Some Perspective on Yahoo, Microsoft, Icahn & Google

On Tuesday, Dennis Berman of the Wall Street Journal wrote a wonderfully insightful and succinct assessment of the latest chapter of the Yahoo/Microsoft/Carl Icahn/Steve Ballmer/Google dance.

In the piece, entitled "Why Yahoo Should Strike as Iron Is Hot," he noted, in closing,

"But the question for Yahoo's board shouldn't be whether it can increase its cash flow. It is whether it can improve its stock price, over a reasonable period of time, greater than a Microsoft offer. A growing chorus of shareholders think it can't.

So, the basics: AOL can't succeed at being Yahoo; Yahoo can't succeed at being Google; Microsoft can't succeed at being any of them. Nonetheless, Microsoft has the fantasy it wants to be Google. How could Yahoo's board do anything but take a decent offer and bank it?"

Berman makes a key point here. Really, despite the much longer verbiage preceding these final paragraphs, the only crucial points in his article.

Yahoo is no longer an investment equity. Neither, really, is Microsoft. Forget AOL/TimeWarner entirely.

With Carl Icahn prowling about to encourage the Yahoo-Microsoft deal, you know that this is now just about short-term speculative gains. Not long-term strategy.

I haven't owned Microsoft in over a decade, or Yahoo since the 1990s. Now, both have simply become opportunities for arbitrage as Icahn maneuvers to recover the value Jerry Yang kicked away.

As the nearby Yahoo-sourced price chart of the past week illustrates, Yahoo's value has held up nicely due to continued betting that something will eventually happen to realize some of the premium of the original Microsoft offer.

But don't bet on any sort of long-term potential for consistently superior total returns from either Microsoft or Yahoo, in any sort of combination, or absent it.

Yahoo's fundamental strategy failed long ago, in terms of consistently superior total return performance. Microsoft's performance stalled before that.

I remain convinced that the only way Microsoft can re-ignite consistently superior return performance is to split itself up into an operating system business, desktop applications, online, and gaming. Then the gaming business can take off and reward shareholders for a few years.

But for now, all of this fuss is about betting that by owning Yahoo, you can benefit from Carl Icahn's ability to recover some value for its shareholders while ringing down the final curtain on Yang.

More Trouble at Howard Schultz' Starbucks

Monday's Wall Street Journal provided some additional information regarding Howard Schultz's attempt to revive the firm he founded, Starbucks.

In this recent post addressing returning CEOs, I wrote,

"In Dell's and Starbuck's cases, I question if they ever will (return to consistently superior total return performance). I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

I still feel that way. The nearby Yahoo-sourced price chart of the coffee seller and the S&P500 Index for the past five years portrays a brand that has run its course.

Typically, a firm once successful at earning consistently superior total returns will fade from either: lack of growth opportunities; competition; regulation, or; investor expectations finally catching up with performance.

Ironically, as I noted in this post, Schultz had been alleging competition had nothing to do with the firm's slumping fortunes,

Perhaps the most amazing comment Schultz uttered in the rather surreal interview this morning on CNBC was, in response to Bartiromo's question about McDonald's,

'Competition- they're just noise,'or words very close to those.

Well, as I noted in this post, regarding Schultz's recent, hand-picked strategist, Michelle Gass, contended,

"She says she hasn't been focused on competitors in developing the new plans. "I think we'd all readily admit that a lot of the situation we're in is self-induced." Sounds familiar, right? At least Gass and Schultz are reading from the same page in the same playbook.

But in that prior post, I went on to note,

"Thus, I find Ms. Gass' comment to be dangerously short-sighted and internally-focused.

Instead, she might wake up to the reality of Schumpeterian dynamics. Between Starbucks' own prior expansion into lower-income segments, and McDonalds' search for growth in kindred products, the former's market dominance was almost certainly going to come to an end, one way or another.

As it is, Starbucks is being bracketed by another coffee retailer on one side, and a fast-food giant on the other. This has less to do with Starbucks' 'self-induced' troubles than it does with recent targeting of the coffee giant's business by two very large, savvy food retailers.

I hope, for Howard Schultz' and Starbucks' sake, that Ms. Gass begins to become aware of this reality."

In this week's Journal piece, however, it reported,

"Reflecting his urgency, Mr. Schultz told workers he no longer wanted to hear about projects that would take as long as 18 months. "We have to defend our position," he said to a few hundred employees shortly after the March annual meeting. "We have lots of companies small and large who want to take a piece of our business away."

Wow. That's some fast reversal of strategic diagnosis, isn't it?

But what is truly disturbing is how personally Schultz is taking Starbuck's natural decline. As the Journal article describes,

But early last year, Starbucks seemed to be losing its edge, a complaint Mr. Schultz himself voiced in a leaked memo. It wasn't setting the agenda with new products but just adding drink flavors and ordinary items like breakfast sandwiches. Stores had grown cluttered with stuffed animals and other noncoffee items. Price boosts were starting to annoy customers.

"I was just depressed," Mr. Schultz says. He launched a personal turnaround routine, consisting of what are now six gym workouts a week and a daily health shake of fruit and cottage cheese.

In public, he appeared humbled. At the annual meeting in March, Mr. Schultz told the crowd to stop applauding when he walked on stage. "I thought I could start crying," he says.

Schultz is so personally invested in the attempt to reverse the age-old forces of Schumpeterian dynamics that he seems to simply deny their existence.

The article cites, through the recounting of many examples, how Schultz has gathered to himself the power to make even the most trivial decisions. It's reminiscent of Steve Jobs, with one big difference.

Jobs' Apple is in a business which creates new products. The best Schultz can now do, having already created a modern version of the old, original Dutch coffee house, is to introduce some marginal new beverage flavors each year.

Hardly the same thing.

It seems to me that people spend a certain amount of money on coffee and beverage purchases at places like Starbucks. Once the firm has penetrated sufficient markets, as I noted in this post, it really has little room for growth. Perhaps growing economies such as India and China provide some opportunities. But if that were all that was needed, the company would have already been growing with those countries' own growth rates.

No, it seems the problems for Starbucks lie more in the realm of simply having been successful long enough to have attracted competition while saturating its primary and secondary market segments.

I doubt Schultz' micromanagement of the firm he created will really change those facts.

But, as always, time will tell.

Ken Lewis' Awful Bank: Another Tale from the Frontline at BofA

Last week, I wrote this post about my recent experience with Ken Lewis' BofA. It seems they had a rather significant disclosure of sensitive account information which required them to attempt damage control in their Debit Card division.

I visited my local bank branch for more information, but learned that this form letter from one Gordon Rains, a BofA national-level executive, was news to my branch's manager and platform officers.

Fast forward to today. It's been a week, and I had heard nothing from Ms. Gonzalez, the platform officer who promised to expeditiously contact me with information last Tuesday.

As you can guess, what follows won't be pretty. After all, I'm discussing the retail bank branch customer interface of one of America's largest three banks. A sprawling, gigantic behemoth of a financial utility.

Ms. Gonzalez, upon seeing me stride to her desk, immediately registered a mixture of resignation and displeasure. With good reason.

She provided me with the explanation that my debit card, along with many, many other bank customers' cards, had been compromised by some unspecified problem "in Maine."

According to the bank officer, this 'problem' necessitated BofA replacing many ATMs, and, apparently, although this part was not explained, many debit cards, as well.

When I asked why Ms. Gonzalez had not called or emailed me last week to notify me that she was working on my issue, she simply ignored me. When I asked her why some effort was not made to convert a problem with compromised customer information into an opportunity for the local branches to get ahead of the issue and directly contact their local branch customers to explain the safety-oriented steps being taken by BofA, although those customers' data was not compromised, she gave me some nonsensical, difficult-to-understand doublespeak about it being the province of some national business unit, and each branch couldn't know the full extent of the problem.

At this point, I reminded Ms. Gonzalez of my initial request for a meeting with the branch's manager to learn more about the issue. She, in turn, informed me that she had just given me the explanation. Period.

When I politely expressed dissatisfaction with her slow, uncommunicative response to me for over a week, and that I now would probably walk down the block and re-open an account at the smallest local bank in town, of which I had been a customer in a nearby town years ago, she simply noted that I was free to do so, and that it was fine with her if I chose to do so.

As a last effort at provoking some sort of responsible customer service from Ms. Gonzalez or her branch manager, I promised her that, if I did not hear promptly from the branch manager about this issue, I would call BofA's headquarters in Charlotte, NC, in search of whatever ombudsman's office the firm's CEO, Ken Lewis, might have.

Again, Ms. Gonzalez invited me to take that action if I so chose.

By the way, I don't wish to suggest Ms. Gonzalez is a bad person or bears ill-will toward BofA customers. Judging by her change in demeanor from my first meeting with her last week, I'd say she was 'talked to' by her branch manager. She is mostly likely poorly led, rather than badly behaved on her own.

I did open that account at the other bank. And, by the way, among the benefits instantly accruing to me was free wire transfers. Imagine, in this day and age, free inbound wire transfers!

And, upon returning home and not having heard from the BofA branch manager, I called the bank's main office in Charlotte.

There, I spoke with the most gracious, helpful telephone receptionist in my memory. She asked the reason for my call, explained that Ken Lewis has no such office or assistant, but that she would like to put me on the line with the manager of her own function. This she did, and Amanda, her manager, politely and apologetically took the details of my story, which she promised to move up the bank's management hierarchy.

At least, down in Charlotte, even the frontline troops practice the region's trademark courtesy and sense of concern with regard to customer service. I honestly could not have asked for more accommodating attitudes from the two BofA employees with whom I spoke this afternoon.

Poor Ken Lewis. No wonder his bank is in such trouble. As the nearby Yahoo-sourced price chart of BofA and the S&P500 Index for the past five years illustrates, Lewis has managed to barely keep shareholders in neutral for the period. Meanwhile, simply buying the index would have netted investors about a 50% gain over the same period.

Perhaps Lewis mistakes his fellow Charlotte-based employees' attitudes and service ethics for those of his widespread retail banking empire. Believe me, they vary widely.

The staff at my local Summit, NJ BofA branch couldn't have been much less concerned with my welfare, as their customer, nor much less indifferent to whether I remained a customer or not.

We often hear of the description of America's large financial institutions 'as too big to fail.'

Now, however, I think I've discovered a more appropriate phase which described Ken Lewis' BofA and its ilk:

'too big to work.'

Moonves' CBS Buys CNET ???

Since CBS's most recent spinoff, from Viacom, Les Moonves hasn't distinguished himself in providing superior total returns to shareholders. Granted, he's been at it just over two years. But the trend since the stock's peak in mid-2007, as the nearby Yahoo-sourced price chart for the network and the S&P500 Index, has been discouraging.

Thus, Moonves is apparently aiming to fix that with an acquisition of CNET.

Yahoo's profile of CNET portrays it as a rather widespread media content provider. On the surface, it at least seems connected to businesses which CBS ought to understand.

However, Friday's Wall Street Journal article about the proposed acquisition casts doubt on the wisdom of Moonves' latest plan.


According to the Journal,

"CBS's $1.8 billion cash acquisition of Web site operator CNET Networks Inc. is reminiscent of the tech-stock bubble. The CBS offer values CNET at a whopping 22 times Ebitda, according to Capital IQ data. CBS trades at about seven times. What's more, CBS is paying this fat premium when the advertising market is slowing.

Why is CBS overpaying for an asset with a questionable outlook? Look no further than CBS's share price. CBS shares have fallen nearly 30% from their peak last summer. (Fortunately for Mr. Moonves, who took home $36.8 million last year, his compensation has only been recently linked to CBS's share-price performance.)"

The article pulls no punches, does it? Comparing this acquisition to a tech-bubble, all-cash deal is no blessing. Further, if you look at the nearby Yahoo-sourced price chart for CBS, CNET and the S&P500 Index for the past five years, it's clear that, as mediocre as Moonves has performed with CBS, CNET has done even worse in the past 2+ years. Its peak was clearly over two years ago.

On the subject of compensation, I can readily agree with the Journal writer's sentiments. Having banked over $30MM, I would now assign Moonves no motivation whatsoever to enrich his shareholders. He's likely just in this for ego and pride.

For example, the article continues,

"To jumpstart CBS's share price Mr. Moonves wants to create some Internet buzz. He tried the same trick a few years ago, buying CSTV Networks Inc., which operates a college-sports cable channel and numerous Web sites, for $325 million. The network was supposed to complement CBS's other sports operations but was unable to get sufficient distribution and has languished.

Beyond the high price for CNET, it's difficult to see any real synergies between CNET and CBS's existing portfolio of Web properties. CNET is based in San Francisco and CBS's Web operations are concentrated in New York. So there's not much room to save on overhead. It's difficult to see why CBS, which is at its core a broadcaster, will have better luck in monetizing CNET's Web properties than CNET did."

I would concur. While the online media business, per se, is at least close to CBS's broadcast businesses, it's not quite the same thing. And, if anything, the internet argues, as I've written before, for the destruction of any broadcast value beyond local news and information. The actual value of a broadcast network like CBS is rapidly falling.

As such, Moonves seems to be engaging in the sort of game in which a CEO, seeing a dying market for his business, uses a form of sleight-of-hand to trade his shareholders' cash for other assets, the better with which to prolong his own corporate life as a CEO.

Shameful, but it happens all the time. Moonves isn't the first CEO to try this trick, and, sadly, thanks to the modern publicly-held corporation, he most assuredly won't be the last.

More Economists Recant on Recession Call

As I wrote here recently, the US is not currently in a recession.

Now we learn from last Wednesday's Wall Street Journal that more economists are retracting their earlier insistence that the US is, or shortly will be in a recession. The article begins,

"A funny thing happened to the economy on its way to recession: It's taken a detour.
That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected."

It figures. The mass of mediocre economists, having rushed to pre-guess evolving economic data, now see that GDP growth has yet to go negative. Usually not ones to let facts get in the way of a gloomy economic story, now these less-than-first-rate economists are reversing course.

For instance, as the Journal continues,

"In February, Global Insight joined Goldman Sachs, Morgan Stanley, UBS and Merrill Lynch in declaring the U.S. to be in recession. Now, Global Insight's Brian Bethune says that while the firm is still forecasting a recession, "it's conceivable we could avoid it," thanks to "the massive policy response we've seen" since he and others began warning about the risks facing the U.S. economy.
Bruce Kasman, chief economist at J.P. Morgan, said while earlier this year it seemed like momentum was carrying the economy into a clear recession, there's only "a slightly better than even chance" of a recession now. "Even though there are meaningful drags from the credit crisis and energy costs, the economy is showing resiliency," he said.

Even Alan Greenspan, who in early April said the U.S. was in the "throes of recession" and is going through the "most wrenching" crisis since World War II, has more recently toned down the warnings, saying the U.S. is in an "awfully pale recession." George Soros, who has long argued the U.S. is headed for a major crisis, also recently remarked that the "acute phase" of the crisis has now passed."

It's beginning to look like only Brian Wesbury and perhaps David Malpas, late of Bear Stearns, got this one right. The US economy has certainly softened, but is yet to actually go into reverse.

Still, even the Journal hesitates, as the article concludes,

"The question remains open, since recessions typically aren't officially diagnosed until some time after pain hits consumers. A common definition of a recession is at least two consecutive quarters of negative GDP. But the National Bureau of Economic Research -- the nonprofit group that is the official arbiter of when recessions begin and end -- defines a recession as a period of significant decline in economic activity across GDP, income, employment and retail sales that lasts more than a few months.

John Lonski, Moody's chief economist, said recent labor market data and signs the credit crunch is easing on Wall Street have made him less gloomy than he was a few months ago. In the latest WSJ.com survey of economists, conducted in May, he said the likelihood of a recession was 60% -- down from the 90% he predicted in the April survey.

"Recent evidence suggests there's a chance the economy might stabilize before this summer," he said. On average, the 55 economists in the survey, conducted earlier this month, said the likelihood of a recession was 62.7%, down from 70%."

Maybe the mark of a good economist is that s/he doesn't change her/his mind during the period when s/he calls an economic turn, and is correct.

This whole drama regarding the forecast recession that hasn't, and probably won't, arrive, simply gives more credence to the boatload of economist jokes- like how, if laid end to end, they still wouldn't reach a conclusion......

Carl Icahn Focuses On Yahoo!

This week's news about Yahoo has suddenly involved Carl Icahn. It's an almost surrealistic twist, involving the former corporate raider taking a 10MM share position in the company, and options for another 49MM.

As well as Microsoft's switchboard refusing to connect Icahn to Steve Ballmer, when the former called the latter recently. You can't write fiction this good.

The Bloomberg account reports,

"Icahn said in a letter to Yahoo's board yesterday that a combination with Microsoft ``is by far the most sensible path'' if the Internet company wants to take on Google Inc.

``The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,'' said Icahn, 72. ``I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.'' "

On would have to admit, looking at the nearby, Yahoo-sourced price chart of the past week for Yahoo, Microsoft and the S&P500, that Icahn's move has gained nearly-instant credibility.

Notice how Yahoo's price rocketed upward on the news of Icahn's focus on the company and its board?

Icahn further commented, again, according to Bloomberg,

"Accepting Microsoft's offer is a better option than going it alone, Icahn said. The board ``completely botched'' negotiations with Microsoft, prompting some Yahoo shareholders to ask Icahn to step in, he said."

Looks like investors agree, looking at this 6-month Yahoo-sourced chart of the same companies and information.

Yahoo's price shot up upon news of the Microsoft offer, then plunged when it was taken off the table recently. Major institutional shareholders were livid, and said so publicly.

The Bloomberg piece describes Icahn's slate of directors,

"Icahn's board nominees include Mark Cuban, owner of the Dallas Mavericks basketball team, and Frank Biondi Jr., former chief executive officer of Viacom Inc. Icahn said he has sought regulatory clearance to buy as much as $2.5 billion in Yahoo stock, about 6.7 percent of the company's outstanding shares as of April 30.

Icahn also nominated himself for Yahoo's board, along with Keith Meister, principal executive officer of Icahn Enterprises Inc. The other nominees are Lucian Bebchuk, a professor at Harvard Law School; John Chapple, the former CEO of Nextel Partners Inc.; Adam Dell, managing general partner of Impact Venture Partners; Edward Meyer, CEO of Ocean Road Advisors Inc.; Brian Posner, former CEO of ClearBridge Advisors LLC; and Robert Shaye, co-CEO of New Line Cinema. "

There have been a handful of articles discussing how Microsoft is still in the driver's seat, has the advantage, may still not want to risk the acquisition, etc. And there's probably some truth to all of that.

Carl Icahn can't unilaterally make this happen, as he has with some other recent deals, like BEA-Oracle, or the Blockbuster situation.

But it's fair to say that if there's even a scintilla of interest remaining on Microsoft's part, which would, admittedly, probably be bad for those shareholders, you can bet Icahn's going to revive that and get more for himself and his new fellow Yahoo shareholders.

More and more, Icahn is my kind of guy, in terms of having the money and tenacity to push for the shareholder returns he believes are reasonable, usually stopping short of Eddie Lampert's mistake of thinking he can actually run the company.

Should be an interesting time until the Yahoo annual meeting. With any luck, Yang, Yahoo's co-founder, will be kicked out, and Yahoo shareholders will recover some of the lost return for which the inept Yang is responsible.

Pickens Trumps Trump On Oil Economics

Yesterday morning, while busy writing and working, I listened to what is best described as an entertainment segment on CNBC's Squawkbox morning program.

In its continuing quest to demonstrate that they can call on any CEO anywhere, thus to better position themselves against Fox's nascent Business Channel, the program had Donald Trump on an extensive telephone interview. It was one of those fawning pieces, where the co-anchors gushed about The Donald, and Trump kept blathering about whatever came into his self-absorbed mind.

On the subject of oil, Trump castigated President Bush and anyone else involved in US government regarding oil, contending that we needed a team of seasoned, hardened negotiators to just, and this isn't a quote, but a paraphrase,

'go over to the Gulf and tell them these prices won't fly. And negotiate with OPEC to just lower prices.'

I can't recall if Trump included himself in the group of people he saw doing this, but he did name a few names. He continued on declaring that the country just had to stand up to OPEC and get the price of oil down. Period.

Trump went on to declare that the US is in a recession. Nevermind economic indicators. The Donald just knows, you know?

The Squawkbox co-anchors 'oohed' and 'aahhed' at how forceful and plain-spoken The Donald was, and how effective he'd be as a President, but could never be elected.

About ten minutes later, Boone Pickens was also on a telephone interview with the program's co-anchors. Pickens has a good, perhaps special, relationship with Becky Quick, whom he has taken with, at CNBC's expense, on a recent Chinese business trip.

When asked about oil prices and Trump's remarks, Pickens responded, again, this is a paraphrase,

'Yes, I heard Donald. And let me just say, I think he should probably stick to real estate. Because he doesn't understand how the oil business works. The Arabs have the oil, so they're going to dictate prices by how much oil they produce. That's just how it is, and no amount of talking is going to change that.'

I like Pickens a lot. While I may differ with some of his economic theories, as I did in this recent post, he clearly understands how the current oil market works. And he's committed himself, as he announced yesterday on CNBC, to actually building the beginnings of the vast wind farm about which he spoke in February.

Given a choice of whom to believe on the subject of oil prices, I'll take Pickens over Trump any day.

Whither Mark Hurd's HP?

Mark Hurd became CEO of HP just over three years ago, In that time, he has undeniably improved the operating performance of the firm, as well as its total returns.

When he took over HP, Hurd had to finish making sense of the mess left by Carly Fiorina's acquisition of Compaq. The logical comparison for the firm at the time was Dell, the major direct PC seller.

After running somewhat similarly on a total return basis since 2003, Hurd's arrival at HP coincided with, if it didn't actually affect, Dell's steady negative total return performance for most of the years since. On that comparative basis, HP has clearly pulled ahead of its major PC manufacturing competitor.

Now, Hurd is buying EDS. Allegedly, he is fashioning HP into a firm capable of going after the likes of IBM and Accenture.

The trouble is, in my view, what the performance of IBM and EDS already appear to be. The nearby, Yahoo-sourced five-year price performance chart of HP, Accenture, IBM, EDS, Dell and the S&P500 Index tells a very revealing story.

Over five years, IBM's stock price is just even with the S&P, while EDS has been flat, while Dell has lost ground. So, from a performance standpoint, Mark Hurd has already done a better job for his investors than has IBM for its shareholders. And Hurd has clearly outperformed the still-struggling Dell.

HP has even outperformed Accenture (in the interest of full disclosure, a firm for which I once worked, when it was still Andersen Consulting) over the past five years, and since Hurd assumed command of HP.

So my question is,

"What does Mark Hurd intend for the EDS acquisition to do for HP shareholders?"

He's already outperforming current and future comparable firms- Dell, IBM and Accenture. And he's planning to acquire a firm whose own total return performance has been dismal.

From a Schumpeterian dynamics view, HP is bound, at some point, to meet, rather than exceed, investor expectations, and see its total returns flatten out. It might even be that this would occur within a few years.

The question is, will it have a better chance continuing to focus on excellence in its major businesses, which now feature personal computers, or does it need to risk diluting its focus by building up/entering the IT consulting services business?

In terms of competitive position, HP would seem to be at least temporarily advantaged in its current businesses. Consumer computing and the evolution thereof is going to continue to make the market leader serious money going forward. Whether the PC and laptop morph into new devices, or just get more involved, better, etc., HP could still seek to dominate this market.

By buying EDS and turning HP's attention to the business of cutthroat, big-contract consulting services, Hurd may well stumble into a hornet's nest of unrealized difficulty.

I don't know for certain, of course. But few business expansions of this type work out as well as the architects hope.

Mark Hurd has done a tremendous job truly 'turning around' HP after Carly Fiorina. He's brought it to a fine edge of dominance in its product markets, and in terms of shareholder return.

My proprietary research has shown that, on average, a company can outperform the S&P500 consistently for less than a decade. Things happen that eventually hinder its consistent, ongoing excellent total return performance- limits to growth, competition, regulation, or simply investor expectations catching up with the reality of the firm's performance.

The nearby 30+ year view of these same companies' equity price performances demonstrates, perhaps surprisingly, that Dell is actually still the best performer, despite flattening out for most of this decade. IBM and EDS, both around for decades, and the former, for more than the last decade, heavily into computer services and consulting, have nearly identical pre-dividend returns, slightly below the S&P.

Even allow for the maturity of the PC industry, I can't help but look at Dell's long term performance and wonder if HP's Hurd isn't unwisely taking his eye off of the more attractive segment, and potentially committing HP to a grueling, ugly slugging match in a business where differentiation is difficult, customers can be troublesome, and engagement costs can run amok.

Then there will be the internal management attention drawn away from the now-dominant PC business. And probably issues of succession as EDS takes on more importance in HP's fortunes going forward.

Mark Hurd has distinguished himself both at HP and with his former employer. His acquisition of EDS probably marks the largest risk he will have taken. Perhaps within a few years we'll see whether it has cost HP any ground in its consumer computer business, and whether Hurd has been able to prove the exception to Schumpeterian forces in business.

More Bad News From The Trenches of Ken Lewis' Hapless BofA

Due to a seeming nearly-endless succession of mergers, the very small local bank at which I opened a DDA account years ago is now....BankAmerica.

Thus, I am now subject to the operational mishaps of one of the nation's three largest banks. To wit, I recently received a 'letter,' i.e., mass-mailed notice/apology, which begins thusly,

"Dear Valued Customer,

We have learned that some information from certain Bank of America Check Cards may have been compromised. your Check Card number may have been part of this compromise. To ensure that your privacy is protected to the best of our ability we have taken the following steps.

Please know that Bank of America is working hard to keep your financial information secure.

Sincerely,

Gordon Rains
Debit Card Services Executive"

I omitted the detailed middle of the letter, wherein instructions were provided for using the new card, reporting fraudulent use of the old card, and assuring me that BofA will be liable for all fraudulent charges due to their ineptitude. Except, of course, they didn't use that word. I did.

And notice their use of the word 'compromise.' Sounds innocent, doesn't it? Not 'loss,' 'theft,' or 'error.'

This letter is why I like to use what I call "Danforth's Rule." Years ago, a colleague of mine at Chase Manhattan Bank by that name first enunciated the principle thusly,

'Find the smallest bank in your town and open a DDA account there. Chances are, because they are small, they will treat your account, financial information and business much more carefully than the local branch of the largest bank in the area.'

This is why I strode into my town's branch of BofA yesterday morning. Looking for a platform officer, I waited more than ten minutes for one to manage to notice me and offer to help me.

I thereupon showed her the letter and asked for details of BofA's latest 'compromise.' She had no clue. The officer, one Ms. Gonzalez, had no idea to what event the letter referred.

I pointed out that, while I was not angry with her, it didn't look good that some national Debit Card executive down in Charlotte had flooded the bank's customers with this missive without bothering to give the local branches a 'heads up.'

Or coordinated with the branches, so that the letter, or a phone call, or any communication, would come from a local branch officer, rather than some unreachable, unknown name in some unmentioned location.

I explained to Ms. Gonzalez that this 'compromise' seemed, to me, to be a fairly serious breach of one of the most basic functions a bank undertakes- safeguarding my money.

What the letter meant, I went on, was that BofA had effectively left the door to the vault open one day, and let strangers wander in to take money. They promise they'll make good on any losses, but, still, you probably wouldn't want your assets safekept in a bank that lets strangers raid the bank vaults, would you?

Ms. Gonzalez agreed that this is a serious matter. I further noted that one of the smallest local banks around, of which I happened to have been a very satisfied customer years ago, had recently opened a branch in town. Did she want me to transfer my business there, or would she like to arrange a meeting between me, her and her branch manager?

She agreed to take my contact information, a copy of the letter(!), and respond to me with a time and date to meet.

For what it's worth, as I write this on Wednesday afternoon, that has not occurred.

Meanwhile, I read that last line in Mr. Rains' letter, and shake my head when I note that, having already released my DDA account information to strangers, now Ken Lewis' crack troops promise to do a better job, 'working hard to keep (my) financial information secure.'

Why do you suppose they chose not to work so hard before? Wasn't it worthwhile? Was it too expensive? Or just a nuisance?

Ken Lewis, BofA's CEO, has had a lot of challenges in the past year- buying a failing Countrywide Finance at probably too-high a price, experiencing serious capital markets losses, and, now, presiding over a consumer bank and IT function that can't even manage to properly execute one of banking's most fundamental functions- safekeeping customer deposits.

Not too impressive a job Ken's doing, is it?

Peleton's Fall From Grace

Monday's Wall Street Journal carried an in-depth description of the rise and fall of Ron Beller's Peloton Fund. It's very revealing as yet another story of a can't-miss idea put forth by impeccably-credentialed alumni of a top-flight Wall Street firm. In this case, Goldman Sachs.

The article opens by noting,


"In its sheer speed, Peloton's demise offers an illustration of the delicate relationships upon which the financial industry is built, and the breakneck pace at which they have been unraveling.

There is a widespread weakness in the hedge-fund business: Highflying managers sometimes fail to fully factor in broader risks, such as what happens when troubled banks pull back the borrowed money many funds need to make their investments. Peloton was particularly susceptible because it borrowed heavily to boost returns. For every dollar of client money, Peloton had borrowed at least another nine dollars to buy some bonds.

"If you run out of money, you can't stay in the game," notes Chris Jones of Key Asset Management Ltd., a hedge-fund management firm and early Peloton investor.

Mr. Beller, who personally lost about $60 million in investments, believes Peloton failed not because it made the wrong investments but because his bankers didn't stick with him when the prices of those investments were temporarily out of whack, according to people familiar with the fund. Among investors that lost money are New York investment firm BlackRock Inc., Swiss private bank Lombard Odier Darier Hentsch & Cie. and United Kingdom asset-management firm Man Group PLC."

So in just these few paragraphs, we learn some important facts about Peloton that are probably key reasons for its failure.

First, it was highly leveraged. Second, it would appear that Beller and his colleagues failed to realize how crucial the risk management culture and functions were at Goldman that were now lacking at their startup. Third, Beller is still angry at others, not himself, over the failure.

Failing to acknowledge what the term 'mark to market' means, he feels he should have been given more time and leeway to overcome the realities of borrowing short and holding complex, illiquid instruments long. Finally, some of the 'right' clients invested, which probably assured Beller and his partners that they were invincible.

Other elements in the article seem to point to Beller's lack of attention to detail, such as this one,

"His wife, fellow Goldman alumnus Jennifer Moses, is a policy adviser to U.K. Prime Minister Gordon Brown. In London, the Bellers were better known for the time a Goldman assistant stole more than £4 million, or $7.8 million at today's rates, from their account and that of another Goldman banker.

The episode became fodder for British media, which focused on the opulent lifestyle of expatriate U.S. bankers."

Would you feel comfortable letting someone who, himself, was bilked out of about $8MM by an underling, take responsibility for custody and management of your money?

Started in late 2005, Peloton used its Goldman connections to quickly attract seed investment from the lead partner's former employer, as well as necessary brokerage services. The Journal piece goes on to report,

"By that fall, Peloton's assets totaled $1 billion. Traders met weekly in what they called the "chill out" room, decorated in Moroccan-inspired red and orange colors and low-slung couches, at Peloton's London office. Mr. Grant joined by video link from Santa Barbara, Calif., where he had moved around the time of the fund's launch.

Mr. Beller's intense demeanor sometimes caused friction. He berated secretaries, and poor-performing traders kept quiet in meetings to avoid being humiliated by him, according to people familiar with the situation. Maxwell Trautman, a founding partner, quit in January 2006 after personality conflicts and differing views about strategy with Mr. Beller."

At this point, I briefly stopped reading and thought about some small company environments in which I've worked. The signs of brewing trouble seemed, to me, to be growing: one partner decamps to another country, now unavailable for in-person consultation; Beller's irritability and personality begin to cause problems among the staff; so much so that one of the founding partners quits only months after the launch.

By 2006, Peloton had moved into betting heavily on various mortgage-related securities. According to the article,

"Some investors weren't happy with the shift into mortgage securities. Several withdrew money, including Key Asset Management and Goldman's asset-management arm. In August, Goldman's prime-brokerage unit sharply increased the amount of collateral Peloton had to put up for short-term loans.

The move infuriated Mr. Beller, according to people familiar with the situation.

He berated some investors who decamped, questioning why they would forgo Peloton's gains, which by November 2007 had reached a stunning 87.6%, largely on the bearish housing bet. In late January, Peloton won two awards at a black-tie ceremony hosted by trade publication EuroHedge. Some attendees gasped when Peloton's returns were announced.

At the same time, the relationship between Messrs. Beller and Grant soured, according to people familiar with the situation. Mr. Beller increasingly took credit for the ABS Fund's success -- he accepted the January awards alone -- while the Multistrategy Fund was still struggling. The two discussed a potential split."

Now we have a portrait of the leading partner in denial as customers depart and yet another partner seeks to end his association with him. As the mortgage securities debacle deepened, the situation at Peloton also began to deteriorate,

"In mid-February, Messrs. Beller's and Grant's investments took a hit when Swiss bank UBS AG said it had marked down the value of highly rated mortgage securities similar to those that Peloton held.

Peloton had $750 million in cash and believed its funding from banks was secure. That provided a level of comfort to Messrs. Beller and Grant that Peloton could cover banker demands, known as margin calls, to put up more collateral as the value of its investments fell."

Shortly thereafter, another day's pressure on the instruments shrunk their value to levels that consumed the remaining cash Peloton had in margin calls, and still more collateral was required. The end of the fund came shortly thereafter.

The Journal piece concludes with Beller's rather glamorous version of how the fund finally died,

"The next day, lenders seized Peloton's assets, bringing a chaotic end to the fund. Mr. Beller later likened the situation to the final scene in Quentin Tarantino's movie "Reservoir Dogs," when several actors, guns trained on each other, simultaneously blow each other away."

It's as if Beller saw the entire Peloton enterprise as a gilded joyride in someone else's car, isn't it? He and his partners managed billions in assets, recklessly pyramided investors' capital with excessive amounts of borrowed money, and managed it all with inadequate risk controls.

In the end, it sounds like just another typical end to a too-young, too-brash, too-wealthy asset manager from a name investment bank.

Makes you wonder why firms like Blackrock and Goldman continue to trust these types of newly-minted hedge fund whiz kids, doesn't it?

On Pandit's New Plan at Citigroup

This past weekend's Wall Street Journal edition was full of information regarding Citigroup's CEO, Vikram Pandit, insistence that it will take years to fix the bank.


Sadly affirming the financial supermarket strategy first pioneered by James Robinson at American Express, then lifted by his capital markets hire, Sandy Weill, and ported to Travelers/Citibank, Pandit plans to take several years to get the overly-diverse financial conglomerate on the move in terms of shareholder returns.


Maybe Pandit's drinking whatever his chairman, Bob Rubin's been having, because it takes a lot of chutzpah for a CEO to tell shareholders,


"This will take time."

Apparently, rather than split the sprawling, hapless banking giant into reasonable pieces, such as institutional, consumer, and asset management, in its simplest description, Pandit intends to

"finally merge it all,"

to allegedly finish what Sandy Weill started back in 1998.

Do you know of any other sector in which the rationale for such a major merger is even still valid ten years later, without any changes?

It seems to me that Pandit is demanding, even challenging, his shareholders to stay put and wait a few years to see whether, untested as he is, the former finance professor can actually bring about profitable growth and consistently superior shareholder value at the financial utility.

If it were true that the bank were capable of being fixed to run, as is, intact, yielding consistently superior returns, but it would take some years, then I guess that's one alternative. But in the interim, shouldn't Pandit forgo any significant compensation, since he isn't planning on enriching his shareholders during the time period?

I'm thinking that he would be stripped of all deferred compensation, paid about $350K/year in cash, and, beginning in the year he forecasts improved, superior total returns, deferred stock grants could be paid to him.

If I were a shareholder, though, and heard Pandit's promise of years before a recovery of the bank, I'd just sell my shares and wait for some consistently superior total returns before plunging back in.

Heck, that's what my selection approach does anyway. I don't invest in 'turnarounds.' I only bet on superior operating businesses.

As I noted in this post, regarding GE, if shareholders dumped Citigroup stock now in droves, the price would plunge, actually making it easier for Pandit to earn superior returns in the near future. Provided he actually delivered the promised operating improvements.

Still, it's a pretty galling thing for Citigroup's shareholders to be told to just sit tight, as they have for, what, seven years? And maybe...maybe...this untried CEO will suddenly deliver some better returns than these poor souls could have been getting for the past seven years simply by selling Citi and buying the S&P500 Index.

Investing Options & The Folly of "Corporate Governance"

Thursday night's O'Reilly Factor featured a segment following up on matters at GE. Bill O'Reilly had, as a guest, an institutional investor who holds GE shares and attended the annual meeting in order to ask CEO Jeff Immelt some pointed questions.

During this segment, the audio of the investors was played as he finished asking questions of Immelt and received a reply, including Immelt's contention that the investor had now taken enough of everyone's time.

As I watched O'Reilly retrace some of the same ground he covered in his discussion with me last month, which can be seen in this post, I considered the irony of the situation.

Bill O'Reilly clearly wanted to cover the GE annual meeting and, if possible, capture an unhappy investor closely questioning Immelt, and then interview the investor. This makes sense.

But, then again, it sort of doesn't. Because, as I wrote in this recent post,

"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.

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."

It's one of those Holmesian cases of the dog that did not bark. Only, in this case, it's the investor who was absent.

The investor who was sanguine and realistic enough to have already sold and moved onto better investment opportunities.

So, while I appreciate Bill O'Reilly's desire to deliver good television by interviewing a disgruntled institutional shareholder, I also see that it is very much beside the point.

Further, the institutional fund manager then mumbled something about hoping that the board or shareholders would eventually move Immelt and GE to act in some way that would improve the value of the stock.

I like Bill O'Reilly and I fully understand his reason for covering the GE story on his new program. As I mentioned in this earlier post, he had a trifecta on this topic,

"However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001."

How much better can a news story be? A well-known US company, GE, continues to do business which supports the building of the infrastructure of a country, Iran, which is actively engaged in killing American servicemen in Iraq, while the company's total returns languish and the CEO is paid over $120MM since assuming the job in 2001.

But the investment angle of the story, as represented by Mr. O'Reilly's institutional manager/guest last night, now focuses on the wrong point.

The wonderful thing about our American economic system and environment is that you don't have to own GE! Or any other underperforming asset!

There are thousands of investing options available to both institutional and retail investors alike.

Rather than wait, like those poor souls anticipating Godot's arrival, for the seemingly-always-coming 'corporate governance' solution, investors are better off to just sell what they don't like and buy something else.

Look at Ed Lampert. He got fed up with Sears and decided to improve it. When Lampert surfaced last week, he was full of excuses about how Sears' continuing dismal performance is the economy's fault, and he was sure, in time, when that was doing better, so, too, would his newest headache.

Do you think Ed Lampert now wishes he'd avoided the Sears mess and just stuck with conventional hedge fund investing, instead of crossing the line into operating management of his holdings?

Honestly, the more I watch and listen to people hectoring company CEOs and their boards to 'improve governance,' the more I am convinced you should just vote your shares in the market by selling them.

After all, modern American corporations were devised mainly for the companies to attract capital, not in order to provide investors with additional instruments which would also allow them maximal voices in the operation of the firms seeking capital from the investing public.

If our modern publicly-held corporate model were so highly-evolved and optimal, why would private equity firms exist?

Isn't this the non-barking dog? Private equity?

Obviously some investors are sufficiently trusting of private equity managers such that they hand over large sums of money with less apparent influence on management than they would have in a publicly-listed firm.

Doesn't this suggest that there are more good investment opportunities than there are good CEOs and boards? That it's easier to sell your shares in a company which has potentially good positions, but bad management, and find a better pairing of business opportunity and management?

I thought about this on Friday, when I read a piece in the Wall Street Journal concerning Vikram Pandit's impending moves, or lack thereof, with the bloated, overly-complex and -diversified Citigroup. Rather than hope the inexperienced and untested CEO manages to pull a rabbit out of his hat at Citigroup, why not just sell the stock and buy equity in a company that is better-positioned in its sector, with better, proven management?

There are so many opportunities for investment in the American economy that there's simply no reason to hold onto a problematic equity and either hope, yet again, that this year will bring change for the better, or, worse, lobby for 'management change' or 'board action.'

It probably makes more sense to trust the senior management and board of the firm in which you invest to do a great job with the assets under their control than to invest in a company which you think could, or wish would, do better than it has with the company's assets, and then try to change the management and/or board's behavior.

I'm not Bill O'Reilly, nor one of his producers. So I don't know as much about what makes good television as he and his record-audience-producing staff do. But if it were me? The guest I'd have had on his GE-related segment Thursday night would have been someone who sold GE on or before last month's disappointing announcement of the firm's quarterly profits.

Why did he sell? How long had he waited? What did he buy with the proceeds of his GE equity sale?

That's an investor I'd find interesting and credible.

Some Remarks From A Longtime GE Employee

Last weekend I received an email from a reader who is also a longtime GE employee. The email landed in my spam folder and went unread for a few days.

Of the various developments in my professional life since beginning this blog in the fall of 2005, just after hurricane Katrina struck the US Gulf Coast, this email represents perhaps the most unexpected.

Not being a professional writer, in the sense of living off of income derived from the activity, I wasn't fully prepared for what many columnists must also experience at some point in their careers, i.e., affecting someone sufficiently to trigger a heartfelt outpouring of their own personal aspect of a story about which they have written, or 'covered.'

For me, it's GE. And totally unintended, by the way. I've never owned the equity, choosing instead to simply voice my amazement that anyone else would.

However, here are a few excerpts from my reader's letter,

"I have been checking out your blogs pertaining to GE since your appearance on the O'Reilly Factor about GE and Iran. I recently was laid off from GE West Burlington, Iowa - Switchgear Operations. I got a recall to return temporarily for a few weeks starting soon. ..... The security though is another thing, which leads me to write this to you. I just wanted to pass onto what we've been going through as GE employees the last year and a half, and all that GE does is not surprising to anyone that works for them. As a shareholder though it has been very disappointing since Jeff Immelt has taken over.

The CEO in charge of the Powell-GE mess is Lloyd Trotter, whom ...left and came back as Vice President of GE Consumer & Industrial. He retired at the end of 2007. With the mess that was created, he may have been asked to retire. Now he serves on the board of directors for Pepsi Co. Lloyd was a Plant Manager for GE Burlington in 1986. He wrote articles back then as GE was leading in the market, that to come and see him in 25 years, as he was expecting GE to be still leading the way in Switchgear. And thanks to Lloyd, it may not make it to 25 years. It's a HUGE mess and it's getting worse even though technically the transition is supposed to be pretty much done. It's just the kind of ineptness there is among GE CEOs.

They just want to do business overseas, they don't care about GE Americas anymore. Though the Industrial side of GE should be with GE Energy instead of GE Consumers - has never made sense to me. Though they restructure all the time and change the names every so often you can't keep up from week to week, year to year.

GE just has gotten away from what they built their foundation on. All the attacks on Immelt are deserving. The last time GE lost money was in 2003, and whom was in charge, the same guy. A lot of people in GE are sooo disappointed of the direction of the company.

It sucks being a GE employ right now, and particularly in America. They don't care and it isn't taking much to sell everyone out here in America. GE should be #1 in everything they do, but they don't care and don't put the money back into the company like they should. They've created a mess, and what's sad is all those that have worked their asses off for GE - even after they sell part of the businesses - have to pay for it.

GE used to have an Integrity website when Jack Welch was in charge, they made everyone sign a paper on it. Though they no longer have the site, and maybe since Jeff Immelt has taken over, there is no longer any integrity in the company."


I find it interesting to learn from my reader that, in his opinion, what I've observed as top-level ineptitude on Immelt's part since becoming GE CEO in late 2001 is mirrored down in the trenches among the hourly workers.

Notice how he can attest to Welch's impact at the line employee level, having everyone visit and 'sign' the webpage regarding integrity. During Welch's last CNBC appearance, he talked about the need to knit employees together and create a sense of leadership in which they felt invested and to which they felt committed.

My reader seems to be indicating that Immelt did the opposite.

So there you have it. One GE employee's view from the frontline trenches in Immelt's version of WWI- no forward movement but plenty of casualties. Except for the senior officers.

Reader Email Regarding GE & O'Reilly

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.