Ken Lewis Resigns!

It's official! Ken Lewis announced yesterday that he will resign...err.....retire.....at the end of this year.

This has touched off a huge debate all morning long on CNBC regarding Lewis' legacy and merit. Due to co-anchors Becky Quick and Joe Kernen being absent, this unfortunately left resident idiot Steve Liesman free to run at the mouth about more things about which he knows far too little.

But perhaps the best exchange was very early in the morning, before 7AM, when longtime bank analyst Dick Bove fenced with another banking sector pundit over Lewis' merits.

Bove, ever the apologist and cheerleader for all things banking, championed Lewis as the architect of the current BofA.

His opponent, a large BofA institutional shareholder, more correctly noted that former NationsBank CEO Hugh McColl was primarily responsible for assembling the bulk of BofA, including the merger with that formerly California-based bank in 1988.

Bove claimed the shareholder was factually in error, but, from what I heard, Bove was the one who had his facts wrong.

The nearby price chart for BofA, Chase, Citigroup and the S&P500 Index provides some assistance in assessing Lewis' performance.

What's interesting to me is that, over the 20+ year period shown, from 1985-present, BofA has rarely consistently outperformed the Index. In fact, as I expected, only Citi, briefly, actually outperformed on a consistent basis.

By the time Lewis took over BofA in 2001, the bank had actually underperformed the S&P since 1985. The price trajectory under Lewis was pretty flat, if slightly upward, mostly mirroring the S&P, until, of course, last year.

Certainly, nothing in BofA's share price performance suggests Lewis did an exemplary job as CEO, Bove's sputtering to the contrary.

The apparent hot topic of discussion regarding Lewis' departure is whether the board conspired to bring it about. If they didn't, why not?

Lewis' murky behavior in last year's purchase of Merrill Lynch, for which he overpaid with his shareholders' money, then failed to inform them of material facets of the deal, would be sufficient to have dismissed him. It doesn't help that Lewis has gone on to tell different things to different audiences regarding who told him to do what during that deal.

If Lewis had led BofA to a clearly consistently superior total return performance during his eight years at the helm of the bank, this debate might be understandable. But he didn't.

Xerox Apes Dell & Bids On A Service Provider

Earlier this week, a big business story was Xerox's bid to buy services provider Affiliated Services Corp.

This CanWest website reported the Xerox bid as follows,

"The mergers and acquisitions race is warming up. Xerox, the world's biggest producer of high-speed printers, said Monday it is bidding $6.4 billion U.S. for Affiliated Computer Services Inc. in an effort to expand into document services.

Xerox values ACS at $63.11 a share or a premium of 33 per cent over Friday's market close. "It's a game change for Xerox and the deal will provide stronger revenue and earnings growth," said Xerox's CEO Ursula Burns. It will triple its services revenue to $10 billion U.S. annually, she added,

ACS is the biggest supplier of managed services to the U.S. government and as an outsourcer operates in the telecoms, healthcare, education and retailing sectors. The merger offers annual synergies up to $400 million U.S. for the first three years.

Xerox offers $18.60 cash and 4.935 Xerox shares for each ACS share. The deal closes early in 2010 and CEO Lynn Blodgett will continue to run ACS."

Xerox currently has about $1.2B in cash on its balance sheet. By my arithmetic, they are offering about $1.8B in cash, the balance in Xerox equity.

When I read this story, I immediately thought of the recent Dell acquisition, at an outrageous premium north of 50%, of Perot Systems. I wrote in that post,

"Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.

Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.

There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.

Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. "

I think Ursula Burns is doing the same thing. Mind you, as I wrote here, in May, I'm not exactly wowed by her to begin with. I wrote,

"Ann Mulcahy, CEO of Xerox, is retiring. Replacing her will be Ursula Burns. Who cares?

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

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

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

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

At least Burns isn't paying over 50% too much for ACS. It's only about 33% over current market value. Yikes!

You cannot tell me that Xerox shareholders would not have been better off to have received a $1B cash distribution, borrowed or used other funds, and bought ACS shares at the market.

As I asked in the Dell case, just what are Burns and Xerox going to do for ACS that it hasn't or can't do for itself?

As the nearby 5-year price chart for Xerox, ACS and the S&P500Index shows, the acquired firm has done a much better job of at least matching the S&P than Xerox has.

Other than cash, what can Burns hope to provide ACS? Schumpeterian dynamics have more or less shut the door on Xerox's days of consistent market-outperformance. So Burns' answer is to squander shareholder value on a better-run company, at a huge premium?

Looking at the past two years' performances of the same three- Xerox, ACS and the S&P500- the next chart illustrates that ACS managed to ride out the recent economic turbulence surprisingly well. Much better than the management of Xerox.

But how does this justify Burns throwing her shareholders' money at ACS? On this basis alone, she should be fired by the board.

After all, look at this second price chart. On Monday, the day the deal was announced, Xerox's price quickly lost about 20%, ending Tuesday still down 15%. ACS mirrored this in picking up similar percentages, indicating investors viewed the deal much as I do- a mistake for Xerox, a bonanza for ACS.

Whether ACS is a growth firm, and better managed than Xerox, is beside the point. There's nothing special that the two firms couldn't do via a marketing agreement, without the expensive premium. This deal is simply a way for Burns to guarantee herself a job by buying a better firm with her shareholders' money. But it won't make Xerox's core businesses any better, for the same reasons Perot Systems cannot magically stuff Dell products into each of its customer engagements. That is, if Dell wasn't a good alternative before, it's no better just because they are owned by the same firm. That's true for Xerox and ACS, as well.

No, this is yet another pointless acquisition of a decent company by a corporate has-been.

About Extractive Industries: Peter Maass' Book "Crude World"

Last Wednesday's Wall Street Journal had a fascinating review of "Crude World," a book about the oil industry by Peter Maass.

Robert D. Kaplan, the reviewer, provides a very clear sense of what is newly observed in Maass' book. That is, as Kaplan writes,

"Oil, corrupts, Mr. Maass says, because it is an "extractive" industry. The computer business and other industries actually design and produce something, but oil is simply taken out of the ground. Thus power lies in the hands of the king, dictator or prime minister who controls the real estate and with whom all sorts of unsavory deals can be struck. Extractive industries "do most of their business in compromise-inducing countries," Mr. Maass explains. "The problem is not that extractive industries have lower principles than other industries. The problem is that they must have better principles"- something that shareholders do not necessarily encourage. Because the number of oil fields on the planet is finite, and the oil in many of them is difficult to extract, the industry is governed by a zero-sum and aggressive realism of the bleakest sort." "

For me, it's a very illuminating statement of fact that I confess to not having understood prior to reading Mr. Kaplan's review.

Elsewhere in his review, Kaplan relates Maass' observations that "Oil, he seems to say, exaggerates the worst human tendencies." By that, he means the rulers of oil-rich countries confiscate the wealth for themselves, leaving most of their countries' citizens to starve. As an example, Kaplan notes that Nigeria has earned $400 billion from oil, but 9 out of 10 Nigerians live on "less than $2 a day, and one out of five children dies before his fifth birthday."

It certainly explains why oil multi-nationals come under such heavy fire for ethics issues and producing wealth that somehow never benefits the entire countries from which they extract the oil. The same, of course, seems to go for basic mining companies, as well.

This is a fascinating aspect of the structure for extractive industries that I hadn't really grasped before. No matter what the scale of competitors, and it usually evolves to few and massive, the behaviors always seem to end up the same. And now Mr. Maass has explained why.

3Q Profit Expectations & The Economy

Yesterday's Wall Street Journal's Money & Investing section featured a lead article concerning third quarter performances of US companies, entitled "Profits Poised to Surprise Again."


To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.

First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.

Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.

Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.

Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.

Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.

All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.

What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.

It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?

Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.

Peter Kann's Thoughts On Newspapers

This past weekend's Wall Street Journal carried an extended editorial by the chairman of Dow Jones, part of NewsCorp, Peter Kann. Kann is a longtime Journal man, and his editorial contains so much historical perspective on the sector that it almost qualifies as an in-depth strategy piece.

Pity, really, because that sort of piece is almost nonexistent in today's Journal, post-Murdoch.

But, I digress.

The headline of Kann's article, "Quality Reporting Doesn't Come Cheap," has, as its main purpose, to belatedly lecture all of us on how the demise of newspapers will hurt society, because no other entity reports raw news anymore of similar "quality."

Kann meanders through the past, noting how newspapers were advised by "bright young managers" to give away electronic copies of their print editions. Long story very short, in a decade, print circulation fell disastrously, without an offsetting revenue stream from online sites.

Kann is quick to note that the Wall Street Journal, alone among US newspapers, has always charged for access to its online paper, beyond the day it is published, and ruminates that, perhaps if the NY Times, Washington Post, and a few others, had gone along with this, the entire industry would have followed, and they'd all be in great shape now.

But these passages, near the closing, reveal Kann's emotionally-tilted "analysis,"

"The reason any of this matters has little to do with the plight of newspaper publishers or even with the future of newspapers. The real threat is to the future of news—informative, relevant, reliable news of the wider world around us. And that is disappearing as newspapers, whose reporting staffs still produce most of the news, no longer can afford to do so. As their news budgets and staffs continue to shrink, the key question is what can fill that gap?

Television does not begin to fill it. To the extent broadcast networks ever tried they now have abdicated to so-called cable news channels. These, in turn, now devote most of their resources to covering celebrities, crimes and sundry social trivia and to prime-time programming that pretends to be analysis and informed opinion while mostly offering the spectacle of extremist heads yelling at each other. There are few resources and even less commitment to covering significant news beyond floods and fires.

The Internet is not filling news vacuums either. There are hundreds upon hundreds of online sites and blogs that claim to provide news, but virtually none of them even pretend to pursue the traditional news role of newspapers, which is to invest in professional staffs dispersed around a community and across the country or the globe to cover, analyze, and only then comment on, events. Actually, all they do is comment.

As to all the free online editions of our newspapers, their business model does not begin to cover the cost of significant news reporting. So the online editions with growing audiences—largely cannibalized from print audiences—rely on the poor print editions for almost all the news they give away.

Sadly, there is less and less of that, and the ultimate loser, of course, is the public."

I actually don't agree with Kann's diagnosis of cable news. On national topics, it is more timely and possessing of greater impact than print journalism. As I wrote about a year and a half ago, on the occasion of NewsCorp's purchase of Dow Jones,

"The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.

What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.

The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.

No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities."

Print media simply can't deliver the same punch that a live cam feeding a cable news channel's programming, then residing on its website, can. Nobody said newspapers can't continue to serve a very local function in society. But in the era of ubiquitous cable news, YouTube, video on cell phones, and the internet, print just can't compete on national news stories. And if it has superior opinion and analytical pieces, then it has value, and product, but it's not news reporting.

However, earlier in his piece, Kann slipped this little nugget in,

"If publishers were at fault here for chasing ever larger audiences, editors and even reporters all too often were complicit. The list of modern journalistic flaws and failings is long, but surely includes the blurring of traditional lines between news and opinion and news and entertainment, predatory pack journalism, an undue emphasis on conflict rather than context, pessimism and cynicism (as differentiated from appropriate skepticism and criticism), social orthodoxy, elitism, flea-like attention spans, and more. Yes, the traditional newsprint medium was becoming less appealing, but its messages also were becoming less enlightening."

As a business person and strategist, once I read that paragraph, the rest of Kann's editorial became largely moot.

You see, what Kann unwittingly did, with these admissions, is essentially prove that poor management led to print news' downfall. The publishers made bad revenue strategy choices. The editors got carried away slanting the news, dumbing it down, and treating their customers as if they were morons.

Now, they complain that, having gutted their own product of much of its past value, nobody will pay for it.

Well, boo-hoo, Peter. You print guys did it to yourselves, and you got what you deserved. Newspapers are dying for a reason. Their operators lost sight of their strengths, screwed up their strategies, then lay weak and helpless in the face of advancing new technlology- cable news.

By the way, I doubt a Glenn Beck would find a supportive home in print, or have anything like the reach and punch he now has. And, yes, he actually reports news. And then also mixes it with analysis.

But I can't honestly say I believe, as Peter Kann does, that print could in any way rival the impact of well-honed video news and opinion programs now available to the viewing public- for free.

Stop&Shop: A Failure of Customer Service

One of the larger grocery stores in my area is a Super Stop&Shop. I'm uncertain as to the ownership of the chain. It's based in the Boston/Rhode Island area, but I cannot find it as a publicly-listed company.

(Author's note: I have since verified that Stop&Shop is a division of Royal Ahold, the Dutch-based food retailer.)

In recent years, the chain has upgraded stores, adding departments and various services. Recently, it took a giant step to distinguish itself by adding hand-held scanners. This product allows a customer to scan bar codes while shopping, including using custom-printed produce bar codes generated by electronic scales. The result is potentially the quickest possible checkout experience, bar none.

Not only does a customer not have to re-scan each item, but, due to having nothing to scan, s/he may use the express lane. The only significant activity at checkout is paying for the merchandise.

Due to this technology, I had shifted nearly my entire food purchasing activity to Stop&Shop, from a local, smaller chain, Kings. That chain had been owned by British-based Marks&Spencer for years. I'm not sure of its ownership status now, but I believe M&S at least reduced their stake, if they did not succeed in divesting themselves of their entire interest.

The Stop&Shop hand-held scanner is apparently a third-party provided solution, as I learned this summer.

One evening, having successfully sped around the store scanning away, I was checking out in the express lane, when the monitor announced that I "needed help," and suspended checkout. I was the victim of a cart audit.

Understandably, the hand-held scanner system generates "random" audits of shoppers, at which a S&S employee comes over to randomly scan items from the customer's purchases, confirming that each re-scanned item matches an originally-scanned item.

However, this became a problem when I was subjected to this so-called "random" event at least 4 times this summer.

Since the entire purpose of the combination of self-checkout lanes and a hand-held scanner is to deliver a speedy shopping experience to the customer, being stopped for an interaction with a low-paid, low-skilled clerk defeats the entire purpose. A well-designed audit program would balance stopping theft through unscanned items with truly random, or, better, system learning, so that customers who are audited, and not found to be stealing, are rated a lower risk, and subject to fewer random checks over time.

After the third audit this summer, I demanded to see the manager on duty at the time. In a long conversation, I explained that I did effectively all my grocery shopping at that store, because of the self-checkout and hand-held scanners. And that it was difficult for me to believe that I was "randomly" audited 3 times in, at most, as many months. That each audit was, to me, as a customer, a pending accusation of theft.

I told the employee, actually the store's assistant manager, that if I was subjected to one more audit within the next three months, I would stop patronizing his store. I didn't care how he would arrange it, but this was my promise.

Last week, I was stopped again for a cart audit. This time, as I loudly asked if the audit did not mean the store management suspected me of theft, and, when I passed the audit, was I not innocent of said assumption, I demanded to see the on-shift manager. This time, it was the store's manager, and he was standing only a few feet away. With him was the man I recognized, from my earlier conversation, as the store's assistant manager.

That's when the real fun began.

By now, a short line of people were queued up behind me in the express lane. I had a heated conversation with the manager, who tried to excuse the situation by claiming that the system was not under his control. That a third party was managing it.

I retorted that, as a customer, that made no difference to me. I was in a Stop&Shop store, so I had a reasonable expectation that the store's manager was responsible for my treatment. We went on like this for some minutes, with the manager incredibly contending that if I were to contact his corporate management, it would have more impact than his own complaint.

I replied that I had better things to do with my time, and that, if his statement were true, his firm is in more trouble than they probably realize. And that, as promised to the assistant manager, who had not recognized me, I was now returning to Kings to do all of my grocery shopping.

When I tried to check out, after the employee had done the required cart audit, the monitor froze, then came back up blank. The manager was horrified. Because my purchase used the scanner, the hand-held unit was needed to restart the checkout process.

But the audit employee had taken it. She, and it, were nowhere in sight.

I then had the pleasure of an event of which many of us have probably dreamt, but few have done.

I announced loudly that the store's system and management were totally inept, and could not even check out my purchases.

And then, I began to unload my very full canvas shopping bag onto the floor.

Again, clearly and loudly, to the manager, explaining that I did not even want the merchandise I had just selected and tried to buy, I placed various produce items and packaged goods in and around a small hand-basket, then left the store. Again, announcing my next stop- the rival grocery chain store down the street.

This is a store manager's worst nightmare. The cost of reshelving items is pretty high. Basically, with 1% sales margins in grocery stores, it effectively wipes out profit on those items, and then some. Not to mention the produce, which might have to be discarded.

Then there is the visual of a customer dumping items back onto a floor in full view of other customers. It's the ultimate repudiation of a retailer.

Honestly, I'm surprised the manager let me do this, and didn't offer almost anything to prevent it.

Ironically, as I processed what had just happened, with this post in mind, I realized that Stop&Shop's failure in this case was not its use of technology. Or the technology's failure.

No, the real culprit was the store's manager, assistant manager, and staff.

The assistant manager had never taken my name or contact information during our initial conversation in July. I clearly warned of the consequence of my experiencing another cart audit within the next few months.

Had the assistant manager been alert and competent, he would have taken my contact information, and at least begun a communications process that would lead me to believe, and, more importantly, feel that the store's management sympathized with my plight, and was doing something about it.

Even during my second conversation, with the store manager, he, too neglected to take any identification or contact information whatsoever.

Here, he had a disappointed, angry soon-to-be-ex-customer loudly denouncing his store in front of several lines of other customers at the checkout lanes. You'd think he would take the opportunity to exhibit maximal empathy and a show of action calculated to defuse my frustration and demonstrate real concern for his customer.

Instead, he appealed to me to contact his own senior management, though offering no advice as to how to do that, or whom to contact.

If that store manager had taken my contact information, apologized for the occurrence, and promised to 'do something,' he would have kept my business for at least a week or so, and have put on a wonderful show of positive, caring customer service in front of several dozen other customers.

This is, I think, a rather important lesson. Blaming the technology that a firm chooses to provide in its stores for its customers, for a bad shopping experience, is hardly productive or effective.

But almost any bad customer experience can be, at least temporarily, assuaged by genuine attention, collection of the customer's name and contact information, and a promise of imminent contact and communication to remedy the situation.

As I have mulled over this experience for the past week, I become more and more amazed at the lack of training, sophistication and innate instinct for good customer service that was displayed by the store manager of the Stop&Shop. What's sad, of course, is that if this constitutes "leadership" at the store, imagine how inept and ineffective customer service must be among the lower-level employees.

Isn't it ironic that Stop&Shop has invested substantial sums of money to become a leader in allowing very fast shopping trips, with no interaction with the store's staff, only to blunt this potentially important competitive advantage through poor control and oversight, and integration, of the technology with the store's management. And, then, compounding this error with poor customer service.

Customer service really is the first- and last- line of defense for a retailer. It can at least temporarily blunt and offset a poor customer experience with the store. But if this line of defense fails, the retailer is lost.

Cadbury's Stitzer's Key Customer Insights

Tuesday's Wall Street Journal featured an article detailing a supposed "softening" of Cadbury CEO Todd Stitzer.



However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,



"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."



This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.



This was followed by the article's noting,


By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.



Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,



"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."



Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.



With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.



After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?



If anything, Stitzer is really making the case, by omission, for another approach entirely.



Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?



That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.



The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.

It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.

Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.

Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.

Art Laffer's Recent WSJ Piece

Noted economist Art Laffer wrote a sobering piece in yesterday's Wall Street Journal. I would have gotten to his piece later yesterday, but a number of searches which brought people to my blog were about Laffer and the Journal, so I knew he must have written a new editorial.

There are quite a few economists who write on the pages of the WSJ from time to time. Brian Wesbury, one of my favorites, has been absent for some time. But those who still contribute include Robert Barro and Alan Reynolds, to name two more.

While not a degreed economist myself, I have studied the discipline with great interest since my freshman year in college. I've read a number of basic texts, including Keynes' work, and one of his contemporary critics, Michael Hutt.

I've come to feel comfortable reading and evaluating various economists' monographs. In this vein, Laffer's recent piece is very troubling.

Without going into details, Laffer addresses the 1930s as the milestone by which current fiscal and monetary powers that be are measuring themselves. Laffer begins by discussing the initially too-tight monetary policy of the Depression, and current Fed Chairman Bernanke's determination to avoid making that mistake again.

At this point, Laffer takes a turn into tax policy. Framing Smoot-Hawley as a tax, which it most assuredly was, he provides evidence of enormous increases in a myriad of tax rates. He observes,

"The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that the U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s."

Laffer then cites the current slated rise in state tax increases at 3.1% rate, the highest in almost twenty years. Further, he notes the 'cap-and-tax' legislation and health care levies as heading in this wrong direction.

He then turns to Milton Friedman and Anna Schwartz on the subject of gold.

Following the twists and turns of the period's gold policy, Laffer notes two rather obscure facts. First, FDR forcibly took gold from the US populace at $20.67/ounce, then, less than a year later, devalued the dollar to $35/ounce. He both seized assets, and unintentionally sparked inflation, with two gold-related actions.

And this was technically fiscal policy, because, as Laffer points out, it was FDR's doing, not the Fed's.

Laffer concludes with a rather astounding statement of facts. The consequence of FDR's actions, in concert with the Fed, by mid-decade, produced consumer price inflation of roughly 15% from 1933-37, during a period of double-digit unemployment.

He finishes his editorial with these words,

"The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.

My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits."

There's no getting around what Laffer is saying. He bemoans the fact that fiscal tax policy can easily exist with lax monetary policy, ushering in a lethal economic brew of stagflation. That is, high unemployment, deficits, and high inflation. Because economic management is split between an administration and the Fed, this is a perennial risk.

As Laffer notes, Bernanke is already doing his part to over-inflate money supply. The current governments, state and federal, are repeating the mistakes of FDR's administration during the Depression, raising taxes to new heights.

This is the type of economic piece which causes me do dispute James Grant's recent cock-eyed optimism.

I had lunch earlier this week with my friend, B. He is a PhD with a focus on the history of monetary systems. He is currently concerned about inflation. As a member of a prominent think tank's board, he frequently participates in conferences and discussions of selected topics. Recently, he presented a paper concerning the sources and consequences of the recent financial debacle. B, and his colleagues, all fear hyper-inflation far more than a Depression.

And they are all pretty convinced we are headed in that direction. As Laffer notes, just because we have retarded economic activity today does not in any way mean we can't, or won't, also manage to ignite serious inflation.

The Fed had doubled the monetary base in the past year, as Laffer pointed out early in his editorial. The Fed is buying Treasuries, monetizing our own debt, too. The financial markets have responded by using the printed money and Fed cash to push up asset prices and keep interest rates low. Laffer remarked on this yesterday afternoon, on Neil Cavuto's Fox News program. With so much government liquidity flooding markets, he explained, of course equity prices are on a tear, as are commodities. But Laffer sees this sparking inflation within a few years.

Laffer quoted the esteemed late Milton Friedman,

"Inflation is, everywhere, a monetary phenomenon."

And monetary policy is probably the easiest in our Republic's history. Printing presses wide open and Congressionally-legislated deficits doubling through the next decade.

We have, as Laffer noted, a nearly-exact replay of the Great Depression's monetary and fiscal mechanics now in full swing. Monetary easing combined with fiscal irresponsibility that is resulting in higher tax burdens.

This is why I don't see an imminent, nor prolonged real economic recovery underway in the US at this time.

About Dell's Purchase of Perot Systems

Yesterday morning's big corporate news was Michael Dell's computer making company buying Perot Systems. For a hefty $30/share, a hefty premium to the $17 or so Perot closed at on Friday. A price the consultant/system integrator hasn't seen in ten years!

I'm sure Dell shareholders are thanking Michael profusely for squandering their money so unwisely.

I happened to have lunch with my friend and former/sometimes business partner, B. He noted that all of Ross Perot's companies had now been purchased, i.e., EDS by HP, and Perot Systems by Dell.

I added that a third, GM, was now owned by the US government. We both laughed. For those too young to recall, GM once purchased EDS, making Ross Perot the largest single shareholder, and a gigantic thorn in the side of then-CEO Roger Smith. Eventually, they paid Ross to go away. And spun off EDS, as well.

But, back to Dell.

The nearby 5-year price chart for Dell, Perot Systems and the S&P500 Index clearly displays the folly of Michael Dell's move. For the past five years, Dell has been on a long, slow decline. My many posts discussing the firm's fall from its prime, and Michael Dell's inability to recover its lost ability to generate consistently superior total returns, provide background on this.

With a loss of 50% of its value over the past half-decade, Dell is headed toward the graveyard of Schumpeterian dynamics. There's just not that much juice left in manufacturing, selling and distributing computers the Dell way.

Compared to Dell, Perot Systems have performed spectacularly well. It's managed to remain even, and even slightly outperform the S&P over the whole period, though not consistently.

For Dell to buy Perot is essentially a bid to diversify into a different business, using spare cash. It's a classic example of the financial theory argument that investors can more cheaply diversify for themselves. At a premium exceeding 50%, that's certainly true in this case!

In fact, the nearly $4B acquisition begs the question of what Dell is doing with some $10B in liquid assets on its balance sheet while its value decays?

The Wall Street Journal opinion piece lauded Dell for diversifying. Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.

Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.

Finally, as usually occurs in these situations, Dell seems to be buying the weakest of the breed of remaining systems integrators. The better ones, such as EDS, were already picked off.

There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.

Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. Or, better yet, just sell Dell immediately and take the recent loss as a lesson in being more judicious investors when the company is run by the guy it's named for, but the firm is over the hill.

James Grant on An Economic Recovery

This past weekend's Wall Street Journal edition carried a prominent, long piece by respected market observer James Grant.

The Grant piece, which comprises the very long lead in the last section of the edition, is surprisingly positive. Given Grant's recent scepticism, he is unfailingly optimistic about an imminent economic recovery of monumental proportions.


In a way, it's too bad that Grant spent so much ink on something that, to sane, informed business professionals with any economics education, is so obvious. I don't disagree with him that really deep recessions produce really strong recoveries.

The question is when.

On that, I don't see Grant providing compelling evidence, despite his assertion that said recovery will be much sharper and sooner than many pundits now believe and forecast.

Grant omits any evidence as to why recent political changes are not different than prior ones, or, if the same, why. The truth is, today's more powerful government interventions are built upon FDR's original interventions, not instead of them. And the exit of the US from the Great Depression had more to do with rearming for WWII than it did with a magical, sudden change in consumer spending and subsequent employment.

Personally, from my reading of many economists and related pundits, I simply feel that Grant is, in a word, wrong. Too optimistic about the timing of a recovery.

What if one had been similarly optimistic at Carter's election in 1976? One would have been waiting a long time for the Reagan recovery, strong as it ultimately was.

Instead, I found this morning's article by E. S. Browning in the Money & Investing section of the Journal more useful and credible.

Browning is much more convincing, in my opinion, in his/her detailed assessment of the risks of this period of "economic instability."

Absent a major war, it's unclear what consistent, steady demand will arise very soon in the US economy to fuel all the economic recovery currently forecast by Grant and others.

About The Kodak-KKR Financing Deal

I read of the Kodak-KKR financing deal yesterday with mixed feelings. It wasn't until today, reading another, more analytical piece in the Wall Street Journal, that I settled on a final opinion of the matter.

It seems to me that Kodak's CEO and senior management are probably guilty of some poor corporate governance behavior.

In retrospect, the Journal's Thursday edition headline, "Kodak Gets Financial Lifesaver from KKR," should have immediately tipped me off. Yet another management team of a publicly-held company enriches lenders at the expense of its own shareholders.

The way the deal is structured, KKR comes out much like Warren Buffett in his GE financing deal. KKR gets a 10% rate on its loan of up to $700MM, warrants that are already in the money, and senior status to all other Kodak debt.

The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.

You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?

Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return.

No, the management is basically rolling the dice with their owners' money, after having pissed away so much of it over the past five years, as I noted in this recent post.

Schumpeterian dynamics, as I noted in that post, have gutted this company's ability to function in a manner that would deliver its shareholders consistently superior total returns.

What does management do? Does it explore avenues to reap gains on sale of assets to those who could more profitably use them? Or at least stem the losses? No.

Instead, they are doubling down with borrowed money. Expensively-borrowed money, at that. Paying 10% in an era of 0% Fed funds.

Am I the only person who wonders why those choosing to remain as shareholders in this hapless has-been aren't suing to block the KKR deal?

As for me, I simply don't own this pig.

Michael Porter Is Over The Hill

I regretfully sat through too much of Harvard professor Michael Porter's visit on CNBC this morning.

If Porter isn't emeritus yet, he should be. If that.

I have never actually held Porter in very high regard. The 'competitive strategy' books for which he became known in the late 1970s were, in fact, merely rehashed microeconomics, with generous dashes of findings from the Strategic Planning Institute's PIMS database. Friends of mine from that organization related that Porter had spent months over at their shop, due to its historic tie to Harvard Business School, using their then-current and copious business-unit level database.

Now, with time and thinning hair, Porter is introduced as a 'competitive strategy expert.'

On what basis, I still ask? His books provided no new information. To my knowledge, no one ever hired Mike as a VP of competitive strategy, and then announced some heretofore unachieved total returns over time. Or share gains. Profit. Etc.

You get the idea.

This morning, Mike launched into now-typical accusations against and descriptions of the US medical/health insurance sector, with nary a statistic nor fact within sight.

He began by declaring various European countries to have 'superior' health care systems, and ours to be of inferior 'quality.' Then he held forth on the inadequacy of US health care distribution and lack of universal coverage, declaring those to be worth rating US medical care as subpar.

Apparently, I wasn't the only viewer who had misgivings about Mike's rather loose and cavalier manner of evaluating the US health care sector.

About fifteen minutes later, co-anchor Joe Kernen, in response to many emails which had flooded the program in that time period, asked Porter to clarify his earlier comments.

At which point Porter backtracked, suddenly declaring that, for serious illness, US medicine was, and is, in fact, on a par with, if not superior to that of other countries. He then sharpened his criticism to that of 'delivery' and 'coverage.'

Well, that's fair. But he's not known as a medical care delivery and coverage expert. And Mike provided not a shred of comprehensive, non-anecdotal evidence to support any of his statements this morning. And his little intellectual two-step made him look old, doddering and unable to communicate his thoughts. If he even clearly understood them himself, in the first place.

They may as well have had him on to opine about financial regulation or energy policy. Neither of which is he known for having studied, either.

In fact, it was extremely disappointing to see the program's anchors completely avoid asking Mike some questions that would have taxed his supposed expertise.

For example:

-Given your years studying industry structure, Mike, what do you think is the most likely competitive structure of the health care sector, consistent with sustainable profitability and competitive total returns?

-How do you think some of the proposed new regulations will alter what would be, in their absence, an optimal, terminal competitive industry structure in this sector?

-What do you think of current expense and profitability levels in the health care sector, as compared with; other US economic sectors, long run sustainable profit levels, global comparables.

-How would eliminating or relaxing policy mandates, and allowing inter-state health insurance competition, affect competitive structure, profits, total returns, and overall performance in the sector?

-If the government eviscerates profit in this sector, either through regulation, and/or a government-owned competitor, how do you envision that type of 'competition' comparing with competition from relaxing interstate marketing and policy mandates?

I'd have really appreciated hearing Porter's thoughts on those topics. Sadly, nobody thought to have prepared such a list to ask him. What a waste.

The guy has one alleged speciality, competitive structure analysis, and the CNBC co-anchors and staff couldn't even be bothered to tap it in an intelligent fashion while Porter spent about half an hour on the set.

Two Contrasting Views of The Impact of Lehman's Failure

Today's Wall Street Journal presented two starkly differing anniversary reviews of the failure of Lehman Brothers.

Two finance professors from the University of Chicago, John Cochrane and Luigi Zingales, argued, with hard, credible quantitative evidence, that it wasn't Lehman's demise, but Hank Paulson's and Ben Bernanke's panicked testimony to Congress a few days later, that caused financial markets to begin to fail, too.

On the other side of the argument, with little but hearsay and a few top-line numbers sizing the mutual fund market, is the Journal's own financial columnist, James B. Stewart. Augmenting Stewart's piece in the paper was an afternoon appearance on CNBC, wherein he went beyond his Journal article, contending that Lehman's failure was a financial system near-death event, and that no firm like Lehman should, or could, now, ever be safely allowed to fail.

Whom to believe?

Well, first, let's review the academics' piece. Cochrane and Zingales present a graph showing clearly that shortly after Lehman's bankruptcy, spreads of instruments like Libor-OIS rose only 18 points, whereas it rose more than three times that within two days after the Treasury Secretary and Fed Chairman sounded the general financial alarm and demanded that the TARP legislation be passed.

Since the TARP was never actually used as described, it wasn't even the source of any significant calming of the financial markets.

As to the importance of the Lehman failure, or its rescue, they wrote,

"Would a Lehman bailout have averted a panic? The news would still be that Lehman failed, and markets knew bailouts would not last forever. After all, the Bear Stearns rescue in February had just postponed worse trouble."

Cochrane and Zingales go on to contend that the real lesson in Lehman's bankruptcy "cannot be that the government must always bail out every large financial institution."

They cite the 1984 Continental Bank rescue, and others that followed, including LTCM, to demonstrate that none of these rescues have positively or constructively affected financial firms' appetite for risk. They write, near the end of their piece,

"The blame-it-on Lehman story leads to a dangerous complacency. If we can persuade ourselves that the fault was just one policy mistake, forced on the feds by silly legal restrictions and not enough bailout power, everything can go back the cozy way it was before.

This is a convenient story for large banks that dominate the lobbying and communication effort. And it absolves the Fed and Treasury of facing up to their long string of policy mistakes."

The two Chicago professors conclude that, while they don't claim to have the perfect answer, they would trust markets before trusting an overly-powerful government which has serially increased the stakes of each financial crisis which it has spawned through 25 years of bailouts.

In contrast to Cochrane's and Zingales' use of actual data to demonstrate that Lehman's failure did not panic markets, Journal writer James Stewart continues his usual misunderstanding of financial markets by claiming that Lehman's debt obligations, stuffed into so many mutual funds, required the government to guarantee those assets. Thus, by Stewart's reasoning, allowing Lehman to fail was a huge mistake which necessitated the assumption by the government of $4 trillion of mutual fund value.

On CNBC this afternoon, however, Stewart babbled on incessantly about how necessary it was that Lehman had been saved. That no similarly-sized financial firm can ever be allowed to fail again, because, although markets would have eventually corrected, Stewart solemnly judged that such correction would have taken us 'back to the iron age.'

Really?

That's precisely what the two professors convincingly demonstrate would not have happened. And did not happen.

The fact is that mutual fund investors take risks for extra return. Holding those assets meant investors chose to bet on the managements of those funds.

Have those funds now been cleansed of inept managers? No. The federal safety net saw to that. Just as Ken Lewis and Vik Pandit still run BofA and Citigroup, their incompetence notwithstanding.

I don't know if anyone else happened to notice this bizarre coincidence in today's Journal. It makes for an interesting comparison between savvy, analytical observers of last year's financial crisis, and a fear-mongering, large-government and -bank supporting financial beat flack with little in the way of evidence to sustain his contentions.

BofA, Merrill Lynch, Ken Lewis, Bernanke, Paulson et. al.- Redux

The big news out of always-litigious New York state is that gubernatorial hopeful AG Andrew Cuomo is expected to file charges against BofA CEO Ken Lewis and perhaps his CFO, Joe Price, over the tortured purchase by the ailing bank of Merrill Lynch late last year.

I wrote these two posts, here and here, earlier this year, regarding the conflicting stories emanating from former Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, and BofA CEO Lewis.

As I reread the first post, I found myself ironically delighted that a suit may actually be brought over this issue. Reviewing my impressions of Lewis' testimony before Congress, as well as recalling Paulson's and Bernanke's later remarks, also in on Capitol Hill, I'm looking forward to seeing this whole mess hashed out in a courtroom.

Serendipitously, Judge Jed Rakoff rejected the SEC's settlement in the case, pointing out that it is patently unfair to require injured shareholders of BofA to pay a fine for said injury.

Somehow, it seems appropriate that this entire affair is barrelling toward a more formal legal event.

The nearby 2-year price chart for BofA, Chase, Wells Fargo, Citigroup and the S&P500 Index shows that the entire sector hasn't done any favors for investors lately.

As you'd expect, the worst of this sorry bunch are Citi and BofA.

BofA is off more than 50% in the past two years, which hardly constitutes effective stewardship of shareholder assets. It's too simplistic to associate all of the loss in shareholder value in late 2008 with BofA's agreement to acquire the nearly-failed brokerage firm, Merrill Lynch. Still, the bank's equity price dropped an additional 20 or so percentage points through early 2009.

Having heard Lewis, Paulson and Bernanke tiptoe around the issue of whether, and how strongly the two federal officials intimidated and coerced the bank CEO, I, for one, welcome seeing them retell their stories under oath in a courtroom.

I'm not a lawyer, so I can't cite specific laws of which any of the three may be guilty. That said, as I alluded to in my prior posts, I think it's just possible that Lewis could be found guilty of violating Sarbane-Oxley and some other SEC rules. Bernanke and Paulson could potentially be charged with perjury and conspiracy to lead Lewis to violate federal laws.

While reading Amity Schlaes' "The Forgotten Man," it has occurred to me that, just as FDR's NRA was brought low by a seemingly-minor lawsuit in New York court, so, too, could recent, bipartisan federal overreaching into the affairs of financial service companies be brought to a halt by some convictions in the BofA-Merrill matter.

Lehman's Dick Fuld's State of Denial

This past weekend's Wall Street Journal carried a front-page article regarding the recent activity of now-defunct Lehman Brothers' last CEO, Richard Fuld.

It's a lengthy article, carrying over from the middle of the front page to half of an inside page. There are a host of details concerning how Fuld is, appropriately, still treated as a pariah by most senior executives in the financial services sector.

Despite that, Fuld has already filed the paperwork to start his new shell of a firm, Matrix Advisors LLC.

One thing the Journal article stresses through numerous anecdotes is that nobody is paying Fuld for anything. He has "given hours of free advice to a firm run by a former Lehman employee," the piece states, and then goes on to remark similarly on other Fuld efforts to stay busy.

Somewhere among the details of his helping to wind down the smoldering ruins of his old firm, this passage appears,

"Yet in these same months, Mr. Fuld would walk down the hall and park himself in Mr. Marsal's office, sometimes asking his new boss: "Is there anything I could have done differently?" "

Gee, let me think.

Take less risk? Try not to intimidate anyone inside Lehman who disagreed with you?

Maybe wake up by late 2007, watch the commercial banks booking hundreds of millions of dollars in mortgage securities write-offs, and figure that debt markets were going to be getting chary? Maybe lengthen your own firm's average funding duration and prepare to shrink your balance sheet, so you would not get hit with an age-old risk of brokerages, which is having your funding commercial banks pull your credit lines?

You see, when the balance sheets of banks that fund your short-term credit needs, out of their aptly-named broker-loan divisions, begin to shrink like balloon suddenly thrust into a deep-freeze, you can pretty much guess that you, as a brokerage and/or investment bank, will be next in line for credit access troubles.

But, I guess, not if you're Dick Fuld.

No, Dick just merrily played Russian roulette with the regulators, lenders, and investors. Never one to look on the gloomy side, or prudently plan for less-than-desirable scenarios, Fuld rammed his firm's operating throttles to the wall as 2008 moved into summer.

In a telling, candid interview nearly exactly one year ago today, described in this post, former Salomon Brothers' CEO John Gutfreund addressed Fuld's actions at Lehman.

I wrote of Gutfreund's remarks,

"Gutfreund was asked how Lehman's demise came about, and he said something to the effect,
"By the over-optimistic actions of the firm's CEO and his senior managers."

Pressed further, he allowed as how the firm was unrealistic, in this era and environment, to believe it could remain independent while grappling with its writedown problems. Gutfreund never used Fuld's name, but pointed out that Lehman had had months in which to gracefully sell itself before coming to Chapter 11."

Maybe Dick Fuld should have asked Gutfreund, rather than a rather innocuous financial rag merchant, how he managed to run Lehman into the ground, and what he could have "done differently."

The Journal article also replays Fuld's now-famous comment before a House committee that he will never understand, until he is buried, why no government rescue was organized to save Lehman.

I find, and have always found, this to be the epitome of chutzpah on Fuld's part. Ever the swaggering, intimidating brute of an investment bank CEO, cutting an image of a swashbuckling, fearless leader, he now asks us to sympathize with his expectation that, having ruined Lehman, someone should have saved him, and his investors, from his own bad judgment.

I'm a bit surprised the Journal even wasted half a page on this treacle. Then, again, as a friend and I observed over the weekend, the paper has morphed heavily toward tabloid business journalism since Murdoch's purchase.

Human interest stories of fallen Wall Street titans probably sells a lot of newspaper subscriptions.