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February 28, 2008

MGM Mirage's Use of Strategic Alliances

MGM Mirage is using strategic alliances to diversify itself from a concentration in the casino business into a diversified real estate developer as well. The alliance will allow MGM Mirage the ability to more quickly grow its casino and other related hotel, condo and non-casino related properties. The good news for MGM is that it will continue to grow its business without taking enormous amounts of debt which has been the standard in the casino business. The bad news is that MGM is giving up some the control that it has had over its casino and other related projects as well as share some the profits that traditionally has taken all to itself.

This strategic alliance is one that shares the financing and background of investors and real estate developers while MGM adds its brand name and expertise in design, construction and operations. The structure of the arrangement is through a series of joint ventures between MGM's newly created subsidiary, MGM Mirage Hospitality and a series of developers/investors such as Kirk Kerkorian and Dubai World.

This strategic alliance differerentiates itself from its competitors such as Harrah's Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. I believe it is a good idea for MGM to enter into this arrangement because is lowers the amount of debt and interest expense that it needs to carry on its balance sheet. The article suggests that the extra money saved can be used to upgrade its current casino and property locations.

However, the risk I see in this joint venture is that a conflict of interest over money may ultimately arise in this kind of arrangement. My suggestion is that each party have a clear understanding of the control, profit percentages and potential break-up plans in case things do not go well. With amounts that range in the billions of dollars, the stakes are very high and could make for a very messy divorce.

Attached is the article from Forbes in case the upload does not work correctly.

Title: Beyond Blackjack. By: Miller, Matthew, Forbes, 00156914, 2/25/2008, Vol. 181, Issue 4
Database: Business Source Premier
Beyond Blackjack
Contents

A Worldwide Gamble

Terry Lanni is transitioning MGM Mirage from a debt-heavy casino builder into a diversified real estate developer--using other people's money

On a brisk December evening in Macau, China, J. Terrence Lanni was all smiles. Cameras flashed as Lanni, chief executive of MGM Mirage, the second-largest casino firm in the world with $8.2 billion in estimated 2007 revenue, arrived on a red carpet to attend the black-tie opening of MGM Grand Macau. He greeted Pansy Ho, his partner in the project and daughter of Macau casino mogul Stanley Ho, with a kiss on each cheek.

After participating in several ceremonies for good luck--including one involving bowing in front of a roasted pig and then slicing into its back with a large butcher knife--Lanni retreated to a private dinner where 400 guests, including Stanley Ho and rival Steve Wynn, enjoyed shark fin soup and Kobe beef. Opera singer Sarah Brightman sang "Con Te Partiro," backed by the Hong Kong Philharmonic Orchestra. When the casino doors opened an hour before midnight, masses of eager Chinese gamblers rushed in to face their destinies at one of the joint's baccarat tables.
For Lanni the celebration marked more than the opening of MGM Mirage's first casino in China: The party capped off a stellar year for the company and its majority shareholder, billionaire investor Kirk Kerkorian, the seventh-richest man on The Forbes 400. Earnings were expected to rise 14% to $740 million for 2007; despite a post-October crash the stock ended the year ahead 46%.

But now Lanni has embarked on a new strategy that is aimed at remaking MGM Mirage from a debt-heavy casino builder into a diversified real estate developer that uses other people's money for expansion. That expansion will include not only more casinos but also hotels, condos and other noncasino properties.

The traditional casino model goes like this: borrow billions, build casino, operate casino, minimize losses at the tables, borrow against first casino, design new casino, repeat. Instead Lanni is partnering with deep-pocketed firms in joint ventures. The strategy is not defensive, he insists, but it will allow MGM to expand more rapidly and diversify revenue while keeping a lid on debt. The plan puts Lanni in sharp contrast to his counterparts at Harrah's Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. The downside: MGM will have to share profits and lose some control over projects.

To push the noncasino projects, Lanni created a subsidiary, MGM Mirage Hospitality. Its first deal will develop a $3 billion condo/hotel project in Abu Dhabi, part of a joint venture with Mubadala Development. MGM Mirage will invest no cash but will be paid licensing, branding and development fees in exchange for the use of the MGM name and design, construction and operational expertise. This development will provide $20 million to $22 million in annual fees to MGM, Lanni says.

MGM Mirage Hospitality will also soon be developing boutique hotels in China with partner Diaoyutai State Guesthouse--a move that will bring licensing income and the opportunity to sell the MGM name to Asian high rollers. The subsidiary is also developing a casino under the MGM Grand name at Foxwoods for the Mashentucket Pequot Indians in Connecticut; that partnership with the Pequots will also explore opportunities to develop other casinos across the U.S.

Last year Lanni finalized a multibillion-dollar joint venture with Kerzner International and Istithmar Hotels to develop a new casino resort at the north end of the Las Vegas Strip. In this off-balance-sheet move MGM Mirage will provide an $800 million, 40-acre plot of land to the project. Kerzner and Istithmar will throw in $600 million cash, then all three partners will finance the resort's construction, and split the operational costs and income the casino brings in when completed in 2012. In October MGM announced it would build a $5 billion casino complex in Atlantic City, a project Lanni says could be done with partners once construction begins.

Lanni also says that by roughly 2010 he can foresee MGM Mirage Hospitality being involved in as many as 15 noncasino real estate projects around the world, several in the Middle East and Far East with Dubai World. Last year, for $3.7 billion, Dubai World bought a 50% stake in MGM's $8 billion multiresort project CityCenter, currently the largest privately funded construction project in the world (see FORBES, Oct. 3, 2005), along with 4.5% of MGM's stock.

Lanni says it is too early to tell how much money this noncasino business will generate, but he volunteers that some analysts have speculated the licensing and development fees could bring in $300 million to $500 million annually within a few years. Based on the Abu Dhabi project numbers the company would need to license and develop 15 projects worth $45 billion to yield the $300 million estimate--an ambitious target, especially given the stalling of development around the world amid the credit crunch.

The deal with Dubai World was the finest example, Lanni says, of how he wants to partner on new projects. The sale of shares and part of CityCenter allowed MGM Mirage to take $3.7 billion in debt off its balance sheet and put the company in a position to partner with Dubai World on real estate developments it has planned around the world.
"Had we not done the sale to Dubai World and gone along with all of the other projects we plan to build, we would have $18 billion in debt on our balance sheet in 2010," he says. "Instead we will have $11 billion. That's nearly $650 million in interest we won't have to pay each year, which can go towards capital projects, paying down debt, dividends or buying back stock."

When the company purchased Mandalay Resort Group in 2005 for $7.9 billion, it bought some of the older themed properties on the Strip, including Luxor and Excalibur. Those need upgrades. MGM could also do something more with the 850 acres it owns on the Strip, a quarter of which are undeveloped or underdeveloped. Or it could pick up a few shares of its own stock, which, at $73, is off 27% from its fall high.

Lanni says MGM's main rival, Harrah's Entertainment, the largest casino operator in the world with $10.5 billion in revenues, will spend the next few years paying down debt, while MGM Mirage pours its cash into refurbishing its existing casinos. Harrah's was recently bought by private equity firms Texas Pacific Group and Apollo Group for $27.8 billion in cash and assumed debt. "We partnered with a bank," says Lanni, when speaking of Dubai World. "They married a mortgage company."

A Worldwide Gamble

Here are some of the casino--and noncasino--projects MGM Mirage is building with partners.

Legend for chart:

A: PROJECT
B: PARTNER
C: COST
D: LOCATION
E: OPENING

A: MGM GRAND CASINO AT FOXWOODS
B: Mashentucket Pequot Indians
C: $700 million
D: Connecticut
E: June 2008


A: CITYCENTER--MULTICASINO, HOTEL, CONDO COMPLEX
B: Dubai World
C: $8 billion
D: Las Vegas Strip
E: 2009


A: MGM-BRANDED BOUTIQUE HOTELS
B: Diaoyutai State Guesthouse
C: Unknown
D: China
E: Unknown


A: CONDO AND HOTEL RESORT
B: Mubadala Development
C: $3 billion
D: Abu Dhabi
E: 2012


A: CASINO RESORT
B: Undetermined
C: $5 billion
D: Atlantic City
E: 2012


A: CASINO RESORT
B: Kerzner International and Istithmar Hotels
C: $5 billion
D: Las Vegas Strip
E: 2012
PHOTO (COLOR)
PHOTO (BLACK & WHITE)
~~~~~~~~
By Matthew Miller
________________________________________
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February 27, 2008

Outsourcing

Rethinking the India Back Office
Some Western Firms Weigh Selling
Their Units as Costs Rise, Dollar Weakens
By JACKIE RANGE
February 11, 2008; Page A6

NEW DELHI -- Many of India's back-office businesses -- the industry that propelled this nation onto the front lines of global commerce -- may soon be changing hands.

Some of the largest outsourcing units are still those belonging to Western companies, including Wall Street's biggest banks, which set them up here in recent years to take advantage of India's low-cost, educated labor force. Now, many of the big companies could soon be looking to get out of part or all of the business by selling either to Indian companies that specialize in outsourcing services, to private-equity firms or through initial public offerings.

The reason: The costs for big companies of having their own Indian units are rising sharply -- India's skilled-labor wages are shooting up -- and many, particularly financial-service companies, are looking to cut their overhead as the U.S. economy slows and the credit crunch takes its toll. The dollar's weakness, which makes doing business in India comparatively more expensive, is another incentive for Western companies to leave the sector.

Moreover, a study by consultants McKinsey & Co. and Nasscom, the Indian tech and outsourcing industry group, found that, on average, company back offices -- or "captives," as they are referred to in the tech and outsourcing industry -- were less efficient than companies run by outsourcing firms that specialize in the business. For some types of back-office work, captives' costs are 30% higher. The survey found that the higher costs didn't lead to lower staff turnover or better-quality work.

The scale of many of these individual deals is expected to be small, mostly in the range of $50 million to $100 million. But together they could total sizable numbers at a time when deals elsewhere are expected to become scarce because of the economic slowdown in the U.S. and elsewhere.

"As U.S. companies come under pressure, in a recessionary environment, I think this will be a good way to cut their costs -- and also get some money," said Amitabh Chaudry, CEO of Infosys Technologies Ltd.'s fully owned business-process outsourcing arm, Infosys BPO Ltd.

India's tech and business-process outsourcing industry is growing fast and has been a big factor in boosting economic development here. Nasscom says sales for the industry totaled more than $47.8 billion in the year to March 31, 2007, up almost 10 times over the past decade. The Indian tech sector was 5.4% of the nation's gross domestic product in fiscal 2007, up from 1.2% in fiscal 1998.

Four or five years ago, setting up a unit in India made sense: Shift the accounts, tech department or customer-care center to India and cut costs by 45%. Many American and European companies rushed to do it. Swiss bank UBS AG has a back office employing about 2,000 in tech hub Hyderabad. Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and HSBC Holdings PLC have their own, too.

For some companies, such offices have now become a headache. Once the initial benefit was felt, companies found it hard to keep on top of their costs. Salaries and the cost of office space jumped. Staff turnover has been high, and companies are having to spend on headhunting fees and training.

India, however, remains a low-cost destination that offers a large quantity of people with the often-special skills required to make such businesses work, says Pankaj Kapoor, an analyst at ABN Amro Asia Equities in Mumbai. Although costs have risen, they remain substantially lower than in the U.S. or Europe. While some companies have begun to move their back-office operations to lower-cost countries such as Vietnam, Mr. Kapoor says he thinks many -- particularly the more complex back-office functions -- will remain in India. But at the same time, Western companies are still likely to look for ways of getting those functions off their balance sheets, he adds.

Not all back-office operations are suitable for sale or for operation by another company. Functions that are very central to a business or are too sensitive to be outsourced are likely to stay owned by the parent company, says Viju George, an analyst at Edelweiss Securities, a financial-services firm in Mumbai. Companies that market themselves as having an India presence, often as a low-cost benefit to clients, are also unlikely to sell, Mr. George says.

But already, sales are happening. Genpact Ltd., a business-process outsourcing concern, was spun out of General Electric Co. and listed on the New York Stock Exchange in August. GE and private-equity concerns General Atlantic LLC and Oak Hill Capital Partners remain big shareholders.

Travelport Group, a U.K. travel-services company that is owned by private-equity concern Blackstone Group LP, in December sold Travelport ISO, its Indian back-office operation, to Mumbai-based Intelenet Global Services Pvt. Ltd., a company 80%-owned by Blackstone. At the same time, Intelenet unveiled a deal to buy Upstream, an international outsourcing company, from its major shareholders based in Fargo, N.D. Together, the deals were valued at $75 million.

Back offices also have changed hands as part of bigger outsourcing deals. As part of a $250 million outsourcing contract last July, Infosys bought three back offices in India, Thailand and Poland from its client Philips Electronics NV of Amsterdam for $28 million.

Citigroup Inc. has eyed a sale of its Indian back-office unit, Citigroup Global Services Ltd., people familiar with the matter say. Citigroup declined to comment. And United Kingdom insurance giant Aviva PLC said a strategic review of its Indian offshore business, Aviva Global Shared Services Pvt. Ltd., had come to the early conclusion that partnership, in a variety of forms, could be a better alternative to its current back-office set up. Aviva is now in talks with "a very small number of parties before reaching a final conclusion," the company said in a statement.

Templeton Buys 49% of Vietcombank

Franklin Resources hopes to leverage its partnership with the asset manager to make funds available for Vietnamese investors.

Franklin Resources, which operates under the Franklin Templeton Investments corporate name, has bought a 49% stake in Vietcombank Fund Management (VCFB), an asset management firm focused on private equity investments in Vietnam.

Franklin Templeton bought the stake from Singapore-based investment company Viet Capital Holding. The remaining 51% of VCBF will continue to be owned by Vietcombank, the state-owned commercial bank. The value of the acquisition was not disclosed.

The acquisition is in line with Franklin Templeton's approach of entering new markets by building the business on the ground.

"In building Franklin Templeton's global business, a key approach we have employed has been to make strategic investments in local companies around the world in order to leverage the expertise of well-qualified investment and financial services professionals who have first-hand knowledge of their domestic markets," says Greg Johnson, president and chief executive officer of Franklin Resources. "We see tremendous opportunity to grow our business by extending our local asset management network to Vietnam."

Franklin Templeton's strategic relationship with VCBF marks its first joint venture in Vietnam and while the focus for now is private equity investments, this provides an opportunity for the firm to build a local asset management presence.

Although Vietnam's funds industry is still small and in its early stages, fund management companies that have been among the early movers have held an advantage in terms of fund raising and building a performance track record. So far, there are only three retail mutual funds in Vietnam, the first having been launched in 2004. There are around 100 so-called member funds, but these are not widely available to the public and are mainly offered to private individuals or certain companies that may want to invest in these portfolios.

Franklin Templeton intends to partner with Vietcombank to make its investment funds available, in time, to Vietnamese investors. Vietcombank is one of the big four state-owned commercial banks in Vietnam that make up a combined 65% of the banking system, so the partnership will likely open many doors for Franklin Templeton.

"We see great opportunity in Vietnam with rising income levels among Vietnamese investors and a low penetration rate for mutual fund investments," says Mark Browning, co-CEO of Templeton Asset Management and managing director for Asia at Franklin Templeton International. "With Vietnam's average growth rate of approximately 7% over the last 10 years, we see a bright future for expanding our pan-Asia business to serve investors in Vietnam."

Browing and Dennis Lim, co-CEO and portfolio manager of Templeton Asset Management, have been named members of VCBF's board of directors.

Approximately 9% of Franklin Templeton's assets under management are currently from investors in the Asia-Pacific region. It has no investments in Vietnam shares at the moment but the market will be a key area of focus in expanding the company's penetration in Asia.

Mark Mobius, who heads Templeton Asset Management's global emerging markets team from Singapore, has been cautious about Vietnam in recent years, which is understandable because he's been burned by that market once before.

In September 1994, Mobius started the Templeton Vietnam Opportunities Fund, then the first US-listed Vietnam fund. That was just months after the US lifted its trade and investment embargo on Vietnam and Mobius expected the local stock exchange would be up and running within two years. He had no problems convincing investors and was able to raise $105 million, double his target. But after almost four years passed and no exchange appeared, the fund was restructured and renamed Templeton Vietnam and Southeast Asia Fund with a broader investment mandate. Templeton Asset Management's exposure in Vietnam has since then mainly been in the form of private equity investments.

VCBF was initially set up in 2005. Earlier this month, VCBF debuted its Vietcombank 3 portfolio, a closed fund with a registered capital of Vnd455 billion ($28.4 million), bringing to three the roster of private equity funds launched by the company.

Franklin Templeton established its presence in the Asia-Pacific region in the late 1980s and today has offices in China, Hong Kong, India, Japan, Korea, Singapore and Australia.

http://www.businessweek.com/globalbiz/content/feb2008/gb20080221_300696.htm?chan=search

Banking February 21, 2008, 8:08AM EST

Sprint Merger Issues

BusinessWeek

Special Report February 21, 2008, 5:00PM EST text size: TT
Sprint's Wake-Up Call
Reversing a miserable service reputation after the Nextel merger will be key to the company's turnaround

by Spencer E. Ante

When Daniel R. Hesse was named chief executive of Sprint Nextel in December, he figured that customer service was going to be one of his biggest challenges, given how poorly the wireless service provider had performed on that count in recent years. He quickly found out precisely how big. The lanky 54-year-old walked into his first operations meeting at Sprint headquarters in Overland Park, Kan., and found that customer service wasn't on the agenda at all. He changed course right away. Customer service is now the first item discussed at every one of the weekly meetings. "We weren't talking about the customer when I first joined," says Hesse. "Now this is the No. 1 priority of the company."

With good reason. Since Sprint and Nextel merged three years ago, the deal has turned into something of a fiasco, with the company's stock down 66% since the agreement was struck. Poor service is a central reason. After the merger, unhappy customers defected in droves, and profits evaporated. On Jan. 31, Sprint Nextel (S) said it would take merger-related charges of as much as $31 billion, wiping out nearly all of the deal's value. In addition, two lawsuits have been filed against the company for allegedly extending customers' service contracts without their consent.

Employees like Paula Pryor saw the merger's impact firsthand. The 38-year-old, who worked in a call center in Temple, Tex., says the numbers-driven management approach implemented after the combination led to poor morale and deteriorating customer service. Even bathroom trips were monitored. "They would micromanage us like children," says Pryor, who was fired last year after taking time off when her father died.

The toll on Sprint's reputation has been dear. The company has ranked last among the country's five major wireless carriers in customer service every year since the merger in 2005, according to annual surveys by J.D. Power & Associates (MHP).

Now, two months into his job, industry veteran Hesse is disclosing for the first time detailed plans for turning around customer service. He's increasing investments in customer care, adding service technicians in retail stores, and reversing many management practices in customer call centers. Hesse is convinced that restoring Sprint's reputation with customers is the key to its future. "You will see progress," he says. "We have the right people in place. We will get it done."

For the combined Sprint Nextel to be criticized for quality issues is a remarkable reversal. During the 1980s and '90s, when Sprint was the nation's third-largest long-distance company, it distinguished itself by advertising a fiber-optic network so high-quality you could "hear a pin drop." Nextel was known for its "push-to-talk" technology and the best rate of customer retention in the industry.

When the two unveiled plans to merge in December, 2004, there was a certain logic to the deal. Separately, they were much smaller than AT&T (T) and Verizon Wireless, but together they would nearly rival the two wireless leaders in size. The theory was that, combined, they would have the bulk to get the latest phones, best prices on equipment, and most complete network for wireless customers. "The combination of Sprint and Nextel builds strength on strength," Gary D. Forsee, CEO of Sprint and later the combined companies, said then.

But as the two formally combined in August, 2005, it became clear this deal would be even more complex than the typical megamerger. At the same time Forsee and Executive Chairman Timothy M. Donahue were piecing the two companies together, they laid out an aggressive strategy for the combined entity to become a leader in wireless broadband services and content. That led to plans to spin off Sprint's local telephone business, form partnerships with the cable industry, and develop a wireless technology known as WiMAX. "There was so much going on after the merger that there was a lack of focus," says one former senior-level insider.

In September, 2005, the month after the merger closed, Forsee told Wall Street that the deal was going more smoothly than expected. He raised the projection for expected "synergies," or cost savings, to $14.5 billion, up from the original $12 billion estimate at the time of the merger announcement.

That boosted pressures to find cost savings throughout the company, say former employees and executives. An important component of the effort was importing the quantitative management approach of Sprint to Nextel. While some of the new metrics worked well, others had detrimental effects, former employees and executives say. In particular, call centers began to be measured and viewed primarily as cost centers, rather than opportunities for strategic advantage. Customer service ended up a secondary priority, say former executives. Forsee, now the president of the University of Missouri, declined to comment for this story.

In the fall of 2005, as board members gathered for their first meetings as a combined company, the directors from Nextel noticed another key change, according to the former senior-level insider. Before the merger, Nextel directors talked at every board meeting about "churn," the industry term for the percentage of existing customers who leave each month. The directors felt churn was a good shorthand way to understand the quality of customer service, and they prided themselves on Nextel having the lowest in the industry. But after the merger closed, the combined board paid little attention to churn, concentrating instead on the progress with synergies and strategic initiatives. "From the very beginning there was a philosophical difference on churn," says the former insider.

In the trenches, meanwhile, workers were dealing with fallout from the merger. Pryor remembers the conditions in her Texas call center, originally a Nextel facility, shifting dramatically in the first months after the merger closed in late 2005. Managers began tracking what she was doing on her computer. Overtime pay became much harder to get. Most puzzling for her was the pressure to keep customer calls short. At Nextel, she was judged only on the number of customer problems she solved each month, however long they took, and she would occasionally spend 30 minutes to resolve a thorny issue. But after the merger, speed was the priority, she says. "They would say, Your calls need to be shortened,'" she says.
`LIKE NOAH'S ARK'

Other employees say they felt similar pressure. Gayle R. Romero, who worked in Sprint Nextel call centers for six years, says that at one team meeting after the merger, a manager said, "if you don't think you can handle this, I hear McDonald's is hiring." Says Romero: "Everyone was scared."

Customer service issues began to surface later that year. In January, 2006, Sprint unveiled plans to merge the two billing and customer care systems from the combined companies. But employees say there was little evidence of any progress in the following months. Service reps had to toggle back and forth between systems, and at times couldn't get access to billing or technical information for customers. "It was like Noah's Ark," says one former insider. "We had two of everything."

Churn rose quickly, hitting 2.4% in the third quarter of 2006. That was the highest among the country's major carriers and far above the 1.4% rate Nextel reported before the merger. At the same time, Sprint reported softer-than-expected earnings, punishing its stock.

As Sprint came under financial pressure in 2006, it began to ask call-center workers to engage more in sales. Whereas Nextel service reps had no sales quotas, workers at the combined companies were required to hit targets for renewing contracts or retaining customers who wanted to cancel accounts. One call-center employee says she was supposed to renew 600 to 900 contracts per month, and sometimes the target exceeded 1,000. In the customer retention unit, workers were given cash bonuses of $2,000 to $3,000 per month if they met monthly quotas. "They wanted those big bonuses," says Romero.

Allegations in the two lawsuits against Sprint raise questions about how far Sprint workers went in meeting those sales quotas. Selena L. Hayslett, a realtor from Apple Valley, Minn., says she called Sprint Nextel four times in late 2006 to dispute charges on her bill. Then she realized that each time she called, Sprint was extending her contract, without her consent, according to an affidavit filed in one of the suits. "I felt tricked," said Hayslett.

Her complaint is included in a lawsuit filed by the Minnesota attorney general, alleging that Sprint extended contracts when customers made small changes to their service. "It's kind of like the Hotel California," says Lori Swanson, the attorney general, "where you can check in and never leave." Sprint declined to comment in detail on the lawsuit. However, a spokesman says there are "discrepancies between our rec-ords and the lawsuit's portrayal of customer interactions."

Paula Appleby, a plaintiff in the other lawsuit, claims she tried to cancel her Sprint contract a number of times. But "each time she has attempted to cancel her service she has been told that her contract had been previously extended," according to the complaint, a federal lawsuit filed earlier this month seeking class action status. Sprint said it is still reviewing the Appleby lawsuit and declined to comment on specific claims.

In early 2007, as its financials deteriorated, Sprint cracked down on the freebies that call-center workers could give to keep customers happy, say current and former employees. One current manager in customer retention says that in the first half of 2007, Sprint cut back on virtually all the free minutes, service credits, and free phones that his workers used to be able to dole out. "One hundred minutes is it," says the manager, who asked for anonymity because he does not have authorization to speak to the press.
NO STOPWATCHES

The new policies hurt Sprint's ability to build its customer base. In the third quarter of 2007, churn stayed high, and Sprint saw its subscriber numbers remain flat, at 54 million, while rivals AT&T and Verizon added millions. In October, Forsee stepped down as CEO under board pressure. Today, Hesse is reversing course on several fronts, hoping to salvage what he can from the troubled merger. He and his lieutenants aren't eliminating the quantitative approach entirely, but they're changing many of the old metrics to now emphasize service over efficiency.

Bob Johnson, Sprint's new chief service officer, has eliminated limits on the amount of time service reps spend on the phone with customers. Instead, he'll track how frequently reps resolve customers' problems on the first call. Employees who don't solve a minimum percentage on the first call won't be eligible for sales bonuses. He'll also track how quickly customer calls are answered, to ensure they're getting prompt attention. "My incentives and policies are all driven around improving the experience," says Johnson. He says the long-delayed combined billing system will be done by May.

Hesse is also returning to the Nextel philosophy in a number of areas. Churn, for example, is once again a top priority, discussed at every operations meeting. The figure remained stubbornly high, at 2.3% in the fourth quarter of 2007.

As for the allegations in the two lawsuits, Johnson says Sprint has implemented a zero tolerance policy for shoddy customer service, which includes a new focus on extending contracts only with detailed approvals from customers. Among other things, Sprint sends a letter to customers outlining any changes to their account, and customers have 30 days to cancel the changes.

Hesse knows he has a long, hard road ahead of him. Still, he's convinced Sprint is at last moving in the right direction. "We're beginning to improve customer service already," he says. "There will be a lag between when it improves and when the world knows that Sprint's customer service has improved. There's always a perception lag."

Proposed EA, Take-Two Merger Will Spark More Consolidation

Proposed EA, Take-Two Merger Will Spark More Consolidation
Tuesday, Feb. 26 2008
Fox Business: Ken Sweet

News that Electronic Arts wants to buy game developer Take-Two Interactive should be the beginning of even more mergers and acquisitions in the video game publishing business.

With the production cost of a major video game soaring, and competition increasing between video game consoles and the computer gaming market, industry analysts said consolidation in the video game publishing industry is sorely needed.

Electronic Arts (ERTS: 47.94, +0.01, +0.02%), publisher of the Madden NFL series and The Sims, made an unsolicited $2 billion bid on Monday for Grand Theft Auto publisher Take-Two Interactive (TTWO: 26.54, -0.31, -1.15%). The bid valued shares of Take-Two at a 62% premium from the company’s closing price on Feb. 15--sending the company's stock soaring through the roof.

The proposed merger of EA and Take-Two is the second merger announced within the video game industry in the past three months. In December, video game publisher Activision (ATVI: 27.17, -0.08, -0.29%) said it would merge with software developer Blizzard, a subsidiary of Vivendi (VIV: 6.73, +0.08, +1.20%).

Take-Two's Board of Directors said in a statement Monday they rejected EA's bid, saying the offer undervalued the company.

Like the airline industry, the $9.6 billion video game industry has been ripe for consolidation for some time, analysts and experts said. The costs of producing a major title for a console like Nintendo's Wii, Sony's Playstation, or Microsoft's Xbox, are now so high that if a title does poorly, it can take out the entire game publisher.

“For the small-time publishing houses, it’s a huge financial gamble to put all your cards in one title,? said Edward Williams, a video game industry analyst with BMO Capital Markets.

There are two sides to the video game software business: development and publishing. Development houses create the games, while publishing houses get the game ready for consoles and computers. Think of developers as authors and publishers as book publishers.

EA is one of the largest third-party video game publishers and developers. The company makes games and distributes them. While Take-Two is also a developer and publisher, it's primary business is to develop titles. Take-Two makes nearly all their money from the company's hit series Grand Theft Auto. While it does have some other major titles, the company's entire financial future is staked on GTA.

EA can afford to take Take-Two under its wing because it has multiple franchises working under the company's umbrella. Plus, EA needs Take-Two, analysts said.

“Take-Two has one of the best development teams in the industry,? said Doug Creutz, a video game analyst with Cowen and Co. "It should bring some fresh ideas to EA, which for most people has become pretty stagnant when it comes to ideas.?

A key issue in the video game industry is scale, analysts said. Video game publishers need the infrastructure and talent to produce blockbuster titles across multiple platforms like PlayStation, Wii and Xbox--on top of producing titles for computers. If a company is a single-title video game developer, the business can go months, even years, without making a profit.

That's a huge financial gamble. According to industry experts, a big-name franchise can cost a publishing house upward of $20 million to $40 million per title for development and publishing.

The costs are mainly related to the scale and vastness that games now require. Game publishing companies are not making titles like PacMan or Pong anymore. Instead games often have multiple levels and intricate graphics that require millions of lines of code and teams of 50-100 game developers.

As the barriers to entry grows, the industry may start looking more like its media cousins in a few years, where conglomerates will control the bulk of the creative content being produced, analysts said.

"It's turning into the movie business," said Cruetz. "You'll have smaller players like Lions Gate Films who are the exception to the rule, but the bulk of the content is in the hands of companies like Sony Pictures of Warner Bros."

While most analysts believe consolidation will continue in the industry, they disagree on where it will come from.

There are very few major U.S.-based video game publishing houses that haven't been acquired or made into giants themselves. One of the last ones is game publisher THQ (THQI: 19.04, +0.01, +0.05%), whose shares soared more than 10% in trading Monday on takeover speculation. There are also smaller game development houses like id Software or Epic Software, both privately held and both seen as potentially lucrative takeover targets.

Williams said he believes consolidation will come from overseas: most likely in Japan and Europe. Japan is the world's largest market for video games, and has some notable video game publishing houses that could merge with an American counterpart like Square-Enix (SQNXF), maker of the Final Fantasy series, or Capcom (CCOEF). There is also Ubisoft (UBI) in Europe.

Cruetz, meanwhile, said he does not believe there will be a joint Japan-U.S. game publishing merger because of the cultural differences. "Japanese video game publishers are not as popular in the U.S. as they are at home and visa versa," he said.

Instead, Cruetz said he sees consolidation coming from big publishing houses buying up start ups.

Whole Foods CEO Blogging Backfires

SE MONEY
HD Whole Foods' CEO was busy guy online ; 17 postings under pseudonym in 1 day
BY Greg Farrell; Paul Davidson
WC 1435 words
PD 13 July 2007
SN USA Today
SC USAT
ED FINAL
PG B.4
LA English
CY © 2007 USA Today. Provided by ProQuest Information and Learning. All Rights Reserved.
LP
Anyone who thinks that posting anonymous comments on an Internet bulletin board is a harmless diversion should pay close attention to what happens to John Mackey.

Mackey, Whole Foods CEO, was outed this week as "Rahodeb," a frequent visitor to Yahoo chat rooms dedicated to stock trading. In his comments, Rahodeb was unstintingly bullish on the prospects of Whole Foods' continuing growth, and frequently critical of a rival company, Wild Oats.

TD
It's not clear whether he violated any securities laws in his pseudonymous postings, but his comments could end up hurting Whole Foods shareholders in another way. The Federal Trade Commission is using some of his remarks to bolster its contention that Whole Foods' planned acquisition of Wild Oats, announced in February, would be anti-competitive.

In a court filing Tuesday, the FTC referred to Mackey's anonymous postings to back up its position.

Corporate governance experts and image consultants say that Mackey's exposure as an anonymous commentator could cause the company's board to question his leadership abilities.

"This evidence raises more doubts about his sanity than his criminality," says Jack Coffee, a securities law expert at Columbia Law School. "The merger is a major business strategy, and he's undercut it with reckless, self-destructive behavior. It's a little weird, like catching him as a Peeping Tom."

"It's more of an embarrassment than an issue of profound ethical and legal consequence," says Eric Dezenhall, a crisis communications consultant. "It shows a degree of obsessiveness that's a little disturbing."

Wednesday, after The Wall Street Journal identified Mackey as Rahodeb, Whole Foods acknowledged that the CEO had posted anonymous comments from 1999 through 2006 using the handle, an anagram of his wife's name, Deborah.

For the curious, Yahoo on Thursday put up a link from its Finance page to all 1,394 postings with Mackey's screen name on all its message boards, going back to 1999. Some days, Mackey was a heavy poster. On Sept. 5, 2005, for instance, he posted 17 times from 12:03 a.m. until 11:09 p.m. On Nov. 11, 2005, he posted 17 times from 12:04 a.m. to 5:25 p.m.

The postings

While some of Mackey's postings sound like press releases from Whole Foods, citing same-store sales and compound annual growth, others convey the sarcastic, overheated atmosphere that often pervades Internet message boards.

"If you don't like my posts, put me on 'ignore,'" writes Rahodeb on May 6, 2005. "No one is forcing you to read my posts. If you think I'm an 'autistic dyslexic parrot' then simply stop reading my posts. Do you know how the 'ignore' feature works? Maybe you aren't as clever as you think you are?"

In other posts, Rahodeb bashes Wild Oats, criticizing former CEO Perry Odak for an alleged lack of vision, and noting that in all its years as a public company, Wild Oats hasn't turned a profit. In February 2005, Rahodeb gleefully noted that Wild Oats was going to have to restate its earnings.

"In my book this means that OATS has been misleading its investors for years now and is almost bound to result in shareholder litigation," he writes. "It also means that OATS leadership lacks either competence or integrity and probably both."

Despite Rahodeb's oft-stated opinion that Wild Oats stock was worth around $5 per share (or less), Whole Foods offered $18.50 per share in February to acquire the smaller company, then selling for $15.72.

That bid, which threatened to reduce competition in the natural foods grocery business, captured the FTC's attention. In seeking to block the merger, the FTC argues that Whole Foods, the No.1 natural and organic grocery chain, wants to destroy its leading competitor and monopolize the market in many cities. That would lead to higher prices and poorer service for customers, the FTC says in a court filing.

The agency cites Mackey's presentation to Whole Foods' board in which he says the deal would let the company "avoid nasty price wars." Mackey also told the board the merger would "eliminate forever the possibility" that chains such as Safeway and Kroger could use Wild Oats as a "springboard" to launch a rival organic food chain, according to the FTC. It contends natural and organic supermarkets don't face direct competition from mainstream groceries because of the quantity and quality of their perishables and organic products.

Mackey disputes that in a blog on the company's website, saying that Whole Foods faces "vigorous competition" from chains such as Safeway, Giant and Trader Joe's, and that Wild Oats is "only a relatively small part."

He further maintains that Whole Foods would not raise prices if it bought Wild Oats, noting its prices are no higher in markets where Wild Oats has no stores. In fact, he says, prices would be cut and service improved because Whole Foods is larger and benefits from greater buying efficiencies.

James Rill, a former antitrust chief at the Justice Department and now with the Howrey law firm, doesn't think Mackey's postings help the FTC.

"It's certainly imprudent for him to have done that, but it doesn't tell much about the real competitive consequences of Wild Oats and Whole Foods," he says.

But Steve Newborn, head of the antitrust practice for Weil Gotshal & Manges, says that any assertion by Mackey that some of his postings were not truthful could hurt his credibility in court.

---

Contributing: Brad Heath, Barbara Hansen

Examples of his postings

Whole Foods CEO John Mackey often posted to a Yahoo investor bulletin board for his company under the pseudonymous Rahodeb. Some postings bashed a rival company, Wild Oats, that Whole Foods is now trying to buy. A timeline with examples of Rahodeb's postings:

1 March 28, 2006: "Whole Foods says they will open 25 stores in OATS territories in the next 2 years ... The writing is on the wall. The end game is now underway for OATS ... Whole Foods is systematically destroying their viability as a business -- market by market, city by city."

2 April 11, 2006: "What I did say about OATS back when it was at $6 a share was that it was a poorly managed company that has lost $81 million over its 18 year history and over $60 million the past 5 years. ... These are facts and not subject to dispute. The company has been very poorly managed and I don't believe it has a sustainable business model. I can't deny that the stock has traded up over the last year, entirely due I believe to buyout speculation by Ron Burkle. ... However, if Burkle sells his 15% share and nobody else buys the company, OATS stock price will return to its intrinsic value -- below $6 a share."

April 11, 2006: "... Whole Foods has a hugely successful business model by all objective financial measurements there are. OATS does not."

3 May 6, 2006: "... If selling organic foods is the key to success, then answer one simple question: why has Wild Oats lost over $80 million in its 19 years of existence? OATS sells the same product line that Whole Foods does, but they've lost money big time. How is this possible?"

4 June 21, 2006: "Invest in OATS only as a speculation of a takeover by Burkle. Invest in Whole Foods if you are willing to hold for 5+ years and to risk the stock significantly falling at some point. Over the long-term its strong growth will bail out the long- term buy & hold investors, but it may require commitment and patience."

5 Aug. 12, 2006: "This will be my final message on this bulletin board as I have lost my bet with hubris12000. ... Mr. Market hit the panic button and the stock has crashed, down almost 40% from its high of just a few months ago. Whole Foods itself has a very bright future and I will continue to hold my stock for a very long time -- until the growth begins to significantly slow. I've enjoyed my 8 years on this Board, but all things must come to an end. ... Surgeon General and Boston Cowboy -- you were both right about my true identity all along. Congratulations on your cleverness."

ART
GRAPHIC, B/W, Julie Snider, USA TODAY, Source: CSI, USA TODAY research (LINE GRAPH); PHOTO, B/W, Whole Foods Market

IN
iint : Internet/Online Services

NS
c181 : Acquisitions/Mergers/Takeovers | c41 : Management Issues | c411 : Management Moves | ccat : Corporate/Industrial News | gfod : Food/Cooking | c18 : Ownership Changes | gcat : Political/General News | glife : Living/Lifestyle | ncat : Content Types | nfact : Factiva Filters | nfcpex : FC&E Executive News Filter | nfcpin : FC&E Industry News Filter

RE
usa : United States | namz : North American Countries/Regions

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FOOD & COOKING CORPORATE OFFICERS MANAGEMENT ISSUES ACQUISITIONS, MERGERS & TAKEOVERS BUSINESS/FINANCE/ECONOMY GROCERY STORE ORGANIC FOOD EXECUTIVE INTERNET ETHICS SECURITIES MERGER Federal Trade Commission Mackey, John Burkle, Ron

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USA Today Information Network

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More Like This

Electronic Arts Offers $2 Billion for Take-Two

By ANDREW ROSS SORKIN and SETH SCHIESEL
Published: February 25, 2008

Electronic Arts, the video gaming giant, made an unsolicited $2 billion bid on Sunday for rival Take-Two Interactive, publisher of the Grand Theft Auto franchise, a deal that would further a wave of consolidation in the rapidly growing industry.

Electronic Arts, which publishes hit games like the Madden N.F.L. and Need for Speed series, offered to pay $26 a share for Take-Two, a 50 percent premium over its share price of $17.36 on Friday. The offer was made publicly after a series of private offers to Take-Two were rejected by its board.

Electronic Arts approached Take Two with a $26-a-share offer on Feb. 19, up from $25 share it initially offered on Feb. 15.

The timing of the bid appears to be an attempt to acquire Take-Two before it releases what is widely expected to be the top-selling game of 2008, the fourth installment of the crime thriller Grand Theft Auto. The Grand Theft Auto franchise, Take-Two’s crown jewel, has sold more than 60 million copies since Grand Theft Auto III took the game industry by storm in 2001.

Through its Rockstar subsidiary, Take-Two is scheduled to release the game on April 29 for Microsoft’s Xbox 360 and Sony’s PlayStation 3 consoles. If it lives up to consumers’ expectations, the game is expected to sell 10 million copies or more by the end of the year, which would almost certainly make Take-Two more expensive.

Electronic Arts’s dominance has been strongly challenged by Activision. Not only has Activision had a recent string of hits, notably Guitar Hero, it also recently agreed to buy Vivendi’s game division to form a company called Activision Blizzard.

At the same time, E.A. has endured a growing chorus of criticism from some investors who say the company has lost its creative and innovative edge.

There is little doubt that E.A. remains the juggernaut of the video game industry. But it has come to rely heavily on sequels.

A merger with Take-Two would be a union of two vastly different companies. E.A. has a reputation for steady growth and fiscal discipline, while Take-Two is known as a mercurial one-hit wonder.

Electronic Arts said it was making its offer public to “bring its proposal to the attention of all Take-Two shareholders.? In a telephone interview on Sunday, Electronic Arts’ chief executive, John Riccitiello, said, “It is an enormous premium,? suggesting that rather than consider the offer hostile, “We think of ourselves as a ‘white knight.’ ?

Take-Two was far less generous. In a statement, Strauss Zelnick, the company’s chairman, said, “Electronic Arts’ proposal provides insufficient value to our shareholders and comes at absolutely the wrong time given the crucial initiatives under way at the company,? referring to the new Grand Theft Auto and other products.

Mr. Riccitiello said, however, he believed that Take-Two’s stock price already reflected an expectation among investors that Grand Theft Auto IV would be a success, and that Take-Two would become less valuable to E.A. after the game’s introduction than it was now.

Mr. Riccitiello said his offer’s timing reflected a desire to integrate Take-Two’s operations with E.A.’s before the all-important holiday shopping season. He said he had formed a relationship in recent years with Sam Houser, one of Rockstar’s founders, but added that he had avoided contacting Mr. Houser while pursuing his negotiations with Mr. Zelnick.

Mr. Zelnick said that Take-Two had offered to initiate discussions with Electronic Arts on April 30, the the day after Grand Theft Auto IV was scheduled for release. “We believe this offer demonstrated our commitment to pursuing all avenues to maximize stockholder value, while we believe that E.A.’s refusal to entertain this path is evidence of their desire to acquire Take-Two at a significant discount,? he said.Mr. Riccitiello refused to speculate about what steps he would take next, but it is possible that Electronic Arts could pursue a proxy contest to oust the board.

Over the next several weeks, Mr. Riccitiello’s main challenge will be to persuade investors to accept the deal and convince employees that Electronic Arts will respect the creative autonomy of Take-Two’s various development teams. Over the last decade, E.A. has acquired many high-profile game studios, including Westwood (the Command & Conquer series), Bullfrog Productions (Populous) and Origin Systems (Ultima), which essentially dissolved after Electronic Arts tried to direct and homogenize their creative output.

Any deal for Take-Two would be largely empty if Take-Two teams like Rockstar and Ken Levine’s group at 2K Boston, which recently released the acclaimed game BioShock, were to depart rather than work for E.A.

Mr. Riccitiello seems aware of the danger and is taking steps to convince the game industry of E.A.’s newfound respect for creative talent. At a well-received speech at an industry conference in Las Vegas earlier this month Mr. Riccitiello promised that in future deals, Electronic Arts would avoid killing the creative golden goose as it has in the past.

Tiffany & Co. has high hopes for Swatch watch deal

Tiffany & Co. has high hopes for Swatch watch deal
By Andria Cheng, MarketWatch

NEW YORK (MarketWatch) -- About 30 years after deciding to develop its jewelry line over its watch business, Tiffany & Co. said it's finally paying attention to the long-neglected segment. The luxury retailer announced this past weekend it will partner with Swatch Group, its biggest partnership in its 170-year history.
The Swiss watchmaker will help the retailer produce and sell a line of Tiffany & Co. (TIF:
Tiffany & Co. TIF40.75, +0.29, +0.7%) branded watches to help significantly catapult watch sales, which represented about 2% to 3% of the company's $2.6 billion in total revenue last year, Tiffany Chief Executive Michael Kowalski said in an interview on Wednesday. That compares to 20% to 40% of sales for some of the other larger luxury brand companies, he said.
"There's a potential to grow significantly above that" of where Tiffany's watch business is, said Kowalski. "Watch has always been an underdeveloped business at Tiffany. It can be a substantial business for Tiffany. We expect it to grow dramatically."
The first line of watches may be unveiled as early as the second half of 2008 with a full collection expected to be introduced in 2009, according to the companies. They will sell for prices similar to Tiffany's existing collections, which range from $1,600 to $10,000, Tiffany spokesman Mark Aaron said.
The deal is equally significant for Swatch, the Swiss watchmaker (CH:001225515: news, chart, profile) said. Swatch, with about $5 billion in sales, will add Tiffany to its 18-brand portfolio that includes luxury lines Omega, Longines or Breguet.
The business can eventually grow to "several hundred million" in sales and be as large as Tiffany rivals Bulgari or Cartier's watch businesses, said Nick Hayek Jr., chief executive of the Swatch Group, in a separate interview on Wednesday.
Swatch will create a new subsidiary in Switzerland devoted to making Tiffany-branded watches, headed by Nayla Hayek, daughter of Swatch founder Nick Hayek Sr.
"This is a clear signal that it's important to us," said Nick Hayek Jr. at a news conference at Tiffany's flagship store in New York on Wednesday.
Swatch and Tiffany's 20-year partnership will help Tiffany devote more resources to "significant" advertising of its watches, Kowalski said.
The agreement also will help Tiffany tap into Swatch's "substantially larger" network to expand its namesake watches to where Swatch sells its luxury lines or where Tiffany rivals Bulgari and Cartier sell their timepieces, executives said at the news conference.
Tiffany's watches are sold in its 180 stores, on its Web site and about 100 independently operated locations that represent a "very small" percentage of sales, Tiffany spokesman Aaron said. The two companies also will collaborate on marketing and design. Tiffany first began making watches in 1846.
"This is better than anything than we could have achieved on our own," Kowalski said in the interview. "Fundamental economics of this partnership is certainly very attractive. Vertical integration ultimately is margin accretive."
Tiffany will get an undisclosed percentage of pre-tax profit from Swatch. Swatch also will take over production of the existing collections including Atlas, Tiffany Grand and Tiffany Mark. Swatch said it'll significantly ramp up capacity to meet the production demands of Tiffany watches.
Tiffany announced Monday it will take about $20 million in pre-tax charge to discontinue some of the watches and related inventory.
Andria Cheng is a MarketWatch reporter based in New York.

A Capitalist Jolt for Charity by Steve Lohr

New York Times: February 24, 2008
A Capitalist Jolt for Charity
By STEVE LOHR

IN the summer of 2005, Miles Gilburne and Nina Zolt had long talks over dinner in their Washington home about what to do next. For more than six years, Mr. Gilburne, a former AOL executive, and his wife, Ms. Zolt, a former lawyer, had supported a philanthropy that used books and online tools to enhance skills of inner-city students.

The program, which Ms. Zolt directed, had been moderately successful. Students liked writing online about books and sharing their ideas with Internet pen pals, including adult mentors. Many teachers embraced the project, called In2Books, and participating students outscored their peers in standardized tests.

Still, the costly venture grew only gradually, classroom by classroom. The couple had put $10 million into the charity, a “meaningful portion? of the family wealth, Mr. Gilburne says. “It was enough money that I did lie awake at night thinking about the size of the checks,? he recalls.

As philanthropy, the couple’s efforts, however worthwhile, weren’t sustainable. But their vision of using the Internet for communication and collaboration to improve education has taken on a new life — as a business.

Today, the once-struggling venture has morphed into a primarily for-profit enterprise. And the striking transformation of In2Books is emblematic of a larger trend: charities are changing their spots and making use of some of capitalism’s virtues.

The process is being pushed forward by a new breed of social entrepreneurs who are administering increasing doses of bottom-line thinking to traditional philanthropy in order to make charity more effective.

To make a fresh start, Mr. Gilburne attracted like-minded angel investors, and at the end of 2006 the group bought a for-profit company, ePals Inc., to expand on the original mission and support the foundation. The ePals company has grown and now offers classroom e-mail, blogs, online literacy tools and Web-based collaborative projects on subjects like global warming and habitats.

EPals says 125,000 classrooms around the world are using at least some of its free tools, reaching 13 million students, and its ambition is to become a global “learning social network.?

National Geographic is to announce this week that it is investing in ePals, based in Herndon, Va., and will supply educational content for the ePals learning projects. Worldwide distribution should get a lift from Intel, which will soon ship its Classmate laptops, designed for students in developing nations, with the ePals icon on the screens. And ePals is also offered for use on the low-cost computers from One Laptop Per Child, a nonprofit group trying to bring the content and experience of the Internet to children in developing countries worldwide.

Various versions of efforts like this are appearing across the philanthropic landscape as business-minded donors, epitomized by Bill and Melinda Gates and their foundation, have treated their charitable contributions more like venture capital investments. They seek programs that can be catalysts for broad changes in fields like health, education and the environment, they measure performance and results, and they encourage nonprofits to become more self-sustaining.

Yet to have the greatest possible impact, a further step down the capitalist road is sometimes needed, analysts and others in the field say. Muhammad Yunus, the microfinance pioneer and Nobel laureate, calls this next step the “social business.? The goal, according to Mr. Yunus, is to create ventures that more than pay for themselves — in other words, turn a profit.

Social business entrepreneurs, he writes, can help “make the market work for social goals as efficiently as it does for personal goals.?

PHILANTHROPIES are discovering that for-profit status and financing can be a useful tool. For example, many microfinance lenders, modeled after Mr. Yunus’s project, the Grameen Bank in Bangladesh, aim to make the crossover to profit-making institutions.

Mozilla, the nonprofit foundation that developed the open-source Web browser Firefox, decided that it needed a for-profit unit to accelerate its business activities and gain market share against Microsoft’s Internet Explorer. The business unit is freer to spend on marketing, charge for software service and technical support, and pay to compete for engineering talent in Silicon Valley.

Likewise, Google.org, the search giant’s corporate foundation, chose for-profit status to be able to easily make investments in for-profit companies including alternative energy start-ups like eSolar and Makani Power.

“Capitalism is a very mutable, flexible beast, and what we’re seeing is social entrepreneurs addressing some of these social challenges in profoundly different ways than traditional nonprofit organizations,? said John Elkington, co-author with Pamela Hartigan of “The Power of Unreasonable People: How Social Entrepreneurs Create Markets that Change the World,? a new book that was handed out last month to attendees at the World Economic Forum in Davos, Switzerland.

Even among its hybrid peers, ePals has evolved into an unusual combination of a business and a social venture. When Mr. Gilburne and Ms. Zolt established the for-profit arm in 2006, they attracted like-minded investors, acquired ePals Inc. and began hiring talented staff. They gave the original education foundation a 15 percent stake in the ePals company, and its endowment will grow if the business prospers. The nonprofit division is focusing on educational research and bringing technology into classrooms.

But the company is where the action is. “This needs to be a large business to have a really significant social impact,? Mr. Gilburne said. “We couldn’t do what we’re doing as a nonprofit.?

Very few nonprofits get big. Only 144 of the more than 200,000 nonprofits established since 1970 had grown to $50 million or more in revenue by 2003, according to a study published last year by the Bridgespan Group, a nonprofit consulting firm that advises philanthropies.

With the rising influence of social entrepreneurs in philanthropy, many nonprofits have sought to generate revenue to become more self-sustaining. But it is still rare for a nonprofit to cross the chasm to become mainly a profit-seeking business, as in the ePals experience.

“It’s tricky, but it makes sense when the business is highly aligned with the mission of the social entrepreneurs,? said Jeffrey L. Bradach, a managing partner of Bridgespan.

As a for-profit business, ePals can more easily attract financing for growth. But outside investors raise the risk that the original social ideals will be lost in a single-minded pursuit of profit. Mr. Gilburne has tried to avoid that pitfall by gathering a stable of angel investors among his longtime business friends, who bring not only money but also a shared belief in the promise of the Internet to improve education.

The group includes Stephen M. Case, the former chief executive of AOL; Mitchell Kapor, the founder of the early spreadsheet maker Lotus Development and an open-source software supporter; and Yossi Vardi, an Israeli Internet entrepreneur.

“None of our investors are interested just in making another financial score,? Mr. Gilburne said.

AFTER pooling their money, the angel investors bought the ePals company in December 2006 for an undisclosed price. Mr. Gilburne had watched ePals for years, starting when he was at AOL in the 1990s, and he saw it as the foundation on which to build an educational social network.

EPals started as a Web-based electronic pen-pal service in 1996, offering point-and-click tools that teachers could use to control how students use e-mail. A teacher in California, for example, set the controls so her class could communicate online only with a class in China that was engaged in a joint cultural exchange project.

Since the angel investors came aboard in 2006, the ePals work force has more than doubled, to 43, and the company continues to hire. It has improved the e-mail and blogging software and added links to outside resources, like National Geographic’s digital library, to its Web-based software for online projects.

“We were a small company with little capital,? said Tim DiScipio, a founder of the original ePals, who is the chief marketing officer of the revamped company under its new ownership. “But now we have the resources to really pursue the vision of social learning over the Internet.?

Until last fall, ePals charged $3 to $5 a year for each student e-mail account, but the service is now free. The effect of free distribution was immediate and dramatic. The number of registered users has nearly doubled, to 13 million, since September.

The growth and ambition of ePals have impressed National Geographic enough to make an investment and forge a partnership.

“We’re looking at them as a global network to distribute National Geographic content,? explained Edward M. Prince, the chief operating officer of the venture arm of the nonprofit scientific and educational organization.

The ePals team is betting that it can build a worldwide social network in education — a serious, controlled version of Facebook, for students in kindergarten through 12th grade. “When markets go digital, they go collaborative and sharing,? said Edmund Fish, the chief executive of ePals and a former executive of AOL, where he oversaw online education offerings. “That can happen in education, too. A learning social network is not an oxymoron.?

Even the basic social networking of ePals e-mail exchanges, teachers say, helps improve writing skills and stirs curiosity about other cultures. Mirjana Milovic, a teacher in Kragujevac, Serbia, says ePals has helped the 120 students in her school with their English-language skills. Their correspondents in Alabama and Kansas have also learned that jeans and Nike shoes are popular in Kragujevac but that the McDonald’s in town closed for lack of business.

“We usually prefer our domestic food,? wrote Marija, an 18-year-old.

Candace Pauchnick, who teaches English and sociology at Patrick Henry High School in San Diego, has been using ePals for what she calls “virtual field trips.? In their online exchanges with students in Italy, China and the Czech Republic, her students have learned about family life and political systems in foreign lands and improved their writing skills.

“If they were just writing for me, they wouldn’t be as careful,? Ms. Pauchnick said. “But they’re writing for a student in another country. It’s not drudgery for them. They buy in and they enjoy it.?

Ms. Zolt, the chief program architect of ePals, endorsed the for-profit route but insisted that the digital network also provide a free searchable database for educational research.

“The promise here is to be able to study, with vast amounts of real-time data, how children learn,? she said.

Scholars are enthusiastic. “Its potential is very exciting,? said Linda B. Gambrell, a professor of education at Clemson University, who is one of the academic advisers of ePals. “This should help us quicken the pace of translating innovative research into best practices in the classroom.?

Like many start-up companies, the revamped ePals is still working on its business model. Mr. Gilburne, the chairman, says it will pursue corporate sponsors for certain project areas. These could be part of a company’s community and social responsibility activities, providing approved adult experts to help students online. For example, General Electric might sponsor ePals’ global warming section by providing environmental experts as online mentors, Mr. Gilburne said, or perhaps Intel or I.B.M. would help in engineering projects.

There are commerce opportunities, Mr. Gilburne added, for education publishers who might want to market books or curriculum materials for home-school students over ePals.

Eventually, Mr. Gilburne said, advertising will be part of the mix. “But we’ll go gingerly to figure out what is appropriate and doesn’t impose on the classroom,? he said.

The failure rate for entrepreneurs — whether social or purely capitalist — is high. Still, ePals’ backers are betting that it is worth the risk. “These kinds of opportunities to do well and do good at the same time don’t grow on trees,? said Mr. Kapor, the ePals investor and a philanthropist. “But I do think that ePals could be one of them.?

http://www.nytimes.com/2008/02/24/business/24social.html

Starbucks Cuts 600 Positions

By JANET ADAMY
February 22, 2008; Page B6

Starbucks Corp. is eliminating 600 jobs as part of an effort to revive the struggling coffee giant.

The Seattle company said that 220 people lost their jobs as part of its restructuring. The remaining 380 jobs are open positions that won't be filled. The cuts are happening in Starbucks' so-called field operations, or offices that support Starbucks cafes, and won't result in job losses at the retail stores. Nearly all of the jobs are based in the U.S. Starbucks employs about 170,000 people.

"We have to step up to the challenge of being strategic as well as nimble as our business evolves," Chairman and Chief Executive Howard Schultz said in an email to employees. The company also increased by two the number of regional divisions it has in the U.S., for a total of four.

In returning to the chief executive position last month, Mr. Schultz said the company's rapid growth had led to bureaucracy. Starbucks shares lost almost half their value last year as price increases and a weak economy slowed traffic at its U.S. locations, and a lack of appealing new products dulled demand.

A few days after his return, Mr. Schultz announced he had shuffled a handful of top management positions. This latest round of cuts doesn't reach into the executive level.

Since his return, Mr. Schultz has said he plans to close weak stores and slow the number of store openings in the U.S. as well as refocus the chain on coffee. He says he will release more details of his plans at the company's annual meeting next month. On Tuesday, Starbucks plans to close all of its company-operated stores in the U.S. from 5:30 p.m. to 9 p.m. local time to retrain 135,000 store workers, in part to teach them how to better make espresso drinks.

Mr. Schultz has indicated that, among other things, he plans to make better use of the Starbucks payment card, emphasize the company's expertise in coffee roasting and possibly create a new segment for Starbucks that would allow customers with lower incomes to try its products.

Of those who lost their jobs, about one-third worked at Starbucks headquarters in Seattle, and about two-thirds worked at other Starbucks field operations outside headquarters

Google Health Begins Its Preseason at Cleveland Clinic

By Steve Lohr Published: February 21, 2008, The New York Times

For 18 months, Google has been working to come up with a product offering and a strategy in the promising field of consumer health information. Until now, the search giant hasn’t had anything to show for its labors other than bumps along the way — delays and a management change.

But on Thursday, Google’s technology for personal health records, which is still in development, is getting a big endorsement from the Cleveland Clinic. The big medical center is beginning a pilot project to link the health information for some of its patients with Google personal health records.

Cleveland Clinic is at the cutting edge of health information technology, and its more than 100,000 patients each has a personal health record. But a sizable portion of those patients are retirees, notes Dr. C. Martin Harris, the clinic’s chief information officer. Many of them, he said, spend about five months elsewhere, typically in Florida or Arizona, and the clinic’s sophisticated electronic health records don’t follow them there.

“It forces the patient to become his or her own medical historian,? Dr. Harris said.

The Google personal health record, he said, is a solution to that problem, among others. A person can approve the transfer of information on, say, medical conditions, allergies, medications and laboratory results from the clinic’s computers to a Google personal health record — a series of secure Web pages.

The pilot project will last six to eight weeks, and involve less than 10,000 patients. The project with Cleveland Clinic is “a milestone? for Google, said Marissa Mayer, a vice president, who took over management of the health team six months ago.

Google’s personal health record is still in development, and it will be introduced publicly and made widely available, after the pilot project is concluded, Ms. Mayer said.

To be sure, Google is only one of several companies trying to make a business from Web-based personal health records. Microsoft, for example, brought out its entry, called HealthVault, last October, and it has commitments from medical centers including New York-Presbyterian Hospital and the Mayo Clinic. WebMD, Revolution Health and others also offer personal health records.

While it’s still not entirely clear what Google’s personal health record will be like, its approach seems to be ambitious and comprehensive. Google has its own user interface, while Microsoft, for example, appears to be focusing on back-end storage. Google is offering automated data links, so the patient does not have to type in personal data, as is required with some personal health records. And Google, along with Microsoft, has the deep pockets and technological knowhow to offer personal health records free to millions.

Other medical centers are ready to sign up. “This is truly a patient-controlled health record, and that’s a very significant step in the drive toward a more consumer-oriented system of health care,? said Dr. John D. Halamka, chief information officer of the Harvard Medical School.

Dr. Halamka is also chief information officer at Beth Israel Deaconess Medical Center in Boston, which plans to link its electronic patient records with Google personal health pages. He is also a member of
Google’s Health Advisory Council.

http://bits.blogs.nytimes.com/2008/02/21/google-health-begins-its-preseason-at-cleveland-clinic/

Sony to own one-third of Sharp's $3.5 billion LCD plant

By Kiyoshi Takenaka

TOKYO (Reuters) - Sony Corp said it would take a one-third stake in Sharp Corp's $3.5 billion LCD panel plant set for completion by March 2010, in an effort to meet fast-growing demand for flat televisions.

The move is the latest in a wave of alliances among Japanese flat TV makers as they try to secure enough panels while keeping initial investments in check to fight steep price declines.

Sharp, which offers Aquos LCD TVs, plans to turn the liquid crystal display factory, which would be the world's largest, into a joint venture, with the Osaka-based company owning 66 percent and Sony taking the remainder.

Besides LCD panels, the joint venture will also produce LCD modules, which are display panels equipped with components such as a backlight unit and LCD driver chips.

Sony and Sharp are the world's second- and third-largest LCD TV makers, behind South Korea's Samsung Electronics Co Ltd

The two Japanese companies plan to hold a joint news conference at 7 p.m. (1000 GMT), where Sony President Ryoji Chubachi and Sharp President Mikio Katayama will speak.

"For Sharp, this is a positive step since it means a major buyer that would keep the 10th-generation factory busy," Daiwa Institute of Research analyst Kazuharu Miura said.

Sharp's new factory would use so-called 10th-generation glass substrates, which can yield more panels than earlier-generation, smaller glass substrates, improving production efficiency and helping both firms offer attractively priced flat TVs.

Global LCD TV sales are likely to more than double to 155 million units by 2012, according to the Japan Electronics and Information Technology Association.

"Sony needed an extra source of panels because the large-size LCD TV market is growing faster than it had expected. As Sony expands TV production, it is natural to seek to diversify panel sources," said Park Hyun, an analyst at Prudential Investment & Securities.

"Sony is likely to continue the partnership with Samsung.... Therefore Sony's diversification strategy won't have a negative implication for the alliance with Samsung."

Sony, which aims to sell 10 million units of its Bravia LCD TVs in the current business year to March 31, runs another LCD joint venture, S-LCD, with Samsung.

The announcement follows Toshiba Corp's decision late last year to buy LCD panels from Sharp, while Panasonic maker Matsushita Electric Industrial Co Ltd said earlier this month it would spend 300 billion yen ($2.8 billion) to build an LCD plant in the face of robust LCD TV demand and tight panel supplies.

Aggressive investments in panel capacity, however, have raised investor concerns about a potential supply glut.

"The problem will be 2010 and 2011. Just when TV demand is likely peaking, Sharp's 10th-generation plant will come onstream, and so will Matsushita's new factory," Shinko Securities analyst Hideki Watanabe said.

"Today's deal gives Sharp good risk hedging."

Shares in Sony closed up 1.2 percent at 5,200 yen, while Sharp was flat at 2,100 yen. The Tokyo stock market's electrical machinery index IELEC.rose 0.3 percent.

($1=107.94 Yen)

(Additional reporting by Edwina Gibbs in Tokyo, Rhee So-eui in Seoul; Editing by Mike Miller)

http://www.reuters.com/article/technologyNews/idUSTFA00300220080227?pageNumber=3&virtualBrandChannel=0&sp=true

Boston Scientific and Guidant Announce Signing of Merger Agreement Valued at $27 Billion


NATICK, Mass. and INDIANAPOLIS, Jan. 25 -- Boston Scientific Corporation (NYSE: BSX - News) and Guidant Corporation (NYSE: GDT - News) today announced that the Board of Directors of Guidant has unanimously approved and entered into the merger agreement provided to Guidant by Boston Scientific on January 17, 2006. Under that agreement, Boston Scientific will acquire all the outstanding shares of Guidant for a combination of cash and stock worth $80 per Guidant share, or approximately $27 billion in aggregate. Prior to entering into this agreement with Boston Scientific, Guidant terminated its merger agreement with Johnson & Johnson.

The strategic rationale, business and growth profile of a combined Boston Scientific/Guidant should be compelling to shareholders of both companies. As a highly diversified company with leading positions in growth markets, Boston Scientific/Guidant will be one of the world's preeminent medical device companies, with total revenue in 2006 of nearly $9 billion.

"Guidant and Boston Scientific share an entrepreneurial spirit, highly talented employees, strong customer relationships and an ability to pioneer lifesaving therapies for patients around the world," said Pete Nicholas, Chairman of Boston Scientific. "Shareholders will benefit from the significant upside potential of the combined company, while doctors and their patients will continue to receive the most technologically advanced and highest quality medical devices and therapies. The resources and capabilities of the combined company will allow us to make further investments in our current businesses as well as pursue new revenue opportunities."

"We believe the transaction and the strategic rationale for this combination are in the best interests of our patients, employees, customers and shareholders -- reflecting the full value of our firm," said Jim Cornelius, Chairman and Chief Executive Officer of Guidant. "The combination of these two companies provides faster, more consistent revenue growth opportunities to shareholders. We want to express our appreciation to our employees who have been dedicated to building this great company, and we all look forward to the future."

"We are excited about combining the talent and experience of Boston Scientific and Guidant employees," said Jim Tobin, President and Chief Executive Officer of Boston Scientific. "We look forward to working with Guidant to complete the transaction quickly and to creating a global leader in cardiovascular devices."

The transaction is subject to customary closing conditions, including clearances under the Hart-Scott-Rodino Antitrust Improvements Act and the European Union merger control regulation, as well as approval of Boston Scientific and Guidant shareholders. The transaction is not subject to any financing condition. Boston Scientific expects to complete the transaction by the end of the first quarter of 2006.

As previously announced, Boston Scientific has entered into an agreement with Abbott (NYSE: ABT - News) under which Boston Scientific has agreed to divest Guidant's vascular intervention and endovascular businesses, while agreeing to share rights to Guidant's drug-eluting stent program. Under its agreement with Abbott, Boston Scientific will receive $6.4 billion in cash from Abbott on or around the closing date of the Guidant transaction. This amount consists of $4.1 billion in purchase price for the Guidant assets, a loan of $900 million, and Abbott's agreement to acquire $1.4 billion of Boston Scientific common stock. Boston Scientific and Guidant believe that Boston Scientific's agreement with Abbott will enable Boston Scientific and Guidant to rapidly secure antitrust approvals for the proposed transaction.

Under the terms of the merger agreement between Boston Scientific and Guidant, each share of Guidant common stock will be exchanged for $42.00 in cash and $38.00 in Boston Scientific common stock, based on the average closing price of Boston Scientific common stock during the 20 consecutive trading day period ending three days prior to the closing date. If the average closing price of Boston Scientific common stock during this period is less than $22.62, Guidant shareholders will receive 1.6799 Boston Scientific shares for each share of Guidant common stock, and if the average closing price of Boston Scientific common stock during this period is greater than $28.86, Guidant shareholders will receive 1.3167 Boston Scientific shares for each share of Guidant common stock. Guidant shareholders will own approximately 36 percent of the combined company.

Boston Scientific has received commitment letters from Bank of America, N.A. and Merrill Lynch & Co. for the financing of the transaction. Bear, Stearns & Co. Inc., Deutsche Bank AG New York Branch and Wachovia Bank, National Association have also committed to participate in the financing.

Shearman & Sterling LLP is acting as legal counsel, and Merrill Lynch & Co., Bear, Stearns & Co. Inc., and Banc of America Securities LLC are acting as financial advisors, to Boston Scientific.

Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal counsel, and J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated are acting as financial advisors, to Guidant.

Boston Scientific Corporation
Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices whose products are used in a broad range of interventional medical specialties. For more information, please visit: http://www.bostonscientific.com .

Guidant Corporation
Guidant Corporation pioneers lifesaving technology, giving an opportunity for better life today to millions of cardiac and vascular patients worldwide. Guidant develops, manufactures and markets a broad array of products and services that enable less invasive care for some of life's most threatening medical conditions. For more information, visit http://www.guidant.com .

Forward Looking Statements
This press release contains "forward-looking statements," including, among other statements, statements regarding the proposed business combination between Boston Scientific Corporation and Guidant Corporation, and the anticipated consequences and benefits of such transaction. Statements made in the future tense, and words such as "anticipate," "expect," "project," "believe," "plan," "estimate," "intend," "will," "may" and similar expressions are intended to identify forward-looking statements. These statements are based on current expectations, but are subject to certain risks and uncertainties, many of which are difficult to predict and are beyond the control of Boston Scientific or Guidant. Relevant risks and uncertainties include those referenced in Boston Scientific's and Guidant's filings with the Securities and Exchange Commission ("SEC") (which can be obtained as described in "Additional Information" below), and include: general industry conditions and competition; economic conditions, such as interest rate and currency exchange rate fluctuations; technological advances and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approvals; domestic and foreign health care reforms and governmental laws and regulations; and trends toward health care cost containment. Risks and uncertainties relating to the proposed transaction include: required regulatory approvals will not be obtained in a timely manner, if at all; the proposed transaction will not be consummated; the anticipated benefits of the proposed transaction will not be realized; and the integration of Guidant's operations with Boston Scientific will be materially delayed or will be more costly or difficult than expected. These risks and uncertainties could cause actual results to differ materially from those expressed in or implied by the forward-looking statements, and therefore should be carefully considered. Neither Boston Scientific nor Guidant assumes any obligation to update any forward-looking statements as a result of new information or future events or developments.

Additional Information
This material is not a substitute for the prospectus/proxy statement and any other documents Boston Scientific and Guidant intend to file with the SEC. Investors and security holders are urged to read such prospectus/proxy statement and any other such documents, when available, which will contain important information about the proposed transaction. The prospectus/proxy statement will be, and other documents filed or to be filed by Boston Scientific and Guidant with the SEC are or will be, available free of charge at the SEC's Web site (http://www.sec.gov ) or from Boston Scientific by directing a request to Boston Scientific Corporation, One Boston Scientific Place, Natick, Massachusetts 01760-1537, Attention: Milan Kofol, Investor Relations, or from Guidant by directing a request to Guidant Corporation, 111 Monument Circle, 29th Floor, Indianapolis, Indiana 46204, Attention: Investor Relations.

Neither Boston Scientific nor Guidant is currently engaged in a solicitation of proxies from the security holders of Boston Scientific or Guidant in connection with Boston Scientific's proposed acquisition of Guidant. If a proxy solicitation commences, Boston Scientific, Guidant and their respective directors, executive officers and other employees may be deemed to be participants in such solicitation. Information about Boston Scientific's directors and executive officers is available in Boston Scientific's proxy statement, dated April 4, 2005, for its 2005 annual meeting of stockholders, and information about Guidant's directors and executive officers is available in Guidant's most recent filing on Form 10-K. Additional information about the interests of potential participants will be included in the prospectus/proxy statement when it becomes available.

Contacts -- Boston Scientific
Milan Kofol (508-650-8569) (cell: 617-834-8595)
Investor Relations, Boston Scientific Corporation

Paul Donovan (508-650-8541) (cell: 508-667-5165)
Media Relations, Boston Scientific Corporation

Steve Frankel / Steve Silva (212-355-4449)
Joele Frank, Wilkinson Brimmer Katcher


Contacts -- Guidant
Steven Tragash (317-971-2031)
Corporate Communications, Guidant Corporation

Andy Rieth (317-971-2061)
Investor Relations, Guidant Corporation

Doug Hughes (317-971-2039)
Investor Relations, Guidant Corporation

Source: Boston Scientific Corporation

The Death of Groupthink

http://www.businessweek.com/managing/content/feb2008/ca2008025_687188.htm?link_position=link2

The Death of Groupthink
Diversity isn't just the best way to guard against the proliferation of Groupthink—it's also good for the bottom line, says Deloitte's Sharon Allen
by Sharon Allen

As the chairman of the board at Deloitte LLP, I've witnessed many times how the courage of one person with a very different perspective can keep the flame of critical thought burning brightly.

Yet, for me, one of the most dramatic illustrations of this healthy communications dynamic didn't come from a boardroom. If you haven't seen the 1957 movie classic Twelve Angry Men, you might want to check it out the next time you have a rainy weekend afternoon—or if you want to learn more about good corporate governance.

The Power of Independent Thinking
The story is about a jury of 12 white, middle-class, middle-aged men deciding what appears to be an open-and-shut murder case. We quickly learn that the group is quite willing to let closely held attitudes harden without much stirring into a foregone conclusion. That's when the soft-spoken Juror No. 8—an architect named Davis played by Henry Fonda—begins very calmly to ask questions and propose possibilities from a different point of view.

I won't spoil the story for you. Let's just say that I would have been delighted to serve with Juror No. 8 on any board of directors.

To me, this epic of jury room debate is really what good corporate governance is all about: the willingness to consider new ideas, ask tough questions, and enable every voice in the room to be heard. But what most captivates me about the movie is its ability to portray "Groupthink," a social dynamic that can become a challenging roadblock to informed decision-making.

Originally coined by the business author and editor William Whyte, Groupthink describes a behavior you may have seen or even been a part of—one in which members of a group avoid conflict and expedite consensus by choosing not to test, analyze, and evaluate ideas critically. Unfortunately, Groupthink isn't just the stuff of compelling movies. Historians have cited this flawed approach to decision-making as a prime suspect behind a diverse array of events including Pearl Harbor, the space shuttle Challenger explosion, the dot-com meltdown, and the collapse of Enron.

In business organizations, opportunities for Groupthink abound, from the shop floor to the C-suite. Yet the insidious nature of Groupthink may be most dangerous in a corporate sense if it takes root in the boardroom. There, the gravitational pull of conformity can become so strong that directors fail to rise above it by questioning and challenging management.

How can boards build a firewall to keep Groupthink from corrupting boardroom deliberation?

Why Diversity Works
As a chairman, my preferred method for guarding against Groupthink is diversity of thought—made possible by including new voices in the boardroom along with those that are traditionally white, older, and male.

If you think that I'm just saying that because I'm a woman, think again. Several studies conducted by Catalyst indicate that there is real value to be gained from diversity beyond the window-dressing of political correctness. That makes sense. If a board wants to think "outside the box" it may be useful to include directors from demographics that historically have had limited access to boardroom participation—such as women and minorities.

Research conducted by the Wellesley Centers for Women supports the premise that a variety of perspectives can enrich boardroom dialogue. Wellesley discovered that women directors make three contributions that their male counterparts are less likely to make: a willingness to consider the concerns of a wider range of stakeholders; greater persistence in pursuing answers to difficult questions; and a more collaborative approach to leadership through improved communication.

Evidence about the value of diversity also comes from our legal system. In a 2007 study, Tufts University found that racially diverse juries deliberated longer, raised more facts about the case, made fewer errors discussing the case, and conducted broader and more wide-ranging deliberations.

While that sounds promising, can boardroom diversity really translate into greater value for stakeholders?

Financial Results
As Juror No. 8 might suggest, let's take a look at some new evidence. In October, Catalyst announced that Fortune 500 companies with the highest representation of female board members attained greater financial performance, on average, than those with the lowest. And the results weren't just significant. They were astonishing. Returns on sales, equity, and invested capital ranged from 42% to 66% higher. Now there's a motive for bringing new voices to the boardroom.

Diversity of thought gives needed vitality to corporate debate. Through robust and rigorous examination, diverse boards can help management develop the best approach to any challenge or opportunity. In doing so, such boards elevate the good of the enterprise above the self-interest that can sometimes prevail among like-minded individuals.

The verdict is clear. As the death of Groupthink, diversity of thought can be the heart and soul of your board—and add impressive value to your bottom line.

Sharon Allen is chairman of the board, Deloitte LLP.

February 26, 2008

Wal-Mart Sets India Plans, Aims to Back Local Players

Gaurav Raghuvanshi and Eric Bellman. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 21, 2008. pg. B.4

Wal-Mart Stores Inc. plans to open 10 to 15 large cash-and-carry stores in India in the next seven years, hoping to crack the booming retail market without angering the tiny mom-and-pop retailers and small middlemen that dominate the industry.

The world's largest retailer by sales says its wholesale joint venture with India's Bharti Enterprises Ltd. will employ about 5,000 people over that period after opening its first store this year. The stores will be 50,000 to 100,000 square feet and offer items ranging from fruit to footwear for sale to retailers, hotels, hospital and other businesses. Indian rules don't allow foreign retailers such as Wal-Mart to sell directly to consumers. They are, however, allowed to run wholesale operations and provide back-end support to Indian retailers.

Meanwhile, Wal-Mart's wholly owned subsidiary, British retailer Asda Group Ltd., unveiled a GBP 400 million ($779 million) expansion program that will involve opening as many as 22 stories and extending 12 existing outlets. The expansion will create more than 9,000 jobs this year, the company said.

In India, Wal-Mart is one of many international and local retailers with plans to invest billions to modernize India's retail industry and supply chains. They are hoping to carve out their own share of India's retail market, which is already valued at more than $300 billion but has until recently been dominated by millions of small family-run stores. German retailer Metro AG, the world's fourth-largest retailer in terms of sales, already has wholesale stores in Bangalore and Hyderabad and plans to open more in India. India's Reliance Industries Ltd. has opened more than 100 grocery stores in the past year. It plans to open thousands more, hoping to get the jump on the international competition.

The surge in interest in the sector has sparked protests by mom-and- pop store owners and the middlemen that supply them across the country. As it announced the outlines of its India plans yesterday, Wal-Mart said its arrival wouldn't hurt the small players in the industry. "Our goal is to work with India's existing supply-chain infrastructure and improve efficiency to minimize wastage and maximize value for farmers and manufacturers as well as retailers," Wal-Mart Vice Chairman Michael Duke said. "We can help cut the waste, not the middlemen who can play a very important part in the entire supply chain."

As it increases its ties with India, Wal-Mart said it is also looking to outsource some of its information-technology work to Indian companies. It didn't say which companies it plans to use. "As we deepen our relationship with India, it only made sense that we take advantage of the 24-hour development cycle that India offers," Mr. Duke said.

Separately, Bharti Enterprises Joint Managing Director Rajan Mittal told reporters the cash-and-carry joint venture with Wal-Mart hopes to open its first wholesale store by December, followed by a couple of more stores next year.

Starbucks Continues to Align Organization for Sustained Global Growth

Monday, Feb. 25 2008
Starbucks Continues to Align Organization for Sustained Global Growth

SEATTLE, Feb 25, 2008 (BUSINESS WIRE) -- With a focus on strategic global expansion and providing customers with the distinctive Starbucks Experience, Starbucks Coffee Company (NASDAQ:SBUX) today announced that former Starbucks executive Arthur Rubinfeld has returned to the Company in the role of president, Global Development. In this newly created position, Rubinfeld will be responsible for site selection, design and creative concepting for Starbucks stores worldwide.

"Arthur is a world-class business person, who helped the Company grow from 100 to 4,000 stores and was a key member of the leadership team," said Howard Schultz, chairman, president and ceo. "I know his leading-edge work in the area of retail design and architecture will be a tremendous asset as we transform Starbucks for the future."

Most recently, Rubinfeld served as executive vice president, Corporate Strategy and chief development officer at Potbelly Sandwich Works, a rapidly growing restaurant concept. In 2001, he founded AIRVISION, an advisory firm specializing in brand positioning, growth strategies and operational plans for clients, including adidas, Omaha Steaks, Oakley and Washington Mutual. Additionally, Rubinfeld served as Starbucks executive vice president for Store Development from 1992-2001 and is credited with building the world-class function for the Company.

"Arthur's past success, extensive experience, knowledge of the business and Starbucks culture, will provide the foundation and leadership we need to execute the Transformation Agenda and support our long-term success," said Schultz. "I am proud to have him as part of our senior leadership team, once again."

Prior to joining Starbucks in 1992, Rubinfeld was managing partner of Epsteen & Associates, practiced as a national NCARB-certified architect in New York, and authored the book, "Built for Growth - Expanding Your Business Around the Corner or Across the Globe," a tutorial on brand development, business model infrastructure, retail site selection and innovation.

About Starbucks

Since 1971, Starbucks Coffee Company has been committed to ethically sourcing and roasting the highest quality arabica coffee in the world. Today, with nearly 16,000 stores and more than 170,000 partners (employees) in 44 countries, Starbucks is the premiere roaster and retailer of specialty coffee in the world. Through our unwavering commitment to excellence and our guiding principles, we bring the unique Starbucks Experience to life for every customer through every cup. To share in the experience, please visit us in our stores or online at www.starbucks.com.

SOURCE: Starbucks Coffee Company

Starbucks Media Relations
Brandon Borrman, 206-318-7100
or
Starbucks Investor Relations
JoAnn DeGrande, 206-318-7893
http://www.businesswire.com/cnn/sbux.shtmlCopyright Business Wire 2008

Molson Coors, SABMiller looking outside Denver, Milwaukee

By Roger Fillion, David Milstead

Wednesday, February 13, 2008

Molson Coors and SABMiller are expected to locate the headquarters of their new joint brewing venture in a locale other than Denver or Milwaukee, according to a top Molson Coors executive.

Molson Coors Vice Chairman Pete Coors told the Rocky on Tuesday that it was "not likely" the MillerCoors headquarters would be in Denver or Milwaukee.

Sources have told the Rocky in recent weeks that the joint venture partners were strongly mulling Chicago or Dallas as headquarter sites.

That's contrary to initial expectations. Denver, in particular, had been given the inside track. Pete Coors and Leo Kiely - the expected chairman and CEO, respectively, of the new U.S. joint venture - both hail from Colorado.

Kiely is CEO of Denver- and Montreal-based Molson Coors, parent of Coors Brewing. London-based SABMiller's Miller Brewing unit is based in Milwaukee.

"There's a fairly strong sense a neutral site would be important," said Coors. "If you pick one city over another, people in the other city will say, 'They're running the deal.' I don't think that's particularly healthy."

Naming specific cities is "totally speculative," Coors added, noting a decision hasn't been made. "You can talk about Chicago, Dallas, Kansas City, Atlanta, New York, Boston - there's a lot of options available to us. I don't know where it's going to end up."

Announced in October, the new entity would combine Miller Brewing, the nation's No. 2 brewer, with No. 3 Coors Brewing, based in Golden. MillerCoors would rank No. 2 behind Anheuser-Busch in terms of U.S. market share, pending Justice Department approval.

"There's going to be a continued huge presence in Colorado and Milwaukee," Coors said. "You just don't give up that legacy that both companies have in their respective communities."

The Molson Coors headquarters are expected to remain in Denver and Montreal. While Golden-based Coors Brewing will cease to exist as an operating company, MillerCoors will continue to use the brewery here.

Some Wall Street analysts have singled out Chicago or Dallas as possible headquarter cities.

Credit Suisse analysts Carlos Laboy and Anthony Bucalo said in a November report they "suspect Chicago will be a leading candidate" but also said there is "noise" about Dallas.

They cited Chicago's proximity to Miller's headquarters in Milwaukee (it's 90 miles away); Chicago's status as a "major airline hub"; and the Windy City's ability to act as a "magnet for international talent."

In the interview, Pete Coors said, "My hope is we'll have a very small headquarters."

He added that it would be "several months before we have to make a decision," citing the Justice Department's need to sign off on the joint venture.

Molson Coors' Kiely told Wall Street analysts Tuesday he expects a "positive" decision from regulators by "early to midsummer."

Molson Coors spokeswoman Kabira Hatland said any review "of potential sites will not begin until the proposed joint venture receives regulatory clearance."

"At this stage, no decision has been made and nothing has been ruled out," she added in a statement. "We've not even begun a selection process."

Colorado and Wisconsin politicians have been courting both companies to locate the MillerCoors headquarters in their respective states.

Chicago economic officials also have been reaching out to woo the MillerCoors headquarters to their city.

"We had sent the signal that the mayor and the business community of Chicago would be eager to pursue this," said Paul O'Connor, former executive director of World Business Chicago.

O'Connor noted Chicago is home to major advertising agencies. "It's a famous beer marketing town," he said.

Jerry Roper, CEO of the Chicagoland Chamber of Commerce, said Chicago would serve as a logical "neutral" site - rather than Denver or Milwaukee. "Chicago is sort of the Switzerland for the beer companies and makes all the sense in the world," Roper added.

Molson Coors' Kiely has Texas links. Prior to his stint at Coors and later Molson Coors, Kiely worked as an executive at Dallas-based Frito-Lay. During his nine years at the snack food company, Kiely rose from brand manager to president of the central U.S. division.


Two brewing giants

Following is a snapshot of Molson Coors and SABMiller, as well as their respective U.S. brewing operations. MillerCoors, a proposed U.S. joint venture between Molson Coors and SAB Miller, involves Coors Brewing and Miller Brewing. The two companies have not said where MillerCoors would be headquartered, though Chicago and Dallas are said to be possible sites.

Molson Coors, parent of Coors Brewing and Molson

* Headquarters: Denver and Montreal

Coors Brewing, U.S. brewing unit of Molson Coors

* Headquarters: Golden

SABMiller, formerly known as South African Breweries, came about through the 2002 purchase of Miller Brewing

* Headquarters: London

Miller Brewing, U.S. brewing unit of SAB Miller

* Headquarters: Milwaukee

MillerCoors, proposed U.S. joint venture between Molson Coors and SAB Miller; involves Coors Brewing and Miller Brewing

* Headquarters: Chicago? Dallas? Other?

fillionr@RockyMountainNews.com or 303-954-2467

© Rocky Mountain News

Studios Are Trying to Stop DVDs From Fading to Black

http://www.nytimes.com/2008/02/25/business/media/25dvd.html?_r=1&sq=DVD&st=cse&oref=slogin&scp=2&pagewanted=print

February 25, 2008
Studios Are Trying to Stop DVDs From Fading to Black
By BROOKS BARNES and MATT RICHTEL
A winner has finally been declared in Hollywood’s high-definition DVD war. So why isn’t there more cheering?

In the 1980s, the triumph of VHS over Betamax helped develop the lucrative home entertainment market. DVDs, introduced in the 1990s, turned into an even bigger gold mine, accounting for roughly 60 percent of studio profits in recent years, analysts say. The entertainment giants have positioned high-definition DVDs as yet another blockbuster business.

But the victory of Sony’s new Blu-ray high-definition disc over a rival format, Toshiba’s HD DVD, masks a problem facing the studios: the overall decline of the DVD market. Domestic DVD sales fell 3.2 percent last year to $15.9 billion, according to Adams Media Research, the first annual drop in the medium’s history. Adams projects another decline in 2008, to $15.4 billion, and a similar dip for 2009.

So instead of celebrating the Blu-ray format — which remains a nascent business — the studios are scrambling to introduce an array of initiatives aimed at propping up the broader market. Some efforts, like the addition of new interactive features and changes in how DVDs are packaged and promoted, are intended to prevent further market erosion while nurturing Blu-ray.

But media companies are also introducing technology that they hope will solve the more difficult tasks of generating growth and delaying the obsolescence of DVD altogether.

DVD sales are sagging for various reasons, including a flooded marketplace and competition for leisure time. But the Internet is perhaps the biggest enemy.

Technology companies have watered down the DVD market by aggressively pushing Internet downloads. Apple’s iTunes now offers downloads of 500 movies and last month started renting titles like “Spider-Man 3.? Meanwhile, telecommunications providers like Time Warner and Comcast are pushing their faster broadband lines by promoting them as capable of delivering fast downloads.

Movie studios are fighting back by taking a page from the Internet playbook. Indeed, the centerpiece of the market rejuvenation effort is something 20th Century Fox calls “digital copy.? Fox DVDs, starting last month, now come with an additional disc holding a digital file of the title. Consumers can download the file to a computer in about five minutes — far less time than via the Internet — and then watch the movie there or transfer it to their iPod.

“This puts the DVD at the center of the digital revolution and returns the business to a growth trajectory,? said Mike Dunn, the president of 20th Century Fox Home Entertainment. Sony Pictures Entertainment, Universal Studios, Walt Disney and Warner Brothers are all pursuing their own versions of the idea.

Most technology consultants, while not as optimistic about the DVD’s future as Mr. Dunn, are greeting studio efforts with enthusiasm. Tom Adams, the founder of Adams Media Research, said the packaging of digital files with standard DVDs “has the real potential to steal the thunder from the Internet delivery of movies.?

But John Freeman, an industry analyst, sees the effort as a stall tactic. Although digital copies are “a step forward,? he said, that step is tantamount to Hollywood admitting that its lucrative hard-goods business is growing obsolete. Today, digital files on discs; tomorrow, mass downloading straight from the Internet.

Troubles big and small started buffeting the DVD business in 2005. First, overall sales of television shows on disc started to slip as releases lost their freshness — New to DVD! “Murder She Wrote: The Complete Eighth Season? — and consumers realized they were devoting a lot of living room space to bulky boxed sets they never watched.

Next, prices started to plummet as overall demand weakened and retailers and grocery stores turned to DVDs as loss leaders. DVDs sold for an average retail price of $15.01 last year, compared with $21.95 in 2000, according to Adams.

“Wal-Mart has indicated it is getting bored with older library titles,? said Stephen Prough, the co-founder of Salem Partners, a small investment bank that specializes in film catalogs. “When there is little to no consumer demand at a $6 price point, you’ve got problems.?

And a lingering battle among various participants in DVD marketing — hardware makers, studios and retailers — over which of two competing high-definition technologies would replace standard DVDs left consumers in limbo, analysts say. Last week, Sony’s Blu-ray finally won the battle after Toshiba threw in the towel on HD DVD.

Media companies, aware of investor concerns about the future of their cash cow, say the problems are overblown. Their position in part: DVDs will continue as a giant profit center because the Internet — despite the “marketing hocus pocus? of the telecommunications industry, in the words of one Fox executive — will remain too slow for widespread downloading to catch on for the foreseeable future.

International DVD sales are still growing, studios add, and some players do not concede that domestic growth is over. Bob Chapek, president of the home entertainment unit of Walt Disney, said that blockbusters like “Pirates of the Caribbean: At World’s End? achieve large numbers even if lesser titles are struggling. He said sales of Blu-ray discs would contribute to “a vibrant growth pattern? for the category by decade’s end.

“There is nobody worried about the consumer suddenly fleeing,? said Ronald J. Sanders, president of Warner Home Video.

Blu-ray DVDs, which sell for a 25 percent premium, will without question restore momentum to the DVD market, but there is disagreement over how much and how soon. “There is still plenty of concern at Sony, Best Buy and Blockbuster that this isn’t going to achieve the same level of success that the DVD has,? said Robert Heiblim, an industry consultant with RH Associates.

Microsoft said this weekend it would stop making HD DVD players for its Xbox 360 game system. Toshiba, reflecting on its failure with HD DVD, said the industry might be overestimating interest in a new format. Jodi Sally, Toshiba America’s vice president for DVD marketing, said consumers en masse do not feel a nagging need to upgrade.

“Our biggest competitor was that consumers seem to be satisfied? with DVDs, she said.

Studio executives dismiss that view as sour grapes, pointing to their own research. Fox, for instance, estimates that sales of Blu-ray discs will soar to nearly $1 billion in 2008, from $170 million last year. “Blu-ray growth will more than replace losses from the mature business,? said Mr. Chapek of Disney.

Disney is leaving nothing to chance, mounting an aggressive campaign to persuade consumers to upgrade to Blu-ray. Among its efforts: a Blu-ray exhibit, built to look like the Sleeping Beauty Castle at Disneyland, that tours shopping malls; Blu-ray previews on its DVDs; and a $10 rebate when consumers buy certain Blu-ray movies.

Still, the studios are hedging their bets. Home video executives are racing to “refresh? the traditional DVD to raise sales.

Some, like Warner Brothers, are getting results through more marketing. Mr. Sanders said the studio was releasing more movies on DVD and on video-on-demand services at the same time; typically the two are separated to prevent undercutting either revenue stream. “By pairing up the marketing, V.O.D. and DVD both do a lot better,? he said.

Sony is trying to milk obscure titles from its library that it previously considered unsustainable on DVD, said David Bishop, president of Sony’s home entertainment unit. Last month, it said it would make certain niche movies available to consumers through Hewlett-Packard’s manufactured-on-demand service. “It allows us to sell some of the deeper catalog that retailers would not normally carry,? said Mr. Bishop.

Over-the-top packaging stunts are also helping buoy sales. “We are trying harder to create very handsome, collectible packaging that retailers are proud to put on their shelves,? said Ken Ross, general manager of CBS Home Entertainment. CBS and its distribution partner, Paramount, recently had success with a 34-disc set, priced at $199, of the entire run of “I Love Lucy.?

Mr. Ross sees no weakness in TV shows on DVD — CBS will release 15 percent more titles this year than last — but he said the company was trying to make exclusive agreements with retailers, like a recent deal with Borders for Showtime titles.

“This business certainly isn’t as easy as it used to be,? he said.

Motorola: Left to Its Own Devices

News Analysis February 25, 2008, 12:01AM EST

Motorola: Left to Its Own Devices

The equipment maker's inability to find a buyer for its beleaguered cell-phone unit revives the urgency of reforming the division from within
by Olga Kharif and Roger O. Crockett

To many the recent announcement that Motorola (MOT) was exploring options for its troubled handset division was seen as a sign the once-legendary business would soon be sold. That seemed a better outcome than, say, a spinoff or internal overhaul for a business mired in losses.

Yet almost a month later, despite rumors of acquisition interest from such heavyweights as Korean electronics maker LG and U.S. PC giant Dell (DELL), bankers, analysts, and industry executives close to Motorola say a sale is neither imminent nor likely. Several Asian handset makers have publicly said they're not interested (BusinessWeek.com, 2/4/08). One banker gives a sale a "50-50" chance, at best.

And while potential buyers may have run proposals by the phone-making giant, none appears willing to offer as much as Motorola's management is seeking. Analysts say the beleaguered business is worth no more than about $8 billion—a far cry from the $10 billion it was once suggested that Motorola might be able to fetch. The lack of acceptable bids has added renewed urgency to Motorola's backup plan: an in-house revamp. Improved performance would help Motorola sell the division at a more attractive price later, spin off a higher-value asset, or even hang on to a revitalized handset maker.

A Fixer-Upper
From early in his tenure, Motorola CEO Greg Brown has given strong signals he's intent on tuning up the cell-phone business. He has taken operational control of the unit, replacing former head man Stu Reed, who has left the company. Those familiar with Brown's plans say he has been weeding out underperforming executives and those he had no hand in hiring. Meanwhile, he's attempting to attract the talent Motorola desperately needs. "He knows what to do to fix this business," says Robert Laikin, CEO of Brightpoint (CELL), a major cell-phone distributor.

Plenty needs fixing. In the fourth quarter, handset sales tumbled 38%, to $4.8 billion, from a year earlier, and the division lost money. Motorola's share of global cell-phone unit shipments dropped from 22% in 2006 to 13.8% last year. Had Motorola found a buyer, "they'd certainly not be selling on a high note," says Todd Rosenbluth, an analyst with Standard & Poor's.

Brown may also need to spend big to ramp up handset production. Mark McKechnie, an analyst with American Technology Research, estimates the company needs to spend $500 million to $2 billion to come out with a new and exciting product line. Adds Motorola shareholder Eric Jackson, president of Ironfire Capital: "The R&D pipeline was really bare [six months ago] and still is." As of December, Motorola had $2.75 billion in cash.

Collaborative Effort
Although a deal isn't imminent, the prospect of a sale or at least a partnership is not dead. Banking sources say major private equity funds, from Blackstone Group (BX) to Silver Lake, are circling the company. And lots of private buyers may be interested. Some Chinese vendors such as ZTE have long wanted to conquer the U.S. market and have talked about cultivating relationships with Motorola. "ZTE often talks with other leading telecommunications manufacturers around potential opportunities for collaboration," ZTE said in a statement. Company officials declined to comment on a potential alliance with Motorola's phone unit.

Motorola told analysts during the industry's big trade show in Barcelona earlier this month that it has two parties interested in the business. Company officials would not specify which, but they acknowledged looking into partnerships as well as a sale. So it's conceivable that Motorola might enter into a joint venture with a company with a proven track record in consumer marketing. Potential partners include LG, Samsung, and even Google (GOOG).

Pressure to Act Fast
Nor is anyone ruling out a spinoff, now or in the future. These kinds of spinoffs are in Motorola's blood: Back in 2004, the company spun off chipmaker Freescale Semiconductor, earning its investors hefty short-term returns. Freescale was later snapped up in 2006 by a consortium of private equity firms. "We think the most likely scenario is a spinoff to shareholders," says Richard Windsor, an analyst with Nomura. "It gives [shareholders] an option to stay or go."

Unfortunately for Brown, many investors are choosing to go. The company's stock is down 30% since the beginning of the year. Most analysts don't expect Motorola to sell more than 30 million handsets this quarter, which would mean even further erosion in share. "They've got to do something quick," McKechnie says. "The asset is deteriorating."

How Hershey Went Sour; Lack of Communication, Trust Alienated Firm From Key Holder

Julie Jargon, Matthew Karnitschnig and Joann S. Lublin. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 23, 2008. pg. B.1

Abstract (Summary)
A little over a year ago, Todd Stitzer, chief executive of Cadbury Schweppes PLC, of the United Kingdom, sat down in the Ritz-Carlton Grande Lakes hotel in Orlando, Fla., with Richard Lenny, his counterpart at Hershey Co., to suggest the two executives create a "global confectionery powerhouse." The encounter set off a chain reaction that has left Cadbury, which has since agreed to spin off its beverage business, on its own and Hershey firmly in the grip of its largest shareholder, a secretive charitable organization called the Hershey Trust Co. The events culminated in the fall with the resignation of Mr. Lenny and the subsequent departure of eight Hershey directors in what a local newspaper dubbed "the Sunday night massacre."

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By June, for the first time in decades, there will be a big new stand-alone candy maker: Cadbury. But its architects had intended to add another iconic brand to the name -- Hershey.

A little over a year ago, Todd Stitzer, chief executive of Cadbury Schweppes PLC, of the United Kingdom, sat down in the Ritz-Carlton Grande Lakes hotel in Orlando, Fla., with Richard Lenny, his counterpart at Hershey Co., to suggest the two executives create a "global confectionery powerhouse."

The encounter set off a chain reaction that has left Cadbury, which has since agreed to spin off its beverage business, on its own and Hershey firmly in the grip of its largest shareholder, a secretive charitable organization called the Hershey Trust Co. The events culminated in the fall with the resignation of Mr. Lenny and the subsequent departure of eight Hershey directors in what a local newspaper dubbed "the Sunday night massacre."

The Pennsylvania chocolatier faces a host of challenges. Hershey's earnings have deteriorated and the company has been losing market share to rival Mars Inc. Its stock price has fallen about 31% in the past 12 months, closing at $36.84 Friday on the New York Stock Exchange, while the Dow Jones Wilshire U.S. Food and Beverage Index is up 5.6% over that same period. Hershey also is one of several candy companies under a price-fixing probe by antitrust authorities in the U.S., Canada and Europe.

Hershey's downward spiral offers an illustration of how a breakdown in communication and trust among a company's main actors -- management, the board of directors and key shareholders -- can paralyze an organization and leave it vulnerable. As Hershey Trust Chairman LeRoy Zimmerman wrote in an October letter to Hershey Co.'s board: "The lifeblood of collaboration is truth."

In 1909, company founder Milton Hershey established a school for orphans and later transferred his wealth, including his ownership stake in the company, to the Hershey Trust Co., which administers the school's trust. Few trusts hold substantial equity in public companies anymore, and those that do rarely seek to wield much influence over them.

The Hershey Trust became aggressive after concluding Mr. Lenny had kept it in the dark about Cadbury and the company's declining financial fortunes. Now, the future of Hershey and its hometown, population 12,771, according to the 2000 census, lies squarely in the trust's hands. The trust, whose board is dominated by local elites, owns almost 30% of Hershey's stock, controls about 79% of the voting shares and has the legal authority to appoint or remove up to five- sixths of the company's directors.

The trust would like to find an international partner like Cadbury that would help solve Hershey's biggest problem -- reliance on the U.S., which accounts for more than 80% of its revenue. So far, that hasn't happened.

Cadbury and Hershey had flirted for decades. But Hershey had insisted on doing a deal on equal footing, and the two sides were never able to agree on how to handle Cadbury's drinks business, which made it considerably larger than Hershey.

Armed with a nearly 30-page presentation, Mr. Stitzer told Mr. Lenny in Florida in January, 2007, that Cadbury's board was ready to remove that stumbling block by getting rid of the drinks division, people familiar with the matter said. He also offered to register the company in Delaware, put headquarters in Hershey and maintain a U.S. stock listing.

Under the plan, Mr. Stitzer would be CEO of the new company and Mr. Lenny chairman, the people said. Mr. Lenny told Mr. Stitzer that he would consult his board and get back to him.

Exactly when Messrs. Stitzer and Lenny next spoke and what was said is a matter of dispute. What is clear is that merger talks between the two never got off the ground.

Mr. Lenny waited for the Hershey board's next regular meeting Feb. 13, 2007, to address the issue. He raised it late in the session, and the discussion was short. Some directors left not realizing the approach had been serious, people familiar with the matter said.

In mid-March, Mr. Stitzer announced Cadbury would jettison its drinks business, which makes Dr Pepper and 7 UP. Two weeks later, he told analysts in London a merger with Hershey would make sense. The news piqued the interest of Robert Vowler, the trust's liaison to the company who met quarterly with Mr. Lenny.

Relations between Mr. Vowler, who manages the trust's day-to-day operations from the limestone mansion in Hershey where the company's founder used to live, and Mr. Lenny have been cool for years. In 2002, the trust decided to sell Hershey and then reversed course just as Mr. Lenny was about to sign an agreement with Wm. Wrigley Jr. Co. It was Mr. Vowler who called Mr. Lenny to tell him the trust was pulling the plug.

So when Mr. Vowler reached out to Mr. Lenny last April to ask about Hershey's position on Cadbury, things didn't go well. It was only then that Mr. Lenny told him that he had gotten a proposal from Mr. Stitzer, said a person familiar with the matter. In a series of testy exchanges, Mr. Vowler accused the CEO of intentionally withholding information from the trust, according to people familiar with the matter.

Mr. Lenny responded that it was the responsibility of the trust's representative on the Hershey board to tell the trust, not his. That representative, Robert Cavanaugh, didn't notify the trust because he didn't know how detailed the Cadbury proposal was, said a person familiar with the matter.

So upset was Mr. Vowler that Mr. Lenny had discussed a merger with Cadbury without engaging the trust that he recruited former Hershey executive Robert Reese to advise the trust on the potential merits of a Cadbury deal.

Mr. Reese is a grandson of the man who created the eponymous peanut butter cups; Hershey bought the H.B. Reese Candy Co. in 1963, and Mr. Reese worked as a lawyer at Hershey from 1978 to 2002. In the late 1980s, he worked with Mr. Stitzer on a deal that gave Hershey the rights to sell Cadbury chocolates in the U.S.

Working out of an office in the Hershey mansion, Mr. Reese called Hershey employees with questions about the company. Mr. Reese, in a written statement, said he began advising the trust last April "on a variety of matters."

When the company reported a disappointing second quarter in July, the trust board felt blindsided, said people familiar with the matter. Once again, Mr. Lenny had withheld key information, they believed.

By September, Hershey stock was down about 7% for the year. As Hershey's profits and market capitalization had declined since the stock's peak in 2005, the trust had seen the value of its holdings decrease more than $1 billion.

Early in September, the trust took the Cadbury matter into its own hands. Trust and Cadbury representatives met at the Palace Hotel in New York City; Mr. Lenny wasn't invited, though Jon Boscia, a Hershey company board member, was.

But things had changed. The credit crisis had made a sale of Cadbury's beverage business much less certain, and Hershey's declining performance made the company look less attractive. The talks went nowhere. On Oct. 1, Mr. Lenny called trust Chairman Mr. Zimmerman and said he was going to "retire."

The next day, Hershey Co. announced Mr. Lenny's right-hand man, Chief Operating Officer David West, would become CEO Dec. 1. Trust board members believed Mr. West would be an interim CEO, according to a letter the trust later wrote to the Hershey board. But a few days later, the trust learned from a regulatory filing that the company board had signed Mr. West to a three-year contract. People close to the company insist the trust knew Mr. West would be signed on as the permanent CEO.

In either case, the trust again felt betrayed. On Oct. 10, Mr. Zimmerman issued a public statement on behalf of the trust in which he said the shareholder was "not satisfied with the company's results."

About a week later, Hershey reported third-quarter earnings had fallen 66%. Mr. Zimmerman arranged for a conference call with Mr. Boscia and Hershey director Robert Campbell, who worked most closely with the trust's board. Mr. Zimmerman demanded they resign and that four trust nominees be added to the Hershey board by the close of business Oct. 22.

The Hershey board agreed to the trust nominees but not the resignations. If the trust forced the resignations, the board said, the other directors, with the exception of the trust's representative, Mr. Cavanaugh, would quit, too. The board had drawn its line in the sand.

On Nov. 9, the trust board decided to cross it. It demanded and received the resignations of Messrs. Campbell and Boscia, along with four other directors. Two other independent directors resigned on their own.

On Sunday, Nov. 11, the trust announced their successors.

Gov't Sues to Block UnitedHealth Merger

AP
Gov't Sues to Block UnitedHealth Merger
Monday February 25, 8:15 pm ET
Justice Dept. Sues to Block UnitedHealth's Proposed Merger With Sierra Health Services


WASHINGTON (AP) -- The Justice Department on Monday moved to block UnitedHealth Group Inc.'s proposed $2.6 billion acquisition of Sierra Health Services Inc., citing concerns it would reduce competition in the Medicare health insurance market in Nevada.
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The antitrust lawsuit filed in U.S. District Court in Washington seeks to require UnitedHealth, which is based in Minnetonka, Minn., to sell portions of its Medicare Advantage business in the Las Vegas area for the merger to proceed. Justice officials said the new company otherwise would control 94 percent of the Medicare Advantage market in that area.

"This divestiture ensures that senior citizens and others will continue to benefit from competition between sellers of Medicare Advantage products," said Thomas O. Barnett, assistant attorney general in charge of the department's antitrust division.

UnitedHealth has disputed that the merger would allow it to unduly dominate the market, saying the combined companies would cover only the 36 percent of Nevadans who are eligible for Medicare and who choose to purchase more comprehensive health insurance from private insurers. The rest have opted just to use the public Medicare system to cover their expenses.

Sierra Health Services Inc., based in Las Vegas, is the largest health insurer in the Las Vegas area.

A normal industry? Much is riding on the possible merger of America's third- and fifth-biggest airlines

A normal industry? Economist, 2/16/2008, Vol. 386 Issue 8567, p69-70

Much is riding on the possible merger of America's third- and fifth-biggest airlines

One by one, the obstacles along the runway to what could be one of the most transforming deals in the world's air-transport industry are being cleared. If, within the next few days or weeks, executives at Delta and Northwest succeed in hammering out a common labour contract with their 11,000 pilots, the airlines will declare their intention to merge, subject to regulatory approval.

Were the deal to go ahead, it would almost certainly trigger similar mergers between the rest of the "big six" American network carriers, with United and Continental likely to pair off on one side, and American and US Airways on the other. If, and it is still a big if, what emerged was a stronger, more stable American airline industry, that in turn would be an important step towards completing the stalled liberalisation of the global aviation industry.

It is not the first time that America's big airlines have attempted to join forces. Delta saw off an $8.7 billion hostile bid by US Airways in 2006, and proposed mergers between Northwest and Continental in 1998 and United and US Airways in 2001 were blocked by the competition authorities. But a lot has changed since then. Four of the big six have been restructured under Chapter 11 bankruptcy protection, the industry has reduced its workforce by 39%, wages have been cut by 30% and there has been a $20 billion default on pensions. Even so, and despite booming business and leisure demand and a return to respectable profits in the past few years, the big airlines are still in a fragile state.

Gains in operating efficiency have been partially offset by the huge rise in the price of jet fuel. According to the International Air Transport Association (IATA), airlines' global spending on fuel has risen from $40 billion in 2002 to $135 billion last year. Expensive fuel hits the American airlines harder because their fleets are much older than those in Europe and Asia. The average age of planes in Northwest's gas-guzzling fleet, which includes DC-9s that first flew 30 years ago, is 18 years, for example. In the collective trauma that followed September 11th 2001, the airlines' net debt rose to 20 times operating cashflow. Buying new planes, which are up to 30% more fuel-efficient than old ones, was not an option. And balance sheets are still too stretched to permit large-scale fleet renewal.

What is also concentrating minds at America's airlines is the certainty that 2007 marked the peak of the business cycle for the industry worldwide, and that North America will be the region hardest hit by the recessionary headwinds. Yields (the average revenue per passenger mile), load factors (the share of seats filled) and profits are already starting to fall.

Airline managers also reckon that time is not on their side for political reasons. If there is a Democrat in the White House next year, it may become even more difficult to secure regulatory approval for mergers that will lead to further job cuts in one of the country's most unionised industries. And although there are good grounds for discounting fears that reduced competition will drive prices upwards, a less pro-business administration may be more inclined to heed the inevitable protests of passenger lobbies fearing the closure of routes or a city hub.

Some industry critics are sceptical of the airlines' claims about the efficiency gains that mergers will make possible. They counter that the airlines are already big enough to enjoy economies of scale and that the difficulties of knitting together complex organisations with different cultures will distract managers and divert scarce cash. They also argue that proponents of consolidation exaggerate the boost to load factors that a reduction in capacity will bring. Low-cost carriers, they say, will quickly move to occupy abandoned hubs and routes, replenishing capacity almost as soon as it is reduced.

The success of big airline mergers is certainly not guaranteed. More than two years after their merger, US Airways and America West are still struggling with integration. That said, Air France's experience after taking over KLM, and Lufthansa's after buying Swiss, have been largely positive. Even without trying to integrate their businesses fully, the airlines have cut costs and benefited from economies of scale more quickly than investors expected, so they are now confident of being able to pull off more ambitious deals. Air France even believes it will quickly be able to make money by buying Alitalia, one of the weakest airlines in Europe.

And there are good reasons to think that the Delta-Northwest and United-Continental deals would make sense. For one thing, airline managers have become more professional during the past few years. The visionaries have left the field, and their successors have ruthlessly focused on cutting costs. One measure of their success is that the market share of low-cost carriers appears to have stabilised at around 30%, at least for the moment.

Furthermore, the big network carriers know that their future depends on developing their long-haul business, where there is greater scope for savings, and where the growth of premium traffic continues to buck other industry trends. Delta has been particularly keen to take advantage of the "open skies" agreement with the European Union which comes into force next month. With Northwest's strength on the Pacific, a merged airline would be able to offer a more comprehensive set of destinations.

That both airlines regard securing a single agreement covering all their pilots as a pre-condition for a merger is an indication that they plan to go further than Air France-KLM and Lufthansa-Swiss have in integrating operations. Success would mean a much bigger pay-off. The prize for passengers, investors and regulators would be a globally competitive American airline industry that no longer needed to shelter behind bankruptcy laws and outdated bilateral agreements that keep foreign investment and ownership at bay.

"All of us in the airline business need a strong American industry, because it would be less protectionist," says Willie Walsh, the chief executive of British Airways. Giovanni Bisignani, the chief executive of IATA, also sees strong American airlines as one of the keys to unlocking change in the industry and opening the way to further international consolidation, of the kind that happens in other, "normal" businesses. "If we cannot change the rules of the game," he says, "we will never be a normal business."

Microsoft President on Micro-Hoo: We Can Do It

February 22, 2008, 6:57 pm
By Miguel Helft

We can do it. We can mesh our technologies and our cultures. And we’ll keep the Yahoo name alive.

Those may be the highlights of a letter sent Friday to Microsoft employees by Kevin Johnson, president of the company’s platform and services division, addressing his company’s offer to acquire Yahoo. The letter, the first missive to employees to come to light since Steve Ballmer, the chief executive, wrote to them on Feb. 1, has no new information on the fate of the proposed merger.

But Mr. Johnson addressed several challenges that the companies will face if they indeed end up merging — challenges that have been noted by the press and analysts in recent weeks. “Both companies share a passion for great engineering, creativity, and development of services and technologies that truly can change the world,? Mr. Johnson wrote. In other words, the Yahoo and Microsoft cultures are not that different. But, Mr. Johnson added, it may take time to fully integrate them: “Some aspects of the two cultures will naturally merge quickly and some will remain unique in the near-term and merge more slowly over time.?

Mr. Johnson also said that one of the significant integration challenges facing the companies, their different technology infrastructures, was not insurmountable. Microsoft has already acquired companies based on open-source technologies, he said, and it hasn’t always felt a need to migrate those companies to Microsoft technology. “We would work closely with Yahoo! engineers to make pragmatic platform and integration methodology decisions as appropriate, prioritizing above all how those decisions would impact customers,? he said.

Mr. Johnson also said that Microsoft would retain Yahoo’s brand and its large presence in Silicon Valley. And he seemed to suggest that mass layoffs would not be on the agenda. “While some overlap is expected in any combination of this size, we should remember that Microsoft is a growth company that has hired over 20,000 people since 2005, and we would look to place talented employees throughout the company as a whole,? he said.

It might be reading too much into this, but Mr. Johnson seemed to be slightly more cautious than his boss, Mr. Ballmer. In his Feb. 1 letter, Mr. Ballmer said flatly that leaders from Yahoo and Microsoft “will work together closely on the integration process.? Much of Mr. Johnson’s message appeared to be predicated by an important caveat: “If and when Yahoo! agrees to proceed with the proposed transaction…?

The Big, Big Brewer from Belgium.

By: Leung, Calvin, Canadian Business, 00083100, 2/18/2008, Vol. 81, Issue 2

All due respect to Budweiser, but Inbev is the king of beers. From its base in Leuven, Belgium, it sells more brew than any other company on the planet. With brands such as Stella Artois, Beck's and Labatt Blue, and operations spanning more than 130 countries, InBev sold the equivalent of about 12 billion six-packs in 2006. (It also markets soft drinks in Latin America and a few countries in Europe.) When it comes to stocks, of course, bigger isn't always better. But shareholders could be raising a glass to InBev in the years ahead.

For starters, it has opportunities to cut costs. InBev was formed from the merger of Belgium's Interbrew and Brazil's AmBev in 2004; since that deal, it has implemented zero-based budgeting--a system that requires departments to justify every expense each year rather than use last year's costs as a starting point-- to many parts of its organization. Rajiv Jain says InBev now boasts "some of the best margins you can find anywhere in the world," yet its European and North American operations can still get leaner.

Losing fat isn't the only way InBev can create a buzz among investors. Despite its mass, it still has room to grow. The brewer commands roughly a 70% share of Brazilian beer sales, and Jain says it should squeeze more volume from that market in the coming years, since per capita consumption is low compared with levels in developed nations. In its most recent fiscal year, InBev Brazilian volume increased 5%. Meanwhile, through a partnership agreement with Guangzhou Zhu Jiang Beer Group Co. Ltd., InBev also has a presence in China, the world's largest beer market; the Zhu Jiang brands have about a 12% share of the Chinese market. And Jain says eastern Europe could be a source of growth for InBev, too.

Combine InBev's cost-cutting, growth in emerging markets and share buyback plan, and Jain says he "can't see why earnings per share can't grow 12 to 13 percent per year over the next three to five years." Analysts covering the stock are more optimistic on that figure, expecting EPS growth of 18% over the period; most research firms following InBev rate it a Buy.

What could leave a bad taste in investors' mouths? Well, for one thing, there are doubts over whether InBev can grow in developed markets, Jain says. In fact, the company's 7.8% volume decline in western Europe during its most recent quarter contributed to a one-day 11% drop in InBev's stock price. And Wim Hoste, a senior equity analyst at KBC Securities in Brussels, says InBev management warned in November that raw material costs could go up faster in 2008 than in previous years, prompting him to assign the stock a Reduce rating.

InBev's share price has remained relatively flat since its dip in November. For value investors, however, now could be a buying opportunity, with the stock featuring a price-earnings-growth ratio of 1. The drop certainly didn't bother Jain. Rather than dump his InBev shares--or perhaps pour himself a stiff drink--he simply bought more of them.

February 25, 2008

Managing the Dream: The Learning Organization

by Charles Handy

In an uncertain world, where all we know for sure is that nothing is sure, we are going to need organizations that are continually renewing themselves, reinventing themselves, reinvigorating themselves. These are the learning organizations, the ones with the learning habit.

Just as the world has changed, so too has the process of learning. When the future was an extension of the present, it was reasonable to assume that what worked today would also work next year. That assumption must now be tossed out. During times of discontinuous change, it can almost be guaranteed that what used to work well in the past will not work at all next time around. The old approaches are simply too incremental. More than that, they are too slow.

Today we are hearing so much about change that the word is becoming a cliche. Rather than chant change, it is more accurate to say that we all -- individuals and organizations -- must acquire the learning habit, the new learning habit. It is a habit that changes many of the old assumptions about management. The learning organization is a different sort of place. But it is an exciting one.

Characteristics of the Learning Organization The learning organization is built upon an assumption of competence that is supported by four other qualities or characteristics: curiosity, forgiveness, trust and togetherness. The assumption of competence means that each individual can be expected to perform to the limit of his or her competence, with the minimum of supervision.

For too long, organizations have operated on an assumption of incompetence. The characteristics of this assumption are controls and directives, rules and procedures, layers of management and pyramids of power -- all very costly. By contrast, the assumption of competence promotes flat organizations, with fewer checkers checking checkers. Flat organizations are far more responsive, efficient and cost-effective. They put a high premium on early training, on acculturation in their ways and values and on some form of vetting or qualification before an individual is allowed to operate. In these organizations the learning habit starts early.

Competence alone, despite all the prior learning it implies, is not enough to foster the learning habit. It must be accompanied by curiosity. Watch a small child learning. The questions are endless, the curiosity insatiable. But curiosity does not end with the questions. Questions beg answers, and the truly curious are in search of the right answers. This often requires experimentation. This process is encouraged in the learning organization, provided there is an assumption of competence and a license to experiment within the boundaries of a person's authority.

Because experiments can fail, forgiveness is essential. Instead of failures, unsuccessful experiments must be viewed as part of the learning process, as lessons learned. One can also learn from successful experiments. That form of learning needs not to be forgiven but to be celebrated.

None of these things - competence, curiosity, forgiveness or celebration -can foster a leading organization if there is no trust. While people may be highly competent, you will not allow them to be competent unless you trust them. Of course, it is difficult to trust someone you don't know or have never seen in action. A person you know only by name from a memo is not a person to take a risk with. For the learning organization, the implications of this simple human fact are enormous. How many people can one person know well enough to trust them? On the answer to that question hangs the whole design and structure of the corporation.

One solution is togetherness. Few, if any, of the problems businesses face nowadays can be handled by one person acting alone. That is fortunate in a way, because curiosity, experimentation and forgiveness need to be shared. Lonely learners are often slow and poor learners, whereas people who collaborate learn from each other and create synergy.

Today we are seeing an increasing number of organizations made up of shifting ?clusters,? or teams, that share a common purpose. The need for togetherness, both to get things done and to encourage the kind of exploration that is essential to any growing organization, creates the conditions for trust. Trust, in turn, improves togetherness.

Despite the presence of trust and togetherness, the learning organization is not a comfortable place for its leaders. It is an upside-down sort of place, with much of the power residing at the organization's edge. In this culture, imposed authority no longer works. Instead, authority must be earned from those over whom it is exercised. This organization is held together by shared beliefs and values, people who are committed to each other and to common coals -- a rather tenuous method of control.

Such an upside-down way of running an organization requires a powerful theory to justify it: in this case, a theory of learning. Real learning is not what many of us grew up thinking itwas. It is not simply memorizing facts, learning drills or soaking up traditional wisdom.


The Wheel of Learning

This process can best be described as a wheel -- a wheel of learning. The wheel has four quadrants that, ideally, rotate in sequence as the wheel moves. The first quadrant consists of the questions, which may be triggered by problems or needs that require solutions. The questions prompt a search for possible answers or ideas, which must pass rigorous tests to see if they work. The results are then subjected to reflection, until we are certain we have identified the best solution. Only when the entire process is complete can we truly say that we have learned something. There are no shortcuts.

This process lies at the heart of individual growth and of corporate success. Too simple, some would say. They should try putting it into practice.

Organizations that have acquired the learning habit are questioning the status quo, are forever seeking new methods or new products, forever testing and then reflecting, consciously or unconsciously pushing round that wheel.


Keeping the Wheel Moving

Maintaining constant movement of the wheel is not as easy as it sounds. There are two key concepts which can help to keep it turning: subsidiarity and incidental leading.

Subsidiarity. The word itself is rather ugly, but the concept is important. Subsidiarity means encouraging individuals and groups to have as much power as they are competent to handle. It is an old idea in political theory, an idea central to democracy and an idea which, today, is at the heart of the learning organization. Power is given to those closest to the action.

Subsidiarity is managed, organizationally, by defining the boundaries of the job. There are two boundaries. The inner boundary defines the essential core of the job, be it an individual's job, a team's or a function's. This part of the job is defined, the roles and responsibilities made clear. If these things are not done, then one is seen to have failed. The outer boundary defines the limits of discretion. In between lies the scope for initiative and for personal responsibility.

W L. Gore, creator of the well-known ?Gore Tex? fabric, whose company does its best to foster the learning habit, makes a nice distinction between the two boundaries. There are experiments above the water-line, which do little harm if they go wrong, Gore pointed out, and there are experiments below the water-line, which might sink the ship. The former are encouraged; the latter are outlawed.

In good organizations, the mistakes are rare because the people are good; and they are good because they know that they will be entrusted with big responsibilities, including the chance to make mistakes. Subsidiarity is self-fulfilling.

In traditional organizations, the space for initiative is limited. Many jobs are all core and no space. The water-line is set very high. Control is tight. There is no initiative without prior permission. In the flexible, responsive organizations that are needed today, the space has to be larger because the center cannot define in advance the details of every job. Control then has to be after the event -- with forgiveness if necessary. This means that each individual or team must understand very clearly which types of initiatives are acceptable and which are not. Everyone has to agree on the definition of success. Control depends more on a common understanding than on budgets and procedures. Shared values reinforce constant and effective communications, all of which are essential if subsidiarity is going to work. The organization that talks together works together.

Incidental learning. Subsidiarity by itself will not move the wheel of learning. It needs to be bolstered by incidental learning. Incidental learning means treating every incident as a case study from which we can learn.

This learning does not occur automatically; opportunities must be created for it to develop. For example, regular meetings of one's group or cluster can be arranged to review recent critical events. This is, in fact, the time-honored way in which doctors, social workers and other professionals help each other to learn from their experiences. It requires honesty with oneself and with others, a sense of togetherness and trust. Incidental leading is the organization's way to build in time for reflection, the final segment of the wheel. A mentor from outside the organization or group can enhance the process by encouraging a free and frank exchange without acrimony.

Incidental learning is most appropriate when one is dealing with divergent problems. It was E. F. Schumacher, author of Small Is Beautiful who first distinguished between convergent and divergent problems. Convergent problems have right answers: ?This is the shortest route to Boston.? Divergent problems, such as ?Why do you want to go to Boston?? have answers that are only right for a particular person, time and place.

Once we have moved beyond the basics, all the problems of organizations are divergent, to be solved only by the process of the wheel. This is what makes organizations so endlessly fascinating, and also so difficult.


There Is No Alternative

People once believed that there was a science and a theory of organizations which, like the laws of motion, would allow us to predict and determine the future. We now know that this is impossible. We have learned that chance happenings will trigger chain reactions, that the past will be a poor guide to the future and that we shall forever be dealing with unanticipated events.

Given that scenario, organizations have no choice but to reinvent themselves almost every year. To succeed, they will need individuals who delight in the unknown. The wise organization will devote considerable time to identifying and recruiting such people and to ensuring job satisfaction. Being a ?preferred? organization will become increasingly important. Preferred organizations will be learning organizations. They will provide opportunities to exercise responsibility, to learn from experience, to take risks and to gain satisfaction from results achieved and lessons learned.

Such organizations will continue to defy conventional wisdom. They will be organizations of consent, not of control. They will be able to maintain a feeling of togetherness despite their size and far-flung locations. They will make many mistakes, but will have learned from them before others realize they occurred. They will invest hugely in their people and trust them hugely and save the salaries of ranks of inspectors. Above all, they will see learning not as a confession of ignorance but as the only way to live. It has been said that people who stop leading stop living. This is also true of organizations.

Microsoft and Yahoo: The Corporate Water Cooler

SAN FRANCISCO (MarketWatch) -- As the stalemate over Microsoft Corp.'s bid to buy Yahoo Inc. enters its third week, some analysts are already pointing to a winner in the impasse: Google Inc.

Two weeks after Yahoo ( YHOO) rebuffed Microsoft's (MSFT) merger proposal and the software giant's vow to explore all options, it remains unclear how the situation will play out. But the uncertainty in what could turn into a protracted battle is giving crucial openings to the two titans' common rival, Google ( GOOG) , some analysts said.

"In the interim, we foresee disarray at Microsoft and Yahoo," analyst Marianne Wolk of Susquehanna Financial Group wrote in a note. "We believe the deal has distracted the engineers."

Representatives from Microsoft and Yahoo respectively said that the they had no comment.

Nevertheless, the management teams of both tech companies have told employees that everything is going well, while urging them to keep busy.

In an email sent last week, Kevin Johnson, president of Microsoft's platform and services division, told staffers that "it's business as usual, and as such, your commitments remain unchanged. ... It's important that we stay focused on our business commitments and let the process for the transaction take its course."

But Roger Kay, president of Endpoint Technologies Associates, said the internal notes sent by both companies "indicate that each feels the need to tell his troops to keep their eye on the ball."

"The water-cooler chat must be pyroclastic by now, to the detriment of any actual work that's got to be done," he added.

Wolk of Susquehanna echoed this point, saying that the distraction over the planned merger "should benefit Google over the next 18 to 24 months, providing with a major opportunity to advance in branded advertising."

She cited Microsoft's statement that it expects the process to close in the second half of 2008, which many analysts already believe is too optimistic and is predicated on a friendly merger agreement between the two companies.

"If instead Microsoft is forced to acquire Yahoo via a proxy fight, it would mean a more protracted closing process," according to the analyst.

That would mean Microsoft would have to field its own slate of board candidates and wait for the next shareholder elections, which analysts say may not happen until June or July.

"Then the transaction will not close until early 2009, when it would begin the complex integration of Yahoo's 14,300 employees, multiple advertising platforms, technology infrastructures, content sites, culture, etc," Wolk commented. "Google may not face a more competitive Microsoft-Yahoo until 2010."

By then, she said, Google could "extend its lead in search monetization" and grab a "major lead in emerging growth areas, such as video advertising, mobile and local advertising."

More importantly, Wolk pointed out, Google would likely find it easier to hire top engineers from Microsoft and Yahoo "as they fear for their jobs in a consolidation." She cited the anxious chatter on blogs by Microsoft and Yahoo employees that suggest "a growing fear of layoffs."

Analyst Steve Allen of Sierra Tech Research also believed that the process will likely lead to a demoralized workforce. "The longer the deal takes to consolidate, the more able-bodied Yahoo 'foot soldiers' will desert their assigned posts," he said.

He cited America Online's takeover of Netscape which, Allen added, involved "a class of management styles and the option of going elsewhere" for employees. "Not a good recipe for success, if what you want is the people."

Allen noted that "ironically, many went to Yahoo or dot-com startups. Of course, Microsoft may not be so worried about retaining the people. They have plenty already. Which in turn is why there is so much angst amongst the Yahoo troops."

Benjamin Pimentel is a MarketWatch reporter based in San Francisco.

Managing the HR challenges of a major global merger

How HR underpinned the successful merger between Logica and CMG

Mergers bring with them a host of issues and can represent a major challenge for HR. The 2002 merger that formed LogicaCMG was seen as an opportunity to combine the strengths of the two legacy companies and roll out best practice HR programs. Nigel Perks,

IN DECEMBER 2002, Logica and CMG completed a merger that created the third largest quoted IT services company in Europe. Today LogicaCMG employs around 20,000 people across 34 countries and delivers IT management, consultancy, system integration and outsourcing services to customers spanning industries such as telecoms, transport, utilities and financial services as well as the public sector. The merger presented an opportunity to undertake an objective review of HR policy and services across the newly created business and establish best practice. More importantly, it provided a chance to implement HR initiatives that would enable motivational and productive working environments across all operations, regardless of location.

Company backgrounds
Both companies were established in the 1960s and targeted similar markets, notably financial services, defence, public sector and telecoms. They competed head-to-head for business and both employed highly skilled, well qualified software development professionals, consultants and analysts. This meant that there were already synergies in place that would help to achieve a successful merger. Logica and CMC had leading market positions and critical mass in the UK, Benelux, France, Germany and Australia, as well as in the Americas and Asia-Pacific regions. The merged business would be able to strengthen its market position in these territories, add more value to its clients, invest more in research and development and, for its shareholders, become a stronger contender to win business and return value. But beyond the undisputed logic of the merger lay the pragmatic challenge of integrating and managing just over 20,000 people across the world. Technical skills and business domain know-how are LogicaCMG's strengths, so retaining and developing those skills through and beyond the merger was a key priority. Retaining and recruiting experts who manage client relationships, analyze and problem solve, create solutions and manage complex and challenging projects is critical to the future performance of LogicaCMG and the success of our clients.

The pre-planning phase
The more work that could be done before the merger was completed would help in the swift implementation of new processes and procedures, as well as identifying key individuals within the new structure. It was important during this pre-planning phase to build a new HR strategy that would not only establish best practice for the future, but also honor the past of both companies. Every employee had a history of working at either Logica or CMG and were all very passionate about their roots and both companies' successes. It was also acknowledged that failure to act quickly and create a new organization and structure that every employee could identify with, could have detrimental effects on the company's long-term vision. The announcement of the merger had already created a degree of uncertainty, and the last thing the HR team wanted to do was to add to it unnecessarily.

Setting key priorities
Underpinning all of the activities undertaken at this time were a clearly identified set of key priorities which allowed everyone involved to focus their energies and efforts on the right areas. These priorities included:

* building a new ethos for the company which staff could connect with;
* speed and clarity of communication;
* establishing a common framework; and
* ensuring equality and openness.

An agreed central plan was put in place to provide the top level milestones and activities. This was supported by regional plans dealing with the detail of each location in turn. This ensured that the integration was not limited by the speed of the slowest or most complex country and enabled each country to effectively and efficiently move forward within a common framework. Essentially, the program was run like a large IT project with a small dedicated project management team at the center supported by local level expertise as and when required.

Developing a new ethos
Before communicating any new processes or procedures the company undertook a rebranding exercise to create a common identity and establish a way to embody the principles on which LogicaCMG's success would rest. Building on the strengths of both Logica and CMG, we established a new set of principles and values. These would be used to help the existing employees as well as new joiners to assimilate into the new company and understand our mission, our values, the HR support services and initiatives. Openness was a key part of the new ethos and Martin Read, the new chief executive, established an online forum called "Ask Martin" so that employees could ask the questions they really wanted answers to. This worked well and affirmed how the company would be led and how individuals would be supported both through the change and into the future. Initiatives like this demonstrated to employees that this new ethos was supported at the highest level of the business.

Avoiding an "us and them" culture
While developing core and regional plans we were particularly sensitive to the risks associated with the merger. These included the risk of an "us and them" culture manifesting itself, the risk of losing good people if we didn't communicate plans quickly enough, and the risk of getting communication wrong at a local level. One of the biggest challenges was how to manage communication with employees - not just in terms of who is communicated to and in what fashion, but how often and by whom. The chief executive was involved from the beginning providing a video briefing together with the new company chairman that communicated their commitment to the future as well as expressing pride in the past. Our primary concern was to deal with uncertainty following the merger. We needed to minimize any potential for conflict or ambiguity as a result of introducing new policies and procedures. It was also vital that employees were made aware of the new structures that had been put in place so that they felt secure in the new company.

Multi-channel communication
Lessons learned from other mergers led us to believe that a multiple communication approach would be the most effective and lowest risk strategy. Toolkits were prepared for managers and supported by an Internet site which was up and running from day one. Weekly communication bulletins were also used. We identified the key managers across the business who would communicate messages about the changes in HR policy at a local level. The toolkits served three purposes. It provided the HR team with breathing space to get on with the strategy and devise the next initiative, while the first ones were delivered at a local level. second, it made sure that the HR team had an international project team that could roll out the program simultaneously while accommodating regional variances. Third, it ensured that employees had identifiable figureheads who could provide consistent support and point them in the direction of the right online tools and materials. Using nominated HR champions also meant that messages were consistent as they cascaded throughout the organization, which would help to address the fears regarding lack of clarity or openness.

Introducing new HR processes
The core merger team established the key elements of the overarching HR strategy. This had to be understood at group level, accommodated in the form of regional plans and then communicated in a meaningful way - so there could be no room for miscomprehension or error at local level. This stage also influenced the calendar for roll-out of the plans. It was critical that the timeline reflected national legislative and consultative requirements as well as the key milestones we had identified in our core plan. Once plans and processes were communicated it was important that staff knew how they could help themselves, and what help they could expect from the company. We also needed to eliminate differences in remuneration policy that had existed in Logica and CMG that had to be standardized in the new company. Workshops for managers and a program of people management workshops were put in place to support the communication of the new processes.

Winning hearts and minds
What was important was to try and reach the hearts and minds of the staff and to realize that this would be the single hardest part of the entire exercise. We ran a series of employee surveys to support this process. The surveys helped us to identify how people were feeling and gauge general sentiment and morale. They also allowed us to survey how effective our strategy was and which elements needed more work. The survey findings fed into the next stage, which was to develop a new career architecture matrix, called Pathways, together with a full coaching and mentoring program. This formed the basis of our Performance Management System (PMS), which allows individuals to understand which skills and training they need to follow a certain career stream. While it was important to enable self-management of career planning, it was also vital to provide help and support to employees. This included the introduction of our people management workshops that helped to disseminate LogicaCMG's brand values and ethos, as well as the new skills requirements outlined in PMS.

Building a coaching environment
In a bold move, LogicaCMG took one of its most successful managing directors, and appointed him as director of coaching. With the support of the core HR team and the board, an approach to coaching was developed that was designed to deliver benefits to the bottom line. The concept of a coaching environment was piloted with the executive committee for the Group. Using a newly developed competency framework, future leaders were selected for the coaching program. The value of coaching rather than training at this level proved to be extremely powerful. The future leaders were, without exception, highly motivated and ambitious people. However, they were also individuals who needed specific guidance; spending time with senior directors (their mentors) proved to be a valuable and personally relevant experience. Using professional, accredited external coaches meant we were able to get to the hearts as well as the minds of individuals and create goal-oriented plans that would not just move them on towards new levels of competency as leaders, but that would also help the business move forward. The success of this program has led us to drive this process throughout the organization globally.

Critical success factors
The importance of this project to the long-term future of LogicaCMG cannot be understated. But it was also vital for LogicaCMG to keep its eyes firmly on the business and its customers during the planning and roll-out phases of the new HR strategy. One of the success factors to achieving this goal was the fact that we put in place a small working party that could define an agreed path then leverage the strength of a global network of HR champions.
Visible leadership from the top was also critical to our success. The CEO's passion for the new company and his commitment to the new HR strategy undoubtedly helped to gain buy-in across the company. But, above all, the project worked extremely well for the following reasons:

* The plan was developed and rolled out in a consistent fashion by HR champions across the world.
* The plan was developed and delivered within one year within budget and to agreed timescales (a fact that was reported in our annual accounts).
* Communication was timely, clear and consistent.
* Employee surveys were vital tools to measure satisfaction and success throughout the change.
* The program set in motion new initiatives for the future and didn't focus only on short-term goals.
* Every part of the program referred back to the brand, ethos and values established for the new company at the beginning.
* The merger was seen as a unique opportunity to take the best from both organizations to establish new HR processes.

We believe that despite the success of the merger, we cannot sit on our laurels. There is an ongoing challenge to not just win but retain the hearts and minds of our employees. We have to work with them refining, reviewing and improving what we have in place to help everyone feel pride in their new company. We cannot tell people to be proud, we must harness the enthusiasm and energy within the employees and ensure that the shape of the company we create matches their ambitions.

KEY POINTS

* The 2002 merger between Logica and CMG was underpinned by clear, consistent priorities from the outset.
* A new company ethos was created that built on the strengths of both Logica and CMG.
* Communication was multi-channel and timely to avoid a "them and us" culture. Champions were identified to communicate changes locally.
* Workshops were rolled out to support the new career architecture matrix and performance management system.
* Coaching became a powerful tool to win the hearts and minds of future leaders and move the business forward.

by Nigel Perks

LogicaCMG
AUTHOR_AFFILIATION

Nigel Perks was appointed group HR director and a member of the executive committee of LogicaCMG in March 2004. Previously he was corporate HR director for Logica from September 2001 and has also held a variety of senior international HR roles with Prudential and Digital Equipment Co. (DEC).
AUTHOR_AFFILIATION

CONTACT

Nigel Perks

E-mail: nigel.perks@logicacmg.com

Electronic Arts Offers $2 Billion for Take-Two

Rough-and-tumble tactics are common in popular videogames like Electronic Arts Inc.'s Madden NFL. Now the company has launched a blitz against one of its top competitors.

EA made an unsolicited $2 billion cash offer to buy Take-Two Interactive Software Inc., publisher of the hit Grand Theft Auto videogame, in the latest sign of consolidation in the games business.

EA, of Redwood City, Calif., yesterday said it was making public an offer of $26 a share for Take-Two after that company's board last week rejected the proposal as insufficient. Take-Two swiftly reiterated its negative opinion of the transaction.

The offer is a 50% premium over the closing price of Take-Two's shares Friday. EA said it was a 63% premium over Take-Two's average share price in the 30 trading days preceding Feb. 15, the last trading day before EA made its $26 a share offer.

The move comes at a time when one of EA's closest rivals, Activision Inc., is merging with the games unit of Vivendi SA to create Activision Blizzard Inc., a powerhouse with properties spanning the Guitar Hero series of music games to the hit online title, World of Warcraft. The consolidation of bigger players may put further pressure on smaller game developers to sell out to big entities, including media companies that are upping their investments in games.

EA's action follows an even bigger bid by Microsoft Corp. for Yahoo Inc., continuing a new trend of unsolicited offers in the maturing tech sector. Such companies had long stuck to negotiated acquisitions, on the theory that unfriendly transactions could spur the departure of talented engineers and programmers that were seen as key assets of target companies.

EA is also the maker of the Sims and other hit games. If its bid succeeds, the company would assume control over Grand Theft Auto, a franchise that is as well known for its controversial depictions of violence as it is for its titanic commercial success. More than 65 million copies of Grand Theft Auto games, which follow characters around gritty urban environments as they steal cars and perform other misdeeds, have been sold since the series was launched.

"This is among the most important franchises in the entire game industry," said John Riccitiello, EA's chief executive.

In an interview, Mr. Riccitiello described Take-Two as an "enormously attractive asset" that would find a better home at EA, a larger publisher with more extensive distribution networks abroad and the ability to more fully exploit Take-Two game properties on, for example, newer game devices like mobile phones. He said Take-Two as a standalone company faces substantial risk because of the increasingly high cost of game development and other factors.

Such unsolicited bids are often characterized as "bear hugs," since they aren't overtly hostile but are unwanted and difficult to escape. "We're a friendly bear," Mr. Riccitiello said. Characterizing the company's premium as generous, he added, "that's not an unfriendly transaction."

EA's offer comes about two months before Take-Two plans to ship Grand Theft Auto IV, one of the most eagerly anticipated games of the year. In an interview, Strauss Zelnick, the chairman of Take-Two, described EA's offer as "opportunistic" since the shares of game companies and other purveyors of entertainment often trade up in the months before the release of a big entertainment property.

"Had the offer been made at a price that was compelling from a value point-of-view, naturally, good governance would suggest we would have considered it," Mr. Zelnick said. "This offer is woefully undervalued."

Mr. Zelnick said Rockstar Games, the Take-Two group making Grand Theft Auto, is still working on the game and that discussions with EA would be a distraction from completing the title. In a press release, Take-Two said it offered to initiate further discussions with EA about a deal on April 30, the day after Grand Theft Auto IV ships, in order to stay focused on the game.

Take-Two's current management was installed after a revolt by dissident shareholders, who in March 2007 started a proxy fight and voted in a new slate of directors.

Ryan Brant, who founded the company in 1993 and served as chief executive until 2001 and chairman until 2004, in February 2007 pleaded guilty to criminal charges associated with stock options backdating.

Earlier, Take-Two was investigated by the Securities and Exchange Commission over its accounting practices. In 2005, the company agreed to pay $7.5 million to settle SEC charges that it "parked" copies of games with distributors during fiscal 2000 and 2001, inflating revenue by booking shipments of games that it later took back as returns.

EA said its pursuit of Take-Two stretches back nearly a year to the time the dissident Take-Two shareholders were attacking the poor financial performance of the company. In March of last year, Take-Two publicly disclosed that it was considering a sale of the company, and Mr. Riccitiello confirmed yesterday that EA was "very close" to acquiring Take-Two then.

But Mr. Riccitiello said he helped put the brakes on the deal at the time. In March, Mr. Riccitiello was acting as an adviser to EA in the time between his appointment as EA's new CEO in late February and his official start in that job in April. Mr. Riccitiello said he wanted to focus on reorganizing EA when he got to the company, instead of digesting Take-Two.

EA said it resumed discussions with Take-Two in December and offered the company $25 a share on Feb. 6, which Take-Two rejected on Feb. 15. EA boosted its offer to $26 a share on Feb. 19 and Take-Two rejected that proposal Feb. 22.

For EA, a deal could help it with a plan to reverse a recent loss in market share for its games because of the relatively weak performance of some key titles.

Michael Pachter, an analyst at Wedbush Morgan Securities, believes EA's bid for Take-Two was prompted in part by EA's desire to protect its important sports videogames business. Take-Two is one of its few credible competitors in sports games, and Mr. Pachter predicted that EA could use superior sports developers from Take-Two or shut down rival games to eliminate competition.

Jeff Brown, an EA spokesman, denies that sports motivated EA's offer. "Sports is a very small part of Take-Two, and they have a lot of other great assets," Mr. Brown says.

A big risk for EA, if the deal succeeds, is that it may not be able to retain key talent, including the team behind Grand Theft Auto. The creative direction of the game is still overseen, in part, by two brothers who helped invent the series, Sam and Dan Houser of Rockstar Games. Mr. Riccitiello, who says he knows the Housers well, says he hasn't discussed EA's offer with them.

http://online.wsj.com/public/article_print/SB120389064519388895.html

Sprint & Nextel's Merger Troubles

BusinessWeek
Special Report February 21, 2008, 5:00PM EST text size: TT
Sprint's Wake-Up Call
Reversing a miserable service reputation after the Nextel merger will be key to the company's turnaround
by Spencer E. Ante

When Daniel R. Hesse was named chief executive of Sprint Nextel in December, he figured that customer service was going to be one of his biggest challenges, given how poorly the wireless service provider had performed on that count in recent years. He quickly found out precisely how big. The lanky 54-year-old walked into his first operations meeting at Sprint headquarters in Overland Park, Kan., and found that customer service wasn't on the agenda at all. He changed course right away. Customer service is now the first item discussed at every one of the weekly meetings. "We weren't talking about the customer when I first joined," says Hesse. "Now this is the No. 1 priority of the company."

With good reason. Since Sprint and Nextel merged three years ago, the deal has turned into something of a fiasco, with the company's stock down 66% since the agreement was struck. Poor service is a central reason. After the merger, unhappy customers defected in droves, and profits evaporated. On Jan. 31, Sprint Nextel (S) said it would take merger-related charges of as much as $31 billion, wiping out nearly all of the deal's value. In addition, two lawsuits have been filed against the company for allegedly extending customers' service contracts without their consent.

Employees like Paula Pryor saw the merger's impact firsthand. The 38-year-old, who worked in a call center in Temple, Tex., says the numbers-driven management approach implemented after the combination led to poor morale and deteriorating customer service. Even bathroom trips were monitored. "They would micromanage us like children," says Pryor, who was fired last year after taking time off when her father died.

The toll on Sprint's reputation has been dear. The company has ranked last among the country's five major wireless carriers in customer service every year since the merger in 2005, according to annual surveys by J.D. Power & Associates (MHP).

Now, two months into his job, industry veteran Hesse is disclosing for the first time detailed plans for turning around customer service. He's increasing investments in customer care, adding service technicians in retail stores, and reversing many management practices in customer call centers. Hesse is convinced that restoring Sprint's reputation with customers is the key to its future. "You will see progress," he says. "We have the right people in place. We will get it done."

For the combined Sprint Nextel to be criticized for quality issues is a remarkable reversal. During the 1980s and '90s, when Sprint was the nation's third-largest long-distance company, it distinguished itself by advertising a fiber-optic network so high-quality you could "hear a pin drop." Nextel was known for its "push-to-talk" technology and the best rate of customer retention in the industry.

When the two unveiled plans to merge in December, 2004, there was a certain logic to the deal. Separately, they were much smaller than AT&T (T) and Verizon Wireless, but together they would nearly rival the two wireless leaders in size. The theory was that, combined, they would have the bulk to get the latest phones, best prices on equipment, and most complete network for wireless customers. "The combination of Sprint and Nextel builds strength on strength," Gary D. Forsee, CEO of Sprint and later the combined companies, said then.

But as the two formally combined in August, 2005, it became clear this deal would be even more complex than the typical megamerger. At the same time Forsee and Executive Chairman Timothy M. Donahue were piecing the two companies together, they laid out an aggressive strategy for the combined entity to become a leader in wireless broadband services and content. That led to plans to spin off Sprint's local telephone business, form partnerships with the cable industry, and develop a wireless technology known as WiMAX. "There was so much going on after the merger that there was a lack of focus," says one former senior-level insider.

In September, 2005, the month after the merger closed, Forsee told Wall Street that the deal was going more smoothly than expected. He raised the projection for expected "synergies," or cost savings, to $14.5 billion, up from the original $12 billion estimate at the time of the merger announcement.

That boosted pressures to find cost savings throughout the company, say former employees and executives. An important component of the effort was importing the quantitative management approach of Sprint to Nextel. While some of the new metrics worked well, others had detrimental effects, former employees and executives say. In particular, call centers began to be measured and viewed primarily as cost centers, rather than opportunities for strategic advantage. Customer service ended up a secondary priority, say former executives. Forsee, now the president of the University of Missouri, declined to comment for this story.

In the fall of 2005, as board members gathered for their first meetings as a combined company, the directors from Nextel noticed another key change, according to the former senior-level insider. Before the merger, Nextel directors talked at every board meeting about "churn," the industry term for the percentage of existing customers who leave each month. The directors felt churn was a good shorthand way to understand the quality of customer service, and they prided themselves on Nextel having the lowest in the industry. But after the merger closed, the combined board paid little attention to churn, concentrating instead on the progress with synergies and strategic initiatives. "From the very beginning there was a philosophical difference on churn," says the former insider.

In the trenches, meanwhile, workers were dealing with fallout from the merger. Pryor remembers the conditions in her Texas call center, originally a Nextel facility, shifting dramatically in the first months after the merger closed in late 2005. Managers began tracking what she was doing on her computer. Overtime pay became much harder to get. Most puzzling for her was the pressure to keep customer calls short. At Nextel, she was judged only on the number of customer problems she solved each month, however long they took, and she would occasionally spend 30 minutes to resolve a thorny issue. But after the merger, speed was the priority, she says. "They would say, Your calls need to be shortened,'" she says.

`LIKE NOAH'S ARK'
Other employees say they felt similar pressure. Gayle R. Romero, who worked in Sprint Nextel call centers for six years, says that at one team meeting after the merger, a manager said, "if you don't think you can handle this, I hear McDonald's is hiring." Says Romero: "Everyone was scared."

Customer service issues began to surface later that year. In January, 2006, Sprint unveiled plans to merge the two billing and customer care systems from the combined companies. But employees say there was little evidence of any progress in the following months. Service reps had to toggle back and forth between systems, and at times couldn't get access to billing or technical information for customers. "It was like Noah's Ark," says one former insider. "We had two of everything."

Churn rose quickly, hitting 2.4% in the third quarter of 2006. That was the highest among the country's major carriers and far above the 1.4% rate Nextel reported before the merger. At the same time, Sprint reported softer-than-expected earnings, punishing its stock.

As Sprint came under financial pressure in 2006, it began to ask call-center workers to engage more in sales. Whereas Nextel service reps had no sales quotas, workers at the combined companies were required to hit targets for renewing contracts or retaining customers who wanted to cancel accounts. One call-center employee says she was supposed to renew 600 to 900 contracts per month, and sometimes the target exceeded 1,000. In the customer retention unit, workers were given cash bonuses of $2,000 to $3,000 per month if they met monthly quotas. "They wanted those big bonuses," says Romero.

Allegations in the two lawsuits against Sprint raise questions about how far Sprint workers went in meeting those sales quotas. Selena L. Hayslett, a realtor from Apple Valley, Minn., says she called Sprint Nextel four times in late 2006 to dispute charges on her bill. Then she realized that each time she called, Sprint was extending her contract, without her consent, according to an affidavit filed in one of the suits. "I felt tricked," said Hayslett.

Her complaint is included in a lawsuit filed by the Minnesota attorney general, alleging that Sprint extended contracts when customers made small changes to their service. "It's kind of like the Hotel California," says Lori Swanson, the attorney general, "where you can check in and never leave." Sprint declined to comment in detail on the lawsuit. However, a spokesman says there are "discrepancies between our rec-ords and the lawsuit's portrayal of customer interactions."

Paula Appleby, a plaintiff in the other lawsuit, claims she tried to cancel her Sprint contract a number of times. But "each time she has attempted to cancel her service she has been told that her contract had been previously extended," according to the complaint, a federal lawsuit filed earlier this month seeking class action status. Sprint said it is still reviewing the Appleby lawsuit and declined to comment on specific claims.

In early 2007, as its financials deteriorated, Sprint cracked down on the freebies that call-center workers could give to keep customers happy, say current and former employees. One current manager in customer retention says that in the first half of 2007, Sprint cut back on virtually all the free minutes, service credits, and free phones that his workers used to be able to dole out. "One hundred minutes is it," says the manager, who asked for anonymity because he does not have authorization to speak to the press.

NO STOPWATCHES
The new policies hurt Sprint's ability to build its customer base. In the third quarter of 2007, churn stayed high, and Sprint saw its subscriber numbers remain flat, at 54 million, while rivals AT&T and Verizon added millions. In October, Forsee stepped down as CEO under board pressure. Today, Hesse is reversing course on several fronts, hoping to salvage what he can from the troubled merger. He and his lieutenants aren't eliminating the quantitative approach entirely, but they're changing many of the old metrics to now emphasize service over efficiency.

Bob Johnson, Sprint's new chief service officer, has eliminated limits on the amount of time service reps spend on the phone with customers. Instead, he'll track how frequently reps resolve customers' problems on the first call. Employees who don't solve a minimum percentage on the first call won't be eligible for sales bonuses. He'll also track how quickly customer calls are answered, to ensure they're getting prompt attention. "My incentives and policies are all driven around improving the experience," says Johnson. He says the long-delayed combined billing system will be done by May.

Hesse is also returning to the Nextel philosophy in a number of areas. Churn, for example, is once again a top priority, discussed at every operations meeting. The figure remained stubbornly high, at 2.3% in the fourth quarter of 2007.

As for the allegations in the two lawsuits, Johnson says Sprint has implemented a zero tolerance policy for shoddy customer service, which includes a new focus on extending contracts only with detailed approvals from customers. Among other things, Sprint sends a letter to customers outlining any changes to their account, and customers have 30 days to cancel the changes.

Hesse knows he has a long, hard road ahead of him. Still, he's convinced Sprint is at last moving in the right direction. "We're beginning to improve customer service already," he says. "There will be a lag between when it improves and when the world knows that Sprint's customer service has improved. There's always a perception lag."

Back to Customer Service Champs Table of Contents

Ante is Computer Editor for BusinessWeek .

Tata: Master of the Gentle Approach

Tata: Master of the Gentle Approach
The Indian giant has found a way to acquire companies across the globe—and still tread lightly
by Manjeet Kripalani


Ravi Kant was shocked. As head of commercial vehicles at India's Tata Motors (TTM), Kant had traveled to the Korean port city of Gunsan to examine the failing Daewoo conglomerate's truck division, which was being auctioned. When Kant asked a midlevel Daewoo manager which bidder he preferred, the Korean replied that a European suitor would best secure his company's future. "I realized we had to change our entire strategy," Kant recalls, "and tell the Koreans what Tata was about."

Kant quickly put together a massive public-relations effort: Tata executives were enrolled in Korean language classes, company brochures were translated into Korean, and Tata began making presentations to employees, the local auto association chief, the mayor of Gunsan, officials in Seoul, even Korea's Prime Minister. If Tata were chosen, Kant's team explained, it would preserve jobs, build Daewoo into a major exporter, and blend the outfit seamlessly with the parent company. "Tata had done its homework in everything needed to do business here," says Chae Kwang Ok, chief executive of Tata Daewoo. The Indians won the auction, paying $102 million.

Americans often associate takeovers with layoffs and factory closings. Tata, India's premier industrial group, with an expected $50 billion in sales this year, has a different way to merge—more strategic partner than vulture capitalist. It has applied this approach to $18 billion in overseas deals since 2000, when it acquired Tetley Tea for $400 million. After buying British and Italian engineering and design houses, tony American hotels, Asian and European steelmakers, and software companies around the globe, Tata now has 333,000 employees worldwide, 26% of them outside India. In the latest move, Tata Chemicals on Jan. 31 bought Wyoming's General Chemical Industrial Products, a leading producer of soda ash. And Tata is the front-runner in the bidding to buy Ford Motor's (F) Jaguar-Rover (F) operations for an estimated $1 billion.

In all its deals, Tata has been careful to signal its respect for workers. While it chooses its targets carefully and doesn't do a lot of bottom-fishing, Tata is nonetheless unusual in that it hasn't laid off any workers or shuttered any facilities following its overseas acquisitions (though it has had layoffs at home in the past decade). "Tata buys companies overseas not to reduce costs but to improve [its own] capabilities," says Arun Maira, Boston Consulting Group's chairman in India. And Tata's Indian background has given it plenty of experience in managing a diverse workforce. Its employees in India come from various castes, religions, and ethnic origins and speak any of dozens of languages or dialects.

With its overseas acquisitions, Tata typically leaves executives in place. Instead of dispatching legions of Indians to the new company, Tata sets up a joint management board, which decides on issues ranging from growth targets to the development of new talent. Working groups find common goals, and managers of the acquired company are asked to help smooth out any cultural differences. This approach takes time, says Philippe Varin, chief executive of Corus, which Tata Steel bought for $12 billion last year. But it allows Tata to stay focused on bigger strategic issues "without sweating the small stuff," Varin says.

At Daewoo, Tata knew not to act like an occupation force. The company formed a joint board of directors, and Daewoo CEO Chae was given the freedom to keep running the business his way. Kant wanted two Tata executives to act as advisers. Chae welcomed them but insisted on incorporating them into his management team, with one caveat for the Indians: They had to shave their mustaches, as Koreans preferred a "clean" look.

The Indians helped devise a strategy to expand Daewoo's product line and boost exports. "It's turned out to be a win-win situation," says Choi Jai Choon, a union leader there. While the company had been largely focused on its domestic market, the new Tata Daewoo accounts for two-thirds of Korea's heavy truck exports, up from 20% three years ago. Sales are expected to hit $670 million for the year ending in March—more than double their level before the takeover. That success, says Kim Ki Chan, an auto industry specialist at the Catholic University of Korea, can be attributed to Tata's capital injection of $176 million, as well as its hands-off approach to the company. "It would have been difficult to find a better suitor than Tata," says Kim.

Tata's unique shareholder structure makes it easier for the group to tread lightly. Since its founding in 1868, Tata has been controlled by charitable trusts. Today, they own 66% of parent Tata Sons' shares and aren't as focused on short-term gains as most investors. The trusts, says R.K. Krishna Kumar, a director with Tata Sons, have long insulated employees "from the greed that is sweeping the corporate world." As the company gets more deeply enmeshed in the global economy, that gentility will be put to the test. Says Harvard Business School professor Tarun Khanna: "There's a different kind of rough-and-tumble to competitive pressures outside of India."

Pilot Seniority Muddles Delta-Northwest

Impasse Over Seniority of Pilots Has Thrown Delta-Northwest Merger Into Doubt

ATLANTA (AP) -- Not too long ago, Delta Air Lines Inc. and Northwest Airlines Corp. seemed all but certain to announce a combination soon. That still could happen in the next few days, but an impasse over seniority involving the pilots unions has jeopardized a deal, raising the question of what happens if Delta or Northwest walks away.

ndustry observers say the two airlines could stay independent, seek a quick deal with another carrier or wait until next year to try the consolidation game again.

"I can conceive of the pilots not coming to an agreement and destroying a potential merger," said Ray Neidl, an airline analyst with Calyon Securities in New York.

While in bankruptcy, Atlanta-based Delta defeated a hostile takeover offer from Tempe, Ariz.-based US Airways Group Inc., arguing that Delta was better off as a standalone carrier. It emerged from Chapter 11 last April with that feeling intact, but soaring fuel prices soon prompted a wave of consolidation chatter.

Delta has considered a combination with Northwest or Chicago-based UAL Corp.'s United Airlines, but in recent weeks has apparently focused on trying to hammer out a deal with Eagan, Minn.-based Northwest, which was once headed by Delta Chief Executive Richard Anderson.

People close to the Delta-Northwest talks said the pilots unions have agreed on a comprehensive joint contract, a significant equity stake for pilots and big pay raises for some, but cannot agree to how seniority for the 12,000 pilots would work under a combined carrier. The people asked not to be named because of the sensitive stage of the talks.

Seniority is important for pilots because those at the top of the list get first choice on vacations, the best routes and the bigger planes that they get paid more for flying. It's also the reason pilots don't often leave to go work for another airline.

A person close to the talks said Tuesday night that a small group of Northwest pilot negotiators want thousands of young Delta pilots to go to the bottom of the combined seniority list as part of agreeing to a deal. The person said that was a major hang-up.

But Greg Rizzuto, a spokesman for Northwest's pilots union, said Wednesday that the labor group is united, and all it wants is what's fair, noting that a pilot's career is tied to his or her seniority ranking.

As of Friday, there was no word on any movement on a pilot seniority deal. Another person familiar with the negotiations said the new target remains Monday for a Delta-Northwest combination announcement, provided the pilot talks make progress over the weekend.

Anderson told Delta employees in a recorded message Friday that the airline has a strong standalone plan and will only move forward with consolidation if such a move meets the company's goals. He offered no details on any talks, saying only, "We'll keep you posted."

John Budd, a labor relations professor at the University of Minnesota, said Delta and Northwest could move forward with a combination without a pilot seniority agreement. Having an agreement in place in advance is clearly their preference, however.

"The other option is try to go it alone or seek other merger partners, although one would have to figure that if the pilots can't reach agreement in this case then it's not very likely they would be reaching agreement in a similar scenario with a different airline," Budd said.

Airline stocks have been battered in recent months because of soaring fuel prices, and analysts generally agree that consolidation would help the sector's performance. If deals in the works fall apart, it's unclear how much airline shares would be affected. Some analysts believe fears of a recession, which would hurt airlines, have already been factored in.

Gary Chaison, an industrial relations professor at Clark University, said he thinks Northwest and Delta are "operating out of high anxiety" due to the prospect of a recession and high fuel prices.

Both airlines believe they have a "rare opportunity to capture the opportunities of scale" and defend themselves against fuel prices and an economic downturn, Chaison said.

"But I also think they understand that if they don't merge it's not the end of the world," he said.

Neidl, the analyst, doesn't believe consolidation needs to necessarily happen this year to get regulatory approval. The industry's financial situation could prompt merger buzz to return next year if no deals happen now, he said.

"We're going to have consolidation one way or another," Neidl said. "Either the government will allow consolidation, or in the next recession some airlines will disappear."

Saturday February 23, 4:02 am ET
By Harry R. Weber, AP Business Writer

Media Firms Create Online-Ad Network

Four of the largest U.S. newspaper publishers have teamed up to create an online ad-sales network, the second such partnership to be formed in the newspaper industry in recent years.

Gannett Co., Hearst Corp., the New York Times Co. and Tribune Co. are setting up the network as a stand-alone company called quadrantOne. Like a consortium created by Yahoo Inc. and a group of newspapers last year, it will allow national advertisers to buy space on certain of the Web sites operated by their newspapers in a bid to capture new sales as revenue at their print editions evaporates.

While Yahoo's partnership doesn't have guaranteed access to the Web- site ad inventory of its affiliate newspapers, quadrantOne will get access to a certain percentage of the ad inventory. QuadrantOne will include more than 120 papers, whose Web sites reach a total of 50 million unique monthly visitors, the company said. All four publishers have devoted funding to the company.

The network doesn't include Gannett's largest paper, USA Today, or the New York Times, which already have their own national sales operations. Instead, those companies will use the system to place ads on local titles such as the New York Times's Boston Globe.

QuadrantOne is designed to let national advertisers buy space in many local papers as well as on the Web sites of local television affiliates, without media buyers and planners having to make calls to multiple companies. If a marketer "can make one phone call to a portal or 100 in local markets to get the same audience" for their product, "the answer . . . would be a no-brainer," said quadrantOne interim Chief Executive Dana Hayes.

The formation of the partnership comes as the newspaper industry is struggling with falling advertising revenue, a result both of advertisers defecting to the Web and the weak economy. Difficult industry conditions sparked a new wave of cost-cutting this week. Yesterday, the New York Times said it will cut about 100 newsroom jobs this year, out of an editorial staff of 1,332, believed to be the largest such reduction in its history.

The cuts, through buyouts, attrition and possibly layoffs, came one day after Tribune said it would shed as much as 2.5% of its staff, including cuts at the Los Angeles Times, Chicago Tribune and Baltimore Sun. Tribune yesterday named Russ Stanton as the new editor at the Los Angeles Times, its largest paper. Mr. Stanton, previously innovation editor of the paper, will be the Times's fourth editor in three years. His three predecessors all invoked budget-cutting issues as a reason for their departures. Another Tribune paper, the Orlando Sentinel in Florida, said its publisher, Kathleen Waltz, was resigning as well after 34 years with the company.

Cuts in the industry have been sparked by investor unrest, leading to some mergers. Tribune recently went private in an $8.2 billion buyout. The New York Times is facing a dissident investor group that has nominated a slate of people to run for seats on its board.

Yesterday, New York Times Chairman Arthur Sulzberger Jr. and CEO Janet Robinson had breakfast with a representative of the group, according to a person familiar with the matter. It is the second meeting the executives have had with a member of the group, which includes hedge fund Harbinger Capital Partners and Firebrand Partners LLC, an investment firm led by Scott Galloway, an associate professor at New York University's Stern School of Business.

A spokeswoman for the Times declined to comment.

The investor group as of Tuesday had amassed 10.5% of the Times's publicly traded shares, according to a Securities and Exchange Commission filing last night, and wants the Times to focus more on its Internet strategy. As of 4 p.m. in New York Stock Exchange composite trading yesterday, New York Times's shares rose 86 cents, or 4.8%, to $18.84.

Earlier this week, the Times nominated Dawn Lepore, the CEO of Drugstore.com Inc. and an eBay Inc. board member, and Robert Denham, the former CEO of Salomon Inc., to its board. It also said that Sara Lee Corp. CEO Brenda Barnes and Centerview Partners LLC partner James Kilts will step down. The company is expected to oppose the directors that Harbinger and Firebrand nominated.

Rober MacMillan, Wall Street Journal, February 15, 2008

February 24, 2008

Electronic Arts Offers $2 Billion to Acquire Take-Two

By Nancy Kercheval and Eric Martin

Feb. 24 (Bloomberg) -- Electronic Arts Inc. offered to buy Take-Two Interactive Software Inc. for $2 billion in cash to help maintain its lead as the world's largest video-game maker and acquire the top-selling ``Grand Theft Auto'' series.

Take-Two's board rejected the offer of $26 a share on Feb. 22, prompting Electronic Arts to take its bid directly to investors. The offer by the Redwood City, California-based company is 64 percent higher than the Feb. 15 closing price, the last day of trading before it was made.

``There can be no certainty that in the future EA or any other buyer would pay the same high premium we are offering today,'' Electronic Arts Chief Executive Officer John Riccitiello said in a Feb. 19 letter to Take-Two Chairman Strauss Zelnick that was made public today.

Zelnick said in an interview today that the offer undervalues Take-Two and he's willing to talk to New York-based Electronic Arts after releasing the fourth ``Grand Theft Auto'' at the end of April. Electronic Arts, the maker of ``Need for Speed'' racing and ``Madden'' football games, is looking for more hit titles as it stands to lose its spot as the biggest gamemaker when Vivendi SA combines its games unit with Activision Inc.

Electronic Arts has fallen 15 percent this year and gained 79 cents to $49.74 in Nasdaq Stock Market trading Feb. 22. Take- Two, down 5.9 percent in 2008, climbed 35 cents to $17.36.

`More Than Fair'

Wedbush Morgan Securities analyst Michael Pachter in Los Angeles said Electronic Arts was ``somewhat foolish'' for offering $26 a share.

``The price is more than fair,'' said Pachter, who had a ``sell'' rating on Take-Two shares prior to announcement of the offer. ``EA is really stretching the limits of the value they can get out of the deal. I'm quite confused why Take-Two would reject it. I don't see anybody else stepping up.''

Combined, the companies had about $4 billion in 2007 sales, compared with around $3 billion for Activision and Vivendi's games unit. Vivendi said in December that it will contribute its $8.1 billion video-game business and pay $1.7 billion in cash for a 52 percent stake in the combined company.

The gamemakers are trying to capture a bigger slice of an expanding market. The global video-game industry will grow an average of 9.1 percent annually to reach $48.9 billion in 2011, according to a June 2007 report by PricewaterhouseCoopers. That's faster than the 6.4 percent growth rate for the overall entertainment industry, the report said.

`Growth Industry'

``The company is still in the midst of rebuilding in a growth industry, and we have the biggest release in the industry coming,'' Take-Two Chairman Zelnick said. ``EA has been clear about its growth appetite.''

Take-Two hasn't reported an annual profit since 2005 and has been without a hit since postponing the previously scheduled October release of ``Grand Theft Auto IV.'' Sales have been hurt by the delay and by concerns over violent content in its ``Manhunt 2'' game released last year. That title was banned in the U.K. and Target Corp., the second-largest U.S. discount chain, pulled it from stores in November.

Electronic Arts, which first approached Take-Two in December, wanted to complete an acquisition after the release of ``Grand Theft Auto IV'' and before the end of the summer to capture the fall and Christmas buying season, CEO Riccitiello said in a telephone interview.

Take-Two's stock already reflects investor expectations for a strong release of ``Grand Theft Auto IV'' when it ships April 29, Riccitiello said. Take-Two also makes the games ``Civilization'' and ``BioShock.''

To contact the reporters on this story: Nancy Kercheval in Washington at nkercheval@bloomberg.net ; Eric Martin in New York at emartin21@bloomberg.net .

The New Urge to Merge -- what's behind this?

Why M&A Is Back, for Now
What's behind the new urge to merge? The November election, for starters
by Ben Steverman
February 22, 2008, 12:01AM EST

Despite a credit crunch and recession worries, the dealmakers have returned to Wall Street.

Their current run includes Microsoft's (MSFT) $44 billion bid for Yahoo! (YHOO). Major U.S. air carriers are reportedly talking about mega-mergers. And a wave of smaller deals has hit the headlines, including Reed Elsevier's (RUK) $4 billion buyout of ChoicePoint (CPS).

So far it's a pale imitation of 2007, when private equity firms used cheap credit to gobble up company after company. That pumped up the stock market in the first half of the year, just before the credit crunch took it down again.

Fears of a Coming Antitrust Crackdown
The credit crisis still drags on, and private equity players sit on the sidelines, unable to obtain financing for billion-dollar deals. So what's behind this encore performance of the M&A boom? And how long can its run last if the economy continues to deteriorate?

One factor is the Presidential election. The next U.S. President will appoint regulators who can decide whether to challenge deals on antitrust grounds. They will determine whether a proposed combination would restrict competition or create a monopoly. Some deals are being rushed to get them approved before President George W. Bush leaves office on Jan. 20, 2009.

Most deals ultimately get approved, but the process can create a headache for CEOs and shareholders. On Feb. 19, the proposed merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) hit its one-year anniversary as the controversial deal still waits for word from the Justice Dept.'s Antitrust Div.

Obama Has Criticized Bush's Antitrust Record
All else being equal, most assume a Democrat in the White House will be more suspicious of proposed mergers. But it's hard to know what the next President will do. Antitrust regulation is the sort of topic that makes voters' eyes glaze over, so it rarely gets attention on the campaign trail.

Senator Barack Obama (D-Ill.) was the only current candidate to respond to a questionnaire from the American Antitrust Institute last year. Obama criticized the Bush Administration for "the weakest record of antitrust enforcement of any administration in the last half century." He pledged to "reinvigorate" enforcement, and cited health care, including the insurance and pharmaceutical industries, as a sector where the lack of competition has raised prices for consumers.

Delta Air Lines (DAL), Northwest Airlines (NWA), Continental Airlines (CAL), and United Airlines (UAUA) are among the carriers said to be discussing mergers. Airline deals have gotten close scrutiny from regulators in the past, and that's likely to happen again. On Feb. 14, Senator Hillary Clinton (D-N.Y.) said the mergers should prompt "a hard look at the potential effects on workers" before they're approved.

Federal Judges Have the Ultimate Say
Antitrust law is full of "squishy language that reasonable people can disagree on," says Robert Lande, a University of Baltimore law professor who co-founded the American Antitrust Institute. While all regulators may worry that a merger would raise prices, Democrats are more likely to consider other factors, such as whether a merger would restrict consumer choices, Lande says. That approach could threaten mergers of media companies, for example, under an Obama or Clinton Administration.

Still, many argue antitrust policy won't change much even if Democrats take the White House. For one thing, political appointees don't make ultimate decisions on mergers—federal judges with lifetime appointments do.

Also, a new Administration may affect "close cases," but there is a consensus on most questions, says antitrust expert Paul Denis, now at the law firm Dechert LLP. As a Justice Dept. lawyer in the early 1990s, he helped draft merger guidelines still in place today. The political parties may be split on many other important issues, but antitrust "is an issue where there is probably more agreement than disagreement," Denis says.

A Leadership Vacuum Could Stall Approvals
The 2008 election does create problems for dealmakers, however, Denis says. The transition to a new administration in 2009, often a chaotic process, could create a leadership vacuum, he says. Under normal circumstances, deals under review can stall for months and months, with the average review taking seven-and-a-half months, Denis says. The change in power in early 2009 could add to delays even if Republicans remain in power. Companies have just a few more months to put together big deals before they run the risk of getting stuck in post-election limbo.

For large, controversial mergers like the airline deals or the possible Microsoft-Yahoo combination, the 2008 election is undoubtedly at least one consideration. But otherwise, M&A experts say, the Presidential election is a sideshow to a number of bigger factors shaping the M&A market in 2008.

First, companies are finding more bargains when they look for acquisition targets. The weak stock market has lowered share prices. And private equity firms aren't around anymore to bid up buyout offers. Before the credit crunch made many leveraged buyout deals impossible, companies "got to the point where they didn't feel like they could compete" with private equity buyers, Denis says.

Foreign Buyers Eye Global Brands
A weak U.S. dollar adds to the advantages for foreign buyers. Strong respective currencies are helping Canadian, Asian, and European firms see lots of good prices in the U.S. stock market. "You can afford some deals that you couldn't afford before," says Stefano Aversa, co-president of AlixPartners, a global consulting firm. The most recent example is Anglo-Dutch firm Reed Elsevier's $4 billion offer for ChoicePoint on Feb. 21.

Buyers from India and China may be especially active in 2008, Aversa says. In the consumer space, foreign buyers may be attracted to global brands with great long-term value, Aversa says. In technology, firms in emerging markets with production capacity may want to buy U.S. tech firms for their respected brands and their access to technology and Western consumers, he says.

It won't just be foreign buyers on the prowl for bargains, says Mike Hogan, managing director at Harris Williams. The weak economy may be prompting more CEOs of all stripes to find ways to expand their companies through acquisitions, he says. With his firm focusing on M&A's "middle market"—companies under $1 billion—Hogan says the buyout market is "still very active."

More Banking Mergers Are Expected
Popular targets of M&A activity are firms in energy, technology, transportation and logistics, and commodities, Hogan says. For smaller firms, antitrust rules aren't much of a worry. However, the election may have an impact: Buyers of family-controlled firms may want to sell before Democrats allow Bush's cuts to capital-gains and estate taxes to expire, he says.

In other sectors, trends are pushing companies toward consolidation, says Mike Moriarty, a partner at A.T. Kearney, a management consulting firm. Banks, for example, will still want to merge to compete with global giants such as HSBC (HBC) and JPMorgan Chase (JPM). Given the trends in banking, "Aspiring to be the Wal-Mart (WMT) of banking is not a bad idea," he says. Hotels, publishing, aluminium, and steel are other industries undergoing consolidation, he says.

A variety of factors, from elections to strategy to good bargains, may be pushing players toward more M&A activity this year. But it won't be easy for dealmakers: A slowing economy and wild financial markets have many players sitting on the sidelines. Moriarty argues that smart CEOs will see past the current difficulties. If they do, they'll be rewarded. M&A is "such an important part of every successful company's strategic kit," he says. Despite the tough market and weak economy, "Companies are going to find a way to make that happen."

That might be true for the bravest players. But until the economic climate clears up, many firms will be reluctant to spend their rainy-day funds on expensive mergers.

Maybe Microsoft Should Stalk Different Prey

February 24, 2008
Digital Domain
Maybe Microsoft Should Stalk Different Prey
By RANDALL STROSS
OVER the years, Microsoft has pummeled countless rivals, including the superheavyweight I.B.M. But it has never faced a smaller foe as formidable as Google. The tale of the tape gives Microsoft a $100 billion advantage in market capitalization, but it counts for little: Google appears to be its superior in strength, speed, smarts.

Having exhausted its best ideas on how to deal with Google, Microsoft is now working its way down the list to dubious ones — like pursuing a hostile bid for Yahoo. Michael A. Cusumano, who has written several books about the software industry and about Microsoft, is not impressed with Microsoft’s rationale for its Yahoo offer. He said the bid seemed to be a pursuit of “an old-style Internet asset, in decline, and at a premium.?

Determined to match Google in search and online advertising, Microsoft has managed to overlook a plain-vanilla strategy, the oldest one in the book: build on its own strengths. What it does best is to sell software to corporations, for all sorts of applications, visible and not so visible, at a handsome profit.

If Microsoft thinks this is the right time to try a major acquisition on a scale it has never tried before, it should not pursue Yahoo. Rather, it should acquire another major player in business software, merging Microsoft’s strength with that of another. This is more likely to produce a happier outcome than yoking two ailing businesses, Yahoo’s and its own online offerings, and hoping for a miracle.

For an illustration of how Microsoft could select targets more judiciously, Mr. Cusumano, who is a professor at the Sloan School of Management at the Massachusetts Institute of Technology, pointed to the Oracle Corporation’s strategic acquisitions and its prudent use of capital to “roll up firms with similar products and customers to its own.? With impressive regularity — 13 strategic acquisitions in 2005, another 13 in 2006 and 11 in 2007 — Oracle has picked up key products and customers while avoiding an “oops? slip, venturing too far away from its core business, or paying too much. At no point along the way has it acted in a fit of desperation.

Last month, Oracle pulled in another major prize, BEA Systems, a leading software company, for about $8.5 billion. You’ve probably never heard of BEA: it’s doubly obscure, producing the behind-the-scenes infrastructure that large companies use to build behind-the-scenes software systems for their entire business, or “enterprise software.? Both Oracle and BEA are based in Silicon Valley, but their side of the street is not lit by klieg lights and does not get the same attention as the Googles and Yahoos.

And, to be honest, it’s not much fun hanging out on the enterprise side of the software business. BEA says its software helps organizations “ensure that business processes are optimally defined, managed, executed and monitored.? Unless you’re playing Business Jargon Bingo, it’s hard to sit still and remain attentive. You have to admire Oracle’s ability to remain focused on the business that serves business and to not be distracted by the buzz of the Web crowd gathered across the street.

Microsoft does business software well. Approximately half its revenue comes from business customers for its e-mail infrastructure, database systems, developer tools, Office productivity applications and other mainstays. It has also assembled, through acquisitions, a fledgling line of enterprise software that it calls Microsoft Dynamics. Microsoft would like Dynamics to be viewed as competing head to head with the No. 2 name in enterprise software, Oracle, or the No. 1, SAP of Germany. For the moment, however, Microsoft Dynamics’ parity with those big names is nothing more than wishful aspiration.

Professor Cusumano has a suggestion: Rather than acquire Yahoo, Microsoft should pursue SAP.

It’s not an outlandish idea. The two companies held merger talks in late 2003, and perhaps since then, too. Microsoft is in an enviable position: it is a nearly universal presence in corporate data centers, and large enterprise customers are arguably the best customers a software company can have. Clients pay very dear prices for the complex, semicustomized software that runs their business. And once they’ve got their systems running — a process that can take years to complete — they aren’t inclined to change vendors lightly.

A few dozen well-paying Fortune 500 customers may actually be more valuable than tens of millions of Web e-mail “customers? who pay nothing for the service and whose attention is not highly valued by online advertisers.

Today, SAP’s market capitalization is about $59 billion, and a sizable premium to get a deal done would send its price well north of that. Microsoft cannot put both SAP and Yahoo in its shopping cart, deals that together might run well over $120 billion. Microsoft must pick one or the other.

Suppose that Lawrence J. Ellison, the chief executive of Oracle, were the head of Microsoft and was doing the shopping. Which deal would he choose? Past experience suggests that it would not be Yahoo. That acquisition would bring little but duplication headaches — and no large enterprise customers.

It’s amusing to note that the most Larry-like choice, Microsoft’s acquiring of SAP and leaving it alone as an autonomous division to avoid a cross-cultural integration fiasco, is the course that would be most discomfiting to Oracle. Frank Scavo, president of Computer Economics, an information technology research firm, in Irvine, Calif., said that “a Microsoft-SAP combination would be Oracle’s worst nightmare.?

Google would not be happy with a conjoined Microsoft and SAP, either. It has made a pro forma expression of its own opposition to a Microsoft-Yahoo merger, but we can speculate that it may be cheering that deal on. Working in Google’s favor are the hostile nature of Microsoft’s bid, the colossal potential for integration problems, and organizational paralysis in, and exodus of talent from, Yahoo.

But were Microsoft to turn and head in SAP’s direction, Google would have reason for concern. Whatever strengthens Microsoft is bound to influence, later if not sooner, its continuing competition with Google. For its own part, Google is keen to expand its foothold inside large companies. Last year, it acquired Postini, whose software filters corporate e-mail. Google has not done so well with corporate customers on its own, however. Google Apps has conspicuously failed to win adoption quickly.


If Microsoft is to rededicate its attention to its most valuable assets, business customers, a prerequisite is dropping its ill-advised bid for Yahoo. And to find the best acquisition strategy, ask, “What would Larry do??

If Microsoft tries to fight Google with wobbly legs, scared witless, it will lose.

Randall Stross is an author based in Silicon Valley and a professor of business at San Jose State University. E-mail: stross@nytimes.com.

http://www.nytimes.com/2008/02/24/business/24digi.html

With Gateway, Acer Foils Lenovo

With Gateway, Acer Foils Lenovo
Taiwan's Acer strikes back at its mainland rival with an agreement to acquire Gateway, the third-largest PC brand in the U.S., for $710 million
by Bruce Einhorn

In Asia, few rivalries are as heated as the one between Lenovo Group and Acer, the top two computer companies in the region. Ever since Lenovo acquired the PC division of IBM (IBM) in 2005, the companies have been slugging it out for the No. 3 position worldwide, behind Hewlett-Packard (HPQ) and Dell (DELL). On Aug. 27, Acer announced a 36% drop in quarterly earnings, to $61 million, due in part to competition from Lenovo.

The rivalry between the two companies isn't just about desktops and notebooks. It's also about some unfinished business from 1949, when Mao Zedong took control of the mainland and sent Chiang Kai-shek fleeing across the Taiwan Strait. Lenovo is the top computer company in China, and many Communist officials look at it as leading the Chinese challenge to become a global tech power. Acer is the champion from Taiwan, an island that is trying to maintain its status as a global tech hub while politically resisting Beijing's efforts to absorb it back into the Chinese motherland.

The fight between the two companies has just gotten even rougher. Late in the afternoon in Taipei on Aug. 27, Acer announced that it was acquiring Gateway (GTW), the third-biggest PC brand in the U.S., for $710 million. Not only will that deal help Acer leapfrog back in front of Lenovo for the No. 3 spot worldwide, it will also stymie the Chinese company's plans to expand in Europe. Lenovo on Aug. 8 had announced that it was in negotiations to acquire Packard Bell to boost its position in Europe, where Lenovo is much weaker than Acer, says Martin Gilliland, a PC analyst in Singapore with Gartner (IT).

Blocking the Packard Bell Deal
Acer had been rumored to be looking at Packard Bell, too, and the announcement early this month that Lenovo had the edge in the race to acquire it was a blow to the Taiwanese. Now, however, Acer is able to prevent Lenovo from proceeding with the Packard Bell deal. That's because Gateway happens to have right of first refusal to buy Packard Bell, and at the same time that Acer announced its purchase of Gateway, it also said that the American company plans to exercise that right of first refusal, taking a prize away from Lenovo and giving it to Acer.

That neat blocking move impresses some industry watchers. "The best defense is offense," explains Tony Tseng, an analyst with Merrill Lynch (MER) in Taipei. Given the moves by Lenovo, "they feel they need to go out and be more aggressive," he says, adding that Acer should be able to manage the Gateway acquisition well since the price tag is below 20% of Acer's market capitalization. "It's a reasonable size," he says.

Acer executives such as Chairman J.T. Wang and President Gianfranco Lanci have often said publicly that they intend to eclipse Lenovo, for instance, and take over its No. 3 slot. In the first quarter of 2007, Acer did indeed pass Lenovo, but the Chinese company came roaring back in the second quarter to reclaim its spot. Now, the Gateway deal puts Acer ahead again, with combined sales in 2006 of 18.6 million machines, compared with 16.6 million for Lenovo.

A Fight for Bragging Rights
Some analysts, however, have concerns that the fight between the two companies is getting out of hand. "I'm worried that a lot of it is driven by pride," says Bryan Ma, a computer-industry analyst in Singapore with International Data Corp. (IDC) "It's about having bragging rights."

That said, Ma agrees that buying Gateway does make sense for Acer, which could use a boost in the U.S. market, where Acer is only No. 6. Gateway's No. 3 slot, on the other hand, gives it 5.6% of the market. The combination still leaves Acer far behind Dell and HP, but it does at least put the Taiwanese company in the game. "They needed a stronger position in the U.S., and Gateway can provide that for them," says Ma.

The challenge now, of course, will be integrating Gateway. "They really have to turn that business around," says Gilliland. "It's O.K., but nothing like Acer. They intend to buy it and turn it into a fast-growing company."

Acer does have some experience acquiring U.S. companies. It purchased the notebook PC business of Texas Instruments (TXN) in 1997. But a decade ago the PC business was very different from today, with brands like IBM still independent. As Acer tries to digest its new American acquisition, the company's executives will probably be looking closely at Lenovo for lessons on how to go about absorbing a well-known American brand.

Einhorn covers the computer industry in Asia for BusinessWeek

http://www.businessweek.com/print/globalbiz/content/aug2007/gb20070827_278512.htm

Motorola may drastically change its business

Motorola May Spin Off Handset Unit; Icahn Looms
Sara Silver. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 1, 2008. pg. A.1

Abstract (Summary)
Carving off handsets would leave Motorola with its home and networks division, which makes TV set-top boxes and telecommunications-network gear, as well as its enterprise and government business which makes public-safety radios and hand-held devices for workers on the road. Mr. Gelblum thought a tie-up could make sense for big Korean handset makers Samsung Electronics Co. or LG Electronics to better compete with market leader Nokia Corp. Both already have major U.S. presences.


Motorola Inc., facing pressure from activist shareholder Carl Icahn, said it may spin off or sell its flagship handset division.

The decision is a stunning setback for an American technology icon and offers a parable for other industries. Motorola essentially created mobile telecommunications with the earliest mass-market hand- held radios. But it repeatedly stumbled in keeping up with consumer demand for innovation, while foreign competitors stole away market share.

Motorola produced a series of hits that changed the industry with models such as the StarTAC, an early flip phone from the 1990s, and the ultraslim Razr in this decade. But the company has long struggled to fill in the gaps between hits, and in the past year, Motorola's market share has been cut in half, to its lowest levels since 2001. Last week the company said it couldn't predict when it would halt its market-share slide, sending its stock plunging 19%.

Yesterday's news of a possible spinoff or sell came after the close of regular market hours, and pushed Motorola shares up more than 10% in after-hours trading.

Motorola's decision comes as the mobile-device market -- which shipped 1.1 billion units globally last year -- is undergoing sweeping change. Consumers are demanding easy-to-use devices with Internet and multimedia capabilities. Mobile use of the Web is expected to grow even faster in coming years as carriers increase the bandwidth of their cellphone networks by adding new radio spectrum.

Manufacturers are under heightened pressure to come up with sleek products, particularly after Apple Inc. entered the market last year with its touch-screen iPhone. The latest phones come ready to surf the Internet at high speed and feature software to download driving directions, watch video, share photos with friends and connect to Web- based social networks. New players such as navigation specialist Garmin International Inc. are entering what's already a crowded market.

Motorola has a new chief executive, Greg Brown, who took over from Ed Zander at the start of this year. Mr. Brown must figure out how to deal with Mr. Icahn, who has been pushing for a breakup of the company. The investor said yesterday he plans to mount a new proxy campaign to win four or five seats on the company's 13-member board at the annual shareholder meeting this spring. Mr. Icahn unsuccessfully sought a board seat last year.

Last night, Mr. Icahn said Motorola's announcement wouldn't change his intention to get board seats. He said he has been buying more Motorola shares lately, but wouldn't quantify his current holding. As of Sept. 30, he owned 3.3% of Motorola's stock, according to FactSet Research Systems Inc.

"We think they are moving in the right direction, but they still have a lot of moving to do," Mr. Icahn said, noting that he wants new management at the handset division.

Motorola's handset business accounts for about half of the company's annual sales of $36 billion. Carving off handsets would leave Motorola with its home and networks division, which makes TV set-top boxes and telecommunications-network gear, as well as its enterprise and government business which makes public-safety radios and hand-held devices for workers on the road.

Mr. Icahn argues that these two businesses alone are worth more than Motorola's market capitalization of around $26 billion. He thinks the cellphone division could fetch $20 billion and leave shareholders with a more profitable company.

Don McLellan, senior vice president of corporate strategy at Motorola, agreed that the "current stock price dramatically undervalues" the mobile-devices division. He said Motorola will take an "open-minded fresh look" at its handset business. While a sale isn't "preordained," he said, carving out the business "could well drive the recovery that we've been talking about."

Motorola itself "is not for sale," Mr. McLellan emphasized. Motorola hasn't held discussions with potential buyers so far, people familiar with the matter said.

Analysts said Motorola might get a better deal by teaming up with an Asian company instead of selling its handset division outright when the market is weak. "To partner, where Motorola has skin in the game -- that would make the most sense," said J.P. Morgan analyst Ehud Gelblum. Mr. Gelblum thought a tie-up could make sense for big Korean handset makers Samsung Electronics Co. or LG Electronics to better compete with market leader Nokia Corp. Both already have major U.S. presences. He said Japanese companies that have had mixed success outside of their home market also might be interested.

The business's current problems are sure to be an issue for prospective buyers. Motorola has warned that handset sales would drop more than the 15% that is normal for the post-holiday period. It suffers from a weak lineup of multimedia phones. Last week, Motorola announced it would turn to Qualcomm Inc. for chips to speed the development of such phones, but said the products won't be ready until late this year at the earliest.

The market is likely to see further upheaval as Google Inc. works on new software, dubbed "Android," to speed the development of mass- market cellphones that can easily access the Internet. Motorola is among the handset makers that have agreed to carry the Google operating system on their phones.

Private-equity firms would be natural suitors for Motorola's handset unit, but with credit markets at a near standstill, they would have trouble lining up financing. Another challenge is determining whether a buyer would also acquire the Motorola name or license it.

Some companies might want to join up with Motorola's handset business as a quick way to gain scale in the U.S. Potential partners include Chinese telecom equipment makers Huawei Technologies Co. and ZTE, both of which have been underselling Western competitors in network equipment. The Chinese companies' cellphones, including ones offering high-speed Internet access, are selling well in markets like India and Australia. Both have signed deals in Europe.

February 23, 2008

Mittalic Magic

Title: Mittalic magic. Economist, 00130613, 2/16/2008, Vol. 386, Issue 8567
Database: Business Source Premier

Face value

Lakshmi Mittal built the world's biggest steel firm from scratch--at internet speed

From his grand top-floor office in Berkeley Square, Lakshmi Mittal commands a westward view over London's West End to Kensington Gardens, where he lives in one of the city's swankiest houses. The giant swimming pool in its basement is one reason why the leader of the world's steel industry, and Britain's richest man, looks so fit and relaxed. Born in India, Mr Mittal has long made London his home and first came to notice there in 2002 when Tony Blair, the prime minister at the time, controversially put in a good word for him in a Romanian deal. When he made his sudden and spectacular appearance on the European business scene in early 2006, Mr Mittal was still a relative unknown. French government ministers, frightened by his takeover bid for the largely French Arcelor steel firm, did not know whether they were under attack from America or India.

The answer was neither: Mittal Steel was a company from everywhere and nowhere, which helps to explain why its integration with Arcelor to form ArcelorMittal, the world's largest steelmaker, went so surprisingly smoothly. Most mergers fail: from AOL Time Warner to DaimlerChrysler, the corporate landscape of the past decade is littered with wrecks. Just as surprising was the way in which Mr Mittal managed to overcome opposition to the deal from the business establishment and the French government--and has now gone on to increase profits in the new firm's first full year. On February 13th ArcelorMittal announced that it had made $19.4 billion, before tax and interest, on sales of $105 billion in 2007--up 27% on the two firms' aggregated profits in the previous year. Mr Mittal's 43% stake makes him the world's fifth-richest man, with a fortune of some £19 billion.

It helps, of course, that Mittal Steel made its move on Arcelor--a European champion forged in 2001--just as steel prices were heading for record levels, driven by Chinese demand. Mr Mittal was not the only one thinking of global consolidation in late 2005. Arcelor was fighting with ThyssenKrupp of Germany over Canada's Dofasco. Corus, the firm formed by the union of British Steel with a Dutch firm, Hoogovens, was looking for a strategic buyer, and ended up choosing India's Tata over Brazil's CSN. And Mittal Steel itself (then 88% owned by the Mittal family) had just bought International Steel, a collection of bombed-out American mills, overtaking Arcelor in the process to become the industry's number one. So Mr Mittal was already leading the race to consolidate the industry at the time of the Arcelor deal, which confirmed him as the winner with the creation of a new giant that accounts for one-tenth of world steel output.

The ArcelorMittal merger went so smoothly, Mr Mittal explains, because the two companies had been formed as a result of some 50 smaller mergers between them. Having survived all these previous deals, the firms' managers were not afraid of change. Arcelor was the fusion of Arbed in Luxembourg, Usinor in France and Aceralia in Spain. The origins of the Mittal steel empire were less obvious. The Mittal family had a steel business in their native India, but felt expansion was constricted by regulation and the presence of both a state-owned rival, SAIL, and a private national champion, Tata Steel. So Mr Mittal's father helped him start a steel mill from scratch in Indonesia in 1975. The trick he learned there was to move into steelmaking using imported direct-reduced iron (DRI) pellets instead of more expensive scrap or imported steel billets.

The younger Mittal's emergence onto the world steel scene was not part of some global vision, but was the result of opportunism, a bold eye for a deal and an ability to turn round failing firms. His supplier of DRI was a struggling state-owned steel firm in Trinidad. When the Trinidadians spotted Mr Mittal's success in Indonesia, they invited him to turn their firm around under contract, and he eventually bought it in 1994. At around the same time he acquired another DRI steel plant in Mexico, and two more in Canada and Germany. All of these were distressed assets that governments wanted to offload. By the end of the 1990s the brash newcomer from Kolkata by way of Jakarta was even picking up assets in America, where the rust-belt steel firms were going into decline, and in Eastern Europe, where governments were keen to privatise loss-making state-owned firms. Today Mr Mittal's firm owns one Chinese steel company and holds a stake in another. The steel giant thus straddles the developing world (with opportunities for growth) and the developed world (with scope for consolidation).

Boldness be my friend
Last summer ArcelorMittal launched its new corporate identity with a lavish party at the Musée Rodin in Paris. The company's motto ("Boldness changes everything") is no empty boast, but a neat reflection of the way Mr Mittal's dealmaking created a world-leading steel giant from virtually nothing in barely a dozen years. People expect that sort of thing in Silicon Valley--but not in mature industries like steel.

Can ArcelorMittal continue to grow and thrive? One potential threat comes from the consolidation of iron-ore suppliers: if BHP Billiton succeeds in its bid for Rio Tinto, the combined firm would have over one-third of the freely traded market. But Mr Mittal already has in-house ore supplies to cover half his needs and expects this to grow to three-quarters in a few years. Another challenge will be to carry out rationalisation in Europe in the face of political opposition. After a summons from President Nicolas Sarkozy, Mr Mittal has agreed to review plans to close a plant in north-east France. But perhaps the biggest test of all will be to cope with the emergence of China as a steel exporter. Its steelmakers may be protected and inefficient now, but sooner or later rationalisation and greater technical skill will produce big firms that can make cheap steel. China's rapid development, hitherto a huge boon for Mr Mittal, may yet turn into a threat.

Successful chip manufacturing alliance, Common Platform Alliance

In the $21.5 billion chip-manufacturing business, size matters. That's why chipmakers-for-hire that don't have huge volumes of business are banding together to gain economies of scale. The leading example of this kind of collaboration is the Common Platform Alliance, a venture of IBM (IBM), Korea's Samsung, and Singapore's Chartered Semiconductor.

The alliance is a nice thing for IBM and Samsung, since manufacturing chips for other companies makes up just a small part of their overall revenues. But it's vital for Chartered, which does nothing else. "If we were doing this by ourselves, we would spend at least three times as much, and we'd run a very high risk," says Chartered Chief Executive Chia Song Hwee. "If we ran into difficulty, we'd have nobody to work with on a solution."

The positives for Chartered are plain to see: Five years ago, when it first aligned with IBM, Chartered's annual revenues were just $449 million, with a $417 million loss. "We were behind on technology and losing customers because of our financial situation. It was not a pretty picture," says Chia. Last year, in contrast, the company pulled in $1.414 billion in revenues and made a profit of $67 million. Chartered was the No. 3 contract chip manufacturer in the world last year, behind Taiwanese giants TSMC and UMC, according to market researcher Gartner (IT).

Still, Chartered's market share of 7% was dwarfed by TSMC's 46% and UMC's 17%. IBM was in fifth place, with about 4%, and Samsung wasn't even ranked. Also, last month, Chartered reported its first loss in seven quarters, due to weak demand. All this helps explain why the three companies chose to band together and share resources (see BusinessWeek.com, 8/20/07, "Microsoft and Cisco: Product Promises").

"Leading-Edge Business Model"
Chip manufacturing is such a competitive and costly business that Gartner analyst Bryan Lewis believes the Common Platform Alliance model should be adopted by other second- and third-tier chipmakers as a survival strategy. "I do think we'll see other alliances develop over time that will move in this direction, but this is a leading-edge business model, and it will take time for others to copy it," says Lewis. He believes the alliance could eventually pose a threat to TSMC and UMC.

The alliance partners use IBM's cutting-edge chip plant in East Fishkill, N.Y., as a laboratory for trying out new manufacturing processes. Chipmaking in so-called fabs is a complex business—as much R&D as manufacturing. Once new processes are tried out and codified at the IBM plant, they're transplanted to Chartered and Samsung factories, where the ramp-up process continues. (Samsung joined the alliance in 2004.)

By having three teams of scientists and engineers tinkering with the processes in three locations, bugs are discovered—and fixes found—more quickly. "One of the benefits we hadn't anticipated is that when we introduce new technology, because of the collaboration, we're able to bring the fabs up to a productive and profitable level probably twice as fast as before," says William Zeitler, general manager of IBM's Systems & Technologies Group.

At first the three partners simply shared sophisticated, detailed technologies and processes, but more recently they began to share manufacturing capacity as well. If one of the three can't handle all the orders it has for a part from a particular customer, some of the work can be shifted to a partner's plant.

Security and Flexibility
The unusual alliance also makes it easy for customers to set up dual-source or even tri-source arrangements. Customers like the security and bargaining leverage that comes with having more than one source for a chip. So the fact that these three companies can all manufacture a chip in exactly the same way is attractive to customers.

That's something TSMC and UMC can't offer. Late last year mobile-phone-chip specialist Qualcomm announced that it would order parts from all three Common Platform Alliance partners. The processor for Microsoft's (MSFT) Xbox 360 video game console is made by IBM and Chartered.

The three alliance partners have to accept the fact that they have given up their ability to differentiate themselves based on basic manufacturing technologies and prices. Of course, when they compete with each other for business, they can still price differently, market imaginatively, and offer additional services or benefits.

Partnerships like this are complex to manage. UMC was IBM's original manufacturing partner, but it dropped out in 2002 when it disagreed with a technology choice IBM made—a bet by IBM that turned out to be wrong. IBM researchers had to scramble to come up with an alternative. UMC officials declined to comment about the breakup.

UMC's pullout gave Chia pause, but he did his due diligence on IBM and decided that its technology was sound and that its strategy complemented Chartered's. Since then the two companies have been in sync. "Collaboration is like marriage. You have to manage it," says Chia. "The key thing is having the right mindset to work together."

"In the Chips: Forging Smart Alliances". Business Week online article by Steve Hamm

http://www.businessweek.com/innovate/content/aug2007/id20070830_946994.htm?chan=search

Sprint's Wake-Up Call

Sprint's Wake-Up Call
Reversing a miserable service reputation after the Nextel merger will be key to the company's turnaround
by Spencer E. Ante

When Daniel R. Hesse was named chief executive of Sprint Nextel in December, he figured that customer service was going to be one of his biggest challenges, given how poorly the wireless service provider had performed on that count in recent years. He quickly found out precisely how big. The lanky 54-year-old walked into his first operations meeting at Sprint headquarters in Overland Park, Kan., and found that customer service wasn't on the agenda at all. He changed course right away. Customer service is now the first item discussed at every one of the weekly meetings. "We weren't talking about the customer when I first joined," says Hesse. "Now this is the No. 1 priority of the company."

With good reason. Since Sprint and Nextel merged three years ago, the deal has turned into something of a fiasco, with the company's stock down 66% since the agreement was struck. Poor service is a central reason. After the merger, unhappy customers defected in droves, and profits evaporated. On Jan. 31, Sprint Nextel (S) said it would take merger-related charges of as much as $31 billion, wiping out nearly all of the deal's value. In addition, two lawsuits have been filed against the company for allegedly extending customers' service contracts without their consent.

Employees like Paula Pryor saw the merger's impact firsthand. The 38-year-old, who worked in a call center in Temple, Tex., says the numbers-driven management approach implemented after the combination led to poor morale and deteriorating customer service. Even bathroom trips were monitored. "They would micromanage us like children," says Pryor, who was fired last year after taking time off when her father died.

The toll on Sprint's reputation has been dear. The company has ranked last among the country's five major wireless carriers in customer service every year since the merger in 2005, according to annual surveys by J.D. Power & Associates (MHP).

Now, two months into his job, industry veteran Hesse is disclosing for the first time detailed plans for turning around customer service. He's increasing investments in customer care, adding service technicians in retail stores, and reversing many management practices in customer call centers. Hesse is convinced that restoring Sprint's reputation with customers is the key to its future. "You will see progress," he says. "We have the right people in place. We will get it done."

For the combined Sprint Nextel to be criticized for quality issues is a remarkable reversal. During the 1980s and '90s, when Sprint was the nation's third-largest long-distance company, it distinguished itself by advertising a fiber-optic network so high-quality you could "hear a pin drop." Nextel was known for its "push-to-talk" technology and the best rate of customer retention in the industry.

When the two unveiled plans to merge in December, 2004, there was a certain logic to the deal. Separately, they were much smaller than AT&T (T) and Verizon Wireless, but together they would nearly rival the two wireless leaders in size. The theory was that, combined, they would have the bulk to get the latest phones, best prices on equipment, and most complete network for wireless customers. "The combination of Sprint and Nextel builds strength on strength," Gary D. Forsee, CEO of Sprint and later the combined companies, said then.

But as the two formally combined in August, 2005, it became clear this deal would be even more complex than the typical megamerger. At the same time Forsee and Executive Chairman Timothy M. Donahue were piecing the two companies together, they laid out an aggressive strategy for the combined entity to become a leader in wireless broadband services and content. That led to plans to spin off Sprint's local telephone business, form partnerships with the cable industry, and develop a wireless technology known as WiMAX. "There was so much going on after the merger that there was a lack of focus," says one former senior-level insider.

In September, 2005, the month after the merger closed, Forsee told Wall Street that the deal was going more smoothly than expected. He raised the projection for expected "synergies," or cost savings, to $14.5 billion, up from the original $12 billion estimate at the time of the merger announcement.

That boosted pressures to find cost savings throughout the company, say former employees and executives. An important component of the effort was importing the quantitative management approach of Sprint to Nextel. While some of the new metrics worked well, others had detrimental effects, former employees and executives say. In particular, call centers began to be measured and viewed primarily as cost centers, rather than opportunities for strategic advantage. Customer service ended up a secondary priority, say former executives. Forsee, now the president of the University of Missouri, declined to comment for this story.

In the fall of 2005, as board members gathered for their first meetings as a combined company, the directors from Nextel noticed another key change, according to the former senior-level insider. Before the merger, Nextel directors talked at every board meeting about "churn," the industry term for the percentage of existing customers who leave each month. The directors felt churn was a good shorthand way to understand the quality of customer service, and they prided themselves on Nextel having the lowest in the industry. But after the merger closed, the combined board paid little attention to churn, concentrating instead on the progress with synergies and strategic initiatives. "From the very beginning there was a philosophical difference on churn," says the former insider.

In the trenches, meanwhile, workers were dealing with fallout from the merger. Pryor remembers the conditions in her Texas call center, originally a Nextel facility, shifting dramatically in the first months after the merger closed in late 2005. Managers began tracking what she was doing on her computer. Overtime pay became much harder to get. Most puzzling for her was the pressure to keep customer calls short. At Nextel, she was judged only on the number of customer problems she solved each month, however long they took, and she would occasionally spend 30 minutes to resolve a thorny issue. But after the merger, speed was the priority, she says. "They would say, Your calls need to be shortened,'" she says.

`LIKE NOAH'S ARK'
Other employees say they felt similar pressure. Gayle R. Romero, who worked in Sprint Nextel call centers for six years, says that at one team meeting after the merger, a manager said, "if you don't think you can handle this, I hear McDonald's is hiring." Says Romero: "Everyone was scared."

Customer service issues began to surface later that year. In January, 2006, Sprint unveiled plans to merge the two billing and customer care systems from the combined companies. But employees say there was little evidence of any progress in the following months. Service reps had to toggle back and forth between systems, and at times couldn't get access to billing or technical information for customers. "It was like Noah's Ark," says one former insider. "We had two of everything."

Churn rose quickly, hitting 2.4% in the third quarter of 2006. That was the highest among the country's major carriers and far above the 1.4% rate Nextel reported before the merger. At the same time, Sprint reported softer-than-expected earnings, punishing its stock.

As Sprint came under financial pressure in 2006, it began to ask call-center workers to engage more in sales. Whereas Nextel service reps had no sales quotas, workers at the combined companies were required to hit targets for renewing contracts or retaining customers who wanted to cancel accounts. One call-center employee says she was supposed to renew 600 to 900 contracts per month, and sometimes the target exceeded 1,000. In the customer retention unit, workers were given cash bonuses of $2,000 to $3,000 per month if they met monthly quotas. "They wanted those big bonuses," says Romero.

Allegations in the two lawsuits against Sprint raise questions about how far Sprint workers went in meeting those sales quotas. Selena L. Hayslett, a realtor from Apple Valley, Minn., says she called Sprint Nextel four times in late 2006 to dispute charges on her bill. Then she realized that each time she called, Sprint was extending her contract, without her consent, according to an affidavit filed in one of the suits. "I felt tricked," said Hayslett.

Her complaint is included in a lawsuit filed by the Minnesota attorney general, alleging that Sprint extended contracts when customers made small changes to their service. "It's kind of like the Hotel California," says Lori Swanson, the attorney general, "where you can check in and never leave." Sprint declined to comment in detail on the lawsuit. However, a spokesman says there are "discrepancies between our rec-ords and the lawsuit's portrayal of customer interactions."

Paula Appleby, a plaintiff in the other lawsuit, claims she tried to cancel her Sprint contract a number of times. But "each time she has attempted to cancel her service she has been told that her contract had been previously extended," according to the complaint, a federal lawsuit filed earlier this month seeking class action status. Sprint said it is still reviewing the Appleby lawsuit and declined to comment on specific claims.

In early 2007, as its financials deteriorated, Sprint cracked down on the freebies that call-center workers could give to keep customers happy, say current and former employees. One current manager in customer retention says that in the first half of 2007, Sprint cut back on virtually all the free minutes, service credits, and free phones that his workers used to be able to dole out. "One hundred minutes is it," says the manager, who asked for anonymity because he does not have authorization to speak to the press.

NO STOPWATCHES
The new policies hurt Sprint's ability to build its customer base. In the third quarter of 2007, churn stayed high, and Sprint saw its subscriber numbers remain flat, at 54 million, while rivals AT&T and Verizon added millions. In October, Forsee stepped down as CEO under board pressure. Today, Hesse is reversing course on several fronts, hoping to salvage what he can from the troubled merger. He and his lieutenants aren't eliminating the quantitative approach entirely, but they're changing many of the old metrics to now emphasize service over efficiency.

Bob Johnson, Sprint's new chief service officer, has eliminated limits on the amount of time service reps spend on the phone with customers. Instead, he'll track how frequently reps resolve customers' problems on the first call. Employees who don't solve a minimum percentage on the first call won't be eligible for sales bonuses. He'll also track how quickly customer calls are answered, to ensure they're getting prompt attention. "My incentives and policies are all driven around improving the experience," says Johnson. He says the long-delayed combined billing system will be done by May.

Hesse is also returning to the Nextel philosophy in a number of areas. Churn, for example, is once again a top priority, discussed at every operations meeting. The figure remained stubbornly high, at 2.3% in the fourth quarter of 2007.

As for the allegations in the two lawsuits, Johnson says Sprint has implemented a zero tolerance policy for shoddy customer service, which includes a new focus on extending contracts only with detailed approvals from customers. Among other things, Sprint sends a letter to customers outlining any changes to their account, and customers have 30 days to cancel the changes.

Hesse knows he has a long, hard road ahead of him. Still, he's convinced Sprint is at last moving in the right direction. "We're beginning to improve customer service already," he says. "There will be a lag between when it improves and when the world knows that Sprint's customer service has improved. There's always a perception lag."

February 22, 2008

Survival of the Biggest

With the dollar down and oil up, U.S. airlines are talking merger. But will consolidation be enough to fend off powerful European carriers?

The long-anticipated consolidation of the U.S. airline industry appears to be finally on the horizon. Barring the unexpected, Delta Air Lines (DAL)and Northwest Airlines (NWA) will soon announce they are joining forces to create the nation's largest carrier. When that happens, it's likely United Airlines (UAUA) and Continental Airlines (CAL) will strike their own deal, and it raises the odds that American Airlines (AMR) will follow suit—perhaps linking with a smaller player like Alaska Airlines (ALK) or Frontier Airlines (FRNT), industry sources say.

The immediate pressure driving these pacts is high oil prices. Even with all the wrenching cost-cutting that Delta, Northwest, United, and others endured in bankruptcy, most U.S. carriers are back in the red. But the mergers are also being driven by a competitive threat that could be as onerous as $90-per-barrel oil: the imminent assault by European airlines on the lucrative transatlantic routes that have been the U.S. carriers' few big profit centers. And the European carriers don't plan to stop there. Spurred by the weak dollar, European carriers are publicly agitating to expand a new bilateral aviation treaty to gain the right to acquire or buy controlling stakes in the enfeebled U.S. airlines. The European carriers "are going to trash the profitability of the international routes, which are the only thing the major [U.S.] carriers make money on," says former Continental CEO Gordon Bethune. "They've got to come together and combine their own international networks or get chewed up by the Europeans." (Executives at Delta, United, and Northwest all declined to comment on the state of merger talks or the long-term competitive implications of any deals. Continental did not respond.)

GLOBAL MEGACARRIERS
The initial steps toward this future of global megacarriers may already be taking place. In December, Germany's biggest airline, Lufthansa (DLKAY), bought a 19% stake in JetBlue Airways (JBLU). The move ensures Lufthansa access to the crowded New York market via JetBlue's slots at John F. Kennedy International Airport and gives it an effective right of first refusal on any offer for JetBlue. Virgin Atlantic Airways, after years of legal wrangling, won approval to launch Virgin America. The U.S. affiliate, in which Virgin owns a minority stake, flies coast-to-coast routes. And many of the European carriers are devoting more of their fleets to transatlantic routes at a time when cash-strapped U.S. rivals lack the resources to respond. In January, British Airways (BAIRY) announced plans to launch OpenSkies, a new brand that will focus on routes across the Atlantic. "U.S. carriers are not in a position to create new entities like British Airways. They're simply struggling to stay alive," notes Peter Morris, chief economist for Ascend, a London consultancy.

The European carriers could also invest in some of the prospective U.S. mergers. According to industry sources, Delta and Northwest may bring aboard Air France-KLM as a minority investor. Reason? With more than $6 billion in cash, the Paris-based carrier may be their best source for some of the roughly $3 billion the carriers would need to cover the costs of integrating their route structures. "I think a Delta-Northwest merger would be the first step toward a global airline controlled by Air France," says Stuart Klaskin, a Miami-based strategic aviation consultant. "Everyone in this round of U.S. consolidation will have some financing from foreign carriers, and that will be an intermediate step toward consolidation." Industry executives believe that Lufthansa—its JetBlue stake notwithstanding—would be a likely ally for United and Continental, and British Airways could attempt to partner with either American or a regional carrier.

That the European airlines would be the aggressors is a turnabout, given that the U.S. players have historically been stronger. But the rise of low-cost carriers has spurred debilitating fare wars that have left big carriers bleeding billions over the past decade. By contrast, the major European airlines have been largely protected by rules limiting the ability of upstarts to gain access to gates as easily as they can in the U.S.

The latest moves have been triggered by the Open Skies Treaty signed last year by the U.S. and European Union. In the near term, the treaty gives both U.S. and European carriers greater freedom as of Mar. 31 to fly more transatlantic routes, as British Airways plans to do with its new OpenSkies subsidiary. The name was chosen because it "signals our determination to lobby for further liberalization in this market," British Airways Chief Executive Willie Walsh told reporters in January.

While the aviation pact raises the equity stake European carriers can take in their U.S. counterparts from 25% to 49%, for now it limits the investing airline to no more than 25% voting control. That's a restriction European executives are already pushing to have lifted. In a Feb. 4 op-ed in the Financial Times, Walsh demanded U.S. bureaucrats "sweep away the anachronistic restrictions on the ownership and control of airlines, so that EU investors can take majority stakes in U.S. airlines and vice versa." And if the U.S. doesn't acquiesce by 2010, Walsh warns, "we shall press for the termination" of the Open Skies treaty.

Still, both U.S. and European execs are mindful of the certain opposition they'd face from politicians, who fear not just cuts in jobs and service but the loss of their ability to commandeer aircraft during national emergencies. Indeed, industry insiders point to the uproar when a Dubai-owned company attempted to acquire a firm that managed some key U.S. ports. Labor unions could also be an obstacle, as pilot groups could fight any mergers with airlines that employ lower pay scales. Consequently, analysts believe U.S. and European carriers are likely to opt at first for joint ventures in which they would fly more routes for each other, splitting profits. Only then, if opposition eased, would full mergers follow. The question is whether the U.S. airlines will be the carriers that survive.

Foust, Dean. "Survival of the Biggest." BusinessWeek 25 Feb. 2008: 28-29.

February 18, 2008

Sun to Acquire MySQL for $1B

January 16, 2008 — IDG News Service (London Bureau) — Sun Microsystems will pay $1 billion for Swedish software company MySQL, whose open-source database is used for some of the most widely visited websites in the world.

Sun said the deal will augment its position in the enterprise IT market, including the $15 billion database market.

Sun said MySQL's product line will help it give further support to the open-source Web application platform known as LAMP, the acronym for the Linux OS, Apache Web server, MySQL database and the PHP/Perl programming languages.

MySQL's strength in software-as-a-service offerings -- where applications are delivered over the Internet through a Web browser -- are also a plus, Sun said.

Databases are crucial for Internet-based applications in sites offering a range of services, from e-commerce to social networking.

Sun will pay $800 million in cash and $200 million in options, and the deal is expected to close by the end of Sun's 2008 fiscal year, which will end June 30.

Sun's acquisition ends speculation that MySQL might become a public company.

MySQL has become a formidable competitor to other relational database management systems from companies such as Oracle and IBM. The database itself is free for people to download, and MySQL makes money by offering subscription support packages.

MySQL CEO Marten Mickos -- whose business cards list him as "Open Sourcerer"-- will join Sun's executive team. MySQL will be folded into Sun's Software, Sales and Service organizations.

Sun said it plans to create a joint team to integrate MySQL, which has 400 employees in 25 countries, into its operations.

Sun said MySQL will gain new distribution through companies such as Intel, IBM and Dell via existing relationships Sun has with those vendors.

Sun also said it will also work on optimizing the LAMP stack to run on GNU/Linux, Microsoft's Windows OS and its OpenSolaris OS.

Sun is in need of a database management system, one analyst said. It's choice of MySQL "makes sense with Sun's open-source orientation," said James Kobielus, senior analyst with Forrester Research.

Source: CIO Magazine
Author: Jeremy Kirk
http://www.cio.com/article/172505/Sun_to_Acquire_MySQL_for_B

Source: CIO Magazine
Author: Jeremy Kirk
http://www.cio.com/article/172505/Sun_to_Acquire_MySQL_for_B

February 12, 2008

The Death of Instant Polaroid Film

http://money.cnn.com/2008/02/08/news/companies/polaroid.ap/index.htm

February 7, 2008

Steve Jobs' Open Letter to iPhone Customers

To all iPhone customers:

I have received hundreds of emails from iPhone customers who are upset about Apple dropping the price of iPhone by $200 two months after it went on sale. After reading every one of these emails, I have some observations and conclusions.

First, I am sure that we are making the correct decision to lower the price of the 8GB iPhone from $599 to $399, and that now is the right time to do it. iPhone is a breakthrough product, and we have the chance to 'go for it' this holiday season. iPhone is so far ahead of the competition, and now it will be affordable by even more customers. It benefits both Apple and every iPhone user to get as many new customers as possible in the iPhone 'tent'. We strongly believe the $399 price will help us do just that this holiday season.

Second, being in technology for 30+ years I can attest to the fact that the technology road is bumpy. There is always change and improvement, and there is always someone who bought a product before a particular cutoff date and misses the new price or the new operating system or the new whatever. This is life in the technology lane. If you always wait for the next price cut or to buy the new improved model, you'll never buy any technology product because there is always something better and less expensive on the horizon. The good news is that if you buy products from companies that support them well, like Apple tries to do, you will receive years of useful and satisfying service from them even as newer models are introduced.

Third, even though we are making the right decision to lower the price of iPhone, and even though the technology road is bumpy, we need to do a better job taking care of our early iPhone customers as we aggressively go after new ones with a lower price. Our early customers trusted us, and we must live up to that trust with our actions in moments like these.

Therefore, we have decided to offer every iPhone customer who purchased an iPhone from either Apple or AT&T, and who is not receiving a rebate or any other consideration, a $100 store credit towards the purchase of any product at an Apple Retail Store or the Apple Online Store. Details are still being worked out and will be posted on Apple's website next week. Stay tuned.

We want to do the right thing for our valued iPhone customers. We apologize for disappointing some of you, and we are doing our best to live up to your high expectations of Apple.

Steve Jobs
Apple CEO