Friday, October 29, 2010

Notes From the Ground in China, Part II

By Eric Jackson

RealMoney Contributor

10/29/2010 7:30 AM EDT

Click here for more stories by Eric Jackson

It's been a week since I arrived in China. I have spent time in Shanghai, Beijing, Harbin and each city's suburbs, and this morning I was up in the countryside of Heilongjiang Province near the Russian border. I have had the chance to meet with company executives, workers, locals and government officials. I wanted to provide some commentary on some of the China-related topics that get a lot of coverage in the U.S. press, which I believe are important to consider when thinking about investing in a public company here.

Dollar-Yuan Rhetoric

We hear endless talk about whether and when the Chinese will revalue their currency, which is currently pegged at about 6.6 yuan per dollar. U.S. politicians keep saying it needs to go higher, although they never say what rate they would ultimately prefer. I've heard fund managers Jim Chanos and Hugh Hendry suggest the yuan would sink vs. the dollar if it were allowed to float, though I personally just don't follow their logic in that.

In any case, if the yuan were allowed to float, I'm sure it would rise against the buck, but I don't expect this to happen. No matter how many U.S. politicians talk about what China should do -- including members of the House of Representatives who seems have never gone to China, but have no problem spouting off policy prescriptions -- and no matter how many G8 countries engage in these same discussions, none of it will have any bearing on what Beijing does.

Think about how long this issue has been debated. In all that time, nothing substantive has happened. Moreover, try to put yourself in the shoes of the Chinese government. Why would you want to raise the value of the yuan? How does that help you and the Chinese people? Remember, China's goal -- kind of like that of the U.S. Federal Reserve -- is social stability, which means full employment and price stability.

Given the upcoming U.S. elections, a lot of theater is going on right now, and politicians are saying a lot of things so they can tell their constituents that they said a lot things. Don't expect the yuan to move much, if at all.


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Notes From the Ground in China

Monday October 25, 5:00 pm ET

By Eric Jackson, RealMoney Contributor

I'm in Shanghai and have been traveling in China since Thursday. I will be in the country for the next two weeks on business and will be providing regular updates here at RealMoney and over on TheStreet.

What have I learned so far on the visit?

  1. China is still growing like a weed. The latest GDP numbers last week said the country was still growing at a 9.6% pace. Some observers in the West are concerned that the number wasn't above 10%. On the ground over here, I see massive growth in infrastructure, commercial and residential real estate, and the country appears to be in the early stages of a secular surge in middle-class spending.
  2. Worries about a housing bubble are overblown. Last spring, Jim Chanos and other hedge fund managers claimed that China's property market was in a massive bubble, calling it Dubai times 1000. Since then, the country has introduced measures to cool speculation in Shanghai, Beijing and Shenzhen. Last week, the Chinese central bank raised rates by a quarter point and is expected to raise it five more times in the next months, taking it back to pre-crisis levels. Prices remain firm in Shanghai and have stayed strong in the smaller cities. People are borrowing very little to buy their homes compared to their counterparts in the West. The same is true for the speculators -- many in China still see a home as a desirable and safe asset to own.
  3. The "middle classification" of China will be the country's next Great Leap Forward. China is pursuing a policy of increased internal consumption in order to better insulate itself from financial problems occurring outside the country. This policy is very wise, as most Chinese I've seen in the last few days appear to like spending money and will be happy to abide by the government policy to spend more in the future. Once this starts to happen, the power of China's large population will start to show itself.

As I see them, the big risks remaining for China are:

  1. A trade war spilling over and threatening the global economy: Currency tensions are running high these days, with China in a central position. On the one hand, Beijing wants to protect its own interests and not increase the value of the yuan just because the U.S. and others want it to. On the other hand, it can't be inflexible and risk protectionism and other retaliation that would end up greatly hurting the world economy.
  2. Increase in commodity prices: China is in desperate need for resources (aside from the rare-earth variety) to power its growth. As such, it can't have runaway commodity prices again as we saw in 2008.
  3. Income inequality sparking social unrest: There is great concern among government officials and businesspeople in China about potential future fighting between the haves and the have nots -- or urban vs. rural. This looming discord drives much of Chinese policy today: how to promote harmony over jealousy.

The Chinese government has a big dry mop it can use to soak up a lot on nonperforming loans if need be. While there are risks facing the country, they aren't the ones which get the most attention from Western observers.

From where I sit, the future still looks very bright in China.

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Bettting on Shanda Interactive

By Eric Jackson10/27/10 - 07:00 AM EDT

SHANGHAI (TheStreet) -- I have been in China for the last week visiting with different companies. Throughout the trip, I'm going to be reporting on it in regular updates in TheStreetas well as RealMoney.

On Monday, I met with Shanda Interactive Entertainment (SNDA_) in Shanghai. Going into the meeting, I had no idea that Chinese gaming and Internet stocks were going to have such a strong week. What sent the entire sector rocketing higher was's (SOHU_) positive earnings results which showed advertising revenue strongly ahead of analysts' expectations. This sent other Chinese portals like Sina(SINA_) and online gaming companies like Changyou(CYOU_) rocketing higher. Changyou is the publicly-traded online gaming company owned by Sohu.

The good news of Sohu showed that China's economy is still hot and growing, bringing more and more advertising revenue and usage to Web companies there.

Which brings us back to Shanda. The company is as old as other first-generation Chinese Internet companies like Sohu and Sina, yet they haven't been as high-flying of late -- especially after missing their second-quarter earnings' estimates by 12 cents a share. The key questions are why have they lost their mojo and can they get it back?

There are two Shanda-related companies which trade in the U.S.: Shanda Interactive, which is the original parent company with whom I met, and Shanda Gaming(GAME_), which is the online gaming business subsidiary of Shanda Interactive.

Shanda Gaming was spun-out from Shanda last year to better let investors assign its value as a stand-alone from the parent. However, investors have tended to ignore both the online gaming company and the parent since that spin-out. The enterprise value to EBITDA ratios of Shanda and Shanda Gaming are 3.6x and 5.2x respectively. Contrast that to Sohu's and its online gaming subsidiary Changyou's of 10x and 8.6x. It's clear that Shanda has been lost in the shuffle.

The parent Shanda relies on its online gaming group as its cash cow to bring users back. It has done a great job over the last 10 years of producing a number of hit games. It's also established its platform as a popular enough forum for developers to build and show their games on. The company is relying on the belief that its open and popular platform will continue to attract gamers. Most of their games are played online on computers, but they are working to allow more and more games to be available to play on mobile phones, including the very popular iPhone 4 and iPad from Apple(AAPL_).


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Wednesday, October 20, 2010

Time to End Proxy Vote Monopoly: Opinion

By Eric Jackson, Senior Contributor10/20/10 - 06:10 AM EDT

The Securities and Exchange Commission has been very busy over the last few months with concept releases and new proposed rules. So, lost amidst this activity, you might not have realized that today is the deadline for comments about proposed changes to proxy system.

Before your eyes glaze over, let me say that it's actually a very good thing. And, unlike most situations, there is one proposed change under consideration on which both investors and public companies are in complete agreement: ending the monopoly enjoyed byBroadridge(BR_) for counting proxy votes.

Typically, shareholders and general counsels are at loggerheads on how best to reform the voting process for director elections each year. The lawyers protecting the interests of the managers who pay them seek to keep shareholders at bay as best they can. This is why the whole "proxy access" issue generated so much heat earlier this year.

In "proxy access," shareholders wanted to be able to nominate their own representatives to stand for election to a corporate board -- without paying millions of dollars to run a full-blown "proxy contest." The lawyers for management lashed out against "proxy access" stating that such a process would be "hijacked" by nefarious "special interest groups" who would dangerously promote non-business related ideas on corporate boards if elected.

Shareholders countered that director nominees wouldn't get elected without the majority consent of the company's owners, so why would they elect someone who wouldn't best represent their interests?

Even still, by the time the lawyers and corporate "special interests" got through lobbying politicians, the SEC's passed rule on proxy access stated that investors had to own 3% of a company for at least three years before they could even make the nomination. So much for PETA and Amnesty International being able to hijack the process.

But the corporate paid lobbyists didn't stop there. The US Chamber of Commerce and Business Roundtable have recently sued the SEC to stop the newly passed proxy access rule from being implemented.

So, how is it possible that investors and management can come together on the issue of Broadridge holding a monopoly on counting votes? Easy. Both companies and shareholders aren't being well-served by the status quo.

On the company side, they are held hostage to whatever prices Broadridge wants to charge for their services. As the Shareholder Communication Coalition recently argued to the SEC: "The prices for proxy distribution and communications services should be established by open competition among service providers handling these functions, based on value to end users, and not through a fee schedule established by regulators."


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Monday, October 18, 2010

Google's Turning Point

By Eric Jackson
RealMoney Contributor

10/18/2010 5:30 PM EDT
Click here for more stories by Eric Jackson

Google (GOOG - commentary - Trade Now) earnings last Thursday were a turning point for the company. Even after Friday's big 10% bump up in price, the stock is still down 3% for the year. Negativity has surrounded the company for most of the year -- some of it deserved, in my view, because of missteps (like Google's awkward and ill-advised withdrawal from China in the spring), and some of it not.

The concern for investors for much of the year -- aside from the whole China kerfuffle -- has been whether Google is just a one-trick pony.

Sure, it's been a hell of a pony, but investors have been wondering if Google could leverage its dominance in text ads for search into other areas. The company has thrown a lot of pasta against the wall over the years -- everything from Google Wave to Orkut to its $1.6 billion acquisition of YouTube a few years back - but not a lot has stuck in terms of meaningful profits... at least, not yet.

So, what was so eye-catching about Thursday's earnings call was that Google decided to give some specific data on its key new areas of growth.

The key stats revealed by the company were that:

  • The mobile business is contributing more than $1 billion annually in revenue (calculated by taking the last quarter's revenues and annualizing them)

  • Display advertising (as a result of the Double-Click acquisition a couple of years ago and the YouTube display ads) is contributing more than $2.5 billion annually in revenue (calculated using the same methodology as mobile)

  • More than 2 billion YouTube videos are viewed each week
  • What also seemed to surprise analysts on the upside was a drop in Google's TAC (traffic acquisition costs) in the quarter. Google is no longer paying News Corp's (NWS - commentary - Trade Now) MySpace for traffic under a very lucrative (for MySpace) agreement, struck a number of years ago when MySpace was still the big dog of the social-networking space.

    So, the market is starting to sit up and take notice of Google again in the last two days. And why not? These metrics are important indicators of the company's future success.

    The area that intrigues me most -- as a long holder of GOOG -- is mobile. This $1 billion in revenue is all from mobile ads. Google is still in a land-grab mode with Android. It continues to give away the operating system for free to carriers in order to drive adoption. And that is certainly working, as Android has grown from nothing to major mobile player in the last year. Many expect it to surpass Apple (AAPL - commentary- Trade Now) in terms of mobile market share soon, as it is now part of so many devices.


    [*** This post is an excerpt of the full article, available by clicking here to go to Note: subscription required. ***]

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    Saturday, October 16, 2010

    Rosenberg on the Economic Crisis, Part 3

    By Eric Jackson10/16/10 - 02:55 PM EDT

    Editor's note: Following is the third installment in a three-part interview. Here is Part 1, and here is Part 2.

    NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

    Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

    The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

    In the following, final installment of my interview with him, he discusses why the dollar is about to rally and why a global currency war is such a serious problem.

    Eric Jackson: Do you see a rally ahead for the U.S. dollar? It seems to be as hated now as the euro was earlier in the year when people were calling for parity.

    Rosenberg: Yeah, the U.S. dollar is hugely oversold. It's ripe for a significant countertrend rally. It's probably as oversold now as the euro was 6 months ago.

    Right now, Ireland's deficit-to-GDP ratio is the same as Canada's debt-to-GDP ratio. But the reality is that no one cares because people know the ECB will ride to the rescue of all these Club Med countries. At the margin, there are people who think the euro is not going to survive, but they figure, "If we buy German bonds, and the euro fails, we're getting exposure to future deutsche marks, so what the heck?" The ECB is the only major central bank that's not cutting rates or getting into quantitative easing.

    So what you have in the rest of the world is a dysfunctional foreign exchange market. What history shows is that this will ultimately spill over into other asset classes. You've got China as the poster boy for these great problems in the foreign exchange market, but we know that the yuan is undervalued and China is going to march to its own drummer. And the one mistake they're not going to make with their own economy is to follow the footsteps of Japan and the aftermath of the Plaza accord and allow their currency to appreciate with all the unknown deflationary consequences down the road. So, as far as China's concerned, the most important thing is social stability, so it's unlikely that they're going to do anything radical in the foreign exchange market.

    In the meantime, we've got the Fed embarking on what could be another round of quantitative easing, which is fascinating because the Bank of Japan just went two rounds of easing ... to no avail. The Swiss authorities did the same for the Swiss franc with the same result. The Fed is now pursuing a policy that is aimed at weakening the dollar in the name of economic stimulus. At the same time, we have other countries, who have seen their currencies surge like Brazil and Thailand, who have raised their income tax on bond income for foreigners. Capital controls probably come next. So, you've got a very unsettling situation in the foreign exchange market right now.


    [** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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    Friday, October 15, 2010

    Rosenberg on the Economic Crisis, Part 2

    y Eric Jackson10/15/10 - 09:24 AM EDT

    Editor's note: Following is the second installment in a three-part interview. Here is Part 1. Part 3 will be published Saturday.

    NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

    Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

    The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

    In the following installment of my interview with him, he discusses why inflation is still years away, what the government should do to get the economy rolling again and whom the president should pick as jobs czar.

    Eric Jackson: When do we see real inflation in North America?

    Rosenberg: A decade from now for sustained inflation. We know right now that corn, energy and cotton are experiencing price inflation, but I don't think it will be sustained. We're still in a deflationary environment. There's still far too much excess capacity in the U.S. -- for plant,commercial real estate or labor for that matter.

    I think we're in year two of a six- to seven-year transition to the next bull market in the U.S. So it's going to take some time to create some meaningful inflation pressure.

    Where are we in the debt deleveraging cycle?

    There are two ways to delever: Pay down your debt, or stiff your lender. The fact that so many people have stiffed their lenders doesn't change the fact that we're still in this deflationary world where we're extinguishing excess debt. We've probably delevered 1 trillion dollars in household debt to assets, but we've got another 5 to 6 trillion dollars to go.

    So, in terms of where are we with the whole deleveraging process, we're not at the national anthem, but, at best, we're just past the 3rd inning. We've still got a ways to go, and it's tough.

    People say to me, "Where are the soup lines and bread lines if things are so bad?" I tell them, "They're in the mail, in the form of 99-week unemployment insurance checks." The U.S. government has managed to turn unemployment insurance into a quasi-welfare scheme.

    When you take a look at organic real personal income, which is personal income in constant dollar terms excluding government transfers, it's still down almost 6% from where it was in 2007, so you tell me what kind of recovery we're in? That creates such a big problem. Consumers have upped their savings rate, but it's not enough to compensate.


    [** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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    Thursday, October 14, 2010

    Yahoo! Buzz Will Lead to a Hangover

    By Eric Jackson
    RealMoney Contributor

    10/14/2010 3:15 PM EDT
    Click here for more stories by Eric Jackson

    Yahoo! (YHOO - commentary - Trade Now) once again found itself in the headlines on rumors of a possible buyout deal. The stock got as high as $18 this morning before the open on the hopes and dreams of long investors that a buyout of the company by AOL(AOL - commentary - Trade Now), News Corp.(NWS.a - commentary - Trade Now) and a combination of private equity firms such asBlackstone (BX - commentary - Trade Now) orSilver Lake was imminent.

    This news was broken last night by Kara Swisher at The Wall Street Journal's "All Things Digital" and then followed up by aJournal article. Swisher made it clear in her reporting that any deal wasn't imminent.

    This morning, one Yahoo! shareholder said thatMicrosoft (MSFT - commentary - Trade Now) was the best acquirer for Yahoo! and should step up to buy the company in order to keep it from falling into the hands of AOL or News Corp. This line of thought goes: 1.) the burgeoning search deal between Microsoft's "Bing" and Yahoo! is too strategic for Microsoft to let Yahoo! fall into unfriendly hands, and 2.) taking out Yahoo! at its current $22 billion market capitalization is pocket change for Microsoft.

    The problem is that such a deal is going to be very complex to pull off and -- in my view -- unlikely to happen anytime soon. As such, I believe Yahoo!'s stock price is headed lower in the short term, rather than higher. Indeed, Yahoo!'s price action this morning suggests that most investors are staring at the possibility of a deal in the cold light of day.

    Haven't Yahoo! investors been here before?

    Here's the big problem with a Yahoo! buyout in the short term: There are too many moving parts. If you're expecting Yahoo!'s board,, AOL, News Corp., Microsoft, and multiple private-equity bidders to get on the same page in the next month, I suggest you go organize world peace at the United Nations as your next task. Everyone has competing desires and price targets in mind.

    The main driver of a Yahoo! shake-up is the company's stake in Chinese e-commerce site Alibaba. Most people know that Yahoo! did a deal to buy a 40% stake in Alibaba five years ago, probably Jerry Yang's biggest contribution to the company during his tenure. (It might go down as strategically even more important than his co-founding of the company. Think about that.) Alibaba has tremendous assets in China that are only going to become more valuable over time.

    Most people also know that Yahoo! wants to wait to sell its Alibaba stake until after that company takes its remaining private assets public in an IPO. Alibaba, not surprisingly, would like to buy back Yahoo!'s stake pre-IPO.

    What many people aren't aware of is that, under the terms of the 2005 investment, Yahoo!'s stake in Alibaba just increased to 39% from 35%. Alibaba CEO Jack Ma and his management team saw their stake drop to 32% from 36%. (Softbank Corp. retains its 29% stake.)


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    Rosenberg on the Economic Crisis, Part 1

    By Eric Jackson10/14/10 - 12:10 PM EDT

    NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

    Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

    The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

    Rosenberg remains pessimistic about the economy and contends that home prices could decline another 10% before they hit bottom, as you'll read in the following multipart interview I conducted with him.

    You might be surprised, however, to learn that Rosenberg was an unabashed bull earlier in his career, that he believes a Keynesian approach can save the economy if done correctly, that he thinks the U.S. needs a jobs czar and that he sees the dollar rallying soon.

    He's predicting gold prices will hit $3,000 an ounce in the next two years and believes a potential currency war is the biggest threat to the global economy right now.

    He addressed all these topics and more when he recently sat down with me for the following wide-ranging interview.

    Eric Jackson: When was the last time you were bullish?

    Rosenberg: 2000. Most people know me as a permabear. I'm not. I was bullish on equities in the '80s when I was a senior economist at Bank of Nova Scotia(BNS_) and nobody cared what I thought. Then in the '90s, I was also bullish when I worked with Sherry Cooper at Bank of Montreal(BMO_) and helped [with] her book Riding the Wave about the Internet boom. It was only when I started working at Merrill Lynch in 2000 and I saw the onset of the tech wreck that I turned bearish.

    In the past 10 years, I've had different shades of bearishness. This has been the time when I've gotten notoriety, so people only associate me with bearish views. I certainly have been overall underweight equities in my recommendations. I missed two very significant peaks and two significant troughs. The reality is that nobody ever got hurt from my picks.

    When did you first start to get ultrabearish about what you were seeing in the U.S.?

    Since the dot-com bubble we've had a series of bubbles and policy reflation, combating recurrent market deflation, which has produced all this instability. There's no question there have been massive swings along the way. I have a nasty tendency to be early to a fault. I started getting concerned about the housing bubble in 2005 and very bearish on the economic outlook in 2007.


    [** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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    Microsoft: What Wall Street is Overlooking, Part 2

    By Eric Jackson10/14/10 - 09:00 AM EDT

    This is the final installment of TheStreet's interview with Bill Koefoed, Microsoft GM of Investor Relations. Click here to read Part 1.

    Eric Jackson: How are you going to play in social -- just through your investment in Facebook?

    Bill Koefoed: There are a bunch of ways that we are driving social experiences across our platforms, products and services. Xbox Live and Windows Live are obvious ones; we are doing some very interesting things with Facebook through Bing, and that will be a place to watch. We are also bringing social into our collaboration offerings, including Office 2010, and it will be a space to watch moving forward.

    Why doesn't Steve sit in on the earnings calls with Peter? Jobs and Schmidt don't, but Bartz and Balsillie do. Why not Steve?

    Steve participates in a large number of externally-facing events, such as the Windows Phone 7 launch. He delegates the investor-related activities to Peter and myself as we have the best day-to-day interaction with investors, view to the numbers and the questions that investors are asking. He obviously participates in our financial analyst meeting and meets with investors from time to time.

    What do you think is the biggest misconception of Microsoft(MSFT_) among investors and analysts? Who is responsible for that misunderstanding?

    We are in a lot of businesses, and a lot of markets. Some of the places we are investing in today like cloud, search and mobile are emerging and critical to long-term growth. Others, such as Windows and Office have competitors, but we continue to innovate and drive increasing value to customers.

    Since 2001, Microsoft has grown revenue from $25.3 billion to $62.5 billion in 2010, a CAGR of 11%. EPS has grown from $.66 to $2.1, a CAGR of 14%. Our Server and Tools business has grown to be a $15 billion business. We've grown new billion-dollar businesses: Xbox (+ Xbox Live), SQL Server, System Center, Unified Communications (Exchange), SharePoint, Developer Tools (Visual Studio), Dynamics (ERP & CRM), Online Advertising (display & search). I think that people lose sight of our ability to grow and scale.

    Do you think there are any big misconceptions about your competitors in different spaces?

    Google (GOOG_) has been making lots of claims when it comes to cloud computing, while businesses are continuing to buy Microsoft. Today, more than 40 million people are using Microsoft Online Services, which are available in 41 countries and regions around the world. We are tapping 20 years of productivity experience while they (Google) tap advertising experience. If you look at the traction Google has claimed - they are now backtracking. Customers and educational institutions recognize they are not prepared for business needs.

    A lot of investors are still scared by the whole Yahoo!(YHOO_) hostile bid foray. They're concerned that you guys are not sure of yourself. You wanted to do the deal, then you didn't (thank goodness for investors). The concern going forward is: How are you going to look at M&A now? You haven't done any deals this year while Google has done a bunch. Is that indicative of what we can expect going forward?

    We feel like we have the right partnership in place with Yahoo! that will help us gain the scale and relevancy needed to drive success in our search business. This combination now makes up for almost 30% of the U.S. search market. Not all of our acquisitions are made public, and that goes for most companies. Our philosophy on M&A has not changed; most often we look to do small acquisitions that complement our organic growth -- tuck-in acquisitions. Talent is the most important part of any deal.


    [** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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