Business Insight Zone

I’ve long been a fan of the Wall Street Journal’s Deal Journal blog, and these two posts on The Blackstone Group from Heidi Moore will illustrate why — at least if you’re a fan of hard-core high finance:

• Blackstone: ‘The Credit Markets Have Bottomed Out’
• Live-Blogging the Blackstone Earnings Call

Moore’s got wit, and I laughed out loud more than once as I read through these two live-blogged conference calls (one for press, one for analysts). She makes funny comments about the hold music, the repeated technical difficulties on the second call, and any number of financial points.

(This, by the way, is one of the things I love about reading blogs as compared to traditional print media. If a Blackstone honcho says something funny, why not share the joke instead of couching everything in formal journalese?)

Why Blackstone is so interesting

First, because I’ve been covering them for a while. If you’re a truly old-school reader of this blog, you’ll recall that I covered Blackstone’s IPO (here, here, here, and here) in the summer and fall of 2007, but I had already been an interested spectator of Steve Schwarzman and his firm for years before that.

Second, because of what we can learn from the best companies in a given field. On the one hand, it can be revealing to see how firms handle disaster (Lehman), imminent disaster (Merrill), or slow decline (Yahoo).

But on the other end of the spectrum, you have those bellwethers — I’ve used the example of Toyota before – whose results tell you what the bedrock conditions are for their industries. When Alcatel-Lucent says it’s facing tough times, well, the company’s been listless, if not pathetic, for quite a while, so you discount what it says. But when Cisco says that times are dire, as it did yesterday, you can take it as gospel.

Why it’s good to be Blackstone right now

In short form: because the firm is well-run and has truckloads of money. (”We have a bulletproof balance sheet with no net debt.”)

Beyond that, Moore’s reports talk indicate how the diversity of Blackstone’s business helps it weather the current economic storm. So, for example, while its commercial real estate unit is facing lean times, its bankruptcy-advisory unit is looking ahead at a couple of years of brisk business.

From the sound of it, Blackstone has also done a very good job of limiting its exposure to bad debt, enough so that Moore can report, “Blackstone is in the ‘enviable’ position of being a buyer of assets. If they do say so themselves.”

What’s going on in the markets

Some excerpts:

[Blackstone president Tony] James says the real estate market has not bottomed out, except for subprime. He expects trouble in commercial real estate when borrowers have to roll over their financing. . . . He expects the economy to have another six months of decline. Well. That’s cheery.

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When will leveraged finance be better? James says the bottom for finance was Oct. 10. . . . No real clue on when the equity markets bottom, however.

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M&A business in general is down, but many corporations are viewing this as a historic buying opportunity because valuations are low, and the antitrust regulations are relatively benign. That may change in a new administration.

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How will Blackstone exit its investments? Not through IPOs, that’s for darn sure. James says the firm will exit by selling companies to other private equity firms or strategic buyers.

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[Blackstone co-founder Steve] Schwarzman . . . sums up by saying that the fourth quarter will probably read very badly for the economy, because consumers were in a financial panic between late September and mid-October. The upshot: severe consequences in the fourth quarter.

There’s much, much more than this, so do check out both posts if you want some inside-baseball finance from one of the biggies. For now I’ll leave you with the best tidbit gleaned from the posts, one that reaches far beyond’s Blackstone’s fortunes:

“We’re out of the woods for a systemic meltdown.”

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More than a year ago, when I reviewed the generally sorry state of Detroit’s automakers, I wrote that “The Big Three will hardly dry up and blow away anytime soon.” Probably that’s still literally true, since even a Chapter 11 filing — which plenty of industry watchers are talking about openly for GM these days — would not immediately shutter auto plants. These ancient beasts of General Motors and Chrysler, whose talks for a merger may gain speed after Election Day passes, don’t give up their last breath so easily.

But it’s a testament to the lingering appeal of unrealistic expectations that GM finds itself in this predicament at all. Chrysler’s plight we’ve seen before, back before Lee Iacocca improved its performance and restored its pride in itself.

But GM? Even after all these years of its mediocre-to-awful financial performance, many Americans still feel a wave of nationalistic pride when they think of the company that dominated the global auto industry for long. And yes, that is in the past tense, because although GM remains the #2 auto maker in the world, after Toyota, its influence seems to be waning by the day. The latest indignity: the Treasury’s signal that, no, what’s good for General Motors is not good for the country, and therefore GM will likely not receive Federal money to help its efforts to acquire Chrysler.

If the deal does go through, national industrial pride — or at least job protectionism — will take another blow when the combined GM-Chrysler closes plants and lays off thousands of workers. Those moves would inevitably follow the merger, because they follow every merger of the type: when two giants in an industry converge in HP-Compaq fashion, the underlying motive is to “rationalize” the costs of infrastructure, combining the customer bases of the two businesses while eliminating redundancies.

Maybe — maybe — a Mark Hurd-caliber chief executive could achieve the best of both worlds in blending GM and Chrysler by achieving both great scale and profitability. But such a feat is rare indeed, and there must pass much more water under the bridge, and much more hand-wringing about it, before General Motors ever regains its lost might.

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Related posts:

• What does the future hold for the Detroit car makers?
• General Motors — Company of the Day (9/26/2007)
• Ford gains on Toyota — the Toyota way.
• Company of the Day archive.

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Yahoo is broken, and Jerry Yang cannot fix it.

Consider this morning’s unsettling Yahoo news:

Yahoo to dump 1,500 workers as slump deepens

Now consider this: most corporate turnarounds happen faster than you’d think — often in 18 to 24 months. Sure, sometimes it takes longer than that for the details to shake out, for new revenue streams to get up to speed, and so on. But the fundamental work? In many cases, if not most cases, it’s going to happen in that first year-and-a-half under new management — IF it’s going to happen at all.

Yahoo co-founder Jerry Yang took over as CEO in June 2007. That’s 16 months ago. Lately, the company has suffered from a general slump in online advertising connected to the big slump in the overall economy. Beyond that, the company’s attention was diverted for months by Microsoft’s acquisition attempt (an offer, by the way, that Yahoo’s board should have jumped to accept).

But set aside these circumstances and look to the underlying reality of a Yahoo that is not changing fast enough to keep up with its environments. Good companies — companies that really turn it around — get better regardless. Yahoo isn’t getting better. To paraphrase a line from Pulp Fiction: “You have ability, but if you were going to do something, you would have done it before now.”

If Jerry Yang were going to reinvent Yahoo, most likely he would have done it before now. (He’s had plenty of free offers of good advice.) Now the question is: will he see that he can’t do it and hand the reins over to someone who can?

What would you do if you were in his shoes?

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Related posts:

• Microsoft decides to play hardball with Yahoo.
• The Illogic of a Microsoft-Yahoo deal.
• Yahoo suffers the death of a thousand meetings?
• Company of the Day: Yahoo [9/11/2007].
• What should Yahoo! do?

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Google is a business, sure. It’s a corporation with a Delaware registry, a Silicon Valley headquarters, and a place in the upper half of the Fortune 500. But more than that, it’s an ecosystem. Like Rockefeller’s Standard Oil or the old East India Company, Google is the oxygen and the water for many other companies in the Internet world. Want Web traffic? Better optimize to suit Google’s crawlers. Want to advertise online? Play along with Google.

It has become an ecosystem by becoming, more or less, the only game in town for Internet search. Sure, you can look things up on Yahoo! or Ask, or more esoteric tools like Addict-o-matic, but who does? Eighty percent of all online searches use Google. When Microsoft complains about Google, as it is wont to do, it makes me wonder whether the Irresistable Force of Redmond is simply frustrated to encounter the Immovable Object of search: an outfit that dominates that niche as thoroughly as Microsoft dominates the desktop.

Google’s domination is hardly about bragging rights alone. It has led to top-line revenues ($16.6 billion last year!) that make it one of the biggest players in the high-tech world, and bottom-line results ($4.2 billion!) that have made it the toast of Wall Street — not least last night, when Google’s glowing profit report set off a rally even amid the Street’s many fears.

The scary part is, Google seems to be getting even smarter about how it runs its business. Its latest earnings came as a pleasant surprise to investors not just because the company was able to maintain advertising sales in a down economy, but because of how well Google contained operating expenses, something it’s never needed to do before. So even though Google’s share price has fallen 45% this year — even more than the major indexes — it looks healthy and growing at a time when so many companies have come down with the economic flu.

Beyond that, the company continues to grow into new areas, including the cell-phone business. And its internal ecosystem — so famous for generating a constant flow of innovations — has spread beyond the company to create a “Google diaspora” of technologists working in startups and other companies. In the long run, Google may end up being the GE or Procter & Gamble of the Internet industry: not just a huge, profitable company in its own right, but a breeding ground for talent and leadership in the business world at large.

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Related links:

• Microsoft decides to play hardball with Yahoo.
• Does Google owe me anything?
• Dell, Google, and the myth of invulnerability.
• Possibly Google is not as toasted as Mr. Scoble thinks.
• Is the game simply over in online search?
• Company of the Day archive.

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Let’s see . . . has anything interesting happened since the last time JPMorgan was our Company of the Day? Ah, yes, the wee little heir to the banking legacy of J. Pierpont Morgan bought a collapsing Bear Stearns (with a big financial backstop provided by Uncle Sam) and the assets of the bankrupt Washington Mutual (to the relief of the FDIC), all while earning glowing tributes (including from yours truly) for weathering the current market typhoon better than almost all of its rivals.

But even though this part of the House of Morgan has expanded its footprint in both investment banking and retail banking with this year’s acquisitions, it can’t escape all of the ravages affecting the markets, and it can’t help but be whipsawed by investor expectations that are all over the map. When the bank reported earnings this week, headline writers seemed torn between the urges to harp on the huge decline in its earnings or to praise it for turning in decent numbers in the face of cataclysmic change. (Contrasting examples: “JPMorgan profit plummets on loan losses” from Reuters, “JPMorgan Chase posts surprise profit” from CNNMoney.)

Amid all the tumult, the company has just become the largest bank in the United States — passing Citigroup — in terms of assets. The WaMu deal expands its already-huge retail operations, especially on the West Coast. And the infusion of money coming from the Feds should only increase JPMorgan’s ability to make deals.

CEO Jamie Dimon has warned that tight times will continue. But his bank looks well-poised to carry on the legacy of its namesake founder for a long while to come.

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Related links:

• Company of the Day archive.
• 1907 redux?
• Jamie Dimon is smart.

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(Note: Blog Action Day 2008 — which is dedicated to raising awareness about poverty — is as good a day as any to re-start the Company of the Day tradition. See the CotD archive page for previous installments.)

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Living in Austin, it seems like you can’t turn around without running across yet another Goodwill store. We have big ones, small ones, and in-between ones in every corner of the city. In all, Goodwill Industries has more than 2,100 thrift stores spread across 185 local chapters throughout the world.

While 60% of Goodwill’s revenues come from its retail outlets, the organization also brings in hundreds of millions of dollars each year through industrial and service contract work and other services to people living with poverty, mental or physical disabilities, or other potential impediments to employment. In all, the not-for-profit enterprise generates more than $3 billion in annual revenues, all while helping underprivileged and underserved folks to learn job skills and enjoy the dignity of steady, meaningful work. The organization’s outlets also do other bits of community service: the Central Texas branch, for example, works with local sponsor Dell to collect old computer hardware so that it can be recycled safely.

Goodwill Industries was founded in Boston in 1902 by a Methodist minister named Edgar Helms. He built the bones of the modern organization — collecting donations and giving jobs to the poor — around the motto of “a hand up, not a hand out.” Many years later, Helms issued this challenge to Goodwill’s supporters:

“Friends of Goodwill, be dissatisfied with your work until every handicapped and unfortunate person in your community has an opportunity to develop to his fullest usefulness and enjoy a maximum of abundant living.”

More than 100 years on, Goodwill seems to be fulfilling this role better than ever.

Today’s Company of the Day is Delta Air Lines.

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Delta has been singing the blues for so long that it’s hard to remember that the #3 US carrier operated from the 1920s into the 1980s without ever taking an annual loss. But the tune has been very different for Delta since the terror attacks of September 11, 2001. Like some of its largest peers, Delta has undergone a wrenching bankruptcy, from which it emerged only this year. Unlike its rivals, Delta has long avoided unionization among its workers, but now faces a groundswell of unionizing sentiment among its flight attendants. On top of all this, Delta’s beloved CEO Gerald Grinstein has retired, giving way to outsider Richard Anderson.

Despite all these challenges, last week Delta reported record quarterly revenues, along with profits that were several times higher than during the same quarter of 2006. These results represent at least a temporary victory for Delta’s strategy of expanding its international routes. Although expanding Delta’s service abroad — especially in Europe and Latin America — has been expensive, it opens the door for the airline to sell more tickets at higher rates. In quarters like the one just concluded, when the airline industry as a whole enjoyed higher demand for flights, those pricey international tickets serve as a big profit center for Delta.

So far, so good. But what happens if oil prices stay as high as they are — or even go higher? During the third quarter, Delta was able to hedge itself against higher fuel prices, a move that helped the company hold its costs in line. But fuel hedges only last for so long; they can’t protect Delta from fuel prices that stay high in the long run. It also remains to be seen what Delta’s rivals, some of which are more established in their international routes, can do to counter Delta’s encroachment on their turf. Meanwhile, though Delta has a reason to sing a happy tune.

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Today’s Company of the Day is International Paper.

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Given the radical scope of International Paper’s overhaul in recent years, one is attempted to cross a pun with a dose of business jargon and say that the company “started over with a clean sheet of paper.” The whole paper and pulp industry has turned volatile as consumers have changed their behaviors in various ways, demanding more of some types of paper goods and less of others. International Paper has changed the mix of its business to build up some operations (such as high-end packaging) that yield high profit margins, while shifting away from low-margin or shrinking businesses like coated papers.

Restructuring such a vast enterprise as International Paper — the world’s largest forest products company — has meant years of buying and selling. Although the company still owns half a million acres of US forestland (with harvesting rights on nearly twice that much in Brazil and Russia), it has sold more than five million acres of woodland in the US. It has also hived off chemicals operations (Arizona Chemical), a building products maker (Masonite), and wood products factories (to Georgia Pacific), among many other deals. The result of all this cutting is a smaller but more profitable company: International Paper brought in about one-fourth less revenue in 2006 than it did in 2000 ($22 billion versus $28 billion), but with profit margins near 5% instead of less than 1%.

The company’s profit warning last week is a sign of how far it has come: International Paper’s share price slipped a bit after it announced the profits on land sales would be a little lower than expected for the third quarter of 2007. Yet the company is still on pace to turn more profit in the quarter than it did in the quarter before. That puts International Paper a country mile ahead of its loss-making performances of 2001, 2002, and 2004. That clean sheet of paper looks much better now that it has nothing but black ink on it.

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Today’s Company of the Day is Chevron.

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It’s been a good few years for the oil business. On the one hand, rapidly growing economies in China, India, and the Middle East have generated booming demand for petroleum. On the other, adverse geopolitical events (the Iraq war, unrest in Nigeria) and even the weather (Hurricane Katrina) have put a lid on how quickly the world’s oil supply can grow. The result, straight out of Economics 101, is hardly surprising: oil prices that have broken through one price barrier after another. But even $85 oil is no guarantee of growing profits for oil producers, as Chevron revealed last week. Without offering specific numbers, the California-based oil major warned investors that its profits would be down substantially for the third quarter of 2007.

Not to worry. If Chevron’s Q3 numbers turn out looking at all weak, that will be only by comparison to the record $5.4 billion in profits the company racked up in the second quarter. A key reason for the record earnings then, and the less-than-record earnings now, is refining margins. Usually, gasoline prices reflect changes in crude oil prices — not immediately or perfectly, yet within an easily understood range. But earlier this year a variety of temporary conditions, including low gasoline inventories and pinched refining capacity across the US, led to a short-term disconnect that favored big refiners like Chevron. Now crude oil is more expensive than it was, but gasoline is less expensive, and that combination cuts into Chevron’s refining margins.

Even with all these quarterly fluctuations, Chevron is still on pace to break its own profit record for the fourth year in a row. Longer-term problems could loom, especially if concerns over global warming lead to increased carbon regulations, or if it turns out that worldwide oil production has permanently peaked. For now, though, Chevron can attest that it’s a very good time indeed to be an integrated petroleum company, making money up and down the chain of production.

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Today’s Company of the Day is Magna International.

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Magna International is a magnum-sized player in the auto parts game. Although its Canadian automotive roots go back 50 years, Magna now supplies car and truck parts to manufacturers throughout Europe and North America. Mind you, these aren’t the sort of parts you’re likely to pick up at AutoZone, but rather major body, powertrain, and interior components. Through its various divisions, Magna produces body panels and bumpers, chassis systems, lighting, carpets, windows, seats and seating hardware, engines, and transmissions, as well as complete vehicle assemblies. The company’s largest division, Magna Steyr, assembles Mercedes-Benz, Saab, Chrysler, and Jeep vehicles for the European market. (In 2006 the parent company won 45% of its revenues — more than $10 billion — from customers in Europe.) Magna Steyr also reaches beyond the automotive industry by making components used in European Space Agency launch vehicles.

Although Magna International trades on the New York Stock Exchange, the Stronach family still controls it 50 years after chairman Frank Stronach founded the little tool and die company that later grew into Magna. In recent years, Magna has zigged toward acquisitions and growth while most North American car parts makers have zagged toward downsizing and, in many cases, outright failure. Magna draws most of its business from top car companies like Daimler, BMW, and Detroit’s Big Three, and over the years has succeeded in winning contracts to make or assemble more parts of cars for these gigantic clients. Magna has also engaged in a long string of acquisitions, in particular by buying parts-making operations from big car makers like Daimler and Porsche. It has also kept up a brisk pace of expansion into new geographic markets such as Russia. Moves like these have allowed Magna to thrive even as many of its peers and customers have fallen on hard times.

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