Wednesday, September 25, 2013

JP Morgan New Narrative: Shareholders Are Victims!

We are a nation of self-anointed victims. Victimhood extends both across our population demographic and up and down our economic demographic to include institutional shareholders of JP Morgan Chase, according to the New York Times and to Professor John Coffee of the Columbia Law School.  He should know better, but here's a quote:
“It is perversely inappropriate. You are adding injury to injury. All we’re doing is punishing the shareholders more,” said John C. Coffee Jr., a professor of securities law at Columbia Law School. “This is a case where the victims are the shareholders.”
These remarks were made as JPM paid $920 million to "settle" civil cases related to the London Whale fiasco.  This is just the beginning, as politically ambitious politicians, Federal prosecutors, and corporate governance activists jump on the bandwagon to feed at the trough filled with the shareholders' assets.

It's the fault of the shareholders, and they deserve nothing but what they get, which may not be too much of a penalty on the stock prices, since QE infinitum continues to expand forward multiples.  These same shareholders bought into the findings of the London Whale report without demanding any changes in the way this sprawling financial supermarket is managed.  They also chose not to split the Chairman and CEO roles, in a referendum on Jamie Dimon's popularity.  They also backed not penalizing or changing the structure of management compensation.  These folks are not victims but lazy and uninvolved in delving into their own investments beyond the newspaper and analyst reports, which might as well be newspaper reports.

Shareholders should not be rescued from their own lassitude.  They always had the opportunity to sell, and they must be copacetic with the management of their company.    Shareholders, in turn, don't refund any of their investment management fees for separate accounts or overpriced mutual funds due to their lack of diligence, so let's leave this narrative where it belongs, in the circular file.

Friday, September 20, 2013

Microsoft Analyst Day: The Good, Bad and the Ugly

The good, bad and the ugly were all on display at Microsoft's 2013 Financial Analyst Day.  I didn't have the stomach for the whole shebang, but looked through COO Kevin Turner's slides and listened to part of the Questions and Answer session before succumbing to reading the transcript.

The good stuff is not new, and it all appears in Kevin Turner's slides. The issues for concern are in the behavior, body language and interactions among the COO, CFO and CEO that are evident in the video of the question and answers.

I was surprised by the amateurish character of  the whole setup for a global technology industry leader. How can they help their customer companies do better when they can't even run an important corporate presentation for themselves?  Despite all the remote mikes, a webcast viewer can never hear the questions from the audience.  The transcripts reflect gaps by saying "Off mike," when they can't pick up the speaker. How 1980's!  The lighting is out of balance, poorly placed and gets so bad at one point both the CFO and CEO put their hands over their eyes to look out into the audience.

For a small cap company, this is trivial; for Microsoft at an equity market capitalization of $273 billion, this is just inexcusable and, worse, inconsistent with their image and messaging.  Indicative, but small.

Here is the first question in the Q+A:

"QUESTION:  (Off mike.)  Just a real quick question for Amy, the $6-1/2 billion of CAPEX that you have for Fiscal '14, obviously a big step up from previous years, is that a one-time step up and then back down, or is that a sustainable level for the next several years?

AMY HOOD:  Well, what I would say is that if you're in the devices and services business and you're successful, I would hope that we continue to need to invest capital to build out the infrastructure and the server capacity over time.  So that's how I would think about it."

Simple question.  In fact, to open a session, it's clearly a softball, pitched for the CFO to hit it out of the park. This is the role of the first questioner who wants to do the company a favor.  The answer is not only non-responsive, it makes no sense.  The first thing to do is to reject the "one time" argument as this would make no sense either.  After that, some general comment about a range for the representative level of capital expenditures in the coming years, without making a forecast, would suffice.  Or, to work off the COO's slides, "Look we're pursuing a $181 billion market opportunity in cloud computing, and you see how fast we're already booking business from Kevin's slides, so we'll commit to higher levels because we already see the returns from that business."  

We have expressed concerns about the incumbents in the CFO chair before, and based on what we see and here in this exchange, it is still a real issue for shareholders.  The CFO has to be a strong personality, and shareholders look to that chair as a counterweight to overly optimistic, aggressive CEOs who are expected to be over the top.  The CFO has to make sure that the shareholders' money and interests are well protected.  Here's the flip side of the problem from an extremely loud and overcaffeinated Steve Ballmer. 

"STEVE BALLMER:  I don't know what really happens in all the telecom companies, but at least the myth of the telecom companies from 20 years ago, we should make the investment, huge CAPEX, and then it all goes away, success as Amy said breeds new CAPEX here.  There's no sort of point of saturation if our customers continue to buy more stuff from us.  We would consider that a first rate problem."

Talk about making no sense! Who cares about telecoms from 20 years ago?  Did Amy say "success breeds new capex?"  Capex of $6 billion is not any kind of "problem" for a company with no net debt and $75 billion in cash: that wasn't the question.  It was a softball question for an analyst modeling free cash flows for the next few years.  Mr. Ballmer stepped in with both feet because he didn't like his CFO's answer, but the trouble is, he made it worse not better.  Watch the CFO cringing as he speaks.  

Having a weak role and a revolving door of undistinguished players as CFO will be an issue for the company going forward. 

A critical question was asked in a very soft way by another analyst, and the way it was treated demonstrates the basis for our concerns expressed in a previous post.  

"QUESTION:  (Off mike.)  There is the perception that you need different types of skill sets to operate both in enterprise and the consumer business.  I guess as you see this leadership transition coming in, I guess do you feel that internally you have the skill sets to manage both a very large enterprise company as well as a very large consumer company, and does ‑‑ I guess how does that impact your view or the board's view of who makes sense to take over for you?  Thanks.

STEVE BALLMER:  I mean this is one people like to jawbone about, and I don't quite get it. We've been selling to consumers and enterprises basically since about 1985.  It used to be people thought we were better at the consumer side and worse at the enterprise side.  Now people think we're better at the enterprise side and worse on the consumer side.  I'd love everybody to say you're good at both sides, but I don't see the fundamental disconnect.  I really honestly don't feel it even in the culture of the place."

This is a problem, and will be a problem for the new CEO as (s)he struggles with the Microsoft Leviathan. Mr. Ballmer's history and biases dominating a weak board along with Mr. Gates will stand in the way of Lew Gerstner-style actions from a strong CEO.  Here's a different way of looking at the past.

Microsoft was only "better on the consumer side" because of the OS monopoly created by the WinTel axis and by the domination of the PC in the corporate workplace.  Monopolists make profits not because they're smarter, but because they don't have to compete. 

When Microsoft competed as a monopolist, their culture was not to beat any competition, but to nuke them out of existence.  They were able to do this by dint of their lockup with Intel and by the huge cash flows from the boxed software licensing business. 

Remember when Microsoft wanted to buy Quicken, the best consumer money management software by a mile?  When the regulators stopped this, what did Microsoft produce?  Micrsoft Money!  This was a terrible product even for Microsoft, and I speak as a user who abandoned ship early.  When Personal Information Managers (PIMs) first came out, there were a number of innovative products first-to-market, but somehow they all disappeared and Outlook eventually took over.  Remember Netscape?  Now we have the bloated, resource-hogging Explorer xx.  I use Chrome, which runs fast, smoothly and almost never crashes. But, Microsoft Web Apps don't play well in Chrome, so a user is often forced to go back to Explorer.  

The point is that I, as a Microsoft consumer user from the earliest days can honestly say I never have regarded them as being good at anything, but there was never a seamless alternative.  The switching of the consumer software model to Office 365 really doesn't make a lot of sense unless a home has five PCs which is probably a 1% group.  That model for consumers is not attractive.  How Microsoft does as a consumer company going forward  cannot be predicted from the past; if it were extrapolated from the past, the future would be grim indeed.  

What are some of the points from Kevin Turner's presentation?  A balanced revenue portfolio.  Good, but let the company focus, and let investors diversify their portfolios themselves.  We've talked extensively about capital allocation.  The Enterprise businesses are attractive and Microsoft may ultimately be a stronger competitor than Oracle and other established players on the software and services sides, but that is still an open question.

One of the most interesting slides from Kevin Turner's presentation is one depicting revenue from three large scale corporate customers, pre and post-cloud computing services.  It shows Office 365 and Azure customers, and the year-over-year revenue gains are on the order of 20% or better.  Again, the problem is that the sales efforts and compensation models for these businesses are quite different from the consumer businesses.  Let the Microsoft Enterprise stand alone and do its thing while creating value unencumbered by the legacy of a consumer-unfriendly culture endemic to Microsoft.  

I know that these Microsoft posts are very widely read around the world from the stats, but send me some comments because I want to know about other ideas too. 

Tuesday, September 17, 2013

Microsoft's 22% Dividend Hike: What's The Signal?

So Microsoft raised its dividend 22% ahead of its Analysts Day.  This compares to a widely expected level of 15%.  It also announced a $40 billion share buyback authorization. From John Lintner's 1956 publication, the notion of dividends as signals to the investor marketplace is widely spouted, but not well understood.

So, in the case of Microsoft what could the dividend and the buyback be signaling?  Here is a succinct summary of the signaling case from a 2011 paper by Baker and Wurgler of Harvard Business School and Stern School, respectively,
"Standard dividend signaling theories posit that executives use dividends to destroy some firm value and thereby signal that plenty of value remains. The money burning takes the form of tax-inefficient distributions, foregone profitable investment, or costly external finance."
The research from investment analysts and management consultants on whether share buybacks add or destroy value has generally been negative.  According to a Credit Suisse report by Zion, Varshney, and Burnap from June 2012, the information technology sector bought back $619 billion of stock from 2004-2011, accounting for about 23% of all buybacks from the ten Standard and Poors industry sectors; information technology was number one by a wide margin.  So, in a sense, buybacks come with the territory of being a technology leader.

The Credit Suisse analysts, when they use a benchmark cost of equity against which to evaluate the economic value-added from a buyback, note that only 36 percent of the Standard and Poors companies which bought back $2.7 trillion of their shares during 2044-2011 added value by doing so.  So, 64 percent of our leading public companies destroyed value by their share buybacks.

What's more out of the Top 10 companies that spend more than $1 billion in share buybacks and earned the highest annualized returns above their costs of equity, none of them were in the information technology sector. Rather they were in prosaic industries like tobacco, retailing, and distribution. One financial services firm and a medical device company were in the group.  So, tech companies don't seem to play this game well, according to the most recent period surveyed.

(A 2012 paper by Lambrecht and Myers of the University of Lancaster and MIT Sloan, respectively gives another, more provocative theory about share buybacks.  For those readers who like academic research.)

Microsoft is being set up by the press as facing a tough Analysts Day.  Compared to the HP Investor Day, this one looks extremely bland, more like an extended conference call. Investors have seen their company destroy value through repeated, fundamental misreadings of the evolution of personal and business technology, together with acquisitions that seem to trail innovation rather than blaze the path.

Investors are not worried about the level of dividends or share buybacks.  They want to know if their company will continue to be a leader in the new technology bazaar, not the old Technology Officers Club. Some of the key questions are corporate organization, executive management, the portfolio, allocation of capital, the innovation process, management incentives, and the CEO succession.  Unfortunately, all of these are effectively off the table due to the timing of announcements, by fiat in the case of CEO succession, and by the fact that there are no answers now.

$1.5 billion in Office 365 revenue is pointed to as indicating great things.  I have my doubts, but the truth is that the rationale for consumers and business adopting this model has not seemed convincing.  I recognize that there is some rationale for big corporate licensees, but that's assuming that they don't eventually get fed up and go to a better option being developed elsewhere.

Arrogance and the power of the monopolist is what built the company's cash horde.  The Windows model is winding down, perhaps slowly but inevitably. Trying to become a consumer oriented company around hardware goes against the company's evolutionary DNA.  Consumers are price-driven, fickle, demanding and always set to move to the next big thing.  Microsoft is unlikely to become a leading gaming or entertainment company under its current structure.  How are these issues going to be resolved?

This is where the value will be added, not by short-term share buybacks and dividend hikes.  Microsoft's board charter should to make sure that the company stays in business forever, to paraphrase Harvey Mackay.  Given its current financial strength and many assets, investors need to understand how the past egregious destruction of value will give way to a new era of value creation.  That is the beginning and the end of the story.

Let's see if we know anything more after the Analysts Day.

Saturday, September 14, 2013

Microsoft's CEO Transition: A Play in Two Acts?

In the past few years, one of the biggest topics put forward by corporate governance gurus has been the importance of boards working on CEO succession.  This would include, of course, the development of potential internal candidates.

In the case of Microsoft, given Ballmer's thirteen years of leading Microsoft wandering in the desert, a board which was not asleep should have developed some concrete plans for succession. So, now this board is going to choose the single individual who can lead Microsoft beyond its bloated and dysfunctional culture to become a new tech industry leader?  Highly unlikely, and even more unlikely that such an individual exists.

Let's dismiss a couple of absurd suggestions.  The Messiah Returns: Bill Gates should come back as CEO.   Second acts for leaders of the same enterprise rarely work.  Steve Jobs, yes, seems to be an exception, but the Apple he left was not exactly the Apple he came back to, so he had to refocus the company's product development efforts, not gut the company first. Bill Gates would have to gut the company which has become bloated and dysfunctional under his hand-picked successor, all the while he was assenting to the foolish moves as a board member.  No, this is totally absurd and ridiculous, plus he's more interested in TED talks and philanthropy.

The Energetic Tech Leader: lots of names circulated in the press, including mad ideas like the CEO of LinkedIn. The problem is that Microsoft had a strong player of this ilk when Ray Ozzie was Chief Software Architect. He couldn't accomplish much in a brief spell.  Younger, internal candidates, I believe, would find the sprawling Microsoft empire difficult to get a handle on, no matter energetic they were.

Another peculiar feature of Microsoft---quick, name the past two or three CFOs of Microsoft. The CFO in this company seems more like a Treasurer or Chief Investment Officer of a bank than the strategic and operating partner of the CEO.  I've scratched my head over the past four of five incumbents trying to think of an area where they seemed to add value beyond signing the financial statements.  An incoming CEO would not have the advantage of getting briefed by a strong incumbent. A smart, new CEO would need to come in with a very strong partner from outside and upgrade the profile of the CFO if the company's capital allocation were ever to get better, which it probably won't under the current corporate structure.

I think that this drama is best viewed as a play in two acts.  Act One: costs have to be cut, fast and ruthlessly. The deadwood has to removed from the key bottlenecks. Stephen Elop seems to be the person for this job,  having done this recently at Nokia, and he is a former Microsoft executive.  When this tough job is done, and the portfolio is properly pruned and positioned, Act II would begin.  Assuming, in the meantime that the board were completely turned over, the separation of the company into distinct businesses would begin and then three or four new CEOs would emerge for the new businesses, as we have discussed before.

If Elop were able to achieve this agenda as a CEO, that alone would be a magnificent achievement.  Act II would be the beginning of not just an earnings rebound, but a story of real value creation. Then, Elop could move on or get kicked upstairs. Then, a totally different kind of CEO should be chosen by a new board for a Microsoft on a different journey.  Picking one person now and assuming that (s)he would get it all done alone, with this board and this corporate structure, is truly waiting for Godot.

Friday, September 13, 2013

Syria: Let's Make Sure Our Negotiations Are Bilateral

Russian President Vladimir Putin must have hired the biggest, most expensive public relations counsel in the world to help him with his unprecedented campaign on Syria.  And, his predictable tactics are working, unfortunately.

His Opinion piece in the New York Times takes your breath away for its chutzpah, but it is bold, even over the top.  God's name is invoked as establishing the equality of all human beings, and the Pope is acknowledged among the world's major political and religious leaders. Will wonders ever cease?

We criticized the Administration's first responses to Russia's overtures for talking over the heads of the Russians to the Syrians.  Why?  Because, now it has opened the door to President Assad making demands on our conduct before a deal is made on chemical weapons.  Suddenly, what should have been a bilateral negotiation between Russia and the U.S. is now a trilateral negotiation.  This can't work.

The door is still open to keep this process on track. President Putin's own words point the way. 

"My working and personal relationship with President Obama is marked by growing trust. I appreciate this."  

So, he has understood that we are acknowledging his, and Russia's importance, on the world superpower stage. The disdain he has shown for President Obama has been overcome, and things are improving.  So, let's make sure it stays on track.

President Obama needs to hold President Putin to his words and make Russia responsible for keeping their Syrian client in line.  We need to tell President Putin what we we can accept as an outcome of this process--stability for the Russian client, no armed conflict or regime change, a rapid, internationally verifiable disarming of the chemical arsenal and plans for humanitarian aid--and make Russia responsible for bringing Syria along. Like Mr. Putin told us to work with his foreign minister, we need to tell him to have his foreign minister work with Secretary of State Kerry.

We should ask the U.N. Secretary-General to undertake the program of planning, implementing and monitoring the dismantling of the chemical arsenal through the appropriate mechanisms, including the Security Council.  He will know how best to achieve this goal, and let him work with the Permanent Members.  

We also need to lose our habit of blowing off steam and expressing frustration in the press, or speaking through mouthpieces like Susan Rice.  This initiative started at the highest level, and this is where it has to be seen through to the end.  

Thursday, September 12, 2013

Michael Dell Gets His Pyrrhic Victory

Dell has been stumbling towards the finish line for some time, and today Dell's public shareholders get their payday and say sayonara to their company's long and checkered history as a public company.  Carl Icahn made a few quick millions, got lots of press, and generally muddied the waters and probably ensured that management would get its way.  "Activism" is not synonymous with better governance, nor is it a guarantee of superior share performance.

Who should feel good about today's announcement?   HP, its sales teams, and its shareholders for reasons we've discussed at length in a very popular post.

Michael Dell will own 75% of the post-transaction company, according to the Wall Street Journal.  If he is going to be hands on micro-managing the company like a founder, they're toast.  Assuming that he takes a Bill Gates approach and spends time on his philanthropic issues, then success will come down to his selection of a new management team.  Given that there has to be extensive cost-cutting, does Mr. Dell bring in a "Chainsaw Al" figure?  This doesn't seem to work well for technology companies.  While he's deciding, the best performers at Dell are up for grabs from HP, IBM, and start ups.  Any way you look at it, there's lots of risk.

"Dell is stuck," said Matt McIlwain, a managing director with venture-capital firm Madrona Venture Group, which invests in emerging business-tech companies. "They don't have the ear or the wallet of enterprises like H-P or IBM do, nor are they innovative enough to keep pace with emerging tech leaders like Amazon Web Services."
As Meg Whitman, the CEO of HP recently said of a large meeting with top CIOs, "You want us to win," meaning we CIOs need large, global, financially strong, innovative, customer-driven organizations that will help us succeed in our jobs.

There's nothing so far to indicate that the post-transaction Dell can achieve this status with their customers.

Tuesday, September 10, 2013

Another Perspective on Syria From the Ground

Here is an extended excerpt from a talk given by Bishop Basil of the Antiochean Orthodox Christian Archdiocese of North America to the New York Diocese of the Syriac Orthodox Church of Kerala, India.

We ask your prayers first and foremost for our president. That God might speak as we say in the liturgy “good things to his heart. That God might speak reasonableness and peace to the heart of our president. That he might speak peace to the heart of our elected officials, that they indeed become our representatives, that they speak the voice of the people. God speaks through his people, not through a congressman alone, or a president alone. He speaks through his people. May God hear our prayer for our armed forces. Men and women who sit on the edges of their seats to know whether they will be going to war or not. And don’t believe this “no boots on the ground.” It’s impossible. We’ve heard the promise many times. May God give strength to the parents. The spouses first and foremost of those soldiers, and their children, and their parents and their families, that he might grant them grace during these next coming days to prepare for the tension that must be laid upon them. And God be with the people of Syria. All of them, whether they’re Muslim, they’re Druze, Christians, Orthodox and not. May he be with our Father in God (Patriarch John of Antioch) who has already lost thousands of his people, and priests and deacons and monks and nuns in the war already. Whose monasteries and churches have been occupied and many destroyed by the so-called Free Syrian Army. Whose own brother was kidnapped and still remains kidnapped, Metropolitan Paul along with Archbishop Yohanna, since April 22 by freedom fighters. Freedom fighters--people who rape women, abduct bishops, desecrate churches, open peoples’ chests and pull their beating heart out and eat it in their presence. That’s the Free Syrian Army and their allies, Al Qaeda.

Two days ago I received a call from our Metropolitan Saba Esper, who you know, he has visited here. He is the archbishop of our own Wichita diocese’s sister diocese in south Syria. He spoke by telephone, right before he called me, with Mother Belagia. Mother Belagia is the abbess of the monastery of Saint Thekla in Maalula. It’s only like a 20-30 minute drive north of Damascus. It had been occupied for 3 days (the town). The town is one of three where they still speak Aramaic--Aramaic which our Saviour spoke. The only 3 towns left in the world. The majority of the people in Maaloula are Christians--Orthodox Christians. There’s a smattering of Catholics there, and there’s also some Muslims there, and they live there in peace. The beginning of this week they were occupied by the Free Syrian Army. It turned out to be Al Qaeda, and they turned out to be Chechens--the same ones who abducted our 2 bishops. The nuns took the children there, orphan girls there of St. Thekla, and they and the nuns, many who are aging, into the caves of the village to hide for 4 days. They didn’t even go out to buy bread. The villagers didn’t leave their homes for 4 days. And if you’ve never been to the Middle East, they don’t shop like we do. They go every morning to buy their bread and food for the day. So they were locked in their homes for 4 days. Those who went out were shot, so they knew to stay in their homes. Saba called me on Wednesday. Mother Belagia, and they were ringing all the bells in the town’s churches--the Syrian Army, you know the one that we’re told is so bad. The Syrian Army finally came and drove Al Qaeda out. And what did they find? They found 2 churches in the village completely destroyed. St. Thekla, which is ours, the Orthodox church in the village, and St. Sergius, which is a Catholic church in the village--completely destroyed. On the inside, the icons, the holy books, everything had been desecrated. Not just ripped off the walls, but covered in urine. Real desecration by that wing of the Free Syrian Army. God knows what the people of Syria, and by extension the people of Jordan, the people of Lebanon, the people of Turkey and the people of Iraq--because if there’s a war there’s a regional war--God knows the burden they may have to carry this week. Lighten their burden as you can. And that’s by your prayers. Have a soft heart towards the people. Wrongs were done on both sides--vicious wrongs on both sides. But as we’ve heard from some honest politicians this past week, there’s really no good armed force over there. No one we can trust. None. So the choice is between the evil that we know and that we’ve had for 30-40 years in that part of the world, or another evil we don’t know about except what they’ve shown us in this awful civil war for the past 2 and a half years.

So this week, really pray. Thank God that we live in a country that is safe. Where we can send our children to school, where you can go out and buy your groceries. But realize that that blessed country where we live can also be a disruptive force in other parts of the world, as it has been. Remember Bosnia. Remember Kosovo. Remember what happened in Belgrade, the capital of an Orthodox country, bombed by our armed forces on Pascha night, while people were going to church for the midnight service. God bless America--but a lot of evils have been done in her name. We pray that God will restrain our leaders from being the cause for any more evil and sorrow and hurt in this world. That we might extend a healing hand, to bring enemies together like we’re supposed to. Where we teach people to turn the other cheek, where we teach people to bless those who curse them, to love our enemies. That’s the gospel we preach, the gospel we die for. It’s the gospel which Orthodox Christians have been and I guess will continue to die for. Remember them in your prayers, and as I said, most especially our leaders, who will make the decisions. That God might pour out his Holy Spirit on them, and speak good things to their hearts."

Kerry Puts His Foot In It: The Russians Open A Door in Syria?

Secretary of State John Kerry added his name to President Obama's list of hapless foreign policy advisers by his off-the-cuff remark about Syria's turning in of their chemical weapons to international supervision as a way of avoiding a U.S. attack on Syria.

But, the Russian ploy could also be a real opportunity,  Why?  Russian President Putin believe that the world has moved to a multi-polar configuration of power, and it is critical to his personal and political belief systems that Russia be seen as primus inter pares to China and any other aspirants to the halls of power.  The problem is that the U.S. doesn't give him any sense that we believe the same thing.  Here is a chance.

Think about President Putin's remarks all along during this crisis.  Syria is a valued Russian client in the Middle East and a big purchaser of Russian arms and services.  The Tartus naval base has been a long standing maintenance and supply port for the Russian fleet in the Mediterranean.  Clearly, the President's message is that ambitions for removal of the client would be thwarted by Russia.  On the issue of chemical weapons, Russia's demand for hard evidence never confirmed or denied the existence of chemical weapons in Syria, and even after the St. Petersburg summit President Putin said there was no evidence of their use by the Syrian government.

So now, Russia is taking the statesman's position of getting its client to agree to turning over the weapons stockpile to international supervision and destruction.  Russian Foreign Minister Lavrov said, "we will immediately begin work with Damascus."  This is what a Big Power does, and we should acknowledge it instead of talking over the heads of the Russians to the Syrians.

China needs to be a part of this discussion also, primarily because their government takes a very dim view of what seems like an American preference for regime change whenever foreign politics in a country of interest doesn't evolve to our liking.  Now, there could be three Permanent members of the U.N. Security Council on the same page to eliminating chemical weapons without unilateral military action by the U.S.

Secretary of State Kerry would have to step up to the plate and work with his Russian and Chinese counterparts to work out the broad parameters of how the Russian idea would be implemented through a Security Council resolution.  In the mean time, President Obama's aggressive politicking for action so as not appear weak might be problematical.  Perhaps a phone call from the President to Mr. Putin might be a good thing to break the ice from St. Petersburg.

Sunday, September 8, 2013

Let's Not Bomb Syrian Streets

 Abo Shuja/Agence France-Presse and Getty Images.

What would a U.S. missile strike in Syria mean to the civilian population?   Here's a poignant image from the Wall Street Journal, of a man walking to work on a street that looks like the bombed out city of Dresden during World War II.  It is a town in the province of Deir-al-Zour, an oil-rich province bordering Iraq.

Would the life of this gentleman and his family be better in the aftermath of a strike?  Would this make him feel more positively about America and about our values?  Casualties are mounting, and the flow of displaced persons and refugees is increasing all over Syria.  We would add to both of these rivers of people.

The more the Obama administration's various mouthpieces spin a case of military action, the more heart-rending it becomes to see pictures of what Syrian society is suffering now, while awaiting a strike from the West whose justification is to hold an intransigent dictator, who is without conscience, "accountable."

As we've written before, we've never been cared a whit about the proliferation of chemical weapons, like nerve gas, throughout the Middle East---until now.  Here's what the Wall Street Journal notes today,
"Syria’s top leaders amassed one of the world’s largest stockpiles of chemical weapons with help from the Soviet Union and Iran, as well as Western European suppliers and even a handful of American companies, according to American diplomatic cables and declassified intelligence records."
 Do you think Presidents Hollande of France and Obama of the United States are going to hold those companies accountable for violating non-proliferation treaties?  How about holding ourselves and our allies accountable for being blind, callous and inattentive to the obvious market signals about commercial traffic in chemical weapons?  Let's help the Syrian people by trying to work out a solution which brings them some respite from proxy wars by bringing them help with food, sanitation, and medical personnel.  Bomb fragments which say "Made in the USA" are the last thing they need to see on their streets.

Friday, September 6, 2013

The U.S. Comes Away With Nothing on Syria

Here is the bottom line on Syria.  Try making the bullish case for an international intervention to express outrage for the killing of 1,500 people using sarin gas outside Damascus. If there were a surgical strike, or limited military action against Bashar's regime, what would be the best possible outcome?  There isn't even a good outcome.

Syria can easily become the theater for yet another Sunni-Shia conflict which could eventually change national maps in the region. Were events to go down this path, the already intolerable civilian displacement and migrations would intensify into something which the international community would really find appalling.

Damascus is the crown jewel for Bashar al-Assad and his family history; he will not be driven out or displaced easily.  Striking at the air force on ground with cruise missiles, for example, wouldn't touch any stockpiles of chemical weapons, since those are probably hidden in civilian areas of Damascus itself. Shia militia in Iraq have already spilled over into Syria to reinforce the government troops.

The Syrian rebel forces, whom we might regard as the aggrieved parties, are not democracy-loving, secular humanists seeking to establish a modern state. There is no more compelling evidence of this than the video published in the New York Times of seven captured government soldiers being slaughtered in cold blood by their rebel captors as the rebels talk to the cameras. Western nations should be just as outraged by this behavior as they were by that of President Assad's troops using nerve gas.  Brutality and wanton killing are against our mores, no matter what the weapon used.

Saudi Arabia, which signed the eleven nation document today calling for action in Syria, knows that their monarchy will ultimately be at risk if a wider Shia-Sunni conflict were to expand around them.  There see no cost in throwing a bone to President Obama by signing today's document.  They have no skin in our political game, and they are looking elsewhere to put their money to work for their own preservation.

If there is some face-saving way for the Syrian regime to transition out of power, it would have to be driven by the United States, its European allies, and by Russia and its clients.  This is what they call "an international solution."  If China were to buy in also, then no permanent member of the Security Council would cast a veto against an appropriate resolution.  This is a long road with low odds, but that's called diplomacy. While the talking is going on, increased humanitarian aid  would be welcome by the suffering civilian populations.

The inept briefing by Ambassador Samantha Power today shows that nobody in the Obama administration really believes what they are forced to be saying.  Listen to her Freudian slip about the Security Council.  We have, at the President's whimsy, been forced down a road to taking senseless, military action.  It's time to take this off the table.  Like in Egypt and Libya, we have no idea how the aftershock of a military intervention would hit the fragile fault lines in the region.

Wednesday, September 4, 2013

A Syrian Intervention: A Mission Without A Mandate

In their latest Congressional testimony about military action against the Syrian regime of President Assad, Secretaries Hagel and Kerry were reported by the Washington Post to have said,
"Our military objectives in Syria would be to hold the Assad regime accountable, degrade its ability to carry out these kinds of attacks and deter it from further use of chemical weapons,” Hagel said in testimony before the Senate Foreign Relations Committee. 
Kerry said such a strike would have a “downstream” effect of limiting President Bashar al-Assad’s conventional military capacity. Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said his goal would be to leave the regime weaker after any assault."

Holding a regime accountable is quasi-legal objective, not a military one.  Hitting and disabling the Syrian air force was the specific objective which appeared in the press over a week ago, and this certainly would have limited Assad's conventional military capacity, given some relief to rebel forces, and perhaps limited delivery options for chemical weapons; given the extended dithering, is the Syrian military really standing still and waiting on their runways for their Air Force to be destroyed?  Is this still a viable option?

Both officials made it clear that they are not asking for Congressional approval to "go to war."  That's nice, but it's also completely unclear what Congress is being asked to approve.

The argument about a pro-active strike showing commitment to the administration's support for "non-proliferation" of chemical weapons is laughable.  Were this the case, what substantive activities have been carried out through commercial, regulatory and diplomatic channels for the past six years?  None.

Chaldean Catholic Bishop Antoine Audo of Aleppo, who has personally seen thousands of his Syrian citizens injured and killed in the conflict argued against any outside military intervention as potentially leading to "a third world war."

His Holiness Pope Tawadros II of Alexandria said,
“The acts of violence against Christians in Iraq, Syria and other areas may be interconnected. There is a kind of pressure on Christians in the Middle East, and a large proportion of Christians have already migrated from Iraq,” 
He believed that wars in the Arab world aim at fragmenting the region.
Despite the very large diaspora of Coptic Christians from Egypt, H.H. Pope Tawadros too cautioned against military interventions by outside interests which would cause more casualties, division and instability in the Middle East.

The Security Council in New York is holding both formal and informal consultations about proposed actions in Syria, even as President Obama is washing his own hands claiming the world, not he, has drawn a "red line" on Syria, whatever that means.  France and Russia are both calling for U.N. resolutions, which of course would be vetoed by Russia, anyway.

As much as we dislike the long-standing dictatorship of Syrian President Assad, America has not achieved any kind of constructive engagement with Syria, for a variety of reasons.  President Obama, without the clear support of his advisers or of his own party, beats the drums for action while saying "It's not my decision, the world wants action."  Christian leaders in the region who know first hand about the violence and killing are calling for prudence and restraint, as is Pope Francis.  There is nothing positive to be gained, at this point in time given the public dithering, from any military action against Syria, no matter how much parties agree about the inhumanity of the regime in power.

Tuesday, September 3, 2013

Nokia Makes The Deal With Microsoft: Patents Pending.

Microsoft made its inevitable announcement about Nokia's wireless devices and services businesses , but it was also wound up being a good deal for Nokia, which retains 50% of its pre-divestiture sales and adds a boat load of Microsoft's cash and access to cheap financing.

We were surprised by this part of Microsoft's announcement, namely
"Nokia will retain its patent portfolio and will grant Microsoft a 10-year license to its patents at the time of the closing. Microsoft will grant Nokia reciprocal rights to use Microsoft patents in its HERE services. In addition, Nokia will grant Microsoft an option to extend this mutual patent agreement in perpetuity.In addition, Microsoft will become a strategic licensee of the HERE platform, and will separately pay Nokia for a four-year license."
In the end, it may make no difference, given the option to extend the agreement; a purchase of the portfolio probably would have taken too much time for haggling about the valuation and it would have driven the price tag much higher. Microsoft's paying for the HERE product, a competitor of Google Maps,  with a four-year license, as opposed to a comparable ten-year license is interesting.

Steve Ballmer's letter to employees is really confusing for an outsider and reconfirms the point that the current Microsoft couldn't and shouldn't be the future Microsoft, if it is going to thrive.  Stephen Elop certainly moves higher in the next Microsoft CEO sweepstakes, and Julie Larson-Green moves off the list from reading the labyrinthine structure into which she falls after this acquisition.

The issue of Microsoft's other hardware partners being miffed by the acquisition seems off the mark.  Their relationship was always one of partner, not exclusive partner.  If Windows Phone has a 3% share of the mobile phone market, clearly Microsoft is commuting to make this bigger with the acquisition of Nokia's cellular assets.  Developing a proprietary mobile/table OS wouldn't seem like a good risk/reward proposition for HP. For Samsung, this is a different story, which probably is exactly what it needs to do over time. The unlocked Nokia 521 Windows Phone for T-Mobile certainly seems attractively priced for the features and is available at the new Windows Store; this could be the beginning of a more value-driven foray into the smartphone market. Let's see.

If Microsoft can organize the new mobile/wireless organization headed by Stephen Elop and reporting to Ballmer into a new kind of organization, i.e. working together as opposed to at cross purposes, this would be a step forward.

Sunday, September 1, 2013

Microsoft Moves Towards A Reboot? Questionable Corporate Governance?

Well, it surely didn't take long.  We wrote a few days ago about Microsoft needing a major corporate reboot that should involve radically changing the corporate structure.  A day later, comes the announcement that the Microsoft board "offered" a board seat to ValueAct Capital Management, blandly characterized as an "activist investor."

The problematic question is "Why?"  The follow-up question is "Why this investor?"  Reuters reports ValueAct owning a 0.8% stake in Microsoft, hardly a level that bespeaks meriting a board seat on its own. Is there unique expertise at ValueAct?  Co-founder Jeff Ubben ran Fidelity Management's Value Fund, and when he left, it had $4 billion under management when he left to join the merchant bank Blum Capital. Again, this is certainly a high level of asset management experience, but hardly unique or noteworthy.

Here's an interesting video in which Jeff Ubben talks about ValueAct's approach to active investment management:

ValueAct, according to Reuters, will be prevented from launching any proxy action against Microsoft while serving on the board.  But, in a sense, ValueAct has become a "senior equity shareholder" to other larger, non-insider equity owners of Microsoft.  Why?

Can their stake change while they serve on board?  Hopefully not.  They could turn out to be a source of ideas to restructure the company, which I would believe would be along the lines we wrote about, which is about a fundamental rethinking of how capital is allocated within a different corporate structure.  The problem is that the option of getting feedback and ideas from shareholders is always open to a savvy management with open communications with all of its shareholders.  Handing a board seat to a small investor in order to get ideas hardly seems like a "value."

Just like Steve Ballmer's announcement, the timing and content of this announcement are quite peculiar, and it should be explained by the company, beyond shareholders having to read a Reuters news story.

Greg Mankiw and the Carbon Tax

For the past few years, we've written lots of posts around environmental policies and their nexus with the economics of energy sources, like oil, gas and coal.  "Cap and trade," a scam waiting to happen, seems to have faded with the European system's dysfunctional performance.

A "carbon tax" isn't the perfect instrument, but if the legions of environmentalists, government policy wonks, and corporate execs to who pay lip service to 'climate change' are serious about what they profess, then a carbon tax is the way to go to get real results, directed by market mechanisms and not by government czars.

Now, Professor Greg Mankiw of Harvard has written a New York Times editorial with a cogent, non-partisan article challenging the various academies to implement a carbon tax.

We wrote in 2011, "The carbon tax hasn't had a strong, visible voice in the political and economic markets for some time. Hopefully, one will emerge soon."  It's nice to see the hoped-for emergence.