What Steve Jobs Did Well

I guess I should join the chorus of commentators eulogizing Steve Jobs' tenure as CEO of Apple.  Regardless of what you think of Jobs or of Apple products, you cannot deny that Jobs created substantial wealth for Apple shareholders, as well as for a slew of customers and suppliers.  Many of the latter would not even exist were it not for Apple.  There is an excellent op-ed in the WSJ today extolling Jobs' virtues as a man who created his own markets.  This, I think, is one of his greatest strengths.  He was not an inventor of much, but he was an innovator in that he could take new technology and find a way to make it palatable, even cool, to the everyday consumer.  This allowed him to reap economic profits from industries that had become commoditized for all his competitors.  He realized that he wasn't selling computers, he was selling a lifestyle.  This realization allowed him to expand from computers into MP3 players, phones, tablets, etc., because he was just bringing the value proposition he offered to a wider range of vehicles.  He has been compared to Thomas Edison in recent days, and I think that is fairly apt.  At least, it is in the sense that Jobs' genius was not in inventing technology, but in finding ways to market technology (and I don't just mean advertising) so that it would really add value to people's lives.

I had previously written that I thought Jobs had done a terrible job of preparing his organization for his eventual exit.  I believe this was true when he took medical leave in 2009, but I no longer think so.  Since then, he has groomed the new CEO, former COO Tim Cook, for the job.  Cook has effectively been running Apple since Jobs took on a diminished role in January.  This has eased the transition, and allowed the incoming CEO to hit the ground running.  The market knows Cook, the employees know Cook, and I think that Jobs will be effective in his new role as Chairman, providing some of his ingenious marketing insights, but otherwise staying out of managing the company.  As evidence of Jobs' effective succession planning, note that even though Apple's stock price dropped 5% in after-hours trading when the succession was announced, by the time trading opened the next morning, that drop had been cut in half.  That's as it should be.  A good leader prepares for his eventual exit so that the organization barely notices when he bows out.  Clearly everyone noticed, but I think that the questions about Apple's future will soon abate.  This is all the more remarkable given the suddenness of Jobs' announcement.

So, here's to Steve Jobs, a man who in the last decade and a half created, out of nothing, roughly $350 billion in shareholder wealth.  Not a bad track record for a career.

Why I Will Never Buy Google Stock (Again)

I think Google is a pretty good company.  At least for the time being, they seem to be able to capitalize on their current strengths (search) as well as have an eye on future growth opportunities (Android).  I think that they are currently fairly valued at about $600 per share.  Last summer, when they dropped below $500 per share over fears about an aging business model, I thought they were undervalued and I bought.  The stock went back up to $600 and I sold.  This spring, the stock dropped below $500 again (same old fears, no new evidence) and I thought: "I should buy."  But I didn't for one simple reason, and I subsequently missed out on the rise back to $600 that the stock experienced when it released its earnings.  And I am not the least bit upset about not grabbing that opportunity.

The reason is that while I think Google's business model is sound, I don't trust the Justice Department to leave it alone.  Google is the new Microsoft, meaning that one day or another, the government will see it as an unstoppable behemoth (tell that to Mark Zuckerberg) worth of an antitrust suit.  The more successful Google's business becomes, the more likely this outcome.  The writing is already on the wall.  This is what antitrust does to strategy and investing.  If the government decides that Google controls too much of search, their goes their revenue stream and shareholders take a haircut.  Frankly, I just don't think it's worth the risk.

It is important to note, I think, that since antitrust came on the scene, most prosecutions are not instigated by the government, they are instigated by competitors complaining that the companies out-competing them in the marketplace are being "anti-competitive" by competing too well.  This is what laws like antitrust do to competition.  Firms succeed based on their ability to lobby the Justice Department and the FTC, not on their ability to provide superior value.  Ironically, most of the antitrust threats against Google are coming from Microsoft.  Now tell me, faced with an environment like this, why would a person of integrity ever want to go into business?  They'd get eaten alive.

Why I Think News Corp Will Survive This Crisis

For those who are unaware, News Corp, owner of half the world's media including Fox, Dow Jones, and a whole lot more, was recently embroiled in a scandal.  It seems that employees of News of the World, a British tabloid owned by News Corp (at least it was until the paper closed last week), were hacking people's phones.  And these weren't just any people's phones, they were, like, really pathetic people's phones.  We're talking families of dead and missing children.  Pretty sick.

Anyway, this has ballooned into a gigantic ethics scandal involving News Corp. CEO Rupert Murdoch, his son, bigwigs at Scotland Yard, and even UK Prime Minister David Cameron.  Many have been talking about the 80-year-old Murdoch stepping down as a result of this embarrassment.  News Corp. has already abandoned its bid to acquire the remainder of British media outlet BSkyB, and there are a lot of questions surrounding News Corp.'s future.  Here is what I think about two of those questions:

Question: What will happen to Rupert Murdoch?

Answer: Probably not much.  Murdoch's family owns 40 percent of that company.  Odds are that he isn't going anywhere.  Yeah, the press will beat him up, but the press has been beating him up for years because of his political views, so that's nothing new.  A more interesting question is, "Should Murdoch step down?"  To this I also say "no".  At least, I don't think he should do it right now.  Murdoch has built this company from the ground up, and it pretty much runs on his vision.  Of course, he will die one day (some liberals' theories about him being a real-life Voldemort, notwithstanding), and because of this, it is crucial that he establish a succession plan.  That would be the prudent action to take now.  Develop a succession plan, and then gracefully bow out in about a year or so once all this mishegas has blown over.  He could probably assume an executive chairman role, but pass on management of the firm to his son or to this apparently very capable second-in-command.

Question: How will this crisis affect News Corp.

Answer: It won't!  Here's what makes crises potentially disastrous for companies.  In any crisis, usually some stakeholder is hurt or perceives themselves as potentially in danger.  In this case, it was some people who got hacked.  In BP's case, it was a bunch of fish in the Gulf.  In Toyota's case, it was all of their customers.  What makes a crisis potentially disastrous is that the stakeholder who got screwed is the one buttering your bread.  Yes, BP's stock tanked when they turned the Gulf into salad dressing, but their customers stopped buying BP gas for about a nanosecond.  Their revenues stayed where they had been, and no one even remembers the damn oil spill.  Conversely, Toyota (even though very little actually happened) appeared to put all their customers at risk.  WOOPS!  There go the sales.

Now look at News Corp.  They hurt some people who were newsworthy.  Here's the funny part: while some people may feign outrage, they're still tuning in to Fox News to learn about the scandal.  Murdoch is actually making money off his own screw-up!  Isn't capitalism awesome?  Ultimately, we like hearing about this stuff, even though we may think it's wrong, and so the only way a media outlet could actually hurt themselves is to be boring (you listening, MSNBC?).

The Tao of Steve

I have mixed feelings about Steve Jobs.  In my quasi-academic opinion, the guy is a genius at marketing and a moron at management.  His ability to provide value to customers--and to extract said value for his company--is unquestionable.  However, he appears not to have cultivated a company that can run very well without him.  As evidence consider the fact that he is away on sick leave, but still calling all the major shots.

This becomes an even bigger issue as he gets older and sicker, and as Apple eventually begins to deal with the problem of who will replace the one true CEO?  At the company's annual shareholders' meeting, a group of shareholders proposed a measure that, according to the WSJ,

requested the board adopt and disclose a detailed succession planning policy that included the development of criteria for the CEO position, identification of internal candidates and the submission of an annual report to shareholders.

 Now, normally I don't have a high opinion of shareholder proposals because, frankly, shareholders are mostly idiots.  Just because you bought three shares of Apple doesn't mean you know anything about running a company.  My policy on stock holding is that you own the rights to proceeds from the firm's business, not the right to exert any kind of control over the business.  With limited liability comes limited rights.  Sorry, I'm on my soap box again.

Anyway, the proposal doesn't sound so bad to me, given Apple's circumstances.  But of course, the shareholders themselves voted it down.  What I can't understand is why the board would resist this.  My only thought is that they have bought into the Tao of Steve (it's a movie) and, like most Apple users I imagine, secretly wish that Steve Jobs would stick around until the next millenium.  The fact is, before too much longer he will have to step down, and it would be nice for Apple's stock price if the board had any clue how they would respond to that.

Again, I don't really like shareholder proposals, but it wouldn't be a bad idea for the board to communicate that they are thinking about these things.

Score One for the Good Guys

Prime capitalist institution, BB&T, has asserted itself as a healthy, thriving bank amidst a sea of faltering behemoths. Now, as the economy starts to show signs of life, the bank is breaking out of the gate and gobbling up its weaker competitors who made destructive lending decisions back in the day.

On Friday, BB&T acquired most of Colonial Bank Corp.'s deposits and assets through the FDIC's seizure of the bank. (Don't get me started on that whole process.) This will make BB&T the 8th largest bank in the US by deposits. That's good for us shareholders. (Incidentally, size of a company is most certainly not always a determinant of success, but with a company like BB&T, added market share means more opportunities to apply its winning strategy.)

Important to all friends of Objectivism, however, is the heightened profile of the bank. Take, for example, this WSJ article about the purchase, which mentions capitalist ubermensch John Allison, as well as Objectivism. Here's a slice:

Before Friday, BB&T had about $152 billion in assets, 29,000 employees and operations in more than 11 states. It will purchase an additional $22 billion in assets in the Colonial deal. Mr. Allison, an adherent of Objectivism as practiced by author Ayn Rand, shaped the bank's behavior around his philosophical outlook.

"BB&T Values," a 30-page guide to the company's 10 core principles, written by Mr. Allison, asks employees to practice "reason," justice," "productivity" and "independent thinking."

Employees are encouraged to adopt these principles at the nearby BB&T University training center.

The bank also has long opposed government intervention in the private sector, refusing to lend to any landowner who acquired property via eminent domain. BB&T did accept federal bailout money last year, but was among the first to pay it back. The day the company got approval to return the capital, executives, including Mr. King, cheered.

Other than the fact that the authors neglect to mention that BB&T was forced to take the money, this is very good coverage for the bank, Allison, and the philosophy. It implies that the bank's guiding philosophy put it in a position to be able to succeed in the current business environment.

Very positive stuff.

Shut Out of the Aristocracy of Pull

Well, the Aristocracy has revealed a financial services firm who isn't on their list. CIT, a company I hadn't heard of before this week, looks like it will go under this week barring some big infusion of private capital. The firm is a big lender to small and medium-sized businesses. I didn't think much about it, until I saw this WSJ article: The CEO Left Off the Lifeboat. According to this article:

On June 17, Jeffrey Peek, chief executive officer of CIT Group Inc., spoke at a conference in the nation's capital where the keynote speakers were Federal Reserve chief Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair. His real mission there, Mr. Peek told others, was to raise his profile among Washington's movers and shakers.

This week his politicking foundered, as the U.S. spurned pleas for financial aid from CIT, one of the nation's largest lenders to small and midsize businesses.

Yep.

CIT had been trying for months to improve its connections in Washington. It spent close to $90,000 last year on lobbying, and $60,000 in the first quarter of 2009. It brought onto its board of directors former Congressman Christopher Shays, a Connecticut Republican.

One day I will conduct a study on the use of politicians on boards of directors. It's a really scary trend. And finally, there was a description of CIT's CEO that was one of those paragraphs that makes you double-take, and question you were reading a description of Jim Taggart, a description that is becoming far too ubiquitous:

He installed CIT's top brass in a glitzy office building on Manhattan's Fifth Avenue, eschewing the company's historical base near a big shopping mall in Livingston, N.J., and brought CIT into his high-society orbit as well. CIT became a sponsor of the New York City Opera. Its role as a donor to the Metropolitan Museum of Art may have helped Mr. Peek win a prestigious spot as a museum trustee in 2008.

Mr. Peek threw parties both at the office and in his home. At an Edwardian-themed fete at his home on Valentine's Day 2008, male guests donned top hats provided by the Peeks.

Mr. Peek is a "personable, likable guy" who showed incredible recall for names and personal details, said one former top CIT executive. When he arrived, Mr. Peek criticized CIT's culture, which he deemed too cautious, says the former executive. He hired a psychological-evaluation firm to "understand us," the executive recalled, and used the results to hire hundreds of new sales people who didn't fit the old CIT mold.

Not that there's anything wrong with supporting the opera, but you get the idea. I suppose it's a good development that the Powers have stopped finding "systemic risk" around every corner, but it could simply be that none of them had the requisite number of connections to this guy and his company. I don't really know what to read into this development. The whole situation is just kind of sad.

In other, better news, Mark Cuban is off the insider-trading hook. That's good.

Innovation, If We Let It

Sorry I haven't been blogging in a while. I've been sort of busy. Today's post will be short. I simply have had a thought over the last few days. I've been reading several stories about innovation in the tech sector. Apparently, Google is coming out with its own operating system. At the same time, Microsoft is scrambling to replace the disastrous Vista. Similar movement is happening in the internet browser market. Conversely, Microsoft is trying to chip away at Google's dominance of the search engine market. Microsoft, despite having immense "market power" as the economics buzz word goes, continually has to innovate for fear of losing market share.

It is amid this whirlwind of creativity that the gruesome specter of ANTITRUST rises from its shallow grave like Jacob Marley, complete with ludicrous Dickensian morality. His Majesty's Justice Department understands Antitrust as the club it really is, and intends to use it as such. Microsoft and Google already need to dance around antitrust in hopes they don't compete too well to be labeled "anti-competitive." Obama is sure to extort some rents from them, the same way that the Clinton White House did with Bill Gates in the 90s. Also, hearings are being held on that pimple on the face of our nation known as Capitol Hill, ostensibly to determine the appropriateness of allowing cell phone makers to grant exclusive offering rights to service carriers, a la the iPhone.

I've said this before. After the murderous thugs at the FDA, anyone who would enforce Antitrust should be next in line for tar and feathering. This is a criminal legal quagmire, whose express purpose is to trap every business in its confusion, thus forcing all to bow to the whim of whatever feckless poll-dancer happens to be anointed our Leader. Draw what conclusions you may from that. I'm going to bed!

P.S.: For some excellent discussion of the current application of antitrust, reading any of ARI analyst Alex Epstein's writings on the subject.

Governance Issue at Apple

Recently, Apple has provided a very good example of why CEO succession planning is so important. According to the WSJ, Steve Jobs recently underwent a liver transplant. We all knew he was sick, and he's been away on leave for a little while. Apparently his #2, COO Tim Cook, has been running the day-to-day business in Jobs' absence, and now it appears he's being groomed to replace Jobs. This is a very good idea, and it's lucky that Jobs got a second chance to do this before exiting Apple completely.

In any corporation, but especially in one as large and innovative as Apple, well-done CEO succession is vital. Leadership is everything in a business where extraordinary vision is required simply to stay with the competition. Because there wasn't an heir apparent at Apple, when Jobs got sick, shareholders were rightly perturbed that his health was being kept a close secret. Frankly, the fact that they could keep a liver transplant secret for so long amazes me. Shareholders need to be sure that their company will transition into capable hands in the event of a CEO's sudden departure, as well as in the event of a planned departure. It's just as important as the Presidential line of succession, at least to the firm's shareholders.

Now, here's the really interesting part. As some very intelligent Kelley School of Business professors (I'm not biased) found in this paper, inside directorship (placing top executives on the board) is a very common and useful funnel for selecting a firm's next CEO. Accordingly, the WSJ article says that Cook is likely to be placed on Apple's board. So, it's pretty clear that he's the next in line. However, thanks to Sarbanes-Oxley, inside directorships have been limited, and now the average number of non-CEO executive board members in the Fortune 500 is less than 1. This makes it much more difficult to groom a capable successor. Thanks again, government.

Hopefully Apple will be able to navigate through Jobs' eventual exit. They seem to be taking the appropriate actions to ensure that now, albeit a little late.

Thank Goodness for Congressional Democrats

You heard me. In the ongoing war between politicians' evil and their stupidity--that is, between their desire to control and their complete inability to get even that right--Congress slipped some language into the bill limiting executive pay at TARP-receiving banks that essentially made it easier for banks to pay back the money sooner. The Treasury wanted to hold onto those claims for, well, let's just say awhile. Congress did this in order to justify slapping onerous restrictions on how banks do business. I think they honestly convinced themselves that all the banks needed the money.

So, happily, our benevolent overlords at Treasury announced yesterday that ten banks would be allowed (did you catch that, "allowed") to repay the TARP money that most of them didn't want in the first place. Hallelujah. Naturally, BB&T, The Money Speech's favorite bank bar-none, was one of the ten. Kelly King, their new CEO had a good quote:

This is an important achievement for BB&T....Repaying the government's investment will give us greater flexibility to benefit significantly from future opportunities that will be available as we emerge from this recession. In addition, we will become even more focused on the business of serving our clients, rather than dealing with government distractions.

That's over-regulated businessman speak for "Get the fuck off my lawn, government." A BB&T spokesman had another good line: "I haven't seen anybody swinging from the chandeliers yet, but obviously this was the result we wanted." These quotes are getting more than proportional press time, and I think it's due to the fact that the other spineless bank executives won't call the government out. Regardless, I must say I feel much safer as a BB&T shareholder, safer in the knowledge that the bank will, more or less (it is a regulated institution, after all) be run with my financial interests at heart.

Indiana Pension Fund Stands Up for Bondholders' Rights

In what might end up being a stunning blow to Obama's constant efforts to annihilate the concept of individual rights, the Supreme Court has put a stay on Chrysler's sale to Italian car maker Fiat. The suit was brought by Indiana pension funds, major Chrysler bondholders, who are claiming that the Administration's orchestrated bankruptcy plan for Chrysler elevates junior debtholders above secured, senior debtholders. This claim is quite true.

The Obamanons have been involved in a systematic reorganization of justice in this country, whereby the deserving subsidize the undeserving. If you saved money and didn't go into reckless debt, sorry. Obama's upping your credit card fees and your mortgage rates so that deadbeats aren't "unfairly" punished in debt markets. Did you run your business well over the past decade, building goodwill and a reputation for sound business practices? New regulations will make sure that your claim to any strategic advantage over your competitors is wiped out, and by the way, you need to take government money so your faltering competitors won't look bad to the capital markets.

Hopefully, the Supreme Court will rule that the Chrysler deal is invalid, and Chrysler is liquidated, rewarding senior debtholders first, as any minimal recognition of property rights demands. Encouraging is the penion funds' lawyer commenting that GM bondholders have contacted him about working on a similar suit for them. Hopefully, both groups will get the bankruptcy proceedings they merit as debtholders, and not the pandering backroom dealing we've come to expect from His Majesty.

Update 6/10: The Supreme Court gave the Chrylser sale the go-ahead. So much for bondholder justice.

Out of the courtroom and into the back room

I've been reading a little about Obama's Supreme Court pick, Sonia Sotomayor. She's not great, obviously, but she's probably not the worst result we could have gotten from Obama's "empathy" litmus test. Tom Bowden at ARI has a good blog post on why Sotomayor is unfit for the Court because of her opposition to objective judicial interpretation. (Does denial of its existence count as opposition?) Even so, a judge without principles is basically a broken clock, and ends up ruling well now and then due to sheer happenstance.

So, in reading about this woman, I came across a tidbit of information that troubled and saddened me. In the WSJ's article about Sotomayor's ruling history, this paragraph described one case of investor fraud:

In another pro-plaintiff ruling, Judge Sotomayor allowed a shareholder class-action suit against Merrill Lynch that alleged fraud. A unanimous Supreme Court in 2006 overruled Judge Sotomayor's Second Circuit opinion. The high court found that federal law assigned enforcement to the Securities and Exchange Commission, leaving no room for lawsuits under state fraud laws.

Ignoring the fact that legal philosophy has deteriorated in this country to the point that you're either pro-plaintiff or pro-defendent, I want to draw your attention to the Supreme Court's ruling in this case. As free-marketers, we always talk about how, without the SEC, investors could sue their management for fraud. This, and other vehicles of management's rational self-interest, make sure investors' interests are looked after. What we don't mention enough, I think, is that whent the government removes from the marketplace the competitive advantage that is integrity, investors are at the mercy of the SEC to protect their property rights, a charge the SEC also executes with broken-clock precision. For more on this type of issue, read Alan Greenspan's article in Capitalism: The Unknown Ideal called "The Assault on Integrity". (Greenspan's apostasy notwithstanding)

As in my previous post on regulation, in general, I stress that regulatory bodies like the SEC remove strategic advantages from firms, and drown all interested parties in a sea of mediocrity and subjective selection.

More on CEO Pay

On ARI's blog, Voices for Reason, Don Watkins has a nice post about CEO pay, and how it is a challenging thing to get right, even in a free market. As he writes:

It requires a tremendous amount of thought and judgment. What should be the mix between base salary and incentive pay? What kinds of incentive should be offered–stock options, restricted stock options, stock appreciation rights? How should those incentives be structured–over what time frame and using which metrics? And what about a severance plan? What kind of plan will be necessary to attract the best candidate? And on and on. The mere fact some people make their living as executive-pay consultants illustrates how challenging the task is.

Now, it is sometimes difficult to determine what exists because of its competitive advantage, and what exists to comply with or avoid regulation. (Topic for a study, maybe?) Nevertheless, I think viewing CEO pay as a source of competitive advantage, rather than as merely an administrative, HR-ish issue, has interpretive benefits. It allows us to see that what the Obamanons, and the Bushies before them, are doing is waging all-out war on success. This goes way beyond the tax code. With regulation, you don't just take away the products of success, you force people to all do the same thing, thus ensuring that success in that area is impossible. This helps those firms who would never stay competitive on their own, and hurts those firms who innovate and create.

Put into CEO pay language, being able to appropriately pay an executive for his or her successful effort is a major strategic issue for companies (it better be, otherwise I'd need to switch majors). This is mainly because almost no one has any idea how to do it. Regulating CEO pay takes away any strategic elements, and "levels the playing field," so to speak.

"And the trees are all made equal
by hatchet, axe, and saw."

(Allow me one Rush reference every now and then.)

He's Real and He's Tall

Yesterday, I had the opportunity to bask in the golden glow of capitalist He-Man John Alison. He was speaking at the Chicago Club, in an event hosted by FreedomWorks (Dick Armey's organization) and The Heartland Institute, where I interned last summer. Alison was speaking on the causes of the financial crisis, and gave a presentation almost identical to the one I linked to on this blog that he did back in January in D.C. Still, it was fun to see him talk in person.

It is also worth mentioning that BB&T, the bank which Alison led for over twenty years, has applied to pay back its TARP money, money they were forced to take in the first place. They have to raise new capital to do so, unfortunately, and that requires raising new equity, as well as temporarily cutting their dividend. This was especially difficult for them, because they pride themselves on not having cut their dividend in thirty-some-odd years. Now-CEO Kelly King made an excellent justification in his letter to shareholders, though, in which he stated that even though they hate to do it, the interests of shareholders are better served by getting out from under His Majesty's TARP thumb than by keeping the dividend high this quarter.

It is far too rare in business that leaders embrace uncomfortable reality head-on, and do what's best for shareholders in the long-run. The leadership of BB&T deserves much praise and respect.

Published

It's official, I am now a published scholar. The Michigan Journal of Business, the only major undergraduate academic business journal to my knowledge, has published my paper on executive long-term compensation in its latest issue. Here's the link for the journal and for my paper. In my paper, I found that in a sample from the fifty largest U.S. banks, "long-term" compensation had no effect on either of two metrics of long-term thinking.

This is especially pertinent, if I do say so myself, because His Majesty has lately been talking about issuing new royal decrees governing compensation of all bank executives of the realm, TARP-receiving or not. Here's an article on the subject. A nice excerpt:

Few companies that would be affected by a federal crackdown on compensation would publicly discuss the options being considered by administration and regulatory officials, which include trying to more closely match pay with long-term performance. The wait-and-see response also reflects nervousness about openly challenging the Obama administration on an issue that has become a flashpoint for anger over Wall Street's culpability for the financial crisis and recession.

That's nice, Barack. What I love about this whole charade, other than the blatant violation of individual rights, of course, is that, as I show in my paper, that "long-term" compensation crap is bullshit. Throwing stock options at someone does not a long-term incentive make. This is just more of His Highness' Royal Circus.

So yeah, go me.

No More Drunk Driving at Anheuser-Busch

I don't drink Budweiser (because I'm an elitist snob who likes "craft" beer), but I have friends who do, and so I have a bit of an interest in the progress at Anheuser- Busch. Some of you may remember that several months ago Belgian brewer InBev approached A-B several times offering a merger, only to be turned away several times, and threatened with defensive tactics, such as buying dead-weight companies to scare InBev off (That would have been stellar strategy.) In the end, A-B's board couldn't say no to their European wooers, and caved, much to the chagrin of jingoistic Amer'can protectionists everywhere (mostly in St. Louis).

At the time, many wondered (myself included) how InBev could justify spending $52 billion on a giant, low-growth company. Well, now we know, and it looks like this deal might have been a stroke of genius.

In the business world, we always like to talk about synergies when discussing mergers. According to this WSJ piece on the merger's progression, there were no synergies with A-B. InBev intended to make them.

Since taking over the company, InBev has been attempting to change the culture at A-B from that of an extravagant, perk-pumping employment mill to that of a lean, mean, profit-generating machine. Consider just these changes:

After InBev swooped in last fall with a $52 billion takeover, it sacked about 1,400 employees in the U.S., equal to 6% of the U.S. work force before the merger, and 415 contractor positions. These followed 1,000 employee buyouts accepted at Anheuser-Busch just before the merger.

InBev has overhauled the U.S. division's compensation system for salaried employees, as part of what an internal memo called "an increased focus on meritocracy." In the future, the company will pay salaried workers 80% to 100% of the market rate for comparable jobs, "and any increases above that require special justification and approvals," said the memo. That changed a system in which "high performers...might have seen fewer rewards as dollars were spread more evenly."

Dollars do not spread well. The compensation system is just one change, but I think it is one of the most important, as it lines up incentives when done properly. This can remove the need for a lot of other expensive measures down the road. This little detail is great:

Anheuser-Busch InBev in November gave a total of 28 million stock options to about 40 executives companywide, as an incentive to combine InBev and Anheuser-Busch successfully and lower corporate debt. The executives will be able to cash in the options, potentially worth tens of millions of dollars to each recipient, if the company reduces its debt-to-income ratio by about half in five years.

Meanwhile, the company will halt contributions to its pension plan for salaried employees in 2012. And in January, it will stop providing retiree life insurance.

Stock options are really tricky things, and are usually done wrong, but this idea seems really interesting. Normally stock options are pretty worthless as an incentive because most employees have very little influence on stock price, and thus on whether their options will make money. This vesting criteria of halving debt/income, on the other hand, sets a clear objective that every employee can help affect, through both raising revenue and cutting costs/borrowing.

And providing retiree life insurance is just dumb. Good going InBev. However, your beer still sucks. Work on that.

Time for a Morale Booser...Asian Style

Last week's Economist had a nice little feature on Yuzaburo Mogi, the leader of Kikkoman. You know, the soy sauce people. I had never heard of this gentleman before, but apparently his family was one of the founding families of the company, which "traces its origins to the early 17th century." I'm a sucker for some good soy sauce, so this story's got some special meaning for me. Regardless, it's a great business article all-around.

Mr. Mogi, apparently, is not afraid to break with tradition when it comes to growing his firm. In the fifties, Kikkoman marketed their sauce as an "all-purpose seasoning" so as to attract June Cleaver and her friends. They introduced terriyaki sauce in the U.S., designed for U.S. consumers as a barbecue glaze (I had no idea), and are now eyeing South American tastes, "such as a soy sauce that can be sprinkled on rice--something that is not done in Japan." They're also trying to sell soy sauce in China (which seems like selling cheese in Wisconsin). In the land of cheap knock-offs, Mogi is planning to sell his usually mainstream product as a premium brand.

Read the article. It'll make you feel good about the world for a few minutes.

You're Damn Right "Survival of the Fittest"

Okay, that last post was depressing, so how about something positive? On the front page of today's WSJ, I spotted this feature. It tells a heart-warming tale of a well-run business taking advantage of other firms' shortcomings in an economic downturn, seizing opportunity wherever it appears, even if the article's author sounds like he would have supported the "Anti-Dog-Eat-Dog Rule." It starts like this:

Roy Calcagne offers a simple explanation for why, in the midst of a grueling downturn, his company is selling more sofas and love seats than before."

We're stealing market share," says the chief executive of Craftmaster Furniture Inc., a maker of upholstered pieces with two large factories here.

Huh, imagine that. While I hardly think Mr. Calcagne really thinks of his firm's actions as theft, the article's author seems to take those words to heart. The tone of the piece implies that existing firms have a right to their market share, and that there's something unwholesome about Craftmaster's attempts to unseat their larger rivals, like they should be gracious in their limited success.

Nevertheless, this is still a story to provide some more intellectual ammunition for those of us who respect business as value creation, and want to know that that practice still exists in this country.

Drucker

Today's Profile in Contradiction comes to you from the foremost guru of management, Peter Drucker. Since I'm going to be joining the ranks of the management academe, I felt I should educate myself as to the musings of the great Drucker. And so, perusing his Concept of the Corporation, I came across this excerpt:

Though we have largely abandoned it in legal and political practice, the old crude fiction still lingers on which regards the corporation as nothing but the sum of the property rights of the individual shareholders. Thus, for instance, the president of a company will report to the shareholders on the state of "their" company. In this conventional formula the corporation is seen as transitory and as existing only by virtue of a legal fiction while the shareholder is regarded as permanent and actual. In the social reality of today, however, shareholders are but one of several groups of people who stand in a special relationship to the corporation. The corporation is permanent, the shareholder is transitory. It might even be said without much exaggeration that the corporation is really socially and politically a priori whereas the shareholder's position is derivative and exists only in contemplation of law.

He doesn't ever really say what makes the shareholder view "crude," but then who ever does? This "stakeholder" theory of business is old news today, and is typically paid lip service in any business ethics context. Thankfully, most of business academia is still focused on maximizing shareholder value. Which is good, because how exactly does a business exist without owners? Providing capital and getting return on investment is an indispensable element of capitalism.

Now, Drucker's not perfect, but he understands a few basic points. For one thing, he isn't exactly a stakeholder theorist in the way many closet Marxists are. He's more of a corporation theorist, basically holding that the corporation is an end in itself and all effort should be directed toward the betterment of the firm. (Incidentally, one wonders what this means if not maximizing shareholder value.) So, I feel I should present a more present quote of his from the preceding page:

Survival as an organization is the first law of the corporation as of any institution; and ability to performs its own purpose, to produce goods with the maximum economic return, is its first yardstick of achievement.

Sounds like maximizing shareholder value to me, but hell, what do I know?

The Big Engine That Couldn't

Hi all. Sorry I haven't posted in a few days. I've got three exams this week, and I need to revise a paper for publication by Friday (More on that later). Today I am discussing Rick Wagoner, who last night was fired by Barack Obama from his job as Chairman and CEO of General Motors. Yes, the President asked for his resignation, and he granted it. Someone please tell me why we even have business anymore? Here's the article: demise of a douchebag.

I wish I could feel an ounce of sympathy for Wagoner, but I can't. He asked for this fate. He managed a company for eight years on the principle that profitability is a relative term (only economists actually believe that). When cash ran thin this year, he and his Detroit buddies went crawling to Mommy to bail them out. And because GM is Amer'can, whatever that means these days, it got the money. Shockingly, the money ran out, and they needed more money. Finally, the government had had enough of GM's incompetence, and last night they ousted the captain and replaced him with the first mate of the GM Titanic, the current COO. I'm sure it'll be roses and gumdrops from here on.

And sure enough, with optimism rivaling Stalin, the administration announced that it is "prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future."

We all know the political lessons to glean from this scenario, but I think the less obvious lesson is the business one that really drove the nail into GM's coffin. Other than the political pandering, the environmentalist bullshit, the labor appeasement and pacification, the financing shenanigans, the shitty, unprincipled management, and the all-around bad karma, what finally killed GM was poor cash flow management.

Lots of companies rely on short-term borrowing to fill holes in their cash inflow, so that they can meet their expenses. GM, however, tried to ride that debt horse into the credit crisis, and we know how well that turned out. Generating cash from sales is crucial for navigating rough waters like we face today, especially when you face the galactic labor costs GM does. In the auto industry, it's difficult to keep cash coming in reliably from sales, but maybe, then, a smaller, leaner auto manufacturer might be a preferable business model to the stumbling golem model we enjoy today.

Just a thought.

The Only Friendly Skies

Finally, I have found some good news in the business world to report. Amidst the game of Jenga that is the U.S. economy, it's nice to see that Southwest Airlines is still doing pretty well. Gary Kelly, CEO since 2004, is interviewed in this article and seems to have a pretty fair strategic outlook. A few encouraging remarks:

The airline's chief executive is adding flights to heavily trafficked domestic airports and seeking cross-border alliances with foreign carriers. He's also considering adding on-board Internet surfing and more-extensive wine and coffee service.

But Mr. Kelly says adding full-scale meals remains off the table. And Southwest, the largest U.S. discount carrier by revenue, remains steadfast against charging customers for checking in suitcases and using pillows, as rivals have done.

"Adding fees is not the way to grow the airline," Mr. Kelly says in an interview at the company's headquarters here. "Customers hate that stuff."

Oh, you noticed that, huh?

Last week, true to discount roots dating to 1971, Southwest launched a summer fare sale on domestic flights, with one-way prices as low as $49. As in the past, major competitors were forced to follow suit.

By keeping costs low with simple operations, Southwest has booked 36 straight years of profit and flies more passengers within the U.S. than anyone else. Southwest is the only major U.S. airline to enjoy an investment-grade credit rating.

What I love about Southwest is that they succeed repeatedly by responding to market reality, while their competitors repeatedly fail and run to either bankruptcy court or worse, the government. They foresaw the spike in oil prices last year, and hedged against them (of course, that same hedge hurt them when oil prices plummeted in the fall.)

Basically, it's just nice to see successful firms come out of what is a mind-bogglingly success-starved industry.