment vehicle in the world. For God's sake, people, have any of you heard of the S&P500?
Quit wasting your time kvetching about the stock of some low-growth industrial conglomerate has-been, and, if nothing else, go put your money into the S&P. On the basis of nearly seven years of data, chances are you'll earn a better total return there than in Immelt's GE.
But, what do I know? I just stick to the numbers and write about what I see.
Monday, April 28, 2008
Nelson Pelz Buys Wendy's
Last August, I wrote this post on the occasion of a Wall Street Journal piece about the decline of Wendy's, the fast food purveyor.
In that post, I concluded with these sentiments,
"The fact is, from a business history perspective, Wendy's had to slow at some point. It was Dave Thomas' passionate creation, and was inevitably destined to either grow too large, or miss some market trend. Companies don't grow forever. Changes in management, especially the loss of a gifted, passionate, insightful CEO, can cause irreparable damage.
If anyone should have had the sense to realize that Wendy's was finished as they once knew it, with Thomas' death, it should have been his family. Odds are, Nelson Pelz is more realistic about Wendy's than the family or its management. He realizes that it now is probably worth more in pieces.
A little perspective, and a lot less emotion, might have saved all the actors in this drama some grief, energy, time and money. Wendy's was destined to falter after the loss of Thomas, without some equally-passionate, experienced leader. Certainly, a relative newcomer, and an accountant, at that, wasn't going to be going toe to toe with McDonalds and winning. Or with Nelson Pelz, for that matter.
Sometimes, it's better to simply acknowledge change and get it over with."
This past week's announcement that Nelson Pelz had finally purchased the struggling firm elicited cries of outrage from Thomas' family.
Yet, it's a good bet that Pelz can do for the firm's shareholders what Kerrii Anderson never did in her more than five years as CEO after Thomas' death.
Much like Carl Icahn, Pelz is a fixer who puts his money where his mouth is. Shareholders should be happy at his arrival in their midst. Chances are, he'll get things moving to increase shareholder value in a business where management has gone to sleep.
As the nearby five-year price chart for Wendy's and the S&P500 Index clearly shows, Wendys' shareholders have not enjoyed the past half-decade. They missed out on a 50% rise in the index, and suffered a drop of about 10% in value instead.
But that's perhaps not the worst of the story.
By operating Arbys and Wendy's under one corporate roof, Pelz may get some economies of scale and leverage the business sense of his management team from Triarc about how to run a smallish fast food company in this era.
As much as Dave Thomas loved the company he created, and took public in 1976, the nearby look at Wendy's versus the S&P500 index from 1993 shows that Wendy's has only ever had a brief period of superior performance. That was twenty years ago, for a little less than three years. Then twice more, in 2002 and 2006, the cumulative price performance of the stock brought it briefly equal to the S&P.
That's a pretty small window of time for shareholders to have been fortunate to be holding the stock and enjoy a better return from it than from merely holding the more-diversified S&P500.
Rather than share the sentiment of Pam Farber, Dave Thomas' daughter, who, according to the Journal,
"...owns 33 Wendy's restaurants in Ohio with her four siblings," and said "It's just awful,"
of Pelz' acquisition, I believe this is the best hope shareholders and franchisees of the long-suffering, lagging burger chain have had in the last six years.
In that post, I concluded with these sentiments,
"The fact is, from a business history perspective, Wendy's had to slow at some point. It was Dave Thomas' passionate creation, and was inevitably destined to either grow too large, or miss some market trend. Companies don't grow forever. Changes in management, especially the loss of a gifted, passionate, insightful CEO, can cause irreparable damage.
If anyone should have had the sense to realize that Wendy's was finished as they once knew it, with Thomas' death, it should have been his family. Odds are, Nelson Pelz is more realistic about Wendy's than the family or its management. He realizes that it now is probably worth more in pieces.
A little perspective, and a lot less emotion, might have saved all the actors in this drama some grief, energy, time and money. Wendy's was destined to falter after the loss of Thomas, without some equally-passionate, experienced leader. Certainly, a relative newcomer, and an accountant, at that, wasn't going to be going toe to toe with McDonalds and winning. Or with Nelson Pelz, for that matter.
Sometimes, it's better to simply acknowledge change and get it over with."
This past week's announcement that Nelson Pelz had finally purchased the struggling firm elicited cries of outrage from Thomas' family.
Yet, it's a good bet that Pelz can do for the firm's shareholders what Kerrii Anderson never did in her more than five years as CEO after Thomas' death.Much like Carl Icahn, Pelz is a fixer who puts his money where his mouth is. Shareholders should be happy at his arrival in their midst. Chances are, he'll get things moving to increase shareholder value in a business where management has gone to sleep.
As the nearby five-year price chart for Wendy's and the S&P500 Index clearly shows, Wendys' shareholders have not enjoyed the past half-decade. They missed out on a 50% rise in the index, and suffered a drop of about 10% in value instead.
But that's perhaps not the worst of the story.
By operating Arbys and Wendy's under one corporate roof, Pelz may get some economies of scale and leverage the business sense of his management team from Triarc about how to run a smallish fast food company in this era.
As much as Dave Thomas loved the company he created, and took public in 1976, the nearby look at Wendy's versus the S&P500 index from 1993 shows that Wendy's has only ever had a brief period of superior performance. That was twenty years ago, for a little less than three years. Then twice more, in 2002 and 2006, the cumulative price performance of the stock brought it briefly equal to the S&P.
That's a pretty small window of time for shareholders to have been fortunate to be holding the stock and enjoy a better return from it than from merely holding the more-diversified S&P500.
Rather than share the sentiment of Pam Farber, Dave Thomas' daughter, who, according to the Journal,
"...owns 33 Wendy's restaurants in Ohio with her four siblings," and said "It's just awful,"
of Pelz' acquisition, I believe this is the best hope shareholders and franchisees of the long-suffering, lagging burger chain have had in the last six years.
Sunday, April 27, 2008
Immelt's Defense At The GE Annual Meeting
It's amazing how long Immelt is able to continue fooling his shareholders and board, isn't it?
The guy just makes Ronald Reagan's 'teflon President' image look like a piker by comparison.
On Thursday, the Wall Street Journal published and article entitled "CEO Defends GE'S Strategy Again."
General Electric Co. Chief Executive Jeff Immelt mounted a spirited defense of the conglomerate's business model, just two weeks after presiding over disappointing earnings that prompted the biggest one-day selloff in its shares in 20 years.
Speaking during the company's annual meeting, Mr. Immelt said both he and GE deserved the "tough criticism" they have received in the wake of the stumble. But he was adamant that GE is on the right path.
The executive has spent much of the past two weeks defending his management and rebuffing calls for a radical overhaul of far-flung business operations.......he described himself as "a complete believer in our company and our strategy."
Not everyone in the audience at the meeting in Erie, Pa., agreed with that conclusion. "Maybe it's time for a change" at the company's helm, said Gary Postlewaite, an Erie resident and GE employee who attended the meeting. "Maybe it's time to let somebody else have a shot."
Mr. Immelt took pains to dispel the notion that his confidence in the business model means he is standing pat. He said he has been an advocate of shedding underperforming business units and adding new ones deemed to have promise.
He noted that GE has exited businesses with $50 billion of annual revenue over the past few years, including the sale of its plastics division and insurance operations. He also said it is serious about cost-cutting, and he announced that it has increased its estimate for 2008 expense reductions to $3 billion, from $2 billion.
GE has blamed its first-quarter earnings -- in which net income fell 5.8% to $4.3 billion, well short of expectations -- largely on the credit crisis. Mr. Immelt said GE will look to reduce its exposure to some of the most volatile parts of the financial-services sector."
As I wrote in this recent post comparing the better-performing United Technologies with GE,
"So, as long as twenty years ago, UT began to pull back from the sprawl created by Harry Gray's reign. It now epitomizes the notion of a large, multi-business company focused on common customers and technologies throughout its units.
The company's name seems to now aptly describe it.
Contrast this with GE's more sprawling, less-related businesses: appliances, aviation, consumer electronics, electrical products, consumer & business finance, healthcare, lighting, media, oil & gas, rail, security, and water.
All conglomerates are not alike. The most diversified, financially-oriented US conglomerates of forty-plus years ago are long gone. Of the two remaining entities of this type, it's clear that the more focused, less-diversified one, UT, has handily and steadily outperformed its more famous counterpart, GE."
So it's ironic that Immelt is proud of his rapid shuffling of businesses, as if merely buying and selling the right ones will magically propel the company to consistently superior total returns.
In contrast, UT has held pretty much the same portfolio of businesses for twenty years, but improved productivity and generated new products and services within them.
Immelt truly just does not get it. And at something in the neighborhood of $20MM total compensation per year for over six years, that's a very expensive shame for GE's board members and shareholders.
The guy just makes Ronald Reagan's 'teflon President' image look like a piker by comparison.
On Thursday, the Wall Street Journal published and article entitled "CEO Defends GE'S Strategy Again."
According to the Journal,
General Electric Co. Chief Executive Jeff Immelt mounted a spirited defense of the conglomerate's business model, just two weeks after presiding over disappointing earnings that prompted the biggest one-day selloff in its shares in 20 years.
Speaking during the company's annual meeting, Mr. Immelt said both he and GE deserved the "tough criticism" they have received in the wake of the stumble. But he was adamant that GE is on the right path.
The executive has spent much of the past two weeks defending his management and rebuffing calls for a radical overhaul of far-flung business operations.......he described himself as "a complete believer in our company and our strategy."
Not everyone in the audience at the meeting in Erie, Pa., agreed with that conclusion. "Maybe it's time for a change" at the company's helm, said Gary Postlewaite, an Erie resident and GE employee who attended the meeting. "Maybe it's time to let somebody else have a shot."
Mr. Immelt took pains to dispel the notion that his confidence in the business model means he is standing pat. He said he has been an advocate of shedding underperforming business units and adding new ones deemed to have promise.
He noted that GE has exited businesses with $50 billion of annual revenue over the past few years, including the sale of its plastics division and insurance operations. He also said it is serious about cost-cutting, and he announced that it has increased its estimate for 2008 expense reductions to $3 billion, from $2 billion.
GE has blamed its first-quarter earnings -- in which net income fell 5.8% to $4.3 billion, well short of expectations -- largely on the credit crisis. Mr. Immelt said GE will look to reduce its exposure to some of the most volatile parts of the financial-services sector."
As I wrote in this recent post comparing the better-performing United Technologies with GE,
"So, as long as twenty years ago, UT began to pull back from the sprawl created by Harry Gray's reign. It now epitomizes the notion of a large, multi-business company focused on common customers and technologies throughout its units.
The company's name seems to now aptly describe it.
Contrast this with GE's more sprawling, less-related businesses: appliances, aviation, consumer electronics, electrical products, consumer & business finance, healthcare, lighting, media, oil & gas, rail, security, and water.
All conglomerates are not alike. The most diversified, financially-oriented US conglomerates of forty-plus years ago are long gone. Of the two remaining entities of this type, it's clear that the more focused, less-diversified one, UT, has handily and steadily outperformed its more famous counterpart, GE."
So it's ironic that Immelt is proud of his rapid shuffling of businesses, as if merely buying and selling the right ones will magically propel the company to consistently superior total returns.
In contrast, UT has held pretty much the same portfolio of businesses for twenty years, but improved productivity and generated new products and services within them.
Immelt truly just does not get it. And at something in the neighborhood of $20MM total compensation per year for over six years, that's a very expensive shame for GE's board members and shareholders.
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