Hotshot Executives Are Fleeing the Scrutiny of Public Companies for The

CLASS DIVIDE AT AMHERST (P. 64 ) lA DIFFERENT DIET PILL (P. 74 )

FEBRUARY 27, 2006 www.businessweek.com

GoingPrivate Hotshot executives are ﬂeeing the scrutiny of public companies for the mad money of the private-equity boom BY EMILY THORNTON (P. 52 ) February 27, 2006 52 FOLLOW THE MONEY Cover Story WIth so much private-equity 52 Going Private cash sloshing around, no Money and freedom. That’s wonder top talent is kissing what’s driving hotshot off public companies managers, midcareer folks, and newly minted MBAs alike to private equity, a world where investors buy slumping companies, turn them around, then sell or take them public. Pay is high even at the entry level—and can be spectacular for stars like ex-ibm chief Lou Gerstner. As for freedom, ceos can build for the long term without shareholders second-guessing every move. Not to mention that pesky Sarbanes-Oxley...

58 Buyout Mania’s Mountain of Debt By 2008 there may be a wave of defaults 62 A Chat With Lou Gerstner Why he doesn’t miss the quarterly grind

The Business Week 26 News You Need To Know Retail sales; oil production; Merrill and 84 BlackRock; Warner Music; and more a; BAND WIDTH News: Analysis Your own kind & Commentary of music, online 28 How the IPO Market Got Its Buzz Back Investor appetites have returned, but this time they’re drawn to—mostly— saner offerings

BusinessWeek (ISSN 0007-7135) Issue number 3973, published weekly, except for one week in January and one in August, by The 44 McGraw-Hill Companies, Inc. Executive, Editorial, Circulation, and Advertising Offices: 1221 Avenue of the Americas, New York, NON GRATA N.Y. 10020. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Canada Post Publication Mail Icahn’s frosty Agreement Number 40012501. Return undeliverable Canadian addresses to: DPGM Ltd., 2-7496 Bath Road, Mississauga, ON L4T 1L2. Email: bwkcustserv@cdsfulﬁllment.com reception in Korea Postmaster: Send address changes to BusinessWeek. P.O. Box

8418, Red Oak, IA. 51591-1418. john kuczal by cover photo illustration (bottom left) rick maiman/bloomberg news

2 | BusinessWeek | February 27, 2006 31 Class Actions’ Great Divide More plaintiffs opt out of settlements—a headache for companies being sued 64 32 Commentary: Housing BIG PLAN ON CAMPUS Falling prices will bring on the pain. Even with financial aid, Who’ll get blamed if the roof caves in? most low-income kids 34 The Rising Stock of Black Directors can’t afford college. Companies seek to broaden their boards Amherst President 36 Wanna Buy a Money Manager? Tony Marx wants Banks and brokerages are selling to change that 38 Tesco’s California Dream A British supermarket heads for the U.S. Government 41 Washington Outlook A congressman’s guilty plea shines light Science & Technology 90 Your Very Own Hit Factory on Capitol Hill’s “black budget” A digital home recording studio requires 74 Girth of a Nation the right software and a lot of patience Many doctors may decide obesity is best fought with a pill nearing fda approval 92 Tuning Up a New Generation Global Business Teaching computer-savvy kids to compose 42 Electrolux Cleans Up ceo 94 Singing Beyond the Shower Straberg reverses a slide by Marketing Web sites to expand your audience jettisoning old ways and boosting r&d 76 Video Games: The New Ad Game 44 Icahn: Foreign Raiders in Korea Why they’re becoming the hot spots for His kt&g fight may be the first of many product placements Columnists 45 India’s Generic-Drug Wars 18 Wildstrom: Technology & You pc Suddenly, Dr. Reddy’s and Ranbaxy are Finance New security services for the home up against a fresh crop of competitors 20 Fine: Media Centric Golden West’s Golden Strategy What the U.S. Can Learn from Sasol 78 And the competition is...teen consumers 46 How it’s able to ride a housing bubble The South African company makes 23 Cooper: Business Outlook liquid fuels from coal, not Mideast oil An increasingly global economy will Entrepreneurs hamstring Bernanke’s domestic efforts Currencies: The case for a dollar decline Managing 80 Steering Patients Through the System 96 Marcial: Inside Wall Street 48 The Org Chart That Really Counts Quantum Health points people to the How mapping unofficial job links pays off best care and saves employers big bucks 102 Jack and Suzy Welch: The Welch Way Weighing worklife trade-offs The Corporation Information 50 Dot-Com Fever, Again Technology Ideas Small sites are pursued by Big Media 82 A New Chapter for Digital Books 100 Books In 2006 they may become best-sellers, Spar: The Baby Business thanks to big tech advances 104 Outside Shot: Barney Frank Special Report The free market is producing more 64 Amherst’s Campus Revolutionary inequality than is socially healthy President Tony Marx is developing a Personal Tech/Music radical plan to get more poor kids into 84 Boot Up the Band top colleges, starting with his own school Technology makes it easier to compose, Features record, and promote your own music 7 UpFront People 85 Plug ’n’ Play Pianos 14 Readers Report There’s a digital keyboard for everyone 16 Corrections & Clarifications 72 Death, Dying, and the CEO kpmg’s Eugene O’Kelly and his wife 88 Go, Go, Go Johnny B. Digital 98 Figures of the Week collaborated on a remarkable chronicle Bringing guitars into the 21st century 99 Index of Companies

February 27, 2006 | BusinessWeek | 3 It’s about money.

Earning it. WWW.BUSINESSWEEK.COM Updated every business day. BusinessWeek magazine is available online free to subscribers: Investing it. Go to www.businessweek.com and follow instructions to register. Spending it.

Mourning the closing Check out this weekend’s of Chicago’s landmark show February 18 and 19: eatery

Overlooked deductions: Tips to help lower your tax Keeping it bill and boost your refund.

Teaching tunes: Kids review All in the Family software that teaches them As baby boomers gray, hundreds of how to compose and play music. thousands of family-owned businesses are facing a major decision: What will Destination CEO: Meet Barbie’s they do with the business? Options maker. Mattel CEO Bob Eckert abound: selling to investors, giving the a talks about his rise to the business to children, bringing in corner office. outside management. In this Online Special Report, we take a look at what Barking for bucks: families need to consider as they Dog-related products and decide whether and how to pass their services are making big businesses on. Meet Chicago’s Berghoff bucks for business owners. Family, who after three generations has decided to close the 108 year-old restaurant that bears their name. Visit Execs Craigie and Debbie Zildjian keep with the 14th generation of Zildjians to the cymbal maker marching on ﬁnd out how they’ve managed to keep the family’s cymbal business running for nearly 400 years. Our report also examines Airs Saturday/Sunday nationwide. the generation ready to take control and offers a gallery of family- Check your local listings owned businesses that have stood the test of time. You’ll ﬁnd all or view segments at

this and more at www.businessweek.com/go/familybusiness (top to bottom) jeff roberson/ap/wide world; asia kepk www.businessweekweekend.com

4 | BusinessWeek | February 27, 2006 “I am stunned that he would be out speechifying the ﬁrst week he was off the job.” –Donald Straszheim of Straszheim Global Advisors on Alan Greenspan possibly upstaging successor Ben Bernanke with his public appearances and planned memoir, to USA Today

EDITED BY DAN BEUCKE

MOTHER INDIA romance, politics, hatred, all creating high drama,” says AS THE Shristi Behl Arya, who is the show’s producer. CALL CENTER Indeed, the customer TURNS service scene in India is anything but boring. Centers can MAYBE IT SEEMS like you be a hotbed of hormones; spend half your life on the some average a marriage a phone with a call center in month, often outside tradi- India. But in India itself, call tional bounds of caste and centers actually are seeping economic status. The Call into everyday life, appearing Center, a show coming soon to in a wave of popular sitcoms channel NDTV, takes potshots and books. India Calling, a at Americans venting their hot Indian tv show (below) angst about losing jobs to the on Rupert Indians on the Murdoch’s other end of HAPPIER DAYS Eisner and Jobs STAR channel, the wire. A after A Bug’s depicts a best-selling Life premiere small-town book, One girl who Night @ The lands in Call Center, SHOW BIZ Bombay in touches on search of her love, bad boss- absconding es, even God Eisner: Let’s sister. She finds a job in a call (appearing, naturally, in a center instead. Viewers phone call). Then there are follow the highs and lows of the jokes making the rounds: Break a Deal the work, which attracts When a man complains to a thousands of young Indians. doctor about insomnia, the MICHAEL EISNER now knows they can put your name on the “Call center jobs are now part doctor suggests working at a building, but that doesn’t guarantee a warm welcome back. of India’s social fabric, call center as the remedy. Eisner, who left Walt Disney as ceo on Sept. 30, was honored offering immense scope for –Nandini Lakshman on Jan. 23 when Disney named its Burbank headquarters building after him. But later that day, the board turned down Eisner’s last pitch: a plea to pull out of talks to buy Steve Jobs’ Pixar Animation Studios. For nearly a half-hour, Eisner argued THE BIG PICTURE that $7.4 billion was too much to pay for a studio that had only WHAT’S IN A NAME There’s a new breed of Web six films to its credit, albeit blockbusters such as Finding Nemo and Toy Story. Eisner argued that Pixar’s streak was bound to companies, and good luck figuring out what end and, when it did, Disney would look like it acted rashly. they do from their names. Try to match the Those with knowledge of the talks, first reported by the New startup with its description: York Post, say the board felt it owed it to Eisner to listen. After all, he still holds 1.7% of Disney’s stock. But directors factored 1 Diigo a Multiclient instant messaging application in Eisner’s feud with Jobs, who last year said he would walk away from Disney deals if Eisner stayed. Eisner also may have 2 Etsy b Advertising tools for blogs and RSS feeds lost sway after deciding in October to quit the board a year earlier than anticipated, say Disney insiders. His contract 3 Meebo c Online file sharing allowed him to serve as a creative consultant to the company, 4 Pheedo d Social bookmarking and annotation tool they say, but he chose to pursue other opportunities. Eisner has said he backs his successor, Robert Iger, who put the Pixar 5 Zingee e Person-to-person e-commerce of handmade items

(right) rose prouser/reuters deal together. Disney had no comment. –Ronald Grover 1-d, 2-e, 3-a, 4-b, 5-c 4-b, 3-a, 2-e, 1-d, Answers:

February 27, 2006 | BusinessWeek | 7 DRUG WATCH drugs Aranesp and Epogen SCHOOL TIES (commonly known as Epo) AMGEN’S were developed to help TODAY’S CEOs are less BICYCLE RACE: cancer and kidney patients— likely than predecessors but they also happen to be to be company loyalists or CHEEKY? among the banned performance-enhancing military veterans,says ON FEB. 19 SOME of the drugs used by athletes. the latest census by biggest names in cycling will Amgen has backed charity recruitment outfit line up for the inaugural Tour cycling events, but this is its of California. The race, which first pro race. When the Spencer Stuart. covers 600 miles in eight company announced its They’re also more days, is billed as cycling’s three-year sponsorship of the tour, cyclists snickered and apt to know the the World Anti-Doping Agency words to If You voiced concern that Amgen Want to Be a was sending a mixed message. “We realized there Badger. In would be critics,” says Mary 2005, 14 of the Klem, a company spokes- CEOs at S&P 500 companies held undergrad woman. Nevertheless, she says, Amgen put its name on degrees from the University of Wisconsin. That the event to build recognition puts it in a tie with Harvard for first place, biggest event this side of the and campaign against blood ahead of Princeton, Stanford, Yale, and the Atlantic. Yet much of the buzz doping, not to promote Epo surrounding the race hasn’t to athletes who purchase it University of Texas. Top Badgers include been about its elite field or on the black market. “That Halliburton’s David Lesar (zoology), Kimberly- scenic course but its title market is inconsequential,” Clark’s Thomas Falk (accounting), Exelon’s te sponsor, Amgen. The says Klem. “It would be in Thousand Oaks (Calif.) our best interest for it to go John Rowe (history), and Qwest’s Richard company’s red cell-boosting away.” –Sarah Max Notebaert (political science). –Michael Arndt

BLOGSPOTTING DRAWN & QUARTERED WATCHING THE TRENDS IN DESIGN http://www.designobserver. com/

» WHY READ IT To listen in on the cyberchatter of some of the best designers in the business—six talented syndica feature umbus dispatch/united writers and a bevy of guest observers comparing notes. y charles c. place/getty images;

» NOTABLE POST “Design is, more than ever, a way to relate to the world around us. Our fascination with design, as both a process and an ideal, is reﬂected in the products and services that are increasingly available to the general public. We can customize nearly all the things we consume, turning mass-produced stuff into

our stuff.” b (clockwise from left) photographs col smi; jeff stahler/the stluka/icon david

8 | BusinessWeek | February 27, 2006 BOARD BRAWLS EXPERT ADVICE A SIZZLING ROBERT PARKER trustees, claims Martinez FAMILY wants control now. FOOD FIGHT Now Boyd is fighting from the outside: On Jan. 31 the QUINTESSENTIAL California company fired him, claiming drive-in chain In-N-Out an outside audit discovered Burger has built a cult-like he had used company funds following among fast-food to have told ex-employee to do work at his Arizona gourmands for its juicy Richard Boyd that they “only home. Boyd’s lawyer, Philip grilled patties and “secret” want me dead.” Heller, disputes the audit. He menu items. But the beef The saga is playing out in says Boyd was fired in a these days at the family- a state court in Los Angeles meeting not attended by owned, 200-plus restaurant where Boyd, a former In-N- Snyder, who had said in a FOR INTENSE outfit isn’t its trademark Out real estate vice-president declaration weeks earlier that AND FRUITY, Double-Doubles but and board member, claims she trusted him “completely.” allegations that the chain’s Martinez and her stepsister’s In-N-Out general counsel PRESS 7 23-year-old heir, Lynsi husband, Vice-President Arnold Wensinger calls Martinez, and others are Mark Taylor, maneuvered to Boyd’s claim “a vicious and Wine enthusiasts no longer plotting to force out her oust Boyd and take over the baseless attack.” Martinez have any excuse for buying a 86-year old grandmother, chain. Under the guidelines says Boyd circulates bad bottle. With the launch of the wife of the founder. It’s a of a trust set up when “outrageous fabrications and Robert Parker Mobile, they soap opera that includes Martinez’ father, H. Guy untruths about me and my can consult the wine critic’s allegations of fraud and a Snyder, died in 1999, she grandma” in a “desperate renowned “million-dollar backroom power play. would gain control of the effort to draw attention away nose” anytime, anywhere, by Matriarch Ester Snyder is company on her 30th from his own misdeeds.” cell phone. The service, alleged in court documents birthday. Boyd, one of two –Ronald Grover developed by mobile publisher mFoundry, will deliver Parker’s wine-tasting notes and ratings from PRESIDENT BUSH MAY BE overlooking a The Wine Advocate to any potent source of alternative energy. Sprint Nextel phone (other Last year artist Laurie Palmer called for carriers are being added) for “speculative proposals to redesign exercise $4.99 per month, plus Internet charges. equipment to generate and store energy.” Subscribers can get Wine The resulting ideas, on display at the of the Day suggestions and University of Illinois’ Web site*, are mostly special buying opportunities whimsical. But as energy costs rise, is the from Parker’s newsletter. Or they can search by keyword “Pedal Powered Office” (above, by artist Beate Engle) really that far off? or category (region, vintage, Here are some of the other proposals. –Megan Tucker variety, rating, producer, cost) using their phones’ numeric PROJECT DESCRIPTION pads and arrow keys. There’s SPIN CYCLE Bring your toughest suds to this 24-hour gym-powered even some original content, By Clay Ward and Laundromat. Bikes rigged to washing machines require fierce such as previously unpub- Heather Clark footwork to power your clothes through a permanent press cycle. lished tasting notes. Parker says he expects HUMAN POWER Pandian, a Tulane University professor, is serious about this prototype people to use the service CONVERSION seesaw. In time, child’s play could be converted into power for a mostly in wine shops. But, By Raj Pandian school’s lights and fans in developing nations. he jokes, “I’m sure we’re going to hear some howls HARVARD SCIENCE Even the biggest brains can’t ditch P.E. when the gym comes to the from sommeliers at fine CENTER GYM Science Center. Faculty and students stepping up a steep spiral restaurants.”–Elizabeth Woyke By Oliver Knill staircase supply the power for the relaxing elevator ride back down. (top, l to r) rey jerome/reflex news; (top, massey/zuma press day marianna *www.uic.edu/aa/college/gallery400/notions/home.htm 10 | BusinessWeek | February 27, 2006 ReadersReport Re the Disney-Pixar deal:

EDITOR-IN-CHIEF: Stephen J. Adler Jobs may now have EXECUTIVE EDITORS: Joyce Barnathan, John A. Byrne, Kathy Rebello ASSISTANT MANAGING EDITORS: Paul M. Barrett, Frank J. Comes, Robert a Magic Kingdom, but J. Dowling, Mary Kuntz, Bruce Nussbaum, Christopher Power, Ciro Scotti ART DIRECTOR: Malcolm Frouman TV EXECUTIVE PRODUCER: Eric C. Gonon [Apple’s] customer service CHIEF OF CORRESPONDENTS: James E. Ellis CHIEF ECONOMIST: Michael Mandel is Mickey Mouse.” SENIOR EDITORS: James C. Cooper (Bus. Outlook), Peter Elstrom, Mike France, Neil Gross, Robert Hunter, Jeffrey M. Laderman, –Paul Baudisch John Templeman, Elizabeth Weiner NATIONAL CORRESPONDENTS: Anthony Bianco, Mark Morrison, Wellesley, Mass. Jane A. Sasseen SENIOR WRITERS: Catherine Arnst, Stephen Baker, Aaron Bernstein, Diane Brady, Nanette Byrnes, Steve Hamm, David Henry, Tom Lowry, Gene G. Marcial, Michael Orey ECONOMICS: Peter Coy (Economics ed.), James Mehring, Christopher ‘‘ Farrell (Contributing ed.) NATIONAL NEWS EDITOR: Patricia Kranz; Robin Ajello (Deputy) INTERNATIONAL: Eric Schine (European ed.); David Rocks (Sr. news ed.); Pete Engardio, Rose Brady (Sr. writers); Cristina Lindblad (Europe) HEY, STEVE, STICK WITH THE telephone, and my e-mails were met with ASSOCIATE EDITORS: Susan Berfield, Dan Beucke, Michelle Conlin, Amy TURTLENECK BUT DROP THE CAPE useless automated responses. Dunkin, Hardy Green, Toddi Gutner, Harry Maurer, Christine Summerson (Business Develop.), Anne Tergesen, Emily Thornton, Kimberly Weisul it’s clear the artist of your cover –Paul Baudisch (SmallBiz), Suzanne Woolley cartoon of Jobs did not see The Incredibles Wellesley, Mass. MEDIA COLUMNIST: Jon Fine PICTURE EDITOR: Larry Lippmann (“Steve Jobs’ Magic Kingdom,” Cover Sto- MANAGING ART DIRECTOR: Jay Petrow SENIOR ART DIRECTOR: Steven Taylor ry, Feb. 6). “Super” Steve is shown with a GENERATION DEBT’S LEGIT GRIPES INTERNATIONAL ART DIRECTOR: Christine Silver cape, and even 6-year-olds who saw the —OR SELF-INDULGENT WHINING GRAPHICS DIRECTOR: Joni Danaher authors tamara MULTIMEDIA PRODUCTION DIRECTOR: James Leone flick know that when it comes to super- Draut of Strapped DEPARTMENT EDITORS: B-Schools: Louis Lavelle. Computers: Spencer E. hero costumes, “no capes” is the rule. and Anya Kamenetz of Generation Debt Ante. Corporate Strategies: Brian Hindo. E-Business: Timothy J. Mullaney. Banking: Mara Der Hovanesian. Industries: Adam Aston. –Marc Pfeiffer bemoan the prospects facing students Internet: Heather Green. Management: Jena McGregor. Marketing: David Bedminster, N.J. who are leaving college to face a difficult Kiley. Personal Business: Lauren Young. Science: Arlene Weintraub. Scoreboards: Frederick F. Jespersen. Small Business: Susan Price. world (“Up against it at 25,” Books, Feb. Wall Street: Roben Farzad. re the disney-pixar CONTRIBUTING EDITORS: Mark Hyman (Sports Business) deal: Jobs may 6). Their challenges are almost micro- STAFF EDITORS: Geoff Gloeckler, Jessi Hempel, Elizabeth Woyke now have a Magic Kingdom, but his cus- scopic compared with the situation my COPY EDITORS: Prudence Crowther, Larry Dark, Marc Miller, Jim Taibi (Deputy chiefs); Alethea Black, Aleta Davies, Sarah B. Davis, Monica tomer service is Mickey Mouse. As the fa- generation faced: We survived the Great Gagnier, Joy Katz, Céline Keating, Barry Maggs, Anne Newman, David ther in a household of two Apple iBooks Depression, won World War II, rebuilt Pengilly, David Purcell, Robert J. Rosenberg, Doug Royalty, Victoria Rubin, Lourdes Valeriano. Researchers: Maria Chapin, Gail Fowler, Aida Rosario and three iPods, I’m on the receiving end Germany and Japan, built schools, col- ART: Don Besom, Alice Cheung, Jamie Elsis, Gary Falkenstern, Edith of Apple Computer’s indifference. Owners leges, universities, suburbia, and infra- Gutierrez (Assoc. dirs.); Annie Russinof (Asst.). Graphics and Animation: Rob Doyle (Deputy dir.); Laurel Daunis-Allen, Joe Calviello, Alberto Mena, of sick products are supposed to take them structure on a grand scale. On top of that, David Rudes, Ray Vella; Eric Hoffmann. Multimedia Production: Alan Bomzer (Asst. mgr.), Neal Fontana, Rich Michiel, Joseph Rhames, into the nearest Apple store, where they we prospered individually. Shakena Thornton, Adam Wiesen wait for hours to see a technician at the The parents of the new generation con- PHOTO EDITORS: Scott Mlyn, Ronnie Weil (Deputies); Kathleen Moore, Andrew Popper (Sr.); Sarah Greenberg Morse (Assoc.); Mindy Katzman Genius Bar, even if they have purchased a tinued along the same path. With inge- (Asst.); M. Margarita Eiroa (Traffic mgr.); Burte Hughes, Lori Perbeck ProCare card entitling them to make a nuity and common sense the new gener- (Researchers) EDITORIAL OPERATIONS: Susan Fingerhut (Director); Ken Machlin- service appointment. ation will prosper likewise. Lockwood (Mgr.). Karen Butcher, Francisco Cardoza, Thomas R. Dowd, And if they ever have a problem with a –Newell D. Sanders Peter K. Niceberg, Jane M. Perkinson, Karen Turok, Ilse V. Walton (Edit map mgr.), Ramon Chamorro transaction at Apple’s iTunes Music Retired NASA engineer EDITORIAL TECHNOLOGY: Mauro Vaisman (Director), Diane Bartl, Y. Steve Ben-Ari, Yo-Lynn Hagood, Steven McCarthy, Craig Sturgis Store, well, they should just forget it. Olmsted Township, Ohio ONLINE: Douglas Harbrecht (Executive ed.); Arthur Eves (Creative dir.); When I didn’t receive the iTunes Gift Cer- Martin Keohan (Content dir.); Beth Belton, Patricia O’Connell, Ira Sager i have been waiting (News eds.); A. Peter Clem, John Johnsrud; Will Andrews, Jaime tificate I ordered for my son, Apple made to hear about a Beauchamp, Meredith Bodgas, Jeff Colchamiro, Francesca Di Meglio, it impossible for me to reach anybody by growing rift between boomers and Gener- Angelos Dosoulas, Roger Franklin, Jeffrey Gangemi, Tom Giles, Pallavi Gogoi, Burt Helm, Arik Hesseldahl, Marc Hogan, Reena Jana, Olga Kharif, B. Kite, Matt Kopit, James Kutz, Sarah Lacy, Karyn McCormack, Justin PRESIDENT: William P. Kupper Jr. SR. DIRECTOR OF FINANCE: Brian S. Dvoretz McLean, Phil Mintz, Stacy Perman, Jessica Podell, Rebecca Reisner, Steve SR. VP, OPERATIONS: Gary B. 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14 | BusinessWeek | February 27, 2006 Aetna Pharmacy

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Health Dental Pharmacy Behavioral Health Long Term Care Disability Life ©2006 Aetna Inc. Plans are offered by Aetna Life Insurance Company. Health insurance plans contain exclusions and limitations. Policy form numbers include GR-29 and GR-700-W. 200601 ReadersReport ation Y. The Greatest Generation was fol- poor and coastal cities vs. those inland. lowed by the worst. The boomer genera- China is still 80% agricultural and rural. CORRECTIONS & CLARIFICATIONS tion has put the country in massive debt, Your article focused on the prosperity of In “Is STM on the mend?” (Inside Wall moved millions of good-paying jobs over- the major cities and ignored the underly- Street, Feb. 20), Antoine Badel of Credit seas, reduced future private and public re- ing poverty. Before Mao, the same dispar- Suisse estimates that STMicroelectronics tirement for the younger generations, al- ity existed and gave rise to the communist will earn 95¢ per share in 2006, not 2003. lowed money to consume our democracy, revolution. Now the disparity is even more and even started a war and passed on the noticeable because of news coverage. In tab. It’s time the younger generations wake Beijing and other cities, one side of the diately. While all banking, atm, and cred- up and take action before it is too late, for street has new skyscrapers while on the it-card facilities were out of service all themselves and for America. other side there are slums housing people over Cancun, Wal-Mart miraculously –James Brown trying to eke out a living. This can only (and fortunately for those of us who were Yardley, Pa. lead to another revolution unless the living running out of cash) was allowing cus- standards of the poor are brought up. tomers to charge their purchases to a oh, please! Give us boomers a break. –John Ngai credit card. The only place boomers have failed the X, Rego Park, N.Y. –Maj. Dorian de Wind, USAF-Ret. Y, and Z generations is in failing to instill Austin, Tex. in them a sense of personal responsibility. EXECUTIVE CRIME STILL The “expectations of material comfort” GOES LARGELY UNPUNISHED SAFE SUPPLEMENTS: that may not be met for young people de- punishment of corporate criminals WHAT TO LOOK FOR ON THE LABEL rive from pampered and coddled kids may be harsher today than in the ’80s, but “how safe are diet supplements?” who have grown up thinking they are en- the continuing spate of executive misdoing (Science & Technology, Jan. 30) neglected titled to live a lifestyle immediately, means the sentences handed out are not to note the nsf/ansi Standard 173: Di- well… because they want to! tough enough (“White-collar crime: Who etary Supplements, developed by nsf In- Where is the government when a does time?” Enron Special Report, Feb. 6). ternational in accordance with the Amer- slacker needs it? Senior executives continue to look for ican National Standards Institute (ansi) –G. Keenan loopholes to fatten their already bulging and the Standards Council of Canada. Albuquerque wallets. Grants of millions of stock options The nsf mark means the supplement are being replaced with grants of millions has met American National Standard re- at age 35 i sit firmly in Generation X. I of shares of restricted stock. quirements. It also means products are went to college when I was 19 and lasted Compliant and conniving boards of di- tested and production facilities are in- one semester. I returned 10 years later rectors still shower favors on their senior spected to ensure that what’s on the label and finished my bachelor’s degree, walk- executives (“Not your ordinary gold matches what’s in the supplement. ing away with about $10,000 in loans. I watch,” News: Analysis & Commentary, –Kathleen Jordan recently married, and my wife and I paid Feb. 6). There’s little difference between Dietary Supplements Certification for our own wedding. I am about to pay the criminal wrongdoing of a Bernie NSF International off all my extraneous debt aside from Ebbers and the excess compensation of a Ann Arbor, Mich. school loans. I do not for one second buy Hank McKinnell of Pfizer, other than the Editor’s note: Three organizations set into the lament that I have gotten a bum latter gets away with it because of loop- standards and offer certifications for deal from my parents or anybody else. I holes. The laws need to be tightened to re- dietary supplements that meet those do not believe that I am entitled to any- move these loopholes. standards: the U.S. Pharmacopeia Con- thing that I do not earn for myself and my –Chandran Cheriyan vention (usp), the National Nutritional family. If you don’t have the skills, learn Saratoga, Calif. Foods Assn. (nnfa), and nsf Interna- them. If you don’t have the money, take a tional, in addition to ConsumerLab.com hard look at at your spending and stop AFTER HURRICANE WILMA, llc, a for-profit company. buying that $5 cup of coffee. WAL-MART TO THE RESCUE –Glenn W. Meeks re “a social strategist for Wal- Old Bridge, N.J. Mart” (Up Front, Feb. 6): While Wal- How to reach BusinessWeek Mart Stores Inc. has been under fierce at- LETTERS FOR READERS REPORT i am amazed We prefer to receive letters via e-mail, without the author of “Thirty & tack for its alleged lack of social, attachments. Writers should disclose any connection or Broke” (Special Report, Nov. 14) could environmental, etc., responsibilities, and I relationship with the subject of their comments. All letters maintain any sympathy, or a serious ex- have been one of those critics, I would like must include an address and daytime and evening phone pression, as the crybaby tales of these self- to relate an incident that reflects credit on numbers. We reserve the right to edit letters for clarity and space and to use them in all electronic and print editions. indulged subjects unfolded. It might be this embattled company. E-mail: [email protected] time for those people capable of balanc- My family and I recently survived Hur- Fax: (212) 512-6458 ing a checkbook to circle the wagons. ricane Wilma, along with dozens of other Mail: BusinessWeek Readers Report, 1221 Avenue of the –J. Cobb Americans, in a church shelter in Cancun, Americas, 43rd floor, New York, NY 10020 Phenix City, Ala. Mexico. When the three-day-long hurricane finally left the Yucatan Peninsula, all IN CHINA, SOME ARE RICH, surrounding pharmacies and supermar- BUT MANY MORE ARE POOR kets had been looted, destroyed, or se- www.businessweek.com “to get rich is glorious” (Global Busi- verely damaged except for Wal-Mart. The full text of BusinessWeek, BusinessWeek Top News, and access to BusinessWeek archives starting in 1991 are available ness, Feb. 6), on the superrich in China, Although commercial power was still on the World Wide Web at: www.businessweek.com and on masks the disparities between rich and down, Wal-Mart opened its doors imme- America Online at Keyword: BW

16 | BusinessWeek | February 27, 2006 Technology&You BY STEPHEN H. WILDSTROM

Aiming for a Pest-Free PC Keeping a home computer safe from the swarms of pests that infect the Internet has become a major chore for many consumers. You need software to protect you from viruses, spyware, spam, phishing frauds, and assorted electronic assaults—and you need to keep the programs up-to-date to stay ahead of the evildoers. Now the good guys are riding to the rescue. In the past couple of years security set up for automatic updates, a vital software vendors such as Symantec, step. But behind the pretty faces lie the McAfee, and Zone Labs have helped a same old programs. aol, for example, bit by bundling their products into repackages programs from McAfee. security suites that provide antivirus, And one of the first things it does when antispyware, and antispam software, you install it is try to sell an a firewall, and parental controls for “upgraded” firewall for $3.95 a month. the Web. But the components don’t Security vendors are moving toward act like a single program. And the deeper integration and, with luck, software keeps peppering users with smarter software that needs less user incomprehensible challenges such as intervention. This summer, Symantec “Windows Generic Host Server wants plans to release a new integrated to access the Internet. Allow/Block.” security application and service. Security vendors are working to make safe computing Code-named Genesis, it is easier. A startup called Trusteli has a novel offering that Vendors such designed, among other things, to manages your security on the router that connects your home monitor your system to ensure network to the Internet, not on the pcs themselves. You buy as TrustELI that your security configuration the wireless router for $200, subscribe to a $10-a-month are trying to is correct. service, and follow some simple steps to configure the The wild card in the consumer network. Trusteli then takes over management, including make security security field is Microsoft. The the installation of software updates on the router. company has announced that its easier to antispyware product, which has THE ADVANTAGE OF THIS APPROACH is that it is completely been renamed Windows invisible to the user, but it has some drawbacks. Because the manage Defender, will be built into the security is on the network rather than individual pcs, a laptop Vista version of Windows due

could pick up a worm if it is used on another network, say, at this fall. But in June, Microsoft y michael witte school, then infect other machines from inside when also will offer an integrated security service called OneCare reconnected to the home network. Running the built-in for Windows xp and, later, for Vista. If nothing else, Windows xp firewall on each pc provides a measure of Microsoft’s entry will shake up pricing in the industry. It will protection, but some “malware” can get around it. More charge $49.95 a year for use on up to three computers in a troublesome, the Trusteli approach requires that any Web home, about what Symantec charges for a single pc. content filtering apply to all computers on the network; if you Steps to make security software simpler and to integrate it don’t want the kids to see the online Victoria’s Secret catalog, more effectively are welcome, but the industry has to improve you don’t get to either. Trusteli says it plans to add user- its products so that the nontechnical consumer won’t be specific filtering in an update. required to make highly technical decisions. Otherwise, the Net service providers are also moving to make computer bad guys will likely stay ahead in the race. ❚❚ security management a bit easier for their customers. E-mail: [email protected] Earthlink provides subscribers with the Protection Control Center (available to nonsubscribers for $5 a month), while For past columns and online-only reviews, America Online offers the Safety and Security Center. Both go to Technology & You at businessweek.com/go/techmaven/. provide a single screen that lets you manage all the security To hear Steve Wildstrom's podcast on his latest column, go to www/businessweek.com/search/podcasting.htm. applications and helps make sure that computers are properly b ethan hill; illustration by photograph

18 | BusinessWeek | February 27, 2006 MediaCentric BY JON FINE Media, Marketing, and Advertising in the 21st Century

It’s So Hard To Relate Let’s begin by admitting that grown-ups have always been terrified by teenagers—their noise and warp-drive energy, their hyperactive libidos. There are fingerprints all over cultural history. Think of movies, from The Warriors to Blackboard Jungle. Think of the uproar over flappers in the ’20s. Think of Romeo and Juliet. ¶ This fear easily transposes to media realms. Yesterday’s version was that Grand Theft through stacks of records. You had to Auto and rap lyrics would turn teens into know when you could hear underground violent, sex-crazed thugs. The newish, bands on which college radio station. slightly-higher-brow version is this: Teens Creating, and sharing, mediaspheres is are too good at absorbing new technologies, easier now. Sarah Chubb, president of too skilled in processing multidimensional Condé Nast Publications’ CondéNet likens streams of information. Their brains are social network sites to teens’ fervently getting too big. Soon, they’ll be too far decorated rooms and notebooks, and says, ahead of us overwhelmed grown-ups. (This, “in the olden days, [friends] saw the room presumably, is progress.) or the notebook. Now they can see it, But if you work in media and seek comment, and change it.” realistic grounds for your next panic This is why executives at places like attack, consider this. Today’s teens are the Condé Nast, which publishes Teen Vogue, first for whom self-created content spend a lot of time thinking about new competes with teen-aimed media like ways to reach teens. CondéNet is readying videogames. There are now widespread a teen site, on which Chubb is means with which they can create and share their stuff, be mum. America Online, as they blogs, or the music recording software and design tools Your teen previously reported here, will found on many computers, or sites like myspace.com. launch a suite of tools and Established media has to grapple with the novel fact that its consumers services to enable a MySpace- next generation of consumers is also competition. have now ization of its wildly popular aol “The generation under 25 is the first to grow up watching Instant Messenger service. its entire life on video,” says Aaron Cohen, ceo of Bolt Media. become your These efforts are worth Bolt runs teen and twentysomething site bolt.com, on which watching, but they’re no slam- self-created video documenting, say, tongue-piercings, is a competition dunk for teens whose allegiance major draw. (This generation also grew up with “mash-ups,” to established media brands is in which parts of different songs are digitally reconstituted tenuous. “I’d much rather use into new ones, and thus expects content to be played with as [social networking site] myyearbook.com,” says one 17-year- mark matcho by tration much as absorbed.) “As you grow up watching your life, you old. “It’s much more fun than watching tv. You can do a lot want to be [seen],” says Cohen. Not everyone wants an more.” This teen is David Cook, and he’s kind of biased American Idol-size audience, so that show hasn’t collapsed because one year ago he, his younger sister, and older brother from the weight of millions of auditioners. “But everyone started myyearbook.com. Cook, who lives outside Princeton, does want an audience,” he says. Keeping it small is easy: N.J., makes frequent fervent declarations about how badly he Users can ensure that their videos posted on bolt.com are wants to defeat MySpace. He hasn’t yet. But myyearbook.com, viewed only by their closest online buddies. which launched last May, attracted 2.3 million unique Hints of today’s trends surfaced in past eras. A ’zine visitors last month, up from 1.7 million in November. Not revolution of self-published periodicals exploded in the 1980s only can teens now compete when it comes to making and ’90s, particularly among the younger set. In that era, the content, they can compete for the business as well. Man. plugged-in could create an alternate mediasphere from these Grown-ups should be terrified. ❚❚ ’zines and, say, small-label punk-inflected bands. But finding what you needed to build your own media life took tenacity. For Jon Fine’s blog on media and

You had to know people who knew people. You had to dig advertising go to www.businessweek.com/innovate/FineOnMedia ethan hill; illus by (top) photograph

20 | BusinessWeek | February 27, 2006 Business Outlook

BY JAMES C. COOPER What’s Complicating Bernanke’s Balancing Act Finding the right level for interest rates is trickier in a more global economy

U.S. ECONOMY Ben Bernanke just passed his first test as Federal Reserve Board chairman. On Feb. 15-16, he held his own during a Capitol Hill grilling by both houses of Congress. But that challenge pales in comparison with those that await him. The toughest will be shaping monetary policy in a global economy. Globalization makes it harder than ever to find the right level of interest rates to Heading into 2006, trade volume accelerated. Both foster solid economic growth while keeping inflation at exports and imports posted strong advances in bay. That complication increases the chances the Fed December—2.1% and 1.9%, respectively—and the growth could make a policy mistake by pushing rates too high or rates of both sped up in the final three months of the year. leaving them too low. Correcting the error could cost the During the past two years, the sum of U.S. exports and economy dearly later on. imports grew at an annual rate of 13.2%, the fastest two- Globalization and its impact on monetary policy is not year increase since 1988, when the dollar’s plunge fueled just about how worldwide competition suppresses prices an explosion of exports. of U.S. products. More and more, prices of everything Given the resilience of THE FED SEES A STRONG from steel to corporate bonds to even labor are AND STEADY ECONOMY U.S. demand, the determined by market forces overseas, not just those in continued strength in the U.S. Bernanke stressed the importance of flexibility in FED’S CENTRAL China and emerging TENDENCY FORECAST policy decisions, saying that policymakers must keep “an (4Q TO 4Q PERCENT CHANGE) Asia, and the gathering open mind about the many factors, including myriad 2006 2007 momentum in Japan and global influences, at play” in the economy. REAL GDP 3.5 3.0-3.5 the euro zone, trade Against this global backdrop, measures of labor market CORE INFLATION* 2.0 1.75-2.0 volumes will swell tightness or constraints on output capacity traditionally UNEMPLOYMENT further this year. used by the Fed to gauge wage and price pressures have RATE (4Q AVG.) 4.75-5.0 4.75-5.0 Clearly, one alarming *PRICE INDEX. PERSONAL CONSUMPTION become increasingly less reliable. That is, in a global EXPENDITURES EXCLUDING ENERGY AND FOOD symbol of the new economy, the inflation potential of, say, January’s 4.7% Data: Federal Reserve globalization is the jobless rate or last month’s nearly 81% utilization rate for growing imbalance in industrial capacity is much harder to interpret. world trade, illustrated by the ever-widening U.S. trade Moreover, an increasingly pervasive international deficit. The gap for goods and services hit a record $725.8 capital market complicates the Fed’s search for a neutral billion in 2005, based on preliminary data. The gap has interest rate that neither stimulates nor restricts ballooned to 5.8% of gdp in only the past eight years. economic growth. Some economists even argue that, because of a lack of investment opportunities outside the THAT DRAMATIC WIDENING illustrates how economies U.S., the neutral rate might even be lower than the are becoming increasingly dependent on one another for current policy stance. Bernanke himself has explored this rising living standards. For example, China looks to view, but that interpretation would imply that the Fed foreign markets, especially in the U.S., to generate funds already may have overtightened. to develop its economy. Cheap imports boost the Right now, that seems unlikely. If anything, strong purchasing power of U.S. consumers, and emerging economic data for January, especially the powerful 2.3% Asian nations benefit as China outsources some of its rise in retail sales and a hefty 0.7% gain in manufacturing production of materials and parts. Most important, the output, imply that rates may be too low. U.S. and other nations get China’s surplus savings to help finance their investment and growth. THE GROWING SCOPE OF GLOBALIZATION is evident One result is that the Fed has less control over the cost in the government’s December report on international of capital, its primary tool in keeping the economy trade. The full-year tally for the volume of U.S. trade— running smoothly. With the world outside the U.S. awash shown as the sum of foreign-made goods and services in excess savings looking for a place to be invested, heavy bought in the U.S. and American-made products global demand for U.S. securities is at least one of the purchased overseas—stood at $3.3 trillion for all of 2005. factors holding down long-term interest rates.

charts by eric hoffmann/bw by charts That volume has doubled in only 10 years. More broadly, overall ﬁnancial conditions are no

February 27, 2006 | BusinessWeek | 23 Business Outlook Dept.’s monthly data billion. gap of$725.8 more thanthetrade $910.7 billion,far total netinflowwas billion. In 2005the securities was $56.6 purchases offoreign overseas minusU.S. government agencies by investors and securities purchased showed thatU.S. International Capital (tic)report retreat inthegreenback thisyear. unlikely tolast,leadingaprobable not aslarge asbelievedandare However, thosesupportive inflowsare the U.S. dollardidn’ttumble. bonds tocoverthegap. That’swhy more thanenoughinU.S. stocksand last year, butforeigners invested 24 THE U.S. TRADE Less Foreign Capital ThanMeets the Eye RELATIVELY EASY FINANCIALCONDITIONS totaling 3 June, 2004,despitetheFed’s hikes inshort-term rates, tighter nowthanwhentheFed beganliftingrates in inflation in2006mightbetoolow(table,page23). start suggeststhattheFed’s latestforecasts forgrowth and after thefourth quarter’sweakshowing.In fact,thestrong economic growth are rebounding withgustothisquarter, incentives bycarmakers rightafterSeptember 11 (chart). October, 2001,whensaleswere boostedbygenerous December toJanuary was thelargest monthlygainsince holiday giftcards. jumpinretail The2.3% salesfrom January’s balmy weatherandtheredemption ofallthose off toanexplosivestartthisyear, takingadvantage of factor stokingU.S. demandinearly2006.Consumers got loans, despitereports oftheFed urging themtodoso. not tougheninguptheirlendingstandards onmortgage businesses. Also, thesurveyindicatedthatbanksare still and conditionsoncommercial andindustrialloansto loan officers showsthatbankscontinuetoeasetheterms new borrowers. TheFed’s January surveyofbanksenior which isnarrower nowthanitwas then. between corporate bondsandrisklessTreasury bonds, tightening. That’simpliedbytheinterest rate spread in lendingnowthanwhentheFed firststarted corporate borrowing, butthecredit markets seeless risk rates remain lowenoughtosupportbothhousingand The Treasury On Feb. 15,theTreasury The datameanthatconsumerspendingandoverall And bankscontinuetobeaggressive inseekingout | BusinessWeek THE DOLLAR 1 / 2 percentage points. Not onlydolong-term deficit hitarecord | February 27, 2006 COOL DOWN FOREIGN INFLOWS 120 60 90 30 0 '04 Data BILLIONS OFDOLLARS NET LONG-TERM INVESTMENT FLOWS TRADE DEFICIT : GlobalInsightInc.,Treasury Dept. inflows were overreported byan less thanayear. Asaresult, net involving securitieswithaduration of For example,itexcludesflows tic Bureau ofEconomic Analysis. But the than thequarterlydatafrom the because theycomeoutmore often external financingobligations, the ability oftheU.S. tomeetits are increasingly popularasasignof report isnotascomprehensive. are one '05 central banks. The institutions, suchas investors vs. official money from private also alittle fuzzy on Sachs &Co. Heacock ofGoldman, Nordvig andDavid economists Jens of 2005,say the firstthree quarters per monththrough average of$20billion The giving theFed yetanotherglobalissue toworkaround. inflation pressures intheU.S. viahigherimportprices, renewed dollardeclinewouldgenerate someadditional economies, afull-blown dollarcrisisseemsunlikely, buta would causethedollartoweaken. That leaves fewerglobalfundsgoingtoU.S. assets, which even asbotheconomiesattract more foreign investment. Japanese andeuro zonesavings willbestaying athome, both Japan andtheeuro zoneare turningup. More of protectionism. Congress seemslikely toconsiderthe problems fortheBernanke Fed. Oneisthegrowing threat Two otherglobalizationissuesmightalsocreate trade deficitandtheneedforforeign capitaltofinanceit. will begoingabroad, placing additional pressure onthe tic A BINGEINJANUARY CONSUMERS WENTON 0 2 3 1 Given thenewglobalinterdependency across Those numbersalsoimplythatalotofdemand Data PERCENT CHANGEFROMPREVIOUSMONTH : U.S.CensusBureau,GlobalInsightInc. report is report '05 OCT. AUTOS ANDGASOLINE EXCLUDING TOTAL RETAIL SALES O.DC JAN. DEC. NOV. touches off thedollar’sdecline. may bethestartof acorrection that deficits. ThesmallerDecembertotal inflows don’tpersistentlyoutrun trade 2005’s secondhalf, says Nordvig. Net beyond theirlonger-term trend” over Until December, “inflowsaccelerated reduced demandforU.S. assets. among central banksallpointto diversification offoreign reserves further, andthechanceofgreater China tolettheyuanappreciate Japan andSouthKorea, pressure on be greater. Stronger economiesin the risksofaweaker dollarappearto controlled byforeign central banks, reported andthatmore ofthemare be countedasaprivate transaction. a nongovernmentthird party would So acentral bankmovemadethrough based onwhomakes thetransaction. Treasury Dept.categorizesinflows Making matters more delicate: Given thatinflowsare smallerthan '06 —By James Mehring in New York economic fortunesof decline inthedollar. The likelihood ofarenewed up overall inflation. import pricesandnudge would effectively raise month ortwo. That perhaps withinthenext on allChineseimports, to imposea27.5% tariff Lindsey Graham (R-N.C.) Schumer (D-N.Y.) and bill bySenatorsCharles The otheristhe ❚ ❚ ❚ ❚ producers off the hook for royalties. So how come there are only 75 rigs at work in the Gulf, down almost 25% from a The Business year ago, according to Baker Hughes? Partly we can thank Misses Katrina and Rita, but a major factor is overseas competition for ocean rigs. For now, Washington’s pricey incentives probably won’t spark much new supply.

Merrill Unloads a Unit Is money management more trouble than it’s worth? Merrill Lynch, which said on Feb. 15 that it’s selling its asset management unit to BlackRock, ap- Week parently thinks so, and other banks and brokerages could News you need to know soon take the same path. See “Money Managers on the Block,” page 36

EDITED BY HARRY MAURER A Trade Spat Decision Touché! Score one for the Euro- pean Union in its decade-long duel with Washington over how the U.S. taxes exporters. On Feb. 13 a WTO appeals panel ruled that certain tax breaks are illegal. The downside for U.S. business: Exporters of products such as tex- tiles, steel, and electrical machinery could be skewered with up to $4 billion in Euro-tariffs. The upside: Most of the $145 billion in breaks that Congress O.K.’d in 2004— the last time it tried to ﬁx the export-tax mess—will stick. The U.S. has three months to appeal.

The New Beat in Music Download fever: That’s the tune industry execs dance to these days. Warner Music said doubled downloads helped hike first-quarter net by 92%, while overall music sales fell by 2% as folks shied away from cds. And RealNetworks boogied to a record $325 mil- A Gold Medal Quarter? After slowing late last year, lion in annual revenues thanks to 50% more downloads the U.S. economy is accelerating in 2006 like a four-man and subscription sales through its Rhapsody service. bobsled on a straightaway. Some experts figure first-quar- See “RealNetworks is Game for Games,” ter growth may exceed a 5% annual rate, up from the 1.1% www.businessweek.com/go/tbw initially reported for the fourth quarter of 2005. Both consumers and business seem revved up: On Feb. 14 the Com- merce Dept. said retail sales grew an eye-popping 2.3%, Buffett Bows Out No one can accuse Warren Buffett of seasonally adjusted, from December to January, aided by being a shrinking director. In his 17 years on the Coca-Cola the warmest January on record. And on Feb. 15 the Fed said board, he helped shove two struggling ceos into early re- factory output rose a solid 0.7% in January. tirement and engineered an 11th-hour veto of a deal to buy This means the Fed will likely lift the federal funds rate Quaker Oats. But on Feb. 14 the 75-year-old investment leg- another quarter point, to 4.75%, at its Mar. 27-28 meeting, end announced plans to step down in April. (He’ll hang on the first with Ben Bernanke as chairman. Bernanke played it to Berkshire Hathaway’s 8.4% stake.) Buffett is pushing ex- cool in Feb. 15 testimony, simply saying “I concur” with Gillette CEO James Kilts as his successor, though with former the Greenspan Fed’s statement that more tightening may Dow Chemical CFO Pedro Reinhard and SunTrust Banks exec be what the economic doctor ordered. Maria Elena Lagomasino also set to step down in April, leav- See “What’s Complicating Bernanke’s Balancing Act,” ing Coke with only two minorities on its board, the bever- page 23, and “Chairman Bernanke Goes Up the Hill,” age giant may decide that diversity is it. www.businessweek.com/go/tbw

Horie’s Annus Horribilis The former ceo of once- Where Are the Oil Rigs? The Gulf of Mexico ought to trendy Internet portal Livedoor may be hearing another look mighty good to oil companies these days. Even with kind of door clang shut behind him. Japan’s 33-year-old oil below $58 a barrel on Feb. 15, the lowest close in nearly Net guru, Takafumi Horie, was indicted on Feb. 13, together two months, and natural gas costing less than half what it with the former cfo and two others, for allegedly cooking did in December, prices remain high enough to support the books. Horie could face ﬁnes and prison time. Since risky ventures. And as The New York Times revealed on Feb. Livedoor’s collapse began on Jan. 16, it has lost $6 billion, 14, the industry will beneﬁt from an estimated windfall of or 90%, of its market cap and will probably be delisted by

$7 billion over the next ﬁve years from a policy that lets the Tokyo Stock Exchange. tim boyle/getty images

26 | BusinessWeek | February 27, 2006 Google’s Swoon Bulging bank accounts in Silicon Val- ley look a mite slimmer because of sinking Google shares. After a torrid 2005, in which the search titan more than doubled to a peak of 475 on Jan. 11, the stock has plunged 28%, closing at 342 on Feb. 15. Investors changed their minds after weak fourth-quarter numbers made them look closely at Google’s dependence on search. Still, at a market cap of $101 billion, the company’s valuation has clicked up more than 300% since its ipo 18 months ago.

Firing a Shot at China A valentine it wasn’t. On Feb. 14, U.S. Trade Representative Rob Portman issued a report that marks a rare break in the Bush Administration effort to cool anti-Chinese rhetoric. Portman says China refuses to play by trade rules, so the U.S. will ratchet up pressure on Bei- jing to curb piracy, cut hidden subsidies, and open its own markets. The report came just days after word that the U.S. trade deﬁcit hit a record $725.8 billion in 2005, including a $201.6 billion gap with China. Portman didn’t ask for new powers to retaliate, so his latest isn’t likely to blunt Capitol Hill’s push for more sanctions. See “China’s Changing Economic Balance,” www.businessweek.com/go/tbw

HP Wows the Street It’s been a year since the ouster of Carly Fiorina, and new Hewlett-Packard CEO Mark Hurd is making the most of what she left for him. Crisp restructuring and smoother operations helped hp blow past Street ex- I’m a pectations for its first quarter, posting 30% brawnier profits. Hurd has also nabbed new talent and has segments such as laptops and photo printing gear steaming. The card-carrying stock jumped nearly 4% in after-hours trading on Feb. 15. Yes-man. Blitz of the Week Say yes to high-speed Sprint Mobile His legions of enemies like to call him Dr. Evil, but that Broadband for your laptop. doesn’t stop Richard Berman. The Washington lobbyist pr and maestro for the fast-food industry just launched Introducing Sprint Mobile Broadband from the #1 the Center for Union Facts, an attack Web site. While he wireless provider to business. Say yes to downloading won’t name his backers because “we are talking about union people who have allegedly been involved in crime large email attachments, inventory data, presentation in some cases, so nobody wants videos, rich Web content – huge files at blazing speed – to be targeted,” Berman took from anywhere on the Sprint Power Vision Network. out full-page ads on Feb. 14 in- It’s the most powerful way to extend your office far tended to stymie labor’s beyond the office. And one more way Sprint Business stepped-up recruitment. His line: Many unions are corrupt helps today’s Yes-man, or Yes-woman, make just about and fail to benefit members. any place a workplace. The in-your-face campaign is vintage Berman. Over the years 1-8SPRINT-BIZ sprint.com/business the cigar-chomping ball of fire has helped liquor makers go af- RICHARD BERMAN ter Mothers Against Drunk Driving for proposing stiffer al- cohol limits for drivers and raged against minimum wage hikes for the National Restaurant Assn. Last year he dissed the “food police” in a drive for soda makers that targeted “obesity myths.” Harsh? Sure. Why shouldn’t Big Business have its own Michael Moore? “#1 wireless provider to business” claim is based on independent survey of corporate-liable users. Sprint Power Vision Network covers over 140 million people in 213 major metropolitan markets. Coverage not available everywhere. See in-store materials or sprint.com for details. ©2006 Sprint Nextel. All rights reserved. Sprint, the “Going Forward” logo and the NEXTEL name are trademarks of Sprint Nextel. February 27, 2006 | BusinessWeek | 27 News Analysis & Commentary

STOCKS HOW THE IPO MARKET GOT ITS BUZZ BACK Hungry investors are making 2006 the busiest year for new issues since the tech crash. BY AARON PRESSMAN

hipotle mexican grill Standard & Poor’s 500-stock index. ing ipo, that of Internet telephony Inc. is used to seeing cus- How warm are things getting? Eight of provider Vonage, seems shaky, too. tomers line up for its bur- this year’s deals have been priced higher But investors, grappling with the side- ritos, but at the end of Jan- than underwriters had anticipated, vs. ways stock market of the past 27 months, uary the McDonald’s three to this point last year. “The market aren’t in a mood to quibble just yet. It’s Corp.-owned chain expe- is off to a very healthy start,” says Craig not only the number of offerings that’s rienced an even bigger Farr, co-head of U.S. equity capital mar- grabbing their attention but also the Crush. In an initial public offering, Chipo- kets at Citigroup. kinds of companies going public. Many tle’s shares jumped from 22 to 44 in one are so-called reverse leveraged buyouts— day, the first time since 2000 that a U.S. NO MOOD TO QUIBBLE former poor performers that were bought ipo of more than $10 million had dou- perhaps too healthy, say some ob- up by private equity firms betting they bled so quickly. servers. The downside to a strong ipo could fix them up and sell them back to Investors’ appetite for ipos isn’t limit- market is dumb deals—and they’re here. the public for a profit. The top performers ed to Chipotle. With 32 offerings priced The offering of shoemaker Crocs Inc. on recently have been fast-growing upstarts since Jan. 1, up 14% from the same time Feb. 8 showed investors turning a blind such as Chipotle, Baltimore-based cloth- last year, 2006 is shaping up to be the eye to glaring problems. Another upcom- ier Under Armour, and Latin American busiest year for new issues steel company Ternium, all of since before the tech crash. which are seeing rapid sales And ipos are performing Three Hot Sectors for 2006 and earnings increases. There well in the aftermarket. They has been a “return to the tra- returned an average of 18% in RESTAURANTS ENERGY HEALTH CARE ditional growth ipos,” says 2005 and 10% so far this McDonald’s Chipotle Persistently high Amid fears of an Citigroup’s Farr. That’s good year, according to Renais- spin-off encourages commodity prices economic slowdown, news, of course, for corpora- sance Capital in Greenwich, the likes of Morton’s make going public the sector looks like tions looking to raise money. Conn., vs. returns of just 5% to follow attractive a defensive play And when promising compa-

and 1%, respectively, for the nies have an easier time john craig

28 | BusinessWeek | February 27, 2006 ALSO IN THIS SECTION: Class actions: Big The political fallout if Why banks are fleeing Britain’s Tesco boldly 31| investors are opting out 32| housing goes south 36| money management 38| leaps across the pond News Analysis & Commentary forming capital, the STYLISH MOVE But the hottest niche by far economy as a whole J. Crew’s IPO is has been consumer-orient- benefits. expected in the ed companies, especially It was a long win- next few months restaurants. Despite fears ter, though. When the that Americans are tapped bear market began, unprofitable startups out, retailers and restau- with shaky business plans fell out of favor. rant operators have been Instead, well-established companies gen- thriving. Chipotle’s net erating lots of cash, such as Kraft Foods loss of $17 million in 2002 Inc. and Genworth Financial Inc., stole swung to net income of the spotlight. The percentage of profitless $33 million in the first nine ipo companies fell from 80% during the months of 2005. Clothier tech boom to 40% during the bust, and Under Armour, mean- has stayed there. The average age of com- while, posted revenues of panies going public shot up from four $194 million in the first years in 1999 to 15 in 2002, according to nine months of 2005, triple research by University of Florida finance the 2002 level, and a net professor Jay Ritter. Investors, in other income of $14 million, five words, gave money only to companies al- times the 2002 amount. ready demonstrating that they deserve it. Investors paid a premi- The reverse leveraged buyouts were um for those brands, and received particularly well, making up their success has encour- about 40% of all ipos in 2003 and 2004. aged followers. Steakhouse Most of those companies were in good chain Morton’s Restaurant standing and had been managed smartly Group Inc. raised $161 mil- while in private hands. Now, with lion on Feb. 9, while Ian growth companies back in vogue, reverse Schrager’s hip hotel chain, lbos are making up a smaller percent- Morgans Hotel Group Co., age of deals. The average age of compa- Ready to Roll garnered $360 million on nies going public slipped to 11 in 2005, Valentine’s Day. Among the and it’s heading lower. How five expected IPOs stack up hotly anticipated issues INITIAL are MasterCard, Wendy’s PUBLIC OFFER REVENUES NET PROFITS WORRISOME DEBUTS MILLIONS MILLIONS* MILLIONS* doughnut-chain spin-off but that’ll likely be only a tempo- MasterCard $2,450 $2,222 $320 Tim Hortons, Mexican air- rary phenomenon. The private-equity port operator Pacific Air- market has been booming (page 52), with Pacific Airport Group 954 175 63 port Group, and retailer J. huge investment inflows fueling more Crew Group, all expected to Tim Hortons 600 1,078 175 and bigger lbos. Assuming the ipo mar- offer shares in the next few ket stays strong, the reverse lbo pipeline J. Crew 355 663 -0.4 months. Burger King Corp. should soon be gushing. has said it will file soon, Observers worry, however, about the Vonage Holdings 250 174 –190 and Levi Strauss & Co. Feb. 8 offering of Niwot (Colo.)-based * For most recent nine-month period Data: Companies might file this year. shoemaker Crocs. Yes, the company’s fi- “The consumer confi- nancial outlook seems strong, with a raise $250 million, but it hasn’t dis- dence and spending numbers have been 2004 net loss of $1 million turning into a closed how many shares it will sell or so good,” says Chad Abraham, head of $13 million profit for the first nine what the company’s total value will be equity capital markets at Piper Jaffray months of 2005. But Crocs went off for after the deal. Its business plan empha- Cos. in Minneapolis. “Investors are look- almost 10 times its revenues, a stagger- sizes market share growth over profits ing for ways to play that.” The trend ingly high multiple. And material in its and cash flow. Skeptics point out that shows no sign of slowing: The Commerce filings with the Securities & Exchange what’s really growing are Vonage’s ex- Dept. reported on Feb. 14 that January re- Commission gives reason for pause. The penses and customer acquisition costs, tail sales increased 2.3%, the biggest company found “material weakness” in which are rising faster than revenue. monthly gain in almost two years. its internal controls during its most re- Vonage declined to comment, as did With saner practices and mostly sane cent audit, according to the filing. The fil- Citigroup’s Farr, whose firm is under- offerings, the ipo market seems to be on ing also showed that Crocs has instituted writing the offering. “Investors need to solid ground. Activity could slow if the takeover defenses to protect manage- take some responsibility for due dili- broader stock market tumbles; falling ment. And it has a history of consulting gence,” says Lynn Turner, managing di- equity prices last March and April hurt deals with companies controlled by offi- rector of research at independent re- new issues, as did Hurricane Katrina cers. Crocs declined to comment. search firm Glass Lewis & Co. and the later in the year. But for now, the busi- Also on Feb. 8, Internet telephony former chief accountant of the sec. ness is healthy. Finally, there’s some real provider Vonage Holdings Corp. filed to For the most part, however, the busi- demand out there for growth stories, es- go public, despite posting a net loss of ness models of successful ipos have pecially for companies selling burritos $190 million in the first nine months of been decidedly 21st century. Energy and or T-shirts. ❚❚

2005. The company said it wants to health-care issues have been plentiful. –With Michael Arndt in Chicago andrew popper

30 | BusinessWeek | February 27, 2006 LAWYER LERACH doing so. That’s His clients sue one key reason separately to why Lerach is LAWSUITS win more cash frequently trying another tack: de- taching from class action settle- FRACTURED ments negotiated by others and striking out on his own. While Lerach has helped ham- CLASS mer out plenty of class-wide deals in his time, he now lauds the virtues of opting out. “Why should ACTIONS investors sit passively by and take a couple cents on the dollar?” he “Opt-outs”are a says. “This is an extraordinarily powerful tactical weapon.” growing headache The trend is causing concern in courtrooms and boardrooms. On for companies Feb. 8 a federal judge in New Jersey postponed approval of a $195 million settlement between kpmg In- ternational and tax shelter investors because more than 60 of the BY LORRAINE WOELLERT Diego’s Lerach Coughlin Stoia Geller 284 investors had chosen to pursue their hen time warn- Rudman & Robbins llp, was among a own litigation. Cheryl L. Evans, special er Inc. said it handful of lawyers dominating such suits counsel for the U.S. Chamber Institute for would spend $2.4 more than a decade ago, when firms seek- Legal Reform, says opt-outs increase billion to settle an ing to win control of a big case—and the costs for companies. “When you have this investor class ac- resulting fat paycheck—simply had to fragmentation, companies are paying to tion alleging secu- race to the courthouse to be the first to file settle several cases when it’s more effi- rities violations, a suit. Lerach and a few others had the cient to work on one front,” she says. WChairman and ceo Richard D. Parsons practice down to such a science that the crowed that the company had made swift Justice Dept. is investigating whether BETTER RETURNS work of its litigation woes. “By acting they paid kickbacks to plaintiffs. Lerach last year, lerach got 65 clients, in- now to put these matters behind us, we has denied wrongdoing. cluding several state pension funds, to by- avoid the costs and distractions of pro- In 1995, Congress rewrote the rules, pass a $6.1 billion settlement of claims tracted litigation,” he said in August. making it harder for the small coterie of against banks for WorldCom Inc. The Not so fast. Even as a federal judge pre- securities fraud plaintiffs’ attorneys that group reached a $651 million deal. Now pares to give final approval to the deal on had dominated the business to continue he’s persuaded 93 funds to seek separate Feb. 22, it could be some time before Par- lawsuits against Time Warner. sons can rest easy. Giant shareholder Edward I. Adler, executive vice-presi- Janus Capital Group Inc., which owned dent of Time Warner, calls the number of over 10% of Time Warner and over 3% of Taking A Pass opt-outs “very, very small.” Lead class America Online when the companies an- counsel Samuel D. Heins of Minneapolis- nounced their merger in September, Examples of big investors that based Heins Mills & Olson plc says the 2000, is pursuing its own settlement, opted out of class-action settlements settlement has drawn a negligible num- BusinessWeek has learned. So are several ber of complaints from class members. state pension accounts and more than Enron WorldCom Time Warner has set aside $600 million 100 other institutional investors with al- $ $ to wrap up its remaining liability, but the leged losses ranging from less than 7.1 6.1 growing roster of opt-outs could force $50,000 to more than $500 million. All BILLION BILLION that number up. are exercising their right to opt out of a OPT-OUTS AIG, OPT-OUTS SunTrust There’s always a risk that breakaway Alabama and Ohio Banks, New York class settlement in hopes of winning state pension funds City pension funds investors could do worse by striking out more money by going it alone. on their own, but there’s enough evidence Plaintiffs’ attorney William S. Lerach is Time Qwest to the contrary to keep fueling the trend. at the forefront of what has become the Warner Communications When the California Public Employees’ latest headache for defendants in securi- $ * $ Retirement System quit the WorldCom ties cases. No hard statistics are available, 2.4 400 deal, it recovered $187 million, or 67% of but opt-outs appear to be a more popular BILLION MILLION its claimed bond losses, Lerach says. New tactic for plaintiffs’ lawyers. “There’s no OPT-OUTS Janus OPT-OUTS State York City Pension Funds also opted out of doubt that the numbers are up,” says Capital and nearly Univ. Retirement WorldCom, recovering close to 100% of Stanford Law School’s Joseph A. Grund- 100 other institu- Systems of Illinois, losses, its lawyers say. The final return for fest, who monitors the litigation. tional investors Calif. State Teachers’ WorldCom class members remains to be *Awaiting court approval Retirement System ❚❚ ray ng ray Lerach, founding partner of San seen, but it’s expected to be far less.

February 27, 2006 | BusinessWeek | 31 W rates andrisinghomeprices. Let’s runsomenumbers. people, declining wages are less importantthan lowinterest paying amortgage orgrousing aboutreal estatetaxes. For these of paperintoacrowd, andyouare likely tohitsomeonewhois ownership climbedfrom 67%in2000to69%today. Toss awad better inthepolls. That’s why many Democrats thinkthatthey shouldbedoing orabout$1,100ayear.earnings forsuchworkers fellby2.4%, dent George W. Bushtookoffice. Between 2000and2004,real 32 ization, issues thatshould play wellforthe and many Americansare scared ofglobal- Administration. Real wages are falling, score economicpointsagainsttheBush clusion asIwatch Democrats struggleto A tumble inhousingpriceswould causevoters more painthanfalling wages GetsBlamedWho If the Roof Caves In? BY MICHAELMANDEL COMMENTARY WATCH HOUSING But wait. Thetypical American alsoownsahouse.Home- | BusinessWeek News have seenadeclineinreal wages sincePresi- without evenatwo-year degree. Thesefolks realize, withsomeexposure tocollegebut old andhaslesseducationthanyouprobably American worker. He orsheis35to44years much, letmeintroduce youtothetypical glow ofhousing-induced prosperity. with voters, inlarge partbecauseoftherosy Democrats. Buttheirattacks aren’t resonating | To seewhy thehousingmarket matters so February 27, 2006 will begin.That’smy con- 2006 and2008elections political battles forthe finally goesbust,thereal hen thehousingboom Analysis & Commentary 2006election shape the could bust a respond to How Dems that keep more homesfrom being built.” reduce barriers, especiallyzoningand planning restrictions, tremely highprices, says Atkinson,“Iwouldfigure outhowto with alotofpeoplecurrently locked outofthemarket byex- tic LeadershipCouncil, wouldn’ttrytocushionabust.Instead, sive Policy Institute, theresearch armofthe centrist Democra- who have suffered capitallosses ontheirhouse.” possibility, henotes, is“more favorable taxtreatment forpeople liberal blogAngry Bear(angrybear.blogspot.com). Another lege inWaterville, Me., whoisoneofthemainposterson Mansori, aneconomist atColby Col- sharply, suggestsKashif to helphomeownerswhosehousevalues have dropped start thinkingaboutways toeasethecountry’sbankruptcylaws Democrats could litically crucial.Whatcouldtheparty offer? pecially ifthebottom fallsoutoftheU.S. market, couldbepo- turned totallypessimistic. inflation. No wondermostvoters, whileworried, stillhaven’t values, upabout33%overthepastfiveyears, afteradjustingfor decline inwages. And wehaven’t yetfactored insoaringhome lower interest payments thatmore thancompensatesforthe By contrast, Robert Atkinson, vice-president oftheProgres- That’s why theDemocratic response toahousingslump, es- Thus, many Americans may beseeingapretax gainfrom the roughly $3,000 ayear. house wouldhave dropped by your interest payments onyour nanced toa6%mortgagein2005, mortgage at8%in2000andrefi- ample, ifyouhada$150,000 terest costsbyrefinancing. For ex- almost everyonecouldcutthein- available inthe1990s. Asaresult, 6%, wellbelowthelowestrates ly geta30-year rate oflessthan however, ahomeownercould easi- about 8%.From 2003to2005, for anew30-year mortgage was worried American homeowner. which party canbestreassure the Washington may welldependon is history, politicalsupremacy in their homeequity. After theboom cans whocannolongerdraw on harder fortaxcutstohelpAmeri- ministration is likely topusheven housing downturn.TheBush Ad- standing stillintheevent of a In 2000theaverage interest rate Of course,Republicans won’tbe ❚ ❚

photograph by jeff topping News Analysis & Commentary

seen boards look at a list in a black magazine and say, ‘I want No. 32,’ ” says Julie THE BOARDROOM Hembrock Daum, who leads Spencer Stu- art’s U.S. board practice. “But there are a lot of people that don’t appear on those lists.” THE RISING STOCK “EXTRAORDINARY OPPORTUNITY” perhaps the most prominent member of this second tier of African American di- OF BLACK DIRECTORS rectors is John W. Rogers. The founder and ceo of Ariel Capital Management, a Corporations look to broaden their boards Chicago mutual fund, Rogers was appointed to the Aon board in 1993, when he beyond big names like Parsons and O’Neal was just 35. “It was an extraordinary opportunity to learn from the best,” he recalls. Today, Rogers also sits on the boards of McDonald’s, Exelon, and Bally Total Fit- ness. Besides advising the BY ROGER O. CROCKETT investment and audit com- errill lynch & co. TAKE A SEAT mittees, Rogers co-hosts an ceo E. Stanley John Rogers annual event to train scores O’Neal had barely re- co-hosts an of black directors. “If a annual signed from the Gen- event to board doesn’t have black eral Motors Corp. train black directors to get issues on board on Feb. 6 be- directors the table,” he says, “it’s not fore gm began think- doing its job.” Ming about recruiting another African Another African Ameri- American to fill his slot. can named Rogers has Typically, a corporation like gm would emerged as a director to look to replace him with another marquee watch. Steven Rogers, a African American name. Someone like former entrepreneur who Time Warner ceo Richard D. Parsons, teaches at the Kellogg who sits on the Citigroup, Estee Lauder, School of Management, and Time Warner boards. But in an era of became a director at sc stepped-up corporate governance, ceos Johnson & Son Inc. in the are taking on fewer directorships. late ’90s. Then-ceo That’s prompting companies to broad- William Perez took a risk, en their reach beyond the likes of O’Neal since Rogers was 41 and and Parsons. As it happens, there’s a large lacked major board experi- pool of black directors from which to ence. But Perez was soon choose. You may not have heard of these taking Rogers’ advice—for folks. But at a time when many markets example, investing in ven- are fragmenting along ethnic lines, ture capital firms that back African American directors black businesses. “It’s not are increasingly sought-af- THE STAT American talent. Since like I fell off the watermelon truck,” says ter. According to executive 2000, the recruiter has Rogers, who is also a director at recruiter Spencer Stuart, placed 277 women and 150 SuperValu and Amcor Financial. “Boards 162 black directors sit on minority candidates on sometimes have to go outside their nor- the boards of the top 200 boards. Recruiters often mal blueprint to find people.” s&p 500 companies. That’s 84% work with Washington When Arbitron Inc., the radio-industry double the number in 1987, (D.C.)-based elc, a rich researcher, was looking for a black per- says the Executive Leader- Proportion of top source of largely untapped spective, it made Shellye L. Archambeau a ship Council (elc), which 200 S&P talent. Telecom giant director. The ceo of San Francisco busi- promotes board diversity. Verizon Communications ness software maker MetricStream Inc. “A diverse board translates companies with at Inc. recently lured elc isn’t a big name. But she has operating into a more profitable busi- least one African member Clarence Otis Jr., experience and technology expertise, ness,” says Patrick G. “Pat” American director the 49-year-old ceo of both skills Arbitron needed. Plus, she Ryan, executive chairman Darden Restaurants, to adds a fresh point of view about the data Data: Spencer Stuart of Aon Corp., which has a serve on its board. And Arbitron produces for its minority-owned black man, an Hispanic Donna A. James, 48, presi- media customers. “It’s important to have woman, and an Asian American woman dent of the strategic investments unit of someone on the board [who] under- on its board. “There’s no doubt about it.” Nationwide Mutual Insurance Co., is gain- stands that,” says Philip Guarascio, chair Recruiting firms such as Spencer Stuart ing notice as a director at Coca Cola Enter- of the board’s nominating committee. “It ❚❚ are scouring the country to uncover African prises Inc. and Limited Brands Inc. “I’ve adds to the richness of the discussion.” michael l. abramson

34 | BusinessWeek | February 27, 2006 News Analysis & Commentary

brokerage in a $3.7 billion deal. “The two biggest retail brokerage distribution companies in the world have done the WALL STREET same thing,” says Gary Shedlin, an investment banker in Citigroup’s financial institutions m&a group, which advised MONEY MANAGERS BlackRock on the Merrill Lynch negotia- tions. “This deal is affirmation of a logical trend that will continue.” ON THE BLOCK The only question seems to be which company will be the next to bail out or Banks and brokerages are selling, and merge. Many think it will be Morgan Stanley, which has a large brokerage force plenty of deep-pocketed bidders await and was outbid by Merrill for BlackRock. Don Putnam, managing partner at Boston-based consulting firm Grail Part- ners llc, expects three or four major brokerage firms and banks to sell off their BY MARA DER HOVANESIAN those of others, many companies are de- asset management units in the next 18 money management ciding that owning a money management months. Among them: Bank of America outfit is a great business unit is more trouble than it’s worth. True, Corp. and Wachovia Corp. Insurer Marsh to own—except for a money managers enjoy some of the high- & McLellan might also want to unload its bank or brokerage. est profit margins in financial services. Putnam fund business, while Mellon Fi- That’s the lesson from And, with baby boomers retiring just over nancial could sell Dreyfus. the recent news that the horizon, growth prospects look excel- Merrill Lynch & Co. lent. But these days, “if an investor asks, WHO’S ON THE PROWL? AChief Executive Stan O’Neal is merging [companies] have to tell them they give buyers are in the wings.jpmorgan the company’s $539 billion asset manage- their brokers higher payouts and Ferraris Chase & Co., which has no retail broker- ment unit into BlackRock Inc., run by to sell in-house products,” says Eric C. age unit, intends to build the company’s ceo Laurence D. Fink. For BlackRock the Weber of Freeman & Co., a boutique money management group partly by ac- move represents a chance to diversify its mergers-and-acquisitions advisory firm. quisition. Another promising bunch may bond management business into “Investors don’t like that.” be publicly traded asset managers. These equities. Merrill takes a near 50% own- O’Neal isn’t the first Wall Street big firms are “generally flush with cash, and ership stake in a lucrative and growing shot to want out of money management. many are looking for incremental acqui- business with $1 trillion in assets under In December, Baltimore’s Legg Mason sitions to fill out product lines,” says management. Inc. bought Citigroup’s $437 billion asset Keefe Bruyette & Woods Inc. analyst Wall Street watchers expect more management business in exchange for its Robert Lee. One company that may be deals soon. Still reeling on the prowl, Lee says, is from the aftermath San Mateo (Calif.)-based of a mutual fund HOT PROPERTIES Franklin Resources Inc. scandal in 2003 Mergers and acquisitions, plus big cash inflows, are Already, deal volume is that shined a sending the stocks of public asset managers soaring up. By mid-2005 transac- harsh light on tions, as measured by as- 180 the practice of S&P 500 ASSET MANAGEMENT sets under management, retail brokers & CUSTODY BANKS INDEX were at the highest level pushing their 160 since 2001, with 83 deals firm’s mutual FEB. 20, '04 and $755 billion in global fund products over 140 assets acquired, according to Freeman & Co. Yet 120 there’s a downside to the deal mania. Talented mon- 100 ey managers are getting JAN. 7, '05 FEB. 10, '06 Data: Bloomberg Financial Markets fed up with all the horse trading and starting their BLACKROCK’S FINK own firms. “For all the jockeying for who The Merrill deal owns whom, there’s going to be a lot of adds equities to friction,” says David Silvera of Rosemont his firm’s bond Investment Partners llc, an investor in management private equity firms that specializes in asset management firms. Managers “want to be masters of their own destiny and don’t see the benefit of being part of a larger group.” Let the buyer beware. ❚❚

—With Lauren Young in New York. kafka evan News Analysis & Commentary

filiate last year, is upgrading. “Going from zero to a well-known brand in any coun- SUPERMARKETS try takes a long time, but in the U.S. it will take a lot longer,” says Jonathan Pritchard, food retail analyst at Oriel Securities Ltd. in London. Tesco execu- TESCO: CALIFORNIA tives were not available for comment. GLOBAL BUYING POWER DREAMING? yet tesco is a powerhouse in Britain, where it has blunted Wal-Mart’s drive to The British retailer is counting on high dominate the retail scene. Wal-Mart’s superstore format has been outflanked tech to crack the U.S. convenience market there by a swarm of Tesco stores, from huge emporia to tiny express shops. To- day the company controls more than 30% of the grocery market in Britain, a fact that has led Wal-Mart, which operates un- BY KERRY CAPELL der the name of asda Group Ltd. in t was a covert operation. A Britain, to call for a government investi- year ago, when giant British retail- gation of its rival. Tesco has been expand- er Tesco was planning its foray into ing in Eastern Europe and Asia. And like the U.S. market, the company dis- Wal-Mart, it used its global buying power patched an advance team of senior to achieve operating margins last year of managers stateside. This was no 5.7%, just under Wal-Mart’s 5.9%. routine intelligence-gathering trip, High tech is another Tesco strong Ithough. Hoping to keep their plans secret point. It runs the world’s biggest online from rivals, the Tesco executives posed as grocery: British shoppers can even buy Hollywood film producers making a their groceries via cell phone. Tesco, like movie about supermarkets. The opera- Wal-Mart, was an early adapter of radio- tives set up a trial convenience store in a frequency identification technology and West Coast warehouse. Loath to leave a other methods to get goods to stores in paper trail that could tip off competitors, the most cost-efficient way. “Tesco is they used plastic bags of cash rather than ruthless in supply chain management,” corporate charge cards to buy goods for says Scott Langdoc, vice-president of their mock store. Boston consultancy amr Research Inc. The result was a huge surprise for the Tesco will model its California outlets U.S. retail industry. On Feb. 9, Tesco ceo on its successful Ex- Sir Terry P. Leahy announced that the QUICK SHOPPING press stores, a chain world’s No. 5 retailer will spend $453 mil- Tesco’s plan of 800 mini-super- lion to open a chain of convenience stores targets a weak markets. The compa- on the West Coast next year. spot at Wal-Mart ny, which operates On the face of it, the move sounds not some Express stores only bold but harebrained. European in conjunction with Exxon Mobil Corp., chains have long tried, mostly unsuccess- plans to go far beyond the traditional con- fully, to make inroads into the U.S. Mean- Tesco venience-store format of gas, snacks, and while many U.S. retailers, squeezed by ris- smokes to include groceries, produce, and ing costs and big-box players such as At a Glance private-label ready-to-eat meals. Wal-Mart Stores Inc., are scaling back or REVENUES $59 billion* Is Tesco itching to mix it up with Wal- selling out. Operating a store in the U.S. OPERATING PROFITS $3.4 billion* Mart on the American retailer’s home these days is not for the fainthearted. STORES 1,819 stores in Britain, 648 others in turf? The British actually are targeting an If that all weren’t daunting enough, 12 countries in Europe and Asia area where Wal-Marts are relatively Tesco will be starting from scratch, with STRATEGY Offering reasonable prices scarce. The Bentonville (Ark.) company no brand recognition, no customers, and for private-label food products, clothing, has 266 stores in California, Oregon, and no distribution system in place. There’s cell phones, home-entertainment gear, and Washington, compared with 415 in Texas even new competition to worry about. financial products alone. Wal-Mart is experimenting with its This month, Home Depot Inc. is launch- SHOPPING EXPERIENCE Four types of smaller-format Neighborhood Markets, ing a chain of gas-station convenience stores: Tesco Express, a convenience chain; but these are more like supermarkets stores called Home Depot Fuel. Canada’s Tesco Metro, a large, city-based store; than convenience stores. “To grow, Wal- Alimentation Couche-Tard Inc. is ex- Superstore, up to 50,000 square feet with Mart needs to go beyond big stores,” says panding in the U.S., where it already has nonfood products; and Extra, one-stop Frank Badillo, director of global research 3,000 outlets, including those under the hypermarkets up to nearly 200,000 square feet and senior economist at consultancy Re- Circle K name. Industry leader 7-Eleven tail Forward Inc. in Columbus, Ohio. *2005 Data: Company reports ❚❚ Inc., which was acquired by a Japanese af- “Tesco is beating them to the punch.” times alex segre/financial

38 | BusinessWeek | February 27, 2006 News Washington Outlook

EDITED BY RICHARD S. DUNHAM CAPITAL Dirty Secrets of the INSIDER WANTED: A CEO TO RUN FOR THE WHITE HOUSE ‘Black Budget’ americans would rather have a ceo as commander-in-chief than a politician. A Feb. 7-8 Fox FORMER CALIFORNIA REPRESENTATIVE Randy “Duke” Cunning- News/Opinion Dynamics poll found that 33% of voters ham’s guilty plea to bribery and tax evasion exposed Washing- preferred a business leader for ton’s backroom ways, where gifts to lawmakers are sometimes President, while a politician or followed by official actions that benefit the officeholder’s bene- general each were favored by 21%. Independents, at 42%, factors. But Cunningham’s intervention on behalf of companies were the biggest ceo backers. went far beyond the projects disclosed in tees that control the nation’s purse strings. court filings. Capitol Hill sources say Cun- Lobbyist Jack Abramoff, now a cooperating ningham also delivered for the businesses witness in a federal investigation, called the SENATE HEAT ON that bribed him by slipping projects into appropriations panels Washington’s “favor THE CREDIT RATERS the super-secret “black budget” that funds factory.” Senator John McCain (R-Ariz.) has credit-rating agencies will classified intelligence work. launched a war on earmarking, saying the be on the hot seat on Mar. 7, The San Diego Republican’s alleged ac- practice is ripe for corruption and drives up when the Senate Banking tions cast light on one of the dirty secrets of the federal deficit. The details are hard to dig Committee plans hearings to Capitol Hill: Nothing—not even the spy out, though, because earmarks are often hid- consider tighter regulation of budget—is exempt from lawmakers’ “ear- den in bills that run to hundreds of pages. the raters. Corporate cfos will marks” designed to steer federal spending And in the hush-hush intelligence world, un- urge lawmakers to bar the to favored projects and recipients. “There’s earthing earmarks is all but impossible. But agencies (including Standard & general concern about transparency and classified pork “is just as wrong as any other Poor’s, which, like BusinessWeek, oversight of earmarks in both the ‘black’ earmark,” says McCain. “In fact, it deserves is owned by The McGraw-Hill and the ‘white’ worlds,” says John extra scrutiny now because Duke Cunning- Companies) from offering Schofield, spokesman for the House Ap- ham was able to perpetrate some of his consulting services to corporate propriations Committee. egregious crimes through ex- clients whose debt they rate. While the “white budget” actly that vehicle.” Critics argue that creates is available for public inspec- Indeed, Cunningham’s potential conflicts of interest. tion, the top-secret “black” intervention for San Diego- But a spokesperson for s&p annex to the annual intelli- based defense contractor says: “We have policies, gence-spending bill is kept adcs and Washington intel- procedures, and firewalls in in a secure room. Only a few ligence firm mzm so place to insure the indep- staffers are allowed to work alarmed Hill leaders last endence and objectivity of on it. Even the members of summer that then-Appropri- everything we do.” Congress who vote it into ations Committee Chairman law aren’t allowed to read C.W. “Bill” Young (R-Fla.) the bill unless they are ordered a probe to see what AN IRS PHISHING deemed to have a “need to Cunningham put in the spy EXPEDITION know,” a status limited to a CUNNINGHAM budget. The committee found that the net scammers have been few dozen who oversee the Did he hide projects were legitimate. doing some especially nasty Pentagon and spy agencies. earmarks in the Total spending in the intelligence phishing lately: sending out e- Legislators with access to spy budget? bill is confidential. People familiar mails under a legit-looking irs the classified portion of the with intelligence point out that secret logo that promise info about bill can earmark spending for favored proj- earmarks represent an extremely small your tax refund. All you need do ects and technologies, say multiple share of the $27.3 billion spent on pet proj- is send back your name, Social sources. “These guys can basically give ects. Lawmakers are more circumspect Security number, and credit- money to whomever their heart desires, about favoring special interests in the card details. An irs spokesman and we have no idea who’s getting the black budget, these sources say, in part be- wants you to know you can find money,” says Keith Ashdown, vice-presi- cause they can’t send out press releases the status of your refund at dent of the conservative watchdog group boasting of bringing home the bacon. One www.irs.gov and that the Taxpayers for Common Sense. source says the bill includes fewer than 10 agency never asks for info by The ethics scandals engulfing Washing- earmarks a year. Of course, there’s no way e-mail. And the irs wants the ton have put the spotlight on earmarking by to know for sure. It’s classified. ❚❚ scammer to know imper-

john r. mccutchen/sdut/zuma press the congressional appropriations commit- –By Eamon Javers sonating the taxman is a felony.

February 27, 2006 | BusinessWeek | 41 News Global Business

MAKEOVERS ELECTROLUX CLEANS UP Boosting R&D and getting all units on the same page delivers a rebound

BY ARIANE SAINS searching for the insights they’ll need to AND STANLEY REED dream up the next batch of hot products. ou will never meet It’s a new way of doing things for Elec- Catherine, Anna, Maria, trolux, but then again, a lot is new at the or Monica. But the future company. When Chief Executive Hans success of Sweden’s Elec- Straberg took the helm in 2002, the trolux depends on what world’s No. 2 maker of home appliances and Eastern Europe. He also is spinning these four women think. after Whirlpool Corp. faced spiraling off the outdoor products division. But this Catherine, for instance, a costs while its middle-market products is no ordinary corporate makeover. Stra- Ytype A career woman who is a perfection- were gradually losing out to cheaper berg is also breaking down barriers be- ist at home, loves the idea of simply slid- goods from Asia and Eastern Europe. tween departments and forcing his de- ing her laundry basket into a washing ma- Competition in the U.S., where Electrolux signers, engineers, and marketers to chine, instead of having to lift the clothes gets 40% of its sales, was ferocious. The work together to come up with new prod- from the basket and into the washer. That company’s stock was treading water. ucts. To speed the transition, he has re- product idea has been moved on to the Straberg had no choice but to do some- cruited executives from companies with fast track for consideration. thing radical. He began shuttering plants strong track records in innovation, in- So just who are Catherine and the oth- in Western Europe and the cluding Procter & Gamble and PepsiCo. er women? Well, they don’t U.S. and shifting work to At the Stockholm brainstorming ses- actually exist. They are com- lower-cost locales in Asia sion, for example, the group leader, Kim posites based on in-depth interviews with some 160,000 con- Electrolux’ Hit List sumers from TAKE NOTE around the Divisions The appliance maker’s new emphasis on design is brainstorm globe. To di- yielding a crop of products and hot prospects together um vine the needs of these mythical customers, CURRENT WINNERS HOT PROSPECTS 53 Electrolux employees, including de- ICON CONVECTION WALL OVEN ($2,000 BREEZE HAND-HELD STEAMER This signers, engineers, and marketers hailing and up) The ICON oven is outﬁtted with a cordless device doubles as a stain from various divisions, gathered in glass door that doesn’t get hot during remover. Comes outﬁtted with a Stockholm at the end of November for a cooking and racks that glide out smoothly scent dispenser. weeklong brainstorming session. The thanks to a patented ball-bearing system. Catherine team began by ripping photo- GENTLE DRYER It’s designed to leave graphs out of a pile of magazines and PRONTO UPRIGHT VACUUM ($99) This clothes free of wrinkles and has a lighted sticking them onto poster boards. Next to cordless vacuum with a detachable yellow drum to simulate sunshine. a picture of a woman wearing a sharply handheld is so attractive it doesn’t WATERLESS WASHING MACHINE This tailored suit, they scribbled some of deserve to be hidden away in the closet. machine will use ultrasound, ultraviolet, Catherine’s attributes: driven, busy, and a OXYGEN VACUUM (Around $500) All or ion technology to clean clothes gently bit overwhelmed. controls on this canister model are on the without water. With the help of these characters, handle, so there’s no need to bend down. Data: Electrolux, BusinessWeek

Electrolux designers and engineers are rob schoenba by photographs (this page)

42 | BusinessWeek | February 27, 2006 be locked up in the The broom closet, it calls out to be dis- Pronto played in your vacuum kitchen. In Europe, it now commands swept the 50% of the market for stick vacs, a U.S. and coup for a product with fewer than Europe two years on the market. The Pronto is cleaning up in the U.S., too. Stacy Silk, a buyer at retail chain Best Buy Co., says it is one of her hottest sellers, even though it retails for around $100, double the price of com- parable models. “The biggest thing is the aesthetics,” Silk says. “That gets people to walk over and look.” Straberg, who spent decades running Electrolux operations in the U.S., is crafting these new products even while TRY, TRY AGAIN moving away from many traditional Refining a product tools of customer research. The compa- prototype at the brainstorming ny relies less heavily on focus groups, session and now prefers to interview people in their homes where they can be video- taped pushing a vacuum or shoving Scott, is a recent p&g defector. She urges ing table to the factory floor. laundry into the washer. “Con- everyone “to think of yourselves as To support the innovation sumers think they know what they Catherine.” The room buzzes with dis- drive, Straberg has bumped want, but they often have trouble ar- cussion. Ideas are refined, sketches up spending on r&d from ticulating it,” says Henrik Otto, drawn up. The group settles on three con- 0.8% of sales to 1.2% and is senior vice-president for global de- cepts: Breeze, a clothes steamer that also aiming for 2% eventually. sign, whom Straberg lured away removes stains; an Ironing Center, similar What he’s gunning for are from carmaker Volvo. “But when we to a pants press but for shirts; and Ease, products that consumers will watch them, we can ask, ‘why do you the washing machine that holds a laun- gladly pay a premium for: do that?’ We can change the product dry basket inside its drum. Gadgets with drop-dead good and solve their problems.” Half the group races off to the machine looks and clever features that The new approach is starting to shop to turn out a prototype for Breeze, ordinary people can understand yield results. After dropping for two while the rest stay upstairs to bang out a without having to pore through straight years, annual sales rose 8%, to marketing plan. Over the next hour, de- a thick users’ manual. “Con- $16.5 billion, in 2005. Operating in- signer Lennart Johansson carves and sumers are prepared to come jumped 42% in the fourth sandpapers a block of peach-colored pay for good design quarter, compared with the polyurethane until a contraption that re- and good perform- year before, though it rose sembles a cross between an electric ance,” he says. by less than 2%, to $881 screwdriver and a handheld vacuum be- Electrolux isn’t million, for the year as a gins to emerge. The designers in the the only appli- whole. Johan Hjertons- group want the Breeze to be smaller, but ance maker on son, director of the engineer Giuseppe Frucco points out an innovation kick. consumer innovation that would leave too little space for a In 1999, Whirlpool Corp. launched a pro- program, says product launches have al- charging station for the 1,500 watt unit. gram that allows all of its 68,000 em- most doubled in quantity. And the num- For company veterans like Frucco, ployees to contribute design ideas, yield- ber of launches that result in outsized who works at Electrolux’ fabric care re- ing a flood of new products. unit sales is now running at 50% of all in- search and development center in Porcia, troductions, from around 25% previously. Italy, this dynamic groupthink is a re- EYE-CATCHING DESIGN The stock? Up a third in the last year. freshing change: “We never used to cre- but few have pulled off the range of Catherine would be pleased. ❚❚ ate new products together,” he says. hot new offerings that Electrolux has. –With Michael Arndt in Chicago “The designers would come up with One clear hit is a cordless stick and hand something and then tell us to build it.” vacuum, called Pronto in the U.S. Avail- For a slide show of The new way saves time and money by able in an array of metallic hues with a Electrolux’ best-selling appliances and some avoiding the technical glitches that crop rounded, ergonomic design, this is the of its more intriguing prospects, go to up as a new design moves from the draft- Cinderella of vacuums. Too attractive to www.businesweek.com/extras.

February 27, 2006 | BusinessWeek | 43 News Global Business

The Korean won has gained some 20% against the greenback in the past two years, boosting dollar gains for foreigners. And the market is relatively cheap, trading at just 10.2 times estimated 2006 earnings, compared with 18.8 in Japan, 16.2 in Hong Kong, and 15.7 in India, according to Morgan Stanley. UNLIKELY TARGET by many measures, kt&g wouldn’t seem to be in the kind of distress that nor- mally draws corporate bottom feeders. CORE PRODUCT Icahn kt&g controls three-quarters of Korea’s wants KT&G to sell cigarette market, and its net profits—$528 off other businesses million in 2005—have jumped an average of 14.1% annually in the past four years. SOUTH KOREA Its share price has more than tripled since 2003, thanks partly to shareholder- friendly policies such as doling out half its profits as dividends. And it’s often praised AN UNRULY GUEST for its corporate governance. Nonetheless, Icahn and Lichtenstein think Chief Executive Kwak Young Kyoon FROM THE WEST could do better. They say he has de- pressed profits by holding on to former Icahn’s fight at tobacco giant KT&G may factory sites instead of selling the real estate. And they want Kwak to unload non- spark more activity by foreign investors core assets, such as a convenience store chain and a pharmaceutical unit, and list shares in a fast-growing subsidiary that makes drinks and other products from ginseng, an herbal tonic. Icahn and BY MOON IHLWAN before the Asian financial meltdown of Lichtenstein, head of private investment ou might think carl 1997-98. And at some big companies, for- partnership Steel Partners II, declined to Icahn has his hands full eign ownership is much higher. At kt&g comment for this story. At a news confer- with the battle over Time it’s 63%. At Korea’s largest lender, Kook- ence, Kwak said their demands were “ex- Warner Inc. But he’s also min Bank, it’s 85.7%; at Posco, the coun- cessive” measures that would hurt long- been busy making a try’s top steelmaker, it’s 68%; and at Sam- term profitability. name for himself in Ko- sung Electronics, it’s 54%. All told, 109 Now the stage is set for a proxy fight. rea. “Corporate Pirate,” foreign investors hold more than 5% of at When Lichtenstein announced on Feb. 9 Y“Wall Street Naughty Boy,” and “Cold least one Korean company and have filed that he would seek a board seat, kt&g Negotiator” are some of the nicer things papers saying they intend to influence shares the next day climbed 8.9%. Kwak Korean newspapers have called the U.S. management. “Icahn heralds a new wave has signed up Goldman Sachs & Co. to financier lately. Why the vitriol? Icahn and of activism by international investors,” help manage the fight. The Korea Center fellow investor Warren G. Lichtenstein says Young Chang, head of research at for International Finance, a state-funded now control 7.3% of the shares of kt&g ubs Korea. “Soon such a campaign won’t research group, says the outcome is Corp., Korea’s former tobacco monopoly, be a novelty.” tough to predict, with some 30% of and are demanding changes they hope Other factors may accelerate the trend. shares—largely held by Koreans—likely t szwajkos/getty images t szwajkos/getty will boost the stock’s value. The country’s At least a dozen Korean blue chips, in- to back management, and 16% currently opinion leaders, meanwhile, apparently cluding kt&g, Posco, and Kookmin, lack lined up behind the challengers. Whoever find the notion of foreigners calling the a controlling shareholder, making it easi- prevails, it seems a new wave of “corpo- shots tough to stomach. er for discontented investors to be heard. rate pirates” is sure to set sail for Korea. ❚❚ It’s a taste they had better get used to. Un- OWNERSHIP Many companies lack strong controlling shareholders, til a decade ago, out- Why making it easier for smaller investors to influence management siders had a hard time Korea is PRICE Korean shares are comparatively cheap, trading at 10.2 times penetrating the erst- expected ’06 earnings, vs. 18.8 in Japan and 16.2 in Hong Kong while “Hermit King- Ripe for dom.” But today for- TRANSPARENCY The 1997 Asian financial crisis forced Korea Inc. eign investors own Raiding to clean up its act, so accounting statements are now more reliable 42% of the shares on the Seoul bourse, CURRENCY The won has risen by 20% against the dollar in the past ICAHN two years, boosting dollar profits for foreign investors compared with 13% ma (top to bottom) ki ho park/kistone; Data: BusinessWeek, Morgan Stanley 44 | BusinessWeek | February 27, 2006 where it hurts. In mid-January, Ranbaxy announced that fourth-quarter profits INDIA dropped 56%, to $15.5 million, largely because of falling prices for U.S. generics. Dr. Reddy’s reported a big jump in profits SELLING GENERICS to $14 million, but that was driven mostly by one-time savings from the sale of a facility in India and other cost-cutting USED TO BE SO EASY measures. Indian drugmakers “have to be sprinting to stay in the same place,” says Suddenly, drugmakers Dr. Reddy’s and Vinay Parikh, a fund manager in Bombay. What to do? Cut deals, for one thing, es- Ranbaxy have a host of copycat rivals pecially in the U.S. Last year, for instance, India’s Sun Pharmaceutical Industries acquired Able Laboratories, a generics maker from New Jersey, and bought an Ohio factory from California-based BY BRUCE EINHORN Valeant Pharmaceuticals Inter- AND MANJEET KRIPALANI TESTING, national. In December, Bom- t was supposed to be the Next Big TESTING bay’s Glenmark Pharmaceuti- Thing from India: Its pharma com- A Ranbaxy cals announced a deal with panies would do to the drug indus- research lab InvaGen Pharmaceuticals, a try what Bangalore did to software New York producer of generics, and the back office. And in fact, ri- to work together to sell seven val Indian drugmakers Dr. Reddy’s drugs in the U.S. And on Feb. 1, Laboratories Ltd. and Ranbaxy Dr. Reddy’s reached a deal to ILaboratories Ltd. have turned into some sell authorized generics of of Big Pharma’s fiercest competition. The Merck & Co.’s cholesterol drug two have plowed huge resources into the Zocor and prostate formula generics business, providing U.S. con- Proscar in the U.S. sumers with low-cost versions of brand- name drugs such as Prozac and Aug- TROUBLE AT HOME mentin—and sapping profits at the major europe beckons, too. pharmaceutical companies that once Both Dr. Reddy’s and Ranbaxy held the patents to those formulas. are bidding to acquire German But this is not a story of untrammeled generics maker Betapharm. triumph for the subcontinent; the big In- On Feb. 10, Aurobindo Phar- dian pharma companies are now getting ma, based in the southern In- a taste of their own medicine. The success dian city of Hyderabad, an- of Dr. Reddy’s and Ranbaxy has inspired nounced it was acquiring a wave of copycats. A dozen or so Indian Milpharm, a British generics companies now sell generics in the U.S., maker. And other Indian com- and Indians today account for $8 billion panies are raising funds for of the world’s $48 billion market for overseas deals. generics. “There is a huge gold rush into” Outward Bound Even as they explore markets the U.S., says G.V. Prasad, chief executive abroad, though, the Indians are of Dr. Reddy’s. As generic prices fall, India’s drug- facing increased competition It’s getting harder to find the gold, makers are looking abroad for growth at home. India is opening up, though, as major Western drugmakers and foreign generics makers fight back. For instance, Ranbaxy recent- RANBAXY Competing with Dr. Reddy’s to buy are eager to take advantage of ly lost a high-profile battle with Pfizer Inc. German generics maker Betapharm the low costs that have helped over generic rights to the cholesterol drug DR REDDY’S Bidding for Betapharm; will sell the locals. Israel’s Teva Phar- Lipitor. And Big Pharma companies have authorized generics of two Merck drugs in the U.S. maceutical Industries Ltd., the started selling their own generic versions world’s No. 1 maker of generics, of blockbuster drugs once their patents WOCKHARDT HOSPITALS Arranging a $250 million is on the prowl. And Teva’s expire. The result has been “pricing pres- loan to fund U.S. and European acquisitions biggest rival, Novartis sub- sure that is quite brutal,” says Brian W. SUN PHARMACEUTICAL Last year bought Able sidiary Sandoz Inc., has more Tempest, executive vice-chairman at Laboratories, a New Jersey-based generics maker than 1,000 employees in India Ranbaxy. A few years ago companies working on product develop- launching a generic of a big-name drug CIPLA In November signed deal with Illinois-based ment and manufacturing. Big could expect to make about 25% of the Akorn to sell an anti-infective drug in the U.S. Pharma’s enemies, it seems, original price. “Today it is south of 5%,” are facing a big-time brawl of MATRIX Plans to raise $200 million in a stock ❚❚ says Prasad. offering, with overseas deals likely to follow their own. indiapicture.com That’s hitting the two companies –With Kerry Capell in London

February 27, 2006 | BusinessWeek | 45 News Global Business

FILL ’ER UP Sasol refining the technology and now has a supplies 28% of money-spinner. Assuming oil prices stay SouthAfrica’sneeds in their current range, synfuels alone should earn Sasol $2 billion in operating profits for the year ending June 30, 2006, says Picchi. The fat profits have prompted some South African policymakers to call for a windfall tax on Sasol, a development that recently affected the stock. GOING ON THE ROAD sasol is supplementing its home operations with overseas ventures. The first to come online will be gas-to-liquids (gtl) plants in Qatar and Nigeria. gtl plants use a version of the coal-to-liquids technology to make liquid fuels and petrochemicals from natural gas, which Qatar has in abundance. The Qatar plant will eventually produce 34,000 barrels a day of super-clean diesel fuel and other SOUTH AFRICA products for Europe. Sasol is also allying its gtl technology with Chevron’s exploration and production skills. The two are WHAT THE U.S. CAN building a facility at Escravos, Nigeria, and planning another plant in Qatar. One drawback: cost. Building a gtl LEARN FROM SASOL plant can cost $40,000 per daily barrel of capacity vs. $15,000 for a conventional oil The company makes liquid fuel from coal, refinery. But by Sasol figures, the company can still make $30 a barrel if it gets not Mideast oil. And its margins are huge low-cost gas feedstock and crude stays fairly high. Picchi figures Sasol will be getting gas in Qatar and Nigeria at the equivalent of $5 to $10 for a barrel of oil. He sees Sasol earning $350 million per BY STANLEY REED coming out of the U.S. makes us think year from those ventures. ome 90 miles south- there is a real business opportunity for Making money out of coal-to-liquids is east of Johannesburg, the us,” says Sasol ceo Pat Davies. tougher, since the plants cost more. cooling towers and pipes of No wonder investors have boosted Nonetheless, coal-rich Pennsylvania has a giant industrial installa- Sasol’s New York Stock Exchange-traded assembled a package of federal and state tion sprawl across five shares by almost 60% in a year, to 34. funding that comes close to the $625 mil- square miles. What hap- “You have to tip your hat to them,” says lion estimated price tag of a pilot project. pens at Secunda, as the Bernard J. Picchi of The facility, to make Splace is known, is of great interest these New York’s Foresight diesel from waste days. At a time of sky-high oil prices, Sasol Research Solutions SASOL SURGES coal, would use tech- llc Ltd., Secunda’s owner, churns out 160,000 . “They’ve been U.S. DOLLARS* nology from Royal barrels of gasoline, diesel fuel, and jet fuel doing [synfuels] longer 45 Dutch Shell and Sasol. WEEKLY CLOSE a day, enough to cover 28% of South than anyone else.” 40 Davies thinks such Africa’s needs, without using a single drop Sasol’s technology 35 projects could be vi- of crude oil, imported or otherwise. for making gasoline able in the U.S. with Sasol is not a household name, but from coal is named 30 oil prices at $40 a maybe it should be. President George W. Fischer-Tropsch, after 25 barrel with “the right Bush wants to curb America’s depend- the Germans who de- 20 incentives.” Even so, ence on Middle East oil. Analysts worry veloped it in the 1920s. Sasol would have to 0 about a future gap between supplies and The Third Reich used FEB. 18, '05 FEB. 10, '06 overcome concerns co relentless demand. Yet Sasol, with $11.2 the process—which Data: Bloomberg Financial Markets *U.S. TRADED ADRS about 2 emissions. billion in revenues, is already enjoying employs heat, pres- Davies figures that by huge commercial success in an arena that sure, and catalysts to transform carbon the time Sasol invests in the U.S., its has eluded U.S. companies—making fuel monoxide and hydrogen into fuels—to “processes will meet environmental regu- from coal. It is embarking on a program make diesel during World War II. Simi- lations.” The hurdles are high. But Sasol to brew clean-burning diesel from natural larly, South Africa’s apartheid regime em- has a technology that every energy-hun- gas. It may even link up with coal pro- ployed it to ease the effects of the embar- gry country wants to tap. ❚❚

ducers in the U.S. heartland. “What is go in the ’80s. Sasol has spent decades –With Adam Aston in New York pettersson/getty images per-anders by photograph

46 | BusinessWeek | February 27, 2006 ManagingNetworks The Office Chart That Really Counts Mapping informal relationships at a company is revealing—and useful

BY JENA McGREGOR tacts to help minimize the fallout. “It’s as wo years ago, ken if you took the top off an ant hill and Loughridge, an informa- could see where there’s a hive of activity,” tion technology manager he says of the map. “It really helped me living in Cheshire, Eng- understand who the players were.” land, uprooted his family and moved to the other BIRD’S-EYE VIEW side of the world. His com- while not brand-new—independent Tpany, engineering and environmental con- consultants and researchers at ibm have sulting ﬁrm mwh Global, was reorganiz- been mapping informal networks for a ing its various information technology number of years—the use of social net- offices into a single global division, estab- work analysis as a management tool is ac- lishing its main service center on New celerating. Given the current emphasis on Zealand’s more cost-effective shores and managing talent, companies are hungry promoting Loughridge to manage the for ways to ﬁnd and nurture their organi- company’s worldwide network, system, zations’ most in-the-know employees. and desktop needs. “By and large, the staff And as innovation becomes more critical I’d adopted were strangers,” he says. to corporate survival, the tool lets man- To help adjust to his new surround- agers survey the informal interactions be- ings, Loughridge took a map with him. A tween different groups of employees that map of his organization, that is. A few lead to exciting new ideas. Such a bird’s- months before, mwh had surveyed its it eye view also exposes the glaring gaps employees, asking them which col- where groups aren’t interacting but leagues they consulted most frequently, should be. “Making the collaboration vis- who they turned to for expertise, and who ible makes it much easier to talk about,” nections in their clients’ organizations either boosted or drained their energy lev- says Kate Ehrlich, a researcher at ibm during the past year. Boston Consulting els. Their answers were analyzed in a soft- who studies collaboration. Group, meanwhile, is using the approach ware program and then plotted as a web Management consultants and aca- to map ideas: In November, it launched a of interconnecting nodes and lines repre- demics, along with technological ad- proprietary software program that tracks senting people and relationships. Look- vances, are also driving the trend. Accen- its clients’, and in some cases their coming a little like an airline’s hub-and-spoke ture Ltd. and Katzenbach Partners llp petitors’, patents and research papers so

route maps, the web offered Loughridge a have begun analyzing the informal con- bcg people can chart their internal and bartkus ray map—a corporate X-ray, in a sense—to how work really got done among his PLAYBOOK: BEST-PRACTICE IDEAS charges. It helped him visualize the invisible, informal connections between people that are missing on a traditional orga- Reasons INTEGRATING MANAGING nizational chart. MERGERS & CHANGE Loughridge used the map to identify For an ACQUISITIONS Knowing which people have well-connected technical experts he Social network maps can help the respect of their peers—and should immediately visit face-to-face. X-Ray A map of social networks identify key players that you communicating new strategies And six months into the job, when a key don’t want to lose and, post- or reorganizations through manager in the Asia region left the com- can help in these merger, tell whether integration them—can help bring about pany, he referred back to it, reaching out common situations: is taking place. change more effectively. to the departed managers’ closest con-

48 | BusinessWeek | February 27, 2006 Procter & Gamble, Merck, and Lehman after the event was over. “We wanted to Brothers as participants. invite connections that could be imple- One company in that roundtable is mented between [Solvay] scientists, not Capital One Financial Corp., which began just outside scientists.” using the maps in October to help main- For all of the benefits, charting informal tain links between people with similar networks can be disruptive. “Leaders feel jobs after a reorganization along product pretty threatened by this,” says Katzen- lines. These online communities for bach principal Zia Khan, speaking of peo- groups such as project managers, credit- ple who hold high perches on the organi- risk experts, and even ad- zation chart but are more ministrative assistants serve isolated on the informal as forums for people who Those with map. When using social net- don’t regularly work togeth- work analysis, suggests Uni- er to share best practices. In high perches versity of Virginia’s Cross, hopes of drawing more par- could be it’s important to communi- ticipation, the McLean (Va.) cate to employees that more financial services company shown as connections aren’t necessar- used the maps to encourage ily better: It’s O.K. for some well-connected folks—those isolated on a people, such as those who who show up as “hubs” on spend a lot of time with cus- the map—to take formal, social chart tomers or have expertise in central roles on the forums. niche areas, to show up on While knowledge shar- the periphery of the web. ing is one of the most common reasons Maps can also highlight which employees that companies employ the practice, might be too connected and therefore a po- managers are finding other useful appli- tential bottleneck. cations. Last year, Solvay, a Belgian phar- Confidentiality is also a touchy issue. A maceutical and chemical company, began map that reveals who is well-connected using maps to help with leadership tran- and who is not can be destructive if it is sitions, or “baton passing,” as Philippe shared too widely. “I know who I named, Drouillon, a knowledge management but when I look at the map, I might see project specialist, calls it. “You have a [that person] didn’t name me back,” says map that you can provide to successors Tracy Cox, director of enterprise integra- and say: ‘These are the interactions I have tion at aerospace and defense contractor with the people that you should know,’” Raytheon Co. Now, says Cox, who does he says. network analyses for the company’s seven businesses, that hypothetical employee FEELING THREATENED “knows that he is not valuable to his boss. solvay is also using maps to spur its And not only does he know it, but 50 of innovation efforts. In October it held his closest friends know it, too.” several “scientific days,” inviting outside Instead, the maps Cox shares with the university researchers for two days of groups that he works with are carefully face-to-face discussions. To ensure that coded; employees are described only by external networks. Many point to Univer- the occasion wasn’t just a one-off with generic characteristics such as job titles. sity of Virginia management professor little follow-up, Drouillon and his team Cox provides a separate list of the group’s Rob Cross as a key player in making so- mapped its scientists’ internal and exter- most connected people to everyone. Indi- cial network analysis, which has its roots nal networks before and after the event viduals can ask to see their portion of the in sociology, more applicable to practical to see where research interests over- maps and are offered one-on-one coach- business needs. Cross has formed a lapped and where potential existed for ing to interpret them, but their supervi- roundtable that boasts 53 members after collaboration. The hope, says Drouillon, sors aren’t allowed to see them. just 18 months. It counts biggies such as is “to increase our innovation impact” Are the maps still helpful if individuals’ locations aren’t revealed? Cross says yes. In 95% of the companies that he works with, only the very top two or three managers actually see a complete map with SPARKING SPOTTING TALENT PLANNING FOR names. Everyone else can see where silos INNOVATION Some of the best respected SUCCESSION are occurring, where acquired teams Ideas are sparked when employees aren’t visible on the Social network analysis can help aren’t integrating, or where collaboration people go outside their tradi- traditional organizational chart assure managers that potential could be happening but isn’t yet. tional networks. Seeing where but are exposed by a network successors are trusted by the “Putting that diagram in front of every- the lines of collaboration are map. Tap them for key projects organization and shine a one is powerful because it’s not just the missing can help managers but know that formalizing their spotlight on key experts whose boss who’s walking around saying: find opportunities for growth. status could harm peers’ trust. departure would be disruptive. ‘We’re not collaborating,’” Cross says. “It’s what everyone is saying.” ❚❚

February 27, 2006 | BusinessWeek | 49 The CorporationThe Net

The third contender has an office near the Cooks’ Skillman (N.J.) home—a big plus. After all, says 17-year-old David, “we’re in high school.” The Cooks got their first investment, $250,000, from their 27-year-old brother Who Says Money Geoff, who’d founded and sold his own Web business. They outsourced design to programmers in India and launched the site on rented servers. At high schools Can’t Buy Hipness? they offered free T-shirts or thongs to students who signed up five friends. After Small sites are fetching lofty prices as traffic jumped twelvefold in November, myYearbook.com made it onto traffic Big Media chases their young followers ranking site Alexa.com’s list of movers and shakers, and buyout offers rolled in. In this market, Web site sellers have a lot of competition. The Cooks’ rivals include Jay Gould, 26, who launched two BY JESSI HEMPEL AND TOM LOWRY video-sharing sites in the fall of ailycandy, the popu- 2004 and sold them in December, lar Web site of fashion, 2005. Users of the sites, Mu- beauty, and lifestyle sicvideocodes.com and Yashi.com, trends, was founded in can search databases of videos 2000 at the height of the and attach them to everything from last Internet bubble. Now e-mails to MySpace profiles. Gould it looks as if DailyCandy outsourced the site design and set DInc. could wind up heralding the arrival up shop in his grandfather’s of Bubble 2.0. A Wall Street Journal report Bayville (N.J.) basement. In Decem- on Feb. 15 that former aol Time Warner ber the sites attracted 3.3 million Inc. executive Robert W. Pittman, whose unique views, according to com- private investment firm Pilot Group lp is Score Media Metrix. Gould sold DailyCandy’s majority owner, was putting them to New York media company the site on the block fueled speculation Bolt Inc. that month in a mostly eq- that it could garner offers of $100 million uity deal that makes him a partner or more. in the company. DailyCandy, which breath- lessly describes itself as “the CANDY MAN Pittman’s Pilot Group ultimate insider guide to is expected to see offers of $100 million or more for the site what’s new, hot, and undis- covered,” is the brainchild of Dany Levy, a 33-year-old tined to inflate. In July, Murdoch Two other twentysomething online onetime New York magazine plunked down $580 million to entrepreneurs, Greg Tseng and Johann editor. It has 11 daily city edi- buy MySpace.com, the social Schleier-Smith, also attracted money tions and a vibrant e-mail networking leader. Because quickly for their teen portal Tagged.com. newsletter, and its trend-set- users of sites such as MySpace But Tseng and Schleier-Smith wanted ting editors have steady gigs are largely under 25, investors venture capital for the 35-person com- on the Today show to talk and Big Media companies see pany. Their ambitions are nothing if not an.com about the next hot sneaker or them as a direct route to a high- grand: “We want to build… a Teen Ya- spa service. DailyCandy’s Levy declined to ly coveted but elusive demographic. “The hoo! or the next mtv,” says Tseng. They comment; Pittman couldn’t be reached. risk, of course, with these sites is if they didn’t have to wait long for their growth Buzz machines like DailyCandy have turn out to be fads” instead of something capital. The site launched in mid-2004 become all the rage among corporate that’s sustainable, says Aryeh Bourkoff, a with about $1 million from their savings. buyers looking to connect with the ubs analyst. Traffic hit 1.6 million unique page views hordes of young people living and spend- For now, at least, Levy and other Web in December. The same month the duo ing online. Because the sites always seem entrepreneurs are in a seriously enviable reeled in $7 million from Mayfield Fund a few paces ahead of the action, venture spot. Take David Cook and his sister of Menlo Park, Calif. capitalists are loosening purse strings, Catherine. A venture capital firm, a tech Those thinking of starting similar sites while larger outfits are looking to buy up startup, and a small public company have better move fast. Buyers may find that site existing sites rather than trying to create all made offers for myYearbook.com, the loyalty can be fleeting. But that isn’t like- their own from scratch. social networking site the siblings started ly to discourage the frenzied interest. When someone like News Corp. Chair- last April (page 20). Cook says one suitor Meanwhile, a new generation of dot-com man Rupert Murdoch sets aside $1 billion is offering big bucks—into eight figures— millionaires, some not old enough to cel- ❚❚ for Web buys, it’s clear that prices are des- while another promises creative control. ebrate at the local bar, is being born. jimi celeste/patrickmcmull by photograph

50 | BusinessWeek | February 27, 2006 COVER STORY Going Private Hotshot managers are ﬂeeing public companies for the money, freedom, and glamour of private equity BY EMILY THORNTON

sk j. crew group inc. chairman and chief executive Millard S. “Mickey” Drexler what it’s like to run a public company, and he curls his ﬁngers into the shape of a pistol. “You have a gun to your head,” he says. Drexler knows of what he speaks. He spent four years running AnnTaylor Stores Corp. and seven years as ceo of Gap Inc., where Ahe gained his reputation as a turnaround artist before being ousted in 2002. Drexler, 61, could be enjoying an uncommonly comfortable retirement right now. Instead he’s working harder than ever, trying to revitalize the fashionable clothier. He loves the challenge of transforming companies, and retailing is in his blood. But the best part about the new gig is that he doesn’t have to answer to public shareholders every step of the way. Drexler works for Texas Paciﬁc Group, a $22 billion Fort Worth pri-

1. Jack Welch, Clayton, Dubilier & Rice 2. MGM 6 3. Lou Gerstner, Carlyle Group 2 5 1 4 4. Burger King 3 7 5. Unemployed actor 6. Mickey Drexler, runs J. Crew Group, majority owned by Texas Paciﬁc Group 9 7. Jacques Nasser, 11 One Equity Partners 12 10 8 8. Toys ‘R’ Us 9. Houghton Mifflin 11. Dunkin’ Brands 10. Ann Jackson, CEO of WRC Media, 12. Paul O’Neill, owned by Ripplewood Holdings Blackstone Group robert risko robert Data: BusinessWeek, companies

February 27, 2006 | BusinessWeek | 53 COVER STORY

In a private setting, you eliminate the dysfunctional ‘‘short-term focus on quarterly results. ” LOU GERSTNER, Chairman of Carlyle Group

vate-equity firm. It hired Drexler in 2003 and supported him partner and director of Benchmark Search Group, a financial- through a long overhaul that included chucking a year’s worth executive recruiter in Stamford, Conn. Newly minted mbas are of J. Crew skirts, pants, and sweaters. Now, he says, he has “an joining them. Back in the 1980s most B-school students want- ownership that truly cares about long-term shareholder val- ed to be investment bankers. In the 1990s it was tech-related ue,” in stark contrast to public investors who obsess over venture capital and dot-coms. Now, private equity is hot. quarterly earnings. Luminaries like Drexler are bolting in droves for private equity, the freewheeling world where investors buy slumping com- Long-Term Luxury panies and try to turn them around to sell or take public, risking the attractions are twofold: money and freedom. The billions of dollars in the process. Former General Electric ceo pay can be outrageously good even at the entry levels; for ceos, Jack F. Welch now evaluates investments at Clayton, Dubilier & it can be spectacular. The flexibility is alluring, too. In private Rice Inc., a $6 billion New York firm. (Welch and his wife, Suzy, equity there’s less annoyance from the Sarbanes-Oxley Act, the write a column for BusinessWeek.) Onetime ibm chief Louis V. controversial regulations passed in 2002 to police publicly held Gerstner Jr., who has alternated between private and public companies. And many private ceos will avoid the Securities & companies for two decades, is back in the private sphere as Exchange Commission’s new proposal that would require the chairman of the Carlyle Group, a Washington (D.C.) firm with highest-paid executives at public companies to disclose their $35 billion in committed capital. Former Ford Motor Co. ceo compensation in excruciating detail. (These rules and propos- Jacques Nasser is a partner at the $5 billion One Equity Partners, als still apply to companies that issue registered public debt.)

an affiliate of jpmorgan Chase & Co. Former Continental Air- Regulatory issues aside, the fundamental nature of private-eq- brian smith lines Inc. President Greg Brenneman fixed up Burger King for uity work is different. ceos private-equity firms and is about to take it public. Viacom Inc.’s have a freer hand to do the former chief financial officer, Richard J. Bressler, works for tough but necessary things to Thomas H. Lee Partners lp, a Boston fund with $12 billion of repair companies for the long Money Is Flooding Into committed capital. Gerald Storch, former vice-chairman of Tar- term, with less focus on Private Equity Firms... get Corp., has been tapped to run Toys ‘R’ Us for private-equity quarterly results and placat- owners Bain Capital ($27 billion) of Boston and Kohlberg Kravis ing public shareholders and Roberts & Co. ($11.5 billion) of New York (along with Vornado more on meeting the strate- Realty Trust). And on and on. gic yardsticks of a multiyear ...Fueling It isn’t only ceos who are making the move to private-equi- turnaround effort. Drexler, ty firms. Fast-rising midcareer folks are lining up, too. “The in- for one, says he never could Big Deals terest has really gone through the roof,” says Anthony Lando, have scrapped so much

54 | BusinessWeek | February 27, 2006 There’s no clear road map of what to do; you really feel very ‘‘independent. That is good but challenging.” ANN JACKSON, CEO of WRC Media

inventory at a public company focused on short-term results. The Carlyle Group’s Gerstner says he’s thrilled he went pri- Going private dodges another nuisance: activist hedge funds. vate. “The private-equity industry allows an organization, or a “You’re seeing more instances of hedge funds taking major part of [one], that is operating at a subpar level to be spun off, stakes in companies to cause a sale or major restructuring of a refinanced, reenergized, refocused,” he says. “It’s a very signif- business,” says Daniel S. O’Connell, ceo and founder of 18- icant part of what is going on in the world today.” year-old Vestar Capital Partners, with $7 billion of committed For Ann W. Jackson, a 23-year veteran at Time Inc., the ap- capital. “That will lead to more [companies] going private.” peal of private companies is their nimbleness. She joined Rip- Private-equity ceos, in other words, don’t feel like the gun is plewood Holdings llc, a $10 billion New York firm, last April, pointed at their heads at all times. That allows them to “take and in November became the ceo of educational publisher risks that public shareholders won’t,” says Donald J. Gogel, ceo wrc Media Inc. Jackson and her three division presidents re- of Clayton Dubilier. For example, since Bear Stearns Merchant view their progress each week to see if they’re slipping off their Banking bought what has become New York & Co. from The targets, and move quickly when necessary. “It’s a 30-second de- Limited in November, 2002, it has refurbished or opened 260 cision,” says Jackson, who has limited her executive team to six stores, more than half the chain’s outlets. A public company to keep down bureaucracy. At public companies, Jackson says, would have found it more difficult to make so large an invest- rigid hierarchies prevent such decisive moves. ment in a languishing, minor business. “Managers now under- Vivek Paul, vice-chairman of Indian software maker Wipro stand that involvement in the private-equity world is potential- Ltd. until September, 2005, likes the variety of private equity. ly more interesting, more lucrative, and less of a hassle,” says He’s now part of a team at Texas Pacific investing in different

allison leach Texas Pacific Group founding partner James “Jim” Coulter. sorts of technology and life sciences companies. “I felt I was a frog in a well at Wipro,” 2002 2003 2004 2005 says Paul. “Now I have a panoramic view of business FUND INFLOWS across various industries WORLDWIDE* and companies and $17 24 42 174 countries.” Former Paine Webber Group Inc. ceo 2002 2003 2004 2005 Donald B. Marron enjoys running his own $2 billion PRIVATE private-equity firm Lightyear EQUITY M&A* $130 152 259 370 Capital Inc., which invests in businesses providing finan- *Billions of dollars, estimates Data: Thomson Financial; Buyouts magazine, a Thomson publication February 27, 2006 | BusinessWeek | 55 COVER STORY

[We have] an ownership that truly cares about long-term ‘‘shareholder value.” MICKEY DREXLER, CEO of J. Crew Group

cial services ranging from crop insurance to college funding. Flush with cash, firms are buying bigger-name companies Not that private equals perfect. The business is fraught with and enticing higher-profile public executives to come onboard. risk, and fund partners, with hundreds of millions of dollars at Private-equity funds have scooped up Dunkin’ Brands Inc., stake, can be stern taskmasters. There are also legitimate rea- Neiman Marcus, Metro-Goldwyn-Mayer, and Toys ‘R’ Us, to sons for public shareholders to be wary of the privatization name a few purchases since the start of 2005. trend. And for all the faults of the public life, there are still plen- Hear that noise? It’s the giant sucking sound of capital and ty of ceos who are perfectly happy to remain in the fishbowl. talent exiting the public realm. To a large extent the private-equity phenomenon is cyclical. Another bull market for stocks could slow or even reverse the movement. Wave millions of in-the-money stock options in The Money Beckons front of a ceo and suddenly Sarbanes-Oxley and the other no one knows the full extent of the privatization wave. headaches of public companies will seem less painful. Sooner Firms, and the companies they run, are intensely secretive. or later, the private-equity market will cool off (page 58). But word of the massive amounts of money being made is But for now it is sizzling. The industry controls $800 billion spreading. Here’s how the millions pile up. Partners typically in capital, estimates researcher Thomson Venture Economics, take 1.5% or so off the top as a management fee each year. So more than the $756 billion that Americans spent building new four to six partners of a $1 billion fund might split $5 million homes and renovating existing ones last year. Fifteen years every year among themselves, after paying out, say, $10 million ago there were only a handful of firms managing at least $1 for staff and other costs, estimates Brian Korb, a partner of billion; now there are at least 260. Just three firms—Carlyle, Glocap Search, a New York executive recruiting firm. kkr, and New York-based Blackstone Group—preside over Partners also get a share of profits, usually 20%, when a businesses that employ 907,000 people. In 2005, estimates company is sold or taken public. Say the value of the companies Buyouts magazine, $174 billion in new money flowed into owned by a private-equity firm doubles, to $2 billion, when they U.S.-based private-equity firms (table, page 54-55). Who’s in- sell them. The partners would split $200 million of the $1 bil- vesting? Well-heeled institutions such as pension funds look- lion increase. (The fund’s investors would get the other $800 ing for higher returns than the single digits delivered by the million.) And any money that partners co-invested with share-

stock market the past few years. holders would also double. To top it off, their investment booty peter gregoire eserved. © 2006 Sun Microsystems, Inc. All rights r You’re out buying other companies, so you can range as far ‘‘aﬁeld as you like.” DON MARRON, CEO of Lightyear Capital

would be taxed at 15% as long-term capital gains (assuming the livered last year by companies in the s&p 500. “If an executive investment was held at least a year), vs. the 35% that public makes his numbers, and we get a 25% to 30% return, he should company ceos must shell out for their ordinary income. be paid a lot,” says Daniel F. Akerson, who ran wireless outfit Not all ceos are partners, but they don’t need to be to earn Nextel Communications Inc. as well as telecom and broadband huge sums. When private-equity firms recruit executives to run services firm xo Communications Inc. before joining Carlyle to companies for them, they typically offer them small cash co-head the firm’s U.S. buyout group in 2003. salaries but also a chance to invest their own money for a stake Private equity is changing the traditional career cycle for in the company, sometimes as much as 20%. This is highly many public company executives. ceos are no longer content risky for the ceo, of course. But it’s proving, for now, to be a to grind out their last few years running public companies or better incentive than the stock options grants available at pub- sitting on their boards. Instead, they’re joining private-equity lic companies, which haven’t paid off in the sideways stock firms as partners to review companies’ strategies and to hunt market of the past few years. for deals. Or they’re heading the companies in firms’ portfolios. Consider Drexler. He earns a modest annual salary of Or both, as in the case of Jacques Nasser, who at one point was $200,000, but he was allowed to co-invest $10 million with simultaneously chairman of Polaroid Corp. and partner at own- Texas Pacific, and now owns a stunning 22% stake in J. Crew. er One Equity. “Private equity is becoming a new life-stage for That could turn into as much as a $300 million payday for ceos,” says Jeffrey A. Sonnenfeld, professor of management at Drexler if the company goes public; the more he succeeds in Yale University. “It’s something we have never seen before.” turning the company around, the more money he will make. Some executives who fulfill their private-equity mission by (Drexler declined to comment on the prospect of an ipo, but taking a company public again are looking to return to the pri- market watchers expect one this year.) vate life. “If you ran a buyout and the exit was to go public, you It’s difficult for public companies to compete with that. might stay for a while,” says Lawrence Schloss, who ran Cred- “When we recruit a ceo to a public company, we can’t offer it Suisse First Boston’s private-equity business before starting them [even] 5% of the company,” says Dennis Carey, vice-chair- a firm called Diamond Castle Holdings llc, based in New York, man of executive recruiting firm Spencer Stuart. last year. “But hopefully you’d get out, and do the cycle again.” Buyout firms can afford to be generous. Most big ones boast Two of Schloss’s six partners are former ceos.

jennifer s. altman annual returns in excess of 20%, vs. the average 5% return de- Midcareer executives see private-equity ﬁrms as the new fast

SHARE YOUR THOUGHTS. Sun believes sharing is the way to create better ideas. That’s why we’ve teamed up with BusinessWeek to offer you an opportunity to share your comments. Join the conversation about this week’s Cover Story at businessweek.com/coverstory. COVER STORY track to running their own shops someday. Jackson says the better handle on management, and spent this past summer choice to work for a private-equity firm for the second half of working at Sandbox Industries, an incubator. While peers were her career was obvious. “I love being the ceo,” she says. recently attending “bank week” in New York and doing on- Business school students, meanwhile, are angling to get on campus interviews with consulting firms, Barzyk was working the partner track. At the University of Chicago, says Julie Mor- his contacts, calling on friends, trying to get wind of an opening ton, associate dean of mba career services, résumé writing in a suitable buyout shop. These firms don’t recruit on campus, courses for private-equity candidates are oversubscribed. so it’s up to candidates to hunt up their opportunities. Stanford University is seeing more interest. More 2005 Stan- ford mba grads went into private equity than any other area except consulting and consumer products and services. No Looking Back These students, not yet wary of the public life, are chasing an awful lot of high-profile converts say they’ll never the huge dollars in private equity. The median annual compen- go back to a public company. Gerstner, 63, says he doesn’t miss sation for a 2005 Harvard Business School grad who went to running one “for a second” (page 62). work for a private-equity firm was $174,500, compared with That’s especially telling because Gerstner worked for a $135,000 for the rest of the class. Last year’s Stanford grads did buyout firm before, and things didn’t exactly end well. In better, with median total compensation of $232,000, compared 1989, kkr tapped Gerstner, then president of American Ex- with $140,000 for the class. Some private-equity funds pay as press Co., to run rjr Nabisco. He says he came to realize that much as $300,000 to fresh mbas. kkr had paid too much for the company and couldn’t reach Michael A. Barzyk is a second-year mba student at Chicago. its expected returns. When he got the feeling in 1993 that kkr He worked for a private-equity firm for three years before grad was trying to pull out of rjr, he says, he left to run ibm. (kkr school and saw his two years on campus as a way to polish his declined to comment.) skills. The Chicago native took an operations course to get a With baggage like that, working for a private-equity firm

bond defaults, at just 1.9% in 2005, remain well below the long-term average of around Buyout Mania’s 5%, according to Moody’s. Buyout executives say the higher prices and debt levels are easily supported by the faster Mountain of Debt growth and stronger earnings they achieve. “If we execute against our plans, we improve operations and generate a lot of free cash s there a bubble brewing in the buyout Corp.: “Those are just extraordinary flow that can go to pay down debt,” says business? multiples.” Scott M. Sperling, co-president of Thomas With investors and executives Leverage has also ticked up sharply. In H. Lee Partners LP. At Dunkin’, for example, flocking to private equity, it’s not just the the average deal from 2000 through 2002, greater expansion of the fast-growing coffee money pouring into leveraged buyouts companies took on debt equal to four times and donut chain beyond its Northeast base Ithat’s soaring, or the returns funds are EBITDA. By the end of 2005 that number is planned, while Colony Capital expects big pulling out. Deal prices and leverage are had crept up to over 5.6, according to gains in cash flow at Fairmont thanks to skyrocketing, too. And that has even some Standard & Poor’s LCD unit, which tracks recent renovations. A spokesman also adds seasoned private-equity executives starting the leveraged loan market. “There’s a that the deal is cheap judged by the price to worry that funds are overpaying on deals massive amount of liquidity available, and paid per room rather than EBITDA multiples. and loading companies up with too much right now lenders are not being conservative The question is, what will happen if the debt, sowing the seeds of a big rise in about holding the line,” says LCD director economy slows, interest rates climb sharply, defaults. “If this were emerging-market Chris Donnelly. or buyout firms stumble in boosting growth debt, at these numbers no one would touch So far they haven’t had to worry. Junk- or cutting costs? “Some of these deals are it,” says one fund manager. priced to perfection,” says Michael H. Consider some recent deals. To beat out Anderson, U.S. high-yield strategist for Carl Icahn for luxury chain Fairmont Hotels Deals Get Pricier Lehman Brothers Inc. “They’ll need a strong & Resorts Inc., Los Angeles investment firm economy, and management will have to Colony Capital LLC and Saudi Prince execute perfectly to survive.” 10 AVERAGE PURCHASE Alwaleed bin Talal’s Kingdom Hotels PRICE-TO-EARNINGS MULTIPLE* If they don’t, this buyout boom could go 8 International agreed in late January to pay bust, leaving a pile of junk-rated companies, $3.3 billion and assume an additional $500 6 defaulted debt, and lost equity in its wake. million in debt—roughly 21 times earnings 4 That’s likely to remain a while off, probably before income taxes, depreciation, and no sooner than 2008, says Martin Fridson, amortization (EBITDA) in 2004. Meanwhile, 2 CEO of high-yield bond-market strategist earlier in the month, a group of buyout firms 0 FridsonVision LLC. But with credit quality '00 '01 '02 '03 '04 '05 Q4 '05 paid 12.8 times EBITDA for Dunkin’ Brands *BEFORE INCOME TAX, DEPRECIATION, AND AMORTIZATION sharply deteriorating, he expects default Inc., well over the 7 to 8 times typically paid NOTE: FOR PRIVATE EQUITY PURCHASES OF COMPANIES rates to climb back to peak levels. The good WITH EBITDA OF MORE THAN $50 MILLION; EXCLUDES in the restaurant industry. Marvels Tom MEDIA, TELECOM, ENERGY, AND UTILITY DEALS times, in other words, won’t last forever. Marshella, a managing director in leveraged Data: Standard & Poor’s LCD unit –By Jane Sasseen, with David Henry, finance for credit-ratings agency Moody’s in New York eric hoffmann/bw

58 | BusinessWeek | February 27, 2006 COVER STORY

shrouded in secrecy, with few outside observers able to question I don’t the numbers. That’s why regulators restrict private equity to know if it’s wealthy investors. “It’s definitely caveat emptor,” says Nell Minow, because I have a co-founder of the Corporate Li- brary, a corporate governance re- little bit of ADD. search firm. “They’d better kick the tires carefully.” But I don’t get What’s more, the mechanics of ‘‘ a typical private-equity turn- bored in private around don’t always favor public shareholders. When buyout firms equity.” acquire companies, they often load them up with debt quickly to MICHAEL BARZYK, recoup their investment. For example, within 14 months of buy- Second-year MBA student at the ing Warner Music Group from University of Chicago Time Warner Inc. for $2.6 billion in March, 2004, a group of four private-equity firms led by Thomas H. Lee had borrowed an additional $700 million in debt and extracted $1.4 billion in dividends and capital repayments, seemed highly unlikely when Gerstner retired from ibm in more than recouping their $1 billion investment. Lee co-presi- 2002. His plan was to help fix public schools, advance cancer dent Scott M. Sperling says Warner’s cash flow improved research, and sit on a few public company boards. Then the enough after the buyout to support the debt, pay the dividends, phone started ringing. “I got calls from seven private-equity and fund the company’s growth. firms,” he recalls. When private-equity firms bring their companies public Gerstner added Carlyle to his list of commitments in 2003 again the capital structures of some are shaky. Their gover- because he thought the private-equity business was changing nance could be compromised as well. “Most of the time when dramatically. Carlyle’s three founders convinced him they these things go public ... private-equity firms want to get the were “serious about making [Carlyle] a meaningful entity,” hell out of there,” says Jay W. Lorsch, a professor of corporate Gerstner says. governance at Harvard Business School. “They want to mone- These days, Gerstner is Carlyle’s operational voice on tize their investment and get their guys off the board, because investment decisions. “It’s very easy [for someone evaluating they don’t want to be caught in a conflict of interest.” a deal] to say, ‘The margins are going to go from 14% to 18%, But private-equity firms are also doing things that are and we’re all going to make money,’” he says. “Well, who is go- decidedly positive for the financial system. As they pay larger ing to get the margins up? How is that going to happen?... I get sums for companies, they’ve come to realize that they need bet- a little antsy when I don’t learn a lot about the management ter managers to turn those companies around and make their group that’s going to run [the company] from the first 10 pages investments pay off. At this stage, the easy deals have already of a report.” Gerstner also heads a committee that’s responsi- been done. And so, more than ever, the financial whizzes are ble for ensuring that Carlyle will last beyond its founders. wooing top operations executives. Texas Pacific now has 16 op- George W. Tamke isn’t going back to a public company, either. erating partners, up from two a decade ago. A third of kkr’s 27 “You couldn’t write a big enough check,” says Tamke, 58, who senior executives have an operational background, up from was a co-ceo of Emerson Electric Co. until 2000 and became a partner at Clayton Dubilier that same year. Tamke was chairman of copy chain Kinko’s from 2001 to 2004. Now he’s chairman of Private vs. Public water supply company Culligan International Co. and the rental What Was He Thinking?: Edward J. Zander on leaving private car company Hertz Corp. And he’s relishing every moment. equity firm Silver Lake Partners to become CEO of Motorola. The Company He Keeps: Dunkin’ Brands CEO Jon L. Luther on why he prefers to work for buyout firms in an online video view. Reason to Worry Stuart Weitzman’s Private Reasons: Rather than take his the privatization trend has made scholars and recruiters company public, the shoe impresario sold a minority stake to Bear Stearns Merchant Banking—and it wasn’t for the money. take notice. Brain drains are never easy on the parties losing the The Story Behind the Story: For a podcast interview with talent. Some business thinkers, like management professor Associate Editor Emily Thornton by Executive Editor John Michael Useem at the University of Pennsylvania’s Wharton A. Byrne, go to businessweek.com/search/podcasting.htm School, see the exodus as a sign that the ascent of widely held companies over the past century might be cresting. With capital in fewer hands, there are fewer checks and balances coming from other stakeholders on how that capital is deployed. www.businessweek.com/extras matthew gilson matthew Another drawback: Private companies’ financial results are

60 | BusinessWeek | February 27, 2006 COVER STORY none 10 years ago. “We’ve added more people at a senior level than $50 million. “Historically, ipos for companies with at least with an operational orientation to balance [the investment $50 million in sales meet or beat the benchmarks,” he says. professionals],” says Marc Lipschultz, a kkr partner. For better and for worse, the private-equity boom still has As a result, the companies being brought public again are plenty of life. Even if the cycle turns and public companies get operationally stronger, leaner, and better, even if they do carry hot again, private equity’s true believers won’t go back. ceos debt. This is a positive development after the go-go 1990s. “We say the freedom to run their companies as they see ﬁt is exhila- had a period in which companies went public entirely too rating. Private equity is simply more glamorous than public quickly,” says Minow. “Some of them never should have.” ceo-dom, says recruiter Stephen R. Bochner at Sextant Search Healthier public companies are good for shareholders, obvi- Partners llc in New York. “It’s the difference between driving ously. “I’m fairly optimistic about how private-equity-backed a speedboat and driving an ocean liner,” he says. “When you deals will do from an investor’s point of view,” says ipo market want to turn a speedboat, you turn the wheel. For an ocean lin- expert Jay R. Ritter, Cordell Professor of Finance at the Univer- er, you have to plan two days ahead.” ❚❚ sity of Florida. He notes that private-equity-backed ipos are –With Nanette Byrnes and David Henry in New York, generally mature, sound companies with annual sales of more and Manjeet Kripalani in Bombay

being tolerant of poor performance and being intolerant of 90-day numbers Glad to Be Out of without an awareness that maybe [the executives] were investing over that period The Quarterly Grind and doing the right thing. Is there anything to be done? We have a great deal of attention by hen Lou Gerstner left IBM in combination of excess capacity and new regulators to protect small investors. But I 2002, working for a private- technology enables people to create a don’t see a lot of attention being paid to equity firm was not even competitive advantage where they couldn’t finding a way to have large investors remotely on his mind. Now he before. That’s driving the restructuring of benefit from [focusing on the] long term. I is chairman of the Carlyle enterprises around the world. propose that we should tax gains Group.W Gerstner recently explained his differently for long-term investors than for decision to Associate Editor Emily Thornton. In your view, is it easier to fix a private short-term investors. Until we figure out a company than a public one? way to get [large investors in public You worked for Kohlberg, Kravis & In theory, no. If you’ve got a really good CEO companies] to deal with long-term Roberts in the ’80s. From your point of with strong backing from his or her board, performance, then all of the other things view, how has the private-equity you should be able to go to your we’re doing will not change the industry changed? shareholders and say: “Look, we’re going to preoccupation with short-term results. In the ’80s it was a smaller business. A few go through some tough years. The industry When we [at Carlyle] decide to buy a firms. A few deals. And the fees charged in has changed. The competitive environment company, we lay out a five-year plan. We sit the ’80s almost precluded the necessity of has changed. We’re going to go and down quarterly and review all of the major returns to investors. Today the fundamentally change this company.” That’s companies in the portfolio. But we’re not requirement that you produce operational what I had to do in 1993. I had no choice. We reviewing that quarter’s results. We’re improvements in companies is a lot went through a substantial transformation looking at it against the long-term plan. We [tougher]. It has evolved to the point where at IBM in a public environment. don’t have to deal with a change in the your ability to raise new money and your In a private setting, you eliminate the valuation of our investment because in one ability to generate a substantial fee come dysfunctional short-term focus on 90-day period something happened. from producing positive operating benefits quarterly results that dominates the from the companies you run. [Operational market today. I think there are a lot of Is there a big difference between the improvements have] become more executives who are frustrated by the culture of a private-equity firm like important than [they were] before. extraordinarily short-term nature of Carlyle and a public company? measuring the performance of public When I was running a company and one of What’s driving private equity today? companies. I’m amazed to see that some my divisions was looking to invest hundreds The predominant and most important company made 65¢ a share over a of millions or billions of dollars, we had a economic activity today is restructuring. 90-day period, and some collection of very tough-minded approach to when Excess capacity has been growing in people thought it should have made 66¢. documentation had to be provided. We don’t almost every industry. It’s why we don’t see And it loses $1 billion in market cap. work that way at Carlyle. Sometimes I get an any pricing power [anywhere] in the world. There’s something wrong. And I’m sure investment document four days in advance. Companies are having to restructure, and that’s frustrating. The benefit of being a Sometimes someone sends me a heads-up they’re having to get more competitive. private company is that you have a longer memo two weeks in advance. And They can’t just do what they did before. The time frame, and you have a direct sometimes I get [an investment] document second most important factor is the impact alignment of the shareholders with the the day before. of information and networking technology. management to fix the company, to build Networking technology is fundamentally value over time, and be patient with the Do you miss running a public company? altering almost every industry. So the changes. There’s a big difference between Not at all.

62 | BusinessWeek | February 27, 2006 SPECIAL REPORT

“I’m not interested in being a custodian over a privileged place” –Amherst College President Anthony Marx Campus Revolutionary BYWILLIAMC. SYMONDS nthony w. marx had never college had committed to increasing minorities to a third of the even thought of being a college 1,650-student campus, up from 13% in 1985. But while this president. “I was minding my own brought in more low-income students, Amherst remains an in- business” as a Columbia University cubator of the elite. More than half its students come from fam- political science professor in 2002, ilies prosperous enough to pay the full $42,000 annual tab out he says, when a friend who was an of their own pockets. Many shell out thousands more for cars, Amherst College alum put Marx’s meals out, and other extras. (One student showed up recently name in the hopper to be president with two bmws—one a convertible for sunny days.) “We were of the Massachusetts liberal arts in- blown away” by Marx’s passion and commitment, recalls Jide stitution. Sure, Marx was flattered, Zeitlin, a partner at Goldman, Sachs & Co. who has since be- but he also felt underqualified. A ca- come chair of Amherst’s board. reer academic, his most important administrative experience Since Marx, now 46, took over in 2003 as Amherst’s had come before graduate school, youngest president ever, he has waged whenA he helped found a college in a ceaseless crusade to make the college South Africa to educate blacks de- TONY MARX HAS a leader in welcoming more lower-in- prived by apartheid. “That is very come students. It’s a formidable goal nice,” he wrote back to his friend. A RADICAL PLAN TO considering how programmed the “But I’ve never been a chairman, a place is to seek out the best and the dean, or a provost, and besides, I didn’t GET MORE POOR brightest: A record 6,300 students ap- go to Amherst.” plied for just 431 spots in last fall’s en- Amherst’s search committee felt the KIDS INTO TOP tering class. Now, Marx is challenging same way and tossed his file into the everything from an admissions reject pile. But after grilling many top COLLEGES, process tilted toward affluent students college honchos, a student member re- to social customs that divide rich and membered Marx and suggested that STARTING WITH poor students on campus. Essentially, the group give him a second look. he has set in motion a new affirmative When Marx finally met the commit- AMHERST action initiative, this time based on tee, he made an impassioned appeal. class rather than race. Elite U.S. colleges such as Amherst, he said, are perpetuating Marx began making his case soon after he showed up at deep inequalities in American society. They equate success with Amherst’s clublike campus, with its rolling lawns and acres of serving the privileged elite and have largely abandoned talented tennis courts. Realizing that a college president is no ship cap- youth from poor families, he charged. This deepens the coun- tain who can change course by barking commands, he set out try’s growing class divisions and exacerbates the long-term de- to woo students, administrators, faculty, trustees, and alumni. cline in economic and social mobility. Feeling he had nothing to One volatile issue he faced was the potential for a backlash lose since he hadn’t sought the job, Marx exhorted the trustees from affluent parents worried that their high-performing kids to tackle the problem head-on. “I’m not interested in being a might be displaced by poor students with less glittering ré- custodian over a privileged place,” he remembers telling the sumés and lower test scores. To head off such concerns, Marx gathering of wealthy alums and academic stars that day. wants to expand overall admission by 120 or so slots to be re- As it turned out, Marx’s radical message was just what served for low-income students. Such a move requires an ag- Amherst trustees wanted to hear. Over the past two decades the gressive campaign to raise hundreds of millions of dollars, but

Photographs by Henry Leutwyler February 27, 2006 | BusinessWeek | 65 SPECIAL REPORT it also protects affluent kids from facing lower admissions odds. Amherst’s coveted slots, per- LACROSSE MATES At the same time, welcoming students who lower the haps as many as 25%, to stu- Coaches fret over the school’s 1420 sat average also could jeopardize its No. 2 posi- dents poor enough to qualify plan’s impact on tion in the U.S. News & World Report ranking of liberal-arts col- for a Pell Grant (usually mean- “athletic admits” leges—making Amherst less attractive to affluent students. ing a family income of less (Williams College is No. 1.) Meanwhile, the influential athletic than $40,000 a year). Doing department is fretting over the impact of Marx’s campaign on so would vault Amherst far ahead of other elite privates the school’s 67 “athletic admits,” who tend to be lower-qualified such as Harvard University, where 10% of undergrads academically than other Amherst students. And professors fear are low-income. “If we are sufficiently aggressive, we will that since many low-income students, however smart, come force the rest of elite higher education to be much more from inferior high schools, they will require a lot of help to get serious about this,” says Marx. up to speed in writing, math, and science. “Because most pro- Boosting socioeconomic diversity is already a front- fessors are not fully equipped to handle this, there will be a big burner issue on the campuses of elite colleges. Everyone debate about how far to go,” predicts veteran English professor from Harvard President Lawrence H. Summers to Barry O’Connell, an ardent Marx supporter. William G. Bowen, ex-president of Princeton University, Marx already has won over many of Amherst’s largely liber- is grappling with a deeply troubling fact of American life: al professors to the basic concept. He’s hoping that by the fall, that 30 years of inequality have all but shut off top col- faculty and trustees will approve a formal plan to give more of leges to the poor. Kids from the lowest socioeconomic quartile represent a mere 3% of students at the 146 most selective U.S. uni- Poor kids are less prepared versities, vs. 74% from the top quartile, according to the Century Foundation, a New York think tank. It’s not just academically… a problem at elite schools, either. By age 24 only 8% of these bottom-quarter students have earned a ba from Share of U.S. students HIGHEST LOWEST scoring above 1420* INCOME INCOME any U.S. college, vs. 46% of those from top-quarter fam- on the SAT in 2003, by ilies, according to Stephen Rose, co-author of the Centu- family-income quintile ry study. As educated baby boomers retire over the next 46% 4% 15 years, they will be followed in the workforce by more * The average score of students at Amherst College minority youth who are poor and less likely to have a de- Data: Williams College gree. Says Harvard’s Summers: “Social mobility is a central challenge for our country.” Harvard already has a high-profile initiative to bring ...so they’re shut out of in more low-income kids. Yale, Princeton, and Williams top colleges... are undertaking similar plans, though none is as ambitious as Marx’s. Bowen, who now heads the Andrew W. Share of U.S. students at HIGHEST LOWEST Mellon Foundation, a big funder of higher-education re- the 146 top* U.S. colleges QUARTILE QUARTILE search, is on a crusade to win over admissions officers since 1988, by with statistics showing that low-income students suc- socioeconomic quartile** % % ceed at elite colleges. “America’s most selective institu- 74 3 tions need to put a thumb on the scale” in favor of these * Measured by student grades, class rankings, SAT scores, and share of applicants admitted students, Bowen argues. ** Defined by the family income, occupations, and education levels of a student’s parents Data: The Century Foundation Marx may not have been looking for a job as a campus revolutionary, but in some ways he has been preparing for the role ever since college (yes, an elite: Yale University, class of 1981). ...a result Amherst’s Marx hopes He grew up in Manhattan, where his parents settled after fleeing Germany during Hitler’s rise to power in 1933. Marx’s to change mother worked as a physical therapist after graduating from the University of California at Berkeley; his father never got a He aims to enroll more poor kids by: degree but earned a comfortable living as a middle manager at »Raising up to $500 million, partly to create a metals-trading firm. At Yale, Marx’s interest in politics propelled him into the 120 or so new slots for them. That way, affluent anti-apartheid movement. That led to a job with a South students’ admission odds won’t be lowered. African educational group that was starting a school called Khanya College to help disadvantaged blacks get into the coun- »Doing much more outreach in low-income try’s elite colleges. It was a formative experience: Security po- high schools to find qualified kids. liced raided the house he shared—illegally—with several blacks, and friends were tortured and some even killed. After a year in »Accepting some poor students with lower South Africa, Marx returned to the U.S. to enroll in graduate test scores. school at Princeton. But he returned frequently to work on Khanya, spending nearly three years in South Africa on and off »Offering more help to those who are less while pursuing a PhD in international politics. He learned, he says, that “if you can do this with kids who have suffered under academically prepared. apartheid, then you can’t tell me we can’t do better in the U.S., Data: Amherst College with all the resources we have.”

66 | BusinessWeek | February 27, 2006 College costs are high, even with ﬁnancial aid…

Share of HIGHEST LOWEST family income INCOME INCOME needed to pay for college* in 2003/04, by 11% 47% family-income quartile

* Average annual cost of tuition, fees, and room and board at a four-year public university, minus average annual ﬁnancial aid received by each group Data: College Board

…so most low-income kids never enroll in college… Share of students going to college since 1988 by socioeconomic quartile*

HIGHEST LOWEST INCOME INCOME

FOUR-YEAR COLLEGE 64% 14% NO COLLEGE 11% 64%

…or get a degree

Share of HIGHEST LOWEST students with a INCOME INCOME BA by age 24 since 1988 by socioeconomic 46% 8% quartile*

* Deﬁned by the family income, occupations, and education levels of a student’s parents Data: Stephen Rose, Macro International Inc.

endowment surged 19% in ﬁscal 2005, to nearly $1.2 billion, or TRUSTEES AND ALUMNI $712,000 per student. The college was also wrapping up a $120 even though the board hired Marx to remake Amherst, million renovation that will make room for about 100 more stu- he’s not taking that mandate for granted. First, to give his vi- dents. But it would take hundreds of millions more to maintain sion dramatic force, he asked the trustees last year to award an Amherst’s enviable 8-to-1 student-faculty ratio, plus cover the honorary doctorate to Nelson Mandela, whom he came to ad- tuition and extra teaching costs for the new students Marx mire deeply during his years in South Africa. At a ceremony last wants to draw. Could they raise that kind of money? he chal- May in New York, Mandela warned 500-plus trustees, faculty, lenged. By the end of the three days the trustees had begun to alumni, and students that “economic inequality [in the U.S.] is plan the largest fund-raising campaign in the college’s 184-year growing, not declining. America’s great colleges and universi- history—$400 million to $500 million over ﬁve or so years. ties...must open the door more widely. Let Amherst set the pace.” The next month, Marx took 30 people, including most of the board, on a retreat to discuss his initiative. To highlight THE ADMISSIONS OFFICE America’s rich-poor gaps, he chose Kykuit, the breathtaking the centerpiece of Marx’s crusade is to change what hap- Hudson River estate built by John D. Rockefeller Jr. in 1913, pens in the converted 19th century farmhouse where when he was the world’s wealthiest man. Amid the extensive Amherst’s 14 admissions officers work. Marx is convinced that ceramic, art, and antique car collections, Marx got down to the process is stacked against poor kids. But changing that business. He asked the trustees to fantasize about how threatens the entire admissions rationale of elite colleges. The Amherst could meet Mandela’s challenge. “Imagine that key issue: how much to lower academic credentials. Amherst Amherst could be free to everyone,” he posited. “Get rid of the got to No. 2 in the rankings in part because of its incoming stu- economic constraints completely. Now, which students would dents’ stellar grades and test scores. Those factors are just one you take?” part of college rankings, so Amherst might slip only a few spots Marx also laid out the economics of his campaign. Amherst’s if other selective colleges don’t follow its lead. Still, that could

February 27, 2006 | BusinessWeek | 67 SPECIAL REPORT

STUDENT GOVERNMENT mission Tom Parker was one of the PRESIDENT Michael four lowest-income students in the Simmons rebounded 1969 class at Williams College—“so I from a rough first year know how these places can transform poor kids,” says Parker. Since Marx came along, Parker has been speaking out about a virtually taboo subject: how top universities already bend their standards for all kinds of kids. There are the affirmative action programs for minorities, which most elite schools still run. There are also so-called legacy admits, for whom Amherst reserves roughly 10% of its seats, says Parker. Alumni kids get red-carpet treatment, often including a personal audience with Parker. Yet they rank as twos, on average, he says—meaning that some score three or less and wouldn’t be admitted on their academic credentials alone. But top universities simply can’t ignore legacy donations. “The way you finance a place like this is with alumni contributions,” says Parker. Then there are the athletic admits, who get 16% of each year’s slots. They rank even lower, just 3.5. Amherst reaches clear down to fives—meaning sats of 1250 to 1300—to snag some hot football and ice hockey players. Given the importance of sports to most elite schools’ images, athletic admits are a necessity, too. “If we don’t take any fives for football, the team will turn into a travesty,” says Parker. “With ice hockey, we’d be talking about not having a team at all.” Bringing in more low-income kids would require added compromise. To meet Marx’s 25% goal, Amherst would have to take more threes, says Parker, meaning those who may have straight As but sats as low as 1360. Even though Amherst already does so for minorities, legacies, and athletes, faculty members are worried. “This could be a radical departure that fundamentally changes the character of our institution,” warns physics professor David Hall, who heads the Faculty Committee on Admissions & Financial Aid. Marx hopes to ease such concerns by finding hurt. “If Marx lets in more low-income kids, he’s going to risk more top-notch low-income applicants. his school’s reputation,” cautions Anthony Carnevale, a senior Certainly, many students have never even fellow at the National Center on Education & the Economy. heard of Amherst. So Marx is asking his Right now, Amherst ranks each of the thousands of applica- admissions officers to visit more low-in- tions it receives every fall on an academic scale of one (outcome high schools. And he’s enlisting standing) to seven (inadmissible). Most students admitted for Amherst students in a tele-mentor- academic reasons alone are ones, meaning they were at or near ing program in which they walk the top of their high-school class and scored 1520 or higher on seniors from those schools the sat. Such over-the-top performance typically aligns with af- through the college application fluence. In fact, only 11% of U.S. kids scoring that high on the process. Marx also started using sat come from the bottom 40% of family-income brackets, QuestBridge, a Palo Alto while 75% are from the top 40%, according to a study by the (Calif.) nonprofit that has en- Williams Project on the Economics of Higher Education. listed 8,000 high school Fortunately for Marx, the person he inherited to run admis- teachers to identify talented sions already had a passion for democratizing elite colleges. low-income students for elite The son of a high school football coach, Amherst Dean of Ad- colleges. However noble his goal, Marx’s push for a new ad- The Buzz on Campus missions policy may be A Talk with Tom Parker: Amherst’s Dean of Admission on the opening a Pandora’s secrets of getting into an elite college. box. Some supporters Class Voices Slide Show: Rich and poor students at Amherst think that to make discuss their different backgrounds and experiences. room for poor kids, Harvard, West Point, and Smith: What they’re doing to attract Amherst should rethink low-income students. its rationale for letting in less-qualified legacies and athletes. “There is no prin- cipled reason to have a www.businessweek.com/extras hereditary system” of prefer-

68 | BusinessWeek | February 27, 2006 ences, says Hall. Moreover, “the athlet- How to get into a school like Amherst ics arms race excludes people who Here’s the system the college used to rank the 6,300 students who want to learn.” Others resent such views. Some faculty may see the ath- applied for last fall’s entering class of 431: letes as “dumb jocks, but in reality they’re some of the smartest kids in the RANK SAT SCORE GRADES WHO TYPICALLY MAKES IT country,” says Peter Gooding, who As; valedictorian or Most of those admitted solely on stepped down last spring after 27 years 1520-1600 near top of class their academic performance. as athletic director but has stayed on as 1 soccer coach. Mostly As; Average ranking 2 1440-1510 top 5% of class of entering class. Many As; The likely range for some new low- STUDENTS 1360-1430 getting into a place like Amherst 3 top 10% of class income kids. (Athletes average 3.5.) doesn’t mean low-income students will As and Bs; Some minorities automatically thrive, either. Rachel Car- 1310-1350 top 15% of class and athletes. dona showed up on the Amherst quad in 4 2000 from a high school in Harlem, the B average; Highly desirable football and Manhattan Center for Science & Mathe- 5 1250-1300 top 20% hockey players. matics. When she was 16 and living in a Mostly Bs; Not admissible Brooklyn housing project, her mother 1150-1240 demanded that she quit school to care 6 top 25% since 2004. for her four younger siblings. Cardona Not admissible. (The national SAT refused and moved out. She spent the Below 1150 Bs or lower next two years bouncing around, staying 7 average is under 1050.) with her grandmother, her debate Data: Amherst College coach, even in shelters. Still, she managed to graduate as the top cial markers at Amherst. During meals inside the sprawling female student in her class. Georgian complex, students sort themselves out by race and To Cardona, Amherst was as foreign as status. On a fall evening during the supper rush, Michael Sim- Mars. “I didn’t have much exposure to mons, a black student from Chicago, looks over the balcony brand names,” she recalls, “so when I and decodes the scene. “Down there is what they call the heard students talking about Abercrom- Black Hole,” where mostly low-income minority students sit, bie, I thought it was a person.” Her dorm he says. Over there, at the far end of the cafeteria, “is where mates got regular phone calls, care pack- the athletes congregate. You can’t walk over there unless you ages, and visits from their parents, while play a sport or know a lot of people. It’s an unspoken fiat, but Rachel didn’t. it is very well-followed.” The worst indignity was when she put Simmons, whose single mother runs a small hair salon, got on her apron to work in Valentine Hall, or off to a rough start. He did so poorly in his first semester that Val, as the campus cafeteria is known. Al- Amherst asked him to take a year off. After taking college class- though the job was part of Cardona’s fi- es back home, he returned in 2003 determined to buckle down. nancial-aid package, it was an alienat- Now an articulate senior, he sports a B+ average and is the pop- ing experience. “A lot of the affluent ular president of the student government. Last summer he in- students have no consideration for terned for Senator Barack Obama (D-Ill.) and now has his the staff,” she says. “Even my friends sights set on law school. Simmons says poorer kids are often wouldn’t look at me when I was in put off by the preppy attire and lavish living they can’t afford. my apron.” After work, Cardona of- “Low-income students can come out of here feeling dimin- ten went back to her room to sleep ished,” he says. before getting up to study all night— To lessen the social dissonance, Marx has set out to get the a grueling routine she found neces- whole campus talking. He holds meetings for students to dis- sary to keep up with classes. After cuss class differences and invites smaller groups to come for Cardona graduated in December, “fireside chats.” His “mission has become very palpable on 2004, Marx hired her as a special as- campus,” says Jake Maguire, a junior from Attleboro, Mass. In sistant to help recruit low-income his talks, Marx discusses ideas such as beefing up an already students and better integrate them generous financial-aid program. At Amherst a “full ride,” which on campus. about 15% of students now receive, includes tuition, room, and Val, it turns out, is the crucible board, plus up to $5,000 extra a year to cover travel, books, and of class and other identifying so- other expenses. Marx wants to add more aid to help poor students buy computers or bring their families to the campus for parents’ weekends. NEW MIX Marx wants low-income enrollees like Isabel Duarte-Gray Marx also is talking with low-income students about how to to make up 25% of the school integrate the campus better. Cardona is urging him to require without losing high-income all students to work at Val or at an off-campus job. Simmons students like Conor Clarke wants the college to send all students to off-campus retreats to mix outside the exclusive Amherst bubble. “We have to figure

February 27, 2006 | BusinessWeek | 69 SPECIAL REPORT

The plan brings to the fore a little-discussed truth: Schools already bend their standards for alumni kids and jocks out ways to make sure students feel more welcome here,” says arrive with three semesters of calculus plus linear algebra, while Simmons, whom Marx appointed to Amherst’s Committee some poor ones struggle just to get through the introductory on Academic Priorities, a key faculty committee. level. Adds sociology professor Jan Dizard: “There’s also a cultural mismatch: Working-class kids tend to come from schools that emphasize following orders, while Amherst values think- THE FACULTY ing outside the box.” Tim Zeiser agrees. A junior whose single economics professor Geoffrey Woglom is the quintessen- mother is a bank teller, he says he wasn’t pushed in high school tial Amherst prof. Engaging and erudite, he has been teaching on Long Island and never had to write long papers. “In the first economics since he arrived in 1978 from Yale, where he played semester I had a 10-page paper due, and I just bombed it.” lacrosse with Senator John F. Kerry (D-Mass.). In his spacious Marx is all too aware of the problem, which he says reflects office where his playful spaniel sprawls across the floor, the sorry state of U.S. high schools in general. He estimates that Woglom admits he’s nervous about Marx’s crusade. The facul- 10% to 15% of Amherst students—not just poor kids, either— ty is already struggling to educate all those other students ad- have difficulty keeping up. That’s a remarkably candid assess- mitted for nonacademic reasons, he says. “I want to make sure ment from an elite college president. Marx thinks Amherst can we’re doing a good job with the diversity we already have.” meet the challenge. It already invites incoming students with Woglom and the 200-odd other faculty members have a lot relatively low test scores to a three-week summer science and of power. They showed their clout a decade ago when a previ- math program. When school’s in session, they can turn to writ- ous administration lowered admission standards to beef up a ing and math centers, both staffed by professors and student tu- woeful football team, the Lord Jeffs (short for Lord Jeffery tors. Last year they handled several thousand requests. Amherst, who gave the college its name). Outraged professors Now, Woglom and Cox are taking part in an experiment to demanded—and won—the dismissal of the admissions dean, as make rigorous beginner courses more successful. Last fall, well as a nearly 40% cut in football admits, to the current 14 a Woglom taught introductory economics to 10 invited students year. Since the professors will be teaching any new crop of poor instead of the usual 28. Week after week he painstakingly helped students, Marx must assure them they can handle the influx. them work through problems his brightest students would So far the response has been mixed, says Faculty Dean Gre- grasp in an instant. “I spent one hell of a lot of time on just 10 gory S. Call. Professors understand that just as class back- students,” he says. The payoff: They finished with basically the ground divides students socially, so does it separate them aca- same average as students in normal sections. Woglam and his demically. Math professor David A. Cox says his top students colleagues argue that Amherst will have to hire more professors to handle additional low-income kids. BIO Marx expects to sew up his plan in the spring, taking into account faculty suggestions. A final pitch will go before the board either in late spring or the fall. If he Anthony Marx gets the campus behind him, Marx hopes, it would “help shift the focus of the Amer- BORN Feb. 28, 1959, in New York. Both ican public toward this issue.” But even if parents fled Hitler’s Germany in 1933. His he succeeds, the practical impact of his father, who worked for a metals-trading firm, crusade isn’t clear. Only 20 or 30 colleges never attended college. His mother graduated SOWETO, 1984 have the financial might to contemplate from the University of California at Berkeley and worked as a physical therapist for kids FAMILY Wife, Karen Barkey, is a professor of this kind of gold-plated approach. He also with cerebral palsy. history and sociology at Columbia and an fears that if Amherst and others succeed, they may just wind up stealing the best EDUCATION Public schools in New York ; expert on Turkey. In 1998 they became the first couple in Columbia’s history to win poor kids from less prestigious schools. BA, Yale, 1981; MA, Princeton’s Woodrow The questions won’t stop him, though. Wilson School, 1986; PhD, Princeton, 1990. tenure at the same time. Two children: Joshua, 11, and Anna-Claire, 7. In the end he hopes more students like Car- CURRENT JOB President of Amherst dona and Simmons will inspire the U.S. to College since July, 2003. TV-FREE HOUSE No television in the work harder to cultivate talent among its president's residence on the Amherst poorest children. To Marx this isn’t a revo- CAREER PATH Political science professor at campus because “the kids were fighting lutionary goal; he sees it as a return to Columbia University for 13 years while also over what to watch.” working on public school reform. Amherst’s roots. The college, he notes, was WHEELS A Volvo, but he plans to switch to LIFE-CHANGING EXPERIENCE Spent three founded in 1821 by Noah Webster, creator a hybrid soon. Likes to bike around Amherst of the American Dictionary, whose portrait years on and off in South Africa (above) during with his kids. apartheid, helping to found Khanya College, hangs in Marx’s office. “The object of this which prepared 1,000 young blacks to attend FREE TIME Spends most of it with his institution,” Webster wrote, is “educating white universities. There he was engulfed in children. Vacations in Maine, Cape Cod, Italy, young men in indigent circumstances, but near-civil-war conditions. The house where he and Turkey, where his wife grew up. of hopeful piety and promising talents.” lived—illegally—with blacks was raided by HERO Nelson Mandela, “our greatest living The wording is antiquated, and women police, and friends were tortured or killed. moral icon.” weren’t allowed back then. But there’s nothing dated about the sentiment. ❚❚

70 | BusinessWeek | February 27, 2006 People Passages

IN MOURNING Corinne O’Kelly at the New York apartment she and her husband moved to last year Even in Death, Gene O’Kelly Wanted to Succeed When the CEO of KPMG learned he had terminal brain cancer, he set out to chronicle his last days

BY SUSAN BERFIELD national, the accounting ﬁrm where he trip to China by way of Seattle, where he n the spring of 2004, eugene had worked for three decades. He was would attend the Microsoft ceo Summit. O’Kelly had a premonition: Trou- 52, at the peak of his career, feeling, as Back in Manhattan the weekend before his ble was coming. He couldn’t make he would later say, “vigorous, indefati- appointment, he and Corinne were at a U2 out its shape or size, and the only gable, and damn near immortal.” concert with longtime clients when sud- response he could think of was to A year later he and Corinne had sold denly Corinne bolted from her seat. “I feel move from the townhouse in their house and most of their furniture and like our world is about to blow apart,” she Manhattan he shared with his found a light-ﬁlled aerie overlooking the told her husband. Iwife, Corinne, and their 12-year-old East River. Around the same time, Corinne Within a week, Gene was diagnosed daughter, Gina, to a smaller apartment noticed that the right side of her husband’s with inoperable late-stage brain cancer in the city. At the time, O’Kelly was chair- face was sagging. He agreed to see a neu- and, though no doctor would come right

man and chief executive of kpmg Inter- rologist after he returned from a business out and say so, he knew he couldn’t ex- berman/redux (left) nina

72 | BusinessWeek | February 27, 2006 pect to live past the summer. He down his thoughts on a yellow died at home on Sept. 10. During “I wanted legal pad or dictated them to those 100 days he worked with his assistant. He worked in- his wife and writer Andrew these things, termittently throughout the Postman to chronicle his attempt and only day while also meeting with to face death with as much colleagues, friends, and family brightness, if not hope, as possi- these things: to, as he says, close their rela- ble. Chasing Daylight: How My tionships. He also kept in Forthcoming Death Transformed Clarity. touch with the new chairman My Life was published this of kpmg by phone. That month by McGraw-Hill, which, Intensity. summer the firm would admit like BusinessWeek, is a unit of The Perfection.” to criminal tax fraud and McGraw-Hill Companies. The agree to pay $456 million in book wasn’t intended as a guide, penalties, a settlement that he Corinne says, but Gene was a With Corinne’s guidance he began to had been working on. (He would say to mentor, and that instinct re- meditate in the morning to help develop Corinne: “This can’t be another En- mained intact. His advice is sim- the mental discipline they both believed ron.”) Corinne says the fact that the case ple: Confront your own mortali- he would need in those last moments of had been resolved helped Gene die ty, sooner rather than later. As he life. It was on one of those mornings, peacefully. says: “I’ll be glad if my approach when he had been sitting in the courtyard At kpmg one of Gene’s priorities had and perspective might provide of the Cloisters, a museum of medieval art been to change the firm’s culture—to help for a better death—and for a in Upper Manhattan, with a fountain run- make it more compassionate, a place better life right now.” ning in the background, that he told her where, he would later say, “we felt more Gene was methodical, organ- he wanted the two of them to write a book alive.” He wanted his staff “to get the ized, unequivocating, thorough. about his dying. most out of each moment and day—for He was an accountant by tem- the firm’s benefit and the individual’s— perament as much as by training. SPIRITUAL JOURNEY and not just pass through it.” But as the Faced with imminent death, he corinne says now that she was initial- head of the 20,000-employee company, wanted to be the master of his ly ambivalent about the idea: At the time he had remained relentlessly focused on farewell. “I wanted these things, she was managing Gene’s medical care, the future, willing to sacrifice his home and only these things: Clarity. In- meeting with lawyers, concerned about life for the satisfactions of the job. tensity. Perfection . .. . I was moti- Gina and their elder daughter, Marianne. In those last few months, though, he vated to ‘succeed’ at death—that She knew the project would sap Gene’s came to realize, he says, that his thinking is, to try to be constructive about energy. But he wanted to share what he had been too narrow, his boundaries too it, and thus have the right death called his spiritual journey, and he want- strict. “Had I known then what I knew for me. To be clear about it and present ed to leave his daughters something. now,” he says, “almost certainly I would during it. To embrace it.” “The last gift I could give him was to let have been more creative in figuring out a In early June he resigned from kpmg, him do it his way and to make his dying way to live a more balanced life, to spend started six weeks of radiation treatment as beautiful as possible,” Corinne says, more time with my family.” That, says to try to shrink the three tumors and di- sitting in the living room she has only re- Corinne, was his one regret. He had been minish the symptoms (blurred vision, cently furnished. getting better at finding that balance be- garbled speech, and certain cognitive im- From that moment in the Cloisters fore he became sick, she says, but then he pairments) that had begun to emerge. until the last week of his life, Gene wrote ran out of time. ❚❚ And he made a to-do list for his final days: get legal and financial affairs in order, unwind rela- Farewells tionships, simplify, live in the Gene’s Final moment, create (but also be ne of Eugene O’Kelly’s hopes in the last days of his life open to) great moments, begin was to be able, as he would say, “to unwind” transition to next state, plan fu- Orelationships of all kinds. He placed his many colleagues, neral. He recognized how Type friends, and family in five concentric circles; those closest to him A this was, yet what it required were in the innermost ring. He began to say goodbye through of him was the very opposite— e-mail, phone conversations, walks in Central Park, over a good to let go. As he says: “While I do bottle of wine. And always on his terms. He wanted the believe that the business mind- conversations to be positive, to focus on what he had learned. set is, in important ways, useful And, for many people, he wanted these encounters to be the last at the end of life, it sounds pret- ones. Toward the end, he says, he realized that during his ty weird to try to be ceo of one’s previous life as a business leader he might have been “too own death.... Given the pro- consumed by the outermost circle.” As he puts it: “Perhaps I foundness of dying, and how could have found the time, in the last decade, to have had a different its quality felt from the weekday lunch with my wife more than ...twice?... I realized that life I led, I had to undo at least as being able to count a thousand people in that fifth circle was not many business habits as I tried something to be proud of. It was something to be wary of.” to maintain.”

February 27, 2006 | BusinessWeek | 73 Science&TechnologyFat City

disease with a 5%-10% weight reduction. Doctors who treat the weight-chal- lenged will be prescribing the drug with some regret. “I would love to see people turn this around with a change of behav- ior,” says Roger D. Cone, director of the The Spirit Is Willing Center for the Study of Weight Regulation & Associated Disorders at Oregon Health & Science University. Our bodies hate behavioral changes, however, and can over- –But Pills Work come the best of intentions by fighting hard to keep fat stores constant. Studies Doctors may decide weight loss is best have found that 95% of people who lose weight put it back on within three years. accomplished with the new Acomplia “The need for better solutions is huge, and medication will play a role,” Cone acknowledges. BLOCKBUSTER POTENTIAL BY CATHERINE ARNST even patients who lost weight or more than a decade, with Acomplia weren’t home free. Those magazines, books, and innu- who went off the drug merable diet gurus have regained it all. The pill nagged us to exercise more would therefore have to and eat less, to no avail. A be taken for years to be third of U.S. adults are now effective. That’s a recipe obese, compared with 23% for a blockbuster. Some Fin 1994. Americans may set great store by investment analysts es- a can-do spirit, but in this critical area, we timate that Acomplia can’t. “Overweight or obesity seems al- sales could total $4 bil- most inevitable in adulthood,” laments lion within two years. an editorial in the Feb. 15 issue of the The drug has only Journal of the American Medical Assn. two rivals on the market (JAMA). We live in a society that does now: Abbott Laborato- everything it can to encourage a ceaseless ries’ Meridia, an ap- march toward the far side of the scale. As petite suppressant, and a result, a consensus is forming in the Roche Holding Ltd.’s medical community: Putting pressure on Xenical, which prevents obese patients to exercise and diet is all fat absorption. But well and good, but pills are more likely to Meridia can increase take off the pounds. blood pressure, and One pill in particular is on the cusp of Xenical causes diar- winning marketing approval, and it is al- rhea—side effects that ready galvanizing the weight-loss com- limit the products’ use- munity. Acomplia, from Sanofi-Aventis, ed, the dropout rate was high (51% of pa- fulness. Doctors are calling for better blocks brain signals that stimulate food tients quit the trial before a year was out) medications, and the industry is listen- cravings, with minimal side effects. A and the weight loss doesn’t sound like ing: At least 60 weight-loss medications study in the Feb. 15 JAMA found that 46% much if your starting point is 300 are currently in development. of obese patients who took Acomplia for pounds. But health experts say that even Their time has come. An estimated two years were able to lose 5% to 10% of morbidly obese people can greatly lower 65% of U.S. adults are overweight or their body weight and keep it off. Grant- their risk of diabetes and cardiovascular obese, and almost 20% of children. “We Better Dieting Through Chemistry For some ACOMPLIA PRAMLINTIDE APD356 PYY3-36 people, Sanofi-Aventis Amylin Arena Nastech/Merck »The pill blocks brain »A version of diabetes drug »Pill targets brain »Nasal spray based a pill may receptors that stimulate Smylin, this injected drug receptors that play an on a hormone that makes be the food cravings slows digestion and important role in regulating you feel full dampens hunger food intake and metabolism answer STATUS STATUS FDA decision STATUS STATUS Entering to prayers expected soon Phase 2 clinical trials Phase 2 clinical trials Phase 2 trials chris gall

74 | BusinessWeek | February 27, 2006 Marketing Product Plugs live in an ‘obesity-genic’ environment,” says Dr. George L. Blackburn, associate director of the Nutrition Div. at Harvard Medical School. “[It’s] driving us to the inevitable, the entire population becoming overweight.” This environment is constructed out Rated M for of extremely cheap calories. Waistlines in the U.S. started expanding dramatically only 25 years ago; in 1980, just 46% of adults were overweight. A 2003 Mad Ave study by three Harvard University economists, David M. Cutler, Edward L. Video games are white-hot now Glaeser, and Jesse M. Shapiro, found that Americans are as active these days that Nielsens rate their ad impact as they were in 1970, so sedentary lifestyles alone aren’t to blame. Rather, we are eating 200 calories more a day than we did 10 years ago, which can add 20 extra pounds a year. BY DAVID KILEY year to as much as $1 billion layers of AMERICAN by 2010. Pumping the num- TERRIBLE TEMPTATION Wasteland, pro skate- bers are the launches of the harvard study concluded that boarder Tony Hawk’s lat- Xbox 360 and Sony PlaySta- improvements in processing, the rise of est video game, can’t help tion 3, which connect console fast-food restaurants, and the huge vari- but see that the undisput- gaming to the Internet in a ety of convenience dishes have made ed king of the ramps is a far richer way than previous calories inexpensive, plentiful, and Jeep fan. As gamers joy- versions. “This is a new world deadly. One bad player is high-fructose Pstick their way around a digital likeness of interactivity that puts gaming on the corn syrup, a cheap and easy-to-use al- of Los Angeles, from Venice Beach to the same plane with advertisers as cable ternative to granular sugar that is also Staples Center, they are bound to run tv,” says Tim Harris, who heads the metabolized differently. Corn syrup across, or into, Jeep Wranglers, Grand gaming unit of media agency Starcom gained popularity in the 1980s and now Cherokees, and Liberties. MediaVest Group. accounts for more than 55% of the Of course, the vehicles Meanwhile, Nielsen’s sys- sweetener market. Studies have corre- and the Jeep billboards tem is generating a lot of lated its use with skyrocketing rates of aren’t there by happen- compelling data for mar- Type 2 diabetes. Cheap, tasty food “has stance: They’re paid for. keters. In American Waste- put us in hedonic overdrive,” says Dr. Plenty of advertisers, most land, from gamemaker Ac- George Bray, an obesity specialist at prominently Coca-Cola, tivision Inc., for example, Pennington Biomedical Research Cen- McDonald’s, and Nike, have Jeep learned that all players ter at Louisiana State University. “I con- been putting their products “Gaming were shown the 3-D vehicles clude that this trend is unstoppable.” in video games for several an average of 23 times in 20 Doctors do harbor plenty of concerns years now. But marketers performs minutes. And 96% of those about handing out weight-loss pills, es- and gamemakers successful- much who recalled seeing the Jeep pecially to people who are only slightly ly pushed Nielsen Entertain- felt the vehicles ﬁt well in the chubby. They remember fen-phen, a diet ment last year to start meas- better than game. Feedback even more pill combination whose use exploded in uring the impact of in-game welcome to Jeep: 51% of the mid-1990s. Some 14 million pre- product placement, where TV” with American Wasteland players, scriptions were written in 1995-97, be- there had been none before. including some not yet driv- fore fen-phen was discovered to cause This in turn is drawing more a coveted ing, said they would recom- fatal heart problems and was pulled ad dollars and making audience mend Jeep to a friend, and from the market. gamemakers as eager as tv 65% would consider eventu- Acomplia seems well-tolerated so far. networks, perhaps more so, ally buying one. “Gaming But what if the drug were taken for to open up their stories to the performs much better than years? “We have no idea what the side highest bidders. tv” in turning brand awareness into an effects would be,” warns Dr. Denise G. The video-game business, already actual preference, says Bonita Stewart, Simons-Morton, an obesity specialist at bigger than movie-house box office, did DaimlerChrysler’s director of interactive the National Institutes of Health. She $10 billion in sales last year. With 100 communications. would prefer to see society change in million gaming U.S. households, ac- Advertisers like the extra control game ways that would emphasize an active cording to Forrester Research Inc., and producers allow them, compared with tv lifestyle, smaller portions, and other folks increasingly interacting with a placements. Ford Motor Co. didn’t know forms of prevention, but “I don’t see video screen instead of passively watch- until episodes of Fox’s 24 were in the can much going on” in that direction. Until ing tv, no wonder Nielsen forecasts that just how its vehicles came off looking on there is, for most of us the choice may lie ad spending on brand placement in screen, but Chrysler and Activision exec- between a pill and a plus size. ❚❚ games will balloon from $75 million last utives have extensive back-and-forth dis-

76 | BusinessWeek | February 27, 2006 ware Inc. to put its brand into the nba 2K Sports basketball games. Some 200 athletes in the games wear the Nikes they wear on the court. But the new version integrates the company’s Web-based Nike iD shoe customiza- tion software, which enables players to design and personalize shoes worn by the digitized pros. “SEEDIER SIDE” but as the placements proliferate, some advertisers are committing a few fouls. One recent flap involved Engage In-Game SELLING JEEPS What would Tony Advertising, a company Hawk drive? that inserts ads into online games via a Net ad server. Engage modified the clicking on a popular game Counter-Strike, created by branded cell phone—with changing mes- Valve Corp., and dropped in ads from its cussions during the game’s devel- sages from Hawk that alter the game ex- client, the Subway sandwich chain, over opment. “I understand that the tv and perience. “Staying competitive in a new three weeks in December. The problem: film writers in Hollywood see it as an in- era absolutely depends on ad support, They changed the game without asking vasion of their space, but with gamers we and we’re not interested in ads that don’t Valve for permission. Engage has drawn are treated more like a private equity in- make sense or [that] annoy,” says Kotick. ire from the game creator—and brickbats vestor,” says Stewart. Activision ceo So far, gaming companies and mar- on message boards and blogs. “Advertis- Robert Kotick says the company took in keters are exhibiting good sense for what ing within video games...does have its $2 million in brand placement dollars is “natural” product placement. Jeep ve- seedier side,” writes arstechnica.com, a from Chrysler, Nokia, and Motorola. That hicles and Nokia phones are, after all, tech enthusiast Web site, about the En- offset 10% of American Wasteland’s $20 popular with young men. And Nike re- gage incident. million development costs. cently inked its largest gaming deal ever, Now that Nielsen can quantify the au- Game cartridges that are bought and joining with Take-Two Interactive Soft- dience for advertisers, game producers rented are attractive to ad- would like to move toward a more stable vertisers, but the surge in system by which advertisers can buy ads, online gaming predicted such as a cost-per-thousand formula, the to come as gamers replace The Gaming Gold Rush same way they buy time on tv. That old sets with Xbox 360 Ad dollars are piling into video games now that the means stiffer competition for media al- and PlayStation 3 has the payback for brand placements is being measured ready under pressure from youthful eyes marketers lining up. by Nielsen Entertainment. Advantages include: deserting afterschool and prime-time tv Rather than simply burn- for gaming. The cost of a 30-second spot ing billboard ad images for shows like The Simpsons and csi can and inserting products MORE NATURAL THAN TV A majority of players in a study range from $250,000 to $400,000, but into game scenes, adver- by Nielsen said that advertising relevant to them and to 18- to 34-year-old males represent only tisers will be able to buy the game actually enhanced the quality of play. an average 37% of those audiences, while flights of ads and place- A DEMOGRAPHIC TO KILL FOR Video games are strongest 65% of video-gamers fall into that valu- ments that last a day, a among 13- to 25-year-old males, who are watching less able demographic. “If the goal is to reach week, or a month and TV. Women and even baby boomers are also turning to [young] males, there is a lot of waste in help producers keep the games for fun, as well as to bond with kids and grandkids. buying network television,” says Nielsen games fresh by collaborat- Entertainment Senior Vice-President ing on sponsored Web FRIENDLY PERSUASION TV ads generate awareness, but Michael Dowling. content that ties into the the interactive and repetitive nature of video games packs Why are consumers drifting away from story. The next Tony the power to get gamers to consider purchase, according tv for more gaming? Players see them- Hawk game, says Activi- to the new gamer data. selves in the games, something that’s diffi- tv sion’s Kotick, could in- REAL INTERACTIVITY Linking the Internet with games in a cult with shows. And far from rebelling volve not only brand por- bigger better way, made possible by Xbox 360 and Sony against ads in their players, gamers seem tals that draw gamers in PlayStation 3, opens up a new universe of ad possibilities, to be telling advertisers they want to see to connected sites but also including changing ads daily and giving online brand more of the brands that help define who features such as Internet portals a bigger role in the game. they are. No video-game TiVo or ad zapper “phone calls”—by way of needed, at least not yet. ❚❚

February 27, 2006 | BusinessWeek | 77 FinanceReal Estate

lenders. Over the past 39 years of housing booms and busts, Golden West’s earnings have grown at a compound annual rate of 19%, a record matched in U.S. business only by Warren Buffett’s Berkshire Hath- How to Ride a away Inc. PERFECTING THE BASICS the sandlers’ 1994 performance was impressive. In California, where 78% of Housing Bubble the company’s loans were concentrated, the jobless rate jumped to 9.4%, while Golden West specializes in exotic home prices fell 4.5%. Moreover, the Fed raised banks’ overnight lending rate from mortgages—and in surviving downturns 3.25% to 5.5% that year, often in big half- point leaps. Yet Golden West charged off a mere 0.43% of its loans in 1994—above average for its conventional-mortgage- oriented peers, but hardly disastrous. The BY JUSTIN HIBBARD following year charge-offs fell to 0%. he story is familiar to Golden West’s secret? It excelled at the anyone following the basics of mortgage lending: conservative housing boom. A Califor- underwriting practices, funding loans nia savings and loan did a with core deposits, and balancing interest brisk business in ad- paid on deposits with interest justable-rate mortgages. earned from loans. Even People who previously though the loans were Tcouldn’t afford homes piled in. Then the risky, the customers, for Federal Reserve started hiking interest the most part, weren’t. rates, and mortgage payments began to Herbert Sandler dis- climb. Home prices eventually started misses the hand- falling, making it harder for owners to sell wringing now. “We or refinance. Analysts predicted a wave of have been through defaults and much pain for shareholders. high interest rates, low The thing is, our yarn took place in interest rates, and side- 1994. The s&l in question was Oakland- ways interest rates, and based Golden West Financial Corp., not very much exciting has which has offered its Pick-A-Payment But arms aren’t frightening to Herbert happened,” he says. loans since the U.S. government first al- M. Sandler. He and his wife, Marion O. Still, analysts are sounding the alarm. lowed adjustable-rate mortgages, or Sandler, have been co-chairman and co- In a recent report, Christopher Whalen of arms, in 1981. ceo of Golden West since they independent research firm Institutional The naysayers couldn’t have been founded the company in 1963. For 25 Risk Analytics reiterated his sell rating on more wrong about $20.6 billion Golden years the pair has offered so-called pay- Golden West, calling it “the poster child West. It wasn’t crippled by defaults dur- option arms, which let borrowers choose for the U.S. real estate bubble.” In an in- ing the last housing bust. In fact, it held from among various low-payment sce- terview, Whalen added: “There is no flex- up better than anyone expected. And narios each month, with the principal and ibility in its portfolio.” Golden West should do interest recalculated He has a point. Last year pay-option the same this time, too. accordingly. These arms made up 99% of Golden West’s Adjustable-rate TRADERS AREN’T WORRIED loans are the most loan pool. (It also offers home-equity alberto mena/bw alberto mortgages are once Golden West has handily sensitive to rising in- lines of credit.) And 62% of the loans were again high on analysts’ outperformed its peers terest rates, because secured by homes in California, where worry lists. Given the INDEX: 0=JAN. 30, '04 their rates reset every housing prices could fall in coming years. Fed’s recent rate hikes, 40 month. While option But Golden West’s risk management is PERCENT some lenders will be hit CHANGE arms are big at among the best in the industry. Its annu- by defaults as borrow- 30 GOLDEN WEST WaMu and the oth- al default rate has been lower than that of PHILADELPHIA ers find it more difficult BANK INDEX ers, they’re Golden its peers for years. Golden West maintains 20 to make their pay- West’s No. 1 loan a higher-than-average percentage of as- ments. Analysts have 10 product by far. sets in cash to cover losses. And the already issued warn- But the Sandlers Sandlers don’t lend to the riskiest bor- ings about Washington 0 have survived rate rowers with spotty credit histories. Mutual, Countrywide hikes before, and Golden West’s conservative strategy Financial, and FirstFed –10 their long-term suc- will be put to the test if housing tanks. For JAN. 30, '04 JAN. 31, '06 Financial, along with cess is unrivaled now, though, it looks like history is on the Data: Bloomberg Financial Markets ❚❚ Golden West. among mortgage Sandlers’ side. by serge bloch; chart by illustration

78 | BusinessWeek | February 27, 2006 EntrepreneursHealth Care

patients left their physicians’ offices not knowing what to do. Only 15% got answers to their questions, and 61% of the time patients chose the wrong type of specialist. That misstep generated an average Steering Patients of $3,500 in extra costs. And Trott found that most patients wanted more guidance in choosing health care. Data in hand, Trott quit her job. She told employers that her company would Through the System call their employees when they made doctors’ appointments. Quantum would arm the employees with pertinent questions, Quantum Health points people to the help them choose the right specialists, best care—and saves employers big bucks give them advice about which tests to take, and ensure that tests weren’t dupli- cated. Quantum would get a percentage of any savings the employers reaped. It would also offer workers incentives to BY PALLAVI GOGOI lives,” says Trott. “Of course, everybody stay well, such as by slashing co-pays for or kara j. trott, becom- was skeptical.” preventive care visits. ing an entrepreneur meant Undeterred, she tracked health-care de- Her pitch worked. Trott’s first cus- leaving her corporate law cisions from 2,800 patients, 260 physi- tomers, mostly small, self-insured compa- career. It meant resigning cians, and 140 employers, using data sup- nies, averaged 6% increases in their from a nonprofit board she plied largely by her law firm’s health-care expenditures in no longer has time for and clients. She found that half of B USINESSW EEK 2001, compared with a na- giving up her vacations. And tional average of about 11% Fin the early days it meant taking out a at the time. In 2004, accord- home-equity loan and moving to a ing to a study of 600 patients smaller house. by Appleton (Wis.) benefits consultant As- But the new Kara Trott—the super- sociated Health Group, Quantum made busy one in the more modest home—has 970 telephone calls to patients, compared never been happier. The company she with 27 by a disease management compa- started in 1999, Quantum Health in ny assigned to assist employees with Columbus, Ohio, helps patients navigate chronic ailments. “Quantum takes disease the complexities of the health-care sys- management to the nth degree,” says As- tem. “When someone is diagnosed with sociated’s vice-president, Jeff Prickette. cancer or diabetes, it is the most difficult Still, the first few years were slow go- time in their lives,” says Trott, 44. “It ing. “In the health-care business it takes gives me the greatest satisfaction an average of three years before people that I help people make the believe that results you’re generating right decisions during those aren’t an anomaly,” says Trott. She in- critical moments.” vested $400,000 of her own money and In her prior life many of raised $300,000 from family and friends Trott’s legal clients had been before taking out a Small Business Ad- hospitals or doctors. She wit- ministration-backed loan in 2004 for nessed the insurance industry’s $730,000. In 2002 she hired a profes- attempts to shift health-care costs sional management team, including by cutting reimbursements to her husband, strategy consultant physicians and hospitals and by in- Randy Gebhardt, as coo. creasing employees’ deductibles Now, Quantum is on a tear. Last and co-payments. Trott also had year the number of patients Quan- worked as a consumer products con- tum oversees doubled, to 52,000. sultant, and she thought some of the Trott doubled her own employee techniques used in that industry, such as base, to 55, and 2005 revenues shot providing incentives to get people to buy, up 40%, to $7 million. “If we had could be applied to health care to en- gone to employers in 1999 talking courage patients to reduce spending. about the importance of wellness and dis- That would help everyone in the system, ease management, they would have from patients on laughed me out,” says Trott. Now ❚❚ up. “I wanted to SELLING WELLNESS they’re begging her to come in. create something Trott’s pitch isn’t and make a just about money For more on entre-

change in people’s preneurs, visit businessweek.com/smallbiz zake bruce

80 | BusinessWeek | February 27, 2006 Information TechnologyE-Media Digital Books Start A New Chapter Lighter devices, better displays, and the iPod craze could make them best-sellers

BY BURT HELM images with an electronic charge. Be- ichard d. warren, a cause no power is used unless the reader 58-year-old lawyer in changes the page, devices with the tech- California, is halfway nology could go as long as 20 books be- through Ken Follett’s tween battery charges. The text also looks novel Jackdaws. But he just as sharp as ink on a printed page, doesn’t bother carrying since each capsule is the size and pigment around the book itself. of a grain of laser-jet toner. RInstead, he has a digital version of Follett Sony is the first major player to take ad- he reads on his Palm Treo each morning vantage of the technology. This spring, it as he commutes by train to San Francisco will debut the Sony Reader, which uses E from his home in Berkeley. He’s a big fan Ink and closely mimics the size, weight, of such digital books. Usual- and feel of a book. The Reader will sell for ly, there are around seven ti- about $400. Sony also tles on his Treo, and he will offer roughly buys at least two new ones 10,000 book titles for each month. “It’s just so download from its online versatile,” he says. “I’ve store, along with news the tech publisher O’Reilly Media. tried to convert some stories and blog items. “You’ve got the critical mass of content, friends to this, but they Other players sniff op- and you’ve got attractive hardware. What think it’s kind of geeky.” portunity, too. At least two we don’t have yet is an attractive business Geeky? For now, more companies are intro- model that connects them all together.” maybe, but not for much ducing digital readers this Sony is clearly attempting to pull off this longer. Many experts are year. And scores of compa- feat. Its combination of device and online convinced that digital books, nies, from Google to Ran- store is reminiscent of Apple’s approach. SONY READER after plenty of false starts, are Going for the dom House Inc., are angling The Reader is impressive: a slim, sturdy finally ready for takeoff. look and feel of a for other ways to profit from package that weighs nine ounces and “Every other form of media bound book digital books. Chalk it up to comes bound in heavy faux leather. But it’s has gone digital—music, the influence of Apple Com- unlikely just yet to become the kind of cult newspapers, movies,” says puter Inc. With its iPod, Ap- hit Apple has on its hands. The Reader’s Joni Evans, a top literary agent who just ple has demonstrated that millions of peo- controls can be clumsy to use. Plus, new left the William Morris Agency to start her ple are willing to carry around digital books for the device will cost about the own firm. “We’re the only industry that devices with their favorite content. After same as books from megastores like Bor- hasn’t lived up to the pace of technology. A music, why not novels and nonfiction? ders, and readers will have to search the revolution is around the corner.” “The iPod led the way in getting people Web on their own to get classics that have What developments have won over comfortable with [a similar device for gone off copyright for free. people like Evans? Portable devices are books],” says Jack Romanos, ceo of Si- The other makers of digital readers are becoming lighter and more appealing. mon & Schuster Inc. “These things are not treading cautiously. Jinke, a Chinese Books are being scanned into digital form only inevitable, but a good idea.” company, plans to sell into the education by the thousands. The most important No book company has come close to field in China and other markets. But it step forward may be in “digital ink,” the Apple’s magic touch. But the technology, declined to comment in detail on its technology used for displaying letters on availability of content, and consumer be- plans. IRex Technologies, a spin-off from a screen. A small company called E Ink havior may be aligned for a breakthrough Royal Philips Electronics, says it will has created a method for arranging tiny this year. “The puzzle pieces are on the make a device available for sale by April. black and white capsules into words and table,” says Timothy O’Reilly, founder of ceo Willem Endhoven says the company

82 | BusinessWeek | February 27, 2006 searchable online. The effort has drawn the ire of publishers and authors, since it’s digitizing some books still under copyright. Publishers sued last fall for copyright infringement and the case is pending. (One of the plaintiffs in the case is The McGraw-Hill Companies, the parent of BusinessWeek.) NEW LITERARY MODELS yet google is helping ignite the digital market. In November, following the lawsuit, Random House announced plans to digitize 25,000 titles. It will sell access to them to consumers, charging a per page rate for everything from novels to recipes out of a cookbook. In Decem- ber, HarperCollins Publishers Inc. said it would build a digital warehouse of its entire holdings—another 25,000 titles or so—which it may later sell over the Net. Amazon.com is moving aggressively into digital books, too. It sells digital versions of most of its titles, available for download instantly. In August, it launched Amazon Shorts, a collection of stories, novellas, and essays that can be downloaded for 49¢ apiece. Later this year it plans to offer shoppers who purchase traditional books the chance to buy a version they they can read on the Web, too. That way they could keep Stephen King’s Cell: A Novel on their nightstand and read a chapter from any computer with Net access. “We think consumers increasingly are ready for it,” will begin by selling to companies, such There’s even speculation that Apple says Steve Kessel, vice-president for as newspaper or textbook publishers, could come out with its own device, an worldwide digital media. rather than directly to consumers. iPod designed for books. The secretive Authors are intrigued by the opportu- There are sure to be other companies company hasn’t said anything publicly nities to go digital. George Saunders, a that introduce readers in the months and and declined to comment for this article. short story author and professor of Eng- years ahead. Plastic Logic Inc., a British Just as digital readers are hitting the lish at Syracuse University, says he’d like a startup, is working on a flexible display market, the number of books on the Net is way to get his work out to readers more 1 the size of an 8 ⁄2-in.-by-11-in. piece of pa- swelling to Library of Congress propor- quickly. After the scandal broke over per that can receive books, news, or e- tions. Google, through an initiative it be- James Frey’s falsehoods in his hit book A mail wirelessly. It’s partnering with gan a year ago, is scanning millions of Million Little Pieces, Saunders penned a Japan’s ntt DoCoMo and plans to have a books from five of the world’s largest li- humorous essay stemming from the product on the market by early 2008. braries and plans to make the contents events. It was a confession to Oprah Win- frey that all of the fiction he’d written had, in fact, Read all about it...Digitally been true. But Saunders had a hard time getting Digital devices for NEW TECHNOLOGY A display technology called E Ink makes the piece published reading novels and words look as sharp as text printed on a piece of paper. A single battery quickly, and now it feels can last for months. Plastic electronics will let devices be flexible like dated. “There might be a nonfiction have had a magazine. different model for a liter- plenty of false starts. THE GOOGLE EFFECT The search giant is scanning books as fast as it can ary community that’s But 2006 could be and then putting them online. Publishers and tech players are pursuing quicker, more real-time, different. similar projects. More books will be available online than ever before. and involves more spon- taneity,” he says. If digital READERS' HABITS People are warming up to reading on digital displays. More people scan blogs and news sites by computer and browse text books finally do take off, messages on mobile phones. they could change not only how we read, but ❚❚ illustration by michael witte by illustration what we read, too.

February 27, 2006 | BusinessWeek | 83 i M PERSONAL TECH Dig tal usic

Boot Upthe Band Technology is making it easier to compose, perform, record, and promote your own music.

YOU MAY NOT REALIZE IT, BUT IF YOU HAVE a pc or Mac at home you’ve already got the guts of a professional home music studio. Whether you’re a lapsed amateur or a newbie musician, we’ll help you ﬁgure out the gear you’ll need to start making your own kind of music. We’ve looked at everything from portable keyboards to digital guitars. We’ll point you to the software you’ll want to use to converse in midi, the Musical Instru- ment Digital Interface that is the computer language of music. We’ll help you hook everything up. (It’s pretty easy, actually: Music Trades magazine called last year “the year of the usb port,” as everything from microphones to digital pianos sprout- ed the ubiquitous computer connection.) Rockfest or recital, once you’ve performed or composed, and recorded and edited your music, what can you do with it? We’ve taken a look at Web sites that will host it, judge it, and even promote it. Pretty soon, you can quit your day job—or not. Stay tuned for our May 15 issue, when our next Personal Tech guide will help you work more effectively on the road. That should leave you with more time for jam sessions when you’re home.

84 | BusinessWeek | February 27, 2006 KEYBOARDS Plug ’N’ Play Pianos There’s a digital keyboard to tickle everyone’s fancy. BY LARRY ARMSTRONG

ike many people, i used to play—a piano here, a church organ there, a couple of brass instruments in my high school and college marching bands. Then my adult life intrud- Led, leaving me with neither the space nor budget for a piano, nor the time to do anything with music except listen to it. Now I want to play piano again. But, man, has the landscape changed. The familiar acoustic piano, with hammers that hit strings, seems almost quaint. As a piece of furniture, it’s still impressive. But unless you spend big, it won’t sound half as good as even a low-end portable keyboard that stores digital samples of actual notes played on a grand piano. Consider the portable keyboard’s other advantages. You can bring it home from the store in a car. You can easily move it from room to room, to a vacation home, or into a closet. You never have to tune it. You can plug in headphones and play it without disturbing your family or neighbors. With most keyboards, you can press a button and it won’t sound like a piano anymore: It can mimic a violin or guitar or any other instrument you want to hear. Prepare to be overwhelmed by the choices. Besides your budget, you need to think about your level of musicianship and what you want a keyboard for before you head out to the store. Do you want to learn to play the piano? Or do you just in-

tend to pick out the melody while a band- calef brown

February 27, 2006 | BusinessWeek | 85 i M PERSONAL TECH Dig tal usic in-a-box follows along as tones. Or maybe you’ll find tar, and strings—as your right hand plays you play? Do you plan to Spend more, you prefer other sounds, the melody, it can turn you into a one-per- hook up the keyboard to a such as the artificial sounds son band. Yamaha’s dgx-505, which computer to compose and and you’ll of a synthesizer, and decide sells from $500 to $600, looks and plays record your own accompa- get more— you’d rather spend your more like an 88-key piano, but with near- niments or songs? money there. ly 500 sounds. For about the same price, Let’s say that you or your but even the The most inexpen- Roland’s 61-key e-09, with close to 900 child is serious about want- sive portables have more tones, is more like a synthesizer. ing to learn to play the piano cheap models than a hundred sounds, If you decide you don’t like the idea of or, like me, were trained on from a basic piano to canned accompaniments, the cheapest an acoustic piano. You’re income loaded strings and woodwinds, way to write your own is to use your terested in piano music in- guitars, brass instruments, computer. Hook up a keyboard con- stead of, say, sounding like a synthesizers, and even troller, such as e-mu’s Xboard 49 or m- rock group or a string ensemble. Then, sound effects. And they come with about Audio’s Oxygen 8. They don’t have most likely, you want a digital piano; the a hundred built-in songs to listen to and speakers; instead, they send data, such portable varieties are usually called stage learn to play. Their touch is lighter, more as which key was pressed and for how pianos. It will look like a traditional piano like a synthesizer or organ. Even the most long, to the computer, which uses its keyboard, with 88 beefy, block-shaped basic ones come with on-board software sound card to play the music. (Even the keys (most portables have 61). The keys that teach you to play by showing you cheapest portable keyboard, outfitted will have a weighted or hammer action which keys to press. On some of them, the with a pair of midi cables, can do the that simulates the touch or feel of the appropriate keys light up. same thing.) mechanism of an acoustic piano key. Yamaha and Casio pretty much domi- Or you can buy a keyboard workstation Just a few years ago, you couldn’t get that kind of digital piano for less than $1,000. Now, Casio’s 18-month-old Priv- IVORIES TO GO Portable keyboards now have a wide range of capabilities and prices. We looked at these popular models:

ENTRY LEVEL KEYBOARDS 88-KEY DIGITAL STAGE PIANOS SYNTHESIZER MIDI CONTROLLER MODEL Casio CTK-700 Yamaha Casio Privia Yamaha P-70 Korg Triton E-MU Systems PSR-293 PX-110 (above) Extreme 61 Xboard49

PRICE $93 - $100 $198 - $230 $400 - $500 $600 - $718 $1,900 $165 - $170

THE Full-size keys and This beginner’s This “portable” is This new model It’s got plenty of The rock-solid LOWDOWN built-in songs and model can record the least expensive best captures the sounds, and the keybed makes this styles make this a your songs, and model to mimic sound and action touch screen makes the best for sending good starter there’s a USB port the touch of an of a grand piano at programming music data, not keyboard for your PC acoustic piano a low price songs easier sound, to a computer

Data: BusinessWeek ia px-110 goes for $400 to $500. Yama- nate the electronic keyboard market, and to compose, arrange, and mix complex ha’s new p-70 electronic piano is not both sell keyboards in the $100 range. songs without a computer. This all-in-one much more. Each has about a dozen Two picks for beginners: Casio’s $100 machine has a keyboard, synthesizer, and sounds, usually a half-dozen different pi- ctk-700, or Yamaha’s $200 psr-293. sampler for creating sounds, and a se- anos (perhaps two grand pianos, the The biggest difference? The more expen- quencer that can record, edit, and play Wurlitzer and Fender Rhodes pianos sive one can record your songs, and it has back music data. Adventurous amateurs from the ’60s and ’70s era of classic rock, a usb port that makes it easy to save your like Korg’s 61-key Triton Extreme for its and a honky-tonk piano), an organ or recordings on a computer, or download touch screen, which makes navigation two, and a harpsichord. There aren’t prerecorded songs from the Internet. quick and easy. many nonpiano sounds; these key- The more you’re willing to spend, the When you’re shopping, take head- boards are designed mostly for playing a more you’ll get: More songs and styles, phones so you can hear the sound quality piano repertoire. which are rhythmic backgrounds such as over the din of the store. Play several If you’re a beginner, you’re probably rock, jazz, hip-hop, salsa, or even polka; a models to pin down what kind of touch better off starting with a cheaper, entry- slot for a memory card so you can save you like best. If you’re a beginner, consid- level portable keyboard that has a lot your performances; a liquid-crystal dis- er taking along a friend who plays. Don’t more sounds and without the heavy play that shows the sheet music or lyrics. be intimidated: Today’s portable is a touch of a digital piano. Later, if you ﬁnd Next up is the so-called arranger key- breeze to play, and you’ll be amazed at the that piano’s your gig, you can invest in a board. By automatically playing backing incredible sounds you’ll hear within ﬁve keyboard with a more lifelike feel and tracks—such as drums, bass, piano, gui- minutes of taking it out of the box. ❚❚

86 | BusinessWeek | February 27, 2006 i M PERSONAL TECH Dig tal usic

and ’70s. Then a few years ago it gave its engineers a related but more complex task: Make a guitar that can emulate classics GUITARS such as the Fender Telecaster, Gibson Les Paul, or Rickenbacker 360. They came up with the Variax, among the oddest-looking instruments on the A New Twang market. The reason: The Variax has no standard pickups, so it appears almost naked. Instead, the Variax uses a pickup in For Six Strings the bridge (where the strings are anchored to the guitar’s body) that turns the vibra- tions into a digital signal. This signal is A few pioneers are working to bring the trusty old modified to make the Variax sound like classic electrics as well as other instru- electric into the 21st century. BY DAVID ROCKS ments such as the banjo, an acoustic or 12- string guitar, and more—some 25 in all. Today, Line 6 makes several variants of the Variax, including a bass and an acoustic, rab just about any flangers have been digital for a couple of priced from $500 to $1,500. electric guitar these decades, but the guitar itself remained a Another digital offering comes from days, plug it into an largely analog affair. Now a handful of pi- Gibson Guitar. The Nashville-based man- amp, crank up the vol- oneers are finally experimenting with ufacturer has updated its classic Les Paul ume, and you’ll hear a ways to adapt the trusty old electric guitar guitar with a patented pickup that con- sound not that far re- to the digital era. Three have newfangled verts the sound to bits and bytes before moved from what the pickups that digitize the sound before sending it down the cable to the amp. Gpioneers of the industry heard seven sending it to the amplifier. A fourth uses What’s the advantage of this? For starters, decades ago. Pickups, which work sort of standard pickups, but has tiny lights along it’s a lot quieter. Standard electrics make a like tiny microphones, sense the vibration the fretboard to help guitarists learn how lot of hissing and humming noises that of the strings and translate that into elec- to play new chords and scales. are the bane of guitarists. Another benefit tric waves. The signal flows through a wire Perhaps the coolest of these new axes is that the sound can be divided up into six to your amplifier, and you get to wake up come from Line 6. The California company separate streams, one for each string. That the neighbors. got its start as a maker of digital effects lets you send the sound of each one to a And digital electronics? Sure, effects pedals and amplifiers that mimic the separate amplifier with different effects, pedals such as delays, choruses, and sounds of classic gear from the ’50s, ’60s, opening up a huge range of mind-bending DIGITAL AX Most electric guitars work much as they have since their invention seven decades ago. But some new models have been adapted for the digital era

BRAND iGuitar Optek Gibson Line 6

PRICE $800 $500 $3,000 $500-$1,500

THE This small New Optek’s Fretlight, The maker of the Its Variax LOWDOWN York company, for- a clone of the venerable Les models—both merly called Brian Stratocaster, has Paul solid-body acoustic and Moore Guitars, lights on the offers a digital electric—digitize makes an ax that fretboard that model that can the sound of the can plug directly show guitarists separate the strings, then into a computer where to put their signal from each tweak it to to control ﬁngers as they string for emulate the software-based learn new chords individual tones of classic synthesizers. and scales. processing. guitars.

Data: BusinessWeek 88 | BusinessWeek | February 27, 2006 i M PERSONAL TECH Dig tal usic possibilities. For traditionalists, the guitar also has a pair of classic humbuck- ing pickups that sound, well, just like a HOME RECORDING Les Paul. The downside: the $3,000 price tag. As pcs become the hub of music production and more home musicians start Your Very Own recording in the spare bedroom, one problem is getting the sound of the guitar into the pc. iGuitar, a small custom shop based in Poughkeepsie, N.Y., has for sev- Hit Factory eral years made guitars that can plug into a pc. But they always required a con- With the right software and a lot of patience, that necting box, special software, and various cables. Later this year iGuitar plans to in- spare room can be a serious studio. BY DAVID ROCKS troduce an $800 model that can connect directly to a pc via a single usb cable.

GUIDING LIGHT t seems like a common is easy: Apple Computer’s excellent this simplifies things considerably. career trajectory: Pimply faced GarageBand program comes free with The pc immediately recognizes the gui- rock star wannabe. Member of any new computer. Mac owners who tar as a peripheral such as a printer or ex- a band that’s gonna be really want to graduate to a more complex of- ternal hard drive. The cable can handle big, really soon, Mom, I prom- fering can use Apple’s Logic, available in both the audio signal from traditional ise! Ex-member of band that $299 and $999 versions. For pc users, pickups and a digital signal that allows no one remembers. Responsi- things get a bit more complicated. At guitarists to control software-based in- Ible working stiff and parent. Gray- least a half-dozen companies offer de- struments in the pc that can produce the haired rock star wannabe. cent packages, many priced under $100. sound of, say, a piano, a drum kit, or an In my 20s, I played guitar, sang, and I use Cakewalk’s Sonar Home Studio orchestra. And it can be used to trigger wrote songs for a long-forgotten Burling- ($100-$160) and have tried its $40 Mu- software that will translate notes played ton (Vt.) quartet we dubbed The Jetsons. sic Creator and Steinberg’s $100 Cubase on the guitar into musical notation. Then a couple of years later, while living se, all of which let you record various in- A fourth company uses electronics to in Eastern Europe, I was the lead singer strument and vocal tracks and add soft- make learning to play easier. Optek Mu- for Pudelsi (The Poodles), a combo that ware-based synthesizers to round out sic Systems sells the $500 Fretlight, a actually went on to be a top-selling act. In your sound. guitar that looks much like a classic Poland. A decade after I left the country. Once I had my software, I thought I’d Fender Stratocaster. But as its name im- When I quit Pudelsi in 1987, I thought be ready to plug in and go. Not so fast. plies, the Fretlight’s fretboard has tiny I was hanging up my guitar for good. But Few guitars generate a signal that’s red lights at every string position on left over from those days as an aspiring strong enough for a computer to hear every fret. When the guitar is plugged rocker were dozens of songs I never got clearly. I was stymied until I figured out into a pc (via the usb port with a special around to putting on tape. So when I that I needed some kind of amplification cable), the lights show where to put your rekindled my interest in music a couple of fingers to play various chords and years ago, I thought the time had come to melodies. When used with a software finally flesh out and record those songs— GEAR UP package called M-Player, the lights can mostly just lyrics and guitar chords, the guide you through songs. And you can musical equivalent of a sketch. put on the brakes to slow the tempo to as In the digital era, I had heard, all you little as 10% of the original beat, which needed to make really great recordings lets you see the lights before it’s time to was a guitar, a microphone, a computer, EDIROL UM-1EX move on to the next chord. and some inexpensive software. That’s Will digital guitars ever replace ana- true, but it isn’t exactly easy. Two-plus USB MIDI INTERFACE log? Probably not. A lot of the reason years into my transition from rocker $40 musicians like electric guitars in the wannabe to budding recording engineer, edirol.com first place is their unpredictable analog I’m finally starting to turn out tunes that If you want to save or edit your songs on sounds. Much of the beauty of the Strat- sound pretty good to me and to friends your computer, but the music keyboard ocasters and Les Pauls that Line 6 seeks who are polite enough not to tell me oth- or controller you own doesn’t have a USB to emulate comes from flaws in the erwise. Still, professionals assure me port, this is the easiest way. It works with analog signal, which create a distinc- there are plenty of flaws, so I know I have PCs and Macs, and is ideal for laptop tive, distorted sound. But as pcs get a long way to go. computers, where connections are more powerful, digitals will surely take If you’re planning your own home hit limited. The cables are built in, and there an ever-bigger piece of the market. factory, the most important thing you’ll are indicator lights to show which way Don’t worry, though: Whether you’re need is software. There are now at least the music signals are moving. And unlike playing an analog or digital guitar, you a dozen music recording packages traditional MIDI interfaces, this one can still wake up the neighbors. Just available, ranging from basic to extrav- doesn’t need an AC adapter. crank up the volume. ❚❚ agant. For anyone with a Mac, the choice

90 | BusinessWeek | February 27, 2006 track), and a dozen or more other effects that tweak sounds to make them richer, deeper, or just weirder. Then came mixing. The first step is panning each track toward either the left or the right, to put the song in stereo. Then I set the volume of each track so it didn’t overwhelm the others, giving the song a balanced feel. It sounds simple, but it takes a lot of time, and the learning curve is steep. I typically spend at least 10 hours recording and mixing a three- or four-minute song. And most programs, even some scaled- down versions for relative neophytes, are written for knowledgeable professionals. For instance, the manual or help file might tell you how to add reverb, or pan to the left or right, but it won’t tell you when or why you should do it. Tip: Go to Web sites such as Sweetwater.com or user forums hosted by the software manufacturers, where you’ll find aspiring musicians trading tips on how to make your recordings sound professional. The Web is also a great place to let the world hear your songs (page 94). I post mine on a site called SoundClick, which hosts tunes for free. Anyone can stream to goose the sound. There’s no or download them, also for free, and it shortage of options. I settled on notes? You fix them by recording has dozens of charts that rank the popu- the $250 M-Audio Ozone, a pre- over just a tiny sliver of a song. larity of songs in such genres as pop, amp with two inputs (one for a micro- You can cut and paste passages of music rock, and country. Truth be told, I’ve nev- phone, one for a guitar) plus a 25-key pi- or even individual notes just like you er broken the top 50 in any category, so ano keyboard. Manufacturers such as might a bit of text in a word processor. I’m still as far from stardom as I was two Tascam, Line 6, and Edirol offer pre- And most software also lets you insert decades ago. amps for about $80 to $500 or more. loops of different instruments if your That’s fine with me. I know I’m going And Cakewalk, Steinberg, and other soft- playing isn’t up to snuff. In short, musical to be really big, really soon. Really. Just ware makers now bundle a pre-amp with talent isn’t really a prerequisite. ask my Mom. And this time, I have the some programs. Once I had my tracks down, it was time recordings to prove it. ❚❚ to get creative. The software lets you add NO PREREQUISITES reverb (an echo that gives recordings a To download an MP3 once I had gotten past the pre-amp livelier feel), compression (which evens version of a David Rocks song go to roadblock, I was ready to roll. The foun- out the volume of an instrument or a vocal www.businessweek.com/extras dation of any rock song is the drums, so I started there. At first, I used loops—short snippets of a drummer playing a beat pat- I WANNA BE A PRODUCER tern that can be sped up or slowed down With today’s music software, computers can make to match the song’s tempo. Later, I wanted a more complex sound, so I started us- remarkably professional-sounding recordings. ing a sampler—software that takes a beat pattern I create and repeatedly triggers APPLE Its GarageBand is the easiest-to-use program on the market— supershort recordings of individual drum provided you have a Mac. For more ambitious projects, Apple sounds to play a drum track. offers the $299 Logic Express and the $999 Logic Pro 7. With the drums setting the tempo, you can move on to the rest of the song. The CAKEWALK Has a wide range of offerings, from a $40 entry-level package called Music Creator software lets you create scores of separate to the $500 Sonar, which just might suffice for your next Grammy-winning song. tracks, so you can add a virtually unlimit- DIGIDESIGN The gold standard for professional recording studios, Pro Tools will do just about ed number of instruments and vocals. I anything you need. The downside: Mastering all of its rich features can take years. played the guitar and sang, invited a friend over to play bass, and added piano SONY Sony’s Acid programs ($40-$350), have long been tops for making loop-based and synthesizer sounds with my tiny key- music. Acid Pro 6, due this spring, lets users add multiple software instruments, too. board. If you don’t like a track, you can STEINBERG Its Cubase is a favorite of home musicians and pros alike, and will run on both Macs record over it or mute it while you try a and PCs. Steinberg offers three versions, costing from $100 to $600. john corbitt different approach. One or two bad Data: BusinessWeek February 27, 2006 | BusinessWeek | 91 i M PERSONAL TECH Dig tal usic

Vision (about $50), your child gets 36 les- sons beginning with a primer on the mu- KIDS SOFTWARE sical staff and moving through complex concepts such as harmony and time signa- tures. A cartoon conductor named “Mae- stro Max” delivers each lesson followed by Learning Music, games that test what has been taught. Music Ace is popular with schools wanting to cover beginning theory. Deluxe, aimed at ages 8 and up, combines Yawn-Free the best of the two previous versions, including a digital “Doodle Pad” for writing Engaging ways to teach today’s computer-savvy kids simple compositions. The only downside: Primitive graphics like smiling notes and how to compose and play. BY ANDREW PARK bouncing balls might not engage kids used to sophisticated video games. If you really want to grab kids’ attention, throw out the lesson plans and let them play. The beauty of software for making he ipod generation to teach key ideas. In the first lesson, for ex- and mixing digital music is that no skill is isn’t just listening to mu- ample, to learn the difference between a required. One popular program, Garage- sic differently. It’s learn- trumpet and a piano, kids match melodies Band, part of Apple Computer’s $79 iLife ing about it differently, they hear to pictures of the instruments. suite, is now in many classrooms because too. These days, a kid’s Then, in the “Create” section, they use it also allows students to see how musical first introduction to mak- those instruments and scores of other sounds are combined to make songs. ing music is just as likely beats and sounds to compose their own But GarageBand works only on Macs, Tto come on the keys of a pc as on a piano. songs. As the music is played back, an an- and it’s loaded with advanced features. With inexpensive “edutainment” software, imated character saunters across the Fortunately, Sony just children can learn to appreciate, under- screen to represent tempo and duration. THEORY LESSON came out with a pair of stand, and even write music. The best pro- Another screen displays the notes on a Many schools fine kids’ music cre- grams use animation and games to turn staff to introduce kids to reading music. use Music Ace ation programs for pcs: drab music theory into engaging fun. With Music Ace Deluxe from Harmonic Deluxe Super Duper Music An excellent example is the new Looper for ages 6 to 9 Groovy Music series from Sibelius. The and Jam Trax for 11 and British company is known for its sophis- up (less than $20 each). ticated composition and instruction soft- Their clean designs ware, but don’t let Groovy’s pro pedigree make them a snap to intimidate you. Groovy Music is a colorful master, but they other- and charming introduction to important wise work just like musical concepts for 5- to 11-year-olds. Sony’s top-selling pro Each of the three Groovy programs editing software, Acid ($69 apiece) is divided into two parts. The Music Studio. Like “Explore” section uses a variety of games Acid, they come with hundreds of loops, prerecorded musical riffs LET THEM and beats played on a variety of instruments. EDUTAIN YOU To create a song, kids Fun, easy-to-use software can supplement simply layer together loops, or plug a micro- a child's exposure to music at school. phone, guitar, or keyboard into their pc. Once they’ve saved a TITLE Harmonic Vision Sibelius Sony Super Duper Music Ace Deluxe Groovy Shapes Music Looper and song, they can export it to a portable music Jam Trax player or e-mail it. Critics question the educational value of looping software, but a motivated kid can PRICE $46 - $80 $59 - $69 $14 - $20 learn a lot just by controlling and visualiz- ing sound for the first time. For parents, it THE Primitive graphics are Engaging and intelligent A simple way for children beats listening to them bang on drums. ❚❚ LOWDOWN the only weakness of this tools that teach key to create music on a PC, thorough introduction to concepts and then help but the educational For more on this story, beginning music theory kids compose songs value is limited watch BusinessWeek Weekend (check local listings) or go to businessweekweekend.com Data: BusinessWeek 92 | BusinessWeek | February 27, 2006 i M PERSONAL TECH Dig tal usic

First, the Digital Revolution gave us inexpensive recording gear and easy-to-use software, helping amateur musicians record professional-sounding works. Now, the Internet has de- mocratized how music is distrib- uted and even sold. Leading the charge are social networking sites like MySpace, Friendster, and FaceBook, which have built communities around music and other shared interests. Members appreciate recommendations from friends on the sites, notes Rishon Blumberg, a partner at Brick Wall Management, a traditional music company that handles Marc Broussard, Citizen Cope, and other artists. “Putting an artist on MySpace is like opening a store in a heavily traf- ﬁcked shopping mall,” he says. Here are some of the best places to get your own music heard:

MYSPACE In the 13 months since its launch, MySpace has emerged as the mack daddy of all social networking sites, boasting 54 million members and more monthly page views than eBay or Amazon.com, says comScore Me- dia Metrix. While Friendster has been around longer, MySpace’s easy-to-use interface and early focus on music and blogs helped PUBLISHING propel it past its competitor. Whether you’ve recorded a few tunes in your basement or a major label is heralding you as the next big thing, hav- Singing Beyond ing a MySpace page is de rigueur, almost like owning a ripped pair of jeans and a leather jacket. With each account, you can post bios, blog entries, tour info, and The Shower photos. You can upload up to four songs, and there’s a counter that tracks plays and downloads. MySpace recently With Web outlets like these, your music can travel launched a beta version of a video sec- farther than you’ve dreamed. BY JAMES K. WILLCOX tion, and it has promised a more robust instant-messaging system soon. Bands love the site both for its active, vocal membership, and for the ease of ﬁnding other bands. The url is always my- n the 1990s, sam pinola la no longer tours. But more people may space.com/thebandname. played in a band, toured the be hearing his music than ever before, country in a van, and dreamed thanks to the Web page his band, The GARAGEBAND.COM Born in the dot-com of rock stardom. Today music is Support Group, created on myspace.com. gold rush, GarageBand.com (not to be more of a hobby for the 32-year- “We all now have day jobs, so we can’t confused with Apple Computer’s Garage- old project coordinator at just jump into a car and drive to New Band software) was co-founded by erst- William C. Cox, a construction York to play a gig,” Pinola explains. “Hav- while Talking Head Jerry Harrison, Icompany outside Philadelphia. ing a MySpace page has helped expose among others. Eschewing the major-label With a full-time job, a mortgage, and a our music to fans we wouldn’t previously system, the site awarded top-rated indie

girlfriend who will soon be his wife, Pino- have been able to reach.” bands $250,000 recording contracts. The calef brown

94 | BusinessWeek | February 27, 2006 business model wasn’t sustainable, and tributor of your digital music. But with 30 the Web site went dark in 2002. Then GEAR UP days’ notice, you can always cancel out. GarageBand was relaunched by former employees armed with fresh financing M-AUDIO TAGWORLD Newcomer TagWorld is like and committed to helping independent PODCAST FACTORY MySpace on steroids, allowing members musicians gain exposure. $150 to attach “tags,” or keywords, to photos, The heart of the service is now a re- m-audio.com blogs, and even songs so others can find view-based process: You have to rate 30 Creating your own podcast is a great way them more easily. Anytime you come other songs before you can submit one of to get your music heard. M-Audio’s across a new artist you like, just click the your own. GarageBand uses a propri- Podcast Factory bundles everything you’ll Add to My Tunes button and that song etary algorithm to rank songs based on need to record, edit, and distribute a will instantly be available on your own the feedback it receives from the com- broadcast-quality podcast. The basic page. While MySpace lets you keep just munity, with the idea that better songs package includes a USB audio interface, one song on your personal profile page, will get more reviews, move up the site’s dynamic microphone with stand, and the on TagWorld you can create entire charts, and perhaps garner so much at- necessary software. The playlists, tagged by genre, which will be- tention that the artist will be offered deluxe version, shown gin streaming whenever someone visits a publishing deal. For those of us with here, cranks it up a notch you. Your My Tunes selections are online less lofty goals, the site is still a great way with two higher-quality so you can listen wherever you browse. to get constructive feedback. It promotes condenser mics and the You can also create a multipage Web its top-ranked songs on college and ability to record interviews site using drag-and-drop modules for in- Internet radio stations, including using voice-over-Internet cluding music, videos, blogs, etc. And you msn Music. You can also create and dis- phone calls. can set the “permissions” for how others tribute podcasts. access the songs that you have uploaded and tagged. You can monitor how many CD BABY Have you ever wondered if times your song gets played, how many smaller artists can get music up on people have added it to their My Tunes iTunes and other services? Thanks to list, and even the age and gender of your cd Baby, the answer is yes. The site has fans. While MySpace has a four-song lim- earned a devotion that borders on the it, on TagWorld you can upload as many cultish. Want to sell your cd? Just pay a songs, photos, and videos as your 1 gb of flat fee of $35 to set up an account, set $23 million to independent artists. storage will hold. your price, and wait for orders to roll in. Now the company is helping inde- cd Baby gets a cut of $4 per disk, a more pendent artists get their music placed on PANDORA This site is part of the aptly equitable split for the artist than any tra- download venues such as iTunes, Rhap- named Music Genome Project. Pandora ditional retailer. Need a bar code so your sody, Napster, aol’s MusicNet, and Ya- and its team of 35 musician-analysts listen cds can get scanned? cd Baby will give hoo! Music. You keep all rights to your to songs in every genre, breaking them you one for $20. The company warehous- music, you don’t have to pay a start-up down into 400 attributes ranging from es all its artists’ cds, ships them prompt- fee, and you get 91% of the artist’s share melody and harmony to rhythm and lyrical ly, handles all the financial transactions, of the sale (cd Baby gets the other 9%), content. That lets Pandora create playlists and even sends your customers endear- which they provide one week after they of tunes that are genetically similar, if you ing thank-you notes. Since its launch in receive payment. The one caveat: cd will, to the songs you like. Wanting to test 1998, cd Baby has paid out more than Baby insists on being the exclusive dis- its limits, I selected a disparate group of artists, including Richard Thompson, Fountains of SITES THAT EXPAND YOUR REPERTOIRE Wayne, and The Who. Pandora sent me Echo After creating your masterpieces, posting them on these sites might bring you an audience and the Bunnymen, Free, and Yo La Tengo—pretty WEBSITE CD Baby GarageBand MySpace Pandora TagWorld impressive. cdbaby.com GarageBand.com myspace.com pandora.com tagworld.com The site is free with ads, or $36 a year with- PRICE Free for digital $99 for unlimited Free Free (with ads) Free distribution out, and accepts submis- hosting sions from unsigned THE artists, once an audition After you have Site is free to join, Offers easy-to- Helps members Offers drag-and- LOWDOWN is cleared. If chosen, your set up an and for different build home discover new drop modules song might get sand- account ($35) to fees you can pages you can music that to help you build wiched between two sell CDs, you can create Web personalize with matches their a personal Web get free digital pages, host favorite songs, tastes. Music site, not just of your favorite artists, distribution of MP3s, and including your from unsigned a Web page, which means the person your music to manage mailing own, and a artists must go and backs it streaming your song may sites such as lists. Popular community of through an up with one be strongly predisposed iTunes, Napster, songs earn chart more than 50 audition process gigabyte of to like your music. For and Rhapsody rankings. million “friends.” to be included. storage per user. an artist, that’s as good as it gets. ❚❚

February 27, 2006 | BusinessWeek | 95 Personal Business Inside Wall Street

BY GENE G. MARCIAL WEB SHOPPERS, PLUS CHINA AND INDIA, HAVE UPS SOARING. PNC FINANCIAL PROFITS AS MERRILL LYNCH BUYS BLACKROCK. A NEW MIGRAINE REMEDY COULD SOON PAY OFF FOR POZEN.

an aftertax gain of $1.6 billion. That pnc OFF AND gives it the flexibility, says , to RUNNING UPS Delivers the Goods repurchase shares. Gary Townsend of nited parcel service (ups) STOCK PRICE (DOLLARS) may soon bring Friedman, Billings, Ramsey Group 70 shareholders a nice surprise package. The world’s figures the deal could boost pnc’s pro 65 largest express company, with an AAA credit rating, is forma earnings to as much as $5.62 a U 60 rich in cash and profits. So it might look as if its stock, up share in 2006 and $6.22 in 2007, up from 66 in September to 75 on Feb. 15, from his pre-deal forecasts of $5.12 55 already reflects these goodies. Not by a and $5.67, respectively. The stock PNC FINANCIAL GETTING UP 0 long shot, says Stephen Leeb, who TO SPEED trades at 12 times his new 2006 AUG. 10, '05 FEB. 15, '06 heads Leeb Capital Management, estimate. pnc is worth 74 a share on a Data: Bloomberg Financial Markets STOCK PRICE (DOLLARS) which owns shares. He expects the 80 sum-of-the-parts valuation, says stock to hit 100 in 18 to 24 months Townsend, who rates the stock “outperform.” because of its “super-growth 75 prospects.” Not only does ups 70 dominate the U.S. market, where it 65 UNITED picks up 75% of its revenues, but it’s PARCEL SERVICE Pozen’s Trexima: 0 also building up in China and India. AUG. 10, '05 FEB. 15, '06 The global delivery market is Data: Bloomberg Financial Markets Going to Market with Glaxo estimated to be worth more than $100 ttention, migraine sufferers: Help is on the billion a year. In the U.S., explosive growth in Internet way from Pozen (pozn) in the form of Trexima, a new retailing is also adding to ups volume. But the still- A drug for severe headaches that analysts claim is more uncounted big plus, argues Leeb, will come from Asia, where effective and faster-acting than GlaxoSmithKline’s $1 billion- its competitive edge may even be greater. ups operates 560 a-year blockbuster Imitrex. It’s expected to get U.S. approval airplanes and 88,000 ground vehicles worldwide. “We can’t in the second quarter. Imitrex’ patent expires in 2009, and think of any other company that can benefit as strongly from Pozen has teamed up with Glaxo to market Trexima in the China, India, and the Internet,” Leeb notes. Jim Corridore of U.S. It will focus on Trexima once it Standard & Poor’s, who rates ups a four-star buy (five is tops), gets O.K.’d, says Pozen ceo John A GIANT expects overseas volume and revenues to rise some 20% this Plachetka. Joshua Schimmer of LEAP year, aided by robust export activity from Asia. Higher oil investment firm S.G. Cowen expects ups STOCK PRICE (DOLLARS) prices won’t crimp operating earnings, he says, because the stock to outscore the market once 20 adds fuel surcharges to deliveries. At 19 times Corridore’s the new drug is launched. It has 2006 profit estimate of $4 a share (vs. 2005’s $3.47), the stock already been on a tear, leaping from 8 15 is trading at the low end of its price-earnings ratio range of 19 in August to 17 on Feb. 15. Schimmer 10 to 30 over the past five years. figures Pozen will earn 50¢ a share in 5 POZEN 2009 and $1.55 in 2010. Nadav Hazan 0 of SunTrust Robinson Humphrey says AUG. 10, '05 FEB. 15, '06 Pozen should get $20 million from Data: Bloomberg Financial Markets BlackRock’s Sale Glaxo once Trexima is approved, on top of the $60 million it has already received. Through 2009, Will Line PNC’s Pockets Hazan figures Pozen will get a 6% royalty on U.S. sales of up nc financial services group (pnc) is a big winner to $600 million, and 17% above that. In addition, Pozen has in the deal between Merrill Lynch and investment an arthritis drug in clinical trials, which the company claims Pmanager BlackRock announced on Feb. 15. Before the is a lot safer than its rival painkillers. ❚❚ agreement, pnc owned 70% of BlackRock’s shares and had 84% of the voting rights. pnc shares have shot up from 55 in Gene Marcial’s Inside Wall Street is posted at October, when rumors first swirled that it might cut its businessweek.com/investor at 5 p.m. EST on the magazine’s BlackRock stake, to 69 on Feb. 15. Merrill edged out Morgan publication day, usually Thursdays. pnc Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their Stanley in making a deal with BlackRock (page 36). firms hold positions in the stocks under discussion. Similarly, they have no investment halved its BlackRock holdings, to 35%. pnc says it will record banking or other financial relationships with them. eric hoffmann/bw by ethan hill; charts by photograph

96 | BusinessWeek | February 27, 2006 Personal BusinessFigures of the Week

% CHANGE % CHANGE YEAR TO LAST 12 YEAR TO LAST 12 STOCKS U.S. MARKETS FEB. 15 WEEK DATE MONTHS GLOBAL MARKETS FEB. 15 WEEK DATE MONTHS S&P 500 1280.0 1.1 2.5 5.8 S&P Euro Plus (U.S. Dollar) 1586.5 0.5 5.0 13.7 S&P 500 FEB. AUG. FEB. FEB. 9-15 Dow Jones Industrials 11,059.0 1.8 3.2 2.0 London (FT-SE 100) 5791.5 1.2 3.1 14.5 1340 1295 NASDAQ Composite 2276.4 0.4 3.2 9.0 Paris (CAC 40) 4934.1 0.8 4.6 22.4 S&P MidCap 400 767.9 0.0 4.0 15.6 Frankfurt (DAX) 5764.4 1.7 6.6 30.9 1280 1280.0 S&P SmallCap 600 373.9 0.4 6.6 13.7 Tokyo (NIKKEI 225) 15,932.8 –2.1 –1.1 36.8 DJ Wilshire 5000 12,867.5 0.9 3.0 8.0 Hong Kong (Hang Seng) 15,423.3 0.3 3.7 10.2 1220 1265 Toronto (S&P/TSX Composite) 11,557.3 –1.5 2.5 20.8 SECTORS Mexico City (IPC) 18,169.2 –1.3 2.1 32.7 BusinessWeek 50* 754.6 0.0 1.7 4.8 1160 1250 BW Info Tech 100** 385.8 0.4 1.4 5.9 FUNDAMENTALS FEB. 14 WEEK AGO YEAR AGO S&P/BARRA Growth 607.1 0.8 1.8 4.5 S&P 500 Dividend Yield 1.78% 1.81% 1.93% 1235 1100 S&P/BARRA Value 669.2 1.5 3.3 7. 1 S&P 500 P/E Ratio (Trailing 12 mos.) 18.0 17.9 20.6 COMMENTARY S&P Energy 385.1 –3.8 3.3 19.8 S&P 500 P/E Ratio (Next 12 mos.)* 14.9 14.6 16.4 S&P Financials 433.9 2.1 1.7 5.6 First Call Earnings Revision* –1.59% –1.42% –0.80% After a subdued start to the S&P REIT 164.0 2.0 7.2 18.0 trading week, markets rallied on *First Call Corp. S&P Transportation 264.4 4.2 5.8 17.8 TECHNICAL INDICATORS FEB. 14 WEEK AGO READING Feb. 14, turning Valentine’s Day S&P Utilities 160.6 0.3 0.6 8.4 S&P 500 200-day average 1226.5 1223.7 Positive into a lovefest. The Dow closed GSTI Internet 195.7 –1.9 –4.6 20.8 Stocks above 200-day average 65.0% 63.0% Neutral above 11,000, while the S&P 500 PSE Technology 872.2 0.1 4.3 14.7 Options: Put/call ratio 0.71 0.80 Positive *Mar. 19, 1999=1000 **Feb. 7, 2000=1000 neared a new high. The next day, Insiders: Vickers NYSE Sell/buy ratio 4.05 4.02 Negative Fed Chairman Bernanke went before Congress to discuss the BEST-PERFORMING LAST LAST 12 WORST-PERFORMING LAST LAST 12 economy. His message—rate GROUPS MONTH % MONTHS % GROUPS MONTH % MONTHS % hikes will continue—set stocks Railroads 16.4 Railroads 53.8 Internet Software –17.6 Automobiles –38.4 back, though by the end of the Steel 16.0 Oil & Gas Equipment 51.3 Internet Retailers –16.6 Photographic Products –23.1 Constr. Materials 15.5 Divsfd. Metals & Mining 51.0 Oil & Gas Reﬁning –14.2 Auto Parts & Equip. –21.6 day they had recovered. Agricultural Products 14.2 Oil & Gas Exploration 46.8 Tires & Rubber –13.8 Divsfd. Commercial Svcs. –19.4 Data: Bloomberg Financial Markets, Reuters Constr. & Farm Mchnry. 10.3 Oil & Gas Reﬁning 46.7 Homebuilding –12.0 Home Entrtnmnt. Software –17.7

EQUITY FUND CATEGORIES MUTUAL FUNDS 4-WEEK TOTAL RETURN % 52-WEEK TOTAL RETURN % INTEREST RATES LEADERS LEADERS 4-WEEK TOTAL RETURN Latin America 3.8 Latin America 62.0 KEY RATES FEB. 15 WEEK AGO YEAR AGO WEEK ENDED FEB. 14 Communications 2.8 Precious Metals 45.5 Money Market Funds 4.01% 3.99% 1.98% S&P 500 U.S. DIVERSIFIED ALL EQUITY Pacific/Asia ex-Japan 2.3 Diversified Emerg. Mkts. 39.4 90-Day Treasury Bills 4.55 4.51 2.58 Diversified Emerg. Mkts. 2.1 Natural Resources 34.2 2-Year Treasury Notes 4.69 4.63 3.35 LAGGARDS LAGGARDS Natural Resources –5.1 Domestic Hybrid 6.2 10-Year Treasury Notes 4.60 4.59 4.10 Japan –2.0 Large-cap Blend 7.7 30-Year Treasury Bonds 4.57 4.68 4.49 Utilities –1.6 Large-cap Value 8.0 30-Year Fixed Mortgage † 6.25 6.19 5.49 –1.5 8.3 %1–2 –1 0 2 3Large-cap Growth Miscellaneous †BanxQuote, Inc. EQUITY FUNDS 52-WEEK TOTAL RETURN 4-WEEK TOTAL RETURN % 52-WEEK TOTAL RETURN % BLOOMBERG MUNI YIELD EQUIVALENTS WEEK ENDED FEB. 14 LEADERS LEADERS S&P 500 U.S. DIVERSIFIED ALL EQUITY Taxable equivalent yields on AAA-rated, Oberweis China Opps. 12.0 ProFunds Ultra Japan Inv. 90.7 tax-exempt municipal bonds, assuming ProFds. UltTelcmms. Inv. 11.2 ING Russia A 89.0 a 30% federal tax rate. Eaton Vance Grtr. India A 9.8 iShares MSCI Brazil Idx. 71.2 10-YR. BOND 30-YR. BOND Janus Asp. Life Scncs. Srv. 9.7 T. Rowe Price Latin Am. 70.0 LAGGARDS LAGGARDS General Obligations 3.84% 4.40% Ameritor Investment –14.3 Ameritor Investment –68.4 Taxable Equivalent 5.49 6.29 % 3 6 9 12 15 18 American Heritage –11.1 American Heritage Grth. –42.9 Insured Revenue Bonds 3.96 4.45 Rydex Commodities H –10.2 Frontier MicroCap –29.6 Data: Standard & Poor’s ProFunds Internet Inv. –10.0 American Heritage –27.3 Taxable Equivalent 5.66 6.36

THE WEEK AHEAD

Tuesday, LEADING INDICATORS Reserve’s Open Market Committee The index ticked down by 0.1% BusinessWeek Feb. 21, 10 a.m. EST » The production index The releases the minutes to its Jan. 31 in December. Excluding food moved up to 270 for the week ended Conference Board’s January index monetary policy meeting, the last and energy, January prices Feb. 4, up 13.4% from a year ago. of leading economic indicators of Alan Greenspan’s tenure. Fed are expected to have posted a Before calculation of the four-week probably rose 0.5%. That’s the watchers will scour the notes for 0.2% gain for the fourth moving average, the index moved up median forecast of economists clues on how close the central consecutive month. to 271.2. surveyed by Action Economics LLC. bank is to halting its rate hikes. DURABLE GOODS ORDERS Friday, Lower initial jobless claims and CONSUMER PRICE INDEX Feb. 24, 8:30 a.m. EST » higher stock prices should help the Wednesday, Feb. 22, 8:30 Durable goods orders most likely January reading. In December, the a.m. EST » Consumer prices pulled back by 1% in January. For the BW50, more investment index edged up 0.1%. for goods and services most likely During December, orders jumped data, and the components FOMC MINUTES Tuesday, Feb. increased by 0.4% during January 1.8% on strong gains in computers of the production index visit 21, 2 p.m. EST » The Federal on a rebound in crude oil prices. and machinery. www.businessweek.com/magazine/extra.htm

98 | BusinessWeek | February 27, 2006 IdeasBooks And Baby Makes...a Market THE BABY BUSINESS How Money, Science, and Politics Drive the Commerce of Conception By Debora L. Spar; Harvard Business School Press; 298pp; $26.95

The Centers for Disease Control & ensued, typified by the reaction at the time of biologist Leon Kass (who went on to chair President George W. Bush’s Prevention reports that 12% of U.S. Council on Bioethics): “This blind assertion of will against women between the ages of 15 and 44— our bodily nature...can only lead to self-degradation and dehumanization.” In the wake of Louise’s birth the federal some 7.3 million in total—experienced government set up a commission to figure out what to do infertility in 2002. In addition, an about ivf, but it never issued any recommendations. Instead, by 1983 some 150 babies had been conceived in vitro, and the estimated 30% of adult men are infertile. furor had disappeared. That means one in every eight couples is Today, desperate couples go through round after round of ivf, at an average cost of $12,400 per try, even though the unable to conceive children by natural average success rate is only 25% and drops as means. Behind that number is a lot of low as 9% if the woman is over 40. High cost heartbreak, yearning, and a huge market: and poor results would be a death knell for Fertility clinics in the U.S. collected $2.7 most businesses, but in the emotional world of billion in 2002. infertility, couples often keep paying until they It’s a market unlike any other, however, run out of money; very few run out of will. because no one wants to acknowledge its Those who do give up can turn to adoption existence. Baby selling may be outlawed in along with about 120,000 other U.S. families every nation, yet every day, in every country, each year, shelling out up to $35,000 per child. money and the means for having children The most disquieting parts of the book are change hands with little government those chapters that detail some very advanced oversight. “When parents buy eggs or sperm; reproductive technologies. Doctors can now when they contract with surrogate [mothers]; remove one or two cells from a two-day-old when they choose a child to adopt or an embryo in a test tube, tell the parents its gender, embryo to implant, they are doing business,” and test for certain genetic defects. The parents writes Debora L. Spar, a professor at Harvard then choose which embryos they want Business School. “Over the past 30 years, implanted. Scientists are also only steps away advances in reproductive medicine have from cloning a human. indeed created a market for babies.” Of course, the fact that couples can use such Spar dissects this thriving industry in her high-tech methods doesn’t mean provocative The Baby Business: How Money, Science, and that many will. As one fertility Politics Drive the Commerce of Conception. The book, though Costs are expert says: “Most people would well worth reading, is somewhat unnerving in that it brings high, results rather have sex.” Then again, matter-of-fact business analysis to the creation of children, the desire to have one’s own surely one of the most unbusinesslike of subjects. Still, it is a are poor, and biological offspring can be valuable if occasionally dry look at a sector of the economy insatiable. Spar quotes an whose customers are usually far too emotional to clearly laws are few. infertile woman who says assess just what it is they are paying for. cloning may not be right for Spar starts with a history of the baby-making business, Welcome to everyone, but “if the only way going back as far as the Old Testament story of Jacob’s wife. the fertility biz for a person to have a child of After failing to conceive she sent Jacob to sleep with her maid their own is to do this, and if and adopted the resulting child. There were few other means they are willing to take a chance, for coping with infertility until the 1920s, when the hormone then they should be able to.” estrogen was discovered and mass-produced. By the late Spar raises some troubling ethical issues surrounding the 1930s, most major U.S. cities had at least one fertility practice baby-making machinery. Science is handing us the ability to administering estrogen. After a woman using hormones gave choose the method of conception and its likely results, yet birth to quintuplets in 1970, demand soared. there is little public debate and even less regulation The industry really took off in 1978 with the birth of surrounding these choices. “We can moralize about these Louise Brown, the first test-tube baby. She was created by in developments if we desire,” she concludes, “or we can plunge vitro fertilization (ivf), in which an egg is extracted and into the market that desire has created, imagining how we combined with sperm in a test tube. The fertilized egg is then can shape our children without destroying ourselves.” ❚❚ implanted in the mother’s womb. An international outcry –By Catherine Arnst

100 | BusinessWeek | February 27, 2006 For more advertiser information, log onto www.businessweek.com/classiﬁeds For Ad Rates and Information Phone: (312) 464-0500 MARKETPLACE Email: MMiller@classiﬁedinc.com Authors Wanted Business/Career Opportunities Yacht Charters PUBLISH AN INCREDIBLE INVENTION Rent A Greek Proven to cut electricity costs YOUR BOOK by up to 40%. Cruising Palace With America’s leading subsidy Manufacturer seeks USA & overseas And sail book publisher. Dept W-55, distributors for this top quality high tech Vantage Press 419 Park Ave. S. product with amazing consumer demand. among the New York, NY 10016 Tel: +44 (0) 1872 223 000 4,000 Greek www.vantagepress.com Contact: www.somars.com islands for further information FOUNDED IN 1969

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Knowing When to Fold ’Em

You make the case that leaders should be candid. But what other job. To hang around and complain under your breath is a would you advise a middle manager whose leaders place fast track toward probably the worst workplace hell imagina- challenging questions in the “parking lot” and tend to stunt ble: victimhood. People with this self-infliction conceive of (or end) the careers of people who keep asking them? themselves as vanquished heroes. Their bosses see them as en- –Anonymous, Minneapolis ergy-sapping boors. Do not go there! Only you know what choice you will ultimately make. Just be Before answering, can we ask you an awful question? With all sure you make it—one way or another. due respect, is the problem possibly you? Now and again, leaders ignore “challenging questions” because they’re more an- For four years I ran a single store in a large national retail chain, noying than constructive, and the people asking them are, too. but I was recently promoted to oversee multiple stores. I am If that’s you, and you have the self-awareness to accept that finding, however, that I still worry more about the performance unpleasant fact, our only suggestion is to redirect your energies of my old store than what’s going on at all my stores. toward real work, or you’ll be in the “parking lot” before long. –Jerry Martellaro, Huntington Station, N.Y. But let’s assume that’s not you, and that your questions are meaningful, if maybe a bit irritating. In that case, you’re in one You’ve nailed it, and bravo for that. Most people in your posi- of two situations, neither of them optimal but both actionable. tion don’t have the self-confidence to realize they have fallen It could be you have a boss problem. That is, your boss is into one of the most common traps of moving up, namely, tak- something of a jerk and can’t handle open dialogue, particularly ing on a new job with enthusiasm but keeping one foot in the if it is potentially contentious. In that case, if you like your job old. With your promotion, two people got new jobs: you and well enough, your best bet is to wait it out for a while. In time, your replacement. As a leader, your task is to unleash the inno- most good organizations identi- vative ideas you both have. Neither of you can do that if you are fy stultifying idea-blockers and spending your energy “going home” all the time. Instead, get to move them elsewhere or out. Feel you’ve know your expanded world and raise the bar for all your stores. On the other hand, you could How? Start by thinking of your stores as labs. Yes, they all do have a culture problem. Maybe reached the roughly the same thing, but certainly some of them have meth- the leadership in general does limit? Then ods or procedures that are more effective. Your job is to spot not relish constructive curiosity. those best practices. You want everyone in all your stores talk- In that case, you have a question look for a ing about each other’s best ideas and and improving them. That to ask yourself: Does your job will add more value than looking over someone’s shoulder. have enough upside to live with new job. No Transparency is another great tool to raise the bar. Make sure this overarching downside? to share the comparative metrics of every store, ranked from About 12 years ago a friend of sense playing best to worst. Such clarity works wonders. It’s motivating for ours became marketing director the victim top-performing stores and signals to poor performers exactly of a consulting firm. Since then where they can look for more effective approaches. the firm has fared pretty well, A final way to raise the bar and avoid the “foot-in-the-old” but its three partners have re- trap is to conduct regular, rigorous performance evaluations. mained steadfastly opaque. Employees never know what the That allows you to reward managers who demonstrate the val- partners are thinking about the firm’s direction or how they rate ues you have laid out, coach your middle group, and weed out each person’s performance. The result: a sense of constant anx- underperformers. The outcome: higher standards for all. iety and confusion. Your new job is bigger than your old one. More important, it Our friend, however, has no plans to give up the good mon- is different. You’ve got a lot to do, but it doesn’t include what ey and the short commute. The work is interesting enough, he you used to do. Leave that to your replacement, who can get says, and he likes most of his colleagues. Yes, the leadership’s busy reinventing the “perfect situation” you left behind. ❚❚ lack of candor drives him nuts (“intermittently,” as he puts it), and he feels that it has significantly hindered the firm’s growth. Jack and Suzy Welch are the authors of the international best-seller But, he says, “I’ve traded an O.K. quality of work for a great Winning (HarperCollins, 2005). They are eager to hear about quality of life.” your career dilemmas and challenges at work and look forward to Like our friend, you can make peace with your situation. Or answering your questions in future columns. Please e-mail them at

if you know you have reached your limit, you can look for an- [email protected]. trent brad by photograph

102 | BusinessWeek | February 27, 2006 IdeasOutsideShot BY REPRESENTATIVE BARNEY FRANK

When the Bounty Isn’t Shared Adlai Stevenson, the story goes, was once congratulated after a speech by a woman who told him it would get him the votes of all “thinking people.” “That’s wonderful,” he is said to have replied, “but unfortunately I need to get a majority.” It may have been Stevenson’s propensity for making such amusingly deprecatory comments about voters that kept him from winning that majority in his two 1950s Presidential bids. But policies that help the economy at their own expense. Stevenson’s observation is relevant today to those of us in the Look overseas. In 2004, India’s ruling Bharatiya Janata Party minority who believe the most serious problem America faces (bjp) called elections in a campaign based on overall economic is excessive economic inequality. growth that had exceeded expectations with the slogan “India “Excessive” is the operative word here. Inequality is not a Shining.” But with hundreds of millions of ordinary Indians bad thing in a free market economy; indeed, it’s essential if feeling they had not shared in the benefits of economic reform, we’re to benefit from the incentives and efficiencies that make voters’ response was essentially “shine this,” and the bjp lost. the market so effective a producer of wealth. But left entirely More recently, Latin American voters have backed leaders to its own devices, the free market will produce more hostile to deregulation, globalization, and economic flexibility. inequality than is necessary for efficiency or a healthy society. So it’s important for business leaders to understand that That’s especially true in an economy marked by globalization, overall gross domestic product growth is not enough to win the increased use of information technology, and the rapid political support for the tax code changes and curbs on public flow of capital across borders. Alan Greenspan spending they support. This was brought home at said as much when he told Congress’ Joint a dinner I attended last month at the World Economic Committee in 2004 that nearly all the Of course Economic Forum in Davos, where a leader of a benefits of recent productivity growth were large financial institution voiced frustration with going to corporate profits, resulting in “a globalization the average American’s lack of support for marked fall” in employees’ share of the gains. is a tough globalization. “After all,” he said, “a recent study Nothing in the past two years has alleviated by the Institute for International Economics that problem. Real wages for the average worker sell if it only showed that globalization adds a trillion dollars a have eroded, and health and pension benefits year in value to the American economy,” which, have faded. Meanwhile, corporate profits and pay benefits the he noted, was worth $9,000 a year to the average for the top 2% of the population have soared. American family. The problem, of course, is that For many of us, this is morally objectionable top 2% of the average American hasn’t seen that $9,000. because it means that a large majority of people Americans Instead, many of them believe—resentfully—that live at a lower standard of living than we think corporate executives have been keeping it all for Americans ought to. But the counterargument, themselves. supported by many in Corporate America, is that Therefore, it’s time to make a deal. I am focusing on inequality is a mistake, so long as the absolute prepared to help persuade my fellow liberals that many of level at which the majority lives is acceptable. So any the public policies they have been resistant to, or skeptical reduction in inequality can only be won by a majority that of, are in the national interest, if those in the business includes people who do not share my values-based objections. community work with us to ensure that the bulk of That’s why business must understand that it too benefits by Americans get a larger share of our increased wealth. Our reducing inequality. In testimony last summer, Greenspan nation has both the resources and the intellect to implement lamented the “growing evidence of antiglobalization sentiment public policies that diminish inequality so that it does not and protectionist initiatives,” which threatened economic become socially corrosive, without reaching the point where flexibility. And he agreed when I suggested that this is not that diminution threatens the needs of the capitalist system. simply a case of crankiness but a broad public reaction to the Is Big Business ready to come to the table? ❚❚ perception of inequality he cited in 2004. Indeed, when people see their real wages stagnating or falling, health benefits Barney Frank, a member of Congress since 1981, is ranking

threatened, and pensions insecure, they’re unlikely to support Democrat on the House Financial Services Committee. tom williams/roll call photos

104 | BusinessWeek | February 27, 2006