Sonics Move: A Curse to the NBA

A Sonics Move would be Unfair to Seattle and Detrimental to the NBA

In July of 2006, Howard Schultz announced he was selling the Seattle Supersonics to an Oklahoma City-based investment group led by billionaire Clay Bennett. Like children losing a no-good father only to get a no-good step father, Sonics fans across the Pacific Northwest were struck by the deal.

The deal came just five years after Schultz, the current chairman of Starbucks, bought the basketball team in 2001. He claims that the NBA franchise suffered yearly losses of around $12 million during his tenure. However since Bennett agreed to pay $150 million more than Schultz originally bought the team for, Schultz’ investment seems to have delivered. Although, for a business man, it’s only natural for Schultz to accept Bennett’s offer of $350 million, the deal disappoints Seattle fans. The fans emotionally invested in the team and believed Schultz when he claimed in 2001 that he was purchasing the team in an effort to save basketball in Seattle.

Upon acquisition of the Sonics, Bennett stated that his hopes were to keep the franchise in Seattle, but his true intentions were blatantly apparent to even the average fan: Oklahoma! It’s obvious that Bennett is intent on developing Oklahoma City. He was instrumental in temporarily bringing the New Orleans Hornets to Oklahoma City following Katrina during the 2005-2006 season, and the attendance the Hornets received gave him the sweet taste of financial honey to be reaped by bringing an NBA team to an area that lacks a major sport franchise. It came as no shock when Bennett formally informed the NBA, this November 2nd, just a season after his purchase, that he intends to move the Sonics to Oklahoma City. I was more blown away by the ending of that cheesy romance my girlfriend made me watch last Saturday. Who would have thought love would find a way in the end?

But the real barb is that some believe Bennett bought the Sonics at such an extravagant price in order to increase the financial losses so as to facilitate the move. Bennett claims that during his first ear as owner the franchise lost $17 million. As a result, Bennett proposed to Seattle a plan to construct a new $500 million arena, of which the city would be required to cover $300 million. Without such an arena, Bennett stated that he would be forced to relocate the team. Such an unrealistic proposal was of course just another tool of Bennett’s to move the Sonics. Seattle residents had already suffered a decade’s worth of raised taxes to provide for two other expensive sport facilities (Safeco Field for the MLB franchise Seattle Mariners and Qwest Field for the NFL franchise Seattle Seahawks). Additionally, the current home of the Sonics, the Key Arena, was renovated in 1995 for $100 million. Another burden of $300 million on Seattle residents is really out of the question, and Bennett surely knew this.

NBA owners ultimately have a right to move their team wherever they feel they can acquire the largest profit, as professional sports is a business not a game. But even business should have some code of honor. Bennett should not have even purchased the Sonics if he had no intent of keeping the team in Seattle. The city has supported the franchise for 40 years, which should entitle the city to more than just a year’s worth of discussion to provide $300 million. This is especially true when Bennett has only owned the team for a year, and has yet to attempt to make improvements from within the organization. The team has not been very competitive over the majority of the past decade, thanks in large part to poor roster transactions (i.e. Jim Mcilvaine and his $34 million for three points a game). Couldn’t the franchise’s losses be due to this rather than an ill-equipped stadium? Ultimately, Bennett’s treatment of Seattle residents has been unfair and deceiving. If he is unwilling to make an effort to keep the Sonics in Seattle, he should sell the franchise to somebody who will.

Bennett doesn’t need to apply trial and error to learn his move to Oklahoma City is not a sure-fire success. In 1995, after years of unsuccessful seasons, the Seattle Mariners (Seattle’s baseball franchise) were all but assured to move to Tampa Bay. One amazing season later (in which the Mariners reached the American League Champion Series) fan support grew, revenue increased, and the franchise was saved. Tampa Bay was instead forced to develop an expansion MLB team, the Tampa Bay Devil Rays, whom have yet to enjoy a winning season. The team’s average attendance has ranked near the bottom in the MLB in each of their 10 years of existence. The financial success of a team depends less on the team’s location as on its competitive success. That being said however, when a team’s competitive edge is dulled, the only thing that will stick with it is the support of long-time fans, fans whose fervor spans generations.

Finally, losing basketball in Seattle would be a detriment to the NBA. Basketball is clearly one of the world’s fastest growing sports, as evident in last week’s game between the Houston Rockets and Milwaukee Bucks. The game was viewed by nearly 300 million viewers (an NBA record), largely because Chinese fan’s eagerly watched their country’s two biggest stars, Yao Ming and Yi Jianlian, compete. Seattle is a gateway to the Pacific with strong trade relations with Asia. The Seattle Mariners are even owned by the Japanese videogame franchise Nintendo - why do you think Mariner fans have the choice of unagi instead of hot dogs at home games? If the NBA wants to maximize its profits internationally, it should not permit the move of the Seattle SuperSonics.

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iPhone Under Attack

Apple’s recent product launch of a cell phone has, to the surprise of many, come under serious criticism. Detractors charge the phone is not functional for businessmen, lacks a target audience and is severely overpriced, leading these critics to question what Apple was thinking when it decided to venture into the cell phone market.

I, on the other hand, wonder what the critics are thinking because I have fallen in love with the iPhone and am again amazed at Apple’s brilliance. Here’s my analysis of what the iPhone is, what makes it unique, and why Apple’s business strategy is close to flawless.

First, what exactly is an iPhone? It is a device with which you can, among other things, listen to music, watch videos, view photos, make conference calls, check e-mail, browse the web, and view maps.

If you’ve purchased a cell phone in the last two years, you’ll realize that this list of features is nothing special. Even free cell phones that are given away with service plans have most of these features, and there are several phones costing around two hundred dollars that will allow you to do all of the above.

So what makes the iPhone unique and worth six-hundred dollars? For starters, it has perhaps the largest, most gorgeous screen I’ve ever seen on a phone. With a width of 3.5 inches, the screen is even larger than the one for the iPod video. But perhaps most important is the sheer brilliance of the iPhone’s design.

While other products offer the same features as the iPod or the Macbook at a significantly reduced cost, people willingly pay extra because Apple provides the smoothest-running applications and the most intuitive and easiest to use products.

What the iPhone’s critics don’t understand but what most Apple customers realize is that product design is what sets Apple apart from its competition. While other products offer the same features as the iPod or the Macbook at a significantly reduced cost, people willingly pay extra because Apple provides the smoothest-running applications and the most intuitive and easiest to use products.

For example, before the iPod was released many mp3 players with similar song and memory capacity were already on the market. Four years ago, I begged my father for an iPod, but he insisted I buy the Nomad Zen 2.0, which carried the same number of songs and was a hundred dollars cheaper. What did we get? A mp3 player whose hard drive crashed after I endured a frustrating year of weird play lists, a lagging interface and a difficult to use file transfer software. Now my father uses my iPod more than I do, and I don’t think he could ever switch back.

I expect that customers will come to realize that the iPhone is another iPod. Yes, the iPhone may cost four or even five hundred dollars more than some competing phones, but the iPhone’s design and usability will attract customers. The cell phone has become an essential resource for everyone from eight to eighty. Everyone has a cell phone. But everyone I know has a problem with their cell phone too, from broken antennas, buttons that respond four seconds after they are pressed, impossibly complex interfaces, or other problems that grow to frustrate people over time.

Given Apple’s standard and commitment to design, I am confident this won’t happen with the iPhone, and I am certain there is a large market for people willing to pay a premium for a product that they will actually enjoy using. While the features of the iPhone may not differ from its competitors, the iPhone delivers in a fun way. The new visual voice mail system allows users to see on a very simple screen who has left a voice mail and to pick which messages to listen to—brilliant. Perhaps the most significant feature is the huge, incredibly intuitive touch screen. While most cell phone users pay for many features that they have no idea how to use, iPhone owners pay for features that can access easily.

Yes, compared to its competitors, the iPhone seems expensive, but Apple always prices its products based on what people will pay. Apple sells the black Macbook at a more expensive price than the white Macbook simply because of its color. Why? Because people are willing to pay more for a black Macbook than a white one! The iPhone is so vastly superior to its competitors, people will buy it. There are those who say the iPhone lacks a target audience, but that’s because the iPhone wasn’t made just for college students or just for businessmen but for every cell phone user who wants a quality product.

Last year, one billion cell phones were sold. Cell phones are a trillion dollar industry that dominates the mp3 player industry in terms of size. Apple understands the problems users have with their cell phones - more so than even cell phone users do, and Apple is entering with perhaps the best cell phone anyone’s even seen.

While other companies have turned to open-sourcing, sharing information, and providing products as cheap as possible, Apple marches to its own drummer. Apple will continue to lead not by being the first, but by being the best. Ladies and gentlemen, if I can’t persuade you to buy an iPhone, I hope I can convince you to buy your Apple shares now.

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The iPod Video

Recently, there has been a whole lot of clamor about the new iPod video. So, couple of days ago, I decided to test-drive this new fad by borrowing one from a close friend of mine.

One of the first things I realized about the iPod is that I never needed to open the instruction manual to figure out how to use it. I have to admit, after a couple seconds of holding the iPod in my hands, the controls felt very natural and the navigation was surprisingly straightforward and intuitive—just slide the touch-sensitive wheel and you immediately see its effect on the screen. This fifth generation iPod provides an optional new way of interaction though, called the iPod Remote. Simply connect the iPod to your TV via the also optional universal dock, and you can check out a slide show of color pictures with your family and friends.

The revamped 2.5-inch color LCD screen is actually a smidgen wider than the ones on the previous four generations. Viewing a video on the 65000+ color screen was amazingly smooth even during intense graphic sequences. Alright, I admit that it would be better to view them on, say, a 3-inch + display, but I can settle for this one. Despite the excellent video display, there have been many negative things said about the new iPod’s video playing capabilities. Some say the battery life becomes horrendously short or that the load times for videos are sometimes long. Apple advertises its battery life as 14 hours for the 30 GB model and 20 hours for the 60 GB. Realistically though, you definitely won’t be getting this much. A good way to conserve life is to turn off the backlight; the display is quite readable with sufficient indoor light. For the casual movie users though, there is no need to worry about battery life too much. Unless you plan to watch the entire series of “The Godfather” on one charge, you’ll be more than satisfied with what this iPod can put out.

Concerning compatibility issues, the iPod Video is remarkably versatile; it can display most of the conventional media formats out there: MPEG-4, H.264, quicktime mov, just to name a few. Regardless of format, whatever you download from the iTunes store (now one of the largest online media providers in existence) is guaranteed to work. One of the more popular ways of getting media on to your iPod has been through third-party conversion software. There are plenty of converters that will transform anything playable by your computer's QuickTime Player to an iPod-compatible format. Some of these are freeware programs like Videora’s Converter for Windows, while some are purchasable that tend to be of better quality and speed such as QuickTime 7 Pro or Roxio’s Toast 7.

Despite the rather scratch-prone surface, the new iPod Video is a huge jump in value for the iPod line. Whether you’re an iPod aficionado or newbie, you’ll love the added features, capabilities, and accessories. It’s slightly sleeker and more comfortable design adds a touch of grace to this already eye-catching piece. Compared to other competitors, it’s a fantastic deal. Kudos to Apple!

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A New Mission for Microsoft

Just a couple months ago, Microsoft Chairman Bill Gates unveiled a new corporate mission statement to the public by announcing the refocusing of his company’s resources toward a set of “Live Software.” These digital instruments would facilitate access to Microsoft’s web-based services and MSN for consumers, developers, and businesses. During the conference, many executives from Microsoft, including David Cole, senior VP, and Neil Holloway, President of Microsoft’s Europe and Middle East Operations, expressed their division’s progress on Live initiatives and claimed that soon Microsoft’s search technology would be the most relevant source for consumers in the United States. Unfortunately, one small hurdle stands in their way: Google.

“Windows Live” is the core of Microsoft’s innovative endeavor to reap some of the plentiful and ever-growing benefits of Internet-related sales that Yahoo and Google have dominated in the last few quarters. Cole, also head of MSN, comments “Make no mistake, Windows Live is our strategic bet to change the game and win, while we grow and drive revenue with MSN.com.” Their new site, www.live.com, provides technologically advanced multimedia tools that pave way to new methods of search protocol. Even though it is still in beta version, live.com commands the attention of more than 3 million users worldwide and possesses the second highest Net Promoter score, which is a measure of the number of users that have found the site to be useful enough to recommend to their peers.

One of the most powerful and ingenious tools provided by live.com is the ability to customize searches so that users can sift through their search results over and over again using whatever types of filters they want. The idea of mass customization is a new theme of Microsoft’s Live initiative. Corporate members hope that by the summer of 2006, computer users would be able to create “search macros,” which are features that lets them save specific internet sites to review upon their next search. For instance, business people will be able to create a list of news feeds, be it Reuters, WSJ, or Business Week, and each time they search for, say, Goldman Sachs, they will have the option to find out what these sources have to say about this company. Users will also be given the ability to share their macros with their friends, giving a completely new meaning to the phrase “distributed computing.”

They will also be able to preview pages directly on the Live search engine as well as have a results page that will continuously load itself so that searchers will not have to click on the “next page” link ever again. Image searches will also be revamped as Microsoft plans to implement a magnifying script so that when users hover their mouse over a picture, the image will enlarge outwards for a better and clearer view. Microsoft is also utilizing scripts from Onfolio, a company they purchased earlier, which allow versatile caching of web pages. Think of this as bookmarks (or “favorites”) on steroids. Live is finally topped off with the unveiling of a new tool called Live Local Search which is customized to the user’s chosen town.

To further challenge Yahoo and Google, Microsoft has launched “Windows Live Mail” which is a newfangled version of its popular Hotmail email service, which currently hosts 750,000 subscriptions. Corporate executives are hoping that that number rises to 20 million by June of this year. “Windows Live Mail” will not be just an upgrade from Hotmail but rather a completely new system that has been rewritten from scratch. Some aspects of Live Mail that trump Yahoo’s and Google’s services include its higher performance, tighter security, greater functionality, and more advanced guards against phishing, which is a method of identity theft used in emails through which the sender acts as a legitimate company such as Paypal and attempts to steal the recipient’s personal information.

Of course, no comprehensive internet service would be complete without anti-virus packages. Windows Live also provides a “Safety Center” that combines anti-virus software with free spyware and malware scans. So far, 2 million free scans have been processed. Microsoft's MSN Messenger will also be incorporated in this internet package through the introduction of Live Messenger, which allows users to create a virtual workspace for them and their clients as well as provides conduits for communication via video conference or audio feed.

Microsoft plans to release these new functions through what Cole calls the “rolling thunder” approach—a fancy name for implementing services as soon as the coders finish producing them. Microsoft hopes that through an “onslaught” of Live services and MSN upgrades, the Live program will become a leader in its field.

Unfortunately, these new implementations will not kick Google off its throne anytime soon. Internet statistics show that even though Google is the most popular search engine for recent users, Microsoft’s msn.com stills resides as the home page for which many computer users see when they first launch Internet Explorer or Firefox. For Google, that is a huge risk nonetheless. With the advent of Live just on the horizon, Google’s reign will be challenged once again. Now lets wait and see what Google has to throw back.

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Google Acquires YouTube

A gigantic step toward an even more gigantic goal.Today, video streams are as necessary for college students as their e-mail accounts and ID cards. At any hour of the day or night I can walk down my hall to see classmates procrastinating by watching hilarious short clips, ranging from home-made videos to ridiculous foreign commercials to NASCAR crashes filled with flames and twisted metal. Indeed, free video sharing has grown exponentially in recent years, and no one knows this better than the industry’s leader, YouTube.

The small, sixty-seven person company has just been acquired for $1.65 billion in shares by Google. This popular video archive, a particular favorite of American college students from around the country, will make a sizable addition to Google’s economic empire. To put this number into perspective, MySpace was recently acquired for $580 million, and the only internet based acquisition in the past few years which rivals the YouTube deal is eBay’s purchase of Skype for $2.6 billion.

But was YouTube really worth all that money? Can it really be more valuable than a year of Google’s net income? And doesn’t YouTube have some serious copyright infringement lawsuits hanging over its head?

All the numbers lead me to believe that the acquisition will be fruitful for years to come. Despite Google having a product which competes directly with YouTube, Google Video has clearly demonstrated its inferiority over the past two years. Back in November 2005, Google Video actually had 400,000 more visitors today than YouTube, but since that time, YouTube has overwhelmingly pulled ahead in visitors per day (a 15.9 million person lead), frequency of visits, and average stay per session. Users comment on YouTube’s superior interface, its swifter uploads and better selection of videos.

Phillip Schindler, head of Google’s Northern European division, cited numerous new opportunities that YouTube’s acquisition brings to the table. These opportunities include a significantly expanded customer base, untapped internet advertising potential, sponsorship of specific YouTube content, and displaying commercials before the video starts. Schindler also emphasizes Google’s attention to copyright laws, explaining that the company is developing a new program for tracking copyrighted videos.

Curiously, it seems that YouTube has been one of many first-rate companies with which Google has paired itself recently. Dell, MySpace, Intuit, Adobe, and MTV, BlackBerry, AOL, and Apple have all developed strong ties with Google. What exactly is Google trying to obtain?

“Distribution” says Larry Page. He says that these companies can “reach customers in a way we do not.” Which implies revenue for Google’s one true profit-gainer—AdWords. Each of these companies attracts a different user base—the average Dell user is much different than the average Adobe customer, which is very different than the average MySpace customer. Although only a small percentage of each of these customer bases overlap, all of them can use Google’s revolutionary pay-per-click advertising software.

The concept is truly revolutionary. Many jokingly proclaim that Google is “taking over the world,” and even though it is, it isn’t for the reasons you might think. Sure, they have Google Maps, Google Earth, and a million other incredibly useful products which are provided for free, but in many cases, their products (by themselves) are inferior to their competitors and lose money for Google, but because of AdWords, it doesn’t even really matter.

As PayPal, a subdivision of eBay, discovered this summer, AdWords provides an almost unfair advantage for Google. PayPal has been a leader in the e-commerce business, allowing payments and transfers to be made very securely through the internet for a very affordable transaction fee. But when Google entered the market, they may have offered an inferior product, but they did so for free—and they even offered Google Checkout users a discount on their AdWords software. Any other company would lose miserably, but Google can survive and even turn a profit because of AdWords.

But it’s unlikely that Google is satisfied with being a one-product company. Google will continue to expand, just as earlier dominant companies did. Eight years in, Microsoft was also a one-product company. It’s next product? Microsoft Word. So what will Google’s next product be? It’s way too soon to tell, but through its partnerships, Google will swiftly be gaining experience with many different industries, and will have an incredible customer base to tap into when it does find it’s next big thing.

Sure, YouTube’s acquisition may have been a huge step for Google, but compared to the company’s larger goals, the acquisition is one of many huge moves that are sure to come.

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China’s Main Share Index Hits Low

On Friday, April 18th, 2008, the Shanghai Composite Index, China’s main stock market index, dropped nearly 4% to hit a 12-month low of 3,095. Despite tremendous gains in the past couple of years, this “Black Friday” was not altogether unexpected; in fact, China’s stock market, currently one of the five largest stock markets in the world, has taken quite a hit in the past year or so, as the government tried to prevent overheating by cooling inflation and growth. What are the implications of this recent decline in the stock market and what is in China’s future?

To fully understand the recent news surrounding China’s stock market crisis, one must first gain an understanding of the way stocks work in China. Equities traded in China can be categorized into three distinct types: A shares, B shares, and H shares. A shares are yuan-denominated and unavailable to most foreign investors, while B and H shares are both dollar-denominated and available to most foreign investors. In addition, A and B shares are traded on the Shanghai Exchange, while H shares are traded on the Hong Kong Exchange. Oftentimes, a company may sell both A shares and H shares; although both stocks may originate from the same company, there may often be large price discrepancies between the two types of shares.

In the two years leading up to 2007, China’s stock market surged nearly sixfold, making it one of the fastest growing stock markets in the world. As its emerging economy continued to grow at a rapid pace, Chinese citizens were eager to invest their money in the stock market, hoping to quickly double or even triple their initial investments. For a while, this strategy proved highly effective, as the stock market continued to shoot up like a rocket. After the Shanghai Composite Index hit its record peak in October of 2007, it seemed like the good times might never end.

However, in recent times, inflation in China has reached near its highest point in the last decade. In order to combat serious concerns of rampant inflation and economic overheating, the Chinese government has tried tightening monetary policy by raising interest rates. Unfortunately, these actions may have had an overall negative impact on the economy, as the government’s efforts to curb inflation have resulted in slowed economic growth and disappointing corporate profits.

As the stocks prices of many of China’s largest companies have dropped, so has the stock market as a whole. For instance, PetroChina, the largest company in China, saw its stock price fall nearly 5% to around 16 yuan, well below the price at which it was initially floated last October. Similarly, the stock prices of some of China’s other largest companies, such as China Life and Sinopec, have also dropped significantly following disappointing earnings reports. Even with the government passing measures aimed at stimulating the economy, such as tripling the amount of money overseas institutions could invest in yuan-denominated stocks and bonds to $30 billion and ending a freeze on the sale of new mutual funds, the stock market continued to drop. Overall, the benchmark CSI 300, which measures shares traded in both Shanghai and Shenzhen, and the Shanghai Composite Index, which includes 862 company listings, have both declined approximately 40% over the course of the past year, making China’s stock market one of the world’s worst performers during this time period. To put things in perspective, the Shanghai Composite Index is currently 50% below its record high in October 2007.

In the days following China’s “Black Friday,” the government has tried to fight the drastic decline in the stock market, which wiped out $1.7 trillion of market value, by cutting the equity trading tax from 0.3% to 0.1%. The following week, the stock market seemed to rebound, as it gained 16% on the week; this included the biggest single-day gain, 9.2%, in its history. Even though the month of April has resulted in an overall gain for China’s stock market, it is still experiencing some major difficulties.

So what can be expected of China’s stock market in the upcoming months? According to some analysts, such as Jerry Lou and Allen Gui of Morgan Stanley, corporate earnings growth may continue to disappoint this year. Furthermore, in the opinion of Credit Suisse analyst Vincent Chan, H shares are considered more attractive than A shares. At the same time, the recession in the United States may also have a negative impact on China, as the country’s exports may decrease. As a result, the current consensus among many analysts is that China’s shares are viewed as a “sell”.

Nevertheless, there are still reasons for hope and optimism in the coming months. The upcoming 2008 Summer Olympics in Beijing are expected to be a major boom for the economy. As the world’s best athletes descend upon Beijing to compete for Olympic gold, money will also pour into China. Through corporate sponsors, ticket sales, merchandise sales, tourism, and other revenue streams, the Games are expected to bring in billions of dollars to help China’s currently sagging economy. As a result, there are hopes that this boost to the economy will lead to a strong stock market rally once the Games have ended.

Like any country’s stock market, China’s stock market has experienced both highs and lows in the past few years. At present, it is experiencing one of its low points, but moving forward, there may be hope for an improved economy and stock market.

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The Role of BlackRock in the Financial Crisis

During the historic year that has been 2008, many of the largest financial institutions in the United States have fallen victim to the financial crisis that has hit the American economy. Other than financial troubles that have resulted in bailouts by the federal government, purchases by other companies, or filings for bankruptcy, what links companies such as AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, and Freddie Mac? The answer is BlackRock. During the historic year that has been 2008, many of the largest financial institutions in the United States have fallen victim to the financial crisis that has hit the American economy. Other than financial troubles that have resulted in bailouts by the federal government, purchases by other companies, or filings for bankruptcy, what links companies such as AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, and Freddie Mac? The answer is BlackRock. As the turmoil and upheavals in the financial industry continue, BlackRock sits right in the middle of the whole crisis.

What is BlackRock? BlackRock (BLK) is a major American investment management company that manages more than $1 trillion in assets through mutual funds, pension funds, 401(k) plans, and other investment vehicles. Founded in 1988 as the Financial Management Group within the private equity firm Blackstone Group, it was separated into an independent company in 1992 under the name BlackRock by Larry Fink, the current CEO of the company. BlackRock was purchased by PNC Financial in 1995 and four years later, in 1999, the firm went public. In recent years, BlackRock has undergone significant growth through various mergers and acquisitions. These transactions include the purchase of mutual fund business State Street Research Management from MetLife in 2005, a merger with Merrill Lynch Investment Managers in 2006, and the acquisition of fund-of-funds company Quellos Capital Management in 2007. Today, the New York City-headquartered BlackRock employs around 6,000 employees and operates 35 offices in 18 countries.

As credit-ratings agencies such as Moody’s and Standard & Poor’s have lost credibility during this credit crunch, BlackRock is well regarded in the industry for its ability to examine a financial institution’s balance sheets and provide an accurate valuation. For instance, BlackRock recently worked with UBS to help the Swiss giant unload a $20 billion portfolio of mortgage-backed securities. In fact, Treasury Secretary Hank Paulsen tabbed BlackRock as a candidate to manage the Troubled Asset Relief Program (TARP), part of the $700 billion bank bailout package. Whether a client survives or not, BlackRock receives payment in the form of a pre-negotiated flat fee. Nevertheless, in these unprecedented times, the survival of one of its clients is regarded as a win for BlackRock.

Ironically, CEO and Chairman Larry Fink’s career is closely intertwined with collateralized mortgage obligations (CMO), which along with other asset-backed securities, have been one of the major impetuses for the current financial crisis. A CMO is a type of mortgage-backed security in which a pool of bonds is divided into different components, or tranches. The tranches each have their own risk characteristics and maturity ranges; thus, repayments from the securities are used to retire bonds in a specified order. For instance, in a CMO with A, B, and C tranches, investors in class A are paid off first, then investors in class B, and finally, investors in class C. Working as a bond trader at First Boston in 1983, Fink sold his first mortgage-backed security to Freddie Mac to help the company unload $1 billion in mortgages. In the ensuing years, Fink became a rising star at First Boston for his expertise in CMOs during their nascent years. As mortgages grew into a multi-trillion dollar industry, dangerous side effects began to arise: the distance between the original borrowers and the investors of the mortgage-backed securities grew wider and wider, so the Wall Street firms trading the securities became less and less aware of whether the loans would actually be paid off by the original borrowers.

Luckily for BlackRock, due to Fink’s expertise in mortgages and his understanding of their hidden dangers, the company was prepared for the mortgage crisis last year. BlackRock Solutions, an in-house team created to help troubled companies analyze their portfolios, was founded in 2000; in 2006, as the current crisis was about to hit, the company began advising credits to unload mortgage-backed securities. The analytical capabilities of BlackRock are enormous; with 2,000 computers lined up row after row and an army of analysts that includes physicists, nuclear engineers, electrical engineers, economists, MBAs, and accountants, BlackRock Solutions runs millions of risk models a day to help answer the million dollar question for many companies these days: How much money is the collapse of the debt markets going to cost our company?

BlackRock itself has not been immune to the current economical crisis, however. When Merrill Lynch, which owned a 49% stake in BlackRock, was bought by Bank of America, Bank of America then became the new largest shareholder in BlackRock. On November 17th, 2008, BlackRock notified its employees that job cuts would soon be made in order to reduce expenses in the current market environment. In a memo to employees, BlackRock stated, “Expense policies and business practices will be tightened. However, it was not possible to reduce costs and achieve re-engineering efficiencies to the extent necessary without considering cuts in staffing. Some positions across the firm will be eliminated.” This follows in the footsteps of other leading money managers, such as Fidelity Investments, Janus Capital Group, Legg Mason Inc., and Putnam Investments, that have also recently announced headcount reductions. At the end of September, BlackRock had $1.26 trillion in assets under management, down from $1.43 trillion at the end of June. At the same time, the stock price of BlackRock is down 40% for the year.

In the end, what separates BlackRock from other firms is not that it can analyze risk; many companies can run risk models. BlackRock distinguishes itself from other firm in that on one hand, it is not an investment bank, so it does not trade for itself and compete with its clients and yet, on the other hand, it offers such a broad range of services that it dwarfs most other independent risk-assessment companies. Thus, in this current whirlwind of economic turmoil, BlackRock sits well-positioned to help analyze and provide solutions to the deepening troubles of the economy. With no clear end in sight, it is a safe bet that going forward, BlackRock will continue to be a key player in helping to bring the U.S. economy out of its current troubles.

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Diamond

Thursday, 04 December 2008

On October 10th, Robert Diamond Jr., President of Barclays PLC, spoke to Princeton students about the state of financial markets, government’s response to the crisis, and Barclays’s position as one of the leading financial institutions. On October 10th, Robert Diamond Jr., President of Barclays PLC, spoke to Princeton students about the state of financial markets, government’s response to the crisis, and Barclays’s position as one of the leading financial institutions. Diamond said that over the last four or five weeks, liquidity issues have returned due to the restructuring of Fannie Mae and Freddie Mac and the government’s decision not support a bailout of Lehman Brothers. The preferred stocks of the two government-sponsored enterprises (GSEs) were seen as safe investments and after the government took over the GSEs, the value of those shares went to zero causing investors to panic. When this was followed by the disorderly liquidation of Lehman Brothers, financial markets reached new lows and the spreads of credit default swaps of other financial firms rose drastically. Credit default swaps are derivatives in which the buyer of the instrument pays a premium to the seller and receives a payment in the event that the underlying company defaults on its debt; the cost of buying the swap rises if there is increasing concern that the company will have difficulty fulfilling its debt obligations. The Board of Barclays had been discussing the possibility of acquiring another institution since early in the year after realizing that the distress in the financial markets may offer opportunities to take over other companies at a discount. Executives from several financial institutions, including Barclays, began serious discussions to acquire parts of Lehman Brothers. After failing to reach a deal, Lehman was forced to declare bankruptcy on Monday, September 15th. In the ensuing days, discussions continued and Barclays agreed to take over Lehman’s broker-deal unit and headquarters in Manhattan for $1.75 billion. Barclays’s acquisition of Lehman’s broker-dealer business was the only instance of a non-US bank acquiring a US institution. The deal gave Barclays a top three position in US equity trading, derivatives trading, equity origination, high grade and high yield corporate bond trading, and asset-backed securities trading as well as a top five position in US Mergers and Acquisition Advisory. Analysts have said that the deal was a bargain for Barclays and that the takeover of Lehman Brothers, which was the fourth largest investment bank, gave Barclays substantial market share in many areas that it previously had not been exposed to. Throughout his presentation, Diamond stressed that “the universal banking model is the only model that can succeed” and that “as markets consolidate, it is important to be a leader in Investment Banking, Investment Management, and Wealth Management.” He added that there is a growing overlap between these three divisions and that knowledge of all three fields is needed in order to be successful and properly cater to clients. After J.P. Morgan agreed to acquire Bear Stearns, Bank of America purchased Merrill Lynch (the deal is set to close in early 2009), and Barclays took over parts of Lehman Brothers, the only two investment banks that remained were Goldman Sachs and Morgan Stanley. However, those two institutions filed to become bank-holding companies, effectively ending the era of the free-standing investment banks. Diamond also stated that Barclays continues to concentrate on managing risk and costs as well as staying close to clients during these turbulent times. In one move to reassure its clients, Barclays put its own money into its money-market funds after several money-market funds that broke the buck lost many of their clients. Also, Barclays continues to lend to its corporate clients, while some other banks have halted or cut back loans to many of their customers. Despite predicting that it will continue to be a challenging time for financial markets around the world as the US economy likely enters a recession and commodity prices continue to fluctuate, Diamond sees imminent opportunities for both Barclays and students who are entering the financial sector. While admitting that it will be more difficult to obtain positions in the field of finance, he stated that “industry will be far more entrepreneurial and creative” as the universal banking model becomes the preeminent feature of the finance sector.

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Delta-Northwest: Will the merger work?

Thursday, 12 June 2008

Rising gas prices have heavily hurt multiple industries, but the airline industry could be the most dramatically damaged by rising fuel costs. Current economic conditions have made it nearly impossible for major airlines to earn a profit. To combat the gloomy economic forecast, Delta Airlines and Northwest Airlines announced that they had agreed to merge in a $3.1 billion deal. The proposed merger would create the world’s largest airline, surpassing industry leaders such as American and United. Both Delta and Northwest hope that the merger will allow the two companies to reduce costs through consolidation. After Delta agreed to buy the Eagan, Minnesota based Northwest, the Delta president Ed Bastian said to Minnesota legislators that the US airline industry was reaching the “break point”. Since March 31, Aloha Airgroup Inc., ATA Airlines Inc., Frontier Airlines Holdings Inc., and Skybus Airlines Inc. have all filed for bankruptcy. With crude oil prices reaching over $100 a barrel, Delta and Northwest believed that the only way for the two companies to survive was to combine resources and consolidate. The new Delta-Northwest would also have over $7 billion in capital to withstand problems facing the industry and integrate the operations of the two companies. Most industry analysts were not at all surprised by the proposed merger because of the possibility of huge savings. Currently, Delta and Northwest employ a combined 89,000 workers, while American, the current largest carrier, has 85,000 employees. Delta says that after restructuring the merged airline will employ 75,000 workers. However, the critical group in all airline labor negotiations, pilots, has refused to agree to any deal relating to combining the two pilot groups. Richard Anderson, current Delta CEO, decided to risk possible labor chaos and continue full speed with the merger. Anderson has already negotiated a new contract with Delta pilots that would give them a 3.5% raise but not to Northwest pilots. He hopes that this strategy will pressure Northwest pilots to quickly accept a deal. Northwest pilots have very few options to stop the merger other than appealing to legislatures or the Justice Department. However, the pilots can dramatically hinder the eventual outcome of the merger with labor slowdowns that could lead to delayed or canceled flights. Even if Delta and Northwest manage to reach an agreement with the pilots, the combined company will unlikely lay off any pilots as the predicted cost cuts are all greatly hindered by the current structure of both airlines. In last year’s attempt by US Airways to take over Delta, US Airway predicted that by combining they could cut 10% of all flights and still meet demand. In the case of Delta and Northwest, many passengers on flights to Delta’s hub in Atlanta and Northwest’s hub in Memphis are only in transit to flights to other cities. By eliminating overlapping flights, Delta and Northwest could reduce costs by over $1 billion. However, Delta is unwilling to significantly shrink capacity or eliminate hubs, thus preventing significant cost savings. Delta only plans on scaling back capacity in Northwest’s Minneapolis hub and combining their airport operations and technology departments. Even these negligible savings could be offset by the costs of new labor deals and restructuring that the new company will have to face. Instead of massively cutting costs, Delta and Northwest are instead trying to increase market share to increase revenues. The companies do have complimentary networks, with Delta securing a strong European presence, and Northwest controlling a wide Asia network. A combined Delta and Northwest would carry over 129 million passengers with 975 planes, both leading all other world carriers. Even with the most passengers, the new company would still trail Air France-KLM and Lufthansa in sales. Delta and Northwest would still be forced to raise prices to generate enough revenue to earn a profit. To achieve greater market share, Delta and Northwest would have to attract customers away from the other large carriers. This proposition will get increasingly difficult with looming mergers that would create even larger competitors. The Delta-Northwest merger is just the beginning of a possible series of mergers that would further consolidate the airline industry. United Airlines and Continental Airlines have already entered into talks for a possible merger of the two companies. If this happens, they would create a company with an even greater market share than the combined Delta and Northwest. Overall, the Delta and Northwest merger does not look like it will be the silver bullet for the two companies’ woes. Only by significantly reducing redundant flights can the two companies effectively save costs. To achieve lower operating costs, Delta-Northwest should consider shutting down redundant hubs. For example, Delta’s Atlanta hub covers the same geographic region as Northwest’s Memphis hub. By eliminating the smaller Memphis hub, Delta could still deliver the same services but only need to operate one hub instead of two. If the other major airlines also merge and refuse to cut costs, Delta-Northwest will just be the first of a new breed of bigger but still unprofitable airlines.

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