Thursday, January 29, 2009

Good CEO/Bad CEO Investing

By Eric Jackson

1/28/2009 11:45 AM EST

The bestselling author of Why Smart Executives Fail, Sydney Finkelstein is Steven Roth Professor of Management at the Tuck School at Dartmouth College. His upcoming book,Think Again: Why Good Leaders Make Decisions, coauthored by Jo Whitehead and Andrew Campbell and published by Harvard Business Press, expands on why companies run by sharp executives run off the rails.

After discussing the main themes of his new book and how they relate to the current market environment, we moved on to translating his research on executive and board decision-making into tangible investment ideas.

Jackson: What are examples of corporate leaders who make smart decisions and whose companies would make good long bets?

Finkelstein: I'll start with Jeff Bezos of Amazon (AMZN - commentary - Cramer's Take). That's a company that keeps on going even though no one gave it much of a chance in 2001. Remember that he had the foresight -- or good luck -- to tap the debt markets for $1 billion. This helped Amazon weather the storm after the Internet bubble burst. He's made his strategy work and he's innovative in ways that are complementary to the core business.

This is anecdotal, but I've had so many people ask me if my new book is coming out on Kindle. (Editor's Note: It is.) They've told me they wouldn't read it unless it did. Bezos has had a strong vision for what he wanted the company to be and stuck with it. He experimented with offshoots to the core business without getting too far afield. He also surrounded himself with good team members who appear to have been unafraid to challenge him.

Jackson: People worry about Amazon's high valuation.

Finkelstein: I'm not a valuation expert, I'm a leadership expert. However, I do know that good leaders do the necessary things to keep growing their businesses in sustainable ways. For that reason, I think Amazon is a good pick.

Another great corporate leader is Sandy Cutler at Eaton (ETN - commentary - Cramer's Take)(ETN). He's a Tuck grad, so I've had the chance to meet him several times at the school and he's always impressed me.

I haven't met anyone more knowledgeable about M&A. He knows how to integrate a company, how not to overpay. He's built a very strong organization around him. He always demands a good debate from the executive team. He also wouldn't be comfortable with me singling him out alone; he would always credit the team. Eaton's stock is down by half in the last year, but it's ahead of many peers in the market.

Google (GOOG - commentary - Cramer's Take) has also done a good job. It has one business that makes money and 29 that don't. A bunch of these that don't make sense have been jettisoned. Google is growing up. It was fine to experiment when times were flush, and you want to keep talented people around. Now it's being serious and cutting and not hiring.

New CFO Patrick Pichette seems to have done a good job here. No one could believe how well Google put the brakes on costs in the last earnings call. Capital spending dropped by half of what was spent a year ago and only 99 people were hired last quarter, down from thousands in past quarters. The company appears to have an excellent management team: It's not just Eric Schmidt, Sergey Brin and Larry Page. Shona Brown is also very strong.

Lastly, I'll mention General Electric (GE - commentary - Cramer's Take) and Jeff Immelt, even though the stock has been savaged. He was dealt the toughest hand you could possibly be dealt for an incoming CEO: following the most famous CEO ever, as well as dealing with Sept. 11 and the general stock market decline that followed. He's focused on some important themes: globalizing, going green and continuing to develop talent. He's controlled what he can control.

Jackson: Let's shift to examples of CEOs doing the opposite of what you advise and which companies, as a result, would make good short candidates.

Finkelstein: I'll start with Ken Lewis at Bank of America (BAC - commentary - Cramer's Take). It's amazing to me that he still has a job. Lewis cut his teeth as a credit analyst under Hugh McColl at North Carolina National Bank, later overseeing the bank's aggressive acquisition strategy. He got the top job in 2001 -- most people thought Lewis would be less acquisitive than McColl, but it has been just the opposite.

This is going to sound a little like armchair psychology,but for Lewis to be a major success at BofA, he knew he'd have to surpass McColl, already a legend in Charlotte for growing the bank into such a global powerhouse. How do you do that? You've got to make acquisitions and grow this bank even bigger. In 2003, he bough FleetBoston Bank for $48 billion. He bought MBNA in 2005 for $34 billion. And in April 2007, he bought LaSalle Bank for $21 billion.

He followed the Citigroup (C - commentary - Cramer's Take) failed "financial supermarket" strategy. Then BofA took on Countrywide for $4 billion and Merrill for $50 billion this year, with all the ticking time bombs in their portfolios. You're looking at another Citi. Lewis has been overly attached to his image of needing to be better than McColl.

There's another aspect to Lewis that relates to what we discuss in the book: He based his decision-making in 2008on misleading past experiences. BofA was built on many small bank acquisitions. McColl would cut costs and look for revenue enhancements, which gives you greater market power and heft. It's a great model, on such a different scale than Fleet, MBNA, Countrywide and Merrill.

Lewis thought -- based on Fleet and MBNA -- that he knew how to do these big acquisitions. He didn't. The due diligence was shockingly short on Merrill. This was a trophy acquisition. Reports are that Lewis wanted this jewel for a while. If the stock goes up, I would look to short it. I would bet there are more skeletons in their book.

Staying with financials, when you think of what Citi was and what it could have been, it's a tragedy. Citi has been incredibly slow to face up to problems. It took far too long to replace former Chair Sir Win Bischoff. There were rumors that he was on his way out for months. Dick Parsons appeared to be the de facto chair anyways, so what was holding Citi up?
It's also obvious that Citi moved too slow to break up the company. It's only been done begrudgingly and probably at the insistence of the new owners -- the U.S. government.

Vikram Pandit is a disastrous CEO. It's a tossup if he's worse than Charles Prince. You really wonder where was the board in all this? Why are most of the directors still there after making two terrible picks? When you think of the job of a board of directors, its most important job is hiring the CEO. Citi's board has failed twice now in this most basic function.

How they picked Pandit is a story in itself. He ran a hedge fund that seemed to be successful, but a year later Old Lane proved to have made many terrible bets. The performance plummeted, redemptions were through the roof and Citi needed to inject it with capital to keep it going. It has since been shut down.

Pandit was picked because basically any other senior talent in the company had been driven away months and years earlier. Pandit's been in way over his head from the start.
The lesson from Citi is: you've got to face reality immediately and move on. And for the board, the lesson is: you can't be attached to the CEO you pick. Your attachment can blind you to what's going on. Until there are major CEO and board changes, Citi is a short.

Finally, Jerry Yang at Yahoo! (YHOO - commentary - Cramer's Take) clearly made a number of poor decisions as CEO. First of all, he had an inappropriate attachment to Yahoo! from the beginning as a cofounder. From the outside, it also appears that he (and others on the management team) were very much against the idea of selling to the "evil empire" of Microsoft. As a result, he left $30 billion on the table for his shareholders.

Even now with Carol Bartz, about whom I've heard a lot of very positive things, I wonder whether Yang would approve a deal if it came along.

The other major problem with Yahoo! -- even more important, in fact -- is the tired board. It didn't pay any attention to Terry Semel, except when it came to approving his monster pay packages; let Yang be CEO when he wanted to instead of doing a thorough search; and let the company go through countless reorganizations with no results and no accountability.

How can you expect the rest of the organization to be accountable when no one on this board has been accountable? Even if Bartz is exactly the right CEO, she's going to be saddled with one of the worst boards in corporate America. What shocks me the most is that Yahoo!'s largest shareholders sit back and except this. They are gluttons for punishment.

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Tuesday, January 27, 2009

Interview: Why Good CEOs Make Bad Moves


By Eric Jackson

01/27/09 - 05:04 PM EST


Sydney Finkelstein is the Steven Roth Professor of Management at the Tuck School at Dartmouth College. He authored the 2004 No. 1 business best-seller, Why Smart Executives Fail, based on extensive research on what causes successful companies run by smart executives to suddenly drive off a cliff in terms of performance.

The book is as relevant today as it was in the post-Enron world of Sarbanes-Oxley. Indeed, it seems we haven't learned much from that period and have set ourselves up for the current -- even more serious -- economic decline.

I've known Syd for 12 years and worked on consulting projects with him. There are few people in Corporate America today who understand what drives CEOs and Directors as well as Syd.

He's about to release his new book, which he co-authored, called Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. It's published by Harvard Business Press and is coming out next month.

I caught up with him earlier this week to discuss the current market environment, what caused it and what we can learn from it. The following is a transcript of our discussion.

(Note: I will also be writing an upcoming RealMoney article, where Syd discusses specific investment recommendations based on his research.)

Jackson: As someone who teaches and consults with CEOs and Boards, what surprises you most about what we've lived through in the last 12 months?

Finkelstein: There are three things that stand out to me. Number one: Why are there no people protesting in the streets? I find it hard to believe that people are so passive. We've all been witness to a high-jacking of the economy by many corporate executives and boards in the name of higher profits without adequate risk-protection.

Now, our government is deciding in its wisdom to dole out potentially trillions of dollars in our money -- without clarity on if it will work. The average person is losing his job and half of his 401k. Maybe we don't understand it; maybe it's a generational thing. We should be more upset and demanding more accountability.

We did a panel discussion recently at Tuck. There was an economist talking about the bailout and why TARP made sense. There was an investment person talking about potential return on investment for taxpayers with TARP. I talked about everyday people's reactions to what was going on. The bonuses which are considered Standard Operation Procedure on Wall Street are so far removed from the man-on-the-street. There was a major disconnect that still exists and needs to be bridged.

As a professor, I've given a lot of talks in my career, but I can tell you I've never had such a strong reaction as to that talk. Staff people, students, regular people from Hanover [New Hampshire] all came up to me afterwards. It touched a nerve with them. There are real people struggling out there now and just can't relate to the fantasy world of expected bonuses and $87,000 area rugs.

The second thing that strikes me about what's going on: Where are the shareholder activists? It's been astonishing to me to watch the growth of these activists in the last 10 years (including what you were able to do at Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) using the Web). But where is Carl Icahn now?

The sad part of the activists' success in the past few years is that our Boards of Directors are so inept that we have to rely on outsiders to correct the problems which should be solved by management and boards within their own companies.

The third thing I notice is how little the so-called experts know about what we're living through. This is concerning for someone proud of America and our economy. Nobody really knows if TARP is the right answer, or how to make banks lend, or whether we should buy up toxic assets. As you can guess, I meet a lot of smart people from business, academia and government at Dartmouth and I can tell you that nobody knows what will work. And yet we're betting hundreds of billions of dollars on this.

Jackson: Well, who's to blame? Is one group more to blame more than another.

Finkelstein: Look, none of us is innocent. From people wanting to buy a bigger house than they could afford, to mortgage brokers, to the press, regulators, and even business schools. We've all got our fingerprints on this.

But is one group more deserving of blame? Yes, the corporate boards ultimately let these companies get in way over there heads on their watch. This wasn't malfeasance. It wasn't illegal. It's just that they didn't provide any oversight. They're supposed to ask questions and not just go along. They decided it was o.k. to accept high risk and high leverage.

I don't mean CEOs get a pass for driving their businesses for big bonuses. However, our system of governance is most to blame.

Jackson: Why do smart leaders make bad decisions?

Finkelstein: The way people actually make decisions is not at all how textbooks say we do and that's what this new book is all about. We don't identify a set of alternatives and weigh them with a best expected value in their head.

Jackson: We're not "rational economic beings" like economists argue?

Finkelstein: No, and we've known that for some time now. The data just do not support that view. We have evolved to make very quick decisions to get along in life. We generally make one plan at a time at the moment. We then run with that solution.

Jackson: Sounds like TARP.

Finkelstein: It's exactly like how TARP was developed. The role of emotions is paramount to making decisions. We have emotional tags tied to each decision we make. Some tags are stronger than others. Our brain remembers the tags that are most positively or negatively charged. We look at these tags with the most emotion when making current decisions and it shapes the choices we make. All this operates at the subconscious level. These processes have been developed by our brain over time and are very useful -- most of the time.

Problems occur when we start to face situations in our current environment which don't match situations we've faced in the past. We need to be conscious of our decision-making process and not succumb to past emotional choices.

There are four red flags we talk about in the book to be on the watch for in real-time, when facing new types of problems: (1) misleading experiences when we think we've encountered a similar situation in the past but misjudge its similarities to the current situation, (2) inappropriate attachments when we are making decisions about a group or people with whom we have past ties, (3) misleading pre-judgments when our past decisions color current decisions, and (4) inappropriate self-interests when we have different personal interests than the stakeholders we represent.

Jackson: Do these red flags apply to Dick Fuld [former CEO] of Lehman Brothers?

Finkelstein: Sure. With Dick Fuld, the biggest thing he did that ended up hurting Lehman was believing he could fix the mess instead of selling the company sooner. No suitors were willing to take a chance. He'd driven down his negotiating power. John Thain [former CEO of Merrill Lynch (acquired by Bank of America (BAC Quote - Cramer on BAC - Stock Picks)] -- leaving aside his interior decorating decisions -- saw the writing on the wall sooner and sold Merrill at a premium when he could.

Fuld also fell prey to misleading experiences. During the Long-Term Capital Management (LTCM) crisis in 1998, there was global uncertainty about what would happen and Lehman and Fuld got themselves through that. He came out looking like a hero. His experience taught him that he could do it again -- and there were lots of people in the press, earlier in 2008, who agreed with him. He was over-confident. He assumed this time was similar to LTCM. But this crisis was far more severe.

Another red flag about Dick Fuld is the attachment story. He was credited with rebuilding the firm when it was spun out of Shearson in the early 90s. He thought of himself as a founder -- as if he was a Lehman. His over-attachment caused him to not want to sell. John Thain had no such attachment. He was looking to sell out at the highest price.

Jackson: Most would say President Obama is smart. He appears to have surrounded himself with talented people. He has enormous goodwill from the American public. What are the biggest lessons he should take from your work in order not to squander the opportunity he has?

Finkelstein: He appears to have the right management style with what we've found works. He delegates with appropriate oversight without micromanaging. That's a real art. He also pays attention to the importance of symbols and customs. A lot of leaders have no clue about just how important it is to pay attention to the symbolic things that people always remember. He also appears to engender real debate without getting bogged down by analysis paralysis. I think his biggest risk is that he listens too much. At end of the day, there's only one leader and he has to decide.

I would also advise him, if he asked me, to never give up the high ground on values -- the fundamental values of what you believe in. He's come to power with a lot of high hopes. Compromise is important and part of the political process, but he's got to stick to some fundamental principals.

Jackson: I was struck by what you said in the book about pattern recognition. Hedge funds have gotten their share of the blame for the current mess. Many funds built quantitative models with bright PhDs in math, computer science and physics to predict the future. When the world changed, their models were found to be worthless and resulted in billions in losses and redemptions. If you were advising a hedge fund picking up the pieces now, how do you do pattern recognition correctly?

Finkelstein: A lot of people in hedge funds attribute their success to their genius -- on the way up. You think they're doing the same now? Arrogance is an incredible warning sign for later tragedy. Every one of their quant models was based on a set of assumptions. You have to understand those assumptions and whether your model is based on limited data.

The world changed. Going forward, they have to build new models and ensure they are monitoring and updating their assumptions as they go in a dynamic fashion instead of remaining static.

Jackson: You point out the risks of an over-confident leader. Shouldn't leaders be self-confident though?

Finkelstein: No one has ever been successful without self-confidence. Of course, you need a balance. It's tough but you need to find it. You have to be confident, willing and able, but you have to stay open to alternative points of views.

But again, boards play a big role in reining in out-sized egos. There are a lot of safeguards you should be aware of that we discuss in the book: avoiding yes men and ensuring a high quality of debate in group discussions. But there's no replacement for good governance. Boards need to be much more assertive.

Jackson: How do you do that? The SEC can't mandate assertive boards?

Finkelstein: You're right. Outsiders can't make it happen. It has to come from the boards themselves who are often self-perpetuating. You and I worked on a tool for boards to use to identify early-warning signs of problems. It wasn't a very successful tool because we found that most boards don't want to hear about the problems they have. No bad news is good news. And there's an army of consultants and search companies to always come around and compliment you.

However, the evidence of the last 12 months is clear: If boards don't do a better job identifying early-warning signs, their companies will fail. I guess that's my hope, that boards become afraid enough so that they'll make the necessary changes themselves. The government cannot regulate good governance. We're talking about quality of decision-making and interaction here. You're not going to be able to put something like that in a Sarbanes-Oxley.

Jackson: How should CEOs and boards safeguard themselves against killing their companies?

Finkelstein: Do you have high-quality debate in your management team or board or are you an "imperial CEO" who has driven away anyone with a different opinion than you? Are you surrounded only by "yes men" or a bunch of weak consultants telling you what you want to hear?

Boards need to be regularly monitoring the strategy of the company against a set of predetermined yardsticks. It should be like a well-run venture-backed company: You don't get your next round of funding until you hit your metrics. Is the board regularly discussing the risks facing the company and are they working on mitigating the risks?

Finally, each director -- no matter how much they like their CEO or other members of the management team -- has to constantly remind themselves that they are the last backstop for shareholders and for other stakeholders. Don't let a stellar career go up in smoke because you didn't ask that extra question. Understand what the company does for customers, and exactly how that translates into profits and shareholder returns. That's one thing that no board member can outsource.

Jackson: Thanks, Syd.

Think Again from Harvard Business Press will be available in February.

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Hurd's Palate Should Concern H-P Shareholders


By Eric Jackson

1/26/2009 12:29 PM EST

You'd be hard-pressed to find a CEO who since arriving at the top spot has been as admired as Mark Hurd of Hewlett Packard (HPQ - commentary - Cramer's Take). The stock is up 80% since he was hired in March 2005, recovering from years of wilt under Carly "all flash, no substance" Fiorina. Over the same period, archrival IBM's (IBM - commentary - Cramer's Take) stock has declined 1% and the NASDAQ has fallen 26%.

Hurd has kept a low profile while underpromising and overdelivering. Quarterly beating of estimates has become the norm for H-P. However, a big red flag for investors popped up last week in the company's most recent proxy filing with the SEC.

As discovered by Michelle Leder of, on page 47 of the proxy filing, in addition to his $23.3 million in total compensation last year, Hurd received "an other gross-up" of $79,814, which "represents amounts reimbursed to the NEOs for taxes on meals associated with business travel undertaken by the NEOs in connection with events to which family members were invited."

Based on disclosures elsewhere in the proxy, Leder estimated the "gross-up" meant Hurd and his family ate over $243,000 worth of food last year on shareholders' dime. I don't know how that is possible for a family to do, even assuming they dine at the finest restaurants in the land.

After this news bounced around several media outlets last week, H-P issued a statement to Silicon Alley Insider:

The tax gross-up figures contained in H-P's 2009 proxy were miscalculated. The correct "other gross-up" figure for Mark Hurd was $4,117 (not $79,814), which is in-line with last year's figures. Notwithstanding this, some media outlets inaccurately extrapolated the supposed tax rate, resulting in vastly inflated and inaccurate figures for Mark's meals. While this is not a material disclosure, we wanted to set the record straight.

If Hurd and his family really charged over $200,000 in meals last year to H-P's shareholders, it is a major heads-up, especially in the wake of Merrill Lynch CEO John Thain's $1.2 million personal office renovation. In a opinion column last week, I wrote there were few warning signs of selfish spending prior to Thain's ultimately rejected request for a $30 million to $40 million bonus for 2008, followed by his rushing up Merrill Lynch's year-end bonuses to December and only decreasing them by 6% from the previous year.

In the case of Hurd -- if the original proxy is correct -- this is a warning that he thinks it's OK to charge a few personal things here and there to H-P shareholders. After all, hasn't he increased the shares by 80%, far outpacing his peers, since he took over as CEO? As we learned at Enron, Tyco (TEL - commentary - Cramer's Take), WorldCom and Adelphia , it's that type of thinking that causes corporate leaders to ultimately take one step too far and dramatically cripple or kill the company.

But what if the H-P PR people are right and erroneously inflated the number 19 times in the SEC filing? It's hard to believe the accountants would make such a mistake, but if they did, as in the case of Broadridge, it makes you wonder what other reports to the SEC might have been wrong. It wouldn't give me any more confidence as a shareholder, than if Hurd's family had taken advantage of shareholders.

It reminds me of the terrible blunder made in the counting of Yahoo! (YHOO - commentary - Cramer's Take) shareholder votes at last August's annual meeting. Initially, tabulation company Broadridge Financial Solutions (BR - commentary - Cramer's Take) reported that Yahoo!'s directors had received much higher levels of shareholder support than in 2007. Reporters painted the entire annual meeting as a ho-hum affair, suggesting that reports of shareholder discontent prior to the meeting were overstated.

A few days later, Gordon Crawford of Capital Research Global Investors, one of Yahoo!'s largest and most influential shareholders, challenged the veracity of the reported numbers. It turned out that Broadridge had forgotten to add 200,000 shares for some directors and 100,000 for others. When the company corrected this error, several Yahoo! directors had much higher "against" votes than originally reported (40% versus 20% in the case of Chairman Roy Bostock).

You wonder what would have happened had Crawford not kicked up a fuss? Probably nothing, which makes you wonder how often this happens.

In addition, no revised filing has been sent to the SEC. Just a simple "Whoops -- we messed up" apology is all H-P had to issue for this story to go away.

Will the new SEC headed by Mary Schapiro not give out penalties for mistakes in filings? Surely the public deserves to know that the public company financials on the SEC's EDGAR website are accurate. And why did it take a blogger to uncover all of this? Where were the research analysts working to uncover what was really going on for the benefit of investors?

Whether H-P has a problem doing its numbers or with food expense budgeting, shareholders have seen a bright red flag. At the same time, H-P is trying to digest a slower and less profitable company in EDS, purchased for $14 billion in early 2008. In the next quarter or two, it wouldn't be surprising to get a warning from H-P about cost overruns or expected synergistic revenues that have not materialized.

There will likely be pain in 2009 for H-P shareholders. It would be wise to stay clear until the company shows it has its arms around the new acquisition and is treating its shareholders fairly.

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Friday, January 23, 2009

TheDeal: Jackson to Launch Online Site


by Michael Rudnick

Posted 05:39 EST, 23, Jan 2009

Eric Jackson, founder of upstart activist hedge fund Ironfire Capital LLC, may be a minnow in a big pond, but he knows how to navigate the backwaters.

The voluble activist, better known as the instigator of a broad, Internet-based campaign against Yahoo! Inc. in 2007, plans to attract small investors to a new online network and serve as a catalyst for activist campaigns against selected targets.

Jackson, 36, does not plan to recruit investors for his hedge fund. Rather the Web site, to launch sometime in June, is expected to funnel campaigns against more visible, large-cap companies, he said in an interview.

Jackson, whose year-old Naples, Fla., hedge fund manages less than $5 million, hopes to replicate the successful activist campaign he waged against Yahoo!. He may lack the deep pockets of larger activists, but he has a knack for grass-roots organizing using viral communication.

The yet unnamed site will be segmented into a number of campaigns Jackson will coordinate, he said. It will include a messaging component in which investors will share views about the target companies.

Interested parties must provide information about their holdings in the targeted companies.
The site will offer several features, such as a Wiki software component enabling visitors to create and edit alternative plans for the targeted companies. It will post links to third-party video sites where investors can create visual presentations discussing the targeted companies.

The site will allow users to vote on campaign proposals, and learn the how-to's from a tutorial section.

Jackson said he will take stakes in target companies and will serve as the "spokesman" for the shareholder groups pooled through the Web site.

Eventually, he hopes to pass the torch to other individual investors.

To help finance the launch, Jackson is in talks with a potential partner, though he said he is prepared to go it alone, if necessary. A partnership with online messaging networks is also under negotiation.

Before launching Ironfire in 2008, Jackson, a Toronto native, was president at Toronto-based Jackson Leadership Systems, a management consulting firm founded by his father, David Jackson. The firm specialized in corporate governance.

Before that, he was an executive at software company VoiceGenie Technologies Inc. — which Alcatel-Lucent acquired in 2006 — while he completed a Ph.D. at Columbia University Business School. While studying corporate governance, he met with activist Ralph Whitworth of Relational Investors LLC, who has been a strong influence ever since.

In 2007, Jackson pushed for the ouster of Motorola Inc. CEO Ed Zander. Though that campaign faltered, Jackson organized 131 investors because he believed management would not ultimately give in.

He had better luck in the Yahoo! effort: He stoked up an online campaign, dashing off blogs and drawing a steady stream of comments from other Yahoo! shareholders. His nine-point plan called for the ouster of then-chairman and CEO Terry Semel, pointing to numerous strategic failures that hurt the company's share price. He also called for the ouster of six other directors, among other demands.

At Yahoo!'s annual meeting in June 2007, more than 30% of its shareholders voted against the re-election of Semel to the board, due partly to pressure Jackson created.

"Something Eric Jackson is good at is getting media focus, which can have a viral effect among investors," said Bruce Goldfarb, CEO of New York-based proxy solicitor Okapi Partners LLC.
He added that his success at Yahoo! may be due to "picking the right target at the right time."

Typically in uncontested elections, about 90% of shareholders vote for the candidate, Jackson said. He confronted Semel at the meeting with his gripes. A week later Semel stepped down, and Jerry Yang replaced him.

Jackson's backing from shareholders was relatively small, but the sentiment was widely shared. "We had good ideas that resonated with other shareholders," Jackson said.

Many of the other shareholders were big institutional investors "who are not built to be activists," he added. Nonetheless, while those institutional shareholders did not formally join his group, Yahoo!'s largest institutional shareholders told him behind the scenes that it supported his efforts.

The online campaign against Yahoo! differed from a typical activist campaign "in that it was a community of people where the best ideas rose to the top," Jackson said.

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Thain's Undoing Was Thinking He's Worth It

By Eric Jackson


01/23/09 - 09:08 AM EST

MER , BAC , C , GS (Cramer's Pick) , NYX , TYC , AAPL , JPM , GE

The stunning announcement of John Thain's departure from Bank of America (BAC Quote - Cramer on BAC - Stock Picks) yesterday, less than a month after merging Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) into the bank would have been unthinkable a few weeks ago.

After announcing the shotgun marriage of Merrill Lynch with Bank of America in September, hours after Lehman Brothers collapsed, the sterling reputation of John Thain was cemented: This was a CEO who could do no wrong.

Revelations leaking out of Bank of America in the last few days, and Thain's departure today, alter his image -- perhaps irreparably. Observers now wonder how this quiet, smart overachiever could have shown such poor judgment. After all, this is a man who rose through the ranks at Goldman Sachs(GS Quote - Cramer on GS - Stock Picks), turned around the New York Stock Exchange(NYX Quote - Cramer on NYX - Stock Picks) and merged it with Euronext and then had headhunters and corporate boards falling over themselves offering him numerous CEO spots.

There are 5 puzzling decisions Thain has made in recent weeks that ended up being his undoing:

1. He decided to move up Merrill's bonuses which are typically paid in January to December, prior to the closing of the merger with BofA. The payouts amounted to $15 billion, only a 6% drop from last year. Bank of America sought an additional $20 billion from the Treasury days later (this after requesting a $10 million bonus for himself for 2008, which was rejected by his board).

2. He did not come to BofA CEO Ken Lewis immediately to disclose Merrill's fourth-quarter loss after a sharp erosion of Merrill's book of business.

3. He left New York to go on a family ski vacation in Vail at the time news broke about the Merrill bonuses.

4. He planned to attend the upcoming Davos meeting, even though the financial industry is once again under extreme strain and BofA has advised against it.

5. He reportedly ordered an expensive redecoration of the Merrill corporate offices using his personal decorator in early 2008 at the same time he was preaching cost cuts to his new employees. (Among the expenses reported: $87,000 for an area rug, $11,000 for a "Roman shade" and $243,000 in salary and bonuses for Thain's driver last year.)

The last detail prompted short-seller Doug Kass to draw comparisons with now-imprisoned former CEO of Tyco(TYC Quote - Cramer on TYC - Stock Picks), Dennis Kozlowski, who famously approved a $6,000 shower curtain for the corporate apartment he stayed at in New York. (Kozlowski actually looks frugal compared to Thain.)

What's interesting about to the comparison between Thain and Kozlowski is that both were highly regarded prior to these scandals. At the time of his hiring, new Merrill CFO Nelson Chai complemented Thain's intelligence: "When you're the smartest guy in the room, which he typically is, you come at things from a different altitude."

How could someone so smart, make these poor decisions? And if it can happen to Thain, who will be the next golden CEO to drop? How can you spot the next smart executive to fail?

Sydney Finkelstein, a Professor of Management at Dartmouth's Tuck School of Business with whom I've worked on consulting projects, published a 2004 business best-seller called "Why Smart Executives Fail" that looked at 60 successful CEOs who later failed, including Kozlowski, Enron's Ken Lay and Jeff Skilling and George Shaheen of dot-bomb Webvan. The book is a great read -- and very current, given what we're living through.

Finkelstein summarizes what he calls the "Seven Habits of Spectacularly Unsuccessful Executives." One of those habits seems very relevant to John Thain: "They identify so completely with the company that there is no clear boundary between their personal interests and their corporation's interests." This was the habit that derailed Kozlowski, in Finkelstein's opinion. Here's a brief except from the book on this trait:

"We want business leaders to be completely committed to their companies, with their interests tightly aligned with those of the company. But digging deeper, you find that failed executives weren't identifying too little with the company, but rather too much. Instead of treating companies as enterprises that they needed to nurture, failed leaders treated them as extensions of themselves. And with that, a 'private empire' mentality took hold.

"CEOs who possess this outlook often use their companies to carry out personal ambitions. The most slippery slope of all for these executives is their tendency to use corporate funds for personal reasons. CEOs who have a long or impressive track record may come to feel that they've made so much money for the company that the expenditures they make on themselves, even if extravagant, are trivial by comparison. This twisted logic seems to have been one of the factors that shaped the behavior of Dennis Kozlowski of Tyco. His pride in his company and his pride in his own extravagance seem to have reinforced each other."

In the case of Thain, he signed off on these expensive corporate renovations after Merrill "won" the battle to get him as CEO (remember Citigroup (C Quote - Cramer on C - Stock Picks) wanted him too). At the time he took over the company a year ago, he was one of the kings of Corporate America. He might well have felt justified in green-lighting these expenses and using his own decorator.

It's also interesting to note that, in all the criticism of how Ken Lewis of BofA failed to do sufficient due diligence on Merrill prior to announcing the deal, no one has criticized John Thain for insufficient due diligence on Merrill prior to taking the top job. At the time of his hiring, he assured the press that he'd been given complete access to Merrill's books. Apparently he did a poor review. When Merrill's fortunes started to go south, no one went back to ask Thain about this oversight.

What this sorry episode teaches all analysts, media, and investors is that we need to appreciate success and achievement but always remain skeptical. We shouldn't be afraid to ask tough questions even about "untouchable" CEOs like Apple's(AAPL Quote - Cramer on AAPL - Stock Picks) Steve Jobs, JPMorgan Chase's (JPM Quote - Cramer on JPM - Stock Picks)Jamie Dimon, or General Electric's(GE Quote - Cramer on GE - Stock Picks) Jack Welch. Past success no longer guarantees future success in today's world.

Unfortunately for BofA shareholders, no one had warning signs about Thain until the last 72 hours. (And let's not forget that, if you're a Merrill shareholder, you are overjoyed that Thain sold this company at such a premium and kept the fourth-quarter loss under wraps until the deal went through.)

One thing's for sure: If you're a company insider and you hear about a big corporate office renovation, starting looking for work and start selling your insider stock right away.

Neither Eric Jackson nor his fund owns stock in Merrill or BofA.

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Thursday, January 15, 2009

Where Citi Went Wrong

By Eric Jackson

01/15/09 - 12:26 PM EST

C , WFC (Cramer's Pick) , GS , JPM , MS , NFP

Citigroup (C Quote - Cramer on C - Stock Picks) is a mess.

From the moment Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) snatched Wachovia from under Citi CEO Vikram Pandit bank in October, Citi has stumbled.

Its stock price since then has plummeted from the low $20s to the mid-$3s today, as the market fears its decision to sell its Smith Barney business to Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) will fail to quench its need for capital in the coming months.

So what caused this massive implosion? A lot of Citi watchers have assigned blame for the large drop in the bank's market cap, from $300 billion to $30 billion.

Pandit has been widely characterized as a weak and indecisive CEO in the press. The New York Times blamed Bob Rubin and risk management headed by Tom Maheras -- both are now gone. In a recent interview, large Citi shareholder Prince Alwaleed bin Talal pointed the finger at former CEO Chuck Prince. A few (including John Reed, the man who merged Citi with Travelers in 1998) have also pinned Citi's shortcomings on the "financial supermarket" model masterminded by Sandy Weill. (On Tuesday, Pandit announced Citi would dismantle that supermarket model, returning to its old Citicorp roots.)

It turns out that Citi's biggest mistake leading to its downfall did occur in 1998, but it wasn't the April super-merger of Citicorp and Travelers -- it was the November ousting of Jamie Dimon by then-Chair and CEO Sandy Weill over a disagreement with Weill's daughter.

Had Dimon stayed on, he -- not Chuck Prince -- would have succeeded Weill and Citi would have avoided many of its missteps. Instead, Dimon moved to Chicago to head up Bank One, later triumphantly returning to New York when Bank One merged with JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks). Dimon, who could now stare at his former employer down Park Avenue, now serves as CEO and chaiman of JPMorgan.

Wall Street has watched the spread in performance of the two banks ever since. JPMorgan's stock is down 30% since the merger with Bank One on Jan. 15, 2004, while Citi's stock is down 92%.

The reasons for corporate blow-ups are never simple; it's usually true that every employee is replaceable. However, Citi has never been the same company since Dimon was pushed out.

Even a decade ago, most knowledgeable observers knew Dimon was going to be a special CEO one day. Sallie Krawcheck (who was a Citi analyst at the time) said back then: "Investors are asking two questions: What should I do with my Citigroup shares and where is Jamie going next so that I can buy the stock?''

Dimon had been a longtime protégé of Sandy Weill's. After graduating from Harvard Business School in 1982, Dimon turned down a job offer from Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) to go and work for Weill, whom he knew through his father. Over the next 15 years, the two built an empire: Commerical Credit, Primerica, Travelers and Citi.

But in late 1998, after announcing the biggest merger ever, Weill and Dimon sparred over Weill's daughter, Jessica Bibliowicz. Dimon refused to give Bibliowicz the job of chief asset manager of Travelers, as Weill demanded. What's more, Dimon also wouldn't agree to promote Weill's son, Marc, to head up Salomon's bond group. Weill demanded that Dimon resign.

Jessica went on to run National Financial Partners (NFP Quote - Cramer on NFP - Stock Picks), a $100 million financial advisor that has seen its stock swoon by 93% in the past year as Barron's has written negatively about its future prospects. Having left Citi in 2000, Marc now heads a small money management firm in Greenwich, Conn., called City Light Capital.

All the World's a Stage

The Shakespearean similarities between what happened with Weill and Dimon are uncanny. Jaime Dimon was the Earl of Kent challenging King Lear and Weill sided with blood over an adopted son.

Weill now has had to watch the dismantling of everything he spent his career building. The Wall Street Journal quoted two friends who know Weill as characterizing his mood ranging from anger to despondence since hearing that Citi's "financial super-market" model was being disassembled.

Vikram Pandit was a poor choice as CEO in December 2007, as he's waited much too long to change Citi's status quo until forced by the government, but it's likely that neither John Thain, Ken Lewis nor Sandy Weill circa 1995 could have done much better given the circumstances the bank was facing prior to Pandit's hiring.

It's not 20-20 hindsight to say that Citi's greatest mistake was letting Dimon walk out the door. Many knew this at the time; when he said goodbye on the Salomon Smith Barney trading floor, 1,000 traders gave him a standing ovation.

One bad move does not usually cost a career or a company. Life has a way of giving us lots of "do-overs" to course-correct our mistakes. However, there are decisions that stick with us for the rest of our lives and we always look back on and regret. Weill's hubris in pushing Dimon out will always be looked back on as the beginning of the end of Citigroup.

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Dow Jones: More Job Cuts Expected As Motorola Continues To Struggle


Thursday January 15th, 2009 / 17h30

- The bloodletting has only begun for Motorola Inc. (MOT). Fresh off of eliminating 4,000 jobs, many believe the embattled telecommunications equipment maker still needs further cuts to survive, particularly as it feels the squeeze from a faltering handset market and increased competition. Even after the recent cuts, critics believe the company still carries a bloated work force.

"They are still way too overstaffed," said Bill Choi, an analyst at Jefferies & Co. "What you really need is a combination of cost reductions and a meaningful improvement in the portfolio."

Motorola shares recently rose 6 cents, or 1.5%, to $4.17.

While Motorola has been working on better handsets, including more smartphones, analysts don't see anything significant coming out until the end of the year. In the near term, the company can only control the costs.

Motorola spokeswoman Jennifer Erickson declined to comment, saying the company wouldn't speculate on further job cuts.

The cuts are expected to yield $700 million in savings this year. That comes on top of the $800 million in savings gleamed from restructuring actions taken in the fourth quarter.

In the past three months, Motorola announced 7,000 job cuts, with 5,000 coming from the mobile devices division. That's roughly a 25% reduction in the unit, but many believe that isn't sufficient. The company still has roughly 20,000 employees in its mobile handset business.

In comparison, Sony Ericsson, which sells slightly more handsets than Motorola, employs 9,400. The company, a joint venture between Sony Corp. (SNE) and L.M. Ericsson Telephone Co. (ERIC), has said it wants to cut 2,000 workers. While a direct comparison between Sony Ericsson and Motorola is unfair, the difference in staff versus their similar handset sales numbers is telling.

"The issue of the day is cost," said Eric Jackson, managing member of activist hedge fund Ironfire Capital LLC and a former Motorola shareholder. While getting Motorola trimmer was one priority, Jackson believes the company's underlying problem comes from its lack of direction - a problem exacerbated by the co-chief executive leadership structure.

In terms of fixing the cost structure, analysts were reluctant to give specific numbers on the necessary cuts. "It's tough to say what the appropriate level is," Choi said. Motorola's cost structure will look increasingly out of hand as the mobile devices business continues to lose ground and handset shipments fall further.

In addition to the slowing handset market, other handsets are likely to take Motorola's share of the market. A new version of the Apple Inc. (AAPL) iPhone, new Research in Motion Ltd. (RIMM) Blackberrys, and even the Palm Inc. (PALM) Pre could slice into Motorola's high-end device sales, leaving it only the cheaper devices.

Motorola co-Chief Executive Sanjay Jha promised better smartphones. "We are making good progress in developing important new smartphones for 2009 and are pleased with the positive response from our customers to these new devices," Jha said in a statement.

Still, the new handsets aren't likely to arrive until the fourth quarter. "Their products are just not competitive," said Matthew Thornton, an analyst at Avian Securities LLC. "They're left in no man's land." But even if Motorola comes out with a blockbuster handset now, it couldn't turn a profit because its cost structure is too high, he noted. Beyond job cuts, Motorola will have to look hard at other places, including the supply chain, outsourced staff, and other general expenses. "It's a necessary step and the right step, even if it's not pleasant," Thornton said.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020;

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WSJ: Departing Yahoo President Has History of Missteps

From The Wall Street Journal

JANUARY 14, 2009, 10:02 P.M. ET


On Monday night, outgoing Yahoo Inc. Chief Executive Jerry Yang delivered some tough news to Yahoo President Susan Decker: The Yahoo board had picked someone else as its new CEO. On Tuesday, Ms. Decker announced her plans to resign from the company whose ranks she scaled rapidly during her nearly nine-year tenure.

Her exit caps more than a year of stumbles, during which Ms. Decker -- a well-regarded finance whiz and strategist -- failed to execute her plans. Among other things, she planned multiple reorganizations and growth strategies to get Yahoo back on track, only to see few of the initiatives bear fruit. She also played a significant role in advising Yahoo's board to reject Microsoft Corp.'s offer to acquire it last year, a move that incited Wall Street's ire.

Carol Bartz, a Silicon Valley veteran who got the CEO job Tuesday, and several other external CEO contenders "happen to be better athletes than Sue," says one person familiar with the matter, who notes Yahoo directors wouldn't have considered outside CEO candidates "if she (Sue) was a great president." But "sometimes, CFOs don't make great presidents."

Ms. Decker's fall from grace is all the more eye-catching because she had once been viewed as a near shoo-in for Yahoo CEO. The onetime Wall Street analyst catapulted from chief financial officer to head of Yahoo's advertiser business to president in 18 months. She had sealed several high-profile deals, including an ad deal with eBay Inc. several years ago and Yahoo's purchase of ad-technology company Right Media Inc. And she had pushed the development of Yahoo's new search-advertising system Panama, which was delayed but is now showing results.

It's unclear where Ms. Decker will go next. "She would like being a CEO but there are other things in life she likes, too," says Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., where Ms. Decker is an outside director. He added that he doesn't plan to hire her into Berkshire because he likes her work as a board member too much.

Many of the challenges that Ms. Decker ran up against at Yahoo -- such as questions over the company's strategic direction and her financial background in a company founded by engineers -- may end up dodging Ms. Bartz as well. One person close to Ms. Decker said her expansive knowledge of Yahoo's business would have made her an excellent CEO if given the chance. Ms. Decker declined interview requests through a spokesman.

Ms. Decker joined Yahoo as its chief financial officer in 2000 following 14 years in equity research for investment bank Donaldson, Lufkin & Jenrette. At Yahoo, she quickly she won over Wall Street with her sharp mind and focus on cash flow. Over the next few years, she sought and was given more management experience.

In mid-2005, Yahoo's then-CEO Terry Semel handed Ms. Decker responsibility for sealing a sweeping ad-sharing agreement with eBay that would move Yahoo into the business of selling ads on other Web sites, not just its own. Ms. Decker pushed a deal through in intimate meetings with Mr. Semel and eBay's then-CEO Meg Whitman, say people familiar with the negotiations.

In December 2006, Mr. Semel rewarded Ms. Decker by tapping her to run one of Yahoo's two major business units, the advertiser and publisher group. Yahoo's then-chief operating officer Dan Rosensweig resigned in the reshuffling. Employees began whispering that the CEO job was Ms. Decker's to lose.

At the same time, however, Yahoo was facing more challenges. Google Inc. continued to expand its share of the online ad world through search ads, stealing Yahoo's thunder in the market. Yahoo's stock price sank. In June 2007, Mr. Semel resigned and Mr. Yang took over the CEO job. Ms. Decker was appointed president.

In her new role, she soon intimidated managers with how quickly she could pick up the nitty-gritty numbers of their business and spot flaws in their financial models without picking up a pencil, say Yahoo employees. She inspired employees with a company-wide presentation about Yahoo's potential in mid-2007, predicting the stock would soar if the company increased traffic a little and pricing a lot, according to people who attended.

But Ms. Decker struggled to turn that theory into practice. In mid-2007, she pushed a new business decision-making framework called RAPID, which stood for "recommend, agree, perform, input and decide." She required managers to fill out grids assigning employees to each letter for decisions ranging from who could veto an ad or set a privacy policy. The ordeal irritated employees, who turned the phrase "Who's the D?" into a company-wide joke.

In late 2007, Ms. Decker stepped back into her comfort zone when Mr. Yang asked her to devise a three-year financial plan to boost the board and investors' confidence. The plan projected Yahoo would grow revenue 25% in both 2009 and 2010, well above analysts' estimates of 13% and 11% growth, respectively.

The exercise took on new urgency after Microsoft made a $45 billion bid for Yahoo last January. Yahoo rejected the bid as too low.

Ms. Decker, Mr. Yang and other Yahoo executives took to the road to defend their three-year plan in March 2008, facing heat from shareholders and analysts who had picked it apart. "The analyst community had a really tough time making sense of the numbers," says Ross Sandler, an analyst with RBC. Employees also questioned the model's assumptions -- including that Yahoo could nearly double its share of the display market, according to people familiar with the plan.

Back in Sunnyvale, Calif., in early 2008, Ms. Decker created two task forces. One was dubbed Judo to review Yahoo's advertiser strategy. The other was called Aikido to review the company's consumer products strategy. The mission was to determine whether Yahoo should think of itself as an advertising or consumer business, according to people familiar with the process. In an initial vote, advertising won, say these people.

But after months of presentations, Ms. Decker concluded the company should stick to its strengths and the consumer lens, while innovating in advertising as well. Some claimed it wasn't decisive enough and that the whole experience was a waste of time.

Around the same time, Ms. Decker embarked on an ambitious corporate reorganization designed to rethink how the company builds products. The plan -- which created different geographic product regions and a central product management group to service them -- broke apart the powerful group that had been previously in charge of running all of Yahoo's consumer products, from Yahoo Finance to Yahoo Mail.

Some executives started to catch wind of the plan in May 2008. At the same time, activist investor Carl Icahn, who had built up a big stake in the company, announced his campaign to replace the Yahoo board.

When Jeff Weiner, Yahoo's executive vice president for consumer products, announced he wanted to leave in June 2008, Ms. Decker was forced to rush out the details. Several other senior executives also resigned. "Change produces change," Ms. Decker said in an interview at the time.

By now, Yahoo's stock price had sunk to around $20 a share, down from around $30 in February, after Microsoft's offer. Yahoo, crippled by a proxy battle, was also facing shareholder lawsuits over its handling of Microsoft's acquisition offer.

At a tense annual shareholders' meeting in August 2008, weeks after Mr. Icahn settled his attempt to topple the board and replace Mr. Yang, Ms. Decker found herself in the hot seat. Investor Eric Jackson, founder of Ironfire Capital, took the microphone and challenged the hours Ms. Decker spent in meetings on three outside boards. How are "these extra 168 hours a year best serving our company?" he asked.

Yahoo's Chairman Roy Bostock piped up to defend Ms. Decker as the hardest-working executive he knew. Ms. Decker said she had learned a lot from all these companies, citing how she had applied supply-chain knowledge from Costco to Yahoo.

In the fall, as the economy collapsed, Ms. Decker's attention turned to more cost-cutting and reshuffling. Mr. Yang began discussing his willingness to step aside with board members, say people familiar with the process. On Nov. 17, Yahoo announced they were commencing a search to replace him.

When Yahoo board members began their search, they brushed aside a hefty list of candidates from recruiting firm Heidrick & Struggles International Inc. for a shortlist of names of executives with experience running public companies. They also considered Ms. Decker as the internal front-runner, according to people familiar with the process.

At a meeting on Dec. 4 at Yahoo's headquarters, board members discussed external candidates and Ms. Decker. Outside contenders then included Ms. Bartz, Arun Sarin, a former chief executive of Vodafone Group PLC who later withdrew from consideration, and Bill Nuti, NCR Corp.'s president and CEO, say people familiar with the matter. An NCR spokesman declined comment Wednesday. Board members focused more on outsiders than Ms. Decker because they already dealt with her regularly, according to one informed person.

Ms. Decker sat for interviews with most of Yahoo's 11-person board, according to people familiar with the matter. She told some people she felt they went well, according to two familiar with the matter, but she wasn't sure where in the board's estimation she sat. On Monday night, she found out.

In a farewell email to employees, Ms. Decker said she did not make the decision to leave "lightly," according to her memo. "I want to congratulate Carol on her new role and put my full support behind her," it read. "I would ask that you all do the same."

Write to Jessica E. Vascellaro at and Joann S. Lublin at

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Wednesday, January 14, 2009

CNET: Yahoo investors cautiously optimistic following Bartz hire

Posted by Dawn Kawamoto
January 14, 2009 11:50 AM PST

Yahoo investors weighed in with cautious optimism Wednesday following the appointment of former Autodesk CEO Carol Bartz as the embattled company's chief executive.

Yahoo, which formally announced Bartz as its new chief executive after the markets closed Tuesday, climbed as high as 3.2 percent during morning trading Wednesday to $12.49 a share, while the broader markets were down.

While noting that Bartz, for the most part, lacks name recognition beyond Silicon Valley and has little experience with media companies and the Internet, investors pointed to her reputation as a strong operator as boding well for Yahoo's future.

"Yahoo needs more of an operator than a visionary right now," said Kenneth Smith, senior portfolio manager for Munder Capital Management, who runs the Munder Internet Fund. "Yahoo has missed out on some opportunities like social networking, but at the end of the day, the company needs someone to manage all their valuable assets and stem the brain drain."

Smith, whose fund held 727,280 shares of Yahoo as of November 30, pointed to the company's frequently visited Web sites as a core asset. But he noted past redesigns of the sites have appeared somewhat haphazard and that's an issue he believes can be addressed with strong operational skills.

Bartz, Smith noted, had a good reputation while at Autodesk. He added she managed to turn things around with its portfolio of businesses and reignite growth for the drafting and design company.

Shareholder activist and Yahoo investor Eric Jackson, meanwhile, said he was initially disappointed with the selection of Bartz, but in the last 24 hours has become cautiously optimistic as more information about the new CEO has surfaced.

Nonetheless, Jackson noted some concerns still linger, such as the fact that Bartz managed a smaller workforce than what she'll encounter at Yahoo, and he questions her ability to manage a high-growth business given that he considers Autodesk to play in a sector with slower growth.
"I'm still skeptical. I have a show-me attitude," Jackson said. "Right now, Yahoo is guilty until proven innocent."

Jackson said he hopes Bartz will demonstrate within the next 30 to 60 days that she has clear ideas of what she is going to do to reignite Yahoo's various media businesses.

Smith, however, said after Bartz has "one quarter under her belt," he hopes she'll show signs of grasping the issues that plague Yahoo and its solutions. And by the end of the second quarter, he hopes to see Bartz implement some of those solutions.

"I think it'll be the second half of the year before we begin to see some impact," Smith noted.
Smith, while declining to say whether he plans to increase his fund's position in Yahoo now that Bartz has been named CEO, noted that the fund has generally been increasing its stake in the Internet search pioneer over the last year.

Jackson said he plans to sit it out on the sidelines for now and keep an eye on Bartz's performance before considering whether to increase his holdings, which current are a few hundred shares.

Wall Street analysts, meanwhile, where largely neutral to bullish on Bartz's appointment, noting there was not much more the new CEO could do to damage Yahoo.

Analysts with Cowen & Co. noted in a research note Wednesday:

We do not believe the announcement of Carol Bartz as CEO and the resignation of president Sue Decker will result in a material change in Yahoo's prospects. We think the odds of a search deal with Microsoft and/or an acquisition of AOL increase under the new CEO, but the terms may not be highly attractive due to the current economic environment.

UBS Securities analyst Ben Schachter, meanwhile, sounded more bullish in his research note Tuesday regarding Bartz's appointment as Yahoo CEO:

Vision still undetermined, but progress now at least possible.

With Ms. Bartz first approached just this past December, her full vision for the company must still be evolving. Still, simply by putting in place a capable outsider with a strong track record, Yahoo should finally be able to make decisions on various strategic and operational choices.
And while we don't know the new direction just yet, clearly Ms. Bartz and the board have discussed their views and walked through scenarios, including potential partnerships (MSFT, AOL, etc.). Given the recent stagnation at Yahoo, we think almost any movement from here will be forward.

One source, familiar with the board's thinking, noted that the company may not necessarily keep Microsoft at bay while Bartz ramps up her learning curve at the company.

Depending on the type of offer that Microsoft may bring to its door, Yahoo could potentially react immediately, noted the source.

"It depends on their offer," said the source. "If they were to come to (Yahoo) with an offer of $33 a share, (the company) would be stupid to say no now."

Microsoft, or not, Yahoo's board believes it has landed one of the top technology executives.
"(Executive recruiter) John Thompson was told to get the top five candidates, no matter where they were from," said the source.

Bartz, who was the only candidate offered the job, was selected for her track record, added the source, noting it was among a number of other characteristics that made her the top choice.

Investors Jackson and Smith hope Bartz has it within her skill set to signal to Microsoft a willingness to sit back down at the negotiating table.

Both investors do not expect anything to happen with Microsoft in the immediate future, with Jackson predicting as long as one to two months and Smith as long as three months before signs will surface that any such activity is underway.

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Time for a Yahoo! Board Reboot

There's a great post from Kara Swisher this morning, which tips the cap to Sue Decker for stepping down from Yahoo! now and also calling for Roy Bostock to do the same. I want to second her sentiments.

Chairman Roy Bostock has repeatedly blown off criticisms of his botched handling of last year's Microsoft's negotiations by suggesting it was all because of Microsoft that a deal didn't get done.

He was dismissive of my suggestion at last August's annual meeting that he step down after 30+% of shareholders voted against his reelection in 2007. He said I was looking at it with a glass half-empty mentality. A few days later, we learned that well over 40% of shareholders voted against him at that August meeting. The figure would have been well over 50% had Carl Icahn's gold proxies from the previously called off proxy fight had been counted against Bostock.

If Carol Bartz wants to send the message that Yahoo! now has a performance culture, she should turn around and fire the guy who just hired her: Roy Bostock.

As Kara also says, she should then point her eyes on other directors. Gary Wilson and Ron Burkle -- like Bostock -- have received sizable protest votes from past annual meetings from investors. They came in weeks after Semel was hired (both are LA residents like Semel). Art Kern and Eric Hippeau have served on this board for over 12 years. That's not exactly a pair of fresh eyes they bring to the decision-making process. Finally, Kara suggests her sources said several directors wanted to be CEO. This is likely John Chapple and Maggie Wilderotter. They might also want to move on (even though they're relatively new to the group) to avoid any Bartz back-seat drivers.

Carol and Jerry need to hit "re-boot" to this board to really refresh this company.

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Thursday, January 01, 2009

A Look Into the Micro Crystal Ball

Published in

By Eric Jackson

12/31/2008 12:00 PM EST

In these final days of 2008, we turn our eyes to next year and how the stock market will fare. Rather than adding to the chorus of predictions about the price of oil, gold and the dollar -- as well as the S&P 500 in general -- I wanted to offer some predictions that are micro in nature.

1. New York Times (NYT - commentary - Cramer's Take) will be sold to avoid shutting down. The sales of its Boston properties, cutting of its dividend and mortgaging of its headquarters will not be enough to refinance its debt in 2009. The Times will be forced to seek out a friendly purchaser, more likely to be Mort Zuckerman, Eli Broad, Terry Semel or Ron Burkle than Rupert Murdoch because of News Corp's (NWS - commentary - Cramer's Take) own financial challenges.

2. Yahoo! (YHOO - commentary - Cramer's Take) will appoint an inside board member as CEO by the end of February (either Gary Chapple, Maggie Wilderotter or V.J. Joshi), which will be panned by the business media and employees as uninspiring. Current President Sue Decker will immediately leave the company and take a job later in the year working for Warren Buffett at Berkshire Hathaway (BRK.A - commentary - Cramer's Take). Microsoft (MSFT - commentary - Cramer's Take) and Yahoo! will announce a friendly "merger" by the end of the summer.

3. Terry Semel will buy a media property through his investment firm and effectively run it (a la Sam Zell). After all the bad press from his days at Yahoo!, Semel won't be content to stay on the sidelines.

4. CBS (CBS - commentary - Cramer's Take) will be spun off from Sumner Redstone's control and Les Moonves will be removed as CEO. Redstone's debt restructuring talks with the banks will force him to jettison his stake in CBS and hang on instead to Viacom (VIA.B - commentary - Cramer's Take). The network will be sold to another media company and Les Moonves will immediately move on. Home Depot (HD - commentary - Cramer's Take) cofounder Ken Langone will be among the new owners of the company.

5. Howard Stern will announce he's not re-signing with Sirius (SIRI - commentary - Cramer's Take) and instead retire; Sirius will restructure through Chapter 11 with Mel Karmazin staying on. Disappointed in his lack of influence as part of Sirius, Stern will throw in the towel and announce he's retiring after his five-year contract ends in 2010. He will stay retired for nine months before announcing he's returning to terrestrial radio.

6. Google (GOOG - commentary - Cramer's Take) will buy geospatial satellite operator GeoEye (GEOY - commentary - Cramer's Take). Google will see providing the map images (and searching any location on Earth) that appear on Google Maps, Google Earth and its G1 mobile phone as strategic, as well as in line with its interest in space in general. Google's stock will end 2009 at $350.

7. Women's retailers will face bankruptcy. Ann Taylor (ANN - commentary - Cramer's Take), Talbots (TLB - commentary - Cramer's Take) and Charming Shoppes (CHRS - commentary - Cramer's Take) will all announce bankruptcy before the summer, as cautious women shoppers stay away from these retailers and tighten their purse strings. Chico's (CHS - commentary - Cramer's Take) will teeter on the edge of bankruptcy but survive the year.

8. Bill Gates' investment firm will orchestrate a takeover of Crocs (CROX - commentary - Cramer's Take) in his first active investment. Faith in the Crocs products, which are used by the Bill & Melinda Gates Foundation with children in Africa, as well as frustration with the current management, will spur Gates into taking over the footwear company.

9. Hugh Hefner will make a lowball offer to take Playboy (PLA - commentary - Cramer's Take) private with several other friendly individual investors after disillusionment in the low stock price. This action will spur interest from a larger foreign investor to buy the company with the promise of letting Hefner continue to run it independently.

10. Dry bulk shippers like DryShips (DRYS - commentary - Cramer's Take) and TBS International (TBSI - commentary - Cramer's Take) will triple in value before June 1 as the general market rallies, before declining 50% in the second half of the year.

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