Steve's Health Report
Will this finally allow Apple (AAPL) investors to sleep nights? After fretting about Steve Jobs' evident weight loss over the past year, they got reassurance in the form of an open letter from the Apple CEO on Jan. 5. Jobs blamed a "hormone imbalance" that is "robbing me of the proteins my body needs to be healthy." Treatment, he said, will be "simple and straightforward," and he will remain on the job. Doctors who treat patients in similar circumstances—Jobs had surgery for a rare, less lethal form of pancreatic cancer in 2004—say he has an excellent prognosis. Apple the next day announced new policies for iTunes, the top online music store. It will now sell songs for as little as 69 cents, and soon they'll all be free of copy protection.
See "Was Apple 'Adequate but Late' on Jobs?"
—Edited by Harry Maurer & Cristinal Linblad
One Big Downturn
Get set for "the first truly global recession of the modern economy." So writes Stephen Roach, chairman of Morgan Stanley Asia. Roach says that while the crash began with the U.S. subprime meltdown in the summer of 2007, "there were bubble-dependent growth models in a surprisingly large number of countries—all now bursting." Asia's export bubbles, for instance, were inflated by the U.S. consumer-spending bubble. So he expects the recovery to be slow and anemic at best. (Foreign Policy)
—Edited by Harry Maurer & Cristinal Linblad
Scandal at Satyam
Just what Corporate India didn't need right now: an accounting scandal at one of its star outsourcers. On Jan. 7, Ramalingam Raju, chairman of Satyam Computer Services, quit and admitted he had cooked the books. Raju said he had overstated cash on hand by $1 billion and inflated profits and revenues in last year's September quarter. Satyam shares sank 78%, and the benchmark Sensex index lost 7.3% that day, as other outsources fretted about how the news would affect their reputations.
See "India's Madoff? Satyam Scandal Rocks Outsourcing Industry"
—Edited by Harry Maurer & Cristinal Linblad
Natural Gas Face-Off
It's turning into an annual affair: Russia's Gazprom and Ukraine fighting about the price of natural gas. But this time matters got out of hand, and on Jan. 6, Russian Prime Minister Vladimir Putin cut off deliveries to Europe through Ukraine. At one point the two countries weren't far apart—Ukraine said it would pay $235 per 1,000 cubic meters, just $15 less than Russia wanted. So why couldn't they make a deal? Some experts suspect corruption is playing a role.
See "Ukraine and Russia: The Role of a Middleman"
—Edited by Harry Maurer & Cristinal Linblad
Citgo's About-Face
Propaganda is a tricky business. For three cold winters, Venezuelan President Hugo Chávez took delight in distributing free or discounted heating oil to poor families in the U.S. while lambasting President George W. Bush. But on Jan. 5, former Representative Joseph P. Kennedy II, whose Citizens Energy administered the program for Venezuelan-owned Citgo, announced that falling oil prices had prompted the company to ditch the largesse. Whoops—two days later, Citgo said it would continue the program after all, offering 100 gallons for free.
—Edited by Harry Maurer & Cristinal Linblad
Monday, January 12, 2009
News You Need to Know 2
Whitman Eyes a Run
So what will they call her—The Auctionator? It sure looks as if former eBay CEO Meg Whitman will make a bid to succeed Arnold Schwarzenegger, who can't run again, as California's governor. According to a source close to Whitman, who left eBay (EBAY) earlier this year as the online marketplace struggled, she will make a decision on the 2010 race in four to six weeks. In preparation, she resigned on Jan. 6 from the boards of eBay, Procter & Gamble (PG), and DreamWorks Animation (DWA). Whitman got a taste for politics when she worked on the Presidential campaigns of former boss Mitt Romney and John McCain.
—Edited by Harry Maurer & Cristinal Linblad
Red Ink at Time Warner
Last year was ugly for a lot of companies, including Time Warner (TWX). But it got a whole lot uglier for the media giant on Jan. 7, when it said it would post a net loss for 2008 instead of previously projected profits. It added that it would likely take a $25 billion impairment charge for the falling value of some businesses, including cable and AOL (TWX). Reasons for the red ink: a legal judgment against the Turner Broadcasting unit; a charge related to a lessee declaring bankruptcy; and building up reserves for potential losses from customers who have gone under.
—Edited by Harry Maurer & Cristinal Linblad
The CEO Carousel
More bad news from the chicken coop: A month after Pilgrim's Pride (PGPDQ) filed for bankruptcy, the CEO of rival Tyson Foods (TSN) quit on Jan. 5. Dick Bond's exit came as Tyson old-timers such as Don Tyson, son of the founder, and his ally Leland Tollett have recently reasserted authority over the nation's No. 2 chicken processor, whose stock has dropped by half since April as the meat industry suffers its most rotten stretch in decades. Tollett, 71, was named interim CEO. Another corner office changed hands the same day as beleaguered bookseller Borders Group (BGP) replaced George Jones with Ron Marshall, 54.
—Edited by Harry Maurer & Cristinal Linblad
IndyMac's New Owners
It's a star-studded lineup: hedge fund heavy-hitters George Soros and John Paulson, plus computer king Michael Dell. They're on the team of investors who agreed on Jan. 2 to buy failed IndyMac bank from the feds. The buyers will pony up $1.3 billion in new capital for a bank with 33 branches and $16 billion in loans.The FDIC will absorb losses above a certain level, and the group will continue the process of tweaking mortgages for 46,000 IndyMac borrowers behind on their payments.
—Edited by Harry Maurer & Cristinal Linblad
Death of a Billionaire
As the German government squabbles over a stimulus package that should bring more money into consumers' pockets, the credit crunch claimed a prominent victim. Adolf Merckle, 74, estimated to be the fifth-richest man in Germany, killed himself on Jan. 5 by throwing himself under a train. Merckle's holding company, VEM, which encompassed outfits such as generic drugmaker Ratiopharm and HeidelbergCement, was in trouble after Merckle lost hundreds of million of euros speculating on VW shares, while the downturn caused HeidelbergCement shares to plunge. For months, Merckle had been pressed by banks to find bridge loans or sell his core businesses.
—Edited by Harry Maurer & Cristinal Linblad
So what will they call her—The Auctionator? It sure looks as if former eBay CEO Meg Whitman will make a bid to succeed Arnold Schwarzenegger, who can't run again, as California's governor. According to a source close to Whitman, who left eBay (EBAY) earlier this year as the online marketplace struggled, she will make a decision on the 2010 race in four to six weeks. In preparation, she resigned on Jan. 6 from the boards of eBay, Procter & Gamble (PG), and DreamWorks Animation (DWA). Whitman got a taste for politics when she worked on the Presidential campaigns of former boss Mitt Romney and John McCain.
—Edited by Harry Maurer & Cristinal Linblad
Red Ink at Time Warner
Last year was ugly for a lot of companies, including Time Warner (TWX). But it got a whole lot uglier for the media giant on Jan. 7, when it said it would post a net loss for 2008 instead of previously projected profits. It added that it would likely take a $25 billion impairment charge for the falling value of some businesses, including cable and AOL (TWX). Reasons for the red ink: a legal judgment against the Turner Broadcasting unit; a charge related to a lessee declaring bankruptcy; and building up reserves for potential losses from customers who have gone under.
—Edited by Harry Maurer & Cristinal Linblad
The CEO Carousel
More bad news from the chicken coop: A month after Pilgrim's Pride (PGPDQ) filed for bankruptcy, the CEO of rival Tyson Foods (TSN) quit on Jan. 5. Dick Bond's exit came as Tyson old-timers such as Don Tyson, son of the founder, and his ally Leland Tollett have recently reasserted authority over the nation's No. 2 chicken processor, whose stock has dropped by half since April as the meat industry suffers its most rotten stretch in decades. Tollett, 71, was named interim CEO. Another corner office changed hands the same day as beleaguered bookseller Borders Group (BGP) replaced George Jones with Ron Marshall, 54.
—Edited by Harry Maurer & Cristinal Linblad
IndyMac's New Owners
It's a star-studded lineup: hedge fund heavy-hitters George Soros and John Paulson, plus computer king Michael Dell. They're on the team of investors who agreed on Jan. 2 to buy failed IndyMac bank from the feds. The buyers will pony up $1.3 billion in new capital for a bank with 33 branches and $16 billion in loans.The FDIC will absorb losses above a certain level, and the group will continue the process of tweaking mortgages for 46,000 IndyMac borrowers behind on their payments.
—Edited by Harry Maurer & Cristinal Linblad
Death of a Billionaire
As the German government squabbles over a stimulus package that should bring more money into consumers' pockets, the credit crunch claimed a prominent victim. Adolf Merckle, 74, estimated to be the fifth-richest man in Germany, killed himself on Jan. 5 by throwing himself under a train. Merckle's holding company, VEM, which encompassed outfits such as generic drugmaker Ratiopharm and HeidelbergCement, was in trouble after Merckle lost hundreds of million of euros speculating on VW shares, while the downturn caused HeidelbergCement shares to plunge. For months, Merckle had been pressed by banks to find bridge loans or sell his core businesses.
—Edited by Harry Maurer & Cristinal Linblad
News You Need to Know 1
Obama Hits the Hill Running
There may be only one President at a time, but for now there appear to be two. Barack Obama arrived in Washington on Jan. 4 and jumped right into negotiations with Congress over an economic stimulus package. Aides say the President-elect is pressing for about $775 billion worth of stimulus over two years, including some $300 billion in tax relief for individuals and businesses. Balanced budgets? Forget about it. On Jan. 6, Obama said: "Potentially, we've got trillion-dollar deficits for years to come." The tax cuts in the package should win over some Republican lawmakers. Struggling sectors such as autos, banking, and homebuilding are excited that Obama may support a measure giving them refunds on past years' taxes. It would lengthen the period for money-losing companies to write off operating losses against previous profits from the current two years to four or five.
—Edited by Harry Maurer & Cristinal Linblad
Cutbacks at Alcoa
Only a year ago, Alcoa (AA) was getting scolded for not expanding fast enough as commodity markets boomed. Now, with aluminum prices down by half from last summer as customers slash orders, the top U.S. producer said on Jan. 6 it will cut 15,000 jobs, or 15% of its global workforce. It will also chop capital spending by 50% this year. Another commodity biggie is ailing even more: Chemical maker LyondellBasell put its U.S. unit into Chapter 11 on Jan. 6.
—Edited by Harry Maurer & Cristinal Linblad
Chipped Chipmaker
Next in the parade of companies unveiling nasty numbers: Intel (INTC). Having already forecast, on Nov. 12, its biggest quarter-on-quarter sales drop, the chip king on Jan. 7 said it now expects fourth-quarter revenue to be worse yet: $8.2 billion, down nearly $2 billion from forecasts in the fall and 20% from the third quarter. Demand for PCs and servers is cratering. Also on the tech front, Verizon Wireless surprised nearly everyone by saying on Jan. 7 that it will tap Microsoft (MSFT), not Google (GOOG), for search and ad services on its phones.
See "Intel Sales Take a Nosedive"
—Edited by Harry Maurer & Cristinal Linblad
Detroit's December
Be careful what you wish for. Carmakers couldn't wait for 2008 to end: U.S. auto sales sank 35% in December, closing out an annus horribilis that saw 13.2 million vehicles roll off the lot, the fewest since 1992. Making matters worse, soaring fuel prices last summer scrambled truck sales, where Detroit makes its richest margins. For the first time since 2000, Americans bought more passenger cars than trucks. Even mighty Toyota Motor (TM) says it will lose money this year. In fact, Toyota's sales are so skimpy that on Jan. 6 the company said it would idle 12 plants in Japan for 11 days in February and March to keep inventory from piling up. And that's the problem. As bad as 2008 was, it might look good compared with 2009.
—Edited by Harry Maurer & Cristinal Linblad
There may be only one President at a time, but for now there appear to be two. Barack Obama arrived in Washington on Jan. 4 and jumped right into negotiations with Congress over an economic stimulus package. Aides say the President-elect is pressing for about $775 billion worth of stimulus over two years, including some $300 billion in tax relief for individuals and businesses. Balanced budgets? Forget about it. On Jan. 6, Obama said: "Potentially, we've got trillion-dollar deficits for years to come." The tax cuts in the package should win over some Republican lawmakers. Struggling sectors such as autos, banking, and homebuilding are excited that Obama may support a measure giving them refunds on past years' taxes. It would lengthen the period for money-losing companies to write off operating losses against previous profits from the current two years to four or five.
—Edited by Harry Maurer & Cristinal Linblad
Cutbacks at Alcoa
Only a year ago, Alcoa (AA) was getting scolded for not expanding fast enough as commodity markets boomed. Now, with aluminum prices down by half from last summer as customers slash orders, the top U.S. producer said on Jan. 6 it will cut 15,000 jobs, or 15% of its global workforce. It will also chop capital spending by 50% this year. Another commodity biggie is ailing even more: Chemical maker LyondellBasell put its U.S. unit into Chapter 11 on Jan. 6.
—Edited by Harry Maurer & Cristinal Linblad
Chipped Chipmaker
Next in the parade of companies unveiling nasty numbers: Intel (INTC). Having already forecast, on Nov. 12, its biggest quarter-on-quarter sales drop, the chip king on Jan. 7 said it now expects fourth-quarter revenue to be worse yet: $8.2 billion, down nearly $2 billion from forecasts in the fall and 20% from the third quarter. Demand for PCs and servers is cratering. Also on the tech front, Verizon Wireless surprised nearly everyone by saying on Jan. 7 that it will tap Microsoft (MSFT), not Google (GOOG), for search and ad services on its phones.
See "Intel Sales Take a Nosedive"
—Edited by Harry Maurer & Cristinal Linblad
Detroit's December
Be careful what you wish for. Carmakers couldn't wait for 2008 to end: U.S. auto sales sank 35% in December, closing out an annus horribilis that saw 13.2 million vehicles roll off the lot, the fewest since 1992. Making matters worse, soaring fuel prices last summer scrambled truck sales, where Detroit makes its richest margins. For the first time since 2000, Americans bought more passenger cars than trucks. Even mighty Toyota Motor (TM) says it will lose money this year. In fact, Toyota's sales are so skimpy that on Jan. 6 the company said it would idle 12 plants in Japan for 11 days in February and March to keep inventory from piling up. And that's the problem. As bad as 2008 was, it might look good compared with 2009.
—Edited by Harry Maurer & Cristinal Linblad
CEO Pink-Slip Watch
By Nanette Byrnes
In terms of job security, America's corporate chiefs are coming off a good year. As layoffs among rank-and-file employees surged to multi-decade highs, CEO turnover actually dropped.
That could change in 2009 as boards that were reluctant to fire leaders at the height of the credit crisis face more shareholder pressure. For many CEOs, 2009 could be a make-or-break year. "If you're in a growth cycle and your company is in the bottom half of its industry, that's not so good, but [at least] you're still growing," notes executive coach Marshall Goldsmith. "If your whole industry is tanking and you're in the bottom half, it becomes a lot harder to massage the numbers."
One high-profile laggard is Brenda C. Barnes, who heads Sara Lee (SLE). The food company's share price decline and operating margins were among the worst in the industry in 2008. Barnes recently announced that Sara Lee will cut 700 jobs, but weakness in Europe threatens to derail her efforts to boost profits in 2009. "She has a lot to prove," says Marian L. Kessler, a portfolio manager and analyst with the Becker Value Equity Fund (BVEFX), who praises Barnes' focus on higher-margin businesses but says investors are wary of the company's frequent restructurings. "Brenda has been CEO since 2005 with not a great deal of success," says Kessler. Sara Lee declined to comment.
Chief executives of retailers with high debt levels are especially vulnerable, says retail consultant Howard Davidowitz. He points to Terry J. Lundgren, CEO of Macy's, as someone who needs to make significant progress after poor 2008 results and the ill-timed acquisition of May Co. "It's life or death," says Davidowitz. A spokesman for Macy's disputes the idea that Lundgren is under pressure, saying the company has outperformed competitors by some measures and has strong cash flow. Another CEO who Davidowitz says may feel pressure is Neiman Marcus chief Burton Tansky. The high-end retailer in December posted an 84% quarterly profit plunge. "The question," says Davidowitz, "is whether Tansky is enough of a change agent in a time when luxury is absolutely out of step with the consumer." Neiman declined to comment.
Perhaps the most obvious place to find CEOs on the hot seat is the financial sector. One who could feel pressure in 2009 is Morgan Stanley (MS) chairman and CEO John J. Mack, who returned to lead the firm in 2005 and quickly embraced riskier strategies that came back to bite him in 2008 as the financial crisis worsened. Morgan also lost market share in the mergers-and-acquisitions business. Mack is expected to retire when his contract expires in 2010, but some say poor results this year could prompt calls for an earlier exit. Michael Garland, a director at CtW Investment Group, says the issue of Mack's status will be raised this spring. Morgan Stanley declined to comment.
"DEARTH OF TALENT"
American International Group (AIG) wasn't the only insurer to be battered in 2008. Hartford Financial Services Group chief Ramani Ayer has to answer for more than $2 billion in losses in the firm's portfolio last year, not to mention high executive churn. Given all of the blowups in the finance sector already, it's not easy to see who might step into vacant roles. Says Jeffrey W. Arricale, portfolio manager of the T. Rowe Price Financial Services Fund (PRISX): "There's a dearth of talent." Hartford declined to comment.
Citigroup (C) chief Vikram Pandit, meanwhile, is at what one headhunter calls "the tipping point." He needs to clean up the bank's finances quickly—and show that taxpayer money is being well spent. A Citi spokeswoman says the bank remains focused on Pandit's strategy of dumping bad assets and cutting costs. Pandit took over in 2007, before the full extent of Citi's problems became clear. Even executives who prepare for trouble ahead can be swept up in events beyond their control. Says Arricale: "It's not like [Pandit] planned any of this."
In terms of job security, America's corporate chiefs are coming off a good year. As layoffs among rank-and-file employees surged to multi-decade highs, CEO turnover actually dropped.
That could change in 2009 as boards that were reluctant to fire leaders at the height of the credit crisis face more shareholder pressure. For many CEOs, 2009 could be a make-or-break year. "If you're in a growth cycle and your company is in the bottom half of its industry, that's not so good, but [at least] you're still growing," notes executive coach Marshall Goldsmith. "If your whole industry is tanking and you're in the bottom half, it becomes a lot harder to massage the numbers."
One high-profile laggard is Brenda C. Barnes, who heads Sara Lee (SLE). The food company's share price decline and operating margins were among the worst in the industry in 2008. Barnes recently announced that Sara Lee will cut 700 jobs, but weakness in Europe threatens to derail her efforts to boost profits in 2009. "She has a lot to prove," says Marian L. Kessler, a portfolio manager and analyst with the Becker Value Equity Fund (BVEFX), who praises Barnes' focus on higher-margin businesses but says investors are wary of the company's frequent restructurings. "Brenda has been CEO since 2005 with not a great deal of success," says Kessler. Sara Lee declined to comment.
Chief executives of retailers with high debt levels are especially vulnerable, says retail consultant Howard Davidowitz. He points to Terry J. Lundgren, CEO of Macy's, as someone who needs to make significant progress after poor 2008 results and the ill-timed acquisition of May Co. "It's life or death," says Davidowitz. A spokesman for Macy's disputes the idea that Lundgren is under pressure, saying the company has outperformed competitors by some measures and has strong cash flow. Another CEO who Davidowitz says may feel pressure is Neiman Marcus chief Burton Tansky. The high-end retailer in December posted an 84% quarterly profit plunge. "The question," says Davidowitz, "is whether Tansky is enough of a change agent in a time when luxury is absolutely out of step with the consumer." Neiman declined to comment.
Perhaps the most obvious place to find CEOs on the hot seat is the financial sector. One who could feel pressure in 2009 is Morgan Stanley (MS) chairman and CEO John J. Mack, who returned to lead the firm in 2005 and quickly embraced riskier strategies that came back to bite him in 2008 as the financial crisis worsened. Morgan also lost market share in the mergers-and-acquisitions business. Mack is expected to retire when his contract expires in 2010, but some say poor results this year could prompt calls for an earlier exit. Michael Garland, a director at CtW Investment Group, says the issue of Mack's status will be raised this spring. Morgan Stanley declined to comment.
"DEARTH OF TALENT"
American International Group (AIG) wasn't the only insurer to be battered in 2008. Hartford Financial Services Group chief Ramani Ayer has to answer for more than $2 billion in losses in the firm's portfolio last year, not to mention high executive churn. Given all of the blowups in the finance sector already, it's not easy to see who might step into vacant roles. Says Jeffrey W. Arricale, portfolio manager of the T. Rowe Price Financial Services Fund (PRISX): "There's a dearth of talent." Hartford declined to comment.
Citigroup (C) chief Vikram Pandit, meanwhile, is at what one headhunter calls "the tipping point." He needs to clean up the bank's finances quickly—and show that taxpayer money is being well spent. A Citi spokeswoman says the bank remains focused on Pandit's strategy of dumping bad assets and cutting costs. Pandit took over in 2007, before the full extent of Citi's problems became clear. Even executives who prepare for trouble ahead can be swept up in events beyond their control. Says Arricale: "It's not like [Pandit] planned any of this."
How Our Best Managers Have Fared Over the Years
By Peter Carbonara
Flipping through BusinessWeek's past surveys of the best managers is a lot like taking a peek at your high school yearbook. It evokes nostalgia, pride, and—on occasion—embarrassment.
Sure, we lauded Jamie Dimon back in 2003, predicting the Bank One CEO "may deal his way into greatness." Six years, two big acquisitions, and one financial crisis later, Dimon runs the largest bank in the U.S. by market value, JPMorgan Chase (JPM). He's also one of the few big bankers whose reputation remains intact.
We were also right to criticize Gerald Levin, the chief architect of the megamerger between Time Warner (TWX) and America Online (TWX), back in 2002. The conglomerate is still struggling to prove the online service provider makes sense as part of a media company. Levin now runs a holistic mental health center in Santa Monica, Calif., which the company's Web site describes as a place to "revel in the wonder of you."
There are, however, lots of choices we'd rather forget. In 2002 we singled out Dennis Kozlowski, then head of Tyco International (TYC), as one of the best managers for his "relentless dealmaking and lean operating style." Unfortunately the "lean" style also included his $30 million New York condo and its now-infamous $6,000 shower curtain. Kozlowski is currently serving an 8- to 25-year sentence for fleecing his former company.
We highlighted Lehman Brothers (LEH) CEO Dick Fuld as a best manager in 2002 for consistently "proving naysayers wrong." He wasn't a bad call at the time. After all, he fought insolvency rumors triggered by the collapse of hedge fund Long-Term Capital Management in 1998 and silenced skeptics after the September 11 terrorist attacks left Lehman homeless. But years later, Fuld's tough-as-nails attitude seemed more delusional than inspirational in the face of the crisis. He told anyone who would listen that the bank had plenty of capital—right up to the point when Lehman filed for bankruptcy this past September.
ARMs DEALER
In 2004, Ken Thompson, then CEO of Wachovia (WB), got kudos from us after a string of acquisitions. The industry veteran, we noted, "has rewritten the book on bank mergers." That turned out to be true—just not in a good way. Thompson's hurried acquisition in 2006 of Golden West Financial, a big California bank crammed with risky adjustable-rate mortgages, was a fiasco. Thompson was forced out last year, and a wounded Wachovia was swallowed up by Wells Fargo (WFC).
After transforming UnitedHealth Group (UNH) from a regional medical insurer into a diversified health-services giant, William McGuire rocketed to the top of our annual roundup in 2004. Three years later the former pulmonologist paid $468 million to settle allegations by the Securities & Exchange Commission that he received a slew of backdated stock options.
Some of our top picks have more ambiguous legacies. Consider Maurice "Hank" Greenberg. We applauded the autocratic leader of American International Group (AIG) in 2002 for turning the company into a financial giant and championing "innovative products that insure almost any type of risk." Greenberg, however, was forced out in 2005 amid allegations of fraud by the New York state attorney general—charges he contests to this day.
But Greenberg's successors bear the brunt of the blame for AIG's current state. As the housing bubble inflated, AIG pushed aggressively into credit default swaps, insuring some $426 billion worth of debt, including subprime mortgages. After those deals began to sour, the government had to come to its rescue.
Which crusading regulator brought down Greenberg back in 2005? None other than Eliot Spitzer, whose probes into investment banks and mutual fund firms helped change Wall Street's ways. In 2004 we saluted Spitzer for "wielding his staff of 1,800 like a battering ram against the fortress of Wall Street privilege." Spitzer rode the reformer image to the New York governor's mansion two years later, but in 2008 he resigned in disgrace after a dalliance with a high-priced prostitute. We had expected Spitzer to uncover the "next great scandal"—not to become it.
Flipping through BusinessWeek's past surveys of the best managers is a lot like taking a peek at your high school yearbook. It evokes nostalgia, pride, and—on occasion—embarrassment.
Sure, we lauded Jamie Dimon back in 2003, predicting the Bank One CEO "may deal his way into greatness." Six years, two big acquisitions, and one financial crisis later, Dimon runs the largest bank in the U.S. by market value, JPMorgan Chase (JPM). He's also one of the few big bankers whose reputation remains intact.
We were also right to criticize Gerald Levin, the chief architect of the megamerger between Time Warner (TWX) and America Online (TWX), back in 2002. The conglomerate is still struggling to prove the online service provider makes sense as part of a media company. Levin now runs a holistic mental health center in Santa Monica, Calif., which the company's Web site describes as a place to "revel in the wonder of you."
There are, however, lots of choices we'd rather forget. In 2002 we singled out Dennis Kozlowski, then head of Tyco International (TYC), as one of the best managers for his "relentless dealmaking and lean operating style." Unfortunately the "lean" style also included his $30 million New York condo and its now-infamous $6,000 shower curtain. Kozlowski is currently serving an 8- to 25-year sentence for fleecing his former company.
We highlighted Lehman Brothers (LEH) CEO Dick Fuld as a best manager in 2002 for consistently "proving naysayers wrong." He wasn't a bad call at the time. After all, he fought insolvency rumors triggered by the collapse of hedge fund Long-Term Capital Management in 1998 and silenced skeptics after the September 11 terrorist attacks left Lehman homeless. But years later, Fuld's tough-as-nails attitude seemed more delusional than inspirational in the face of the crisis. He told anyone who would listen that the bank had plenty of capital—right up to the point when Lehman filed for bankruptcy this past September.
ARMs DEALER
In 2004, Ken Thompson, then CEO of Wachovia (WB), got kudos from us after a string of acquisitions. The industry veteran, we noted, "has rewritten the book on bank mergers." That turned out to be true—just not in a good way. Thompson's hurried acquisition in 2006 of Golden West Financial, a big California bank crammed with risky adjustable-rate mortgages, was a fiasco. Thompson was forced out last year, and a wounded Wachovia was swallowed up by Wells Fargo (WFC).
After transforming UnitedHealth Group (UNH) from a regional medical insurer into a diversified health-services giant, William McGuire rocketed to the top of our annual roundup in 2004. Three years later the former pulmonologist paid $468 million to settle allegations by the Securities & Exchange Commission that he received a slew of backdated stock options.
Some of our top picks have more ambiguous legacies. Consider Maurice "Hank" Greenberg. We applauded the autocratic leader of American International Group (AIG) in 2002 for turning the company into a financial giant and championing "innovative products that insure almost any type of risk." Greenberg, however, was forced out in 2005 amid allegations of fraud by the New York state attorney general—charges he contests to this day.
But Greenberg's successors bear the brunt of the blame for AIG's current state. As the housing bubble inflated, AIG pushed aggressively into credit default swaps, insuring some $426 billion worth of debt, including subprime mortgages. After those deals began to sour, the government had to come to its rescue.
Which crusading regulator brought down Greenberg back in 2005? None other than Eliot Spitzer, whose probes into investment banks and mutual fund firms helped change Wall Street's ways. In 2004 we saluted Spitzer for "wielding his staff of 1,800 like a battering ram against the fortress of Wall Street privilege." Spitzer rode the reformer image to the New York governor's mansion two years later, but in 2008 he resigned in disgrace after a dalliance with a high-priced prostitute. We had expected Spitzer to uncover the "next great scandal"—not to become it.
Wall Street: The Bright Side of a Bad 2008
By Roben Farzad and Ben Levisohn
Last year was that rare wrinkle in history when everything that could go wrong did go wrong. Stocks and real estate imploded. Bank failures abounded. Fannie Mae, Freddie Mac, and AIG became wards of the state, while the Federal Reserve had to double its balance sheet in the course of a few weeks.
Oh, and Wall Street as we knew it pretty much died.
But the crash was good in one small (O.K., minuscule) sense: It separated the truly wise managers in finance from the highly paid pseudo-geniuses whose years of success turned out to be a bull market mirage. The few bankers and hedge fund pros who stuck to the basics of lending and investing during the mortgage boom are now inheriting the earth. Most of the rest are exploring other career options. With any luck, some of the physicists and engineers who flocked to trading floors in recent years will flock back to science labs to create things.
ASLEEP AT THE WHEEL
Where was the foresight? Almost all of the managers who were supposed to see the wreck coming did not. Most glaring were Bear Stearns' James E. Cayne and Lehman Brothers' Richard S. Fuld Jr., who morphed from bond gurus to credit casualties practically overnight. Much of the blame for the meltdown also lies with the phalanx of highly compensated executives just below the C-suite—the risk managers and trading chiefs who failed to avoid the carnage.
Two managers who did sidestep the crash are in position to help shape the future of banking. JPMorgan Chase (JPM) CEO Jamie Dimon got federal help to acquire Bear Stearns and Washington Mutual and now sits at the helm of a dominant global firm. Bank of America's (BAC) Kenneth D. Lewis snatched Merrill Lynch (MER) from the jaws of bankruptcy, a move that could vault BofA near to the top of investment banking.
And what of the supposed sophisticates managing the world's biggest hedge funds? Most of them blew it, too. Now some are closing up shop—and throwing hundreds of onetime masters of the universe out of work. Chicago's Hedge Fund Research says hedge funds lost an average of 19.4% through November as billions of investor dollars fled. SAC Capital Advisors saw its Multi-Strategy Fund lose 13% through November, even though the fund is supposed to make money in any environment. The two main funds of Kenneth C. Griffin's Citadel Investment Group were hit with $1.2 billion in withdrawal requests.
Most hedge funds charge clients 50% of their profits and 2% of assets under management. None has agreed to refund to clients half their losses, but Renaissance Technologies' James Simons has waived the management fee for his year-old futures fund, which lost 12% in 2008. Perhaps he has started a trend.
The small winner's circle included longtime subprime skeptic John Paulson, whose largest fund returned 38% through Dec. 19. But the biggest hedge fund victor may be James Chanos, whose Kynikos Associates (Greek for cynic) shorted its way to a 50%-plus gain through November. That, of course, is cold comfort for the millions of ordinary investors who had their money in stocks.
Return to the Best Managers Table of Contents
BusinessWeek Senior Writer Farzad covers Wall Street and international finance. Levisohn is a staff editor at BusinessWeek covering finance and personal finance.
Last year was that rare wrinkle in history when everything that could go wrong did go wrong. Stocks and real estate imploded. Bank failures abounded. Fannie Mae, Freddie Mac, and AIG became wards of the state, while the Federal Reserve had to double its balance sheet in the course of a few weeks.
Oh, and Wall Street as we knew it pretty much died.
But the crash was good in one small (O.K., minuscule) sense: It separated the truly wise managers in finance from the highly paid pseudo-geniuses whose years of success turned out to be a bull market mirage. The few bankers and hedge fund pros who stuck to the basics of lending and investing during the mortgage boom are now inheriting the earth. Most of the rest are exploring other career options. With any luck, some of the physicists and engineers who flocked to trading floors in recent years will flock back to science labs to create things.
ASLEEP AT THE WHEEL
Where was the foresight? Almost all of the managers who were supposed to see the wreck coming did not. Most glaring were Bear Stearns' James E. Cayne and Lehman Brothers' Richard S. Fuld Jr., who morphed from bond gurus to credit casualties practically overnight. Much of the blame for the meltdown also lies with the phalanx of highly compensated executives just below the C-suite—the risk managers and trading chiefs who failed to avoid the carnage.
Two managers who did sidestep the crash are in position to help shape the future of banking. JPMorgan Chase (JPM) CEO Jamie Dimon got federal help to acquire Bear Stearns and Washington Mutual and now sits at the helm of a dominant global firm. Bank of America's (BAC) Kenneth D. Lewis snatched Merrill Lynch (MER) from the jaws of bankruptcy, a move that could vault BofA near to the top of investment banking.
And what of the supposed sophisticates managing the world's biggest hedge funds? Most of them blew it, too. Now some are closing up shop—and throwing hundreds of onetime masters of the universe out of work. Chicago's Hedge Fund Research says hedge funds lost an average of 19.4% through November as billions of investor dollars fled. SAC Capital Advisors saw its Multi-Strategy Fund lose 13% through November, even though the fund is supposed to make money in any environment. The two main funds of Kenneth C. Griffin's Citadel Investment Group were hit with $1.2 billion in withdrawal requests.
Most hedge funds charge clients 50% of their profits and 2% of assets under management. None has agreed to refund to clients half their losses, but Renaissance Technologies' James Simons has waived the management fee for his year-old futures fund, which lost 12% in 2008. Perhaps he has started a trend.
The small winner's circle included longtime subprime skeptic John Paulson, whose largest fund returned 38% through Dec. 19. But the biggest hedge fund victor may be James Chanos, whose Kynikos Associates (Greek for cynic) shorted its way to a 50%-plus gain through November. That, of course, is cold comfort for the millions of ordinary investors who had their money in stocks.
Return to the Best Managers Table of Contents
BusinessWeek Senior Writer Farzad covers Wall Street and international finance. Levisohn is a staff editor at BusinessWeek covering finance and personal finance.
DuPont's Swift Response to the Financial Crisis 2
Holliday had to weigh whether the gathering financial storm was serious enough to warrant implementing the plan or whether declaring a crisis might frighten the company's 60,000 employees needlessly. As the evidence of a deepening economic downturn quickly mounted, he decided that activating Corporate Crisis Management was right.
Immediately, 17 standing teams met at DuPont headquarters. Over four days of meetings, it became clear that the nature of the crisis was strictly financial, and eight teams—those that dealt with such issues as security and plant safety—stood down. At the end of the four days, the remaining nine had determined what needed to be done to ensure DuPont's viability. It was time to let the troops around the world know what was going on.
Holliday enlisted the company's chief economist and the head of its pension fund, both of whom are highly regarded in the organization, to explain in nontechnical language the roots of the crisis and the way it was affecting DuPont. The pension fund manager also took time to develop some instructional material advising employees about investment options for their $18 billion in retirement funds.
Within 10 days of the crisis plan's creation, every employee in DuPont had a face-to-face meeting with a manager who explained what the company needed to accomplish. Employees were asked to identify three things they could do immediately to help conserve cash and reduce costs. Within a few days after the communications program was rolled out, the company conducted polling to see how well employees understood the nature of the crisis and to determine their psychological reaction. Were they scared, or were they energized and ready to confront the crisis? The company also wanted to see whether the rank and file were doing what they needed to be doing.
TOO CONFIDENT?
Overall, the employees seemed to get it. It helped that the news media were full of stories about the developing financial crisis. The actions aimed at conserving cash took hold quickly. Travel was curtailed sharply, internal meetings were canceled, and consultants and contractors were eliminated where possible.
Yet Holliday felt people still didn't grasp the urgency with which they needed to be acting. "In hindsight, maybe we were too good at giving them the reassurance and confidence that we could come through this," Holliday says. "We gave them so much confidence that they just weren't responding as fast as the slowdown demanded."
Together with his chief operating officer and chief financial officer, Holliday took the time to spend an hour and a half with each of the company's top 14 leaders. They were asked to explain what they were doing to cope with the crisis. They all brought long lists, and it seemed they were doing a lot. But the problem was how fast it was getting done. "They were talking about things that would be implemented by January or February, but they were things we needed implemented in October," Holliday says. So Holliday and his senior team assigned the executive vice-presidents sharply revised targets for cost, working capital, and other metrics for the rest of 2008 as well as the first quarter of 2009.
Even as immediate measures were being taken, DuPont had three top executives looking at longer-term actions the company needed to embrace. It would take a while to figure out which production facilities could be closed permanently or shut temporarily to reduce costs. So the fastest way to save the most cash was to cut back as much as possible on the more than 20,000 outside contractors the company was using. In most cases a contractor could be released with one week's notice and without any severance costs. Where possible, employees whose operations were slowing or would be closed were shifted into what was formerly contract work.
DuPont's initial reaction to the spreading crisis took place in less than six weeks. There will be much more to do, depending on how the global economy fares over the next year or two. And when the slowdown ends, Holliday predicts that inflationary trends will reassert themselves. But DuPont will be ready for resurgent inflation—and any other emergency—if and when it happens.
The lesson CEOs should draw from Holliday's experience: You must recognize reality. This is the single most important task confronting a CEO, and it is extremely difficult to do in this environment. Facing wrenching uncertainty, many become fearful. Others indulge in wishful thinking: "We'll soon be back to normal." Don't believe it. Though we don't know what the new world will look like, we can be certain it won't look the way it did before.
Return to the Best Managers Table of Contents
Ram Charan, co-author of the international best-seller Execution and an adviser to business leaders and corporate boards worldwide, is the author of Leaders at all Levels: Deepening Your Talent Pool to Solve the Succession Crisis, to be published by Jossey-Bass in December, 2007.
Immediately, 17 standing teams met at DuPont headquarters. Over four days of meetings, it became clear that the nature of the crisis was strictly financial, and eight teams—those that dealt with such issues as security and plant safety—stood down. At the end of the four days, the remaining nine had determined what needed to be done to ensure DuPont's viability. It was time to let the troops around the world know what was going on.
Holliday enlisted the company's chief economist and the head of its pension fund, both of whom are highly regarded in the organization, to explain in nontechnical language the roots of the crisis and the way it was affecting DuPont. The pension fund manager also took time to develop some instructional material advising employees about investment options for their $18 billion in retirement funds.
Within 10 days of the crisis plan's creation, every employee in DuPont had a face-to-face meeting with a manager who explained what the company needed to accomplish. Employees were asked to identify three things they could do immediately to help conserve cash and reduce costs. Within a few days after the communications program was rolled out, the company conducted polling to see how well employees understood the nature of the crisis and to determine their psychological reaction. Were they scared, or were they energized and ready to confront the crisis? The company also wanted to see whether the rank and file were doing what they needed to be doing.
TOO CONFIDENT?
Overall, the employees seemed to get it. It helped that the news media were full of stories about the developing financial crisis. The actions aimed at conserving cash took hold quickly. Travel was curtailed sharply, internal meetings were canceled, and consultants and contractors were eliminated where possible.
Yet Holliday felt people still didn't grasp the urgency with which they needed to be acting. "In hindsight, maybe we were too good at giving them the reassurance and confidence that we could come through this," Holliday says. "We gave them so much confidence that they just weren't responding as fast as the slowdown demanded."
Together with his chief operating officer and chief financial officer, Holliday took the time to spend an hour and a half with each of the company's top 14 leaders. They were asked to explain what they were doing to cope with the crisis. They all brought long lists, and it seemed they were doing a lot. But the problem was how fast it was getting done. "They were talking about things that would be implemented by January or February, but they were things we needed implemented in October," Holliday says. So Holliday and his senior team assigned the executive vice-presidents sharply revised targets for cost, working capital, and other metrics for the rest of 2008 as well as the first quarter of 2009.
Even as immediate measures were being taken, DuPont had three top executives looking at longer-term actions the company needed to embrace. It would take a while to figure out which production facilities could be closed permanently or shut temporarily to reduce costs. So the fastest way to save the most cash was to cut back as much as possible on the more than 20,000 outside contractors the company was using. In most cases a contractor could be released with one week's notice and without any severance costs. Where possible, employees whose operations were slowing or would be closed were shifted into what was formerly contract work.
DuPont's initial reaction to the spreading crisis took place in less than six weeks. There will be much more to do, depending on how the global economy fares over the next year or two. And when the slowdown ends, Holliday predicts that inflationary trends will reassert themselves. But DuPont will be ready for resurgent inflation—and any other emergency—if and when it happens.
The lesson CEOs should draw from Holliday's experience: You must recognize reality. This is the single most important task confronting a CEO, and it is extremely difficult to do in this environment. Facing wrenching uncertainty, many become fearful. Others indulge in wishful thinking: "We'll soon be back to normal." Don't believe it. Though we don't know what the new world will look like, we can be certain it won't look the way it did before.
Return to the Best Managers Table of Contents
Ram Charan, co-author of the international best-seller Execution and an adviser to business leaders and corporate boards worldwide, is the author of Leaders at all Levels: Deepening Your Talent Pool to Solve the Succession Crisis, to be published by Jossey-Bass in December, 2007.
DuPont's Swift Response to the Financial Crisis 1
By Ram Charan
In Leadership in the Era of Economic Uncertainty: The New Rules for Getting the Right Things Done in Difficult Times (McGraw-Hill), renowned management consultant Ram Charan offers chief executives a detailed guide to surviving the worst financial and business crisis since the Great Depression. The key, Charan says, is "management intensity"—deep immersion in the operational details of the business and the outside world, combined with hands-on involvement and follow-through.
Plans and progress must be revisited almost daily. Big-picture, strategic-level thinking cannot be abandoned, but every leader now must be involved, visible, and in daily communication with employees, customers, and suppliers. In this world, CEOs need detailed, up-to-date, and unfiltered information. And they have to act decisively when trouble looms. "If you don't prepare for the worst," says Charan, "you will put both your company and career at risk."
What follows is an excerpt from Charan's book that describes how one of his major clients, chemical and life sciences giant DuPont (DD) , has responded to the crisis. CEO Charles O. Holliday Jr. reacted with maximum speed, rallied his entire company to confront the emergency, and put a sharp focus on maintaining cash flow, which Charan considers the lifeblood of any company in a severe downturn.
The first clear sign that the economic crisis was spreading globally came to DuPont CEO Chad Holliday in early October of last year, while he was visiting a major customer in Japan. The CEO of the Japanese company, among the largest and most highly regarded in its global industry, told Holliday he was worried about his company's cash position. The Japanese boss had ordered his executives to conserve cash in case the financial contagion affected his ability to raise capital.
That conversation was a wake-up call. When Holliday's plane landed back in the U.S., he immediately summoned the six top leaders in his company to a meeting at 7 a.m. the next day. He asked them the following questions: How bad is it now? How bad could it get?
The answers that came back over the next few days were grim. The financial industry's problems were pervading many aspects of DuPont's business both at home and abroad. What had seemed to be a crisis of confidence on Wall Street had the potential to become a global crisis as panic swept Western Europe, Russia, and most of Asia. Credit was disappearing, leaving companies struggling to finance their operations.
Evidence of how serious the problems were becoming appeared in different places. Wilmington, Del., where DuPont has its headquarters, is usually a hotbed of legal activity: Many companies are chartered in the state, and corporate lawsuits are routinely filed in Delaware Court of Chancery in Wilmington. Yet bookings at the hotel DuPont owns in the city's downtown had plunged more than 30% in 10 days. Lawyers handling litigation for companies had canceled their reservations when their clients decided to settle their disputes and stop incurring legal fees.
SPRINGING INTO ACTION
More telling was the rate at which production at many companies was slowing. DuPont paint covers more than 30% of all American automobiles, and the company generally manufactures the paint less than 48 hours before it is sprayed on new cars. To maintain such a short lead time, the automobile companies share their production schedules with DuPont. Suddenly there weren't any production schedules. The automakers didn't know what they were going to produce in the face of collapsing sales.
Clearly it was time to take action.
DuPont has long stressed the paramount importance of contingency planning. Its Corporate Crisis Management plan, if invoked, instantly brings together senior managers to appraise the cause of the crisis and put appropriate disaster control procedures in place. The plan is seldom activated. It was used in the wake of the September 11 attacks and in the aftermath of major hurricanes.
In Leadership in the Era of Economic Uncertainty: The New Rules for Getting the Right Things Done in Difficult Times (McGraw-Hill), renowned management consultant Ram Charan offers chief executives a detailed guide to surviving the worst financial and business crisis since the Great Depression. The key, Charan says, is "management intensity"—deep immersion in the operational details of the business and the outside world, combined with hands-on involvement and follow-through.
Plans and progress must be revisited almost daily. Big-picture, strategic-level thinking cannot be abandoned, but every leader now must be involved, visible, and in daily communication with employees, customers, and suppliers. In this world, CEOs need detailed, up-to-date, and unfiltered information. And they have to act decisively when trouble looms. "If you don't prepare for the worst," says Charan, "you will put both your company and career at risk."
What follows is an excerpt from Charan's book that describes how one of his major clients, chemical and life sciences giant DuPont (DD) , has responded to the crisis. CEO Charles O. Holliday Jr. reacted with maximum speed, rallied his entire company to confront the emergency, and put a sharp focus on maintaining cash flow, which Charan considers the lifeblood of any company in a severe downturn.
The first clear sign that the economic crisis was spreading globally came to DuPont CEO Chad Holliday in early October of last year, while he was visiting a major customer in Japan. The CEO of the Japanese company, among the largest and most highly regarded in its global industry, told Holliday he was worried about his company's cash position. The Japanese boss had ordered his executives to conserve cash in case the financial contagion affected his ability to raise capital.
That conversation was a wake-up call. When Holliday's plane landed back in the U.S., he immediately summoned the six top leaders in his company to a meeting at 7 a.m. the next day. He asked them the following questions: How bad is it now? How bad could it get?
The answers that came back over the next few days were grim. The financial industry's problems were pervading many aspects of DuPont's business both at home and abroad. What had seemed to be a crisis of confidence on Wall Street had the potential to become a global crisis as panic swept Western Europe, Russia, and most of Asia. Credit was disappearing, leaving companies struggling to finance their operations.
Evidence of how serious the problems were becoming appeared in different places. Wilmington, Del., where DuPont has its headquarters, is usually a hotbed of legal activity: Many companies are chartered in the state, and corporate lawsuits are routinely filed in Delaware Court of Chancery in Wilmington. Yet bookings at the hotel DuPont owns in the city's downtown had plunged more than 30% in 10 days. Lawyers handling litigation for companies had canceled their reservations when their clients decided to settle their disputes and stop incurring legal fees.
SPRINGING INTO ACTION
More telling was the rate at which production at many companies was slowing. DuPont paint covers more than 30% of all American automobiles, and the company generally manufactures the paint less than 48 hours before it is sprayed on new cars. To maintain such a short lead time, the automobile companies share their production schedules with DuPont. Suddenly there weren't any production schedules. The automakers didn't know what they were going to produce in the face of collapsing sales.
Clearly it was time to take action.
DuPont has long stressed the paramount importance of contingency planning. Its Corporate Crisis Management plan, if invoked, instantly brings together senior managers to appraise the cause of the crisis and put appropriate disaster control procedures in place. The plan is seldom activated. It was used in the wake of the September 11 attacks and in the aftermath of major hurricanes.
Managing Through a Crisis: The New Rules 2
In just one year, the difference in the cost to borrow between a typical investment-grade company and a noninvestment-grade company has tripled.
Getting to financial health will require sacrifice, from selling off assets at bargain prices to issuing stock in a down market. "If your stock was at $50, it may not feel good to issue stock when it is $20," says Marc Zenner, managing director at J.P. Morgan's (JPM) Capital Structure Advisory & Solutions group. "But if you don't do it, the situation could be a lot worse."
Washington (D.C.)-based power utility Pepco Holdings (POM) chose to raise the nearly $1.6 billion it needed for infrastructure spending this year by issuing shares and bonds three months ago when markets were in flux. Chief Financial Officer Paul Barry worried that raising money in 2009 could be even harder. "We just bit the bullet and went ahead and got it done," he says. Now Pepco is well positioned to improve its reliability by building transmission lines.
MAKE A MOVE FOR MARKET SHARE
The pie is getting smaller, and less nimble rivals are getting weaker. Don't wait for your competitors to fall to the ground. Hire away their best people while taking steps to make sure they don't grab yours. Or buy assets from cash-strapped rivals on the cheap. Take steps to solicit new customers at a time when others are cutting back on service.
Abandon strategies or products that don't fit the core business. Wal-Mart (WMT) last year jettisoned its policy of stuffing a wide variety of products into stores to broaden its appeal. Instead, the world's largest retailer focused on simplifying its mix and lowering prices of its most popular products, according to Chief Merchandising Officer John Fleming. The result: more share in hot-selling categories like flat-screen TVs.
RETHINK YOUR REWARD SYSTEM
It's tempting to cut compensation across the board. Now is the time to differentiate more than ever and focus on rewarding your best. If you have to cut costs, start at the top. When FedEx (FDX) CEO Frederick W. Smith announced broad salary cuts last month, he took the largest hit, with a 20% pay cut. As New York-based organizational psychologist Ben Dattner says: "The last thing you want is for people to perceive that you're in it for yourself."
If you can't give staff more money, look for ways to give them more power. Shell Refining (RDS), for one, singled out top supervisors at its Port Arthur (Tex.) refinery last year and asked their advice on how to improve the plant's performance. The result was higher morale, according to refinery general manager Todd Monette, and a 30% reduction in unplanned maintenance work.
DARE TO INNOVATE
Innovating now can leave you nicely situated for a turnaround. Pfizer broke apart both its research and business units last year to help spur new ideas. Corey Goodman, head of Pfizer's Biotherapeutics & Bioinnovation Center in San Francisco, says the move has made "Pfizer more efficient and more entrepreneurial."
For those who are willing to take some risks, 2009 can be a time of great possibilities. "A leader is someone who doesn't do what everyone else does," says Richard S. Tedlow, a professor of business administration at Harvard Business School. "If you have a product you believe in, now is the time to make a bigger investment—not a smaller one."
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
Profits of Doom
There is plenty of literature on making the most of a crisis. Some standouts: Winning in Turbulence, by Bain consultant Darrell Rigby, and Boston Consulting Group's "Collateral Damage" essay series, which suggests ways to survive the year ahead. Meanwhile, Alexander J. Field, a professor at Santa Clara University, bucks conventional wisdom with a paper calling the Great Depression "the most technologically progressive decade of the century."
To check these out, go to http://bx.businessweek.com/management-ideas/reference/
Return to the Best Managers Table of Contents
Thornton is a senior writer for BusinessWeek.
Getting to financial health will require sacrifice, from selling off assets at bargain prices to issuing stock in a down market. "If your stock was at $50, it may not feel good to issue stock when it is $20," says Marc Zenner, managing director at J.P. Morgan's (JPM) Capital Structure Advisory & Solutions group. "But if you don't do it, the situation could be a lot worse."
Washington (D.C.)-based power utility Pepco Holdings (POM) chose to raise the nearly $1.6 billion it needed for infrastructure spending this year by issuing shares and bonds three months ago when markets were in flux. Chief Financial Officer Paul Barry worried that raising money in 2009 could be even harder. "We just bit the bullet and went ahead and got it done," he says. Now Pepco is well positioned to improve its reliability by building transmission lines.
MAKE A MOVE FOR MARKET SHARE
The pie is getting smaller, and less nimble rivals are getting weaker. Don't wait for your competitors to fall to the ground. Hire away their best people while taking steps to make sure they don't grab yours. Or buy assets from cash-strapped rivals on the cheap. Take steps to solicit new customers at a time when others are cutting back on service.
Abandon strategies or products that don't fit the core business. Wal-Mart (WMT) last year jettisoned its policy of stuffing a wide variety of products into stores to broaden its appeal. Instead, the world's largest retailer focused on simplifying its mix and lowering prices of its most popular products, according to Chief Merchandising Officer John Fleming. The result: more share in hot-selling categories like flat-screen TVs.
RETHINK YOUR REWARD SYSTEM
It's tempting to cut compensation across the board. Now is the time to differentiate more than ever and focus on rewarding your best. If you have to cut costs, start at the top. When FedEx (FDX) CEO Frederick W. Smith announced broad salary cuts last month, he took the largest hit, with a 20% pay cut. As New York-based organizational psychologist Ben Dattner says: "The last thing you want is for people to perceive that you're in it for yourself."
If you can't give staff more money, look for ways to give them more power. Shell Refining (RDS), for one, singled out top supervisors at its Port Arthur (Tex.) refinery last year and asked their advice on how to improve the plant's performance. The result was higher morale, according to refinery general manager Todd Monette, and a 30% reduction in unplanned maintenance work.
DARE TO INNOVATE
Innovating now can leave you nicely situated for a turnaround. Pfizer broke apart both its research and business units last year to help spur new ideas. Corey Goodman, head of Pfizer's Biotherapeutics & Bioinnovation Center in San Francisco, says the move has made "Pfizer more efficient and more entrepreneurial."
For those who are willing to take some risks, 2009 can be a time of great possibilities. "A leader is someone who doesn't do what everyone else does," says Richard S. Tedlow, a professor of business administration at Harvard Business School. "If you have a product you believe in, now is the time to make a bigger investment—not a smaller one."
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
Profits of Doom
There is plenty of literature on making the most of a crisis. Some standouts: Winning in Turbulence, by Bain consultant Darrell Rigby, and Boston Consulting Group's "Collateral Damage" essay series, which suggests ways to survive the year ahead. Meanwhile, Alexander J. Field, a professor at Santa Clara University, bucks conventional wisdom with a paper calling the Great Depression "the most technologically progressive decade of the century."
To check these out, go to http://bx.businessweek.com/management-ideas/reference/
Return to the Best Managers Table of Contents
Thornton is a senior writer for BusinessWeek.
Managing Through a Crisis: The New Rules 1
By Emily Thornton
What do Carnegie Steel and Hewlett-Packard (HPQ) have in common? Both were born at a time when people thought the world was falling apart. Andrew Carnegie launched his first steel mill during the Panic of 1873, the start of a long depression. He took advantage of low costs to build an industrial giant that made him the world's richest man. Bill Hewlett and Dave Packard showed similar courage when they launched HP from a Palo Alto (Calif.) garage toward the end of the Great Depression.
History has shown that crisis breeds opportunity. Business leaders may have to cut costs to survive 2009, but the smart ones are also out there looking for prospects. They are willing to take the type of bold move that IBM (IBM) made during the recessionary days of 1981 when CEO John R. Opel aggressively rolled out the company's landmark personal computer just as PC demand soared. Even in the current downturn, there are companies like AT&T (T), which recently announced plans to buy two companies for a total of $1.2 billion. "A recession creates winners and losers just like a boom," observes Mauro F. Guillen, a professor of international management at the University of Pennsylvania's Wharton School.
Managers are now dealing with everything from shattered consumer confidence to tighter credit, not to mention the likelihood of a tougher regulatory environment. Decisions that made sense two years ago may prove disastrous in this climate—from giving outsize rewards to those who take big risks to borrowing heavily just because interest rates are low. Years of excessive borrowing have taken a toll: An unprecedented two-thirds of nonfinancial American companies covered by Standard & Poor's have speculative-grade, or junk-rated, debt. (S&P, like BusinessWeek , is a unit of The McGraw-Hill Companies (MHP).) On the whole, U.S. businesses face a $238 billion wave of debt maturities that will come due by the end of 2009. "Many companies are questioning their survival," says Gerry Hansell, a senior partner at Boston Consulting Group.
Executives have to lead "their people out of a psychological funk and at the same time tailor their business to focus on a new reality," says management consultant Ram Charan. That's good advice during any business cycle but especially important today. Here are some new rules for managing through a tough 2009—and beyond:
CHANGE YOUR MINDSET
Money is scarce. Markets are volatile. Morale is harder to boost in an atmosphere of anxiety. Acknowledge to yourself and your team that the world has changed. Dennis Carey, a senior partner at Korn Ferry International (KFY), argues that now is the time to question every technique that worked during boom years. "You can't rely on a peacetime general to fight a war," says Carey. "The wartime CEO prepares for the worst so that his or her company can take market share away from players who haven't."
Many of the best managers in 2008 were gearing up for battle during good times. Mark Hurd at Hewlett-Packard, for example, has made drastic cost cuts, shed marginal businesses, and focused on playing to HP's strengths over the last few years. Jamie Dimon of JPMorgan Chase (JPM) made substantial changes that shored up his bank's balance sheet and left him ready to pounce as rivals fell.
GET YOUR FINANCIAL HOUSE IN ORDER
A key issue for many companies right now is getting the funds needed to help a business grow. Only those with strong balance sheets stand a chance. Everyone used to have easy access to capital. No more.
What do Carnegie Steel and Hewlett-Packard (HPQ) have in common? Both were born at a time when people thought the world was falling apart. Andrew Carnegie launched his first steel mill during the Panic of 1873, the start of a long depression. He took advantage of low costs to build an industrial giant that made him the world's richest man. Bill Hewlett and Dave Packard showed similar courage when they launched HP from a Palo Alto (Calif.) garage toward the end of the Great Depression.
History has shown that crisis breeds opportunity. Business leaders may have to cut costs to survive 2009, but the smart ones are also out there looking for prospects. They are willing to take the type of bold move that IBM (IBM) made during the recessionary days of 1981 when CEO John R. Opel aggressively rolled out the company's landmark personal computer just as PC demand soared. Even in the current downturn, there are companies like AT&T (T), which recently announced plans to buy two companies for a total of $1.2 billion. "A recession creates winners and losers just like a boom," observes Mauro F. Guillen, a professor of international management at the University of Pennsylvania's Wharton School.
Managers are now dealing with everything from shattered consumer confidence to tighter credit, not to mention the likelihood of a tougher regulatory environment. Decisions that made sense two years ago may prove disastrous in this climate—from giving outsize rewards to those who take big risks to borrowing heavily just because interest rates are low. Years of excessive borrowing have taken a toll: An unprecedented two-thirds of nonfinancial American companies covered by Standard & Poor's have speculative-grade, or junk-rated, debt. (S&P, like BusinessWeek , is a unit of The McGraw-Hill Companies (MHP).) On the whole, U.S. businesses face a $238 billion wave of debt maturities that will come due by the end of 2009. "Many companies are questioning their survival," says Gerry Hansell, a senior partner at Boston Consulting Group.
Executives have to lead "their people out of a psychological funk and at the same time tailor their business to focus on a new reality," says management consultant Ram Charan. That's good advice during any business cycle but especially important today. Here are some new rules for managing through a tough 2009—and beyond:
CHANGE YOUR MINDSET
Money is scarce. Markets are volatile. Morale is harder to boost in an atmosphere of anxiety. Acknowledge to yourself and your team that the world has changed. Dennis Carey, a senior partner at Korn Ferry International (KFY), argues that now is the time to question every technique that worked during boom years. "You can't rely on a peacetime general to fight a war," says Carey. "The wartime CEO prepares for the worst so that his or her company can take market share away from players who haven't."
Many of the best managers in 2008 were gearing up for battle during good times. Mark Hurd at Hewlett-Packard, for example, has made drastic cost cuts, shed marginal businesses, and focused on playing to HP's strengths over the last few years. Jamie Dimon of JPMorgan Chase (JPM) made substantial changes that shored up his bank's balance sheet and left him ready to pounce as rivals fell.
GET YOUR FINANCIAL HOUSE IN ORDER
A key issue for many companies right now is getting the funds needed to help a business grow. Only those with strong balance sheets stand a chance. Everyone used to have easy access to capital. No more.
Saturday, January 3, 2009
A year after $100, oil prices cut in half part2
Activity in the U.S. oilfield already reflects expectations for anemic demand. Baker Hughes Inc. reported Friday the number of rigs actively exploring for oil and natural gas in the United States fell by 98 last week to 1,623. That's nearly 16 percent fewer rigs at work than when oil prices peaked in July, and 9 percent below the year-ago figure.
The Department of Energy said Friday it plans to take advantage of the huge drop in crude prices and is soliciting bids to buy 12 million barrels of oil this year to replenish the nation's Strategic Petroleum Reserve. The reserve is an emergency depot maintained by the Energy Department and can hold as much as 727 million barrels of oil in salt caverns along the Gulf Coast. The DOE said the new supplies will replace those used after hurricanes Katrina and Rita severely crimped oil supplies in 2005.
The February contract for crude rose $5.57 on Wednesday, the last trading day of 2008, to settle at $44.60 after Russia threatened to cut off natural gas supplies to Ukraine. Russia followed through with that threat Thursday, though both countries pledged they would keep supplies to the rest of Europe flowing.
As of late Friday afternoon, no interruptions outside Ukraine were reported.
Analyst Olivier Jakob of energy analysis firm Petromatrix in Switzerland said Ukraine has enough reserves to avoid an immediate risk to its supplies, as long as both parties find an agreement by the end of next week.
The European Union depends on Russia for about a quarter of its gas, with about 80 percent of that delivered through pipelines controlled by Ukraine.
Concerns that the week-old conflict between Israel and Hamas in Gaza could disrupt supplies in the oil-rich Middle East helped keep prices from falling further.
The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months. Analysts say crude's direction in the early part of 2009 will be linked largely to whether the cartel adheres to the new quotas.
The national average at the pump rose slightly overnight but remains well below year-ago levels. The national average for regular unleaded rose eight-tenths of a cent to $1.626 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Still, prices are down 17.7 cents from a month ago and $1.426 from a year ago.
In other Nymex trading, gasoline futures rose 4.85 cents to $1.11 a gallon. Heating oil rose 3.8 cents to settle at $1.48 a gallon, while natural gas for February delivery jumped 24.9 cents to $5.971 per 1,000 cubic feet.
In London, February Brent crude rose $1.32 to settle at $46.91 a barrel on the ICE Futures exchange.
"If there is a disruption in natural gas supplies to Europe, then you will see an increase in the usage of oil instead of natural gas. It will have an impact on oil prices," Jakob said.
The Department of Energy said Friday it plans to take advantage of the huge drop in crude prices and is soliciting bids to buy 12 million barrels of oil this year to replenish the nation's Strategic Petroleum Reserve. The reserve is an emergency depot maintained by the Energy Department and can hold as much as 727 million barrels of oil in salt caverns along the Gulf Coast. The DOE said the new supplies will replace those used after hurricanes Katrina and Rita severely crimped oil supplies in 2005.
The February contract for crude rose $5.57 on Wednesday, the last trading day of 2008, to settle at $44.60 after Russia threatened to cut off natural gas supplies to Ukraine. Russia followed through with that threat Thursday, though both countries pledged they would keep supplies to the rest of Europe flowing.
As of late Friday afternoon, no interruptions outside Ukraine were reported.
Analyst Olivier Jakob of energy analysis firm Petromatrix in Switzerland said Ukraine has enough reserves to avoid an immediate risk to its supplies, as long as both parties find an agreement by the end of next week.
The European Union depends on Russia for about a quarter of its gas, with about 80 percent of that delivered through pipelines controlled by Ukraine.
Concerns that the week-old conflict between Israel and Hamas in Gaza could disrupt supplies in the oil-rich Middle East helped keep prices from falling further.
The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months. Analysts say crude's direction in the early part of 2009 will be linked largely to whether the cartel adheres to the new quotas.
The national average at the pump rose slightly overnight but remains well below year-ago levels. The national average for regular unleaded rose eight-tenths of a cent to $1.626 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Still, prices are down 17.7 cents from a month ago and $1.426 from a year ago.
In other Nymex trading, gasoline futures rose 4.85 cents to $1.11 a gallon. Heating oil rose 3.8 cents to settle at $1.48 a gallon, while natural gas for February delivery jumped 24.9 cents to $5.971 per 1,000 cubic feet.
In London, February Brent crude rose $1.32 to settle at $46.91 a barrel on the ICE Futures exchange.
"If there is a disruption in natural gas supplies to Europe, then you will see an increase in the usage of oil instead of natural gas. It will have an impact on oil prices," Jakob said.
A year after $100, oil prices cut in half part1
By JOHN WILEN AP Business Writer | AP
Exactly one year after crude eclipsed $100 a barrel for the first time, 2009 trading began Friday with prices roughly half their year-ago levels, and some believe oil could be headed even lower.
Oil markets kicked off the new year with crude climbing above $46 a barrel. A variety of factors were likely at work, including continued violence in Gaza and expectations that OPEC would carry out its largest production cut ever to stem historic price declines.
Oil market activity was also light as many traders took a long holiday weekend, and that can lead to price swings.
"I have a feeling, more than anything, it's the thin trading conditions pushing the price higher," said Peter Beutel of energy consultancy Cameron Hanover.
Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel on the New York Mercantile Exchange.
Oil's surge into triple digits for the first time one year ago was the start of a climb that would peak above $147 a barrel by July. Since then, amid fears of a prolonged global recession and crumbling worldwide demand, crude prices have plunged more than 70 percent.
Gasoline prices ticked up a bit overnight, but the average price for a gallon of unleaded is still more than $1.40 cheaper than a year ago.
"Thank goodness that's over!" Raymond James & Associates said in a note to clients Friday, summing up what many traders feel after the most volatile year since crude futures were first offered on Nymex in 1983.
The same gloomy economic data that drove prices into the mid-$30s in the final month of the year continued into 2009.
A private group's measure of manufacturing activity fell more than expected in December, hitting the lowest reading in 28 years as new orders and employment continue to decline. The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November. Wall Street economists surveyed by Thomson Reuters had expected the reading to fall to 35.5.
Any reading above 50 signals growth, while a reading below 50 indicates contraction. The index has fallen steadily for the last five months.
A weakened manufacturing sector suggests demand for energy will not rebound any time soon.
Exactly one year after crude eclipsed $100 a barrel for the first time, 2009 trading began Friday with prices roughly half their year-ago levels, and some believe oil could be headed even lower.
Oil markets kicked off the new year with crude climbing above $46 a barrel. A variety of factors were likely at work, including continued violence in Gaza and expectations that OPEC would carry out its largest production cut ever to stem historic price declines.
Oil market activity was also light as many traders took a long holiday weekend, and that can lead to price swings.
"I have a feeling, more than anything, it's the thin trading conditions pushing the price higher," said Peter Beutel of energy consultancy Cameron Hanover.
Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel on the New York Mercantile Exchange.
Oil's surge into triple digits for the first time one year ago was the start of a climb that would peak above $147 a barrel by July. Since then, amid fears of a prolonged global recession and crumbling worldwide demand, crude prices have plunged more than 70 percent.
Gasoline prices ticked up a bit overnight, but the average price for a gallon of unleaded is still more than $1.40 cheaper than a year ago.
"Thank goodness that's over!" Raymond James & Associates said in a note to clients Friday, summing up what many traders feel after the most volatile year since crude futures were first offered on Nymex in 1983.
The same gloomy economic data that drove prices into the mid-$30s in the final month of the year continued into 2009.
A private group's measure of manufacturing activity fell more than expected in December, hitting the lowest reading in 28 years as new orders and employment continue to decline. The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November. Wall Street economists surveyed by Thomson Reuters had expected the reading to fall to 35.5.
Any reading above 50 signals growth, while a reading below 50 indicates contraction. The index has fallen steadily for the last five months.
A weakened manufacturing sector suggests demand for energy will not rebound any time soon.
Where to Locate Your Business part 2
Most small companies aren't simply looking for the cheapest place to do business, Ubalde says. Instead entrepreneurs tend to ask where they can find the best workers,, as Rousselle did. That's why cities like New York and San Francisco remain attractive despite their high costs, Ubalde says.
Aside from the labor pool, tax rates differ significantly from state to state, and they may be more important for small businesses with few employees. S-corporations and other companies that don't pay corporate income taxes can benefit from states that have low personal income tax. Moving from California to Washington state, for example, could save a small business owner 9% or 10% of taxable income, according to data from the Tax Foundation, a nonprofit Washington, D.C. research group.
Haphazard Approach Not Uncommon
Areas with low taxes often also have lower costs, and the combination can entice entrepreneurs who are priced out of places that are more in-demand, says Tax Foundation economist Josh Barro. "If you're looking for a place where you can start your small business with reasonable costs, you might not be able to do it in New York or New Jersey, but you might be able to do it in Florida," he says. (For a look at the Tax Foundation's list of 25 states with the lowest projected tax rates for 2009, flip through this slide show.)
Those small businesses in a position to create jobs can appeal to local economic development groups for help. Blaine Kern, CEO of forensics lab Human Identification Technologies, found an expansion site in September in Kirkesville, Mo., through Site Selection Network. The Mission Viejo (Calif.) company offers a free service that distributes proposals from companies to 162 economic development groups, who pay for membership in the network. Kern plans to hire between 100 and 200 workers there over the next five years. His current lab, in Redlands, Calif., has fewer than 20 employees and around $7 million in revenues. "If you look at our ability to lower price point and increase profit margin, the labor pool in Missouri is about 41% less expensive when it comes to salary," he says. That's savings on top of refundable tax credits from the state.
Small business owners have long taken a haphazard approach to choosing a location, says ZoomProspector's Ubalde, which puts them at a disadvantage. That might be a minor drag in good times, but in a downturn it can mean the difference between survival and failure. "For some businesses it's the difference of literally millions of dollars each way in affecting the bottom line," Ubalde says.
Tozzi covers small business for BusinessWeek.com.
Aside from the labor pool, tax rates differ significantly from state to state, and they may be more important for small businesses with few employees. S-corporations and other companies that don't pay corporate income taxes can benefit from states that have low personal income tax. Moving from California to Washington state, for example, could save a small business owner 9% or 10% of taxable income, according to data from the Tax Foundation, a nonprofit Washington, D.C. research group.
Haphazard Approach Not Uncommon
Areas with low taxes often also have lower costs, and the combination can entice entrepreneurs who are priced out of places that are more in-demand, says Tax Foundation economist Josh Barro. "If you're looking for a place where you can start your small business with reasonable costs, you might not be able to do it in New York or New Jersey, but you might be able to do it in Florida," he says. (For a look at the Tax Foundation's list of 25 states with the lowest projected tax rates for 2009, flip through this slide show.)
Those small businesses in a position to create jobs can appeal to local economic development groups for help. Blaine Kern, CEO of forensics lab Human Identification Technologies, found an expansion site in September in Kirkesville, Mo., through Site Selection Network. The Mission Viejo (Calif.) company offers a free service that distributes proposals from companies to 162 economic development groups, who pay for membership in the network. Kern plans to hire between 100 and 200 workers there over the next five years. His current lab, in Redlands, Calif., has fewer than 20 employees and around $7 million in revenues. "If you look at our ability to lower price point and increase profit margin, the labor pool in Missouri is about 41% less expensive when it comes to salary," he says. That's savings on top of refundable tax credits from the state.
Small business owners have long taken a haphazard approach to choosing a location, says ZoomProspector's Ubalde, which puts them at a disadvantage. That might be a minor drag in good times, but in a downturn it can mean the difference between survival and failure. "For some businesses it's the difference of literally millions of dollars each way in affecting the bottom line," Ubalde says.
Tozzi covers small business for BusinessWeek.com.
Where to Locate Your Business part 1
By John Tozzi
Adam Rousselle needed to move. His firm, then based in Doylestown, Pa., uses sophisticated technology to identify trees that threaten to take down power lines, and demand from power companies was surging. By last summer, he expected to increase Utility Risk Management's eight-person staff with dozens of new engineers, programmers, and mathematicians. But 25 miles outside Philadelphia, his 3-year-old, $10 million company was too small a player to attract that much talent that quickly.
So in July, Rousselle relocated to the ski town of Stowe, in Vermont, a state with roughly the same population as Bucks County, Pa. He now has the attention of Vermont Governor Jim Douglas and other leaders in government, industry, and academia, all eager to bring technology jobs to a state heavily reliant on tourism. It's attention his small firm didn't get in Pennsylvania. "The governor came to welcome 18 people who came to my job fair," Rousselle says. He now plans to hire 26 people before the end of February.
Each year, entrepreneurs start or expand some 650,000 small companies, according to data from the Small Business Administration. Choosing the right place can mean the difference between profitability and failure. But few small business owners put the same care into locating their companies that Rousselle did, consultants who specialize in site selection say.
State Incentives a Plus
Large corporations typically pay professionals high fees to find the best location for new plants, offices, or stores. But the cost can be prohibitive for small companies, ranging from $50,000 to $125,000 or more. Small firms may hire consultants for key projects, but they more often work with local economic developers, says Mark Arend, editor of Site Selection, a trade publication covering the industry."
Rousselle considered three states besides Vermont to relocate Utility Risk Management: Michigan, Florida, and elsewhere in Pennsylvania. In the end, he says, the labor force, financial incentives, and support from state officials made Vermont the best fit. In addition to mobilizing state leaders to recruit for the company, Utility Risk Management will benefit from an estimated $380,000 in cash incentives through the Vermont Employment Growth Incentive program. Rousselle says he can get up to $5,000 per employee each year to train them in specific skills his customers want. And, he says, he can offer lower salaries than he needed to in Bucks County and still be competitive in the labor market.
The choice won't be as clear cut for most small business owners. Many factors affect whether a place is a good location for a particular business, including the labor force, tax rates, distance from suppliers and distributors, access to transportation, and the local market for the company's products or services. "Is there a perfect location? There is no such thing," says Anatalio Ubalde, co-founder of GIS Planning, a San Francisco company that analyzes geographic data for economic developers. "Is there a better location than another one? The answer is yes."
ZoomProspector Offers Free Help
GIS Planning launched a site three months ago called ZoomProspector.com, designed to help entrepreneurs find and evaluate potential sites based on what attributes of a place matter most to their business. Other Web sites like City-data.com provide local information, but Ubalde says ZoomProspector's proprietary data, much of it collected from the company's economic development clients, offers small business owners access to the same information large companies use when they decide where to site new locations. ZoomProspector is free for users and makes money by selling geographically targeted advertising, Ubalde says.
Adam Rousselle needed to move. His firm, then based in Doylestown, Pa., uses sophisticated technology to identify trees that threaten to take down power lines, and demand from power companies was surging. By last summer, he expected to increase Utility Risk Management's eight-person staff with dozens of new engineers, programmers, and mathematicians. But 25 miles outside Philadelphia, his 3-year-old, $10 million company was too small a player to attract that much talent that quickly.
So in July, Rousselle relocated to the ski town of Stowe, in Vermont, a state with roughly the same population as Bucks County, Pa. He now has the attention of Vermont Governor Jim Douglas and other leaders in government, industry, and academia, all eager to bring technology jobs to a state heavily reliant on tourism. It's attention his small firm didn't get in Pennsylvania. "The governor came to welcome 18 people who came to my job fair," Rousselle says. He now plans to hire 26 people before the end of February.
Each year, entrepreneurs start or expand some 650,000 small companies, according to data from the Small Business Administration. Choosing the right place can mean the difference between profitability and failure. But few small business owners put the same care into locating their companies that Rousselle did, consultants who specialize in site selection say.
State Incentives a Plus
Large corporations typically pay professionals high fees to find the best location for new plants, offices, or stores. But the cost can be prohibitive for small companies, ranging from $50,000 to $125,000 or more. Small firms may hire consultants for key projects, but they more often work with local economic developers, says Mark Arend, editor of Site Selection, a trade publication covering the industry."
Rousselle considered three states besides Vermont to relocate Utility Risk Management: Michigan, Florida, and elsewhere in Pennsylvania. In the end, he says, the labor force, financial incentives, and support from state officials made Vermont the best fit. In addition to mobilizing state leaders to recruit for the company, Utility Risk Management will benefit from an estimated $380,000 in cash incentives through the Vermont Employment Growth Incentive program. Rousselle says he can get up to $5,000 per employee each year to train them in specific skills his customers want. And, he says, he can offer lower salaries than he needed to in Bucks County and still be competitive in the labor market.
The choice won't be as clear cut for most small business owners. Many factors affect whether a place is a good location for a particular business, including the labor force, tax rates, distance from suppliers and distributors, access to transportation, and the local market for the company's products or services. "Is there a perfect location? There is no such thing," says Anatalio Ubalde, co-founder of GIS Planning, a San Francisco company that analyzes geographic data for economic developers. "Is there a better location than another one? The answer is yes."
ZoomProspector Offers Free Help
GIS Planning launched a site three months ago called ZoomProspector.com, designed to help entrepreneurs find and evaluate potential sites based on what attributes of a place matter most to their business. Other Web sites like City-data.com provide local information, but Ubalde says ZoomProspector's proprietary data, much of it collected from the company's economic development clients, offers small business owners access to the same information large companies use when they decide where to site new locations. ZoomProspector is free for users and makes money by selling geographically targeted advertising, Ubalde says.
Mortgages: What You Need to Know in 2009 part 2
Check Your Finances
The hurdles to get one of those low fixed-rate loans are high because Fannie Mae (FNM) and Freddie Mac (FRE) have tightened standards for the loans they'll buy or guarantee, even though the two mortgage finance giants are now under government conservatorship. You'll need a FICO score of at least 720 for the best interest rate, although for a big enough fee Fannie and Freddie will guarantee loans with FICO scores down to the mid-600s. You may also need a down payment of 20%. In the boom times you could get a "piggyback" loan to shrink your down payment, but those are history. Even private mortgage insurance, which used to cover some of the financing gap up to 20%, is much harder to get now because the issuers have suffered big losses.
Lately, says LendingTree's Findlay, the highest hurdle for many buyers has been lenders' debt-to-income standards. Here are the numbers, as of late December, according to LendingTree: For a Fannie or Freddie conforming loan, monthly mortgage payments cannot exceed 28% of gross income, while all debt payments (including student loans, etc.) cannot exceed 36% of gross income.
For a Federal Housing Administration-guaranteed loan, the corresponding figures are 29% for mortgage debt and 41% for all debt.
Before Making an Offer, Get Pre-Qualified
Home sellers are likely to give you a better deal on a house if you're pre-qualified for a mortgage. Why? Because it shows you can get the deal done quickly. In this market, nothing burns a seller more than being strung along by a buyer who wants the house but can't qualify for a loan to buy it.
First-Time Borrowers: Get Credit Counseling
A lot of the mess we're in now could have been avoided if first-time home buyers had paid attention to warnings about getting overextended. If you don't want to listen to your parents or nosy brother-in-law, then visit a credit counseling agency. Says Rick Sharga, marketing vice-president at RealtyTrac: "Most people getting into the market for the first time seriously underestimate the cost of maintaining a home, from taxes to upkeep. What happens if that water heater blows? Do you have enough money to pay for it without missing a mortgage payment?"
Think Hard About Refinancing Now
The decision about when to refinance comes down to personal risk preferences. Of course, you should also run your numbers through one of the many online calculators (a rough rule of thumb is that it makes sense to refinance if the new rate is a full percentage point below your current rate and you don't plan to move soon).
The argument to wait, as expressed by BanxQuote.com President Norbert Mehl, is that the Federal Reserve and Treasury Dept. are determined to force mortgage rates lower in 2009 and are bound to have their way. Says Mehl: "The pressure on the banks will continue to mount to bring down interest rates, not just on mortgages but on all kinds of personal loans."
In contrast, LendingTree.com's Findlay says that while it's reasonable to guess that rates will fall more, nothing's for sure. "Rates have come down so fast that trying to pick the bottom is a mistake," he says. "Their propensity to slingshot back up is high." He votes for refinancing now if the numbers work.
So, pull the trigger or wait? Nobody but you can decide this one.
Coy is BusinessWeek's Economics editor.
The hurdles to get one of those low fixed-rate loans are high because Fannie Mae (FNM) and Freddie Mac (FRE) have tightened standards for the loans they'll buy or guarantee, even though the two mortgage finance giants are now under government conservatorship. You'll need a FICO score of at least 720 for the best interest rate, although for a big enough fee Fannie and Freddie will guarantee loans with FICO scores down to the mid-600s. You may also need a down payment of 20%. In the boom times you could get a "piggyback" loan to shrink your down payment, but those are history. Even private mortgage insurance, which used to cover some of the financing gap up to 20%, is much harder to get now because the issuers have suffered big losses.
Lately, says LendingTree's Findlay, the highest hurdle for many buyers has been lenders' debt-to-income standards. Here are the numbers, as of late December, according to LendingTree: For a Fannie or Freddie conforming loan, monthly mortgage payments cannot exceed 28% of gross income, while all debt payments (including student loans, etc.) cannot exceed 36% of gross income.
For a Federal Housing Administration-guaranteed loan, the corresponding figures are 29% for mortgage debt and 41% for all debt.
Before Making an Offer, Get Pre-Qualified
Home sellers are likely to give you a better deal on a house if you're pre-qualified for a mortgage. Why? Because it shows you can get the deal done quickly. In this market, nothing burns a seller more than being strung along by a buyer who wants the house but can't qualify for a loan to buy it.
First-Time Borrowers: Get Credit Counseling
A lot of the mess we're in now could have been avoided if first-time home buyers had paid attention to warnings about getting overextended. If you don't want to listen to your parents or nosy brother-in-law, then visit a credit counseling agency. Says Rick Sharga, marketing vice-president at RealtyTrac: "Most people getting into the market for the first time seriously underestimate the cost of maintaining a home, from taxes to upkeep. What happens if that water heater blows? Do you have enough money to pay for it without missing a mortgage payment?"
Think Hard About Refinancing Now
The decision about when to refinance comes down to personal risk preferences. Of course, you should also run your numbers through one of the many online calculators (a rough rule of thumb is that it makes sense to refinance if the new rate is a full percentage point below your current rate and you don't plan to move soon).
The argument to wait, as expressed by BanxQuote.com President Norbert Mehl, is that the Federal Reserve and Treasury Dept. are determined to force mortgage rates lower in 2009 and are bound to have their way. Says Mehl: "The pressure on the banks will continue to mount to bring down interest rates, not just on mortgages but on all kinds of personal loans."
In contrast, LendingTree.com's Findlay says that while it's reasonable to guess that rates will fall more, nothing's for sure. "Rates have come down so fast that trying to pick the bottom is a mistake," he says. "Their propensity to slingshot back up is high." He votes for refinancing now if the numbers work.
So, pull the trigger or wait? Nobody but you can decide this one.
Coy is BusinessWeek's Economics editor.
Mortgages: What You Need to Know in 2009 part 1
By Peter Coy
With all the doom and gloom over housing, you might be surprised to know that this is a fantastic time to get a mortgage. Not if you have poor credit, to be sure. But you can get a great deal on a 30-year, fixed-rate, conforming loan these days if you have a solid FICO score, a manageable debt burden, and proof positive of a reliable income.
You have to go back to around 1961 to find a time when 30-year mortgages had rates this low, according to Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, N.J. For that, thank the U.S. government, which is trying to jump-start the stalled housing market by buying up mortgage-backed securities. On Dec. 31, Freddie Mac reported that average rates on 30-year fixed mortgages dropped to 5.1% for the week, down about 1.3 percentage points since late October and the lowest since its survey began in 1971.
Rates are probably headed even lower in 2009, raising the question of whether you should borrow now or wait for a better deal. The experts are sharply divided over this one. Put it this way: If you're a gambler, wait. If you can't sleep at night worrying that rates will go up from here, borrow now.
Here are some key things you need to know about today's mortgage market:
Now More Than Ever, Shop Around
In ordinary times, one loan is about as good as another because most lenders' offers on 30-year loans are clustered within around a quarter of a percentage point. Not now. With the economy so shaky, lenders are all over the map in how much risk they're willing to take in making loans. So it really pays to shop around. And keep checking, because rates are constantly changing. One day in late December 2008, Wells Fargo (WFC) was offering 30-year conforming loans at 5.0% plus one point, while Bank of America (BAC) was offering the same kind of loan at 6.625% plus one point, according to Cameron Findlay, chief economist of LendingTree.com, a division of Home Loan Center. No offense to Bank of America, but only a sucker would have borrowed from it instead of Wells Fargo that day.
For New Loans, Get a Fixed Rate
Forget what you were told in quieter times about the pros and cons of fixed- vs. adjustable-rate mortgage loans. These days, all the best deals are on fixed-rate loans because that's the segment of the market that the government has been targeting with support. The securitization of adjustable-rate loans has mostly dried up, so banks don't want to originate ARMs, therefore they don't offer attractive rates on them, says HSH's Gumbinger.
If You Have an ARM, Keep It for Now
On the other hand, if you got an ARM in the past and it's coming up on an interest rate reset, don't rush to unload it. Short-term interest rates have gotten so low that you're very likely to see your monthly payment fall. Thank your lucky stars if your ARM happens to be indexed to the one-year Treasury bill, whose yield has fallen below half a percent. Even with the typical spread added on, you're still paying only around 3.25% a year, says Gumbinger. ARMs indexed to LIBOR (the London Interbank Offered Rate) are resetting these days to the low 4s, which is still excellent.
With all the doom and gloom over housing, you might be surprised to know that this is a fantastic time to get a mortgage. Not if you have poor credit, to be sure. But you can get a great deal on a 30-year, fixed-rate, conforming loan these days if you have a solid FICO score, a manageable debt burden, and proof positive of a reliable income.
You have to go back to around 1961 to find a time when 30-year mortgages had rates this low, according to Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, N.J. For that, thank the U.S. government, which is trying to jump-start the stalled housing market by buying up mortgage-backed securities. On Dec. 31, Freddie Mac reported that average rates on 30-year fixed mortgages dropped to 5.1% for the week, down about 1.3 percentage points since late October and the lowest since its survey began in 1971.
Rates are probably headed even lower in 2009, raising the question of whether you should borrow now or wait for a better deal. The experts are sharply divided over this one. Put it this way: If you're a gambler, wait. If you can't sleep at night worrying that rates will go up from here, borrow now.
Here are some key things you need to know about today's mortgage market:
Now More Than Ever, Shop Around
In ordinary times, one loan is about as good as another because most lenders' offers on 30-year loans are clustered within around a quarter of a percentage point. Not now. With the economy so shaky, lenders are all over the map in how much risk they're willing to take in making loans. So it really pays to shop around. And keep checking, because rates are constantly changing. One day in late December 2008, Wells Fargo (WFC) was offering 30-year conforming loans at 5.0% plus one point, while Bank of America (BAC) was offering the same kind of loan at 6.625% plus one point, according to Cameron Findlay, chief economist of LendingTree.com, a division of Home Loan Center. No offense to Bank of America, but only a sucker would have borrowed from it instead of Wells Fargo that day.
For New Loans, Get a Fixed Rate
Forget what you were told in quieter times about the pros and cons of fixed- vs. adjustable-rate mortgage loans. These days, all the best deals are on fixed-rate loans because that's the segment of the market that the government has been targeting with support. The securitization of adjustable-rate loans has mostly dried up, so banks don't want to originate ARMs, therefore they don't offer attractive rates on them, says HSH's Gumbinger.
If You Have an ARM, Keep It for Now
On the other hand, if you got an ARM in the past and it's coming up on an interest rate reset, don't rush to unload it. Short-term interest rates have gotten so low that you're very likely to see your monthly payment fall. Thank your lucky stars if your ARM happens to be indexed to the one-year Treasury bill, whose yield has fallen below half a percent. Even with the typical spread added on, you're still paying only around 3.25% a year, says Gumbinger. ARMs indexed to LIBOR (the London Interbank Offered Rate) are resetting these days to the low 4s, which is still excellent.
2 big banking sector acquisitions completed
By HARRY R. WEBER
ATLANTA
Two mega acquisitions in the banking sector have been completed following the biggest financial crisis to hit the United States since the 1930s, capping a year in which Wall Street stocks were hammered, home foreclosure rates soared and job losses mounted.
Bank of America Corp. said Thursday it has completed its $19.4 billion all-stock purchase of Merrill Lynch & Co., while Wells Fargo & Co. said it has completed its $12.7 billion all-stock purchase of Wachovia Corp.
Merrill Lynch's sale to Charlotte, N.C.-based Bank of America, announced Sept. 15, creates the nation's largest financial services company. San Francisco-based Wells Fargo's purchase of Wachovia, a deal that was announced Oct. 3, creates a coast-to-coast powerhouse with community banks in 39 states and the District of Columbia.
Shareholders of Merrill Lynch received 0.8595 shares of Bank of America common stock for each common share of Merrill Lynch they owned. That valued Merrill Lynch at $19.4 billion based on 1.6 billion Merrill common shares outstanding as of the last filing date and Wednesday's Bank of America closing stock price of $14.08.
Wachovia shareholders received 0.1991 shares of Wells Fargo common stock in exchange for each share of Wachovia common stock they owned. That valued Wachovia at $12.7 billion based on 2.16 billion Wachovia common shares outstanding as of the last filing date and Wednesday's Wells Fargo closing stock price of $29.48.
Besides acquisitions, the turmoil in the banking sector has brought announcements of big job cuts and loans to several banks from the government's $700 billion rescue fund.
The Bank of America-Merrill Lynch deal was struck as the solvency of investment banks was in grave doubt, and kept Merrill, which lost billions of dollars in the subprime mortgage crisis, from a complete meltdown like the one suffered by Lehman Brothers Holdings Inc., which was forced to file for bankruptcy.
New York-based Citigroup agreed to step in and buy Wachovia's banking operations for $2.1 billion with the help of the Federal Deposit Insurance Corp. But only four days later, Wells Fargo made a higher offer that did not hinge on any government support and ultimately won the right to purchase all of Wachovia and its businesses and obligations, including all of its banking deposits.
On Dec. 11, Bank of America said it expected to cut 30,000 to 35,000 jobs over the next three years. The final number could be even higher, analysts say. Bank of America said at the time it hadn't yet completed its analysis for eliminating positions, and wouldn't until early this year. Including Merrill Lynch, Bank of America has about 308,000 employees. It said the cuts would affect workers from both companies.
Bank of America reiterated Thursday it expects to achieve $7 billion in pretax expense savings by 2012. It said the cost reductions would come from a range of sources, including the previously announced job cuts and the reduction of overlapping technology, vendor and marketing expenses.
Bank of America said it will have the largest wealth management business in the world with roughly 20,000 financial advisors and more than $2 trillion in client assets. It said the combination also adds strengths in debt and equity underwriting, sales and trading, and merger and acquisition advice, creating significant opportunities to deepen relationships with corporate and institutional clients around the globe.
As for Wells Fargo, it said that with Wachovia, it now has $1.4 trillion in assets and for the first time has a community banking presence in Alabama, Connecticut, Delaware, Florida, Georgia, Kansas, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. As of Thursday, Wells Fargo and Wachovia customers have free use of all of the company's combined ATMs, Wells Fargo said.
There did not appear to be any plans to immediately change the Wachovia name to Wells Fargo. A Nov. 24 regulatory filing said that the plan to integrate Wells Fargo and Wachovia operations was still being developed. The filing said an estimated $1.9 billion in costs was expected to be incurred over time due to "branch and administrative site consolidations, name change and signage."
The chief of Bank of America has said previously the bank intends to keep the Merrill Lynch name intact.
ATLANTA
Two mega acquisitions in the banking sector have been completed following the biggest financial crisis to hit the United States since the 1930s, capping a year in which Wall Street stocks were hammered, home foreclosure rates soared and job losses mounted.
Bank of America Corp. said Thursday it has completed its $19.4 billion all-stock purchase of Merrill Lynch & Co., while Wells Fargo & Co. said it has completed its $12.7 billion all-stock purchase of Wachovia Corp.
Merrill Lynch's sale to Charlotte, N.C.-based Bank of America, announced Sept. 15, creates the nation's largest financial services company. San Francisco-based Wells Fargo's purchase of Wachovia, a deal that was announced Oct. 3, creates a coast-to-coast powerhouse with community banks in 39 states and the District of Columbia.
Shareholders of Merrill Lynch received 0.8595 shares of Bank of America common stock for each common share of Merrill Lynch they owned. That valued Merrill Lynch at $19.4 billion based on 1.6 billion Merrill common shares outstanding as of the last filing date and Wednesday's Bank of America closing stock price of $14.08.
Wachovia shareholders received 0.1991 shares of Wells Fargo common stock in exchange for each share of Wachovia common stock they owned. That valued Wachovia at $12.7 billion based on 2.16 billion Wachovia common shares outstanding as of the last filing date and Wednesday's Wells Fargo closing stock price of $29.48.
Besides acquisitions, the turmoil in the banking sector has brought announcements of big job cuts and loans to several banks from the government's $700 billion rescue fund.
The Bank of America-Merrill Lynch deal was struck as the solvency of investment banks was in grave doubt, and kept Merrill, which lost billions of dollars in the subprime mortgage crisis, from a complete meltdown like the one suffered by Lehman Brothers Holdings Inc., which was forced to file for bankruptcy.
New York-based Citigroup agreed to step in and buy Wachovia's banking operations for $2.1 billion with the help of the Federal Deposit Insurance Corp. But only four days later, Wells Fargo made a higher offer that did not hinge on any government support and ultimately won the right to purchase all of Wachovia and its businesses and obligations, including all of its banking deposits.
On Dec. 11, Bank of America said it expected to cut 30,000 to 35,000 jobs over the next three years. The final number could be even higher, analysts say. Bank of America said at the time it hadn't yet completed its analysis for eliminating positions, and wouldn't until early this year. Including Merrill Lynch, Bank of America has about 308,000 employees. It said the cuts would affect workers from both companies.
Bank of America reiterated Thursday it expects to achieve $7 billion in pretax expense savings by 2012. It said the cost reductions would come from a range of sources, including the previously announced job cuts and the reduction of overlapping technology, vendor and marketing expenses.
Bank of America said it will have the largest wealth management business in the world with roughly 20,000 financial advisors and more than $2 trillion in client assets. It said the combination also adds strengths in debt and equity underwriting, sales and trading, and merger and acquisition advice, creating significant opportunities to deepen relationships with corporate and institutional clients around the globe.
As for Wells Fargo, it said that with Wachovia, it now has $1.4 trillion in assets and for the first time has a community banking presence in Alabama, Connecticut, Delaware, Florida, Georgia, Kansas, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. As of Thursday, Wells Fargo and Wachovia customers have free use of all of the company's combined ATMs, Wells Fargo said.
There did not appear to be any plans to immediately change the Wachovia name to Wells Fargo. A Nov. 24 regulatory filing said that the plan to integrate Wells Fargo and Wachovia operations was still being developed. The filing said an estimated $1.9 billion in costs was expected to be incurred over time due to "branch and administrative site consolidations, name change and signage."
The chief of Bank of America has said previously the bank intends to keep the Merrill Lynch name intact.
Stocks to Fulfill Those New Year's Resolutions part 2
Spend More Time with Family
Even when things at their workplace are relatively stable, many people view the start of a new year as a chance to rearrange priorities in order to spend more time with their families. That can be done on the cheap by staying home more frequently to play games and by volunteering time to help coach after-school sports programs. Resolutions might also include plans for family vacations and other outings.
Theme parks such as those run by Walt Disney (DIS) could benefit from such determination, but they're also more vulnerable to consumer pullbacks in the tough economic environment. Disney's theme parks generate about 20% of the company's operating income, according to Jeffrey Logsdon, an analyst at BMO Capital Markets.
David Miller, an analyst at Caris & Co. in Los Angeles, thinks the Wall Street consensus forecast for Disney's profits in fiscal year 2009 is overly pessimistic. "We believe sufficient evidence exists to suggest that Disney will block and tackle against this recession more nimbly that what is currently reflected in the stock price," he wrote in a Dec. 9 research note. Therefore the opportunity to buy shares at less than 12 times fiscal 2009 earnings is too compelling to ignore, he said.
Miller predicts Disney's theme park revenues will decline 6.4% this year, with attendance expected to drop by 7.4%, and per-person spending to improve by 1%. That translates to a projected 13.2% drop in earnings before interest and taxes—which he believes is conservative, given that Disney hasn't backed off from last August's price hikes at both U.S. parks and hasn't cut park hours, as it did during the 2001 recession.
A weakened U.S. dollar helped Disney attract visitors from overseas for most of 2008, and the recent strengthening of the greenback has taken only a little of that benefit off the table, says Jeffrey Logsdon, an analyst at BMO Capital Markets. He doubts many Europeans will opt against a Disney vacation because of minor swings in the euro's value against the dollar.
The tendency of U.S. consumers to stay closer to home during recession probably works in Disney's favor, says Logsdon. Locals account for about two-thirds of the visitors to Disneyland in California and for between 33% and 40% of visitors to Disney World in Florida, he estimates. Disney is also maintaining traffic through promotions such as offering seven nights in its hotels for the price of four, which should drive bookings at least until the summer, he predicts.
Taking Charge of Finances
After seeing so much of their hard-earned retirement savings evaporate as financial markets collapsed—plus the Bernard Madoff investing scandal—people are considering changing the way they manage their investment portfolios as well. No matter which type of investment or adviser they favored, pain has been widespread. "They're inclined to reevaluate and for that reason there's likely to be a fair amount of movement between [financial services] firms," says Jeffrey Hopson, an analyst at Stifel Nicolaus in St. Louis. But because it's clear that people who handled their own portfolios didn't necessarily do any better, it remains to be seen if there will be greater demand for online brokers, he adds.
Charles Schwab (SCHW) came through the financial debacle pretty well, and is "likely to pick up market share from traditional brokerage firms that have had bad publicity," such as Merrill Lynch, says Hopson.
Besides being fairly low-cost, Schwab's platform is also user-friendly, allowing clients to decide how they want to be serviced. They can choose telephone, Internet, or personal service from a dedicated financial adviser. Plus the company's product line doesn't have a lot of biases—meaning its advisers don't try to push certain investment products on clients. "The quality of the company and the fact they've gotten through this [financial crisis] without any issues, I think, gives people comfort," says Hopson. Another advantage is that Schwab derives less of its revenue from broker fees than many of its peers.
For now, there's no question that many people are glad 2008 is ending. They'll ring in the New Year with hopes of better times and opportunities to come.
Bogoslaw is a reporter for BusinessWeek's Investing channel.
Even when things at their workplace are relatively stable, many people view the start of a new year as a chance to rearrange priorities in order to spend more time with their families. That can be done on the cheap by staying home more frequently to play games and by volunteering time to help coach after-school sports programs. Resolutions might also include plans for family vacations and other outings.
Theme parks such as those run by Walt Disney (DIS) could benefit from such determination, but they're also more vulnerable to consumer pullbacks in the tough economic environment. Disney's theme parks generate about 20% of the company's operating income, according to Jeffrey Logsdon, an analyst at BMO Capital Markets.
David Miller, an analyst at Caris & Co. in Los Angeles, thinks the Wall Street consensus forecast for Disney's profits in fiscal year 2009 is overly pessimistic. "We believe sufficient evidence exists to suggest that Disney will block and tackle against this recession more nimbly that what is currently reflected in the stock price," he wrote in a Dec. 9 research note. Therefore the opportunity to buy shares at less than 12 times fiscal 2009 earnings is too compelling to ignore, he said.
Miller predicts Disney's theme park revenues will decline 6.4% this year, with attendance expected to drop by 7.4%, and per-person spending to improve by 1%. That translates to a projected 13.2% drop in earnings before interest and taxes—which he believes is conservative, given that Disney hasn't backed off from last August's price hikes at both U.S. parks and hasn't cut park hours, as it did during the 2001 recession.
A weakened U.S. dollar helped Disney attract visitors from overseas for most of 2008, and the recent strengthening of the greenback has taken only a little of that benefit off the table, says Jeffrey Logsdon, an analyst at BMO Capital Markets. He doubts many Europeans will opt against a Disney vacation because of minor swings in the euro's value against the dollar.
The tendency of U.S. consumers to stay closer to home during recession probably works in Disney's favor, says Logsdon. Locals account for about two-thirds of the visitors to Disneyland in California and for between 33% and 40% of visitors to Disney World in Florida, he estimates. Disney is also maintaining traffic through promotions such as offering seven nights in its hotels for the price of four, which should drive bookings at least until the summer, he predicts.
Taking Charge of Finances
After seeing so much of their hard-earned retirement savings evaporate as financial markets collapsed—plus the Bernard Madoff investing scandal—people are considering changing the way they manage their investment portfolios as well. No matter which type of investment or adviser they favored, pain has been widespread. "They're inclined to reevaluate and for that reason there's likely to be a fair amount of movement between [financial services] firms," says Jeffrey Hopson, an analyst at Stifel Nicolaus in St. Louis. But because it's clear that people who handled their own portfolios didn't necessarily do any better, it remains to be seen if there will be greater demand for online brokers, he adds.
Charles Schwab (SCHW) came through the financial debacle pretty well, and is "likely to pick up market share from traditional brokerage firms that have had bad publicity," such as Merrill Lynch, says Hopson.
Besides being fairly low-cost, Schwab's platform is also user-friendly, allowing clients to decide how they want to be serviced. They can choose telephone, Internet, or personal service from a dedicated financial adviser. Plus the company's product line doesn't have a lot of biases—meaning its advisers don't try to push certain investment products on clients. "The quality of the company and the fact they've gotten through this [financial crisis] without any issues, I think, gives people comfort," says Hopson. Another advantage is that Schwab derives less of its revenue from broker fees than many of its peers.
For now, there's no question that many people are glad 2008 is ending. They'll ring in the New Year with hopes of better times and opportunities to come.
Bogoslaw is a reporter for BusinessWeek's Investing channel.
Stocks to Fulfill Those New Year's Resolutions part 1
By David Bogoslaw
As 2008 becomes a bitter and fading memory, it's fair to assume U.S. consumers are doing what they usually do as they ring in a New Year: make yet another round of resolutions that range from losing weight to eating more healthfully, and to spending more quality time with their families. This year there's a catch. Most lifestyle changes call for discretionary spending, and with the recession expected to deepen and bring more job losses, people tend to forego changes until they feel more financially secure.
Losing weight is usually the top priority when it comes to making New Year's resolutions. Over the long term the weight loss industry has been benefiting from increasing obesity both in the U.S. and abroad. Weight Watchers (WTW) and NutriSystem (NTRI) are two of the leading diet programs—and each work, says Greg Badashkanian, an analyst at Citigroup Global Markets.
Over the last two quarters, attendance in both programs has slowed a little as fewer new users have joined because of the softening economy, says Badashkanian. Feeling besieged by worries about shrinking home values and investment portfolios—as well as the looming threat of unemployment—some people may seek refuge in comfort foods and make shedding pounds a lesser priority. "January is obviously the most important time for diet companies because you have all these New Year's resolutions that dieters make," he says. "With the tough economy and the negative headlines from news stories on their minds, will they decide to go on a diet or maybe forgo that?"
Dieting can save money
Weight loss programs are a low-cost discretionary purchase compared with much more expensive items like recreational vehicles, whose sales are down more than 50%, says Badashkanian. Since NutriSystem customers get all of their food needs filled for just $10 a day, he sees that program as more of a staple. But while $10 a day for food is a bargain, NutriSystem still shows up on credit cards as a $300-a-month charge. "So,in their minds, there could be some reluctance to make that purchase," Badashkanian says.
Weight Watchers charges $10 a week for a support service with information to help people diet. That translates to a lower monthly expense, but doesn't include food, he says.
Given the weak economic outlook for 2009, Karen Howland, an analyst who covers healthy lifestyle stocks for Barclays Capital, expects the companies she follows to increase sales by only 3.3% this year, vs. 8.6% growth in 2008. "Most of our stocks have strong free cash flow and limited financing needs and should not need to access the capital markets in 2009 or 2010," she said in a Dec. 18 research note.
The $163 million of debt that Weight Watchers has to repay in fiscal year 2009 represents roughly 90% of what Barclays estimates will be the company's free cash flow, which includes the annual dividend.
Staying Fit
Health and exercise clubs such as Life Time Fitness (LTM) and Town Sports (CLUB) also typically benefit from New Year's resolutions, but economic stress may hamper their growth this year, some analysts say, In her note, Howland at Barclays warned that earnings for the healthy lifestyle stocks she covers could fall 7.9% on average in 2009—much more than the 1.9% drop projected by Wall Street, and compared with no change in 2008 from the prior year. These companies tend to be highly sensitive to consumer confidence and spending, she said.
Even though Howland trimmed her fiscal 2009 earnings estimate for Life Time to $2.09 per share, from $2.20, she predicts it will still increase profits by 4.6% over fiscal year 2008 "as centers opened in the past three years become more mature (and subsequently more profitable)."
There's also the possibility that Leonard Green & Partners, which bought a 9.2% stake in Life Time between Oct. 3 and Nov. 24, could take the company private. This "is likely to give owners of the stock some reassurance and a reason to hang on, while potentially causing short sellers (31% of the float) to cover and take profits," Credit Suisse analyst Paul Lejuez said in a Nov. 24 research note.
As 2008 becomes a bitter and fading memory, it's fair to assume U.S. consumers are doing what they usually do as they ring in a New Year: make yet another round of resolutions that range from losing weight to eating more healthfully, and to spending more quality time with their families. This year there's a catch. Most lifestyle changes call for discretionary spending, and with the recession expected to deepen and bring more job losses, people tend to forego changes until they feel more financially secure.
Losing weight is usually the top priority when it comes to making New Year's resolutions. Over the long term the weight loss industry has been benefiting from increasing obesity both in the U.S. and abroad. Weight Watchers (WTW) and NutriSystem (NTRI) are two of the leading diet programs—and each work, says Greg Badashkanian, an analyst at Citigroup Global Markets.
Over the last two quarters, attendance in both programs has slowed a little as fewer new users have joined because of the softening economy, says Badashkanian. Feeling besieged by worries about shrinking home values and investment portfolios—as well as the looming threat of unemployment—some people may seek refuge in comfort foods and make shedding pounds a lesser priority. "January is obviously the most important time for diet companies because you have all these New Year's resolutions that dieters make," he says. "With the tough economy and the negative headlines from news stories on their minds, will they decide to go on a diet or maybe forgo that?"
Dieting can save money
Weight loss programs are a low-cost discretionary purchase compared with much more expensive items like recreational vehicles, whose sales are down more than 50%, says Badashkanian. Since NutriSystem customers get all of their food needs filled for just $10 a day, he sees that program as more of a staple. But while $10 a day for food is a bargain, NutriSystem still shows up on credit cards as a $300-a-month charge. "So,in their minds, there could be some reluctance to make that purchase," Badashkanian says.
Weight Watchers charges $10 a week for a support service with information to help people diet. That translates to a lower monthly expense, but doesn't include food, he says.
Given the weak economic outlook for 2009, Karen Howland, an analyst who covers healthy lifestyle stocks for Barclays Capital, expects the companies she follows to increase sales by only 3.3% this year, vs. 8.6% growth in 2008. "Most of our stocks have strong free cash flow and limited financing needs and should not need to access the capital markets in 2009 or 2010," she said in a Dec. 18 research note.
The $163 million of debt that Weight Watchers has to repay in fiscal year 2009 represents roughly 90% of what Barclays estimates will be the company's free cash flow, which includes the annual dividend.
Staying Fit
Health and exercise clubs such as Life Time Fitness (LTM) and Town Sports (CLUB) also typically benefit from New Year's resolutions, but economic stress may hamper their growth this year, some analysts say, In her note, Howland at Barclays warned that earnings for the healthy lifestyle stocks she covers could fall 7.9% on average in 2009—much more than the 1.9% drop projected by Wall Street, and compared with no change in 2008 from the prior year. These companies tend to be highly sensitive to consumer confidence and spending, she said.
Even though Howland trimmed her fiscal 2009 earnings estimate for Life Time to $2.09 per share, from $2.20, she predicts it will still increase profits by 4.6% over fiscal year 2008 "as centers opened in the past three years become more mature (and subsequently more profitable)."
There's also the possibility that Leonard Green & Partners, which bought a 9.2% stake in Life Time between Oct. 3 and Nov. 24, could take the company private. This "is likely to give owners of the stock some reassurance and a reason to hang on, while potentially causing short sellers (31% of the float) to cover and take profits," Credit Suisse analyst Paul Lejuez said in a Nov. 24 research note.
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