San Antonio-based SBC Communications Inc. is in talks to acquire AT&T Corp., a combination that could create the nation’s largest telecommunications company in an industry where companies are feverishly attempting to grow in an effort to keep up with new technologies and competitors.
So, over 20 years after the breakup of Ma Bell, the breakup may be coming full circle. SBC is now the second-largest U.S. regional phone company and one of the three huge telecoms to emerge from the consolidation of the Baby Bells. Although such a deal is fraught with hurdles before it could be consummated, the proposed merger would combine some of the largest pieces of the Ma Bell monopoly that was broken up in 1984. It appears that the primary attraction of the deal is linking SBC’s 50 million local-line customers with AT&T’s world-largest international fiber network and its large corporate client list.
The deal makes sense for AT&T because it is struggling to compete in the vicious long-distance price wars with MCI and the Baby Bells. Moreover, given AT&T’s diminished role in the industry, the Justice Department would be unlikely to try and block such a merger. Probably the biggest industry issue is how other big telecommunications companies such as Verizon and BellSouth will respond, particularly since BellSouth had similar talks with AT&T in 2003 that did not result in a deal.

Don’t miss the discussion between the two foremost corporate law experts in the blawgosphere — Professor Bainbridge and Professor Ribstein (with an update here) — over the implications to the corporate model of the Hewlett-Packard Co. Board’s deliberations over limiting HP CEO (and notorious micro-manager) Carly Fiorina‘s managerial role in the company. Here is the Wall Street Journal ($) article and a free CNN Money article on the HP Board’s discussions.
Professor Bainbridge suggests that the HP Board’s actions foreshadow the end of the Imperial CEO era, while Professor Ribstein observes that HP’s troubles indicate a fundamental problem with the way in which control decisions are made within the inflexible corporate structure.
Meanwhile, HP shares are flat at $19.95 in morning trading on the New York Stock Exchange. In comparison, HP’s closing stock price was $18.22 on May 6, 2002, the day on which the company finalized its merger with Compaq Computer Corp that Ms. Fiorina orchestrated over strenuous opposition from several of HP’s longtime directors. Thus, two and a half years after Ms. Fiorina had HP pay $19 billion for Compaq, the market attributes virtually no value to the acquisition.
Given that scoresheet, it appears that HP has succumbed to both an Imperial CEO and a broken business model. In this Wall Street Journal column, Jesse Eisinger essentially says the same thing, and passes along this comment about Ms. Fiorina’s performance:

Ms. Fiorina has had more than 2Ω years since completing the merger in May 2002 to make it work. But H-P is still stuck in between high-end services provider IBM and master of the PC-as-commodity market Dell.
“I’m not sure anyone could have pulled this off,” says Merrill Lynch analyst Steve Milunovich. “I wouldn’t give her a high grade, but I wouldn’t call her a disaster.”
Alas, few CEOs envision epitaphs reading, “Not Disastrous.”

The New York Times sometimes has trouble sorting out business news items because of its bias in favor of greater government regulation over capitalist roaders.
On one hand, this NY Times Sunday article on the struggling airline industry suggests that perhaps the solution to the industry’s problems is to return to the era of regulation in which consumers paid higher prices, but airlines served better food on the flights. The only “experts” in the article quoted in favor of returning to those bygone days of high prices and limited service areas are union representatives, who believe that the higher-paying jobs of the regulation era are the birthright of airline workers. Hardly a mention is made of the fact that such increased regulation would bring increased costs to an industry that certainly doesn’t need more of those.
From a consumer standpoint, airline deregulation has been a remarkable success that has resulted in far cheaper prices and much greater service than ever before. Thus, while the Times’ premise for the article is that increased regulation could help the struggling airlines and their workers, the better premise would have been the following — i.e., despite the great success of deregulation, why are so many airlines continuing to struggle and why is it so difficult to put the chronically unprofitable airlines out of their misery?
On the other hand, this Times article notes that an unintended consequence of the increased regulation of public corporations under the Sarbones-Oxley legislation is that an increasing number of public firms are delisting because of the high cost of compliance with the legislation. Thus, as Professor Ribstein notes in this typically insightful post on the same article, “we can add a decline in disclosure as firms delist and withdraw from mandatory disclosure requirements” as further negative consequences of Sarbox.
For most businesses, the primary benefit of going public is the access to cheaper equity capital. Sarbox’s increased cost of compliance is effectively making that public equity capital more expensive and less attractive. Business owners don’t go public just for the joy of making public disclosures and dealing with class action plaintiffs’ lawyers.

This Dallas Morning News article interviews H. Ross Perot, the founder of Electronic Data Systems, the founder and chairman emeritus of Perot Systems Corp., the two-time U.S. presidential candidate, and — depending on your point of view — either the Texas legend or the lengendary Texas quack.
The best book on Mr. Perot is Gerald Posner‘s Citizen Perot (Random House 1996). Although not as good as Posner’s definitive Case Closed (Random House 1994) on the John F. Kennedy assassination, Citizen Perot nevertheless provides a generally balanced of one of the most complex, colorful, crafty figures on the American political and business landscape over the last 25 years of the 20th century.
Perot is fascinating from a business standpoint not only because of the billions he made as a pioneer in data processing and Texas real estate, but also because of the millions he lost in naive and ill-fated ventures. Although often a savvy and skillful business operator, Posner’s book quotes colleagues who describe Perot as as “squirrelly” and “paranoid.” Nevertheless, Perot is not one to allow his critics to gain an advantage, so he made fun of them by dancing in public to Patsy Cline’s famous rendition of Willie’s Nelson’s classic song, Crazy.
In Citizen Perot, Posner does a fine job of delineating Perot’s contradictions. One one hand, Perot can be incredibly generous to employees needing medical help, but he was also known for berating loyal workers viciously. During the 1992 Presidential campaign, he criticized the influence of Washington lobbyists, but he hired the best in the lobbying business to help EDS and Perot Systems secure business deals in Texas, Washington, and internationally. Perot promoted an outsider political image, but he exerted tremendous influence upon past presidents and presidential campaigns. One of the most memorable descriptions of Perot came from Posner’s interview with Ken Riedlinger, a longtime executive of EDS:

“I like Ross. He saved my life a couple of times. But I also hate Ross. Yet I voted for him. And I would probably go back to work for him tomorrow if he asked.”

Other interesting parts of the Perot legacy are his 1979 rescue mission to Iran, his private battles with business and government leaders he considered corrupt, his animosity toward George H.W. Bush, and his paranoid charges of Republican dirty tricks against his daughter during the 1992 campaign. Indeed, Perot’s performance during the 1992 Presidential debates — along with Bill Clinton’s formidable debating skills — made those debates the most entertaining of any since that format was introduced during the 1960 Presidential campaign.
After his second and less successful presidential race in 1996, Perot has all but disappeared from the public scene. He now concentrates on his family, veterans’ causes, and “big picture” business projects. Nevertheless, he remains a consummate storyteller, which makes the DMN interview a good read. Check it out.

U.S. Bankruptcy Judge Leticia Clark denied OAO Yukos‘ request Thursday to commence discovery in regard to its claims for damages against several international financial institutions and Russian entities pending a February 16th hearing on OAO Gazprom‘s motion to dismiss the Yukos chapter 11 case in Houston for lack of jurisdiction. Here are the previous posts on the Yukos saga.
Although the MSM heralds the decision as a setback to Yukos, it’s really not. Judge Clark recognizes that it is inefficient to allow expensive discovery to commence before she has decided whether the Bankruptcy Court has jurisdiction over the Yukos case. There will be plenty of time for discovery if she decides that Yukos’ chapter 11 case can move forward in the American bankruptcy system.
That’s really the big issue in the case — i.e., whether the acceptance of Western investment capital by Russian business interests will bring with it the corresponding risk of having such capital protected in the American civil justice and bankruptcy systems? If Judge Clark rules in favor of Yukos on that issue, how long will it be before the Russian government is hiring lobbyists to support Republican Congressional initiatives for tort and bankruptcy reform?

In Frank Darabont‘s wonderful movie, The Shawshank Redemption (1994), unjustly imprisoned Andy Dufresne ends up making some pretty decent money while in prison.
In an ironic twist in regard to another unjust imprisonment, this NY Times article reports that the value of Martha Stewart‘s stake in Martha Stewart Living Omnimedia has nearly tripled — from about $320 million to around $830 million — since her conviction last year.
Markets are sweet, aren’t they?

Carrollton-based Gadzooks, the teen fashion retailer that has been wandering aimlessly in chapter 11 since February of last year, announced yesterday that it would sell its assets to the highest bidder and give up on its dream of reorganizing and emerging from chapter 11.
As in the recent case of sandwich franchisor, Schlotzky’s, Gadzooks’ liquidation will generate a pittance in comparison to the company’s debt, which means that unsecured creditors will likely receive no dividend on their claims against the company.
The business risk of highly-leveraged and specialized companies such as Gadzooks is perhaps best articulated by the reaction of one of my two teenage daughters, both of whom are both experts in the area of purchasing from teen fashion retailers. Although dismayed last year when Gadzooks went into the tank, when I mentioned the latest news about Gadzooks’ final demise, one of my girls turned to me and observed with no remorse:

“Oh, yeah. I remember that store. They were toast a long time ago.”

Several major airlines reported quarterly earnings yesterday, and the reports continue to verify what everyone already knows — the legacy airline business model is broken and in need of such serious reorganization that it is questionable whether many can or should survive.
While American Airlines parent AMR Corp. and Northwest Airlines reported another round of large fourth-quarter losses, even industry profit leader — Dallas-based Southwest Airlines — reported a 15% profit decline. That Southwest’s profits are declining underscores the grim outlook for the entire industry — of the 10 largest U.S. carriers, only Southwest is expected to report a fourth-quarter profit.
Houston-based Continental Airlines, Inc. reported a fourth quarter loss of $206 million. Continental is implementing a plan to generate $1.1 billion in savings and expand its more profitable international flights. The carrier is also negotiating $500 million in worker wage and benefit concessions that it needs to have in place prior to the end of the first quarter of 2005 to help defray further losses.
All airlines carriers are being hammered by an unusual combination of high fuel prices, fare competition and growing seat capacity in the U.S. market. Had it not been for fuel hedges that saved Southwest $174 million in the quarter, it also would have reported a quarterly loss.
Meanwhile, the other discount airlines that have generated the brutal low-fare competition are also being stung by declining fares as quarterly losses are expected from America West Holdings Corp., JetBlue Airways, AirTran Holdings Inc. and Frontier Airlines. THe primary reason that the other discounters are not profitable is that they do not have the liquidity of Southwest to hedge fuel costs.
Southwest’s quarterly profit fell to $56 million (or seven cents a share) from $66 million last year. Revenue totaled $1.66 billion, which was an increase of about 9% compared to the fourth quarter of 2003. Southwest’s unit costs in the quarter fell 1.3%, or 4.5% excluding fuel.
With several airlines wallowing in chapter 11 cases without clear reorganization plans, is 2005 the year that the needed shakeout in the airline industry will take place?