Thursday, August 27, 2009

Globe & Mail: An innovative balancing act

Karim Bardeesy

From Thursday's Globe and Mail

Tapping on a white cellphone, Patrick Pichette shows off Google's latest marvel.

"There's my wife," he says as a Google map scrolls. A tiny image pinpoints his vacationing spouse, down to the neighbourhood block in suburban Montreal. "And there's my daughter." He flicks the phone's mini-trackball. "Isn't that cool?"

A year ago, the 45-year-old Montreal native moved his family to Silicon Valley to become chief financial officer of Google Inc. But the company's Latitude software application, which allows users to track each other's location, isn't simply a useful tool. It's a window into Mr. Pichette's appetite for the kind of innovation that defines Google, and illustrates one of his strongest features as the man who minds the books at the world's largest Internet company.

Google Latitude may be cool, but it isn't a money maker. Nor are most of the new online applications launched by the Mountain View, Calif.-based company, which nevertheless continues to wring huge profits - $2.9-billion (U.S.) in the first six months of 2009 - from its core business of selling advertising around the Web's most popular search engine.

For the first time, Google is grappling with a slowdown: Its revenue grew only 3 per cent in the second quarter. So it falls to Mr. Pichette, the chief financial officer, to keep an eye on the till - still bursting with $19.3-billion in cash - to ensure spending is in line with the new economic environment without smothering its culture of experimentation that could yield the next online sensation.

Observers say his strategic sense and disciplined management have helped cut costs, guiding Google to even better operating margins in a recession and a tough advertising marketplace.

Mr. Pichette plays down his role, repeating the Google mantra that the user experience is what matters, and that company's goal is to organize the world's information. The Google approach, and the team of "hypersmart" colleagues he found there, excites him after seven-year tenure at Bell Canada, which he left as president of operations.

"[I joined] Bell during the Enron time. [There was] a lot of scrutiny around financial matters. So nothing frazzles me," said Mr. Pichette in an interview at Google's Toronto office.

"But I also bring the same innovation that fuels Google. It's a mindset, it's about seeing the world for its possibilities."

Mr. Pichette wasn't the obvious choice to fill the CFO's post, which he took up last August. He was a relative unknown and, perhaps more importantly, didn't fit the image that Google had been projecting to the markets, which put innovation above cost control.

"This whole suggestion that they were bringing in an operating-focused CFO and driving efficiencies made people think, 'Yeah, sure,' " recalled Jeff Rath, an analyst at Canaccord Adams Inc. "It wasn't consistent with the founding mission of the company."

Mr. Pichette's arrival at the Googleplex coincided with some cost-cutting measures. While free massages are still on offer, other perks, such as Tuesday afternoon teas, have been cut. Google went through a round of layoffs, mostly in the sales, recruitment, and marketing departments, and headcount at the end of the second quarter was 19,786, down about 430 from the end of 2008. Google reduced its general and administrative costs to $364-million in the quarter, down from $474-million in the fourth quarter of 2008.

"The company's actions immediately after his hiring suggest he immediately put the screws to what he saw as needless spending," said Eric Jackson, founder of the hedge fund Ironfire Capital LLC. "He saved the company money before there was really investor sentiment calling for that."

Operating profit margins were 29 per cent in the second quarter of 2008, but have averaged 34 per cent in the last two quarters, a performance that has pleased analysts.

It's hard to credit one man with such results, especially given Google's decision-making apparatus: CEO Eric Schmidt and co-founders Mr. Page and Sergey Brin serve as the ruling triumvirate, guided by the powerful operating committee, on which Mr. Pichette sits.

Mr. Pichette won't take credit for any specific cost-cutting achievement. "You just manage responsibly. What we did during the last six to 12 months since I arrived, through dialogue at the operating committee, was to say, 'Let's just be prudent.' But we'll continue to fully fund everything we do."

Google has cut programs such as microblogging project (Jaiku) and product lines such as a radio-ad placement service. At the same time, Mr. Pichette is part of a strategy that is looking diversify Google from text-based advertising driven by search on its own sites, and advertising provided to partner sites. It hopes for growth, and revenue, from mobile (such as its Android software for mobile phones) and applications (including the free word processing and spreadsheet programs Google hopes will draw users away from Microsoft).

Meanwhile, investors are still waiting for results from the last series of investments, including YouTube, which has generated disappointment revenue so far.

Mr. Pichette argues that continued spending on projects and acquisitions without an immediate payoff is worthwhile. "If something came around that was a good fit, we'd buy it," he said. "When you look at Google, it's been about acquiring technologies and teams of smart people."

When it comes to e-commerce, he would like to see Canadian companies embrace Canadians' high rate of Internet usage and move more of their business online. "The average Canadian probably spends 50 hours a month online," he said. "Yet Canadian companies have not matched and followed their arguments, by advertising more online, using search advertising, or e-commerce."

Investment in a downturn is especially important, he argues: "You need to be prepared that when [the economy] picks up, you are already taking off. That's how you win."

And you have to be ready for surprises. Google Latitude, the project that let him find his wife with his phone, grew out of an earlier, cancelled project. As Mr. Pichette begins his second year as CFO, he'll have to decide which new projects that could be good for the Net will also be good for Google's bottom line.

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Wednesday, August 26, 2009

Benmosche Bests Pandit

08/26/09 - 09:07 AM EDT


By Eric Jackson

NEW YORK (TheStreet) -- The federal government is running some of America's largest and formerly most influential companies, including Citigroup, AIG(AIG Quote), Bank of America(BAC Quote) and GM.

The track record of government managing -- let alone turning companies around -- businesses is poor. Still, it's calling the tune at the moment, sitting in on internal meetings, pushing out CEOs (like GM's Rick Wagoner), CFOs (like Citigroup's Ned Kelly) and directors (see the reconstitution of the Bank of America board since its April shareholders meeting), and determining whether prearranged pay packages should still be treated as valid contracts.

Yet, the government, with all the best intentions, will never turn around these companies. It's the companies themselves and their employees who must turn things around. AIG and its new CEO Robert Benmosche get that, while Citigroup and its CEO Vikram Pandit don't. Both companies are extreme corporate basket-cases now controlled by the government on behalf of taxpayers. Yet, the styles of Benmosche and Pandit couldn't be more different.

Pandit's been the quintessential invisible CEO: quiet, passive, and immediately forgettable when he does speak. Benmosche is on the other end of the spectrum: straight-talking, aggressive, asking challenging questions, and lots of slaps on the back. Benmosche doesn't suffer fools gladly; Pandit appears to suffer fools for years without saying boo.

As horrible as AIG has been as an investment since last fall, Citigroup has been worse. AIG's stock price is 15% higher than Citigroup's since the government took over the company. When the market learned of Benmosche's hiring and digested some of his positive comments on the company, it responded positively, sending up AIG's stock by 35% last week (and still higher this week).

Although I've yet to meet with a Pandit apologist (maybe the only ones are Citigroup's directors who hired him), if I did, they'd likely say he is just one man and certainly didn't cause Citigroup to be the unmitigated disaster it is today. They'd also say one person -- even the CEO -- isn't responsible for a company's stock price.

Certainly there are many people who also deserve blame for Citigroup's current state of affairs: John Reed, Sandy Weill, the entire board, including Dick Parsons and Bob Rubin and Chuck Prince. Yet, Pandit's been in the corner office for almost two years during the crisis. Citigroup's stock price fell in lockstep with Bank of America's from the fall through the March lows. Yet, since then, Bank of America is up 90% more than Citigroup. Yes, assets and past underperforming loans matter, but so does leadership. Pandit's been a dud as CEO, and that affects investors' interest in the company.

Recall that back in early October last year Citigroup was trading at $23.50 after the Federal Deposit Insurance Corp. backed it to buy Wachovia over a competing offer from Wells Fargo(WFC Quote). Five months later, Citigroup's shares touched 97 cents. It's been a breathtaking evisceration of the former king of the American financial world. Pandit has done little to inspire investor confidence.

Pandit's response to being owned by the government since taking TARP money has been to shrink back even further from public scrutiny and contact with staff. The introverted, bookish professor has become even more bookish.

When he has spoken up, it's irked regulators and peers alike. Jamie Dimon of JPMorgan Chase(JPM Quote) called Pandit a "jerk" under his breath on a conference call with Treasury last fall. Lloyd Blankfein has joked that Citigroup was crazy. One business journalist summed it up to me this way: "I've never seen a Wall Street CEO who gets punked that often."

Where is the leadership going to come from? Sheila Bair is not going to turn this company around. Neither is Tim Geithner or Ben Bernanke. Did Citigroup also sign an addendum to receiving its TARP funding that it had to manage its affairs as if no one were really in charge?

Contrast Pandit's style with Benmosche's, the former head of MetLife(MET Quote) and new head of AIG. If any company is a ward of the state more than Citigroup, it's AIG -- it's actually a $182.5 billion ward.

Yet, here was Benmosche coming out swinging last week. He said in an internal town hall meeting that he sees the government as only one of several critical stakeholders -- the others being clients in the U.S., Asia, and Europe; employees, and then "the people we owe money to" (otherwise known as the government).

Benmosche said undoubtedly AIG would have to sell some of its businesses to pay back the government but ruled out an imminent sale for its investment advisory business and said other asset sales could wait until the company received full value. "I don't liquidate things; I build things," he said. "If the government wanted this money back quick, they shouldn't have come in in the first place."

Benmosche even had the nerve to suggest his management team should have the flexibility to pay its employees more if they've just "shot the lights out" in a given year.

Financial blogger Barry Ritholtz called him "totally absurd" to think he's going to pay back the government "in our lifetime." Maybe. But, if you worked for AIG (or were a stockholder), you cheered last week. It's clear who's in charge at this company. It's not the regulators but actually the AIG and its employees. This is quite a contrast in styles from his caretaker predecessor, Ed Liddy, and of course Pandit.

Benmosche finished an employee town hall meeting recently, warning: "My fear is that you'll say, 'I don't know if Treasury wants it, I don't know if the Fed wants it, I don't know if the lawyers want it, I don't know whatever.' If you sit there every day not making the right decisions to take us to the next level, we'll miss an opportunity."

And, he's exactly right. I'm for leaders who see the facts clearly and don't lead their organizations off a cliff. Both Citigroup and AIG went over the cliff a long time ago. They're down in the valley -- but they're still going concerns and they still need leaders. They're not going to be shut down and shouldn't be led by CEOs who would be suited for winding down companies -- like Pandit.

Ask yourself, if you were working in the bowels of one of these companies, who would your dig deeper for: Benmosche or Pandit? That hidden effort will start to show itself in the operating results and stock price in the coming quarters.

The government would be wise to get out of the way of these companies as quick as it can -- assuming there are competent management and directors. The government and taxpayers deserve the best long-term return on their investment, but they aren't suited to micromanage the businesses. They should get the right managers, get the right risk management and get out of the way.

The CEOs of Citigroup and AIG should push back on government requests when they are unreasonable or at odds with the long-term interests of the business. Benmosche appears well-suited to do that; Pandit doesn't.

We got into the current mess by too many people at AIG, Citigroup, and other firms playing fast and loose with other people's money with poor or no risk management. To fix that, we've needed government intervention.

We've got to get back to a true free market system. To heal these firms and our economy, leaders and employees at AIG and Citigroup need to treat assets they oversee as if it's their own money and -- with proper risk oversight -- start making free choices again on how to grow those assets.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson had no positions in 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, August 19, 2009

Apple Needs Outside Director

08/19/09 - 10:12 AM EDT


Eric Jackson

NEW YORK (TheStreet) -- Speculation has begun on who should fill Apple's(AAPL Quote) open board seat, which opened up after Google's(GOOG Quote) CEO Eric Schmidt decided to step down.

Apple's Chief Operating Officer Tim Cook, who took over running the company while CEO Steve Jobs took time off earlier this year for health issues, has been mentioned as a potential director. That would be the wrong choice.

Despite Apple's enormous financial success over the past five years, its board has flubbed on several issues. It needs to appoint one or two new outside directors who demonstrate to its investors that it takes shareholder concerns more seriously.

Apple's stock growth has been phenomenal since the start of 2004. It's up 1,457% vs. -2% for the Nasdaq. Although Google's gone up three times since its 2004 IPO, Apple is up 9.5 times over that same period. Clearly, Steve Jobs deserves kudos for the groundwork he laid for this success since his triumphant return to the top spot at the company in 1997.

Consider this remarkable fact: Apple spends only $1.3 billion a year on R&D (or about 3% of its overall revenues), compared to Microsoft's(MSFT Quote) almost $10 billion, or about 14% of its overall revenue. Is there another large public company that comes to mind that is more innovative than Apple with such a great return on investment for innovation?

I salute Jobs and the entire company for their results. Yet, I'd remind Apple investors that performance like this brings power. Jobs evaded blame in 2001 in a stock-option back-dating scandal that might have claimed other CEOs. He also announced a six-month leave of absence from Apple earlier this year, without disclosing what he was being treated for. Just because you're a titan of business doesn't mean you shouldn't have to answer to someone.

Since his return in 1997, Jobs has constructed a board around him that is very CEO-friendly. The majority of his directors are active CEOs. This board has taken a hands-off approach and let Jobs run his business. The results speak for themselves. Yet, this lax governance has led to problems. Jobs should use Schmidt's board opening to appoint an outsider non-CEO, not the insider Cook or yet another active CEO.

Apple's board today is made up of eight directors: Steve Jobs; Al Gore; Mickey Drexler, former head of Gap(GPS Quote) and now head of J. Crew(JCG Quote); Andrea Jung who leads Avon Products(AVP Quote); Jerry York, onetime CFO of IBM(IBM Quote) and colleague of Kirk Kerkorian who resigned from GM's board in 2006; Art Levinson, who heads Genentech(DNA Quote), William Campbell, chairman of Intuit(INTU Quote), and Schmidt of Google.

I have no issue with the qualifications of Gore, York, or Campbell to serve on Apple's board (although both Campbell and York have served on this board for 12 years now, which, in my estimation, greatly hinders their independence and ability to question Jobs and Apple with a true arm's length perspective). My concern, if I were a shareholder, would be the abundance of the number of active CEOs on this board.

Drexler, Jung, Levinson and Schmidt are all current CEOs, making them naturally sympathetic to Jobs' position at Apple. I'm sure they are all professionals who take their Apple role seriously, but they likely operate by a "golden rule" of sorts: "Ask Steve questions, as you would like to be asked." In other words, don't make him uncomfortable or challenge.

CEO sympathy would also impact questions of executive compensation and granting stock options. Having more current CEOs on your board has been found to predict greater CEO control and executive pay.

Go back to the stock-option back-dating issue of 2001, which involved Jobs. At that time, he was granted 7.5 million Apple shares with an exercise price of $18.30. Later, it was alleged that the exercise price should have been $21.10, which would have led to additional taxable income for Jobs of $20 million.

Apple again allegedly overstated its earnings by this amount. The company claimed a special board meeting had approved this matter, but evidence came to light later this didn't occur. In late 2006, an independent internal Apple investigation declared that Jobs knew nothing and had returned the options.

In 2007, Fred Anderson, Apple's former CFO at the time, said Jobs knew everything and recommended certain favorable dates for issuing the grants. Later, the SEC and the Department of Justice announced it would file no charges against Jobs, allowing Jobs and the former board to sidestep the issue entirely.

So who was on Apple's Compensation Committee at the time these shenanigans happened in 2001? It turns out that Apple didn't have one then. They had a two-person compensation committee in 2000 -- Gareth Chang, who was an active CEO of a small tech company at the time, and Edgar Woolard who was chairman of what then called Conoco and now called ConocoPhillips(COP Quote). Woolard left the board in 2000 and Apple decided it didn't need a comp committee. Instead, it said in its proxy statement that the entire board would fill that role.

In 2001, the members of the Apple board who had responsibility for the stock-option back-dating were Jobs, Levinson, Chang, York, Campbell, Drexler and Oracle's(ORCL Quote) CEO Larry Ellison. This means that 71% of the board then were active CEOs -- an even higher percentage than that of the current board (63%).

This stock-option back-dating problem is a perfect example of why governance matters -- even when it involves the seemingly small fact of who sits on what board committee. Earlier this week, academics uncovered evidence that stock option back-dating was much more prevalent in recent years than anyone first thought.

In this case, when several red flags were raised that should have alerted Apple's board to action, they did nothing - presumably because company performance was good so why rock the boat. In this case, it appears, Jobs was fortunate that possible federal action was not taken -- for whatever reason. Proper board governance should never have allowed that potential risk to face the company.

If Cook has done an outstanding job and warrants being on the board, that's fine, but not on this board at this time. Apple should either redo the composition of the entire board with more outsider perspectives and also include Cook, or appoint an outsider now for this vacant seat.

An outsider doesn't have to be a source of conflict, but he or she should be a source of independent thinking on Apple's board which is currently dominated by Steve's chums.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund 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, August 12, 2009

Goldman's Board Too Cozy

08/12/09 - 10:01 AM EDT


Eric Jackson

NEW YORK (TheStreet) -- Financial journalists have focused a lot on Goldman Sachs (GS Quote) over the past few weeks.

Matt Taibbi of Rolling Stone kicked over a hornet's nest by calling the firm a "vampire squid," pointing out a number of facts he suggested led to the conclusion that Goldman has received preferential treatment from the government through the last year's economic debacle, and having its tentacles spread around many bases of economic and political power in what he called troubling ways.

Heidi Moore, a business writer in New York City, and Charlie Gasparino of CNBC rebuked Taibbi's take as conspiracy theorist claptrap and defended Goldman as a bunch of really smart folks who know how to make money. Goldman's second quarter's $3 billion profit confirms this point.

It's undeniable that Goldman is the whitest of white-shoe investment banks with very talented people who have been very successful. (It's noteworthy that its headcount of 30,000 employees has barely dropped since early 2007, which speaks to its confidence to market opportunities in front of it and the team it has to capitalize on those opportunities.)

Given the firm's success, some have asked me why I didn't include Goldman among my top three "best corporate boards" in my article from a few weeks ago. The simple answer is that, despite Goldman's steady and uncanny ability to churn out profits, its board governance is pretty average when compared to the others mentioned on the list (Berkshire Hathaway(BRK.A Quote), Amazon(AMZN Quote), and Johnson & Johnson(JNJ Quote)).

Goldman's board is too cozy, made up of insiders, former insiders and people who spent years paying fees to or advising these insiders. Some new outsider perspectives who are knowledgeable in Goldman's markets but not beholden to Goldman management would make this a much stronger board and better protect its shareholders.

The banks have been at the eye of this financial Category 5 hurricane that has swept over the economy in the last two years. Prior to the collapsing of the credit bubble, the banks were printing money. Therefore, no one questioned the fact that the average age of the Bear Stearns' 13-member board was 66, including two directors over 80, and two directors who were presidents of universities with no financial markets experience.

No one questioned that Dick Fuld had loaded Lehman Brothers' board with cronies and made questionable decisions such as putting director Richard Berlind (a Broadway producer) on Lehman's Finance and Risk Committee. Nobody complained about Bank of America's(BAC Quote)) board, which has been steadily dismantled by the government since its April shareholders' meeting (which we wrote about here first several weeks ago before The Wall Street Journal and others picked up on the story).

In America, as long as we are getting paid as shareholders, we can put up with a lot. These banks could have taken their leverage ratios up to 300:1 and appointed Pee-Wee Herman to their Risk Oversight committees and we wouldn't have batted an eye. It's only now -- after the crash -- that we scratch our heads and collectively ask "who was minding the store at these banks?"
With the problems of last fall behind us and as no one believes there could be a run on Goldman - just as we all thought it was similarly impossible before September 10 -- let's examine who's minding the store at Goldman.

The 13-member board has three insiders (CEO Lloyd Blankfein, president & COO Gary Cohn, and secretary John Rogers) and one ex-insider (Stephen Freidman).

The board also has five former or current CEOs who presumably paid Goldman a large amount in investment banker fees over their years in office (including current ArcelorMittal(MT Quote) CEO Lakshmi Mittal, Colgate-Palmolive(CL Quote)'s former COO, Lois Juliber, former chairman & CEO of Fannie Mae(FNM Quote), James Johnson, former CEO of Medtronic(MDT Quote), William George, and former Chairman and CEO of Sara Lee(SLE Quote), John Bryan). Goldman also has Rajat Gupta (former head of McKinsey) on the board - someone who likely gave Goldman advice over the years but who also took millions in fees for doing so, creating a non-arm's length relationship with the firm.

I'm not saying these directors aren't professionals who don't try to do the right thing for shareholders. Goldman PR would likely say: "These men and women are titans of business, whose past relationships with Goldman give them valuable insights into the inner workings of our unique firm and culture, making them more effective directors. And they all meet the strict NYSE standards for board independence."

First, the NYSE definition for an independent director is rather meaningless as it ignores all past relationships like the ones described above. The SEC would do well to require disclosure of past financial relationships between directors and the firms on whose boards they sit.

Second, I strongly believe that former clients, who have a relationship on paying Goldman for expert advice, develop a relationship for receiving but not giving advice. This is rather problematic if they later become directors of that firm and must start giving advice and acting as fiduciaries for shareholders (not for the friendly members of Goldman management with whom they've had decades of relationships).

If you disagree with this point, ask yourself: After a lifetime of taking advice from your parents, how easy would it be for you to suddenly flip the switch and start giving them advice and for them to take it?

This leaves two truly "independent" directors on Goldman's board: Claes Dahlback, an advisor to a Swedish venture capital firm, and Ruth Simmons president of Brown University. Simmons is a career academic, with no direct experience working in capital markets. I question her ability to push back on internal debates of firm strategy and risk oversight, especially when she has to go toe-to-toe against Stephen Friedman or Lakshmi Mittal.

Two truly independent directors out of 13 is clearly insufficient for a company as important to the US financial system as Goldman Sachs. At least a third of its directors should be independent from past relationships with the firm, so that they can truly question how the firm structures itself and manages its risk.

These independent directors need to have the requisite background and capital markets experience to meaningfully participate in board meetings. Goldman can't fill those four slots with four presidents of local art museums who will defer to the other business savvy insider directors.
Is Goldman heading for a fall because of poor oversight? Not necessarily. It is a great firm, with an impressive culture. At the moment, their bank status, easy access to cheap capital, a dramatic drop in the number of its competitors, and an abundance of smart people in the firm indicate that all the ducks are lined up for many profitable quarters to come for the investment bank.

Yet, forewarned is forearmed. The current Goldman board is too cozy and non-independent as currently composed

Governance really counts in all the little decisions that amass leading up to times of crisis or unexpected volatility when conventional wisdom gets tossed on its head. When I look at Goldman today, I see risk-taking mattering as much to the firm today as ever. We see that in its increased VaR (value-at-risk) at $245 million in the latest quarter, and in its current leverage ratio of 14, which although down from pre-crash levels (of 30) is higher than you might expect.

A well-functioning board isn't the be-all and end-all to risk management, but it is central to it. Goldman leads its industry in many ways. It should lead in this area by revamping its cozy board with respected outsiders who know their stuff and demonstrate to shareholders that tough questions are being asked behind closed doors.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson holds no position in GS but executes trades through Goldman Sachs Execution & Clearing, LP. 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, August 05, 2009

Letter to Senator Mel Martinez on Dismantling the Broadridge Monopoly

Last month, I wrote to Chairman Mary Schapiro of the SEC about dismantling the monopoly Broadridge enjoys counting electronic proxy votes for all US public companies.

Today, I wrote to Senator Mel Martinez (R-FL), who serves on the Senate Banking Committee, about the matter.

August 5, 2009


The Honorable Mel Martinez
U.S. Senate
Room 356 – Russell Senate Office Building
Washington, D.C. 20510
(Fax) 202-228-5171

Re: Encouraging the SEC to dismantle the Broadridge (BR) monopoly

Dear Senator Martinez:

I am an individual investor and hedge fund manager based in Naples, FL, who is concerned about shareholder voting and communications issues.

I would like to urge you to write to SEC Chairman Mary Schapiro and ask her and her fellow Commissioners to break up the monopoly currently enjoyed by Broadridge (ticker: BR) in overseeing electronic proxy voting for all public companies. I have also recently written to the Chairman on this matter (see the end of this letter).

The foundation of our capital markets is a “one shareholder, one vote” system for running our public companies. On an annual basis, shareholders get to voice their approval or disapproval about the way their representatives are running the company on the Board of Directors and in Senior Management. Broadridge is the company which is solely responsible for counting those votes. It has a monopoly.

Last August, after Broadridge released the results of the Yahoo! (YHOO) annual shareholders’ meeting vote, there was a large protest made by Gordy Crawford of Capital Research (one of the largest mutual funds in the country) who questioned the veracity of the results. Because of Mr. Crawford’s stature, the fact the Capital Research was one of the largest Yahoo! investors, and the intense media interest in the Yahoo! voting results, Broadridge was forced to verify the results. They later admitted their results had been far off the mark from the actual ones.

Although Broadridge said the problem was a simple “truncation error” made by a computer, it’s clear when you look at the actual results and the ones first reported that there was human error involved. What was shocking about the incident was that it likely would never have been reported had Gordy Crawford not spoken up. It makes me wonder how many other errors made by Broadridge are never reported or acknowledged.

I understand that the only check and balance over Broadridge’s monopoly is that they have to submit regular “updates” to the SEC. I don’t believe this is sufficient, given the importance of these voting results.

I also understand from those who work in Investor Relations at corporations using Broadridge that they are often frustrated by monopolistic pricing demands placed on them by Broadridge for using their services.

In my view, investors and public companies would be best served by allowing another company to compete with Broadridge. Let the best provider to companies and shareholders be successful. It’s that spirit of competition and innovation which has served our country so well.

I hope you will consider writing to Chairman Schapiro about this matter. Although the SEC has many issues it is tackling at the moment, breaking up the Broadridge monopoly will help make our companies more competitive and risk-conscious than they previously had been. This certainly would have served them and the whole American economy well in the past 5 years.

Thank you.

/Eric M. Jackson/

Eric M. Jackson, Ph.D.
Managing Member
Ironfire Capital LLC

The letter below was sent on July 16, 2009 and can be found at:

From: Eric Jackson
Sent: Thursday, July 16, 2009 3:00 PM
To: ''
Subject: Breaking Up the Broadridge (BR) Monopoly

Dear Chairman Schapiro:

I would like to urge you to consider breaking Broadridge’s monopoly in overseeing electronic proxy voting for all public companies.

As you might recall, last year, after Broadridge released the results of the Yahoo! (YHOO) vote, there was a large protest made by Gordy Crawford of Capital Research who questioned the veracity of the results. Because of Mr. Crawford’s stature, the fact the Cap Re was one of the largest Yahoo! investors, and the intense media interest in the Yahoo! voting results, Broadridge was forced to verify the results and admitted their results had been far off the mark.

Although Broadridge said the problem was a simple “truncation error” made by a computer, it’s clear when you look at the actual results and the ones first reported that there was human error involved. What was shocking about the incident was that it likely would never have been reported had Gordy Crawford not spoken up. It makes me wonder how many other errors made by Broadridge are never reported or acknowledged.

I understand that the only check and balance over Broadridge’s monopoly is that they have to submit regular “updates” to the SEC. I don’t believe this is sufficient, given the importance of these voting results. What does it matter if the SEC allows proxy access or gets rid of broker votes, if investors can’t trust the final voting results because of future Broadridge “truncation errors”?

In my view, investors would be best served by allowing another company to compete with Broadridge. Let the best provider to companies and shareholders be successful.

I also note that Broadridge appears to be much more company-centric (i.e., management) than shareholder-centric.

I hope you will consider adding further examination of Broadridge to your already busy list of plans.


Eric Jackson

Eric M. Jackson, Ph.D.
Managing Member
Ironfire Capital LLC

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Yahoo!'s Directors Must Go

08/05/09 - 09:51 AM EDT


Eric Jackson

REDMOND, Wash. (TheStreet) -- Last week's news of a search partnership between Microsoft(MSFT Quote) and Yahoo!(YHOO Quote) means that Yahoo! is leaving the search business and handing the keys over to its rival and former suitor.

The market sent Microsoft's shares higher and dropped Yahoo!'s like a stone. Since the announcement, 15% of the Web portal's market capitalization had been shaved off. After a lot of tough talk from the new CEO in her first six months, Carol Bartz has laid her first egg with investors. She didn't manage expectations properly. But it's Yahoo!'s longtime directors who deserve the most blame for this most recent Yahoo! stumble. They should leave immediately.

After years of abuse, Yahoo! investors took heart when Bartz was named to replace Jerry Yang as CEO in January. From the moment she arrived, her cussing and put-downs of her predecessors earned her points on Wall Street and with journalists.

She described Yang's organizational chart of Yahoo! as something out of Dilbert; she agreed with the "Peanut Butter Manifesto" -- a 2006 internal document penned by a Yahoo! vice president that pointed out the internal problems with the company -- at a May conference with Terry Semel and Sue Decker (Yang's predecessors in the top two roles) in the audience; and at the same conference, about 60 days before last week's announcement, she told the audience she would do a deal with Microsoft for "boatloads of cash."

After a $47 billion buyout offer from Microsoft last year for all of Yahoo!, followed by a proposed search deal with a $5 billion upfront payment, Yahoo! investors believed that Bartz finally had Yahoo! on the right track. She let the expectations run. The stock climbed to more than $17 from $13 before the search deal was announced.

Yet, last week's announcement saw Yahoo! shareholders get no upfront money from Microsoft. Instead, they get 88% of the ongoing revenue, or traffic acquisition cost (TAC) rates, from Microsoft in the partnership for the next three years. Meanwhile, Yahoo!'s shutting down its search engineering unit, which employs about 1,000, and saving on that ongoing investment.

Microsoft is getting a zero money-down, lease-to-own deal that allows it to swallow the No. 2 competitor in the fast-growing search market and achieve a credible market share level against Google(GOOG Quote). Despite the high TAC rate, you haven't been able to find one Microsoft shareholder irate about this deal, including me.

Bartz tried to explain the deal to her investors on the initial call by saying that instead of receiving "boatloads of cash," they were getting "boatloads of value" from the deal. The Street thought otherwise and butchered Yahoo!'s stock price.

For the first time in her Yahoo! tenure, she's contrite: "I made a mistake. I was never interested in doing it for upfront money. That doesn't help me operate a business."

Bartz can't have it both ways. She can't portray herself as the "grown up" cleaning up the mess that the kids who used to run the place left her with and then make such a rookie mistake in managing investor expectations. Either she knew 60 days ago that she was getting no upfront payment and made a misguided "boatload" comment, or Microsoft really turned the screws on her in the last few weeks and stuffed lousy terms down her throat that she had to take.

Her other explanations for doing this deal sound hollow. She said, "We didn't want to get into an arms race with Google and Microsoft in search." Then why did your board authorize spending billions on search companies and hundreds of millions of dollars in internal development of the much hyped and never effective "Project Panama" over the last three years?

Bartz said, "We didn't want to pay a lot of taxes on an upfront payment." Wouldn't your shareholders like to see you paying a lot in taxes on a payment as a sign that you had received a lot of money from Microsoft?

She said the market had changed a lot since 2008, when the full buyout offer for Yahoo! was still on the table. Yet, since Microsoft dropped the bid for Yahoo! on May 4, 2008, the Nasdaq is down only 17%, while the value of the deal Microsoft is paying to Yahoo! has dropped 90% (from $47.5 billion to $4 billion to $5 billion, according to Bernstein's Jeff Lindsay), and Yahoo!'s stock price has dropped 47%.

And, what's with the heavy "me" and "I" references in her explanations? I was under the impression that turning around a $20 billion company was a team sport.

These mistakes aside, the real blame here lies at the feet of the Yahoo! directors who have served on the board for the entire time that Yahoo! has failed miserably in search -- the most lucrative non-monopolistic business that modern business has ever known. Yahoo! has had plenty of chances to dominate this space for the last decade and has missed every one.

Yahoo! built its own search engine, which was the original mission of the company; the directors decided to outsource it to a then unknown company called Google, giving Google huge name recognition because of Yahoo!'s traffic; Yahoo! later determined search was a valuable business itself and paid $235 million for Inktomi in 2002, and $1.6 billion for Overture, which created paid search before Google created AdWords, in 2003; and the directors trusted Semel and Decker's promises that "Project Panama" would close the gap between Yahoo! and Google. Yahoo!'s search share is below 20% and the directors have now decided to shut down all internal search development and hand the keys over to Microsoft.

There are five Yahoo! directors who've sat in on all the deliberations about search in the last eight years: current Chairman Roy Bostock, Ron Burkle, Arthur Kern, Eric Hippeau, and Gary Wilson. Where is the accountability here? Why must Semel, Decker, and Yang face the music for strategic decisions that didn't pan out, while these five men avoid all scrutiny and criticism? It's an embarrassment for Yahoo! and each of these men's corporate reputations that they are still there.

We can't always be right, but each of these men has endorsed failure too many times to still retain a job as a fiduciary for Yahoo! shareholders.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund had 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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Tuesday, August 04, 2009

Microsoft Needs Big Acquisitions

07/29/09 - 09:52 AM EDT


Eric Jackson

REDMOND, Wash. -- (TheStreet) -- Microsoft's(MSFT Quote) disappointing quarterly results raise the question of why it hasn't used its ample cash reserves to buy faster-growing companies in a manner similar to its larger rivals IBM(IBM Quote) and Oracle(ORCL Quote).

Last week's earnings results sent the software giant's shares tumbling 10% Friday. The biggest reason for the drop was the $1 billion shortfall in revenues which surprised analysts.

Microsoft's operating results clearly do not mirror those of Google(GOOG Quote) or Yahoo!(YHOO Quote) in the search market (both had weaker results) and they do not mirror IBM's surprising upside results in the services market.

Despite its five business segments, Microsoft's fortunes (and its stock price) most closely rise and fall with the fortunes of the PC market. As that market continues to struggle in the recession and while many customers wait for the rollout of Microsoft's Windows 7 in October and Office 10 next year, Microsoft experienced a strong pull-back in orders in the quarter and the first ever 12-month decline in revenues.

Microsoft bulls argue that the latest results look backwards, and the stock's price is going to reflect investors looking forward to the new product releases being rolled out starting in October with Windows 7. They say that the stock is already heavily discounted relative to its peers, even though its runup is more than 50% since its March lows. That leaves ample room for the stock to move up further. I agree with this view.

Microsoft has a bigger problem, even with the coming product releases. The company's revenue stream is thinning, and it takes a lot of new revenue to keep this elephant looking like it's still dancing and deserving a higher P/E multiple.

Although search engine Bing's successful rollout and a potential deal with Yahoo! are important bricks for Microsoft, their revenue impact to the company will still be very small for a long time. Even with the new products coming on stream, the market will be asking, "What's next?"

The simple truth is that Microsoft has to make acquisitions -- big ones -- to move the needle with respect to its overall top-line revenues and earnings. Unlike many of its competitors, Microsoft has the financial flexibility to do a few very large acquisitions and many small to medium-sized ones. IBM, Cisco(CSCO Quote) and Oracle have shown that they can successfully use an acquisition to grow top- and bottom-lines without getting overly distracted by the integration process.

Some big-name acquisition targets for Microsoft, including SAP(SAP Quote) and Research In Motion(RIMM Quote), already have been thrown around by observers. Either would make sense, although SAP appears to be facing challenges of its own in growing its revenue.

However, in talking with many Microsoft investors over the last few months about this strategy, I was surprised to hear such a high degree of skepticism about the company's ability to execute it. "Right strategy, wrong management," was a common refrain.

Microsoft has made few acquisitions in its history -- and certainly not any on the scale of an SAP or a RIMM. When it has made acquisitions or large investments (like aQuantive or Facebook), the general perception is that it's done so quickly out of fear and have overpaid.

At IBM, Cisco, or Oracle, they have SWAT teams of people with years of experience knowing which companies to go after and which to pass on. When they decide to engage in M&A discussions, they know exactly what that business is worth to them and can push back from the table when the bidding gets too rich.

Once a deal is struck, those companies know exactly how to get the business integrated into the fold, retain key executives and maximize the value of the deal for themselves in the long run.

Microsoft has less of a successful track record in all these areas. The company might still be able to pull it off, but what kind of pilot would you like landing your jumbo jet: one with thousands of miles flown or a newbie?

Given Microsoft's size, cash and low price-earnings ratio (which I believe reflects the market's concern about its future growth prospects), an acquisition strategy is the right one for the company -- as opposed to more internal investments in R&D, which already clock in at just under $10 billion a year.

Investors' concerns about management's ability to execute are legitimate, but can be addressed. Executives can be hired from other companies who have a demonstrated track record of executing the kinds of acquisitions Microsoft needs. One hire will not do. Microsoft will need teams of people.

Microsoft will also have to give these new people a mandate and then work with them to achieve it. That will require support from the board, Steve Ballmer, Chris Liddell and the heads of the five business segments (where the newly acquired companies will be integrated into), as well as key managers within those segments.

Going from doing no real acquisitions to buying a company the size of an SAP would be a shock to the Microsoft system. It would be the equivalent to jumping on a moving subway train as it goes past your station. There is risk for investors.

However, the question that needs to be posed to Steve Ballmer and the board by investors is, "What is your strategy to grow the business and the stock price if it does not include growth through acquisition and why is it likely to be more successful?"

As an investor in the company, I would like to hear more discussion from Microsoft of the long-term direction of the company and less about Bing, Yahoo! and Google.

-- Reported by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund holds a net 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, August 03, 2009

Google's CEO to Resign From Apple's Board

Monday, August 03, 2009

Ken Sweet


Apple (AAPL: 166.43, 3.04, 1.86%) said on Monday that Google’s (GOOG: 452.17, 9.12, 2.06%) CEO Eric Schmidt would resign from Apple’s board of directors effective immediately, reflecting the changing competitive environment between two of Silicon Valley’s most iconic companies.

The decision comes as Google’s and Apple’s businesses edge closer together, especially in the world of mobile and data processing, and as both firms receive closer antitrust scrutiny from regulators.

Apple said Schmidt’s resignation was a mutual decision. He was a director at the company for three years.

In a statement, Apple co-founder and CEO Steve Jobs said, “unfortunately, as Google enters more of Apple's core businesses … Eric's effectiveness as an Apple board member will be significantly diminished.”

Google and Apple, while both technology darlings, once worked in separate spheres of technology: one in search, the other in hardware and software. But as technology has evolved, and as Google in particular makes forays into new business lines, Google and Apple find themselves more and more in direct competition.

Apple’s popular and lucrative iPhone and application store now competes with Google’s Android platform -- and its own app store. Google recently announced the development of an operating system called Chrome OS, which could compete with Apple’s OS X.

"It speaks to how the competitive landscape can change so fast in Silicon Valley," said Eric Jackson, fund manager with Ironfire Capital.

Schmidt said in his own statement that he believes Apple is a "fantastic company,” but said “it makes sense for me to step down now."

"They should use this departure to put an independent director on Apple's board," Jackson said. "Boards over time become enamored with 'rock star' CEOs and executives and like to defer to them, when at this time they should be even more involved."

Shares of Apple and Google were higher in Monday trading along with the broader market.

While Apple said the conflict of interest was the primary reason for the resignation, there have been some legal and anticompetitive concerns surrounding Schmidt’s seat on Apple’s board as of late. The Federal Trade Commission has been looking into whether Google and Apple have been violating antitrust laws by sharing board members.

Genentech Chairman Arthur Levinson sits on the boards of both Apple and Google.

The Federal Communications Commission is also inquiring into last week’s reports that AT&T (T: 26.19, -0.02, -0.08%), which owns the network the iPhone operates on, may have prevented Google Voice Internet-telephony software from being distributed on the iPhone app store.

This isn’t Apple’s first brush with corporate-governance controversy. Some shareholders felt earlier this year that the company wasn’t forthcoming enough about Jobs’s health as the revered company co-founder took medical leave and underwent a liver transplant. Apple also was named in the stock-options backdating scandal several years ago, which came before Schmidt was elected to the board.

Google, of course, is no stranger to tech-company rivalries. To name just one recent example, Microsoft (MSFT: 23.83, 0.31, 1.32%) and Yahoo (YHOO: 14.34, 0.02, 0.14%) announced a search deal last week in order to directly compete with Google, and Microsoft is working on a free online version of its Microsoft Office suite that would compete against Google Apps.

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Yahoo investors disappointed, but hold out hope

Wed Jul 29, 2009 6:35pm EDT


By Anupreeta Das

NEW YORK (Reuters) - Yahoo Inc investors are disappointed it could not milk more money from Microsoft Corp, but said they were relieved a deal was struck that would allow Yahoo to focus on its other, stronger businesses.

The companies signed a 10-year pact on Wednesday under which Microsoft will power search queries on Yahoo's sites and Yahoo's sales force will be responsible for selling premium search ads to big buyers for both companies.

Yahoo shares fell more than 12 percent during the trading day because investors felt they got a raw deal. Prior to the announcement, some had expected Microsoft to pay up to $5 billion in upfront fees to Yahoo.

"It was disappointing, based on expectations," said Ryan Jacob, who owns Yahoo shares through his Jacob Asset Management. "I wish they (Yahoo) could have gotten better terms."

Investors lamented that Microsoft paid Yahoo no money upfront and that it will share only 88 percent of search revenue from Yahoo sites with Yahoo.

"I was surprised at their decision to give the milk for free rather than forcing Microsoft to buy the cow," said Eric Jackson, a former Yahoo investor, who sold off his holdings in September after Yahoo turned down Microsoft's $47.5 billion buyout offer.

"Yahoo should have fought harder for a big upfront," similar to the search proposal Microsoft initially suggested last year after it failed to buy all of Yahoo, Jackson added.

Jackson, who now owns Microsoft stock, does not regret selling his Yahoo shares because the search pact, "is a great deal for Microsoft, not so much from Yahoo's perspective."

Other Yahoo investors still held out hope for a full acquisition by Microsoft, or at least a search deal that would add value to Yahoo's share price. How much value this deal brings to Yahoo is not immediately clear.

"The sentiment was that deal would include as much as $3 billion to $5 billion of upfront, based on what sell-side analysts were saying," said a Yahoo investor, who spoke on condition of anonymity. "That's several dollars of value that goes off Yahoo's share price immediately."

Still, investors and analysts said the long-term benefits to Yahoo of partnering with Microsoft outweigh the short-term losses, especially in light of Google Inc's leading position in the search market.

They are keen for Yahoo to focus on developing its huge portfolio of websites and generate more revenue from selling advertising space on them, known as display ads, rather than battling market leader Google on Web search.

"The lack of an upfront payment and of cash flow guarantees, of a display relationship and complex systems integration are short-term negatives," wrote Jefferies & Co analyst Youssef Squali in a research note.

But Yahoo can now save on search technology expenses and add to earnings. It also "frees up management to focus exclusively on display advertising, where (Yahoo) clearly has an edge," Squali said.

Some analysts also said Yahoo Chief Executive Officer Carol Bartz was under pressure from investors to sign a search deal with Microsoft and move on after talks had dragged on for 18 months.

"This doesn't get them close to Google, but it's somewhat better for the market," said Ned May, an industry analyst with Outsell Inc. "There was such relentless pressure from Wall Street, they had to do something."

With the Microsoft distraction tended to, investors are hoping Bartz will focus more intently on the challenge of turning Yahoo around.

"They have some good strengths -- communication products, different verticals, Yahoo News, Yahoo Sports -- where they're number one across the board," said Jacob. "These are the areas really where they should be focusing and spending the money."

Yahoo, which recently reported quarterly earnings slightly ahead of Wall Street's expectations, has steadily cut costs in recent months. Bartz said on the earnings call the company is now hiring more engineers and sales and marketing staff as it invests in new products and branding.

(Reporting by Anupreeta Das; editing by Tiffany Wu and Andre Grenon)

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