Category: Uncategorized

Ladies and gentlemen, welcome to my underground lair.
—Dr. Evil

Another year, another fawning article about the way Bill Gates runs Microsoft.

Last year it was the Wall Street Journal’s turn to describe Mr. Gates’ near-mythic visits to a cottage on a lake in order to Think Big Thoughts about the Future of Technology, all alone—no friends, no family allowed—with only a caretaker who “slips him two simple meals a day.”

As I pointed out at the time (see “Bill’s Hideaway” from March 28, 2005), perhaps if Bill had instead merely spent a couple of hours each morning at the local Starbucks watching how real people actually use technology, he might have come up with something more in tune with what human beings want or need—a great search engine, perhaps; or a simple wireless email device—instead of a tablet PC and a word processor with an “Insert Button” that you use only when you accidentally touch it and it begins deleting things while you type, so that you have to touch it again to get it to stop deleting things.

But he does not. And thus we have the Insert Button—a technology only Dr. Evil could admire.

Now, almost a year to the day after the insider’s view of Bill’s Hideaway by the lake, Fortune Magazine has apparently been cajoled by Gates’ PR people to publish yet another insider’s story, this time written by Gates himself.

“How I Work: Bill Gates,” it is called, and sure enough, technology’s richest monopolist describes how he actually manages a company that has been sliding into irrelevance ever since the internet came along and allowed consumers to bypass its stranglehold on personal computing.

It is, I think, a sad read. Gates’s words come across not as insightful and informative in the Jack Welch how-I-get-things-done management style, but as the self-impressed noodlings of a man in control of a very large, very rich and very powerful organization who appears to have lived almost frozen in time—the Doctor Evil of the software business, who sees the world the same way he saw it thirty years before without wanting to believe how radically it has changed.

An overstatement, you say? Well, Gates begins the article by describing—and I am not making this up—the three computer screens on his desk.

These three magical screens are “synchronized to form a single desktop” which allows him to drag items “from one screen to the next.” This, he solemnly declares, “has a direct impact on productivity.”

Yes, the CEO of the world’s largest software company begins “How I Work” by lovingly describing a desktop computer setup that sits on every trading desk in every high-rise office building from Wall Street to Moscow by the hundreds: multiple screens linked to the same computer.

Bizarrely, there is no mention of his key managers, software engineers, or any other people in his opening paragraph: just a description of how he has three computer screens all tied together.

Gentlemen, I have a plan. It’s called blackmail…. Either the Royal Family pays us an exorbitant amount of money, or we make it look like Prince Charles, the heir to the throne, has had an affair outside of marriage.
—Dr. Evil

Moving on, Gates describes how each screen has a different function, and here you might imagine you are reading a parody of how a brilliant, nerdy, lines-of-code-centric guy would manage a large enterprise:

“The screen on the left has my list of emails. On the center screen is usually the specific e-mail I’m reading and responding to. And my browser is on the right-hand screen.”

I am not making that up, either. Nor am I making up sentences such as:

“We’re at the point now where the challenge isn’t how to communicate effectively with e-mail, it’s ensuring that you spend your time on the e-mail that matters most.” (As opposed to, say, ensuring that people actually want to use your products. )

All in all, we learn much, much more than we ever need to know about the way Mr. Gates Runs His Company.

My daughter calls this kind of stuff “Over-share.”

We learn he’s “not big on to-do lists.” We learn he likes to “check the folders that are monitoring particular projects and particular blogs.” We learned he’s “very disciplined about ignoring” a “little notification box that comes up in the lower right [of Outlook] whenever a new e-mail comes in.”

And we learn that he’s “getting ready for Think Week,” the cabin-by-the-lake sojourn where Mr. Gates will “read 100 or more papers from Microsoft employees” about “issues related to the company and the future of technology.”

Finally, we learn Bill still keeps an old-fashioned whiteboard in his office with “nice color pens.” It is, he tells us, “great for brainstorming when I’m with other people, and even sometimes by myself.”

Over-share!

After reading the entire piece, which contains much more of this kind of stuff, you begin to wonder how a company can survive management-by-email. Of course, as Microsoft-watchers know, the reality is that Gates does not manage the company by himself.

Finally, I come to my Number Two man. His name: Number Two.
—Dr. Evil

Ex-Procter & Gamble assistant product manager Steve Ballmer is “Number Two” to Gates’ Dr. Evil. Ballmer is a smart, funny, loud, in-your-face promoter of all things Microsoft—the first business manager ever hired at a company founded by software nerds, and crucial to the company’s rise to power.

Oddly enough, the previous edition of Fortune Magazine contained an interview with “Number Two,” which provided a fascinating insight into why Dr. Evil and his Evil Henchmen sitting around the shiny Evil Conference Table in Microsoft’s underground lair appear so out of touch with the Austin Powers-ish free-swinging technology innovation pouring forth from upstarts in Mountain View, Cupertino and elsewhere.

In a story titled “The Sleeping Giant Goes on the Offensive,” Ballmer is asked by the Fortune reporter if he has an iPod:

“No, I do not. Nor do my children…. I’ve got my kids brainwashed: You don’t use Google, and you don’t use an iPod.”

There you have it: the key business manager of the most important technology company ever created (by people far smarter and richer than yours truly) deliberately excludes from his household two of the most important technology innovations of the last decade.

Next thing you know, we’ll hear Dr. Evil’s Evil Henchmen have kidnapped the Google boys and are holding them for a ransom of…

One…million…dollars.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

U.S. office vacancies fell to 14.1% in the first quarter, the lowest level in five years, allowing landlords to increase rents.

Thus in today’s Wall Street Journal we read that in the first quarter of 2006, office vacancies around the U.S. had the largest percentage drop in seven-plus years, thus allowing the biggest occupancy price increase in over five years.

Later in the same paper we read that steel prices, after spiking in late 2004 and having what chart watchers call a “retracement” that bottomed in mid-2005, are on the rise:

Steel prices are returning to last year’s high levels, as economic growth fuels demand.

Seems that steel makers from Charlotte, North Carolina (Nucor) to Shanghai (Shanghai Baosteel Group) are raising prices on all manner of steel-related products, from the hot-rolled to the cold-rolled to the coated-sheet kind.

Further along in the A-Section, we find that Venezuelan strong-man Hugo Chavez, who nationalized two oil fields this week about as casually as a bartender skims cash during a busy Saturday night shift, is mismanaging the world’s largest crude oil reserves outside Saudi Arabia:

Venezuela is becoming a less-reliable source of crude, due as much to poor management as political choices. Rather than respond to current high prices by boosting output, the country has reduced its oil output since Mr. Chavez took power in 1998….

Most interesting of all in these tales of an emerging global resource squeeze might have been Tuesday’s front page story in the New York Times, the headline of which married three words that I believe have never appeared in the same sentence together: “labor” and “shortage” and “China.”

According to the story, headed “Labor Shortage in China May Lead to Trade Shift”:

The shortage of workers is pushing up wages and swelling the ranks of the country’s middle class, and it could make Chinese-made products less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam.

At the Well Brain factory here in one of China’s special economic zones, the changes are clear. Over the last year, Well Brain, a midsize producer of small electric appliances like hair rollers, coffee makers and hot plates, has raised salaries, improved benefits and even dispatched a team of recruiters to find workers in the countryside.

That kind of behavior was unheard of as recently as three years ago, when millions of young people were still flooding into booming Shenzhen searching for any type of work.

A few years ago, “people would just show up at the door,” said Liang Jian, the human resources manager at Well Brain. “Now we put up an ad looking for five people, and maybe one person shows up.”

Those are striking observations from a country whose labor surplus provided sustenance to the bond aficionados who confidently predicted that the “labor arbitrage”—the substitution of high-cost American content with low-cost Chinese content—would last until their ten-year bonds matured. Maybe longer.

Put together, the stories being told by Nucor, office landlords, oil producers recently booted out of Venezuela, and even the Well Brain factory in China, suggest the bond market might see the end of the labor arbitrage well before their ten-years mature.

Maybe, even, before their two years do.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Now that the SEC has declared open season on journalists and research analysts at the apparent behest of an insecure CEO cleverly shifting the spotlight away from his own money-losing public company track record, it is worth looking back to a time when such brittle, blowhard CEOs were the norm, not the exception, to glean what lessons such eras might teach to investors and regulators alike.

The era of which I’m speaking is the roaring 1990’s—the last bubble period, when companies came public on not much more than a Cool Idea and a slick road show.

And anybody who wants to look back and see what happens when the SEC fails to rein in banking-happy analysts and rule-flaunting CEOs need look no further than “Confessions of a Wall Street Analyst,” a new book by former telecom analyst Dan Reingold.

Reingold’s book describes the arc of his career from MCI number-cruncher to Wall Street star to depressed and disillusioned retiree, and it is not a bad read.

I didn’t know Reingold when he was an Institutional Investor-rated analyst famous for his upgrade of the Baby Bell stocks just prior to their Clinton-era deregulation, but he comes across as earnest and well-meaning, if a little too dependant on “models” and “spreadsheets” for my taste: garbage in, garbage out, as they say.

And man did he hate Jack Grubman.

Although some book reviewers of “Confessions…” disliked the anti-Grubman theme, I think that angle actually gives the book depth and heft, and makes it far more readable than just your average sell-side story. After all, how many times can you read about secret negotiations in a plush Manhattan hotel room with a Wall Street firm trying to hire an analyst away from whatever firm he’d just joined?

Furthermore, it is the Grubman angle that brings back all the excesses of the 1990’s, and provides the lessons that I mistakenly thought we had all learned about how Wall Street analysts and public companies ought not to conduct themselves.

Aside from Grubman’s famous upgrade of AT&T just prior to the AT&T Wireless spin-off, Reingold gives chapter and verse on Grubman’s incestuous Worldcom relationship, especially instances when clients apparently heard takeover stories—and exact prices—from Grubman well before the public announcements.

But the chapter most relevant to today’s climate of fear and loathing in the press and among those who would speak skeptically of a public company is called “Crash and Burn,” in which Reingold describes how the whole house of telecom cards begins to crumble—kicked off in part by terrific research from a Reingold competitor, who knew to look not just at the numbers, but behind them.

Simon Flannery was Morgan Stanley’s telecom analyst, and he downgraded Qwest—once the hottest of the telecom hotties—in mid-2001 “on a bunch of arcane accounting concerns,” as Reingold puts it.

Reingold himself “studied the [Flannery] report carefully” but for whatever bizarre reason did nothing else about it. He didn’t pick up the phone and talk to accountants or industry people, didn’t get on a plane and sit down with the Qwest auditors—nothing but reiterate his “Strong Buy” on the stock and listen to a Qwest conference call in which Qwest CEO Joe Nacchio denounced the report.

On that call, Nacchio 1) claimed there were no accounting problems at Qwest, 2) attacked Flannery, 3) attacked Morgan Stanley, 4) attacked Morgan Stanley’s CEO, and 5) banned the analyst from visiting the company or asking questions on the call.

Nacchio, Reingold tells us, “was apoplectic—and determined to make this guy [Flannery] pay.”

Now, we all know that Flannery was right, and Nacchio was wrong; that Qwest ended badly, and Joe Nacchio’s career at Qwest ended badly.

(The SEC eventually charged Nacchio and others with “massive financial disclosure fraud”—three years after Nacchio resigned.)

But, at the time, Flannery was successfully made out to be the bad guy by a CEO eager to shift the spotlight away from the analysis itself.

It’s a story worth re-reading, to remind ourselves of what happens when CEOs attack the person asking the questions, instead of answering the questions and letting the business prove the skeptics wrong.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Until last year…few had heard of [Allan Moss] or his investment bank, Macquarie Bank Ltd. That’s when Moss, 56, decided to go on a $14 billion acquisition spree.—

Bloomberg LP.

Every cycle has a financial star—the “It” guy whose name is sprinkled throughout serious Wall Street Journal articles and whose picture graces breathless Fortune Magazine cover stories about whatever current finance craze is fattening the bonuses of Wall Street bankers.

Now, Macquarie seems to engineer a new international deal every month—most of them purchases of public utilities…. The plan has helped the bank deliver 14 successive years of record profits….

Frank Quattrone was the “It” guy during the Internet Bubble of the late 1990’s—the most powerful investment banker in Silicon Valley—and only recently made the news for getting both a guilty verdict and a lifetime ban from the securities industry overturned.

Michael Milken was the “It” guy during the Leveraged Buyout Bubble of the late 1980’s—the most powerful junk bond financier of hostile takeovers in history—and has successfully resurrected his reputation through smart business deals and aggressive funding of results-oriented cancer research.

Both Quattrone and Milken had unique insights which they used to exploit market inefficiencies on a scale nobody else had dreamed of doing before. Eventually, of course, everybody else woke up from their nap and decided they wanted a piece of the action—and pretty soon everybody was doing it—sparking asset inflation, irrational behavior and collapse.

Macquarie’s success has also lured much bigger investment banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., into planning their own multibillion-dollar “infrastructure” funds.

What Macquarie figured out was this: it could buy public utilities such as airports, bridges and toll roads, package and resell those assets to Australian asset managers looking to redeploy the cash being accumulated by that country’s far-sighted and highly successful public pension plan, and take out fees along the way.

Most Americans first heard of Macquarie last year, when they led a group which paid $1.83 billion—approximately 40-times revenue—for the 7.8 mile Chicago Skyworks. As Bloomberg quotes an admiring fan of Macquarie:

“Macquarie is usually able to bid more aggressively for assets because they have more sophisticated financing capability.”

More recently, Macquarie won the bidding for a 157-mile toll road in Indiana, paying $3.85 billion for an asset that generated $95.6 million in revenues in the 2005 fiscal year. That’s also 40-times revenue. As Bloomberg’s admiring fan says:

“They finance with debt. I don’t know how they do it, but they’re able to finance at lower cost of capital than other people.”

The impetus behind Macquarie’s willingness to pay 40-times revenue for an asset that could be rendered obsolete by any variety of means—acts of God, acts of State Legislatures, or drivers’ unwillingness to pay tolls when they can drive for free elsewhere—comes from the very brilliant notion that such long-lived assets neatly match the long-lived nature of Australia’s pension liability.

As insights go, that’s a powerful one—and ranks right up there with Mike Milken’s discovery that, contrary to popular perception, junk bonds provided better returns, on average, than non-junk bonds, because the default rate on junk was, on average, lower than generally assumed by bond investors at that time.

Like Milken, Maquarie has revolutionized a source of financing which others now seek to emulate and exploit.

And, like junk bonds, internet stocks, and all financial fads that start off from a logical premise, it will get out of hand.

I am sure the Maquarie folks are as brilliant as their reputation, and that they know what they’re doing. But I’m not convinced that everybody else who wants to get in on the action now, by buying toll roads or airports or bridges or whatever else bankers decide to monetize, knows much more than the simple fact that it is, for the moment, a highly profitable way to leverage up the public infrastructure.

If I had a bridge to sell, I’d sell it right now.

And if I were John Corzine, the ex-banker and new governor of New Jersey dealing with a massive budget problem, I’d be getting the Goldman Sachs bankers working on a deal book for every road in the state.
Suddenly that New Jersey Turnpike is looking mighty valuable.
Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

I watched the highly anticipated 60 Minutes segment on hedge funds last night, and my first question is why would anybody in their right mind ever watch 60 Minutes?

The way I grasp the show is this: a bunch of extremely old, infirm, out-of-touch people—all white with the exception of the ridiculous looking, earring-wearing Ed Bradley—pretend to ask tough questions while the camera tries to make them look somewhat younger than Keith Richards.

Is that about it?

And to paraphrase Andy Rooney (who strikes me as not so much a humorist but just a really bitter old guy), I don’t know about you but Leslie Stahl seemed to me so financially illiterate she’d have trouble making a withdrawal from an ATM machine.

Still, the show carries some weight, so I watched. And I did learn something new.

It is, apparently, terribly suspicious behavior when a person arranges a conference call with analysts and then provides those analysts with information, especially when the person arranging the call has a financial stake in the company and hopes to benefit from a movement in the stock.

If this is so—and since Leslie Stahl thinks it’s so, who am I to quibble—then this country is in big trouble.

Because the arranging of conference calls by interested parties with analysts, in order to influence those analysts and the reports they write to clients, is (it seems to me) precisely what all CEOs and CFOs do each time they hold an earnings call with Wall Street analysts.

So if Ms. Stahl is to be believed, all those CEOs and CFOs attempting to influence analyst opinion every quarter are doing something terribly terribly evil.

As is anybody in America who talks to a reporter, hoping to influence a story.

And wouldn’t this apply also to lawyers speaking before the Supreme Court, hoping to influence the outcome of a case?

I just have one question for Ms. Stahl: how is she going do her next story if nobody is supposed to talk to her?

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Earlier this month, in “Monkeys Over America,” I noted the emergence of a Sheffield, England band called the Arctic Monkeys, and described how their music—urgent, fast and funny—took over our household in a matter of hours.

I saw the Monkeys last night at the Paradise Lounge, on Comm Ave in the heart of Boston University, and I will say right now they are better than the hype.

Without giving too much away here (that’s for a later post) I’ll just say it was the best show I’ve seen since—okay, I’m dating myself here—Bob Marley at the Orpheum Theatre, also in Boston, in 1978.

Since they caught fire in England last year, The Monkeys do not play many clubs like the Paradise. Early in the set the lead singer/songwriter, Alex Turner, touched some hands reaching out to him and said “It’s nice bein’ so close. We haven’t played like this for a while.”

And for good reason: they blew the grime-encrusted roof off the Paradise. Halfway through the second song I said to my 17 year old, “pay attention: you’ll never see them this close again.”

She smiled sadly and shouted back, “I know.”

The Monkeys play Webster Hall in New York City tomorrow night and the Crocodile Café in Seattle next Wednesday.

If you live near either city, and if you like music and if you want to see this generation’s version of The Beatles playing the Cavern Club, go get yourself tickets from whatever scalper you have to. Lift the offer—just get the tickets.

You’ll thank me.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Microsoft Corp. announced a delay in its long-awaited Windows Vista operating system, and people familiar with the matter said the company is planning a major management shake-up in its Windows group.

The Redmond, Wash., software company said it will begin broadly selling a version of Vista for consumers in January, compared to its earlier plan of offering the product in time for the holiday selling season.

—Wall Street Journal


Well, it only lasted about a month.

I’m speaking about the 30 days or so that Microsoft was not everybody’s favorite technology whipping-boy—and it was Google’s turn to find out what happens in America when you disappoint people.

Following its fourth quarter earnings report and right up until last night’s admission by The Evil Empire that the so-called “Vista” consumer operating system would be yet-again delayed, Google had been the former whiz-kid-led outfit everybody wanted to mock.

A week or two after its earnings miss, Google’s CFO made some off-the-cuff remarks that panicked the market; then came the Analyst Day when management recanted those comments; which was followed by the accidental sales guidance release on the web site, not to mention Congressional appearances and Justice Department lawsuits.

The Google-bashing culminated in yesterday’s reaction to Google Finance, the underwhelming knock-off of Yahoo Finance: even Jim Cramer—the man who once declared National Google Day on his show and urged everybody who would listen to buy the stock a hundred and fifty points lower than the current price (and two hundred fifty points below its peak)—dismissed Google Finance on air to the hundreds of thousands of Cramericans to whom his word on Google is, rightly so, the last.

But last night Microsoft disclosed yet another delay in the already-delayed “Vista” operating system launch—and everybody can go back to making fun of Microsoft while Google catches a break.

Last night’s news probably comes as no surprise to anybody in the industry, given the fact that Vista contains 50 million lines of software code and is based on an operating system that’s about as secure as an unlocked Yugo on blocks.

Over a year ago I asked the CEO of a large software company (which had managed to flourish in Microsoft’s shadow despite being viewed as eventual road-kill) about the impact “Vista” would have on his company’s business.

At the time, “Vista”—then known as “Longhorn” for whatever reason—was expected to be the Swiss Army Knife operating system that would finally make his company’s product obsolete.

“It’s not the same Microsoft,” he told me. “They have so much on their plate just trying to deal with virus attacks on their core operating system, it’s hard to get all the new features right.”

He said he still worried about Microsoft, and never counted them out. But, all the same, he felt pretty sure that “Longhorn” (or “Vista” or “Slowpoke” or whatever Microsoft wants to call it) wasn’t going to launch on time—and, when it launched, it wouldn’t run him over.

So far, he’s right.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Michaels Stores Inc., the nation’s largest arts-and-crafts retailer, is expected to announce that it is exploring “strategic alternatives,” a decision that could lead to the sale of the company, which has a $4.61 billion market capitalization, according to people familiar with the matter.

—Wall Street Journal

A small, closely held company with which I am familiar decided to put itself up for sale last year.

The company is a perfectly decent little manufacturer of glass fiber yarn—a sort of poor-man’s Corning. It’s had a rocky history, having been in and out of bankruptcy, but management did a good job of turning things around and decided, in today’s vernacular, to “explore strategic alternatives.”

Being small and closely held, however, the company was on nobody’s radar screen—and the Wall Street Journal didn’t even report on the fact that it had put itself up for sale.

Nevertheless, according to the information statement mailed out to shareholders, a total of 105 potential buyers signed confidentiality agreements to look at the financial package.

And of those 105 potential buyers, 15 were “strategic or industry buyers” while 90 were “financial buyers and capital providers.”

(This kind of information is contained in the “Background to Merger” discussion which is always the most interesting part of a merger or takeover information statement. I recommend reading as many as you can get your hands on.)

Back to those 105 “potential buyers” for our little glass fiber company: 21 of them expressed interest in pursuing further negotiations, and out of those 21, 11 actually went into a second round of negotiations, out of which “five potential buyers submitted second-round bids.”

Now, you might expect a small glass fiber yarn manufacturer to prove most valuable to other industry players—the original group of 15 “strategic or industry buyers” out of the first 105 willing to sign confidentiality agreements. After all, an industry buyer would be best able to assess the value of the assets and derive the greatest benefit both in adding sales and being able to reduce costs.

You might expect that, and you would be wrong: all five of the second round bids “were from financial buyers.”

Last week at the Bank of America consumer conference, one of the most crowded presentations was not current investor fave Coldwater Creek or bull/bear tug-of-war Toll Brothers: it was a panel discussion among representatives from several large private equity firms.

The private equity cycle, which today looks to engulf Michael’s Stores, is nowhere near finished.

If our experience with a tiny glass fiber yarn company is any indication, this feeding frenzy is going to make the Drexel/Milken years look positively tame.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Best Buy hasn’t become the last man standing in the notoriously fickle electronics retailing business for nothing.

Few other retailing concepts generate as steady a rate of failure as electronics retailing—falafel stands in Fargo, North Dakota, I suppose—and the formerly large publicly traded electronics retailing flameouts I can name without pausing to think about it includes Crazy Eddie, Newmark & Lewis, The Good Guys! and CompUSA.

(Circuit City looked like it was coming close to joining that parade, but it’s still standing up, although not quite as tall as Best Buy.)

Best Buy has managed through electronics product cycles better than anybody: the corporate culture is terrific at focusing on new product categories and dominating them, re-formatting the stores when necessary to accommodate what customers want—home theater being the latest example.

Which is why I was intrigued to hear Guitar Center management mention a Best Buy experiment in musical instruments on their earnings call recently.

Other than the fact that the Best Buy store was in Riverside California, Guitar Center claimed to know little about how it was going or what it might mean—except that it would no doubt expand the category by encouraging many more consumers to pursue their inner Joey Ramone, as it were.

(“Expand the category” is what every retailer in existence has said whenever a bigger, better-run player has moved into their category. I wasn’t there at the time, but I imagine that when smallpox-infested whites began settling the Eastern Seaboard, the more optimistic Native Americans were telling their friends the pasty-skinned intruders would “expand the category.”)

Having been to Riverside, I can report that while Best Buy’s musical instrument effort is decent enough, it is no Guitar Center—yet.

The most impressive part of the whole thing, in my opinion, was the fact that Best Buy carved it out of the rear corner of the store in such an unobtrusive way that it’s hard to remember what had been in that corner before. It’s big and airy, but it fits the store. You wouldn’t know it hadn’t always been there.

The second impressive aspect is that, yes, there are real guitars—Gibsons, mainly—hanging up across the back wall, in Sam Ash/Guitar Center-fashion. While not nearly as comprehensive, it does tell you they’re selling something besides a plastic grab-and-go disposable gift-pack for somebody’s birthday.

There’s also a glassed-in room with acoustic guitars set up so users can try them out. And along the other, non-guitar wall (we’re in the corner of the store, remember) is a row of computers set-up to show how to create your own home studio. I was told this gets a lot of traffic.

That’s the good stuff—from my point of view, as a hack-drumming semi-regular customer of local Guitar Center and Sam Ash stores.

The rest of the lay-out was weak, I thought, with a very limited set of song books and accessories, and a haphazard collection of electronic pianos and synthesizers scattered around the floor, along with stacks of the grab-and-go guitar/amp starter sets.

Furthermore, the second glassed-in playing room was stuffed with electronics and a measly single set of drums—not very inviting. (It was explained to me that when the drums had been out in the open they attracted a little too much attention from boys.)

On the whole, the new musical instrument section in the Riverside store makes a good first impression, although I doubt it will siphon off the hard core Sam Ash/Guitar Center customers. Eventually, however, I suspect Best Buy will get it right.

Up to now, the musical instrument business has operated in a relatively quiet backwater of Big Box consumer retailing.

Whether Best Buy “expands the market” for the current market leaders, or does what the whites did to the Native Americans, remains to be seen.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

The following paragraphs contrast the excellent Wall Street Journal reporting on the recent Dubai Ports World’s aborted effort to acquire certain U.S. ports with the also-recent acquisition of a toll road in Chicago by the Australian investment bank, Macquarie Bank.

I have not added, changed, or modified a single word.

Dubai Ports World’s offer to delay exerting corporate control over operations at five U.S. ports did little to calm the political firestorm in Congress as several key lawmakers dismissed the step and continued to demand that President Bush reopen a federal review of the deal.

—Wall Street Journal, 2/25/06


Last year, the city of Chicago was in a bind. It faced a $220 million budget deficit and its credit rating was under review for a possible downgrade. Voters feared a jump in property taxes.

Then help came from a surprising place: Australia. Macquarie Bank, Australia’s biggest homegrown investment bank, organized a deal to take over Chicago’s historic Skyway toll road under a 99-year lease for $1.8 billion — hundreds of millions of dollars more than some Chicago officials thought it would fetch.

—Wall Street Journal, 12/6/05

Officials at the government-owned Dubai management company said they plan to complete the $6.8 billion purchase next week of London-based Peninsular $ Oriental Steam Navigation Co, but to freeze all operations as they are at the five U.S. ports where P&O now manages terminals — New York/New Jersey, Baltimore, New Orleans, Miami and Philadelphia.

Australia’s emergence as Chicago’s white knight illustrates a surprising development in the world economy.

On a given day, Macquarie Bank has a dozen bankers roaming the U.S. in search of deals.

But Sen. Charles Schumer (D., N.Y.), who has led the charge against the transaction, shot back that “the cooling off period isn’t going to work.” He and other Senate critics insisted that Congress needed more than just additional briefings by the White House and DP World officials, and should begin a full 45-day investigation of the security implications of the deal.


In San Diego, one of its funds is building a 12-mile-long toll road. In Virginia, a Macquarie fund invested more than $600 million to take control of the Dulles Greenway, a 14-mile toll road outside of Washington. Macquarie operates the tunnel that connects Detroit to Windsor, Ontario, and just bought, with other investors, Icon Parking Systems, one of the biggest parking-lot operators in New York City.

In another sign that the uproar hasn’t subsided, Sen. Hillary Rodham Clinton, (D., N.Y.) plans to introduce legislation barring all foreigners from managing U.S. ports, despite the fact that the vast majority are now run by foreign companies and that U.S. companies are minor players in the industry. “We cannot cede sovereignty over critical infrastructure like our ports. This is a job that America has to do,” Ms. Clinton told a gathering in Miami.

Macquarie funds also hold stakes in the airports of Brussels, Copenhagen and Kilimanjaro, Tanzania. Macquarie funds own stakes in a major port in China, a Japanese turnpike and one of England’s biggest toll roads. This year, Macquarie said it was weighing a bid to buy the London Stock Exchange, though it is unclear whether that deal will be completed.

Mr. Chertoff [Homeland Security Secretary] denied that DP World was being held to different standards than other prospective foreign investors, but said that because the company was the first foreign terminal operator to be vetted by the secret Committee for Foreign Investment in the United States, the safeguards could serve as a template for future deals. “I would certainly anticipate that if another country had a company taking over a port [terminal] we would do the same thing,” he said.

Chicago is certainly glad the firm came knocking. Opened amid great fanfare in the late 1950s, the Skyway was supposed to be a critical leg in a stretch of toll roads extending to New York City. The Skyway turned into an epic white elephant. The toll road failed to generate enough traffic. In the 1970s, Chicago defaulted on its Skyway debt.

[DP World] said they played by long-established rules that control the government’s review of foreign investments. “We just complied with what was required,” said Ted Bilkey, DP World’s chief operating officer. Mr. Bilkey said the company began working last October to get the administration comfortable with the deal, and he personally met with senior officials in early December. “We felt we’ve done everything correctly, and all of a sudden there’s this furor,” he said.

Executives at Macquarie say U.S. drivers can expect to see more of them in the future. Says Nicholas Moore, the head of Macquarie’s investment-banking division: “It’s a firm bet that all of the roads that are being talked about in America, we’ll be looking at.”

If the political outcry against unfamiliar and dark-skinned foreigners from one side of the world owning ports in the United States, when contrasted with the red-carpet treatment given a more familiar brand of white-skinned foreigners from another side of the world, isn’t ignorance at best and racism at worst—then what is it?

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.