I thot of starting a thread to share good articles on BUSINESS, Economy and related areas. M starting this by posting an article on Berkshire Hathaway & Warren Buffett.
I thot of starting a thread to share good articles on BUSINESS, Economy and related areas.
M starting this by posting an article on Berkshire Hathaway & Warren Buffett.
A Finger on the Pulse of Berkshire Hathaway and Warren Buffett
Throughout the spring, the snowballing financial scandal at insurance giant American International Group has put the spotlight on the firm's partner in the improper deal, General Re Corp. Could the damage extend to Gen Re's owner, Berkshire Hathaway Inc. and its legendary chief, Warren Buffett?
The questions about Gen Re come on top of another that gets larger every year: Can Berkshire continue to deliver outsized returns to shareholders after 74-year-old Buffett, who has run the company for four decades, passes from the scene? Since 1965, Berkshire's average annual returns have been about double those of the Standard & Poor's 500.
Gen Re, a reinsurance giant with worldwide operations, is among Berkshire's largest units. In 2000, it provided a $500 million finite insurance policy that AIG used to improperly dress up its financial statements to bolster AIG's stock price. The scandal led AIG directors to force out their chairman and chief executive, Maurice Greenberg, and AIG has since reported a number of other accounting improprieties.
Greenberg, according to AIG, was directly involved in the finite-insurance deal with Gen Re. But it is not clear whether Gen Re executives knew that AIG improperly booked the deal, which in itself was legal. AIG had called the contract an insurance policy when it was in fact a loan. By mid-May, one Gen Re executive had been notified by regulators that he could face criminal charges, and Gen Re put him and a second executive on leave.
Buffett has been interviewed by regulators, but he has been described as a cooperating witness rather than a target of the investigation. In a March 29 statement, Berkshire said that "Mr. Buffett was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions."
Since the end of February, when the seriousness of the AIG scandal began to become apparent, Berkshire's stock has fallen about 8%, compared to a 1.6% drop in the Standard & Poor's 500.
Investing the Float
In 40 years, Buffett has converted Berkshire from a small New England textile manufacturer to a mammoth holding company. Among the publicly traded companies in its portfolio, the largest stakes in market value are in American Express ($8.5 billion), Coca-Cola ($8.3 billion) and Gillette ($4.3 billion). Its largest stakes as a percentage of shares outstanding are in The Washington Post (18.1%), Moody's (16.2%) and White Mountains Insurance (16%). Altogether, Berkshire's holdings in the publicly traded companies were worth $37.7 billion at the end of 2004, according to the company's annual report.
In addition, Berkshire has a number of wholly owned subsidiaries. That includes a number of insurers, whose size is measured by "float" -- the money on hand from insurance premiums received from customers and not yet paid out for claims. Gen Re is the largest of the insurance subsidiaries, with a $23.6 billion float. Next are Berkshire Hathaway Reinsurance ($13.9 billion) and Geico Insurance ($5.3 billion). Total float for these and other insurance operations is about $46 billion.
Reinsurers provide policies to other insurance companies, allowing them to cover potential claims that would be too large to pay on their own. Insurers of all types can make underwriting profits whenever the premiums exceed claims paid. But, typically, the lion's share of insurance-company profits comes from investing the float. Berkshire uses the float to invest in stocks and to buy whole companies.
Gen Re has not been the most successful Berkshire unit. Underwriting profit was a scant $3 million last year, compared to $970 million and $417 million at the smaller Geico and Berkshire Hathaway Reinsurance units.
But in his annual letter to shareholders this spring, Buffett blamed Gen Re's poor performance on bad decisions the company made before its current chairman and CEO, Joseph Brandon, took over three years ago. "At General Re, Joe Brandon has restored the long-admired culture of underwriting discipline that, for a time, had lost its way," Buffett wrote. "The excellent results he realized in 2004 on current business, however, were offset by adverse developments from the years before he took the helm."
The finite insurance deal with AIG was done under Brandon's predecessor. Any repercussions from that deal therefore do not seem likely to up-end Gen Re's current management. Fines or other financial penalties are not likely to do lasting damage, either, as Berkshire is sitting on $43 billion in cash.
But could Gen Re have been involved in other improper activities? "General Re is known as a pretty conservative operation," said Cummins, adding that unlike AIG, which has faced numerous questions about accounting practices and other matters over the years, Gen Re has a clean track record. "I would be mildly surprised if General Re had been into this in a major, major way. If this is the only involvement of General Re, I just don't see it as being a big deal. I think it will blow over." Siegel noted that Gen Re's business problems, mainly from writing policies that were too risky, probably turned out to be bigger than Buffett expected when he bought the company in 1998. But, he added, "I think he's got a better crew now."
Also, it is not unusual for a new Berkshire acquisition to have some troubles at the start. Buffett hunts for companies he can get at bargain prices, usually because they are beaten down by problems he views as soluble. After Berkshire picked up National Indemnity Company in 1980, for example, it suffered losses in four of the next five years, according to Berkshire's 2004 annual report. That was followed by 16 years of handsome profits. The only loss since 1984 was in 2001, when many insurers were hammered. "Indeed, had we not made this acquisition, Berkshire would be lucky to be worth half what it is today," Buffett said in his recent annual letter to shareholders.
Though Buffett is often described as a brilliant stock picker, publicly traded stocks now constitute less than half of Berkshire's net worth. And he is not an active stock trader; he generally buys only stocks he hopes to hold forever.
In recent years, Buffett also has become a big investor in currency markets. At the end of 2004, Berkshire owned $21.4 billion in foreign exchange contracts involving 12 currencies. He strongly believes that the U.S. current accounts deficit will cause the dollar to fall. Although the dollar climbed slightly last year, causing a $310 million loss on these bets, Buffet said he would stick with his bets against the dollar.
"The Buffett Way" of Investing
At 74, Buffett says he is in excellent health and has no plans to retire. Nor has he named a successor. But if he did leave the company, what would happen to it? Buffett is universally viewed as the key to Berkshire's fine performance. "He's obviously a very bright man," Siegel said. "He looks at things very rationally. He doesn't like to get his emotions involved."
While that sounds like a sensible practice anyone could emulate, it's very difficult to keep excitement, worry and other emotions from affecting decisions, Siegel added. Many books have been written about "The Buffett Way" of investing. But like most people at the top of their fields, Buffett has a talent that cannot be bottled, Siegel noted, and his departure would inevitably be something of a blow. He has no obvious successor: His long-time partner, Charlie Munger, is older.
On the other hand, many parts of Berkshire may be able to chug along quite well without Buffett. Although he is a hands-on investor, choosing companies and stocks very carefully, he is not a hands-on manager. His style is to put good executives into place, or keep the good ones he gets when he buys a company. He then leaves them free to manage with little interference from his famously lean corporate headquarters.
His departure could bring an end to the string of brilliant acquisitions. But not much is going on with that part of the company, anyway. "My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have," he said in his shareholders letter. "But I struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year with $43 billion in cash equivalents."
While he promised to keep looking, he also said stock returns are likely to be smaller in the future than they were in the past. Hence, investors cannot count on dramatic gains in Berkshire even if Buffett stays on the job for some time.
Neither, however, should they expect Buffett's advancing age to have much effect on the share price. "Everyone knows he's not going to live forever," Siegel said. "That's built into the price.... The market is thinking, maybe he's got five to 10 years.... If we knew that Buffett was going to live forever, maybe the stock would be 10% higher."
Source : Wharton Business School
Throughout the spring, the snowballing financial scandal at insurance giant American International Group has put the spotlight on the firm's partner in the improper deal, General Re Corp. Could the damage extend to Gen Re's owner, Berkshire Hathaway Inc. and its legendary chief, Warren Buffett?
The questions about Gen Re come on top of another that gets larger every year: Can Berkshire continue to deliver outsized returns to shareholders after 74-year-old Buffett, who has run the company for four decades, passes from the scene? Since 1965, Berkshire's average annual returns have been about double those of the Standard & Poor's 500.
Gen Re, a reinsurance giant with worldwide operations, is among Berkshire's largest units. In 2000, it provided a $500 million finite insurance policy that AIG used to improperly dress up its financial statements to bolster AIG's stock price. The scandal led AIG directors to force out their chairman and chief executive, Maurice Greenberg, and AIG has since reported a number of other accounting improprieties.
Greenberg, according to AIG, was directly involved in the finite-insurance deal with Gen Re. But it is not clear whether Gen Re executives knew that AIG improperly booked the deal, which in itself was legal. AIG had called the contract an insurance policy when it was in fact a loan. By mid-May, one Gen Re executive had been notified by regulators that he could face criminal charges, and Gen Re put him and a second executive on leave.
Buffett has been interviewed by regulators, but he has been described as a cooperating witness rather than a target of the investigation. In a March 29 statement, Berkshire said that "Mr. Buffett was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions."
Since the end of February, when the seriousness of the AIG scandal began to become apparent, Berkshire's stock has fallen about 8%, compared to a 1.6% drop in the Standard & Poor's 500.
Investing the Float
In 40 years, Buffett has converted Berkshire from a small New England textile manufacturer to a mammoth holding company. Among the publicly traded companies in its portfolio, the largest stakes in market value are in American Express ($8.5 billion), Coca-Cola ($8.3 billion) and Gillette ($4.3 billion). Its largest stakes as a percentage of shares outstanding are in The Washington Post (18.1%), Moody's (16.2%) and White Mountains Insurance (16%). Altogether, Berkshire's holdings in the publicly traded companies were worth $37.7 billion at the end of 2004, according to the company's annual report.
In addition, Berkshire has a number of wholly owned subsidiaries. That includes a number of insurers, whose size is measured by "float" -- the money on hand from insurance premiums received from customers and not yet paid out for claims. Gen Re is the largest of the insurance subsidiaries, with a $23.6 billion float. Next are Berkshire Hathaway Reinsurance ($13.9 billion) and Geico Insurance ($5.3 billion). Total float for these and other insurance operations is about $46 billion.
Reinsurers provide policies to other insurance companies, allowing them to cover potential claims that would be too large to pay on their own. Insurers of all types can make underwriting profits whenever the premiums exceed claims paid. But, typically, the lion's share of insurance-company profits comes from investing the float. Berkshire uses the float to invest in stocks and to buy whole companies.
Gen Re has not been the most successful Berkshire unit. Underwriting profit was a scant $3 million last year, compared to $970 million and $417 million at the smaller Geico and Berkshire Hathaway Reinsurance units.
But in his annual letter to shareholders this spring, Buffett blamed Gen Re's poor performance on bad decisions the company made before its current chairman and CEO, Joseph Brandon, took over three years ago. "At General Re, Joe Brandon has restored the long-admired culture of underwriting discipline that, for a time, had lost its way," Buffett wrote. "The excellent results he realized in 2004 on current business, however, were offset by adverse developments from the years before he took the helm."
The finite insurance deal with AIG was done under Brandon's predecessor. Any repercussions from that deal therefore do not seem likely to up-end Gen Re's current management. Fines or other financial penalties are not likely to do lasting damage, either, as Berkshire is sitting on $43 billion in cash.
But could Gen Re have been involved in other improper activities? "General Re is known as a pretty conservative operation," said Cummins, adding that unlike AIG, which has faced numerous questions about accounting practices and other matters over the years, Gen Re has a clean track record. "I would be mildly surprised if General Re had been into this in a major, major way. If this is the only involvement of General Re, I just don't see it as being a big deal. I think it will blow over." Siegel noted that Gen Re's business problems, mainly from writing policies that were too risky, probably turned out to be bigger than Buffett expected when he bought the company in 1998. But, he added, "I think he's got a better crew now."
Also, it is not unusual for a new Berkshire acquisition to have some troubles at the start. Buffett hunts for companies he can get at bargain prices, usually because they are beaten down by problems he views as soluble. After Berkshire picked up National Indemnity Company in 1980, for example, it suffered losses in four of the next five years, according to Berkshire's 2004 annual report. That was followed by 16 years of handsome profits. The only loss since 1984 was in 2001, when many insurers were hammered. "Indeed, had we not made this acquisition, Berkshire would be lucky to be worth half what it is today," Buffett said in his recent annual letter to shareholders.
Though Buffett is often described as a brilliant stock picker, publicly traded stocks now constitute less than half of Berkshire's net worth. And he is not an active stock trader; he generally buys only stocks he hopes to hold forever.
In recent years, Buffett also has become a big investor in currency markets. At the end of 2004, Berkshire owned $21.4 billion in foreign exchange contracts involving 12 currencies. He strongly believes that the U.S. current accounts deficit will cause the dollar to fall. Although the dollar climbed slightly last year, causing a $310 million loss on these bets, Buffet said he would stick with his bets against the dollar.
"The Buffett Way" of Investing
At 74, Buffett says he is in excellent health and has no plans to retire. Nor has he named a successor. But if he did leave the company, what would happen to it? Buffett is universally viewed as the key to Berkshire's fine performance. "He's obviously a very bright man," Siegel said. "He looks at things very rationally. He doesn't like to get his emotions involved."
While that sounds like a sensible practice anyone could emulate, it's very difficult to keep excitement, worry and other emotions from affecting decisions, Siegel added. Many books have been written about "The Buffett Way" of investing. But like most people at the top of their fields, Buffett has a talent that cannot be bottled, Siegel noted, and his departure would inevitably be something of a blow. He has no obvious successor: His long-time partner, Charlie Munger, is older.
On the other hand, many parts of Berkshire may be able to chug along quite well without Buffett. Although he is a hands-on investor, choosing companies and stocks very carefully, he is not a hands-on manager. His style is to put good executives into place, or keep the good ones he gets when he buys a company. He then leaves them free to manage with little interference from his famously lean corporate headquarters.
His departure could bring an end to the string of brilliant acquisitions. But not much is going on with that part of the company, anyway. "My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have," he said in his shareholders letter. "But I struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year with $43 billion in cash equivalents."
While he promised to keep looking, he also said stock returns are likely to be smaller in the future than they were in the past. Hence, investors cannot count on dramatic gains in Berkshire even if Buffett stays on the job for some time.
Neither, however, should they expect Buffett's advancing age to have much effect on the share price. "Everyone knows he's not going to live forever," Siegel said. "That's built into the price.... The market is thinking, maybe he's got five to 10 years.... If we knew that Buffett was going to live forever, maybe the stock would be 10% higher."
Source : Wharton Business School
gr8 initiative dude !!! 
Rankings of Best Global Brands in 2005 is out and again Coca-Cola leads the way with Brand worth of more than $67 bn.
I wonder when will an Indian brand feature in the list. But definitely someday will....
Refere to attachment for the complete list.....
Source : Interbrand
Wonderful article...great initative by teesra banda aka Vijay Singh!!!!!!
keep em coming!!!!
keep em coming!!!!
Goodwill Hunting: Financial Value of Marketing & PR
Can you put a dollar value on your marketing? It's no stretch of the imagination to say that marketing can enhance the perception of a company, but does it have a dollar value? One topic that really perks up the ears of the students in my business administration classes is the subject of the true financial value of marketing and public relations. It's counter-intuitive to assumemuch less believethat something as intrinsic as a brand image or as esoteric as proactive public relations could produce and retain valuetrue economic valuefor a company.
Time and again I hear people questioning the true value of marketing. How does one put a dollar value on a function that doesn't directly contribute to the bottom line? Sales and revenue aren't always accurate indicators, because it's often difficult to tell what part of your marketing budget is the most effective. As the old saw goes, "I know I'm wasting half of my marketing dollars; I just don't know which half." After all, marketing doesn't really create anything. Most companies think of marketing as an indirect expense because it's not directly related to production.
Marketing Value = Goodwill
While many business students (and even some marketing practitioners) believe there is no concrete way to quantify the value of marketing and public relations, I believe there is a financial value to marketing and it stares you right in the face every time you look at the balance sheet. It's called goodwill. What is goodwill? It is simply the value of a company over and above the value of its assets. In short, goodwill is the price someone is willing to pay for a company, not what you could get by selling its components.
Here's an example. Arguably, one of the greatest cars ever made was the AC Cobra. The performance of the AC Cobra has not been duplicated, even in today's most expensive high-performance cars. Only about 200 Cobras were ever built. It was designed to be a street-legal race car of sorts. An AC Cobra in mint condition will fetch upwards of US$ 500,000. Break an AC Cobra down and sell its component pieces and you'll probably get $5,000. Is the car worth $500,000 or $5,000? All depends on whom you're asking. To a parts dealer, the car is worth $5,000, but to a car collector, it's probably worth the half million, because that's what someone who values AC Cobras is willing to pay for them.
A company might be worth $1 billion on paper, but if the market is willing to pay $10 billion, that is the value of the company. Herein lies the value of marketing and public relations. Marketing creates the value; public relations helps retain the value and keep it from deteriorating.
The Best of Times, the Worst of Times
When a company falls on hard times, the first department to receive wholesale cuts is marketing. In effect, when companies have fallen on hard times, they are voluntarily de-valuing their own company at a time when, in the face of competition, value should be trumpeted. In this sense, marketing should not be thought of as its components such as advertising, direct mail, premiums, couponing, etc. In hard times, or in good times, marketing should be thought of as "value." Marketing is goodwill. Goodwill is achieved through marketing, recruiting and product development and protected by public relations.
One relatively recent example is the HP-Compaq merger. Compaq was valued at nearly $25 billion at the time of the merger. Turns out, Compaq was not worth nearly as much goodwill as HP credited to it. In fact, shareholders received such little value in the HP-Compaq merger, HP will likely be forced to write off a major portion of the $14.5 billion in goodwill on its balance sheet, virtually shouting to the world that the merger was an unmitigated failureto the detriment of both companies.
Let's explore that a little further. Of the $25 billion HP paid for Compaq, it was determined that $14.5 billion was goodwill, or the added value of the company. Compaq added that goodwill value to its balance sheet when the merger took place. The offsetting entry for the goodwill asset entry was probably retained earnings or some other line item in shareholder equity. Goodwill is an intangible asset, but since it has value, it can be depreciated just like any other asset. In short, since Compaq wasn't worth that much in goodwill, HP will have to write off the difference between the value it assumed and the value it actually got. That action will likely affect the bond rating along with a host of other financial indicators.
Yes, This Means You
Don't think because you're not a public company and you don't have "goodwill" on your balance sheet that you're not responsible for creating goodwill. Admittedly, goodwill comes into play most often when one company purchases another, but even the mom and pop grocery store on the corner has to create goodwill to survive.
Witness the recent public relations nightmare that Wendy's endured when a woman claimed to have found a piece of a finger in a bowl of Wendy's chili. It seemed to take the Wendy's PR machine forever to gear up. Wendy's investigated the store where the chili was served. Then it investigated all the stores in the area. Then it audited the processes of all its stores nationwide. Then they spent countless, precious, agonizing days trying to figure out if the finger had been cooked (for some reason). All the while, Wendy's was virtually silent. Anyone who has ever spent a day in the PR world knows that the quicker you start dispelling rumors and embarking on "damage control," the quicker you recover.
While this public relations and marketing disaster was going on, I was teaching a university class in Promotions Management. I asked a pointed question over the course of our discussion: "Would you eat at Wendy's today?" And then, "Would you buy Wendy's stock today?" Most students answered no to both questions. Suddenly, the light went on for some of them. The actual value of the Wendy's empire was decreasing before their very eyes, because it had decreased to them as well. It's fair to say the damage from this incident will have long-lasting effects.
I used this incident in my classroom to illustrate the value of goodwill and the role public relations plays in retaining that goodwill. Even though marketing has established the Wendy's brand, 30 years of marketing could not keep customers going to the restaurants while they thought they might be in danger of pulling a digit out of a bowl of chili. But companies can recover if they have a "reserve" of goodwill built up. Because Wendy's does have substantial goodwill in the community, some customers showed their support by showing up at Wendy's restaurants specifically to order the chili.
A situation like this makes even a massive company like Wendy's vulnerable. If McDonald's had had a mind to do so, they likely could have mounted a hostile takeover bid for Wendy'sand they would have gotten the empire much cheaper than they would have a week before this incident.
I predicted to my students that if the woman who claimed to find the finger in the chili was lying, Wendy's would have no choice but to land on her with both feet. Companies must vigorously protect the goodwill value they have spent years building. Just as Tylenol prosecuted the perpetrators of the cyanide hoax and just as Coca-Cola prosecuted the perpetrators of the infamous syringe hoax, the company had to protect its brand image by prosecuting those who had damaged it. Fortunately, those two companies have recovered from their public relations nightmares, and they likely even gained a few fans for how well they handled these incidents.
What company is next in line, and has it built enough goodwill to weather the storm?
Internal Goodwill
Let us not discount the value of internal goodwill. Some of the internal items that comprise the esoteric goodwill entry on the balance sheet are executive and managerial acumen and skill of the labor force. While these are all internal assets, they still create external value. The mantra of venture capitalists in leaner times has been, "I'd rather invest in a company with excellent management and a mediocre idea rather than a company with mediocre management and an excellent idea."
Goodwill, Addendum
It should be noted, for the sake of accuracy, that goodwill has many components and, by definition, most of them are intangible, as has already been stated. Among the items that comprise external goodwill is the company's identity.
It should also be noted that the executives in a company create internal goodwill value through investment in resources like training for the labor force, compensation packages for highly skilled executives and investment in political action committees and lobbyists to help pass laws amenable to the particular business the company is in. The value to the company is still external, but the source of the value is internal. Furthermore, executives create external goodwill value also through the investment in resources, but external resources are other companies and business blocks that hopefully create synergies such that the whole is greater than the sum of the two parts. There hasn't been a tremendous amount of evidence lately that major mergers do, in fact, create that synergy. Conclusion
Marketing and public relations have a clear-cut financial value. The components that make up that value are admittedly esoteric, difficult to quantify and often up for debate, but the potential value is there. You need look no farther than your balance sheet to find it.
SOURCE : INTERBRAND
Can you put a dollar value on your marketing? It's no stretch of the imagination to say that marketing can enhance the perception of a company, but does it have a dollar value? One topic that really perks up the ears of the students in my business administration classes is the subject of the true financial value of marketing and public relations. It's counter-intuitive to assumemuch less believethat something as intrinsic as a brand image or as esoteric as proactive public relations could produce and retain valuetrue economic valuefor a company.
Time and again I hear people questioning the true value of marketing. How does one put a dollar value on a function that doesn't directly contribute to the bottom line? Sales and revenue aren't always accurate indicators, because it's often difficult to tell what part of your marketing budget is the most effective. As the old saw goes, "I know I'm wasting half of my marketing dollars; I just don't know which half." After all, marketing doesn't really create anything. Most companies think of marketing as an indirect expense because it's not directly related to production.
Marketing Value = Goodwill
While many business students (and even some marketing practitioners) believe there is no concrete way to quantify the value of marketing and public relations, I believe there is a financial value to marketing and it stares you right in the face every time you look at the balance sheet. It's called goodwill. What is goodwill? It is simply the value of a company over and above the value of its assets. In short, goodwill is the price someone is willing to pay for a company, not what you could get by selling its components.
Here's an example. Arguably, one of the greatest cars ever made was the AC Cobra. The performance of the AC Cobra has not been duplicated, even in today's most expensive high-performance cars. Only about 200 Cobras were ever built. It was designed to be a street-legal race car of sorts. An AC Cobra in mint condition will fetch upwards of US$ 500,000. Break an AC Cobra down and sell its component pieces and you'll probably get $5,000. Is the car worth $500,000 or $5,000? All depends on whom you're asking. To a parts dealer, the car is worth $5,000, but to a car collector, it's probably worth the half million, because that's what someone who values AC Cobras is willing to pay for them.
A company might be worth $1 billion on paper, but if the market is willing to pay $10 billion, that is the value of the company. Herein lies the value of marketing and public relations. Marketing creates the value; public relations helps retain the value and keep it from deteriorating.
The Best of Times, the Worst of Times
When a company falls on hard times, the first department to receive wholesale cuts is marketing. In effect, when companies have fallen on hard times, they are voluntarily de-valuing their own company at a time when, in the face of competition, value should be trumpeted. In this sense, marketing should not be thought of as its components such as advertising, direct mail, premiums, couponing, etc. In hard times, or in good times, marketing should be thought of as "value." Marketing is goodwill. Goodwill is achieved through marketing, recruiting and product development and protected by public relations.
One relatively recent example is the HP-Compaq merger. Compaq was valued at nearly $25 billion at the time of the merger. Turns out, Compaq was not worth nearly as much goodwill as HP credited to it. In fact, shareholders received such little value in the HP-Compaq merger, HP will likely be forced to write off a major portion of the $14.5 billion in goodwill on its balance sheet, virtually shouting to the world that the merger was an unmitigated failureto the detriment of both companies.
Let's explore that a little further. Of the $25 billion HP paid for Compaq, it was determined that $14.5 billion was goodwill, or the added value of the company. Compaq added that goodwill value to its balance sheet when the merger took place. The offsetting entry for the goodwill asset entry was probably retained earnings or some other line item in shareholder equity. Goodwill is an intangible asset, but since it has value, it can be depreciated just like any other asset. In short, since Compaq wasn't worth that much in goodwill, HP will have to write off the difference between the value it assumed and the value it actually got. That action will likely affect the bond rating along with a host of other financial indicators.
Yes, This Means You
Don't think because you're not a public company and you don't have "goodwill" on your balance sheet that you're not responsible for creating goodwill. Admittedly, goodwill comes into play most often when one company purchases another, but even the mom and pop grocery store on the corner has to create goodwill to survive.
Witness the recent public relations nightmare that Wendy's endured when a woman claimed to have found a piece of a finger in a bowl of Wendy's chili. It seemed to take the Wendy's PR machine forever to gear up. Wendy's investigated the store where the chili was served. Then it investigated all the stores in the area. Then it audited the processes of all its stores nationwide. Then they spent countless, precious, agonizing days trying to figure out if the finger had been cooked (for some reason). All the while, Wendy's was virtually silent. Anyone who has ever spent a day in the PR world knows that the quicker you start dispelling rumors and embarking on "damage control," the quicker you recover.
While this public relations and marketing disaster was going on, I was teaching a university class in Promotions Management. I asked a pointed question over the course of our discussion: "Would you eat at Wendy's today?" And then, "Would you buy Wendy's stock today?" Most students answered no to both questions. Suddenly, the light went on for some of them. The actual value of the Wendy's empire was decreasing before their very eyes, because it had decreased to them as well. It's fair to say the damage from this incident will have long-lasting effects.
I used this incident in my classroom to illustrate the value of goodwill and the role public relations plays in retaining that goodwill. Even though marketing has established the Wendy's brand, 30 years of marketing could not keep customers going to the restaurants while they thought they might be in danger of pulling a digit out of a bowl of chili. But companies can recover if they have a "reserve" of goodwill built up. Because Wendy's does have substantial goodwill in the community, some customers showed their support by showing up at Wendy's restaurants specifically to order the chili.
A situation like this makes even a massive company like Wendy's vulnerable. If McDonald's had had a mind to do so, they likely could have mounted a hostile takeover bid for Wendy'sand they would have gotten the empire much cheaper than they would have a week before this incident.
I predicted to my students that if the woman who claimed to find the finger in the chili was lying, Wendy's would have no choice but to land on her with both feet. Companies must vigorously protect the goodwill value they have spent years building. Just as Tylenol prosecuted the perpetrators of the cyanide hoax and just as Coca-Cola prosecuted the perpetrators of the infamous syringe hoax, the company had to protect its brand image by prosecuting those who had damaged it. Fortunately, those two companies have recovered from their public relations nightmares, and they likely even gained a few fans for how well they handled these incidents.
What company is next in line, and has it built enough goodwill to weather the storm?
Internal Goodwill
Let us not discount the value of internal goodwill. Some of the internal items that comprise the esoteric goodwill entry on the balance sheet are executive and managerial acumen and skill of the labor force. While these are all internal assets, they still create external value. The mantra of venture capitalists in leaner times has been, "I'd rather invest in a company with excellent management and a mediocre idea rather than a company with mediocre management and an excellent idea."
Goodwill, Addendum
It should be noted, for the sake of accuracy, that goodwill has many components and, by definition, most of them are intangible, as has already been stated. Among the items that comprise external goodwill is the company's identity.
It should also be noted that the executives in a company create internal goodwill value through investment in resources like training for the labor force, compensation packages for highly skilled executives and investment in political action committees and lobbyists to help pass laws amenable to the particular business the company is in. The value to the company is still external, but the source of the value is internal. Furthermore, executives create external goodwill value also through the investment in resources, but external resources are other companies and business blocks that hopefully create synergies such that the whole is greater than the sum of the two parts. There hasn't been a tremendous amount of evidence lately that major mergers do, in fact, create that synergy. Conclusion
Marketing and public relations have a clear-cut financial value. The components that make up that value are admittedly esoteric, difficult to quantify and often up for debate, but the potential value is there. You need look no farther than your balance sheet to find it.
SOURCE : INTERBRAND
Hey guys,
This speech that you read below might just stary off a little from the actually name of this thread. But since this thread is slowly gaining popularity I thought id add this "MUST READ" speech by Steve Jobs. It has , I must say, influenced me. Im sure once your done you'd be inspired. Read on..
'You've got to find what you love,' Jobs says
This is the text of the Commencement address by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, delivered on June 12, 2005.
I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.
The first story is about connecting the dots.
I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?
It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.
And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.
It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5 deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:
Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.
None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.
Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.
My second story is about love and loss.
I was lucky I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation - the Macintosh - a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.
I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.
..contd in the next post ...
I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.
During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I retuned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.
I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.
My third story is about death.
When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.
Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.
About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.
I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.
This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:
No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.
Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.
Stay Hungry. Stay Foolish.
Thank you all very much.
Regards,
Roshan
During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I retuned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.
I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.
My third story is about death.
When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.
Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.
About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.
I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.
This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:
No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.
Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.
Stay Hungry. Stay Foolish.
Thank you all very much.
Regards,
Roshan
Hey guys,
This speech that you read below might just stary off a little from the actually name of this thread. But since this thread is slowly gaining popularity I thought id add this "MUST READ" speech by Steve Jobs. It has , I must say, influenced me. Im sure once your done you'd be inspired. Read on..
...
Finally i found someone other than ME posting article on this thread....Thanx atouchofcrypticthunder...
Keep 'em coming !!!
Hey Teesra,
Yup mate you'll be getting more such intresting articles from me for sure.
Take Care!
Regards,
Roshan
Hey Teesra,
Hey Dude !!!
its TEESRA BANDA not TEESRA
Keep Posting ....
Is General Motors Running Out of Gas?
General Motors may be down but it's not out. At least not yet.
True, it's been a tough year for the giant auto manufacturer: a $1.1 billion first-quarter loss, junk-bond status for its debt, a largely lackluster lineup of models, and a mountain of health-care and pension liabilities that builds an immediate cost disadvantage into every vehicle that rolls off the line.
But experts at Wharton and elsewhere who follow the car and truck business say that GM is not on the verge of filing for bankruptcy protection, that it has a talented management team and that some new models on the horizon may rev up sales. In addition, a much-publicized bid for GM shares by billionaire financier Kirk Kerkorian is a sign of confidence in the company, according to Wall Street analysts. GM also has an especially profitable gem in its consumer-financing subsidiary, General Motors Acceptance Corporation (GMAC), and GM's assets are worth far more than the company's relatively paltry market capitalization of $18 billion would indicate.
For GM to survive and thrive over the long term, however, the company needs more than a few hot models, although desirable products are certainly pivotal; it requires a major structural and cultural overhaul, these people say. GM must start thinking small -- not an easy task for a company that has never done that -- and accept a diminished, yet still significant, role in the global auto business. If GM had recognized years ago that a steady erosion of its share of the U.S. vehicle market was inevitable, it might have taken strategic steps to ratchet down its size on its own terms, according to Wharton management professor John Paul MacDuffie. As things stand, however, GM is going to continue to shrink, not by its own volition, but largely due to pressure from competitors and macroeconomic conditions over which it has little control.
"GM will end up being smaller," says MacDuffie. "If they had accepted that idea sooner, it would have helped them. The very slow adjustment to the market-share trends is why they have continued some strategies that have turned out to be bad choices." Whenever the company lost market share, he adds, the rallying cry always was, "We're going to get it back. We're going to get back to 37% or 33% or 29%." Today, GM's share of the U.S. market is 25.6%. By comparison, Ford Motor's share is 18.2%.
MacDuffie -- who is also co-director of the International Motor Vehicle Program (IMVP), which has a network of researchers at universities worldwide and is funded by major automakers and suppliers, including GM -- says it is understandable why that rallying cry has been so constant. GM's entire way of thinking has long been built on the benefits of economies of scale: Good things happen when the company's plants are operating at full capacity and sales volume is rising. But that culture has been showing signs of strain for a long time as competitors, mostly from Asia, have eaten away GM's market share.
Slow in Learning
GM was slow to get its plants ready to build "flexibly," that is, to assemble multiple models in each plant, says MacDuffie. But because it is more expensive to outfit a plant with that capability, GM hesitated to go that route. GM's sales projections showed the company selling a large volume of large vehicles, especially sports utility vehicles. If the product sold well, everyone was happy. If it did not sell well, GM found itself stuck in a money-losing situation.
"That belief in volume, and doing whatever it takes to keep volume, has driven a lot of their decisions," MacDuffie points out. "GM's labor costs are fixed, meaning they remain the same regardless of what the volume of sales is. GM wanted to keep factories open as much as possible. There was some value in that strategy, but I think they overdid it. That strategy delayed them in starting to engage the United Auto Workers (UAW) on ."
John Moavenzadeh, executive director of IMVP, describes GM as "a formidable company with substantial resources. They have managed turnarounds before in the past." But Moavenzadeh labels the company's current situation "dire," adding: "It seems to me like they can't get out of this trap with the company in its existing form, or by making incremental improvements, or even by getting a few more hit products. It seems like there has to be some sort of a restructuring that takes place."
Another researcher at IMVP, Matthias Holweg, a lecturer at the Judge Institute of Management at the University of Cambridge in England, says "GM is too conservative, not inventive enough." He adds: "In terms of product design and engineering, the Big Three have fallen behind their Japanese competitors. Recently, Chrysler has developed a much more attractive product strategy. Neither Ford nor GM has been able to adapt to that."
Gerald Meyers, former chairman of American Motors, a now-defunct company that once competed with GM, Ford and Chrysler in the days of the Big Four, also predicts that GM's market share will continue to shrink. In 10 years or so, he says, "The U.S. auto industry will be much like the European industry is right now -- in a word, fragmented. Everybody will be fighting to get as much as 15% of the market. Nobody will exceed that for very long, if they get it at all."
A decade from now, "Ford will be in the mid-teens and GM will be in the high teens," adds Meyers, an adjunct professor at the Ross School of Business at the University of Michigan. "They might be making money at that point, if they can cut ."
No Bankruptcy Filing
Meyers and MacDuffie agree that there is no need for GM to file for bankruptcy under Chapter 11 of the U.S. bankruptcy code, which protects companies from creditors while they reorganize. "Not a chance," says Meyers, noting that GM is sitting on a cash hoard of $20 billion and has access to about another $20 billion. "There's no scenario that I can think of, or any condition, that GM will do a Chapter 11 any time soon."
Meyers says the overriding factor that explains GM's woes is "a failure to design and manufacture vehicles that are attractive to enough people that they're willing to pay the price at which GM can make a profit. That sounds pretty fundamental, but that's the heart of their problem." GM had high hopes for the new Pontiac G6 and the Chevrolet Cobalt, but sales have been lukewarm. Arriving in showrooms later this year will be the much-anticipated Pontiac Solstice, a sporty roadster. GM has other new products due out for the 2006 and 2007 model years, including a new line-up of large SUVs, which the public may not welcome with open arms, given the price of gasoline.
"The critical point is right about now," Meyers says. "GM is about to give birth to several series of vehicles that are meant to show the way out of difficulty." The lackluster response to the G6 and Cobalt, however, "is an ominous sign. If that's what GM is going to do, that's not enough."
MacDuffie echoes that view. "If the products aren't selling, everything else that GM may try to do is too little, too late. The fact that large SUV and truck sales are going down is not a big surprise. But why aren't their new models selling? They have heralded them. They have talked them up. The reception has not been that positive. The point is, you can't go a long time ignoring your car line, then come back and expect to outsell the Camry, Accord and Passat."
Meyers notes that GM also is buffeted by macroeconomic winds that are damaging the company's bottom line and over which it has no control. Prices for steel, oil and plastics all have risen in recent years. GM also is burdened with legacy costs over which it has little control if it keeps its current promises to employees. "Health care is the one you hear most about -- and it's big," Meyers says. "But pension costs are enormous too."
Meyers also cites GM's culture as a key barrier to turning the company around. "GM's got enormous momentum of the wrong kind. It has, in decades past, been hugely successful. The culture has said, 'Whatever we've done in the past will repeat itself', but that's not working in the current environment." Meyers admires GM's top executives -- G. Richard Wagoner Jr., chairman and CEO; John M. Devine, vice chairman and chief financial officer; and Robert A. Lutz, vice chairman of global product development and well-known "car guy." "I know these people personally," says Meyers, noting that "they are doing their utmost to turn that organization around. So far, they have not succeeded."
Continued...........................
General Motors may be down but it's not out. At least not yet.
True, it's been a tough year for the giant auto manufacturer: a $1.1 billion first-quarter loss, junk-bond status for its debt, a largely lackluster lineup of models, and a mountain of health-care and pension liabilities that builds an immediate cost disadvantage into every vehicle that rolls off the line.
But experts at Wharton and elsewhere who follow the car and truck business say that GM is not on the verge of filing for bankruptcy protection, that it has a talented management team and that some new models on the horizon may rev up sales. In addition, a much-publicized bid for GM shares by billionaire financier Kirk Kerkorian is a sign of confidence in the company, according to Wall Street analysts. GM also has an especially profitable gem in its consumer-financing subsidiary, General Motors Acceptance Corporation (GMAC), and GM's assets are worth far more than the company's relatively paltry market capitalization of $18 billion would indicate.
For GM to survive and thrive over the long term, however, the company needs more than a few hot models, although desirable products are certainly pivotal; it requires a major structural and cultural overhaul, these people say. GM must start thinking small -- not an easy task for a company that has never done that -- and accept a diminished, yet still significant, role in the global auto business. If GM had recognized years ago that a steady erosion of its share of the U.S. vehicle market was inevitable, it might have taken strategic steps to ratchet down its size on its own terms, according to Wharton management professor John Paul MacDuffie. As things stand, however, GM is going to continue to shrink, not by its own volition, but largely due to pressure from competitors and macroeconomic conditions over which it has little control.
"GM will end up being smaller," says MacDuffie. "If they had accepted that idea sooner, it would have helped them. The very slow adjustment to the market-share trends is why they have continued some strategies that have turned out to be bad choices." Whenever the company lost market share, he adds, the rallying cry always was, "We're going to get it back. We're going to get back to 37% or 33% or 29%." Today, GM's share of the U.S. market is 25.6%. By comparison, Ford Motor's share is 18.2%.
MacDuffie -- who is also co-director of the International Motor Vehicle Program (IMVP), which has a network of researchers at universities worldwide and is funded by major automakers and suppliers, including GM -- says it is understandable why that rallying cry has been so constant. GM's entire way of thinking has long been built on the benefits of economies of scale: Good things happen when the company's plants are operating at full capacity and sales volume is rising. But that culture has been showing signs of strain for a long time as competitors, mostly from Asia, have eaten away GM's market share.
Slow in Learning
GM was slow to get its plants ready to build "flexibly," that is, to assemble multiple models in each plant, says MacDuffie. But because it is more expensive to outfit a plant with that capability, GM hesitated to go that route. GM's sales projections showed the company selling a large volume of large vehicles, especially sports utility vehicles. If the product sold well, everyone was happy. If it did not sell well, GM found itself stuck in a money-losing situation.
"That belief in volume, and doing whatever it takes to keep volume, has driven a lot of their decisions," MacDuffie points out. "GM's labor costs are fixed, meaning they remain the same regardless of what the volume of sales is. GM wanted to keep factories open as much as possible. There was some value in that strategy, but I think they overdid it. That strategy delayed them in starting to engage the United Auto Workers (UAW) on ."
John Moavenzadeh, executive director of IMVP, describes GM as "a formidable company with substantial resources. They have managed turnarounds before in the past." But Moavenzadeh labels the company's current situation "dire," adding: "It seems to me like they can't get out of this trap with the company in its existing form, or by making incremental improvements, or even by getting a few more hit products. It seems like there has to be some sort of a restructuring that takes place."
Another researcher at IMVP, Matthias Holweg, a lecturer at the Judge Institute of Management at the University of Cambridge in England, says "GM is too conservative, not inventive enough." He adds: "In terms of product design and engineering, the Big Three have fallen behind their Japanese competitors. Recently, Chrysler has developed a much more attractive product strategy. Neither Ford nor GM has been able to adapt to that."
Gerald Meyers, former chairman of American Motors, a now-defunct company that once competed with GM, Ford and Chrysler in the days of the Big Four, also predicts that GM's market share will continue to shrink. In 10 years or so, he says, "The U.S. auto industry will be much like the European industry is right now -- in a word, fragmented. Everybody will be fighting to get as much as 15% of the market. Nobody will exceed that for very long, if they get it at all."
A decade from now, "Ford will be in the mid-teens and GM will be in the high teens," adds Meyers, an adjunct professor at the Ross School of Business at the University of Michigan. "They might be making money at that point, if they can cut ."
No Bankruptcy Filing
Meyers and MacDuffie agree that there is no need for GM to file for bankruptcy under Chapter 11 of the U.S. bankruptcy code, which protects companies from creditors while they reorganize. "Not a chance," says Meyers, noting that GM is sitting on a cash hoard of $20 billion and has access to about another $20 billion. "There's no scenario that I can think of, or any condition, that GM will do a Chapter 11 any time soon."
Meyers says the overriding factor that explains GM's woes is "a failure to design and manufacture vehicles that are attractive to enough people that they're willing to pay the price at which GM can make a profit. That sounds pretty fundamental, but that's the heart of their problem." GM had high hopes for the new Pontiac G6 and the Chevrolet Cobalt, but sales have been lukewarm. Arriving in showrooms later this year will be the much-anticipated Pontiac Solstice, a sporty roadster. GM has other new products due out for the 2006 and 2007 model years, including a new line-up of large SUVs, which the public may not welcome with open arms, given the price of gasoline.
"The critical point is right about now," Meyers says. "GM is about to give birth to several series of vehicles that are meant to show the way out of difficulty." The lackluster response to the G6 and Cobalt, however, "is an ominous sign. If that's what GM is going to do, that's not enough."
MacDuffie echoes that view. "If the products aren't selling, everything else that GM may try to do is too little, too late. The fact that large SUV and truck sales are going down is not a big surprise. But why aren't their new models selling? They have heralded them. They have talked them up. The reception has not been that positive. The point is, you can't go a long time ignoring your car line, then come back and expect to outsell the Camry, Accord and Passat."
Meyers notes that GM also is buffeted by macroeconomic winds that are damaging the company's bottom line and over which it has no control. Prices for steel, oil and plastics all have risen in recent years. GM also is burdened with legacy costs over which it has little control if it keeps its current promises to employees. "Health care is the one you hear most about -- and it's big," Meyers says. "But pension costs are enormous too."
Meyers also cites GM's culture as a key barrier to turning the company around. "GM's got enormous momentum of the wrong kind. It has, in decades past, been hugely successful. The culture has said, 'Whatever we've done in the past will repeat itself', but that's not working in the current environment." Meyers admires GM's top executives -- G. Richard Wagoner Jr., chairman and CEO; John M. Devine, vice chairman and chief financial officer; and Robert A. Lutz, vice chairman of global product development and well-known "car guy." "I know these people personally," says Meyers, noting that "they are doing their utmost to turn that organization around. So far, they have not succeeded."
Continued...........................
Continued..............
Is General Motors running out of Gas? Part 2
Labor-Management Talks
Meyers does not expect GM to receive any significant relief in the form of a willingness by the United Auto Workers to reopen their current labor agreement, which expires in 2007, and grant concessions to GM to save the company money. "The UAW shows no inclination to back off and I don't think they can as a practical matter," Meyers says. "The UAW's position is, 'We didn't create your problem and were not going to solve it.'"
MacDuffie says there probably are informal talks taking place behind the scenes between management and the union to lay the groundwork for a serious discussion of employee legacy costs in preparation for a new labor contract in 2007. But he, too, doubts how much GM will get from the union. "When a company comes and says, 'We want to reopen the contract,' one response is, 'Why?' Some people are incredulous that the union isn't offering concessions, but there has been a lot of distrust."
A View from Wall Street
David R. Giroux, an investment analyst at T. Rowe Price, a mutual fund company in Baltimore, is well aware of the obstacles GM faces. But he says all the news is not bad for shareholders. For one thing, the various components of GM are worth much, much more than the market value of GM would suggest. "The stock is somewhat attractive because of the underlying value in some of their non-North American business," Giroux says. "Their GMAC business is probably worth $40 per share if it can be separated from GM. So you have a $30 stock and $40 of value in GMAC, plus a lot of cash on the balance sheet. It's an attractive stock just from breakup value." Giroux calls GMAC the "crown jewel" of GM. In 2004, GMAC had net income of $2.9 billion, about 80% of GM's total net income.
Giroux sees other pluses. GM's Asian operation, while not as healthy as it was last year, is still a bright spot for the company. He praises Wagoner and other senior executives as a "very strong management team." And he calls Kerkorian's May 4 tender offer for 28 million GM shares, at $31 per share, a "positive" development for GM shareholders. "He's been a very successful auto investor over time. He made a timely bet on Chrysler in the 1990s. He entered Chrysler at a good price, pushed management to use cash flow to pay dividends, and pushed Chrysler into the arms of DaimlerBenz."
Once the tender is completed, Kerkorian, through Tracinda Corp., his investment company, will control nearly 9% of GM's stock. (He had already owned 22 million shares, or 3.9% of GM's outstanding equity, prior to the tender offer.) Owning that many shares will put Kerkorian in a position to push GM management for change, although he has said that he has no plans to attempt to take over GM. "He's all about shareholder value," Giroux notes. "When he completes his tender, it puts him in a position to be more active, maybe even getting a board seat, maybe eventually arguing for strategic alternatives for GMAC, maybe divestiture by selling GMAC or spinning it off to shareholders."
Meyers, the former American Motors executive, has a less sanguine opinion of the bid for GM stock by the 87-year-old Kerkorian. "He's doing what he's doing for money, not for the welfare of General Motors and certainly not for the auto industry and not for the country," says Meyers. "If you follow the money trail to the end, Kerkorian is there with his hand out. He wants to make money. If he wants, he can cause a lot of headaches for GM, just like he did with Chrysler and the entertainment industry." Kerkorian bought and sold film studio Metro-Goldwyn-Mayer several times over a period of decades, garnering a fortune. Meyers adds that Kerkorian can hurt GM "if GM does not respond to his needs. Or he will raise enough hell in the executive suite that they'll wish they did, such as demanding a seat on the board. That would be unthinkable for General Motors."
Wharton finance professor Andrew Metrick says it is unlikely that Kerkorian wants to stage a hostile takeover. Nor is it likely that he is orchestrating a greenmail play, where he places demands on the company and hopes GM pays him a substantial sum to go away, as GM did with H. Ross Perot in the 1980s. "So far, Kerkorian has been good for GM's stock price," according to Metrick, but "if he wants to rattle GM's cage and then get out, that will be bad for shareholders."
What does Kerkorian's purchase of additional GM shares mean for workers and retirees? "I'd be very nervous," Metrick responds. "To the extent there's any cage-rattling here, it's going to involve shutting down , not opening . Kerkorian coming in makes it slightly more likely that changes that will have to happen in the long run at GM will happen in the short run. That's not great for employees or retirees.'"
Metrick says that GM management no doubt cringed when it learned of Kerkorian's tender offer but that his involvement with GM may give management a convenient fall guy to use in making tough decisions. "Maybe Wagoner would like to shut down Buick, and maybe he won't mind if Kerkorian says, 'Shut down Buick.' Maybe Wagoner would like to get the credit without the blame. Sometimes a shareholder advocating for change can help you."
A New Strategy
In May, GM announced that it was launching a new marketing strategy in an attempt to increase U.S. sales. Among other things, the company said it would use price cuts to jump start sales rather than relying on 0% financing and rebates, which have hurt its bottom line in the last few years; eliminate overlapping models and consolidate the Pontiac and Buick nameplates; and strengthen its effort to sell more GM vehicles on the East and West coasts, where foreign car sales are especially strong.
MacDuffie says the new strategy makes sense. "I understand the reasoning. They feel they have terrific products and the world hasn't caught up to that yet, and there are others coming up that will blow consumers' socks off. They can't only focus on saying, 'Wait a few years when we'll have a whole new line of products.'"
The new approach may also mark the beginning of what MacDuffie has said GM must do -- get smaller. "The new marketing campaign is a message of thinning, prioritizing, consolidating -- all of which are sensible approaches to being smaller and managing that in a smarter way," he says. "Thinning product lines across divisions is consistent with putting flexibility in your factory so you can load the factory with a number of products." But in announcing the strategy, MacDuffie hopes that GM does not mean to suggest "that more and better marketing is all it will take to fix things, as opposed to changing elements inherent in the products."
On June 1, GM made a marketing move showing that it has not entirely eschewed short-term attempts to jack up sales and reduce inventory. The company announced that, for the first time ever, it is offering its employee discount to all consumers who take delivery of a new 2005 GM car or truck from June 1 through July 5. The "GM Discount for Everyone" program excludes the Chevrolet Corvette and GMC medium-duty trucks but is compatible with most other incentives currently offered by the company. "Maybe this is the last hurrah in using the discount-and-rebate approach before GM starts getting off that path," MacDuffie says.
If it is clear that all is not doom and gloom for GM, it is also clear that the company is at a crossroads.
Says MacDuffie: "There's a greater likelihood that the pendulum will swing back to GM doing better than worse. But there does seem to be something about this particular moment that feels like a tipping point of some kind, and I'm still trying to figure out why it feels that way. Some of what I sense may be how the American consumer looks at GM versus foreign competition. Some consumers always bought American cars. Maybe, finally, after all these years of investing in American plants and American jobs, Toyota and Honda have created a sense that consumers can feel patriotic and still buy a Toyota and Honda. That could be part of what's going on. It's not about GM, or Ford, in a performance vacuum, but a subtle shift in how loyal people are to GM and Ford. That really is the tipping point: If people feel they can embrace the cars of foreign competitors, that's a recipe for GM becoming a smaller company much sooner."
Source : Wharton Business School
Is General Motors running out of Gas? Part 2
Labor-Management Talks
Meyers does not expect GM to receive any significant relief in the form of a willingness by the United Auto Workers to reopen their current labor agreement, which expires in 2007, and grant concessions to GM to save the company money. "The UAW shows no inclination to back off and I don't think they can as a practical matter," Meyers says. "The UAW's position is, 'We didn't create your problem and were not going to solve it.'"
MacDuffie says there probably are informal talks taking place behind the scenes between management and the union to lay the groundwork for a serious discussion of employee legacy costs in preparation for a new labor contract in 2007. But he, too, doubts how much GM will get from the union. "When a company comes and says, 'We want to reopen the contract,' one response is, 'Why?' Some people are incredulous that the union isn't offering concessions, but there has been a lot of distrust."
A View from Wall Street
David R. Giroux, an investment analyst at T. Rowe Price, a mutual fund company in Baltimore, is well aware of the obstacles GM faces. But he says all the news is not bad for shareholders. For one thing, the various components of GM are worth much, much more than the market value of GM would suggest. "The stock is somewhat attractive because of the underlying value in some of their non-North American business," Giroux says. "Their GMAC business is probably worth $40 per share if it can be separated from GM. So you have a $30 stock and $40 of value in GMAC, plus a lot of cash on the balance sheet. It's an attractive stock just from breakup value." Giroux calls GMAC the "crown jewel" of GM. In 2004, GMAC had net income of $2.9 billion, about 80% of GM's total net income.
Giroux sees other pluses. GM's Asian operation, while not as healthy as it was last year, is still a bright spot for the company. He praises Wagoner and other senior executives as a "very strong management team." And he calls Kerkorian's May 4 tender offer for 28 million GM shares, at $31 per share, a "positive" development for GM shareholders. "He's been a very successful auto investor over time. He made a timely bet on Chrysler in the 1990s. He entered Chrysler at a good price, pushed management to use cash flow to pay dividends, and pushed Chrysler into the arms of DaimlerBenz."
Once the tender is completed, Kerkorian, through Tracinda Corp., his investment company, will control nearly 9% of GM's stock. (He had already owned 22 million shares, or 3.9% of GM's outstanding equity, prior to the tender offer.) Owning that many shares will put Kerkorian in a position to push GM management for change, although he has said that he has no plans to attempt to take over GM. "He's all about shareholder value," Giroux notes. "When he completes his tender, it puts him in a position to be more active, maybe even getting a board seat, maybe eventually arguing for strategic alternatives for GMAC, maybe divestiture by selling GMAC or spinning it off to shareholders."
Meyers, the former American Motors executive, has a less sanguine opinion of the bid for GM stock by the 87-year-old Kerkorian. "He's doing what he's doing for money, not for the welfare of General Motors and certainly not for the auto industry and not for the country," says Meyers. "If you follow the money trail to the end, Kerkorian is there with his hand out. He wants to make money. If he wants, he can cause a lot of headaches for GM, just like he did with Chrysler and the entertainment industry." Kerkorian bought and sold film studio Metro-Goldwyn-Mayer several times over a period of decades, garnering a fortune. Meyers adds that Kerkorian can hurt GM "if GM does not respond to his needs. Or he will raise enough hell in the executive suite that they'll wish they did, such as demanding a seat on the board. That would be unthinkable for General Motors."
Wharton finance professor Andrew Metrick says it is unlikely that Kerkorian wants to stage a hostile takeover. Nor is it likely that he is orchestrating a greenmail play, where he places demands on the company and hopes GM pays him a substantial sum to go away, as GM did with H. Ross Perot in the 1980s. "So far, Kerkorian has been good for GM's stock price," according to Metrick, but "if he wants to rattle GM's cage and then get out, that will be bad for shareholders."
What does Kerkorian's purchase of additional GM shares mean for workers and retirees? "I'd be very nervous," Metrick responds. "To the extent there's any cage-rattling here, it's going to involve shutting down , not opening . Kerkorian coming in makes it slightly more likely that changes that will have to happen in the long run at GM will happen in the short run. That's not great for employees or retirees.'"
Metrick says that GM management no doubt cringed when it learned of Kerkorian's tender offer but that his involvement with GM may give management a convenient fall guy to use in making tough decisions. "Maybe Wagoner would like to shut down Buick, and maybe he won't mind if Kerkorian says, 'Shut down Buick.' Maybe Wagoner would like to get the credit without the blame. Sometimes a shareholder advocating for change can help you."
A New Strategy
In May, GM announced that it was launching a new marketing strategy in an attempt to increase U.S. sales. Among other things, the company said it would use price cuts to jump start sales rather than relying on 0% financing and rebates, which have hurt its bottom line in the last few years; eliminate overlapping models and consolidate the Pontiac and Buick nameplates; and strengthen its effort to sell more GM vehicles on the East and West coasts, where foreign car sales are especially strong.
MacDuffie says the new strategy makes sense. "I understand the reasoning. They feel they have terrific products and the world hasn't caught up to that yet, and there are others coming up that will blow consumers' socks off. They can't only focus on saying, 'Wait a few years when we'll have a whole new line of products.'"
The new approach may also mark the beginning of what MacDuffie has said GM must do -- get smaller. "The new marketing campaign is a message of thinning, prioritizing, consolidating -- all of which are sensible approaches to being smaller and managing that in a smarter way," he says. "Thinning product lines across divisions is consistent with putting flexibility in your factory so you can load the factory with a number of products." But in announcing the strategy, MacDuffie hopes that GM does not mean to suggest "that more and better marketing is all it will take to fix things, as opposed to changing elements inherent in the products."
On June 1, GM made a marketing move showing that it has not entirely eschewed short-term attempts to jack up sales and reduce inventory. The company announced that, for the first time ever, it is offering its employee discount to all consumers who take delivery of a new 2005 GM car or truck from June 1 through July 5. The "GM Discount for Everyone" program excludes the Chevrolet Corvette and GMC medium-duty trucks but is compatible with most other incentives currently offered by the company. "Maybe this is the last hurrah in using the discount-and-rebate approach before GM starts getting off that path," MacDuffie says.
If it is clear that all is not doom and gloom for GM, it is also clear that the company is at a crossroads.
Says MacDuffie: "There's a greater likelihood that the pendulum will swing back to GM doing better than worse. But there does seem to be something about this particular moment that feels like a tipping point of some kind, and I'm still trying to figure out why it feels that way. Some of what I sense may be how the American consumer looks at GM versus foreign competition. Some consumers always bought American cars. Maybe, finally, after all these years of investing in American plants and American jobs, Toyota and Honda have created a sense that consumers can feel patriotic and still buy a Toyota and Honda. That could be part of what's going on. It's not about GM, or Ford, in a performance vacuum, but a subtle shift in how loyal people are to GM and Ford. That really is the tipping point: If people feel they can embrace the cars of foreign competitors, that's a recipe for GM becoming a smaller company much sooner."
Source : Wharton Business School
Here is one about China and the World Economy:
http://www.economist.com/finance/displayStory.cfm?story_id=4221685
Hope it is useful.
:smile:
IBM, Maytag, Unocal...Who's Next in China's Sights?
Does the aborted bid by CNOOC to acquire Unocal signal the end of Chinese corporate takeover attempts in the West -- or just the beginning?
On August 2, the company, whose parent is the state-owned China National Offshore Oil Corp., withdrew its $18.5 billion offer for California-based Unocal in the face of stiff U.S. political resistance. The incident prompted bad feelings on both sides, and in the near future, merger and acquisition activity from Chinese firms in the U.S. market may well slow down. But in the long term, analysts say, new efforts to purchase Western companies are likely, given factors that include China's immense foreign-exchange reserves, Chinese firms' ability to shore up weaknesses through overseas mergers, and the country's overall aim to expand its influence abroad.
This past weekend, yet another potential deal surfaced. The Sunday Times reported that Chinese network-equipment company Huawei Technologies is in talks to take over British telecom equipment maker Marconi for more than $1 billion. Other possible targets, according to outside observers, include companies with popular brands, firms controlling natural resources and no-name industrial outfits. Furthermore, predicts Wharton management professor Marshall Meyer, smaller Chinese firms, rather than giants like CNOOC, will likely lead the charge outward.
Think of Chinese companies as adolescents, Meyer suggests. Private or semi-private firms are only about 17 years old, and recent Chinese acquisition efforts can be seen as experiments, he says, noting that Chinese business leaders also seem to exhibit the brazenness typical of teens these days. During a trip to Beijing last week, he notes, "People were saying, 'Why don't we buy Wal-Mart?'"
CNOOC's failed bid for Unocal came at the end of a string of recent attempts by Chinese companies to acquire Western companies. In June, China appliance giant Haier tried to buy U.S. counterpart Maytag -- a bid it later dropped. Earlier in the year, Chinese computer maker Lenovo purchased the personal computer wing of IBM. Going back farther, Chinese electronics conglomerate TCL merged its television business with the TV business of France-based Thomson, parent of the well-known RCA brand.
Reactions to these moves varied. While the TCL and Haier deals drew relatively little attention in the United States, the Lenovo acquisition stirred up questions about U.S. technological leadership. Still, U.S. government officials let the takeover proceed. The CNOOC effort in June to acquire a U.S. company with substantial oil reserves, however, struck a nerve. It came as tensions already were running high between the U.S. and China over trade matters, including claims that China was unfairly keeping its currency undervalued to boost exports. A host of objections were raised to the CNOOC bid -- among them the fear that Chinese ownership of Unocal would threaten the U.S. oil supply.
CNOOC itself sounded bitter in withdrawing its bid August 2. The company said it would have improved the terms of its offer further "but for the political environment in the U.S." It called the "unprecedented political opposition" to its bid "regrettable and unjustified." And an essay in the state-run China news service Xinhua warned that the U.S. may pay a high price for the affair. "he explicit message the takeover battle sends to the world is that American business is defined by political needs," the August 4 article stated. "...In the long run, the casualty will be on U.S. competitiveness if the market is to play second fiddle to protectionism with political patronage."
Not an Invasion; an Escape
According to Meyer's contacts in the Chinese business community, government officials have advised business leaders to slow down their foreign merger and acquisition activities in the wake of the CNOOC incident.
One reason is that China-based companies are eager to move into markets that are less cutthroat, says Usha Haley, business professor at the University of New Haven and co-author of the book, The Chinese Tao of Business: The Logic of Successful Business Strategy. It's very difficult to turn a profit in China for a number of reasons, including a lack of protection for intellectual property -- which means knock-off products are created quickly and profits are hard to maintain, she says. "It's not that Chinese companies are invading the West; it's that they are escaping from China."
A foreign merger also brings to Chinese companies certain capabilities they frequently lack, Haley notes, such as service expertise and cutting-edge technology. "Technology is an especially important issue for Chinese companies that view themselves as global competitors. Because customers are so price sensitive, and margins are so razor thin, Chinese companies often lack the resources to make sustained investments" in research and development.
Meyer agrees that Chinese companies have a lot to gain from merging with Western firms. For example, the Lenovo-IBM deal is bringing management experience to the Chinese computer maker. Indeed, Meyer's research into the details of the transaction shows that a consortium of U.S. investors who contributed $350 million to the purchase controls key board committees.
Still another factor in the internationalization drive is China's ambition to restore its prominence in the world order, a position it had centuries ago, Haley says. "China wants to become a 'civilizational' power." The country clearly has the wealth to pursue that goal. "With the possible help of their government and its $700 billion in foreign-exchange reserves, Chinese companies are poised to become bidders for U.S. companies across a variety of sectors," Laura D'Andrea Tyson, dean of the London Business School, wrote in a recent essay in BusinessWeek.
What sorts of Western acquisitions are Chinese firms probably going to make? "It's likely to be consumer-oriented, brand-name activity," predicts Christopher Mark, Sr., chairman of The Signal Group, a consulting firm with offices in Princeton, N.J., and Shanghai. Mark suggests that Chinese companies will look to complement their strengths in low-cost production with the distribution networks and brand power that can come with a foreign acquisition.
Among the possible acquisition targets in the West are companies controlling natural resources such as oil, Meyer says. China's economy not only is consuming more and more resources, but the country tends not to trust its ability to buy what is needed in the market. "China is going to try to get its arms around basic commodities, because the Chinese prefer control and are willing to pay a premium for it."
Chinese companies also may seek to buy Western industrial firms that are little-known and private, Meyer adds. One feature of such acquisitions is that they are unlikely to spark much public outrage in the United States. "There will be virtually no opposition to acquisitions of factories making unbranded industrial products," he suggests.
Two Waves of M&A;
According to Holger Michaelis, a manager in the Boston Consulting Group's Beijing office, the first wave of outbound M&A; happened in the second half of the 1990s, "driven by the objective of the Chinese government to build and strengthen the foundations of the economy and its future development." It therefore focused on natural resources and infrastructure, such as oil, telecommunications and transportation. "External triggers to this wave included changes in the regulatory environment, the return of Hong Kong to the mainland in 1997 and the Asian crisis," which resulted in some takeover opportunities in neighboring countries.
The second wave picked up only in 2003, says Michaelis. "It is carried by a much broader base of industries, is targeted to a more diverse set of geographic destinations" and involves large as well as small deals. In addition, it is "more driven by economic considerations, such as growing the business overseas and reaping higher margins, accessing advanced technology and IP, realizing cost synergies in areas like production, sourcing and R&D;, and creating competitive advantage for the fierce competition in the home market."
Continued.............
Does the aborted bid by CNOOC to acquire Unocal signal the end of Chinese corporate takeover attempts in the West -- or just the beginning?
On August 2, the company, whose parent is the state-owned China National Offshore Oil Corp., withdrew its $18.5 billion offer for California-based Unocal in the face of stiff U.S. political resistance. The incident prompted bad feelings on both sides, and in the near future, merger and acquisition activity from Chinese firms in the U.S. market may well slow down. But in the long term, analysts say, new efforts to purchase Western companies are likely, given factors that include China's immense foreign-exchange reserves, Chinese firms' ability to shore up weaknesses through overseas mergers, and the country's overall aim to expand its influence abroad.
This past weekend, yet another potential deal surfaced. The Sunday Times reported that Chinese network-equipment company Huawei Technologies is in talks to take over British telecom equipment maker Marconi for more than $1 billion. Other possible targets, according to outside observers, include companies with popular brands, firms controlling natural resources and no-name industrial outfits. Furthermore, predicts Wharton management professor Marshall Meyer, smaller Chinese firms, rather than giants like CNOOC, will likely lead the charge outward.
Think of Chinese companies as adolescents, Meyer suggests. Private or semi-private firms are only about 17 years old, and recent Chinese acquisition efforts can be seen as experiments, he says, noting that Chinese business leaders also seem to exhibit the brazenness typical of teens these days. During a trip to Beijing last week, he notes, "People were saying, 'Why don't we buy Wal-Mart?'"
CNOOC's failed bid for Unocal came at the end of a string of recent attempts by Chinese companies to acquire Western companies. In June, China appliance giant Haier tried to buy U.S. counterpart Maytag -- a bid it later dropped. Earlier in the year, Chinese computer maker Lenovo purchased the personal computer wing of IBM. Going back farther, Chinese electronics conglomerate TCL merged its television business with the TV business of France-based Thomson, parent of the well-known RCA brand.
Reactions to these moves varied. While the TCL and Haier deals drew relatively little attention in the United States, the Lenovo acquisition stirred up questions about U.S. technological leadership. Still, U.S. government officials let the takeover proceed. The CNOOC effort in June to acquire a U.S. company with substantial oil reserves, however, struck a nerve. It came as tensions already were running high between the U.S. and China over trade matters, including claims that China was unfairly keeping its currency undervalued to boost exports. A host of objections were raised to the CNOOC bid -- among them the fear that Chinese ownership of Unocal would threaten the U.S. oil supply.
CNOOC itself sounded bitter in withdrawing its bid August 2. The company said it would have improved the terms of its offer further "but for the political environment in the U.S." It called the "unprecedented political opposition" to its bid "regrettable and unjustified." And an essay in the state-run China news service Xinhua warned that the U.S. may pay a high price for the affair. "he explicit message the takeover battle sends to the world is that American business is defined by political needs," the August 4 article stated. "...In the long run, the casualty will be on U.S. competitiveness if the market is to play second fiddle to protectionism with political patronage."
Not an Invasion; an Escape
According to Meyer's contacts in the Chinese business community, government officials have advised business leaders to slow down their foreign merger and acquisition activities in the wake of the CNOOC incident.
One reason is that China-based companies are eager to move into markets that are less cutthroat, says Usha Haley, business professor at the University of New Haven and co-author of the book, The Chinese Tao of Business: The Logic of Successful Business Strategy. It's very difficult to turn a profit in China for a number of reasons, including a lack of protection for intellectual property -- which means knock-off products are created quickly and profits are hard to maintain, she says. "It's not that Chinese companies are invading the West; it's that they are escaping from China."
A foreign merger also brings to Chinese companies certain capabilities they frequently lack, Haley notes, such as service expertise and cutting-edge technology. "Technology is an especially important issue for Chinese companies that view themselves as global competitors. Because customers are so price sensitive, and margins are so razor thin, Chinese companies often lack the resources to make sustained investments" in research and development.
Meyer agrees that Chinese companies have a lot to gain from merging with Western firms. For example, the Lenovo-IBM deal is bringing management experience to the Chinese computer maker. Indeed, Meyer's research into the details of the transaction shows that a consortium of U.S. investors who contributed $350 million to the purchase controls key board committees.
Still another factor in the internationalization drive is China's ambition to restore its prominence in the world order, a position it had centuries ago, Haley says. "China wants to become a 'civilizational' power." The country clearly has the wealth to pursue that goal. "With the possible help of their government and its $700 billion in foreign-exchange reserves, Chinese companies are poised to become bidders for U.S. companies across a variety of sectors," Laura D'Andrea Tyson, dean of the London Business School, wrote in a recent essay in BusinessWeek.
What sorts of Western acquisitions are Chinese firms probably going to make? "It's likely to be consumer-oriented, brand-name activity," predicts Christopher Mark, Sr., chairman of The Signal Group, a consulting firm with offices in Princeton, N.J., and Shanghai. Mark suggests that Chinese companies will look to complement their strengths in low-cost production with the distribution networks and brand power that can come with a foreign acquisition.
Among the possible acquisition targets in the West are companies controlling natural resources such as oil, Meyer says. China's economy not only is consuming more and more resources, but the country tends not to trust its ability to buy what is needed in the market. "China is going to try to get its arms around basic commodities, because the Chinese prefer control and are willing to pay a premium for it."
Chinese companies also may seek to buy Western industrial firms that are little-known and private, Meyer adds. One feature of such acquisitions is that they are unlikely to spark much public outrage in the United States. "There will be virtually no opposition to acquisitions of factories making unbranded industrial products," he suggests.
Two Waves of M&A;
According to Holger Michaelis, a manager in the Boston Consulting Group's Beijing office, the first wave of outbound M&A; happened in the second half of the 1990s, "driven by the objective of the Chinese government to build and strengthen the foundations of the economy and its future development." It therefore focused on natural resources and infrastructure, such as oil, telecommunications and transportation. "External triggers to this wave included changes in the regulatory environment, the return of Hong Kong to the mainland in 1997 and the Asian crisis," which resulted in some takeover opportunities in neighboring countries.
The second wave picked up only in 2003, says Michaelis. "It is carried by a much broader base of industries, is targeted to a more diverse set of geographic destinations" and involves large as well as small deals. In addition, it is "more driven by economic considerations, such as growing the business overseas and reaping higher margins, accessing advanced technology and IP, realizing cost synergies in areas like production, sourcing and R&D;, and creating competitive advantage for the fierce competition in the home market."
Continued.............
Continued.........
Welcoming U.S. Investors
More takeover bids from Chinese companies may be forthcoming, but more opposition to China's push outward can be expected as well. Among those wary of a policy of "engagement" with China is University of Maryland business professor Peter Morici. "The Chinese government sees itself as redressing hundreds of years of Western humiliation," Morici wrote in an essay in the Asian Wall Street Journal last month. "To sustain the Communist Party, China has a strong interest in selling its brand of authoritarian capitalism to its neighbors, and making the international rules of the game less supportive of democracy and human rights."
Tyson, however, says systems are already in place to protect U.S. national interests in the event of proposed Chinese corporate takeovers. And she argues that China, despite some limits, has welcomed U.S. investors. "China is remarkably open to foreign direct investment," she wrote in her essay. "Last year, American companies put $60 billion into China (including Hong Kong), vs. only $2 billion of direct investment by China in the U.S."
Mark says China's expansion push in the United States stands in contrast to the Japanese investment "invasion" of the 1980s, because China is much more receptive to U.S. investment and imports. He worries that if the U.S. doesn't handle the aftermath of the CNOOC bid deftly, China could decide to take its investment dollars to places like Iran, Sudan and Angola. "The Chinese quest for resources could well become more troublesome."
Even so, Mark questions whether CNOOC could have succeeded in running Unocal. Of the major Chinese oil companies, CNOOC has the strongest leadership, he says but all three firms are weak in that category compared to other Chinese companies. The Chinese oil companies are "quite a bit behind in terms of adopting Western management and financial practices," he says.
What's more, the Chinese appear to realize they have some maturing to do. The same Xinhua essay criticizing the United States for its response to CNOOC's Unocal bid suggested the country is eager to learn from its mistakes -- and to keep going global. "The unsuccessful CNOOC bid may make domestic enterprises pause for a while to carefully review their expansion plans," the essay said, "but it will not stop them from transforming themselves into competitive players in the international arena."
BCG's Michaelis says it is important to keep in mind that China "has been a centrally planned economy and still could be called a 'guided' economy. Most large corporations, even those that are listed overseas, are still controlled by the state or by provincial governments. Therefore it is not surprising that important transactions like overseas acquisitions need strong political backing or have often been driven by political interests." In the last two years, however, progress has been made "in terms of approval and access to foreign currency. This trend clearly supports an increase in outbound M&A; on a general basis."
Successful mergers, he adds, "depend not only on the buy side but also on the supply of deals. As the past several transactions have shown, it is the private deals (e.g., IBM-Lenovo, TCL-Thomson) where a selling company carves out a business unit and sells it to a Chinese competitor, that tend to be successful. In these cases, public or political objections are much less likely."
Last but not least, Michaelis adds, realizing the benefits of a transaction "depends strongly on the experience, discipline, approach and cultural sensitivity of the acquirer when actually negotiating the deal and merging the operations. Given the comparatively low level of experience Chinese companies have with large-scale cross-border M&A; transactions -- for example, only a few Chinese companies will have a professional M&A; group or department, let alone experienced program managers to see the integration through -- a lot still needs to be learned until Chinese outbound mergers can be executed successfully."
But overall, he says, "China outbound M&A; will become increasingly professional and also increasingly successful. What we have seen so far is just the start."
The View from China
In this new era of globalization, says Kang Rongping, a professor at the Chinese Academy of Social Science, "an enterprise has to be able to reallocate its resources globally to reach its optimal condition. Today, multinational corporations have become common. And Chinese companies should not be an exception."
Since China joined the World Trade Organization in 2001, he says, "Chinese companies have been facing growing competition worldwide; that competition is forcing them to speed up the efforts to improve their global reach .... I have talked to a lot of entrepreneurs and they have realized that they cannot compete based only on low costs. They must do research and development and build up their brands. One way to grow is to make acquisitions in foreign markets.
According to Kang, a successful acquisition means that "within three years of the deal, the acquiring company's stock price exceeds the average stock price in its industry. Based on this standard, it's impossible that the acquisition by Lenovo of IBM's PC business will be successful. But Lenovo did it anyway because it didn't want to risk its No. 9 ranking in the PC industry. Many companies face more risks by not making acquisitions than by making deals. As a result, Chinese companies seeking technology, R&D;, brands and distribution channels are very likely to venture out overseas ....The trend won't stop."
Private companies, he adds, "will have a higher success rate because they are more cautious, while state-owned companies tend to be less prepared." He suggests looking at the overseas acquisitions made by WanXiang Group, a private enterprise based in Hangzhou, whose main business is auto-parts manufacturing and whose assets total around RMB 10 billion ($1.23 billion). It is a company that planned well, negotiated patiently, mapped out very good strategies, and implemented those strategies well, he says.
According to Wang Wei, chairman of China M&A; Management Holdings, overseas markets that traditionally have had high barriers of entry for Chinese enterprise have recently become more attractive. Nowadays, "almost every industry has experienced overseas acquisitions. Even in real estate, big state-owned developers have gone to Russia to develop residential properties. However, some of the foreign acquisitions are more likely driven by government strategies, focus on natural resources like energy, and rely on government support such as deal financing."
Niu Wenwen, editor-in-chief of China Entrepreneur, predicts that "those who have a good understanding of the local market and customers worldwide are likely to become successful multinationals.... I would bet on telecommunications. In addition, steel, shipping and heavy chemicals are the private sectors that have developed fast in recent years. I'm very confident that we will see multinationals in those sectors."
Zhao Xiao, head of the macro-strategy department at the Research Center of the State-owned Assets Supervision and Administration Commission of the State Council in Beijing, recently told the local business press that "China is entering an era of global acquisitions" mainly because of "changes in China's resources. Since China adopted reforms and its opening-up policy, its citizens have accumulated savings and its enterprises have accumulated capital. China has also continued to attract foreign investment." Consequently, he says, the country "is bound to experience a net outflow of capital."
Lu Zhiming, a doctoral student at Shanghai's Fudan University, gave the following example to illustrate one way that Chinese companies are making overseas acquisitions: Jay Muskovich, CEO of the Huffy Corp., the second largest bicycle maker in the U.S., recently went to China to visit his new shareholder -- also his supplier. Earlier, in October 2004, after Huffy had sought bankruptcy protection, it didn't have money to pay its Chinese supplier. A plan was worked out under which the Chinese supplier and China Export Credit Insurance company would hold a 30% stake in a reorganized Huffy in exchange for forgiving the old debt. The supplier would also have four out of the seven board seats in the reorganized company.
This deal, says Lu, "shows the inter-dependence across the Pacific and represents another way to make acquisitions overseas. Deals must be mutually beneficial and mutually dependable. Chinese companies entering foreign markets must become localized in order to be accepted by the local customers and governments.... It is a good strategy to go to the international market, but Chinese companies still have a long way to go."
SOURCE: Wharton Business School
Welcoming U.S. Investors
More takeover bids from Chinese companies may be forthcoming, but more opposition to China's push outward can be expected as well. Among those wary of a policy of "engagement" with China is University of Maryland business professor Peter Morici. "The Chinese government sees itself as redressing hundreds of years of Western humiliation," Morici wrote in an essay in the Asian Wall Street Journal last month. "To sustain the Communist Party, China has a strong interest in selling its brand of authoritarian capitalism to its neighbors, and making the international rules of the game less supportive of democracy and human rights."
Tyson, however, says systems are already in place to protect U.S. national interests in the event of proposed Chinese corporate takeovers. And she argues that China, despite some limits, has welcomed U.S. investors. "China is remarkably open to foreign direct investment," she wrote in her essay. "Last year, American companies put $60 billion into China (including Hong Kong), vs. only $2 billion of direct investment by China in the U.S."
Mark says China's expansion push in the United States stands in contrast to the Japanese investment "invasion" of the 1980s, because China is much more receptive to U.S. investment and imports. He worries that if the U.S. doesn't handle the aftermath of the CNOOC bid deftly, China could decide to take its investment dollars to places like Iran, Sudan and Angola. "The Chinese quest for resources could well become more troublesome."
Even so, Mark questions whether CNOOC could have succeeded in running Unocal. Of the major Chinese oil companies, CNOOC has the strongest leadership, he says but all three firms are weak in that category compared to other Chinese companies. The Chinese oil companies are "quite a bit behind in terms of adopting Western management and financial practices," he says.
What's more, the Chinese appear to realize they have some maturing to do. The same Xinhua essay criticizing the United States for its response to CNOOC's Unocal bid suggested the country is eager to learn from its mistakes -- and to keep going global. "The unsuccessful CNOOC bid may make domestic enterprises pause for a while to carefully review their expansion plans," the essay said, "but it will not stop them from transforming themselves into competitive players in the international arena."
BCG's Michaelis says it is important to keep in mind that China "has been a centrally planned economy and still could be called a 'guided' economy. Most large corporations, even those that are listed overseas, are still controlled by the state or by provincial governments. Therefore it is not surprising that important transactions like overseas acquisitions need strong political backing or have often been driven by political interests." In the last two years, however, progress has been made "in terms of approval and access to foreign currency. This trend clearly supports an increase in outbound M&A; on a general basis."
Successful mergers, he adds, "depend not only on the buy side but also on the supply of deals. As the past several transactions have shown, it is the private deals (e.g., IBM-Lenovo, TCL-Thomson) where a selling company carves out a business unit and sells it to a Chinese competitor, that tend to be successful. In these cases, public or political objections are much less likely."
Last but not least, Michaelis adds, realizing the benefits of a transaction "depends strongly on the experience, discipline, approach and cultural sensitivity of the acquirer when actually negotiating the deal and merging the operations. Given the comparatively low level of experience Chinese companies have with large-scale cross-border M&A; transactions -- for example, only a few Chinese companies will have a professional M&A; group or department, let alone experienced program managers to see the integration through -- a lot still needs to be learned until Chinese outbound mergers can be executed successfully."
But overall, he says, "China outbound M&A; will become increasingly professional and also increasingly successful. What we have seen so far is just the start."
The View from China
In this new era of globalization, says Kang Rongping, a professor at the Chinese Academy of Social Science, "an enterprise has to be able to reallocate its resources globally to reach its optimal condition. Today, multinational corporations have become common. And Chinese companies should not be an exception."
Since China joined the World Trade Organization in 2001, he says, "Chinese companies have been facing growing competition worldwide; that competition is forcing them to speed up the efforts to improve their global reach .... I have talked to a lot of entrepreneurs and they have realized that they cannot compete based only on low costs. They must do research and development and build up their brands. One way to grow is to make acquisitions in foreign markets.
According to Kang, a successful acquisition means that "within three years of the deal, the acquiring company's stock price exceeds the average stock price in its industry. Based on this standard, it's impossible that the acquisition by Lenovo of IBM's PC business will be successful. But Lenovo did it anyway because it didn't want to risk its No. 9 ranking in the PC industry. Many companies face more risks by not making acquisitions than by making deals. As a result, Chinese companies seeking technology, R&D;, brands and distribution channels are very likely to venture out overseas ....The trend won't stop."
Private companies, he adds, "will have a higher success rate because they are more cautious, while state-owned companies tend to be less prepared." He suggests looking at the overseas acquisitions made by WanXiang Group, a private enterprise based in Hangzhou, whose main business is auto-parts manufacturing and whose assets total around RMB 10 billion ($1.23 billion). It is a company that planned well, negotiated patiently, mapped out very good strategies, and implemented those strategies well, he says.
According to Wang Wei, chairman of China M&A; Management Holdings, overseas markets that traditionally have had high barriers of entry for Chinese enterprise have recently become more attractive. Nowadays, "almost every industry has experienced overseas acquisitions. Even in real estate, big state-owned developers have gone to Russia to develop residential properties. However, some of the foreign acquisitions are more likely driven by government strategies, focus on natural resources like energy, and rely on government support such as deal financing."
Niu Wenwen, editor-in-chief of China Entrepreneur, predicts that "those who have a good understanding of the local market and customers worldwide are likely to become successful multinationals.... I would bet on telecommunications. In addition, steel, shipping and heavy chemicals are the private sectors that have developed fast in recent years. I'm very confident that we will see multinationals in those sectors."
Zhao Xiao, head of the macro-strategy department at the Research Center of the State-owned Assets Supervision and Administration Commission of the State Council in Beijing, recently told the local business press that "China is entering an era of global acquisitions" mainly because of "changes in China's resources. Since China adopted reforms and its opening-up policy, its citizens have accumulated savings and its enterprises have accumulated capital. China has also continued to attract foreign investment." Consequently, he says, the country "is bound to experience a net outflow of capital."
Lu Zhiming, a doctoral student at Shanghai's Fudan University, gave the following example to illustrate one way that Chinese companies are making overseas acquisitions: Jay Muskovich, CEO of the Huffy Corp., the second largest bicycle maker in the U.S., recently went to China to visit his new shareholder -- also his supplier. Earlier, in October 2004, after Huffy had sought bankruptcy protection, it didn't have money to pay its Chinese supplier. A plan was worked out under which the Chinese supplier and China Export Credit Insurance company would hold a 30% stake in a reorganized Huffy in exchange for forgiving the old debt. The supplier would also have four out of the seven board seats in the reorganized company.
This deal, says Lu, "shows the inter-dependence across the Pacific and represents another way to make acquisitions overseas. Deals must be mutually beneficial and mutually dependable. Chinese companies entering foreign markets must become localized in order to be accepted by the local customers and governments.... It is a good strategy to go to the international market, but Chinese companies still have a long way to go."
SOURCE: Wharton Business School
Napster is back. And it's hungry for a bite of Apple. In little over a year, the music sharing application has resurfaced to become iTunes' closest contender for the music download crown. But there's a twist in this cat's tale. Napster was bought back to lifefrom a bankruptcy auction. In 2001 Napster had been written off for dead. The obituary read something like this: Napster enjoyed a short life, but spawned a music revolution. The brainchild of a teenage programmer called Shawn
Fanning, Napster enabled computers to share mp3 (compressed music) files over the Net. In effect, Fanning had created a global jukebox of music, and user's no longer had to pay the record industry to use it. Several major record companies filed a lawsuit against Napster straight after its launch in 1999. By the time an injunction forced Fanning to close Napster two years later, the creation had burned its place into the Internet's history books as the first peer-to-peer application. It also paved the way for digital music's leap into the mainstream: iTunes.
ITunes' launch coincided with Napster's demise in 2001. Never one to miss a digital zeitgeist, Apple's Steve Jobs quickly pounced on the new appetite for digital music (and the long awaited explosion of broadband adoption) by launching the first iPod later in the same year.
As Apple's combined music player, library and store grew apace Napster was still catnapping. During the intervening years Napster became caught in legal wranglings. An American bankruptcy judge blocked the sale of Napster to German media firm Bertelsmann AG in 2002. When Napster was acquired by its eventual owner, Roxio, Inc., in 2003, Apple's iTunes Music Store owned around 70 percent of the online music market.
Roxio wasn't just buying a name when it bought Napster. It bought instant awareness and a shortcut to Apple's lead. According to Adam Howorth, European communications director of Napster, Roxio bought the name "because it is the biggest name in digital music with a 92 percent recognition rate among Internet users." But Roxio was also buying into Napster's infamous past.
Trading on the reputation of the past glories of brand name is a tricky gamble to get right. However, it paid off for VW when it bought and resurrected Audi in the sixties. Famed for fast racing cars (and competitors of Mercedes-Benz), VW made the most of Audi's past performance to successfully enter the luxury market with its newly acquired brand.
But brand success can't thrive on name alone, as Napster found out when it launched Napster 2.0 with the same business model as iTunes. Both sold individual songs for under a dollar a download.
Napster's fortunes began to turn around when it introduced a "Napster to go" alternative. The model works like this: customers can download an unlimited amount of songs from Napster's library for US$ 10 (or GB 10) a month. In the words of Napster's latest ad campaign, users can "try before they buy."
But the model has a hefty catch: users don't own the tracks they download. If customers don't renew their subscription every 30 days, they lose their music. The system uses "Janus" technologysoftware developed by Microsoft to control the distribution and consumption of music. The Janus technology is undeniably clever but it's not without its idiosyncrasies. Perhaps not surprisingly, it's not compatible with the iPod.
From a brand point of view, the Janus technology doesn't sit too comfortably with Napster's brand persona either. Writing by email, Howorth says that the brand values most repeated in Napster focus groups were: "renegade," "credible," and "holding the key to the world's music library." The latter is obviously very positive, but would words like "renegade" or "credible" be part of the brand image of Microsoft?
Many of Napster's current customers probably never even used the original. Fifty-six thousand of its 410,000 users are university subscribers, but there's still a groundswell of Net users who care deeply about Napster's credibility. The Electronic Frontier Foundation (http://www.eff.org/) lists Napster as extinct on its website. Rather derisorily they state that, "Napster 2.0 doesn't share much more than the name and kitty logo with its extinct cousin." This smaller early-adopter audience counts. In the digital world, they have the word of mouth power to make brands like Google, and more recently, Internet Explorer's latest rival, Mozilla Firefox. It is this same audience that have been adopting other more illegitimate music sharing sites like Grokster, eDonkey and BitTorrent (a peer-to-peer file distribution tool) sites like the now extinct Supernova. What ever happened to Napster's inventor Shawn Fanning? He went straight with his own legit music sharing system called Snocap. Touting (yet another way) of licensing music, Fanning's Snocap could be an outside bet to take off. But it's probably too little too late. The legitimate music download market seems to be a two horse race between iTunes and Napster, with Apple enjoying the greater lead by far.
Source : Interbrand
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