Wednesday, June 24, 2009

Yahoo!'s Bartz Provides Hope

06/24/09 - 09:03 AM EDT


Eric Jackson

Yahoo!(YHOO Quote) holds its annual meeting Thursday and, unlike the previous two meetings, I'm not attending this year. It's not that I think the company is doing such a great job; it's that I sold all my shares in Yahoo! last September after being dismayed by the poor decisions being made by the board and senior management despite the company's many assets.

I didn't hold out much hope that the board would make the necessary changes to get the company back on track, after listening to it justify turning down Microsoft's(MSFT Quote) buyout offer last year and ignoring the high number of protest votes cast against the re-election of several directors in the prior two years.

But I do have to give the Yahoo! board credit in one regard: It hired a great CEO in Carol Bartz, and I believe she is doing all the right things since she came aboard to turn this company around. If she is allowed to execute the turnaround path she's on (and, really, why wouldn't she be although I wouldn't put it past Yahoo!'s board based on its track record?), Yahoo!'s stock has a much better chance of outperforming Google's (GOOG Quote) in the next two years, even if Google's operating performance and search dominance continue apace.

With Bartz, what's not to like about her turnaround focus? I went back to the "Plan B" I put forward -- with the support of other retail investors -- to Yahoo!'s board in early 2007 and it appears that a majority of these changes have now happened or are in the process of taking place. It also was refreshing to hear Bartz say recently that she agreed with the "Peanut Butter Manifesto" -- an internal Yahoo! memo that went public in late 2006 that called for much greater focus and simplification of overlapping efforts at the company.

Bartz hasn't let what I believe is a poor board of directors get in her way. For this reason, I was intrigued by her comments on Sunday to the Stanford Business School's Director's College. Bartz was full of opinions on what makes for a good board, with as many barbs tossed in the direction of sleepy directors as shareholder activists. The highlights were published by Barron's and offer a refreshingly candid viewpoint of a CEO on the topic of what makes boards work.

Here's where I think Bartz is right and where she's off-base.

Where she's right:

1. Getting a board of "high achievers" to work together well is tough.

Take any big company board and you'll find a gold-plated list of directors. These individuals haven't been asked to serve because they've been great team players. Typically, they've accomplished a lot. Throw six to eight "doers" into a room and ask them to get a task done as a team and they'll lurch around because no one has been appointed the clear leader and they all have an inherent bias to "jump in" and "fix" the situation. Throw into the mix that this is a team that only meets six times a year and you have a situation where a rhythm for working together never has a chance to develop.

In my view, without clear board leadership -- perhaps because there is no independent chairman, no lead director, or weak ones -- the pecking order of the group gets determined by a combination of who is favored by the CEO, board tenure, or dominant personality. Those factors don't translate into the most effective board discussions and decisions.

2. "We should have less middle-aged white guys."

Bartz pointed out that this narrow demographic makes up the vast majority of boards today. She spoke in favor of more diversity, but "not necessarily more women." (In fact, she discussed how one board tried to recruit her earlier in her career because it was "probably just looking for a skirt.")

I agree with her that it shouldn't matter if a director is named Jane, or John, or that he or she is this type or that type of person. What matters most is how that person will contribute to board meetings behind closed doors. The person needs to have a solid base of business and industry experience to knowledgeably examine and debate issues. Beyond that, diverse viewpoints can lead to better decisions if they help better analyze decisions. Unfortunately, Sarbanes-Oxley or stock exchange requirements define terms like "board independence" which lead to "middle-aged white guy" boards or diverse boards lacking sufficient industry experience.

3. Industry experience is a "must have" for any director.

Directors without industry experience are going to be less involved at board meetings. They are not going to want to make a comment or ask a question that might make them appear stupid. As a result, you can have an impeccably "independent" collection of directors surrounding insiders on a board, without any ability to advise or question those insiders about the business. This does no good for anyone -- unless those directors are well-paid and could care less about adding value or the insiders prefer lapdog directors.

"Industry experience" shouldn't limit directors to those who spent the majority of their careers working in that industry, but they must know enough about that industry to add value to any board discussion.

4. Have three hours of nothing planned at board meetings.

Bartz warns against the perils of over-structured and over-managed meetings. In my opinion, this is a common problem most boards have in which there is no opportunity to really debate issues, because too many "business updates" and "issue approvals" have been scheduled. Sometimes, the most valuable parts of board meetings happen during the unstructured discussions which occur in smaller side meetings or over lunch. There is great value in unstructured time during these meetings (although you must guard against the flip side of too much endless loop discussions resulting in no decisions).

Here's where I think Bartz is off-base:

1. "'Shareholder activism' is a simple but stupid concept."

What I think she's getting at in this comment is that she believes no two shareholders are the same. Everyone wants something a little different. At the Yahoo! annual meeting last August, people lined up to comment on, among other things, how (a) the board and management oversaw poor performance and inexplicably turned down the now-generous looking Microsoft offer, (b) Yahoo! didn't do enough to further human rights in China, (c) Yahoo!'s management had been unfairly criticized, and (d) Yahoo!'s fantasy sports content was fantastic and they should "keep it up."

Bartz was implying that anyone claiming to be a "shareholder activist" is really misrepresenting his own vested interests and those of the larger group. In my view, Bartz has a clear idea of where she wants to go as a manager and doesn't like anyone -- whether it's an incompetent director or misguided shareholder -- getting in her way. Sure, shareholders are a "big tent" -- just like political parties -- but they all follow certain universal truths, such as wanting to see the stock price go up (whether you're in a union, a pension holder, or an employee). She shouldn't paint activists with one brush, just as she goes out of her way to remind us that commentators shouldn't call her "old" because she's 60.

2. Get more current executives to serve on boards.

Bartz's solution to the "middle-aged white guy" problem is to get more executives from other companies to serve on boards. This would not only include CEOs but other senior talent coming up through the ranks that would bring more youthful perspectives with industry experience. I worry that these executives are already too overloaded by their day jobs and, although they'd likely want to add a few directorships to beef up their resumes, they would find it difficult keep up with the needed prep work, travel and participation in board and committee meetings.

These more youthful members of a board might also find it difficult to sit on the Cisco(CSCO Quote) board (as Bartz did when she met Jerry Yang) and challenge John Chambers, for example, about assumptions he was baking into next year's budget. In some ways, Sue Decker is a cautionary tale of the solution Bartz is proposing to the problem of narrow boards.

Decker, the former Yahoo! president, never really was able to get the company turned around successfully and yet kept piling on more board seats, including Intel(INTC Quote), Costco(COST Quote) and Berkshire Hathaway(BRK.A Quote)). As a Yahoo! shareholder during her tenure, I wished she'd never taken on any outside board seats and simply done her job, the remains of which Bartz is now trying to clean up.

From where I sit, Carol Bartz is doing all the right things as an operator of Yahoo! I hope she also will transpose many of her good ideas on corporate governance to the Yahoo! board, which could sorely use them.

Note: A new shareholder rights group called the Shareowner Education Network will be launched in Washington on Thursday, backed by some of the largest pension funds in the country. It will support issues such as promoting a shareowners bill of rights, mutual fund reform and proxy voting education. What's different about this group is that it's particularly focused on education and engaging retail shareholders as a group on these issues.

At the time of publication, Jackson was long Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Wednesday, June 17, 2009

BlackRock Has Power to Influence

06/17/09 - 02:18 AM EDT


Eric Jackson

BlackRock's(BLK Quote) announcement last week that it would purchase Barclays Global Investors from U.K. bank Barclays(BCS Quote) for $13.5 billion confirmed that BlackRock would yield an enormous influence on corporate America.

In fact, the combined firm will own $2.8 trillion in assets, twice the size of its nearest rivals State Street (STT Quote) and Fidelity, which hold $1.4 trillion in assets each.

If you've looked up recently the shareholder ownership tables for any large or small public company, you likely have seen BGI's name among the top five holders of the stock. You've also likely seen BlackRock's name in the top 10. And, with this deal, you will now almost certainly see the new BGI (BlackRock Global Investors) in the list of top three or four shareholders.

Most financial analysis of this BlackRock-BGI tie-up have focused on the price paid, the assets now under management and the growth of BGI over the last few years as an asset for Barclays. Barclays certainly owned a jewel that they wouldn't have parted with unless external capital demands from the British government required it, and also unless BGI's own executives had a compensation structure that incented a full sale. BGI accounted for 15% of Barclays' pretax profit last year.

Yet, there's another interesting question about this tie-up that has gone unmentioned: How will this new BGI behemoth vote its shares in future corporate elections?

Until now, BGI has had a reputation among some for being a shareholder that largely votes its shares in favor of management. A third-party Web site, Proxy Democracy, founded last year by Harvard Ph.D student Andrew Eggers, which tracks how large institutional investors actually vote their shares, recently ranked BGI's family of funds at the 11th percentile in terms of their "overall activism score." This means that 89% of other mutual funds tended to vote in a more pro-shareholder fashion at corporate elections than BGI.

BGI says it has a team of 12 full-time staff globally who are fully dedicated to analyzing and executing corporate governance policy. Seven of those staff are located in the U.S. and are tasked with a special focus on North American assets.

Abe Friedman, BGI's global head of corporate governance, heads this group and is a managing director of the firm. Additionally, BGI claims to vote in 100% of the votes it is eligible to participate in every year. BGI also says it follows a rigorous set of proxy voting guidelines in deciding how to vote.

Given this level of staffing, it's puzzling that BGI's pro-shareholder voting record, according to Proxy Democracy, is so low. Eggers told me recently that BGI has been particularly low in supporting shareholder resolutions and proposals that aim to rein in executive compensation. According to their voting record posted on the site, BGI has supported management on executive compensation in 95.4% of the votes . That's particularly noteworthy, given last week's news that 400 senior Barclays' executives would receive a "windfall" $630.3 million payout from BlackRock for selling BGI, prompting shareholder outrage. BGI Chairman Bob Diamond will pocket $36.5 million from the sale, while BGI CEO Blake Grossman, will take home $91.2 million. If that's the example set from the top of BGI, I'm not surprised that the voting record says BGI supports management on executive compensation issues at such a high rate.

A couple of years ago, when I ran an activist campaign targeting Yahoo!(YHOO Quote), I reached out to all the large institutional holders of the stock leading up to the annual meeting. I had made the public argument that a few Yahoo! directors deserved to be voted off the board because of the company's poor performance and general misdirection (most of the directors I identified are still on the board, by the way).

Of the 10 largest institutions holding Yahoo! stock, I spoke with eight. Most portfolio managers covering the company or governance officers already were aware of some of my arguments about the company before I spoke to them on the phone.

BGI was one of the two institutions better protected than Fort Knox in terms of being open to discussing the issues that Yahoo! was facing. I first called BGI's San Francisco office and asked to speak to Mr. Friedman. I was told that he was no longer with the firm. I asked to speak with people on his team. The receptionist seemed confused and said that such a team wasn't in place. After calling again and asking to speak to someone responsible for voting BGI's shares, I was put to a woman's voice mail. I never received a return call.

One last attempt and voice mail message also were unsuccessful in at least having a discussion about the issues at play in the vote. Based on these interactions with the firm, I assumed no governance team existed at BGI (which I understand now is not the case; they were just simply difficult to get in touch with). Maybe I was just unlucky in my phone calls. However, at eight of the other top 10 holders of Yahoo!'s stock, who presumably were just as busy as BGI in determining how to vote their shares, I found it very easy to engage in a discussion.

Corporate governance is seen by the vast majority of institutional holders as an investment that creates far more value to their clients than the cost. I'm quite sure that if clients of these large institutions knew which ones were responsibly voting their shares on the clients' behalf, and which ones were rubber-stamping votes for less effective CEOs and boards, there would be ramifications seen through large-scale transferring of assets.

That's why sites like Proxy Democracy are so important. All of these large institutions need to be held accountable for how they vote their shares on behalf of clients. These institutions also need to understand that, it's not important how often you vote, or how many people you employ in order to vote, but how you vote your shares that matters to clients.

And this brings us back to BlackRock and the new BGI. BlackRock does have a reputation for speaking up and voting in favor of shareholder-friendly matters. On the Proxy Democracy site, BlackRock's activism score was at the 41st percentile, meaning the company is about average compared with it peers in supporting pro-shareholder votes.

As Barron's pointed out last weekend, BlackRock is also known for its much more active than passive culture compared to BGI. CEO Larry Fink has said one of the great virtues of this deal is that 80% to 90% of the two firms' activities do not overlap and can be left as is. I hope Fink will look closely at how the new BGI votes its shares and steers it closer to the BlackRock model and away from the Barclays model.

If Fink does this, and I have every reason to believe he will, the new BGI has a chance to play a powerfully positive role in voting its shares in future corporate elections.

In my view, sleepy boards and managements just lost one big chip of votes that, until now, they could count on being in their back pockets. All shareholders will benefit if there is a change in philosophy at BGI.

At the time of publication, Jackson had no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Wednesday, June 10, 2009

Microsoft R&D Hasn't Delivered

06/10/09 - 02:01 AM EDT


Eric Jackson

A couple of weeks ago at the D7 Conference in Carlsbad, Calif., Microsoft(MSFT Quote) CEO Steve Ballmer boasted the software company could create a lot of new things by spending $9.5 billion annually on research and development expenses. That's right, Microsoft spends almost $10 billion each year on R&D. That's more than any other company in the world, by a long shot.

R&D spending at many tech, pharmaceutical or biotech companies is treated as motherhood and apple pie. R&D is never a bad thing -- it's only good. More is always better. When you invest in research, you are investing in hope and possibilities. No matter how much you have lost in past projects that never panned out, every new dollar invested in a R&D project holds the possibility that it will deliver a large multiple of that dollar in future earnings before interest, taxes, depreciation and amortization.

Spending a lot on R&D would be a good thing for Microsoft if it was generating a large return from that investment. But that's not the case and it hasn't been the case for a long time.
Ballmer's comments show that Microsoft's senior leadership is proud of its continued investment in R&D and sees it as a source of competitive advantage for the company. On an absolute dollar comparison basis, Microsoft is making a much bigger bet than most in this area.

Microsoft spent 46% more than the $6.5 billion IBM(IBM Quote) invested in R&D last year, 252% more than Oracle(ORCL Quote) ($2.7 billion), 763% more than Apple(AAPL Quote) ($1.1 billion), and 390% more than Google(GOOG Quote) ($2.8 billion). Yet, most would conclude that Microsoft isn't 9 times as innovative as Apple, despite the discrepancy in how much money it is pouring into its research activities. Beyond its Office, Client, and Server core franchises, it's difficult to name innovations associated with Microsoft.

What is also remarkable about Microsoft's spending on R&D is the cumulative total racked up over the years. In the last 10 years, Microsoft has invested $62 billion in the R&D area. Microsoft could have bought back nearly 40% of its stock with that amount; it could have beefed up its dividend; it could have made a string of acquisitions which presumably would have continued to grow its top and bottom lines more than what it has achieved organically.

It's hard to know exactly what Microsoft has delivered for its R&D investment; it doesn't break out the numbers according to its five business segments. However, the two smallest business segments -- Entertainment & Devices, which includes the Xbox, Zune, and Windows Mobile software groups, and Online Services, which includes Search, and the Microsoft MSN, Hotmail, and Messenger properties - likely have taken the lion's share of the investment. Combined, these two divisions have delivered $71 billion in revenue for Microsoft over those 10 years and $15 billion in losses.

So, what Microsoft's $62 billion R&D investment has led to a $15 billion loss for at least those two businesses in 10 years.

Ballmer has argued that Wall Street investors are too focused on the short-term. One large Microsoft investor told me recently that Ballmer had complained loudly to him about the short-sightedness of investors who called on the company four years ago to do a large stock buyback and pay out a dividend with the excess cash on Microsoft's pristine Microsoft balance sheet.

Ballmer apparently said to this large investor: "We did everything they asked for. We did a huge buyback. We did the biggest one-time dividend ever. And what good did it do us?"

Ballmer's right. Total shareholder returns, or TSR, for Microsoft since it initiated its stock buyback and dividend program are down 25%. For the last 10 years, TSRs fell 47% (as of early April). This includes returns from dividend payments (including the big, one-time dividend of $3 a share), as well as stock appreciation, over that time.

Is 10 years a sufficient amount of time for a shareholder to wait to judge a company's management team for how it has performed? Those TSR numbers are clearly unacceptable and likely reflect poor investment decisions and loss of confidence by shareholders in the future prospects for the company.

Over that same 10-year time period (again, as of early April), Apple's total shareholder returns have been 826%, Nintendo's have been 243%, Oracle's have been 166%, IBM's have been 3%, and Nasdaq's returns have fallen 37% -- all substantially higher than Microsoft's TSRs.

If the predominant Microsoft strategy of investing more in internal R&D, steering away from acquisitions, and keeping tight control of the five business segments has led to these results in the last 10 years, should shareholders expect that the same approach will lead to different results in the next 10 years? Are we being "short-termists" or "flippers" of the stock by pointing out these results and suggesting they should have been much better?

R&D spending can lead to blockbuster returns. And Microsoft has a big advantage relative to its competitors in that it can invest enormous sums for future product development. But Microsoft, in being proud of the fact that it can spend almost $10 billion a year on R&D, is like a driller of oil and gas being proud of the fact that it can drill thousands of dry holes. It doesn't matter what you spend on R&D; it only matters what return you make from that investment for your investors. So far, Microsoft hasn't delivered on its promises.

A private-equity investor friend of mine once told me that he only liked investing in companies who practiced "small 'r' and large 'D' R&D" - meaning he wanted to see fewer ivory tower white coats and more of an emphasis on taking cutting-edge ideas and technologies out of the lab and building a real product and revenue stream around it. That process requires discipline, but it can be managed.

Microsoft isn't the first large company to face this challenge of effectively managing its R&D process. Hewlett-Packard (HPQ Quote) lost its way a few years ago. Pfizer(PFE Quote) and other "big pharma" companies are facing similar questions around their R&D activities.

Instead of patting Microsoft on the back for its continued spending on R&D, investors and the press should be asking, "Where's the beef?" The onus should be on the company's management to articulate why its status quo approach for running this function will lead to different results in the next 10 years. Otherwise, I can think of several better ways to spend the next $62 billion of cash flow.

At the time of publication, Jackson's fund held a long position in Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Monday, June 08, 2009

Twitter's Innovation Drought

Sure, it's growing like crazy. But growth and innovation needn't be either/or pursuits, especially when you've got Twitter's cash

By Eric Jackson


June 5, 2009, 9:28PM EST

I love Twitter. I'm in the minority of users who check it and comment at least a couple of times each day. I even have two accounts—one personal (@ericjackson), and one for my company, activist investment firm Ironfire Capital (@ironfirecapital). I set up my personal account over two years ago and have watched in surprise and admiration at how widely the service has been adopted. Forget Oprah. When I finally saw some of my formerly not-very-tech-savvy friends signing up a few months ago, I knew Twitter had gone mainstream.

Twitter's three thirtysomething co-founders—Evan Williams, Biz Stone, and Jack Dorsey—have been on a media blitz of late. And how can you not be happy for these guys? They're all down-to-earth. No hint of arrogance or entitlement. It's a feel-good success story.

People who cover Twitter in the media often criticize it for its lack of revenue, even with its impressive growth. However, I have grown baffled and annoyed at one of Twitter's greater nonaccomplishments: Since I've been using the service, its functionality and offerings have barely improved.

It's virtually the same Twitter experience today as it was two years ago. The only difference is that there are more users. You update, follow, unfollow, reply, or send direct messages. That's it. I understand that part of Twitter's power is its simplicity. But there are still no ads, search isn't easily customizable or useful, and there's been no evident push into location-based services despite the talk.

Outside Innovations

To view the most creative innovations in Twitter from the last couple of years, you have to look outside the company, to related third-party applications or services that have cropped up using the Twitter platform. I use TweetDeck as my desktop client for checking on my Twitter stream during the day; it's infinitely more efficient than the company's own clunky site. I often check on stock news through StockTwits. I shorten links using or another shortening service. Yet all these helpful innovations have emanated from outside Twitter's confines.

I'm all for opening up your service and getting other people to create apps and services that ride on top of your platform. Everyone wants to be open these days. Facebook's doing it. Yahoo!'s (YHOO) doing it. It makes sense to get others to work for free on tools that make more users dependent on your platform.

Yet I still have had this nagging question: What are employees inside Twitter working on to make the service better? At the recent D7 conference in Carlsbad, Calif., Williams and Stone confirmed that Twitter has 43 employees. This is a big increase over years past, when there were only about 20 people working at the company.

Venture capital friends have told me they usually estimate a company's cash-burn rate at the number of employees multiplied by $100,000 a year. This implies it would cost Twitter $4.3 million a year to keep going at its current size. Bump that up a little because of extra server needs compared with most tech startups. At that pace, with more than $55 million raised to date, the company likely has another 6 to 10 years with the current cash in the bank. And the truth is, Twitter could raise much more if it needed to—likely at pre-bubble valuations, judging from the $200 million Facebook recently raised from DST Ventures.

So my question remains: Why is this company being slow to seize the opportunity in front of it? Why are there not more features, services, or ads being tested? To be fair, Twitter has search, which it didn't two years ago.

It's useful if I quickly want to check who won the most recent NBA Final or see what other people thought of last night's Lost episode. But Twitter didn't even create its search—it bought Summize and integrated it. I'm not complaining. Summize has been great. But why hasn't Twitter extended it to be more interesting and useful?

Thinking Small

With good reason, the company has focused a lot of attention on simply keeping the service running. From its early days, Twitter's popularity has led to periodical crashes, epitomized by the now infamous "Fail Whale" graphic. The problem subsided but has returned in the last few months amid a traffic spike. CEO Williams recently acknowledged the internal focus on scalability: "For the entire history of the company, most of the resources have gone to managing growth, and that is still the case. … If it weren't growing nearly as fast, we would be building a lot more things."

I disagree with the assumption that growth precludes innovation. My hunch is that the real cause lies with the co-founders and their board: These guys are in uncharted territory managing a business of this size, and their directors haven't provided enough guidance. In the same story, Williams said: "I've started a bunch of companies but never run one of this size." When you run small companies, you think small. Managers of larger businesses are more accustomed to scope, complexity, and additional ambiguity. As Twitter has blossomed, the co-founders appear to have focused too much on only their biggest problem, the Fail Whale.

Imagine if Yahoo's then-CEO Tim Koogle had told his troops in 1997 that they shouldn't do new-product work until they ensured that the business would be able to keep up with the explosive growth it was then experiencing. It's ludicrous.

Twitter's Board Needs to Step Up

I don't fault the co-founders entirely. None of us can know what we don't know. But that's what advisers and boards are for. This board knows that companies can walk and chew gum at the same time. It is possible to scale the business on an incredible upward trajectory while still building out new features. It's not either/or. They've also known the company has plenty of cash to try a lot of things.

I can't help but wonder if the Twitter directors have come down with a case of Silicon Valley rock star-itis. Etched in the brain of every tech VC are the baby faces of Yahoo co-founders Jerry Yang and David Filo, Google's (GOOG) Sergey Brin and Larry Page, and YouTube's Chad Hurley and Steve Chen. Twitter's funders have made it into the "club" of investing in the Next Big Thing, where it can be difficult to balance back pats with serious advice, debate, or disagreement. The cardinal rule of this club is: Don�t upset the founders. (For another example, see Mark Zuckerberg and the Facebook board.)

There's an appropriate amount of media and press to do to promote a company, but Twitter's co-founders and its board need to start building a better company with better products instead of going around talking about how it all started and how they're discussing lots of ideas for making money.

At the time of publication, Jackson did not hold shares in the companies mentioned.

Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund and Ironfire Capital International Fund.

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Saturday, June 06, 2009

Tweet Some Dealmakers on Follow Friday

Thanks for the mention!

Published June 5, 2009 at 4:30 PM

It's Friday, and if you use Twitter you know that Friday is time to tweet out who you love to follow during the week on #followfriday. So we are going to give you some of our favorites to add to your twitter stream.

@Nouriel Nouriel Roubini is a professor at Stern School, NYU, chairman of RGE Monitor and Web Entrepreneur.
Fun to follow: Dr. Doom gives you the latest updates on why the world and the economy sucks.

@fredwilson Fred Wilson, co-founder, Union Square Ventures (and Flatiron Partners during the dot-com days)
Fun to Follow: Follow Wilson's A VC blog, which is required reading in venture capital circles and get exposure to great bands you might never have heard of, like Magnetic Fields on

@FAquila Frank Aquila is a M&A and corporate governance lawyer at Sullivan & Cromwell.
Fun to Follow: He has some great analysis on the economy, bankruptcy and M&A.

@infoarbitrage Roger Ehrenberg is a reformed Wall Streeter turned early-stage investor via IA Capital Partners LLC and runs the Infoarbitrage blog.
Fun to Follow: Ehrenberg has some witty comments, provides useful links and sports scores for baseball fans.

@JasonCalacanis Jason Calacanis, CEO of (founder of Weblogs Inc., Silicon Alley Reporter back in the day)
Fun to Follow: Staying on top of the West Coast startup scene, he often makes great comments like calling Wikipedia founder Jimmy Wales a "poser," not an entrepreneur. Plus, he's a foodie.

@TiffanyKahnenTiffany Kahnen is a corporate attorney involved with mergers and acquisitions, Strategic Transactions; W3 professional soccer agent, entertainment lawyer and general corporate counsel
Fun to follow: She offers ntertaining posts and good advice especially about IP.

@HowardLindzon Howard Lindzon, co-founder of StockTwits, creator of WallStrip, long-time investor
Why Must Follow: He offers savvy stock-trading info, plus provocative ideas like his urging Twitter to go public.
Fun to Follow: He offers stock trading tips. Plus, he's very funny and knows how to cuss creatively.

@TylerNewton:Tyler Newton is a private equity investor at Catalyst Investors.
Fun to Follow: Tyler has some interesting links and follows middle-market companies in Internet and media.

@GregWNeedham Greg W. Needham is the vice president of marketing and business development at NorthShore Capital Advisors.
Fun to Follow: He provides some interesting commentary about the economy and middle-market private equity trends.

@jdriveJames D. Robinson is the co-founder and managing rartner of RRE Ventures.
Fun to Follow: He has some good insights on VC, technology, pop culture and life in general.

@ericjackson Eric Jackson is a managing member at Ironfire Capital LLC.
Fun to Follow: He provides funny frequent posts and trading tips.

There are many more dealmakers on Twitter that are worth following. Thanks to Mary Kathleen Flynn @mkflynn, Nathaniel Baker @natbaker and Tom Groppe @dealscape for their recommendations. If you would like to follow me or pop me a tweet, I'm @newsgirlmw, and be sure to include your #followfriday recommendations. - Maria Woehr

See's Twitter pages

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Citi's Vikram Pandit on the hot seat


The FDIC is said to be looking to replace Pandit, a sign that regulators won't go easy on the managers of banks that might have failed without taxpayer help.

By Colin Barr, senior writer
Last Updated: June 5, 2009: 3:34 PM ET

NEW YORK (Fortune) -- It's starting to look like the spring awakening in bank stocks may not be enough to save the CEOs of America's biggest troubled banks, Citigroup's Vikram Pandit and Bank of America's Ken Lewis.

A top banking regulator is agitating for Pandit's removal, according to a report Friday in the Wall Street Journal. The clash between Pandit and Sheila Bair, the head of the Federal Insurance Deposit Corp., comes just a month after restive shareholders at Charlotte-based BofA (BAC, Fortune 500) stripped CEO Lewis of his chairmanship.

The FDIC told CNN it had no comment on the story. Citi (C, Fortune 500) says it stands behind Pandit, who took over as CEO at the end of 2007 and has spent much of his tenure trying to clean up the messes left by his predecessors Chuck Prince and Sandy Weill.

In a statement to CNN Friday, Citi chairman Dick Parsons said the company was "confident in our management."

BofA has similarly endorsed Lewis, and the three-month-long rally in bank stocks has quieted talk of wholesale government takeovers of these firms.

But given the massive investor losses at these banks and the failure of their top managers to anticipate the industry's meltdown last year, few would shed a tear at either executive's departure.

"These companies are sort of the poster children for the excesses that created this crisis," said Eric Jackson, an activist investor and managing member of Ironfire Capital in Naples, Fla. "I think it's appropriate for the regulators to push for substantial changes in management and on the boards." Jackson's firm does not own shares of either bank.

Citi and BofA have been the two biggest bank recipients of federal aid since the financial crisis erupted last fall. Together they have taken some $500 billion in federal aid, the lion's share of which has come in the form of federal guarantees of their troubled assets.

Recently, both firms have shown some signs that they have broken out of what earlier this year looked like terminal decline.

Shares of Citi have tripled since Pandit surprised Wall Street by saying Citi was on track for its first quarterly profit since mid-2007. BofA's stock price has quadrupled during the same time frame.

Both banks went on to report better-than-expected first-quarter results in April. Those surprises further boosted the shares even as many observers warned the numbers were padded by one-time gains and legal but incredible accounting maneuvers, such as profits tied to the declining value of the banks' own debt.

The hopes of a banking sector recovery only intensified after regulatory stress tests showed banks didn't need that much more money. The findings helped spur a surge of capital raising from the private sector that has bolstered the balance sheets of many big institutions.

But while investor fears of a giant bank failure have dissipated, regulators haven't lost sight of the problems ahead. Though the 10 of the 19 biggest banks that had to raise $75 billion in capital after the stress tests had no trouble doing so, future loan losses will surely dwarf that figure -- which means further capital raises could be necessary.

"There's a desire to make sure the banks don't get complacent," said Douglas Elliott, a former investment banker who is an economic studies fellow at the Brookings Institute in Washington.
"Until we have a better grasp on exactly how bad the losses are going to be, it's important to be cautious."

Even before the FDIC's push to oust Pandit came to light, it was clear that policymakers intended to shake up the big banks.

BofA named a new chief risk officer this week after regulators questioned the management failures that led BofA into its current morass. Citi shook up its own board earlier this year, with former Time Warner (TWX, Fortune 500) chief Parsons replacing Win Bischoff as chairman and Clinton administration Treasury Secretary Robert Rubin stepping down. (Time Warner is the parent company of Fortune and

Still, skeptics such as Jackson say a change here and there won't be enough, given the size and visibility of the two big banks.

"How can you have such massive failures without there being accountability?" said Jackson. "Citi and BofA are so large, so critical, they're almost a case unto themselves."

And some observers believe that even management changes won't be enough, and BofA and Citi will have to be broken up.

Vernon Hill, a longtime bank executive who is now chairman of investment firm Hill-Townsend Capital in Bethesda, Md., notes that a recent national customer satisfaction survey showed Citi was either last or tied for last in each of the five regions in which it does retail banking.

"Citi has been dysfunctional as long as I can remember," said Hill, who owns "only minor amounts" of both stocks. "How many times are we going to let these guys get in trouble before we put an end to it?"

CNN's Amy Sahba contributed to this report.

First Published: June 5, 2009: 2:33 PM ET

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Wednesday, June 03, 2009

Why Ackman Failed vs. Target

06/03/09 - 02:19 AM EDT


Eric Jackson

When Bill Ackman of Pershing Square Capital Management attended Target's (TGT Quote) annual meeting in suburban Milwaukee last Thursday it was the final culmination of a months-long proxy fight with the company's incumbent board. Although some observers, including me, predicted Ackman's slate would win one or two seats out of the five he was seeking, he came away empty-handed. Target announced at the meeting that all incumbent directors were re-elected with at least 70% of the vote.

The mainstream press immediately declared it a rout against Ackman. "Target Triumphs Over Ackman" said BusinessWeek, "Ackman Misses Target" said the New York Post. The New York Times headline read, "Target Shareholders Strongly Reject Dissident Slate."

But the truth is that the vote was far closer than how Target spun it.

The language from Target's press release includes words like "shareholders appear to have" elected the incumbent directors by a "comfortable" margin. Gregg Steinhafel, Target's chairman, president and CEO, goes on to thank shareholders for their "overwhelming" support of management. Towards the end of the press release, Target suggests it will get around to actually releasing "preliminary" voting results in three to four weeks. Final results will come later, but no timeline was provided. Technically, Target doesn't have to share the final results until the end of August -- 60 days after the end of the quarter in which the annual meeting took place.

I find it insulting to shareholders that companies can get away with not releasing voting results immediately after the meeting. A month ago, Bank of America(BAC Quote), a much larger company than Target, with more votes to be counted, and also facing a large number of dissenting shareholders, provided a detailed accounting of its tally before 5 p.m. the same day as the meeting. Target gets to drag its feet for three months, while posturing to the press working on deadline that it enjoyed a sizable win.

Doesn't this sound more like how a banana republic runs itself, rather than one of the largest retailers in the world?

Another aspect of the vote that inflated the results in Target's favor were the broker non-votes. We are now close to the end of the 2009 proxy season. Thanks to some recent changes by the Securities and Exchange Commission this will be the final year in which brokers can take all the non-votes they receive from their underlying shareholder clients and, in one fell swoop, throw the votes to management's favor. This happens in 99% of the cases in which they vote.

The Wall Street Journal recently concluded that, in most large company votes, these broker non-votes going in support of management amount to 15% to 20% of the overall votes counted. These votes should count as abstentions, since the real owners of the shares haven't indicated a preference. Starting in 2010, thanks to the SEC, that will happen.

Let's assume Target received the "overwhelming" support of 70% of their shareholders. Assuming a normal amount of broker non-votes landing on Target's side of the ledger, it appears that the vote, if it had taken place under next year's rules, would have been up for grabs.
Scott Galloway, New York University Stern School professor and activist investor with Firebrand Partners, who also serves on the New York Times (NYT Quote) and Eddie Bauer (EBHI Quote) boards, sent a tweet out after the vote saying that it was "a blow to activists everywhere." For the reasons I've outlined, I'm more sanguine. However, I think it's important to understand where things went wrong in this campaign, as I certainly thought Ackman had adequately made his case sufficiently to win at least a couple of seats.

Here's how things went off the rails for Ackman.

1. Winning a proxy contest is like passing a major bill in Congress. It's not enough to be right, an activist has to put forward an argument that is politically palatable to other shareholders. Ackman ultimately failed in his proxy contest because he failed to win over the support of the biggest holders such as the large mutual fund companies and pension funds.

Although these investors pay close attention to corporate governance matters, their primary concern as fiduciaries is the long-term health and success of the company. Activists sometimes shoot themselves in the foot with these shareholders when they advocate solutions that are perceived to provide only a short-term boost to the stock instead of a more sustainable move. Ackman's real estate investment trust plan for Target, designed to unlock value in the land under Target stores, and creative from a financial engineering perspective, got no support. It was successfully painted by Target as "risky" and out of step with the current environment. Ackman never should have included it as part of his plan.

2. The messenger is a big part of the message. Any activist investor in a proxy contest should be able to convince fellow investors that they are advocating solutions which will benefit the company in the long term. Far too many activists formerly looked for short-term levers to pull to create value in their shares owned, such as paying out a large dividend, taking on debt, selling off a division to a private-equity firm, or doing a big stock buyback.

For the most part, these strategies have hurt the target companies. There are also many activists, and Carl Icahn is probably the most well-known example, who have cultivated an image of force and intimidation.

Hedge fund managers -- and activists especially -- are still seen by outsiders as short-termists. In the case of Ackman, he is who he is: a big New York hedge fund manager. He can't change that, but that image likely did bleed away potential supporters who, when they reviewed his REIT plan and heard about the number of Target derivatives he owned, prematurely dismissed his slate for not being a "long-term investor." In the final days before the vote, Ackman went out his way to issue press releases saying he was committed to holding his personal Target shares, not his fund's shares, for at least five years if he was elected to the board. By then, it was too late to change how he was viewed by his fellow shareholders.

3. Pick bulletproof fellow directors for your dissident slate. Ackman didn't help himself with the pick of Jim Donald as a fellow director on his slate. In TV interviews leading up to the vote, Donald didn't provide a compelling list of things he was going to attack once he got elected to the board. It fed into the view that Target wasn't really badly in need of improvement.

Ackman made a big deal of Donald's experience heading up Wal-Mart's (WMT Quote) grocery division, pointing out that Target should emulate Wal-Mart's performance there. Yet Donald also brought the baggage of his bio for being ousted from Starbucks(SBUX Quote) by the guy who hired him. It's not necessarily fair, but this baggage diluted the message Ackman was trying to get across.

4. The worse the stock performance track record of a company is the easier it is for an activist to make the case for change. Joe Nocera of the New York Times took Ackman to task for his Target activist campaign. Nocera questioned why Ackman would go after Target in the first place when the company's 10-year stock performance was actually better than Wal-Mart's. Not every poorly-performing stock makes an attractive activist target, but it's clear that poor performance is a necessary condition for any activist to win over broad support.

Under the SEC's 2010 proxy rules, just as many Target shareholders agreed with Ackman that Target's performance should have been better in recent years as other shareholders who would have sided with Nocera that all this was a waste of time. Yet, as Ackman made constant suggestions that Target should be more like Wal-Mart, it would have helped him more if there was clearly a stark difference between the stock performances of the two companies over some time. It wasn't compelling enough.

I am heartened by how many shareholders last week voted for an activist campaign that, although far from perfect, would have improved on the status quo at a sleepy board. Ackman made mistakes in this campaign that lost him the trust of the long-term holders of the stock. Even still, the final tally likely will show a very close contest.

And next year's new rules from the SEC will mean that investors like Ackman will no longer have to pay $15 million to run proxy contests. Target's vote is more likely to be an early warning of future activist successes than a death knell.

At the time of publication, Jackson owned no shares in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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