Big Red Horseshoe - Vanderbilt Owen MBA Students on Business Strategy

Miscellaneous 'Shoe

-- The private equity binge continues. 3Com has agreed to a $2.2 billion takeover deal from Bain Capital LLC and Chinese Huawei-3Com, a China-based division of 3-Com. The deal represents a 44% premium over yesterday's closing price. Bain has made a number of high-profile acquisitions lately: American Standard Companies Inc for $1.755 billion, Guitar Center in June for $2.1 billion and Clear Channel for $19.5 billion (purchased by a group that includes Thomas H. Lee Partners).

-- I'm intrigued by the moves by major television networks to grab audiences online. ABC is now offering free streams of some of its shows at AOL.com (which already offers all sorts of network programming). Now comes news that CBS has created something called CBS EyeLab, a site that seems to be an official admission that online attention spans are incredibly short. CBS Eyelab will have short video clips and a look-and-feel borrowed from sites such as YouTube. For example, one clip is a montage of high-fives from the show "How I Met Your Mother" set to the music of Strauss''s "The Blue Danube." Cute, but prime-time programming isn't my bag whether its on a television or on my laptop. Wake me when mash-ups of AMC's "Mad Men" are posted online.

-- With Jerry Yang's 100 days coming to a close, there could be some changes at Yahoo! All VPs and have been summoned to a meeting at which all invited will "check laptops and Blackberries at the door." The company has announced some changes to its entertainment division. What else do they have in store?

-- When JP Morgan Chase wanted a partner for a credit card program targeted at college students, it went with Facebook. "A year after its debut, the Chase +1 Facebook group has nearly 34,000 members. This puts it in the upper ranks of the 190 or so “sponsored” groups, in the company of American Eagle and the Dave Matthews Band Summer Tour."

GM Deal With Union Improves Health Care Mess, Sees A Ray Of Hope

For a strategy class last year, my group did a presentation on General Motors. We had very few positive things to say about the company. It was bleeding money. Health care and pension costs weighed down the company (retiree health care costs are esimated at $1,400 per car). It was slow to adapt to foreign competition and was equally slow with technical innovation. A recent strategy to goose sales by lowering sticker prices and getting rid of rebates fizzled.

GM cut a deal with its striking workers yesterday and, as Wall Street Journal writer Gregory Zuckerman put it, "foisted the retiree-health-care monkey onto the back of its union." The contract still has to be ratified by union members, but GM's stock jumped 9.4% and lifted Ford's stock as well.

What GM has done is restructure is obligations for its retirees by shifting its $51 billion in health care obligations to an independent trust called a voluntary employees beneficiary association. GM will contribute of to $35 billion to the trust. The union gets to manage the health care benefits.

Journalists are already thinking about the implications of GM's move. A sampling of articles:

-- "Is GM's Health Plan Contagious?" at BusinessWeek.com. "About half of the companies in transportation, communications, and finance have health-care benefits for retired workers. Northwest Airlines (NWA) retirees are now building a VEBA with funds from their bankruptcy settlement. For tax reasons, the trusts are most appealing to unionized companies, which get to make big up-front investments in them tax-free. They also can earn money on those funds without paying the Internal Revenue Service."

-- "What Might GM Trust Fund Mean For Workers Elsewhere?" at the Wall Street Journal. "The quick answer is that most employers aren't setting up so-called voluntary employees' beneficiary associations, or VEBAs, to make life easier for their retirees. They are doing it because it makes financial sense for the companies themselves. Under pension accounting rules, company-run VEBAs can improve a company's bottom line."

Miscellaneous 'Shoe

-- "Wendy's Potential Buyers Are Lining Up" at WSJ.com. As more than a dozen parties -- including the private equity firm whose board counts a Wendy's investor as its chairman -- express interest, the company is reportedly pondering a recapitalization plan or some other strategy. Franchisees are asking Wendy's board not to lower the number of menu items or make other changes -- such as sourcing menu item components from foreign countries -- that could lower the value of the brand before a sale.

-- AOL is moving its headquarters to New York City from Dulles, Virginia. Sucks for U of Maryland MBAs. Won't suck for ad revenue.

-- IBM has joined OpenOffice.org and will give away a free alternative to Microsoft's Office suite of products. I've used OpenOffice in the past and didn't think much of its free versions of Word, Excel and PowerPoint. They were certainly worth the price -- free is good -- but were clearly inferior to the real deals. IBM's package of products, called Symphony, is aimed to increase adoption of its Notes software.

New York Times To Go Free

Now here's a strategy I love: The New York Times has decided to close TimesSelect, its paid offering that included popular columnists and archives, and will open up 20 years of archives at no cost. Previously the Times charged for archived articles. TimesSelect brought in $10 million a year in revenue, but the Times project low growth in the future versus expected general online growth. I really hate trying to get to a New York Times article and seeing a free excerpt followed by a note that the full article will cost me a few bucks. (Then again, Google can often bring up the entire article that another newspaper picked up in syndication and did not put behind a wall.)

This could be an offensive measure against possible changes at the Wall Street Journal, or it could be that Rupert Murdoch's plan to offer WSJ.com for free is a sign of the times. The Times says the decision came from the fact that "many more" readers entered the Times' website through search engines and external links (which shows the influence of agrregator new sites, blogs and word-of-mouth emails).

Miscellaneous 'Shoe

-- Starbucks head honcho Howard Schultz owns less than 5% of weight loss and nutrition business Kinetix Living, and he's giving his employees an opportunity to enroll  (while the article does not say if it is free for employees, I assume it's at least offered at a discount). "By the end of September, about 500 Starbucks employees will have completed Kinetix's eight-week program. The 53 employees who started in May lost a combined 319 pounds of body fat, or roughly six pounds per employee, during an eight-week stretch, said Jamie Brunner, co-founder of Kinetix." Good for employee retention and morale, and maybe for health care costs, but six pounds in eight weeks? I've got to question the effectiveness of the Kinetix program. Meager.

-- TheStreet.com reported that Target may sell its credit card business. This shows the positive influence investors can have on a company. "Target's shift comes less than two months after William Ackman's Pershing Square Capital revealed a 9.6% stake in the nation's second-largest discount retailer. Pershing's nearly $2 billion stock purchase kindled speculation that the firm would look to pressure Minneapolis-based Target to shed its credit card operations and real estate portfolio to focus on retailing." Retailer Sears found benefits in selling its credit card division. Since divesting the unit in July of 2003, its stock is up 435%.

-- Slate on private equity firms' purchase of bank debt and bonds. "Private equity firms are raising money from investors, which they will use to buy the loans made by banks to private equity firms, who are using money raised from earlier investors to buy companies. One interpretation of this dynamic: Wall Street is an efficient self-correcting machine. There is a vast supply of bank debt for sale, and the private equity firms are providing a chunk of the demand.The best metaphor I can think of is this: You pay your friend a few dollars so that you can host a small party while she's out of town. You leave the pool filled with garbage, beer cans, and human waste. The next day you show up dressed as a pool cleaner and charge your friend a few bucks to mop up the mess you made."

Goldman Sachs' Credit Crunch Plan

I ran across this little article on the back page of a section of the Wall Street Journal: "Can Goldman Win on Debt?" (subscription required).

Goldman is trying to make something about the current credit crunch. Follow me through this. Aw, screw it, I'll just quote a bunch of the article. There's no easy way to rephrase this. (Fair use, right? Educational purposes, right?)

"Lloyd Blankfein's firm is mulling whether to set up one or more investment vehicles to buy the troubled debt. The approach is tricky, but it could mitigate the firm's losses -- or even turn a profit. Of course, it also boosts risk.

Here's one way it could work. Say Goldman has committed to underwrite $1.2 billion of loans backing ABC's leveraged buyout. It has effectively promised its client $1.2 billion, no matter what it sells the loans for. If it can only find buyers at 85 cents on the dollar, a 15% discount, then Goldman has lost $180 million on the deal.

Assume Goldman believes ABC is a good credit unfairly battered by the credit crunch. The firm could set up an off-balance-sheet fund, capitalizing it with 20% equity and raising the rest from outside lenders, to buy ABC's loans at the same 85 cents on the dollar.

To entice those lenders, the fund could offer a couple of percentage points more in interest than it receives from ABC on the loans. It can afford to do so because it will be paying out interest on a smaller principal amount than the fund owns in ABC loans, due to the discount at which it bought them."

If Goldman puts up the whole 20% in equity, it could earn $60 million in gains -- a third of its original loss.

Dark Chocolate's Success Is Its Own Enemy

The other day I read an LA Times article about dark chocolate's 15% sales growth last year as white chocolate grew at 5.7% and milk chocolate sales dropped 5.5%. There are a couple interesting things here. One is the reason for the growth: "Dark chocolate has gained cachet as a food -- like almonds, blueberries and red wine -- that studies say is good for the heart." Aren't health trends cute?

The other part to the story is what major chocolate manufacturers are trying to do to better compete in the dark chocolate market: "The Grocery Manufacturers of America, a trade group, has asked the Food and Drug Administration to let confectioners substitute cheaper ingredients -- vegetable oils and milk protein concentrates -- for cocoa butter." If you can't beat them, join them...but first change the definition of dark chocolate so you can compete on price.

That lead me to DontMessWithOurChocolate.com, a website dedicated to saving dark chocolate. I also saw some other LA Times articles, two others from earlier this year.

Starbucks Just Might Get A Hit Movie Yet

Just recently I posted about Starbucks' unsuccessful forays into the movie business. Turns out a helpful solution was already in the works.

Today comes news that Concord Music Group will merge with the film production unit of Village Roadshow, an Australian entertainment company. CMG has a joint venture with Starbucks' Hear Music, a record label that has found success with a Ray Charles album and recently released Sir Paul McCartney's latest release, Memory Almost Full.

Village Roadshow will get up to $86 million in return for 60% of the newly created entity, Village Roadshow Entertainment Group.

The merger combines a film production company with assets like "The Matrix" franchise and CMG's catalog of albums. The synergies are obvious and should help Starbucks improve its track record in theatrical movies. Since it does so well with music, Starbucks can leverage that strength in the cross-promotion of the movie. For every VREG movie, there may be a companion soundtrack on the CMG label. Demand for a soundtrack, though, does not drive demand for a film. It's the other way around. Still, Starbucks will have a better chance of getting that first hit movie.