Monthly Archives: January 2005

HP combines PC and printer units

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Despite the fact that the market attributes virtually no value to its $19 billion acquisition of Houston-based Compaq Computer Corp two and a half years ago, Hewlett-Packard Co. announced today that it is combining its printing unit with its personal-computer division, effectively ending speculation for the time being that the company might sell various units of the company and refocus primarily on its profitable printing unit.
HP shares rose 1 cent to $19.96 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 Compaq merger was consummated. This has led one sage analyst to remark that “HP paid $19 billion for the privilege of hardly making any money” in the personal computer business.
As noted in this earlier post, HP chairman Carly Fiorina publicly stated last month that the company’s board had considered breaking up the technology giant on three different occasions. However, Ms. Fiorina, who was the leading advocate of the Compaq acquistion, stated that the board each time decided the company’s diversified portfolio of technology products helped the company to moderate business fluctuations in the cyclical technology sector.
H’mm. I doubt any of those fluctuations in the technology sector to date would have cost HP the $19 billion it spent on Compaq.

Bill Gates or Steve Jobs, can you please help?

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This NY Times article reports on the FBI’s longstanding and intractabe computer network problems. Amidst the dismay over the national security concerns that this problem presents, there is a good thesis topic here for some public policy grad student somewhere.

The lagging reform movement in corporate governance

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The NY Times’ Kurt Eichenwald, who has been covering the Enron scandal and other post-Dotcom business busts over the past several years, reviews in this NY times article the current status of the lagging government reform movement in regard to corporate governance.
Although the article accurately summarizes the fits and starts of such governmental reforms, it does not get to the real heart of the matter until almost the end:

The problem, . . . is that shareholders – the true owners of a corporation – are virtually powerless to effect change in a board unless they begin expensive and hard-to-win proxy battles. Shareholders are not given the right to vote for an alternative candidate for director, or to vote against one advanced by the company. They can either vote yes, or not vote at all.
Responding to such concerns, the S.E.C. proposed rules essentially allowing shareholders to propose their own candidates for director in companies with proven weaknesses in their procedures for electing directors. At the time it was introduced, William H. Donaldson, the S.E.C. chairman, heralded the proposal as a “significant step.”
Quickly, the proposal brought widespread opposition from the business community, which argued that the effort was intended to allow unions with huge stakes in corporations through their pension funds to force social policy issues to the forefront on corporate boards.
“We think introducing a special-interest agenda into the boardroom isn’t good governance or good for shareholders,” said Mr. Hirschmann of the Chamber of Commerce.

Here, Mr. Eichenwald misses the point. He sees a political battle in what is really a problem of investors and their counsel lazily relying on an obsolescent business model. As Professor Ribstein, one of the blawgoshere’s foremost experts on this issue, commented in this recent post:

I believe an important lesson from all this is that our current model of corporate governance just isn?t working, and that we delude ourselves if we think that Sarbanes-Oxley is going to fix it. . .
Among other problems, Sarbox banks on an absence of conflicts, not the presence of expertise and incentives to actually do a good job. . .
As for expertise, corporate boards will continue to be the playgrounds of do-gooder social responsibility activists who have other things on their minds than actually understanding and doing the nitty gritty of business and finance. In what alternative reality is it that a busy law dean and expert on ethics can be expected to spot accounting fraud? . . . all the other layers of responsibility our laws impose just increase the opportunities for shirking and finger pointing.
So what?s the answer? First, we need high-powered market-based incentives that would be provided by the return of an active market for corporate control. Second, as I?ve been saying (e.g., here) we need to encourage alternative business structures that take near-absolute power over corporate earnings away from corporate executives and give it to the firm?s owners.

Professor Ribstein’s thoughts are spot on. The reform that truly needs to occur is in the marketplace as investors and deal lawyers reevaluate the the way to implement the controls necessary to protect the investor’s investment. That reform is going to take time due to the practical difficulties of changing existing businesses to a better structure. But over time, this reform will have much more far reaching and effective results in the marketplace than anything that government can come up with.
A good way to start this reform movement is for investors to begin demanding of their counsel that they require more responsive business structures as a condition of their investment. The desire of a entreprenuer to raise capital for his business often overwhelms the entreprenuer’s desire for an inefficient and value-limiting business structure. But investors need to take the lead in demanding the more efficient structures. Otherwise, the current status quo of reliance on the inefficient corporate model will continue.
On a related issue, don’t miss Professor Bainbridge’s comments here on how the traditional business judgment rule is being gradually peeled away to foist increased liability on outside directors.
By the way, it was a rather large oversight that Mr. Eichenwald did not approach Professor Ribstein or Professor Bainbride for their comments on these issues. A little Googling while researching the issues would have helped. ;^)

Galveston’s Jack Johnson

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In this NY Times Book Review, David Margolick reviews Geoffrey C. Ward‘s new biography on Galveston’s Jack Johnson, who was the first black heavyweight champion of the world. Johnson’s story is an enthralling and important tale.
When Johnson first won the heavyweight championship at the relatively advanced age (for a boxer) of 30 in 1908, it was one of the most important dates for African-Americans between Emancipation and the Civil Rights movement of the 1960’s. At the time, the mere idea of a black man being the heavyweight champ sent many people into a panic, including more than a few in the press corps. When retired heavyweight champ Jim Jeffries was persuaded to make an unwise comeback to take on Johnson late in 1908, Johnson’s throttling of the over-the-hill Jeffries triggered some of the nation’s worst race riots of the early 20th century.
Inasmuch as Johnson endured a substantial risk of being lynched at some of his fights, his prominence and feats staked new ground for many black Americans, who were still just a half century removed from slavery. During this week in which the modern news media has been expressing outrage at Randy Moss‘ touchdown celebration last Sunday at Green Bay, it is important to remember that such silliness likely would have prompted far worse consequences in America less than a century ago.
Stylistically, Johnson was the precursor of Muhammad Ali. He developed artful footwork and movement to avoid the bull charges of the other heavyweights of the era, which was dominated by brawlers. Although the media of the era acknowledged Johnson’s physical strength, standard racial stereotypes of those times held that black fighters lacked substance and would wilt when truly tested. The fearless and provocative Johnson took that stereotype and stood it on its head.
After he lost the title, Johnson — who died in a car crash in 1946 at the age of 68 — became a frustrated and embittered man, who in his later years even turned on the American legend, Joe Louis. As a result, Johnson alienated himself from even the generally supportive African-American community of the times, which was much more comfortable with the soothing presence of Mr. Louis. It was not until after Ali took a page from Johnson’s free-spirited ways in promoting his boxing career that historians began to reassess the meaning of Johnson’s life and societal impact. That process continues with Mr. Ward’s new book, as well as Ken Burns’ new documentary, The Rise and Fall of Jack Johnson: Unforgivable Blackness, which premieres on PBS on January 17 (next Monday).
Check out this fascinating story about a remarkable Houston-area native. You will not be disappointed.

Note on comments

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I’ve had to close comments for the time being to thwart a fairly large comment spam attack over the past couple of days.
Inasmuch as my blog requires that I approve all comments before they are published, the comment spammers’ spam never makes it on to the site. You would think that they would ply their spam elsewhere, but the robots they set up to send out such drivel don’t know that the spam doesn’t ever get published. So it goes.

Thatcher resolves messy business involving the wild world of Equatorial Guinea

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As noted in this earlier post, Mark Thatcher (or “Sir Mark” as he is typically referred to in England), son of former British prime minister Margaret Thatcher, had been caught up in the wild world of Equatorial Guinea (prior posts here), where the enticing combination of rich energy deposits and corrupt local governmental officals led the mercurial Mr. Thatcher to get caught up in a coup attempt last year. Here is the Telegraph’s article on the matter.
Well, according to this BBC News account, it appears that Sir Mark has been able to take care of that dirty business in South Africa with a fine and a suspended sentence. Despite the plea bargain, do not expect the Thatcher family to be vacationing in Equatorial Guinea anytime soon.

Andrew Beal, the contrarian banker

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The Wall Street Journal ($) has this profile today on Andrew Beal, the Plano-based banker who has made a name for himself over the past decade of so placing contrarian bets on lending and bond business plays. Here is an earlier D Magazine Online profile on Mr. Beal.
Mr. Beal is definitely not your typical banker. He is a college dropout who never earned an M.B.A. He never worked for a big company learning the ropes. In the 1970’s, he operated a business that bought old homes, remodeled them, and then sold them at a profit, which led him to get into the banking business in the late 1980’s. Mr. Beal now owns 100% of Beal Financial Corp., which is a bank holding company with combined assets of $7.8 billion and a net worth of more than $1.7 billion.
One interesting characteristic of Mr. Beal is his penchant for Texas hold’em poker, as the Journal profile relates:

Mr. Beal has other interests in Las Vegas. Since 2000, he has been visiting casinos to play marathon sessions of Texas hold ’em poker against some of the world’s top gamblers. Participants say Mr. Beal sits practically immobile for hours. He wears sunglasses and headphones to shut out voices, so he won’t inadvertently betray a clue about his hand by making eye contact or chatting.
Other players say he lost several million dollars in these games, though a winning spree last spring brought him close to break-even. Mr. Beal doesn’t dispute that account. He is known for blasting away with big bets even if he has bad cards, sometimes inducing opponents with better hands to fold.
“It’s almost as if he’s playing with disdain for the value of money,” says one opponent, Doyle Brunson, a former poker world champion. Mr. Brunson, a legendary bluffer in his own right, calls Mr. Beal “a very difficult person to play against.”

More on the SCOTUS sentencing guidelines decision

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The dust is settling on the U.S. Supreme Court’s decision yesterday in United States v. Booker and United States v. Fanfan that the federal sentencing guidelines are unconstitutional because they violate a defendant’s Sixth Amendment right to be tried by a jury.
Congress enacted the guidelines almost 20 years ago on the theory that the guidelines would standardize prison sentences and make them fairer nationwide. However, the law of unintended consequences took over. As demagogues began advocating long prison sentences, the guidelines evolved largely into an arbitrary and capricious mess that unwisely restricts judicial discretion in sentencing, leading to absurd sentences in cases such as in the sad case of Jamie Olis. The SCOTUS decisions, set forth in two 5-4 rulings, gives broader discretion back to federal judges by relegating the guidelines to advisory in nature.
Despite the demagogic posturing “to be hard on crime” that inevitably follows such a Supreme Court ruling, the decision is the right one. Earlier this year, the American Bar Association’s Justice Kennedy Commission, a distinguished panel of legal scholars and jurists, recommended repealing the mandatory sentences and restoring guided discretion for judges in sentencing, which allows judges to consider the unique characteristics of offenses and offenders that warrant increased or decreased prison time.
Moreover, apart from the troubling moral issues relating to capricious sentencing, such sentencing has also caused practical problems. The harsh sentences that were being meted out under the guidelines has caused big problems in the federal prison system where, according to the Bureau of Prisons, more than half of the 180,000-plus people in federal institutions are there for drug law violations. Most are small-time and nonviolent offenders who are serving long sentences pursuant to the myopic guidelines. Annual federal incarceration costs are estimated at $26,696 per inmate, which translates to about $4 billion annually.
The Supreme Court previewed yesterday’s ruling last year by striking down in Blakely v. Washington the State of Washington’s sentencing guidelines that were similar to the federal guidelines. Both sets of guidelines directed judges to boost sentences based on exacerbating factors such as the defendant playing a leadership role in a crime, acting with deliberate cruelty, or the infamous “market effect” of the crime. The standard for deciding whether to include these “enhancements” under the guidelines was merely a preponderance of the evidence as determined by the judge, rather than the “beyond a reasonable doubt” standard that juries are required to use in convicting a defendant. Yesterday’s ruling held that that mandating such enhancements violated the constitutional right of defendants to a trial by jury.
Unfortunately, the Supreme Court majority that decided that issue could not reach a consensus on whether the guidelines should be overturned entirely or simply rendered advisory in nature. So, a new five-justice majority in a second opinion held that the guidelines should stay almost entirely intact, except for a few provisions that made them mandatory. The second decision also gives federal appeals courts specific guidance on reviewing disputed sentences. The key determinant is the “reasonableness” of the original sentence, although it’s far from clear how district courts will interpret that concept in the sentencing context.
Although yesterday’s decisions are helpful to federal defendants whose sentences are currently under review, the decisions will not result in an onslaught of appeals relating to past sentences meted out under the guidelines. The Supreme Court dashed those hopes by making clear that its decision will not apply retroactively to sentencing decisions that had reached final resolution. Of the estimated 180,000 federal prisoners, only several thousand have cases on direct review, which means that most federal prisoners will not be able to seek a shorter sentence, at least for time being. Moreover, the vast majority of federal sentences are doled out under plea bargains in which the defendant is required by the plea agreement to waive the right to challenge the sentence.
As noted in yesterday’s post, Professor Berman’s blog is the best place to review more thorough analysis of the implications of these decisions. Take a look there over the next few days as he and other sentencing guideline experts provide their views on the implications of these decisions.

SCOTUS rules on sentencing guidelines

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The Supreme Court ruled today in this decision in U.S. v. Booker that the federal sentencing guidelines must satisfy the standards of the Sixth Amendment as applied in the Court’s earlier ruling in Blakely v. Washington. Accordingly, the Supreme Court has set aside two provisions of the guidelines that made them mandatory.
Here is the initial NY Times article on the Supreme Court’s decision, but for more thorough analysis of the decision, check out Professor Berman’s blog.

PW hammered in Ohio accounting fraud case

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In a highly unusual development, a federal magistrate in Ohio is recommending that a U.S. District Court approve a default judgment in an accounting fraud case against Big Four accounting firm PricewaterhouseCoopers for its alleged failure to turn over evidence sought by a former audit client and its shareholders.