上市櫃公司減資 故事才開始...(經濟日報, 10/30/06)

上市櫃公司減資 故事才開始...
‧經濟日報／徐谷楨
2006/10/30

台灣上市櫃公司高唱「減資進行曲」。8月，觀光股股王晶華現金減資72%；10月，凌陽減資50%；外資也猛點名光寶科、中華電等電子、電信業加入減資行列。
今年，台股企業掀起現金減資風潮，預期將延燒到明年，外資顯得「鼓聲隆隆」，但熟悉企業財務規畫的會計師透露：減資，故事才要開始。
多位會計師分析，公司辦理減資，有三種情況：賠錢、賺錢或企業進行分割。最常見的是賠錢的企業為彌補虧損、美化財報，先辦理減資，再增資引進新投資者。
股本縮小 財報會更好
反觀，若是獲利不錯的公司，由於手上現金多，但沒有投資效益，乾脆辦理現金減資，把錢還給股東，而且把股本「逆向」回歸給股東，會使股本縮小，提升每股盈餘，拉抬股價，相較於為彌補虧損而進行減資的公司，這種減資就像是股市的票房春藥。
最近手上錢滿為患的科技業，也準備加入減資行列，根據會計師歸納，賺錢的企業辦理現金減資有幾種原因：第一、股東須資金進行其他投資，這種情況例如富邦產險減資100億元，將錢還給母公司富邦金控；或者公司的資金太多，獲利穩定，且短期無投資計畫，主動把錢還股東，健康「瘦身」，這種情況例如晶華。
第二、企業股本擴充太快，但獲利成長速度已見趨緩，變成一隻「不會跳舞的大象」，因此大股東希望股本適度降低，提升每股報酬率。每股獲利提高將帶動股價上揚，最近外資倡議減資的觀點，像是光寶科、中華電信等都是被外資點名減資的族群。
減資也必須有其條件。會計師說，企業現金流量穩健，足以應付時才得以進行減資。
外資高喊減資，原因是他們認為企業價值被低估，公司手上現金又太多，股東拿到配發的新股「價值」有限。不如減資，還有機會改善每股盈餘，等到多頭來臨、股價翻揚，屆時有資金需求時，再辦理增資，可以募到的資金更多。
先減後增 營運有彈性
「現在退一步，未來可以進二、三步！」一位會計師如此形容。對於位居營運優勢的企業來說，因未來看好，減資其實在為將來保留彈性。
會計師進一步透露，不少企業在過去股價好時曾經辦理增資，例如以50元溢價發行新股，但現在減資卻只要退還股東每股10元面額，還有40元留在公司，所以對公司的現金部位影響有限，但對每股盈餘卻有立竿見影的效果，因此減資可說是不錯的財務操作。
企業因為過去景氣好，手上的現金愈抱愈多，但現在景氣平穩，看不到投資機會，公司的「銀彈」才顯得過剩。但這波減資風潮也並非完全「百利而無一害」，未來同類型產業很可能因為「比價」，產生減資的骨牌效應，「瘋狂減資」將是台灣資本市場未來值得密切關注的現象。
不過，會計師倒認為無須緊張，因為依過去經驗，每家公司減資都是大決策，通常經過深思熟慮，而是「看過去又看未來」後才提出的中長期的財務規畫；二來，上市公司永遠需錢，減資以後勢必將再增資。換言之，減資後，故事才要開始。
【2006/10/30 經濟日報】

In Deregulation, Power Plants Turn Into Blue Chips (NYTimes, 10/23/06)

October 23, 2006
In Deregulation, Power Plants Turn Into Blue Chips
By DAVID CAY JOHNSTON
Four big investment firms bought a group of Texas power plants in 2004 for $900 million and sold them the next year for $5.8 billion.
Sempra Energy, parent of the utility in San Diego, bought nine Texas power plants with two partners in 2004 for $430 million, selling two of them less than two years later for more than $1.6 billion.
Goldman Sachs and its partners bought power plants in upstate New York, Pennsylvania and Ohio starting in 1998 and sold them in 2001 at a profit of more than $1 billion.
These extraordinary profits have come during a decade-long effort in about half the states to overhaul the business of producing electricity — in the name of stimulating competition and lowering utility bills.
But even as some investors have profited handsomely by buying and sometimes quickly reselling power plants, electricity customers, who were supposed to be the biggest beneficiaries of the new system, have not fared so well. Not only have their electricity rates not fallen, in many cases they are rising even faster than the prices of the fuels used to make the electricity. Those increases stand in contrast to the significantly lower prices in other businesses in which competition was introduced, such as airlines and long-distance calling.
Some electricity customers are also being saddled with monthly surcharges to cover construction costs for plants that were sold at bargain prices and then resold at huge profits. Some of these surcharges will continue for years.
Analysts cite several reasons that the new system has not been as successful as hoped.
Regulators required some utilities to sell their power plants so that independent electricity producers could compete on equal footing with those plants. But not enough new competitors emerged.
And sometimes regulators allowed utility holding companies to transfer plants from their regulated utilities to unregulated wholly owned subsidiaries. When some of these unregulated sister companies still found it hard to turn a profit, regulators allowed the plants to become regulated companies again, so they were virtually guaranteed state-approved profit rates.
By last year, only 63 percent of the nation’s electricity generating capacity was owned by utilities, down from almost 90 percent 10 years ago. Often customers did not come out ahead, critics of the new system say.
Take the case of the Texas power plants. After the Texas Legislature, urged by Enron and big industrial customers, voted to make electricity generation a competitive business, the utility serving the Houston area sold 60 power plants that generate most of the power for the area to four investment firms — the Texas Pacific Group, the Blackstone Group, Kohlberg Kravis Roberts and Hellman & Friedman — which soon resold the plants at the $5 billion profit.
But state regulators have ordered electricity customers to pay an average of $4.75 monthly for 14 years to finish paying for the construction of the power plants, plus interest.
And the utility that sold the plants, Centerpoint, is suing for even higher payments from customers. Houston-area consumers now pay among the highest electricity rates, nearly double the national average.
Supporters of deregulation said customers would benefit from healthy competition among a growing number of electricity producers. But such competition has not developed. For one thing, many of the new power plants failed because, unlike many of the old plants, they almost all used natural gas to produce electricity. Demand for natural gas soared, and the price for that fuel tripled, making electricity from these plants too costly to be competitive.
The value of these plants collapsed, and some owners sought refuge in bankruptcy court. That is when investment firms, anticipating a much higher price for the plants’ electricity, bought them for as little as 20 cents for each dollar spent to build them.
And in fact the investment firms calculated doubly right: By paying so little for the plants, they made the construction costs of new plants by competitors seem prohibitively expensive. Over the last five years, few new power plants have been built, although demand for electricity has risen.
The story has been different for electricity customers. Many of the power plants that were sold are still owned by the utilities’ parent companies; they were simply transferred from the regulated utilities to unregulated sister companies. Some regulators allowed utilities to favor the sister companies with long-term contracts even if they did not offer the best price for electricity.
In fact, independent electricity producers argue that their modern generating plants often sit idle while older, inefficient plants owned by politically powerful utilities and their unregulated sister companies whir around the clock under long-term contracts. For example, Calpine, an independent generating company, and some big industrial customers have complained that Entergy, the Louisiana utility holding company, is favoring its own plants when Calpine’s power would be cheaper. Congress has ordered studies of the issue.
Because utilities are still allowed to pass on the cost of the power they buy, they have little incentive to choose a cheaper supplier. Electricity customers therefore end up paying more than they would have to if electricity production were truly competitive.
After Baltimore Gas & Electric transferred its 12 power plants to an unregulated affiliate and became only a distribution company, it continued to buy 70 percent of its electricity from the plants because there were not enough independent generators to supply the area’s needs. Baltimore Gas & Electric sought a 72 percent rate increase this year, causing such an outcry that Maryland regulators gave it only an immediate 15 percent, but with big additional increases virtually guaranteed over the next few years.
Paul Allen, a spokesman for the utility’s parent company, Constellation Energy, said that Baltimore Gas & Electric rates had been frozen since 1993 and that the increase largely reflected the higher price of producing electricity, including the cost of fuel. He said a rate increase was inevitable regardless of the new system.
But Robert McCullough, a utility economist and consultant, disagreed and blamed the new system. He said that in places like Baltimore, where a utility’s plants were sold to an unregulated sister company, “the same energy is generated by the same plants, owned by the same owners, and sold to the same customers, simply at a vastly higher price.”
Ralph Nader, head of the watchdog group Public Citizen, said that many power plants were sold for artificially low prices and that state regulators often failed to protect customers. He said regulators should have required price protection to shield consumers from a “double header corporate gouge, where the defenseless customer is paying twice for the same power plants.”
The American Electric Power Company, which owns utilities in 11 states, sold nine of its Texas power plants to SEMPRA, the parent of a San Diego utility company, and the Carlyle Group in 2004 for $430 million. SEMPRA and Carlyle quickly resold two of the plants for $1.6 billion.
American Electric wanted customers to pay an average of $9 a month for 14 years to cover the difference between the cost of building the plants and the lower price for which it sold them, plus interest. But because the resold plants went for 15 times as much per unit of generating capacity, state regulators questioned whether the utility should have sold the plants for higher prices. Still, regulators have required customers to pay on average $5 per month for 14 years, or more than $800 each.
There are persistent allegations that many plants have become inordinately profitable for their new owners; in some cases, disputes have arisen over just how profitable the plants are. In Connecticut, three plants together earn at least $700 million in annual profits, money that is over and above the 10 percent profit they would earn if they were still in the regulated system, Attorney General Richard Blumenthal said. He wants the state to end the new system and return to a more regulated system or even have a state agency provide power.
The plant owners, P.S.E.& G. and Dominion, said that the profit estimates were “wildly exaggerated” and that most of the power was sold at fixed prices with profits not significantly different from what regulated plants would earn. They did not release precise profit figures.
In Ohio, the state’s consumer advocate, Janine Migden-Ostrander, said the potential savings from a competitive electricity industry were undercut by favoritism that regulators showed to utility companies.
In effect, she said, Ohio regulators allowed an extremely favorable price when unregulated sister companies acquired power plants. The lower the price a sister company pays for a power plant, the more difficult it is for an independent power producer that must build an expensive new plant to compete. That “is how the utilities killed the market before it could be started,” she said.
Lynn Hargis, a longtime utility regulation lawyer who now volunteers as counsel to Public Citizen, said the terms under which power plants were sold are “the equivalent of selling your grandmother’s house for the price she paid 60 years ago, less depreciation. No one would do that.”
The utilities say that no one knew at the time the plants were sold that they would later soar in value. Floyd Le Blanc, a spokesman for Centerpoint, the Texas company that sold the 60 Houston-area plants, said, “We complied with all legal and regulatory requirements.” His remarks were echoed by other utilities.
But even after buying plants at low prices, some utilities have been unable to profit in a competitive setting after decades of operating in a regulated market, where profits are virtually guaranteed. State governments have provided a refuge.
Corporate parents with both regulated utilities and unregulated power plant companies have persuaded sometimes reluctant regulators to allow them to put failing plants into the hands of the regulated utilities, where they were almost certain to turn a profit, said Richard Stavros, executive editor of Public Utilities Fortnightly, a trade magazine. That has happened in Arizona, Missouri, Texas and other states.
Arizona Public Service, for example, brought five plants owned by its unregulated affiliate, Pinnacle Energy West, into the utility. The staff of the state board that regulates utilities at first opposed the deal, saying it was not in the best economic interests of customers. But the staff relented after Arizona Public Service promised it would not add any power plants to its regulated operations before 2015, which may encourage others to enter the market.
The Federal Energy Regulatory Commission recently approved a deal to move a Texas power plant back into a regulated utility, although it expressed concern that allowing utilities’ parent companies to salvage their failed investments in the competitive market could be unfair to competing generating companies.
The sale back to utilities of power plants that are not making money is “a disturbing national trend,” said Jan Smutny-Jones, executive director of Independent Energy Producers in Sacramento, Calif., a trade association for power plant owners.
“It’s a great deal,” he said, “having ratepayers cover your managerial mistakes.”

We’re Google. So Sue Us(NYTimes, 10/23/06)

October 23, 2006
We’re Google. So Sue Us.
By KATIE HAFNER
SAN FRANCISCO, Oct. 19 — Google attracts millions of Web users every day. And, increasingly, it’s attracting the attention of plenty of lawyers, too.
As Google has grown into the world’s most popular search engine and, arguably, the most powerful Internet company, it has become entangled in scores of lawsuits touching on a wide range of legal questions, including copyright violation, trademark infringement and its method of ranking Web sites.
Any company that is large and successful is going to attract lawsuits, and Google’s deep pockets make it an especially big target. But as it rushes to create innovative new services, Google sometimes operates in a way that almost seems to invite legal scrutiny.
A group of authors and publishers is challenging the company’s right to scan books that are still under copyright. A small Web site in California is suing Google because it was removed from the company’s search results. And European news agencies have sued over Google’s use of their headlines and photos in Google News.
In these cases and others, potential legal problems seem to give the company little pause before it plunges into new ventures.
“I think Google is wanting to push the boundaries,” said Jonathan Zittrain, professor of Internet governance and regulation at Oxford University.
“The Internet ethos of the 90’s, the expansionist ethos, was, ‘Just do it, make it cool, make it great and we’ll cut the rough edges off later,’ ” Professor Zittrain said. “They’re really trying to preserve a culture that says, ‘Just do it, and consult with the lawyers as you go so you don’t do anything flagrantly ill-advised.’ ”
Now, with its planned $1.65 billion acquisition of the video site YouTube, which contains not just homemade videos but also copyrighted clips that users upload without permission, some observers say Google is exposing itself to a new spate of lawsuits.
Along with YouTube’s 34 million viewers, Google will inherit a lawsuit filed last summer against the company. Robert Tur, who owns a video from the 1992 riots in Los Angeles that shows a trucker being beaten by rioters, is suing YouTube, accusing it of copyright infringement.
“Clearly, we investigated that whole issue,” said David C. Drummond, Google’s general counsel and senior vice president of corporate development. Mr. Drummond pointed to the “safe harbor” provision of the 1998 Digital Millennium Copyright Act. A number of courts have held that under this provision, Web sites are not liable for copyrighted content posted by users, as long as they promptly remove it when it is pointed out to them.
“We rely on the same safe harbor that YouTube relies on, so we’re fairly familiar with the issues,” Mr. Drummond said. “If you look at it, it’s somewhat illustrative of the kinds of lawsuits we face.”
Google has been known to settle, but for the most part it aggressively fights litigation — so far with a good deal of success.
Over the last few years, the company has spent millions in legal fees and hired a small army of bright young lawyers, many of them technically proficient and experts in the field of intellectual property.
The company’s legal department has grown from one lawyer in 2001 to nearly 100 lawyers now, not just at its headquarters in Mountain View, Calif., but also overseas. The company has also retained counsel at many outside law firms.
Many of the lawsuits Google is facing carry little weight. Yet it has a vested interest in fighting all of them, even those of questionable merit, and seeing that they are resolved quickly. In part, this is because any lawsuit that reaches the discovery, the pretrial fact-finding phase, poses the danger of revealing too much about Google’s proprietary technology. Google also has an interest in establishing a solid body of legal interpretation in its favor.
Many of the plaintiffs are asking for damages, but money is not always the issue. There are several cases, focusing on questions of intellectual property and trademark protection, that challenge Google’s whole way of doing business. These plaintiffs are suing Google to protect their well-established practices; their interest is not so much in remuneration as it is in getting Google to change its approach.
Peter S. Menell, a professor at Boalt Hall School of Law at the University of California, Berkeley, said that although Google’s well-established core search functions are not at risk, “there are a number of areas now in which new and exciting business models are being threatened.”
Cases addressing trademark protection in Google’s ad system could hurt its bottom line, as the company’s revenue comes mainly from advertising sales, said Eric Goldman, director of the High Tech Law Institute at the Santa Clara University School of Law in California.
In one of the most important such cases to date, last year a federal judge in Alexandria, Va., dismissed a claim by Geico, the auto insurance company. Geico said that a Google policy of permitting Geico’s competitors to buy advertisements tied to searches for the keywords “Geico” and “Geico Direct” confused Web surfers looking for the company’s site. The two companies settled the case before the judge reached a full decision on the other issues involved.
“This is Google’s cash cow,” Professor Goldman said. “If they can’t sell keywords freely, they’re not worth their market valuation.”
Michael Kwun, a senior litigation counsel at Google, agreed that “the Geico case was very important.” Mr. Kwun said that establishing a body of precedent was a priority for Google, especially as legal interpretations continued to evolve. “If we don’t at least litigate to the point where we get rulings on the issues that matter to us, we’re left with less clarity in the law,” he said.
Yet in the course of a long run of legal triumphs there have been a few bumps, and Google is facing some uncertain outcomes in the coming months.
Copyright challenges are at the center of the uncertainty. In one case that could have large ramifications, Perfect 10, a publisher of pornographic magazines and Web sites, sued Google for using thumbnail-sized reproductions of photos in its image search results, among other things.
Earlier this year, a Federal District Court judge in California said Google had violated copyright because it had undermined Perfect 10’s ability to license those images for sale to mobile phone users, and he issued a preliminary injunction. Google appealed the decision, and oral arguments before the United States Court of Appeals for the Ninth Circuit are scheduled for next month.
Google’s use of snippets of copyrighted works has also raised the ire of news outlets.
Last month, a Belgian court ordered Google to stop publishing headlines from Belgian newspapers without permission or payment of fees. And in a case pending in a Federal District Court in Washington, Agence France-Presse is suing Google, accusing it of violating its copyright by using its headlines, photographs and story fragments in Google News.
Google is arguing that news headlines and short phrases are not copyrightable.
“From our perspective, these are simple issues that were decided a long time ago,” said Alex Macgillivray, 34, whose title at Google is senior product counsel.
The company is making the same argument in cases pending against its book search service. Representatives of publishers and authors are challenging the company’s practice of scanning books that are still under copyright. They argue that because Google must copy an entire book to make it searchable, it is violating the copyright of the author or publisher if it does so without permission.
Google has offered to let publishers opt out of the book search program but has refused to ask permission to make the copies in advance.
Google has been known to settle cases. But in general it mounts a vigorous defense, Mr. Goldman said. “If they get sued, they turn the tables on the plaintiff and file motions to get the upper hand in the case,” he said.
Last spring, KinderStart, a small search engine in Southern California that focuses on information for parents of young children, sued Google after it noticed that its site had been removed from Google’s search results — leading to a loss of traffic and revenue for the company.
Google said in court filings that an area of the site that permitted visitors to add links had been full of pointers to low-quality or pornographic sites, indicating that it was poorly maintained or was an effort to manipulate Google’s search results. KinderStart said the removal was unfair and unjustified and that Google’s guidelines on ways to avoid such punishment were too vague.
A federal judge in San Jose dismissed the first version of the complaint, in essence agreeing with Google that the company is free to shape its search results in any way it chooses. KinderStart has filed a second, amended complaint, which is scheduled to be heard by the same judge on Friday.
“We’re not against innovation at all,” said Gregory J. Yu, a lawyer for KinderStart. “But Google should not dictate what we should or should not see and find on the Web. They can knock off these small Web sites and there’s nothing the small Web sites can do.”
In the KinderStart case, Google was quick to take the offensive. Shortly after the lawsuit was filed last spring, Google responded with a motion that, if granted, would throw out several of KinderStart’s claims and require KinderStart to cover Google’s legal fees. The judge deferred consideration of the motion.
Professor Zittrain of Oxford said Google’s corporate mantra — “to organize the world’s information and make it universally accessible” — gives some insight into its approach.
“They actually see that as Promethean,” Mr. Zittrain said. “They think of it as bringing fire to humankind. And it may even cause them to be bolder than other companies.”
Google’s legal muscle and shrewdness are not lost on those on the other side of the fights.
“We’ve got a formidable legal team, but obviously it’s nowhere near the unlimited resources of Google,” said David A. Milman, the chief executive of Rescuecom, a nationwide computer repair company that sued Google on trademark infringement grounds similar to Geico’s — and quickly lost. The company said that it would appeal the decision.
“People say you can’t fight the government,” Mr. Milman said. “Google, in this case, is very similar to the government. They’re the government of the Internet.”

Corporate America’s Pay Pal (NYTimes, 10/15/06)

October 15, 2006
Corporate America’s Pay Pal
By GRETCHEN MORGENSON
YOU may not know Frederic W. Cook, but if you are a shareholder or employee who has watched executive pay rocket in recent years, you are likely to be acquainted with his work.
As the nation’s leading executive compensation consultant, Mr. Cook and his colleagues at Frederic W. Cook & Company are probably responsible for creating more wealth for executives over the last 20 years than any other pay advisers.
He and his associates have advised on the $1.1 billion option grant that Computer Associates gave its top three executives in 1998 and the $83 million pension benefit amassed by Hank McKinnell, Pfizer’s recently ousted chief executive. And in 2000, court documents show, Mr. Cook’s firm provided advice to Tyco International’s compensation committee, which heaped a $95 million pay package on L. Dennis Kozlowski, its chief executive at the time.
Mr. Cook also invented “reload stock options,” the financial equivalent of perpetual-motion machines, which helped bestow millions of lucrative shares on executives over more than a decade until an accounting change forced them into disfavor. This year, officials at the Business Roundtable, a corporate lobbying organization, hired Mr. Cook to counter critics of executive pay; his study tried to justify rapid increases in the packages.
The soft-spoken Mr. Cook, 65, does not see himself as corporate America’s Pied Piper of pay. Instead, he asserts, he is just a “foot soldier” in the army of capitalism. But in any study of executive compensation practices over the last 25 years, the contributions of this foot soldier are more akin to those of a field marshal.
“Fred Cook is the dean of compensation consultants,” said Broc Romanek, a former S.E.C. lawyer and editor of CompensationStandards.com, an educational service that provides guidance on pay issues.
An examination of Mr. Cook’s career, clients and counseling neatly parallels the explosive growth in executive compensation packages, offering a window onto the mechanics and machinations behind the growing windfalls. From 1970 to 2000, according to a Harvard study, the median compensation awarded to the three highest-paid officers at major American corporations rose to $4.6 million from $850,000. More recently, that figure has settled down to around $4.35 million.
Concerns about shareholder value, corporate governance and the economic and social impact of soaring C.E.O. pay has led to mounting criticism of compensation practices across the nation. Warren E. Buffett, in his annual report to Berkshire Hathaway shareholders this year, decried the role that consulting firms play in awarding lofty compensation packages that have little to do with how well a company performs. Mr. Buffett’s generic name for these accommodating firms is “Ratchet, Ratchet & Bingo.”
Since its founding in 1973, Mr. Cook’s firm has served more than 1,800 clients, including more than half the world’s 250 largest corporations. The firm, privately held, employs 50 people; it is based in New York and has offices in Chicago, Los Angeles, San Francisco and London. Cook & Company engineered compensation innovations that other consultants and corporations have emulated, innovations all made palatable by an argument that Mr. Cook propagated to justify this huge transfer of wealth to chief executives: that newfangled pay packages aligned the interests of shareholders and management.
IN corporate boardrooms across America, Cook & Company is renowned and relied upon when pay is in play. When the board of Empire HealthChoice Inc., a nonprofit insurer in New York, set out to increase its executive pay to reflect private-sector practices, it called on Mr. Cook. According to a 2002 examination of the company’s pay practices by the New York State Insurance Department, the nonprofit’s directors selected Mr. Cook “in an effort to be creative when considering total compensation.” After HealthChoice hired Mr. Cook’s firm, the insurer’s pay packages increased significantly; the insurance department’s report questioned assumptions that Mr. Cook’s study used to recommend pay raises at the insurer.
Creativity where executive pay is concerned is something in which Mr. Cook takes great pride. On many occasions — at conferences and before Congress — he has identified himself and his firm as “the thought leader” on matters involving executive compensation. Although Mr. Cook declined to be interviewed for this article, previous interviews with him, a review of his speeches, writings posted on his firm’s Web site and discussions with industry peers displays his singular influence on the development of executive pay practices.
In declining to be interviewed, Mr. Cook said that he could not comment on specific clients that he and his firm have worked with, because of confidentiality policies. But amid concerns about escalating compensation packages, some of those who advise corporations on pay say consultants like Mr. Cook can do more than simply engineer or rubber-stamp outsized salaries and stock options.
“It’s not so much that the consultant facilitates, but that the consultant doesn’t apply the brakes,” said Brian Foley, head of an independent consulting firm in White Plains. “You have to read clients the riot act from time to time — you have to be willing to walk away to the point of being fired.”
It is entirely possible that in recent years Mr. Cook and his colleagues have tried to brake the runaway pay train at some or all of the companies they advise.
On Thursday, Mr. Cook addressed 2,000 compensation professionals at a conference in Las Vegas. Mr. Cook told the gathering that he tried to advise companies to do the right thing on pay but was sometimes rebuffed. He cited two occasions when he encouraged clients to rein in exorbitant executive retirement plans but lost the argument. Asked if he ever thought about walking away from clients with whom he disagreed, he said, “It wasn’t a quitting issue.”
Even so, Mr. Cook’s willingness to attach his formidable name to the Business Roundtable’s study exonerating corporate compensation practices suggests that he is friend, not foe, to executives on the receiving end of lottery-sized payouts.
While reasonable people continue to argue both sides of the executive pay question — some say pay is exorbitant, others say it is justified — few dispute that consulting firms like Mr. Cook’s have given corporations the fuel they needed to put compensation growth on the fast track.
Compensation consulting firms range from smallish, independent shops like Cook & Company to huge conglomerates like Hewitt Associates and Towers Perrin that house sizable pay-advisory subsidiaries. Although nearly 50 compensation consultancies operate nationwide, up from just a handful 20 years ago, they have been largely hidden from investors’ view because publicly traded companies have not had to identify them in their pay disclosure filings. That is about to change: the Securities and Exchange Commission has instituted new rules that will require companies to identify their compensation consultants in public filings next year.
The business is very profitable, but analysts say that large firms often use pay consulting as a loss leader so they can snare more lucrative consulting contracts. Any consultant that pushes back on executive pay packages runs the risk of putting other consulting contracts at risk.
A spokeswoman for Hewitt Associates said it had strict policies in place to ensure the independence and objectivity of all its consultants, including those working on executive compensation.
A Towers Perrin spokesman said the firm “rigorously applies policies, safeguards and controls to ensure that the objectivity of our professional advice to clients on executive compensation matters is not compromised by any other consulting assignments we undertake for our clients.”
In that context, some consultants say, the new S.E.C. disclosure rules would have been more robust if, in addition to mandating disclosure of the consulting firm’s identity, they also required a rundown of other services a firm provides to each of its clients. But they do not. Pressure to do more business with a compensation client, some consultants say, has given advisers an incentive to push the boundaries of executive pay practices.
Consultants and the companies often justify pay packages by relying on comprehensive surveys of compensation practices among peer companies. It is out of these studies that the famous percentiles emerge that keep pay rising. Companies report their executives’ pay as landing in a particular percentile of their peer group — the 75th is common — to make it seem reasonable.
BUT the data set that these surveys use can be skewed to include, for example, large, one-time stock option grants given to corporate executives for a specific reason — to reward a promotion, for example, or to induce a top manager to join the company. Though these awards are unusual, they are included in surveys, driving up the pay of every executive who used them.
The bull market in stocks that began in 1982 and ran with some stumbles through the 1990’s also gave consultants an opportunity to juice their clients’ take by showing them that total compensation across corporate America was rising. Mr. Cook pointed this out in a speech last year. Because option grants were valued at the price of the underlying stock when awarded, he said, in periods of rising share prices, consultants could use the fact that total compensation from options was rising in their studies. For companies whose stock prices lagged behind the market or their peers, consultants recommended increasing the size of the option grants, to remain competitive.
“All the benchmarking data everyone is using has been inflated over the past 15 years so most of that data is useless,” Mr. Romanek said. “Everybody should start fresh.”
It is easy to see why compensation consultants are so popular — and powerful — with top executives today. But that was not the case when Mr. Cook started out. At the time, compensation consulting was usually a small subsidiary at firms like McKinsey & Company and Booz Allen Hamilton, and actuarial firms like Towers Perrin.
After graduating from Dartmouth, Mr. Cook spent four years as an infantry officer in the Marine Corps. He began his career at Towers Perrin in 1966, according to a 2001 profile of Mr. Cook in Workspan magazine, a publication for compensation and benefits professionals.
Mr. Cook struck out on his own in 1973, when he was 32 and, according to the magazine profile, he felt that he had little to lose. He cashed in $25,000 in a profit-sharing account he had at Towers Perrin and rented office space in the Murray Hill neighborhood of Manhattan. Cook & Company’s headquarters are still there.
Mr. Cook set himself apart early on, by bringing a keen interest in accounting to executive pay issues. Many companies were concerned about making awards that might prompt tax problems, so a consultant with accounting expertise was in demand. Compensation, meanwhile, was becoming more complex.
According to “Board Perspectives: Building Value Through Compensation,” a book by Paul Hodgson, an expert on compensation issues, stock options were popular throughout the 1960’s, before federal legislation in 1969 reduced their tax advantages. Then the bear market struck and millions of options were underwater. Other long-term incentives replaced options, and cash bonuses became more popular throughout the 1970’s.
During these years, few corporate boards had compensation committees. That changed in the 1980’s, when executive pay began to climb at a faster pace. In 1984, the Internal Revenue Service moved to limit the payment of large severance packages known as “golden parachutes.” Two years later, when the capital gains tax rate rose to 28 percent, cash and option gains found themselves on equal footing as far as taxes were concerned.
Enter Mr. Cook. In 1988, he came up with a new type of stock option — the reload — that put him and his firm on the map. Mr. Cook became the ambassador of reloads, selling them to corporate clients interested in pleasing executives. As he explained them, reload stock options were “enhancements” that allowed executives to increase their stock ownership, aligning their interests with those of shareholders.
IN reality, reloads were awards that were automatically replaced each time they were exercised. For example, if an executive received a grant of 1,000 options carrying a strike price of $10 a share, and later exercised them for $20 a share, he or she instantly got 1,000 more options with a new strike price of $20. Some reloads even had a special feature that covered the tax bills generated by option exercises. In these cases, the replacement option covered a larger number of shares than the original award to pay for taxes due, further diluting the equity stakes of existing shareholders.
Mr. Cook designed the first reload stock option plan for executives at the Norwest Corporation, a Minneapolis bank holding company. The plans soon spread through corporate America like wildfire. In a 1998 analysis of reloads, Mr. Cook noted one reason for their increased popularity. “As executives who have experienced the opportunities of reloads move to other companies or join boards of directors,” he wrote, “they are likely to influence the spread of reloads as a tool to obtain the benefits it provides.”
By 2001, reloads had become so popular that Mr. Cook told clients that about one in five of the largest United States companies were using them. About half that many were using tax reloads, he said. In 1997, for example, Sanford I. Weill received 20 different option grants, all with reload features, worth an estimated $142 million. Reloads contributed to an estimated $1 billion received by Mr. Weill over 17 years at the head of Citigroup and some of its predecessor companies. Through a spokesman, he declined to comment.
Some analysts eventually blamed reloads for an enormous and, some said, stealth transfer of wealth from shareholders to managers. James F. Reda, an independent pay consultant in New York, was among the first to raise a red flag. In a 1999 article in the Journal of Compensation and Benefits, he and Thomas Hemmer, now a professor at the London School of Economics, concluded that reloads were bad for shareholders and that limits should be placed on their use.
“I have a lot of respect for the technical aspects of reloads, but I didn’t like that they weren’t in the best interests of shareholders,” Mr. Reda said. “I was always surprised about how many board members thought it was in the shareholders’ interests. I never could figure out how.”
Reloads fell out of favor three years ago after accounting changes made them less attractive. But Mr. Cook has found other ways to keep compensation aloft, and his firm’s work on pay packages for executives at Computer Associates and Pfizer ended up angering some shareholders at both companies.
Cook & Company advised Computer Associates on a pay plan that in 1998 produced a $1.1 billion stock award for Charles B. Wang, its chief executive; Sanjay Kumar, its president at the time; and Russell M. Artzt, an executive vice president. The award was a result of an employee stock ownership plan approved by shareholders in 1995. Under the plan, the three men stood to share as many as six million options if the company’s stock traded above certain preset levels on at least 30 trading days over the following five years. Mr. Wang was to receive 60 percent of the grant; Mr. Kumar, 30 percent; and Mr. Artzt, 10 percent.
Computer Associates’ compensation committee told its shareholders that the plan would “promote the creation of stockholder value by encouraging, recognizing and rewarding sustained outstanding individual performance by certain key employees who are largely responsible for the management, growth and protection of the business.” The committee also said the plan would help shareholders by retaining key individuals.
The plan generated its first big payment to the executives in 1998. Mr. Wang received shares worth $670 million while Mr. Kumar got shares worth $335 million. Mr. Artzt got a grant worth $112 million. All three executives later returned 22 percent of the shares to settle a stockholder suit.
The company declined to comment beyond saying that the plan was no longer in place.
High-level executives at Computer Associates, now known as CA, were later found to have artificially inflated sales figures in 1999 and 2000. Mr. Kumar pleaded guilty earlier this year to eight counts of fraud and obstruction in the case. Neither Mr. Wang nor Mr. Artzt was named in the case, and Mr. Artzt remains with the company.
Mr. Cook’s firm also guided Pfizer on the pension plan that awarded $83 million to Mr. McKinnell. When the company disclosed the value of the plan, shareholders were outraged because their stockholdings had fallen by 50 percent on Mr. McKinnell’s watch. The pension became the source of picketing and angry questions at the company’s annual meeting in April.
Mr. McKinnell’s pension grew so large because it contained a highly unusual element, a Pfizer spokesman explained at the time. While most pension benefits are figured by using a multiple of an executive’s salary and bonus, the pension calculation for Mr. McKinnell included the value of Pfizer shares he had received under long-term incentive arrangements from 1993 to 2001. In 2000, Pfizer’s compensation committee decided to discontinue that unusual inclusion.
As for the Cook firm’s work for Tyco, which related to stock options, a spokeswoman for Tyco declined to comment.
Last year, Mr. Kozlowski was found guilty of looting the company and covertly selling shares while artificially inflating company results.
OF course, it is possible that Mr. Cook and his colleagues have tried to reduce the size of their clients’ pay packages over the years and have been overruled by them. Consultants are, after all, just advisers. They cannot force clients to follow their advice.
But in testimony before Congress last year on the subject of executive compensation, Mr. Cook argued that a bill to try to rein in pay — the Protection Against Executive Compensation Abuse Act — was undesirable. Mr. Cook used most of his testimony to criticize news-media reports on executive pay. “The media has been flooded with a multitude of distorted, misleading and oftentimes erroneous statistics chosen to portray U.S. C.E.O.’s and board governance in a negative light,” he said.
At an executive pay conference last year, attendees were buzzing after James Dimon, the chief executive of J. P. Morgan Chase, delivered his keynote speech. Mr. Dimon took pay consultants to task in his talk, decrying, among other things, the use of peer-group surveys to “ratchet things up.”
With Mr. Cook in the audience, Mr. Dimon also described the corporate deployment of stock options as “very capricious” and said that when he arrived in 2000 as Bank One’s new chief executive, he immediately cut back on pay items and perquisites — supplemental retirement plans, company cars and club memberships — awarded to top executives. It was too much, he said, because well-compensated professionals should be able to pay their own club dues and car bills. And he eliminated supplemental retirement plans at Bank One.
Who designed the plans that Mr. Dimon so happily and proudly scrapped? Cook & Company.
Gilded Paychecks
Articles in this series are examining executive compensation. Previous articles in the series can be found at nytimes.com/business.
Eric Dash contributed reporting for this article.

Competitive Era Fails to Shrink Electric Bills (NYTimes, 10/16/06)

October 15, 2006
Competitive Era Fails to Shrink Electric Bills
By DAVID CAY JOHNSTON
A decade after competition was introduced in their industries, long-distance phone rates had fallen by half, air fares by more than a fourth and trucking rates by a fourth. But a decade after the federal government opened the business of generating electricity to competition, the market has produced no such decline.
Instead, more rate increase requests are pending now than ever before, said Jim Owen, a spokesman for the Edison Electric Institute, the association for the investor-owned utilities that provide about 60 percent of the nation power. The investor-owned electric utility industry published a June report entitled hy Are Electricity Prices Increasing??/p>
About 40 percent of all electricity customers ?those in 23 states and the District of Columbia where new competition was approved ?mostly paid modestly lower prices over the past decade. But those savings were primarily because states, which continue to have some rate-setting power, imposed cuts, freezes and caps at the behest of consumer groups that wanted to insulate customers from any initial price swings.
The last of those rate protections expire next year, and the Federal Energy Regulatory Commission and other federal agencies warn in a draft report to Congress that ustomers may experience rate shock?as utilities seek to make up for revenue they did not collect during the period of artificially reduced prices and to cover higher costs of fuel. They warned that his rate shock can create public pressure?to turn back from electricity prices set by the market to prices set by government regulators.
The disappointing results stem in good part from the fact that a genuinely competitive market for electricity production has not developed.
Concerned about rising prices, California and five other states have suspended or delayed transition to the competitive system.
And voters around two California cities, Sacramento and Davis, will decide next month whether to replace investor-owned utilities with municipal power in hopes of lowering rates. Drives are under way to expand public power in Massachusetts. In Portland, Ore., the city council tried and failed to buy the local utility company.
Electric customers in other states are facing rude surprises.
In Baltimore, an expected 72 percent rate increase in electricity prices has aroused so much protest that the state legislature met in special session, where it arranged to phase in the higher costs over several years. In Illinois, rates are about to rise as much as 55 percent.
The three New York area states opened their electricity markets to competition, with different results.
In Connecticut, residential electric rates rose up to 27 percent last year to an average of $128 a month, and are expected to go up as much as 50 percent more in January.
In New Jersey, rates rose up to 13 percent this year, and are poised to go much higher.
New York residential customers, by contrast, paid an inflation-adjusted average of 16 percent less in 2004 than in 1996, a state report said. It is not known how much of that is attributable to government-ordered rate cuts, but the state benefited from huge increases in power generated by its nuclear plants and by buying power from New England plants that, starting next year, may have less electricity to sell to New York.
The Federal Energy Regulatory Commission and five other agencies, in the draft of the report to Congress, are unable to specify any overall savings. t has been difficult,?the report states, o determine whether retail prices?in the states that opened to competition re higher or lower than they otherwise would have been?under the old system.
Joseph T. Kelliher, the commission chairman, said Friday that eventually arket discipline will deliver the best prices?and noted that every administration and Congress since 1978 had pushed the industry toward competition. He added that the commission recognized a need for onstant reform of the rules.?/p>
Under the old system, regulated utilities generated electricity and distributed it to customers. Under the new system, many regulated utilities only deliver power, which they buy from competing producers whose prices are not regulated. For example, Consolidated Edison, which serves the New York City area, once produced almost all the power it delivered; now it must buy virtually all its electricity from companies that bought its power plants and from other independent generators.
The goal is for producers to compete to offer electricity at the lowest price, savings customers money.
Independent power producers, free-market economists and the Clinton Administration cheered in 1996 when the federal government allowed states to adopt the new system. The new rules ill benefit the industry and consumers to the tune of billions of dollars every year,?Elizabeth A. Moler, then chairwoman of FERC, said at the time. She said the new rules would ccelerate competition and bring lower prices and more choices to energy customers.?/p>
But that has not happened. A truly competitive market has never developed, and, in most areas, the number of power producers is small. In New Jersey, for example, only six companies produce power, and not all of them sell to every utility.
Some utilities have decided to buy electricity not from the cheapest supplier but from one owned by a sister to the utility company, even if that electricity is more expensive. That has been the case in Ohio.
And if electricity is needed from more than one producer, utilities pay each one the highest price accepted in the bidding, not the lowest. This one-price system, adopted by the industry and approved by the federal government, is intended to encourage investment in new power plants, which are costlier than older ones.
But critics say that, as in California five years ago in a scandal that enveloped Enron, the auction system can be manipulated to drive up prices, with the increases passed on to customers. What is more, companies that produce electricity can withhold it or limit production even when demand is at its highest, lifting prices. This happened in California, and the federal commission has found that it occurred in a few more instances since then. Critics say that more subtle techniques to reduce the supply of power are common and that the commission shows little interest in investigating.
Bryan Lee, a FERC spokesman, said complaints of manipulation are investigated, but only last year did Congress give the commission the legal tools to punish manipulators.
Under the new system there have been some big winners ?including Goldman Sachs and the Carlyle Group, the private equity firm ?that figured out that there were huge profits to be made in one area of the new system.
Such investors have in some cases resold power plants they just bought, making a large profit. In other cases, investors have bought power plants from the utilities at what proved to be bargain prices, then sold the electricity back at much higher prices than it would have cost the utility to generate the electricity.
Richard Blumenthal, the Connecticut attorney general, said the supposedly competitive market has been  complete failure and colossal waste of time and money.?
He asked the federal commission to revoke competitive pricing in his state, but the commission dismissed the complaint last Wednesday, saying the state had not proved its case.
Advocates of moving to the new system say that, in time, the discipline of the competitive market will mean the best possible prices for customers. Alfred E. Kahn, the Cornell University economist who led the fight to deregulate airlines and who, as New York chief utility regulator in the 1970, nudged electric utilities toward the new system, said that he was not troubled by the uneven results so far.
hange,?Professor Kahn said, s always messy.?/p>
But some advocates of introducing competition to the electric industry have soured on the idea. They include the Cato Institute, a leading promoter of libertarian thought that favors the least possible regulation and that concluded earlier this year that government and electric utilities have made such hash of the new system that the whole effort should be scrapped.
e recommend total abandonment of restructuring,?Cato said. If the public rejects a greater embrace of markets, Cato wrote, the next best choice would be a eturn to an updated version of the old?system.
The conflicting results among the many studies of electric prices stand in contrast to the sharp, unambiguous drops in the prices of telephone calls, air travel and trucking.
One study by the utility economist Mark L. Fagan, a senior fellow at the Kennedy School of Government at Harvard and a consultant to various businesses who favors a competitive system, found that the new system often produces better results. He found that in 12 of 18 states that restructured, prices were lower for industrial customers than they would have been under the old system. But he also found that prices were somewhat lower than his model predicted in seven of 27 states that did not open to competition.
In Virginia, a state that did not move to the new system, a report last month by the agency that regulates utilities found o discernible benefit?to customers in the 16 states that had gone the farthest and warned that electricity prices in those states ay actually be increasing faster than for customers in states that did not restructure.?/p>
And Professor Jay Apt, a former astronaut who runs the electricity study center at Carnegie-Mellon University, found that savings from introducing competition to sales of electricity to large industrial customers re so small that they are not meaningful.?/p>
Regardless of the debate over the effectiveness of the new system, electricity prices are expected to rise in the next few years for several reasons apart from any rise in the price of coal, natural gas, oil, uranium and other fuels.
A study issued in June by the Edison Foundation, which represents investor-owned utilities concluded that utilities would have to raise rates to upgrade local distribution systems and to finance long-distance transmission lines, as well as for new power plants. The study found that utility profit margins had thinned and financial strength had weakened. It called for relief in the form of higher rates.

Wall St. Woos Film Producers, Skirting Studios (NYTimes, 10/14/06)

October 14, 2006
Wall St. Woos Film Producers, Skirting Studios
By LAURA M. HOLSON
LOS ANGELES, Oct. 13 — Since the birth of Hollywood, movie studio chiefs have been makers and breakers of careers, arbiters of taste and gatekeepers who decide which movies are made.
But as Hollywood power shifts more to Wall Street investors, financiers are starting to bypass studio bosses by dealing directly with successful producers.
Now, instead of deals being cut over lunch at Spago or the Grill, movies are increasingly being greenlighted in conference calls to New York.
The reason is a simple desire for more control. Wall Street financiers want a greater say over what movies they finance and who makes them; producers want more artistic independence and a larger share of the profits.
The studios themselves are nudging the trend along, too, since they are making fewer movies.
A result for moviegoers is that they could begin to see even more thrillers, comedies and horror movies at the multiplex — the types of movies Wall Street favors, because of their more predictable payoff.
Joel Silver, the producer of the “Lethal Weapon” and “The Matrix” movies, is the latest and most important Hollywood figure to cut a big deal with Wall Street.
He has just joined forces with a consortium of financiers who have agreed to provide $220 million to produce 15 films over the next six years. Mr. Silver will not only have creative control, he will own the movies outright.
“I’ve spent 20 years working for studios,” Mr. Silver said in a recent interview beside an L-shaped azure swimming pool at his Brentwood mansion, a home he referred to as the house ‘The Matrix’ built. “It was always their call.”
To his new partners, Mr. Silver seems like a good bet. In more than two decades as a producer on the Warner Brothers lot, he has produced 46 movies, which have generated $5.6 billion in global ticket sales.
Ivan Reitman, the director of “Animal House” and “Ghostbusters,” struck a $200 million deal with Merrill Lynch in August to produce 10 low-cost films. Tom Cruise and his producing partner, Paula Wagner, after splitting with Paramount Pictures over the summer, are in discussions with potential investors, as are several other producers.
“Hedge funds are picking out who they want to be in business with,” said Rob Moore, president for worldwide marketing, distribution and home entertainment at Paramount Pictures, who gets calls weekly from producers lining up money. “They don’t claim to know how to make movies. They are investing in a track record.”
But such investments are not risk-free, as others have learned. At least since the early 1980’s, studios have occasionally distributed and marketed movies financed by outsiders, some of them from overseas. In the late 1980’s, for example, Crédit Lyonnais famously backed a troubled MGM and Carolco Pictures, which went bankrupt.
Indeed, Hollywood is rife with stories of financiers who came to town with a pocketful of cash, only to leave empty-handed, except for a photograph of themselves with a smiling starlet.
But the new investors are hoping that with enough analysis, they can avoid the fate of some of their predecessors.
In deciding whether to invest with Mr. Silver, the investment firm CIT Group examined not only genre films he had produced, but similar films made by competitors, as well as a wide range of other movies. This style of movie financing has been driven by necessity. Studios have been forced to trim their slates because of higher costs, but they still need a steady stream of movies to distribute. In turn, producers need financing, because the studios are backing fewer films. And cash-rich financial institutions are looking for places to invest, hoping to earn double-digit returns while limiting their exposure to the fluctuations of the stock market.
“It’s a confluence of interests between the people with the cash, studios and producers,” Mr. Reitman said. “As Wall Street gets involved in movie financing, hedge funds don’t want to be ‘stupid money’ and want to align themselves with people who have a history of success. They are looking for a guide. They don’t want to be sold a script that’s been around for eight years.”
Studio executives, who earlier would have balked at such deals, are now open-minded. “I wouldn’t say it’s bad timing given where our strategy is going,” said Jeff Robinov, president of production at Warner Brothers, which, like many studios, is making fewer films. With Mr. Silver providing his own movies, Mr. Robinov said, he can focus on bigger films, like the “Harry Potter” and “Batman” movies.
And regardless of who finances the movies, the studios still make money from distributing them.
Two years ago, studio-slate financing was the toast of Hollywood, with hedge funds and other investors linking up with studios to co-produce films. But many of those deals have yet to pay off. In some cases, studios kept lucrative film franchises for themselves. In others, financiers picked the wrong movies to back.
“Here is a huge industry with a lot of capital,” said Wade Layton, managing director of CIT Communications, Media and Entertainment, referring to private investors. “First, they start off with studios as a way to get up to speed. Then you start to look for deals with producers.”
So far, Mr. Silver’s deal, which includes the investors J. P. Morgan and D. E. Shaw, is the most generous a producer has landed. Mr. Silver will produce a mix of horror, comedy and action movies that will cost $15 million to $40 million apiece to make. Mr. Silver’s Dark Castle Entertainment currently has enough money for eight movies and if those are successful, the revenue will be used to finance the remaining films.
The films are to be distributed by Warner Brothers Pictures, which gets a distribution fee. The first film to be released under the deal is “White Out,” an action thriller about a United States marshal who tracks a serial killer across Antarctica. It is to be released in 2008.
“I would never take a big movie to a financier,” said Mr. Silver, who also has a separate producing deal with Warner through 2009. “What do you say if you go over budget by $10 million? What do you say?”
“With these movies, 30 days and you are done,” he said, wiping his hands together.
Mr. Reitman’s Cold Spring Pictures — a venture among Mr. Reitman; his producing partner, Tom Pollock; Merrill Lynch; and two other investors — retains half the copyrights to its movies. Cold Spring must find a studio to distribute the films and put up 50 percent of the budgets. The financing is $50 million in equity and $150 million in debt. “We don’t want them telling us what to make,” Mr. Pollock said. “But we know if we don’t perform, they won’t be happy.”
Mr. Reitman’s group, like Mr. Silver, will share in 100 percent of DVD sales, which are often highly profitable, compared with an industry norm of 20 percent.
In return for giving up potential profits, financiers want to curb Hollywood’s notoriously wild spending. “We are not making investments for them to fund development,” said Michael Blum, a managing director at Merrill Lynch.
But Wall Street financiers are loath to meddle with the movie-making itself. And producers prefer it that way. “When bankers start reading scripts, you know you are in trouble,” Mr. Layton said.
Mr. Silver agreed: “I don’t mind if they come to premieres. If they want to come to the set, that’s fine — but I’m not making movies in L.A.” (Mr. Silver’s movies are filmed around the world.)
Two weeks ago, Mr. Silver invited his new backers to his estate, Casa de Plata, where they celebrated over sushi, roast beef sandwiches and cocktails. The same week, Mr. Reitman and Mr. Pollock took their partners to Cut, Wolfgang Puck’s new steakhouse, where, Mr. Reitman noted, Merrill Lynch, paid the bill.
“I don’t think any of them are in it for the glamour,” Mr. Pollock said. “They kept talking about their next big deal, which was recreational vehicles.”
But Mr. Reitman said his investors wanted the lowdown on John Belushi, Bill Murray and Dan Aykroyd in their younger days.
Did he share any gossip?
“A little,” Mr. Reitman said, smiling.

Yahoo Feels Breath on Neck(NYTimes, 10/11/06)

October 11, 2006
Yahoo Feels Breath on Neck
By SAUL HANSELL
As Google whips out its fat wallet to buy the video site YouTube, it is making Yahoo look even more out of step with the fast-changing Internet advertising market.
Yahoo itself tried to buy YouTube just a few weeks ago and got as close as negotiating price and terms, according to an executive briefed on the discussions. But the talks broke down, and Google swooped in and closed the deal quickly, just as it has in several recent partnership negotiations. Indeed, many Internet executives are noting just how often Yahoo appears to be late and slow, both in its own business and in negotiations with other companies.
Yahoo would seem to have a strong hand. It is the world’s most popular Web site, with more than 400 million monthly users and a major seller of advertising for its own and other sites. It has top Web properties in areas like e-mail messaging and music. And its management team, led by Terry S. Semel, a former Hollywood executive, is well regarded for its skill and financial rigor.
But in recent months the company has suffered some embarrassing setbacks in its sales of both display and Web search advertising. Many advertising industry executives say Yahoo’s lead in working with big marketers has eroded as other companies have built up popular Web sites, sales operations and advertising technology.
“Yahoo has lost the favor it enjoyed a year or two ago,” said David Cohen, a senior vice president of Universal McCann, a media buying agency of the Interpublic Group. He said his clients were reducing the share of their budgets they allocate to Yahoo in favor of newer sites, like MySpace, and sites developed by big media companies like Viacom.
“There are more players in town, and the others are closing the gap relative to the things Yahoo is good at,” Mr. Cohen said.
But the problems at Yahoo go beyond advertising. From video programming to social networking — areas of interest to users and advertisers alike — the company is losing its initiative. And each time a product fails in the market or is late, Yahoo loses some ability to do more deals and hire more talented employees. The shares are down 38 percent this year, sending some employees out the door in search of better shots at stock market wealth.
Google, in the meantime, is taking advantage of Yahoo’s problems to cement crucial deals that could make its rival’s recovery even more difficult. Before Google agreed to buy YouTube for $1.65 billion in stock, it paid $1 billion for 5 percent of AOL, locking in the right to sell text ads that appear next to its search results. And it agreed to pay $900 million over three and a half years to sell ads on MySpace.com, giving it a huge number of pages where it can place banner ads. (Yahoo flirted with AOL and bid actively for MySpace.)
With these and other deals, Google has neutralized Yahoo’s big competitive advantage on Madison Avenue: its ability to sell the full range of advertising, from splashy video campaigns to text ads on search results.
Joanna Stevens, a spokeswoman for Yahoo, said that no Yahoo executive would comment for this article.
“We feel our business is very strong, even if we are not growing at the rates at which the financial community is expecting us to,” Ms. Stevens said. “Of course growth will slow when you already reach one out of two people on the Internet.” She said that Yahoo frequently discusses business arrangements with other Internet companies, but declined to discuss any potential negotiations with YouTube.
Yahoo has been stymied because its text advertising business has been largely frozen until it completes a new software system. The upgrade is more than a year late and the delay has sucked up the company’s engineering resources and prevented it from developing new advertising products. Yahoo’s system produces much less money from every page than Google, a handicap in bidding for advertising deals.
Moreover, Google has grown so much wealthier and has so much more stock market value, it can afford to make deals that would be much more risky for Yahoo, said Jordan Rohan, an analyst for RBC Capital Markets.
Google has $11 billion in cash and a market value of $131 billion, while Yahoo has $4 billion in cash and is worth $34 billion. “In poker terms, Google is the dominating chip stack,” Mr. Rohan said.
Some analysts argue that Yahoo needs some bold moves to signal to investors, advertisers and customers its commitment to innovation. Its growth in users is slowing. The United States audience grew just 6.5 percent in September from a year earlier, to 106 million unique visitors, while Google’s grew 25 percent.
Yahoo has made several overtures to buy Facebook, a social networking site popular among college students. This would help compensate for the failure of Yahoo’s own social network — Yahoo 360 — to find a place in the market. It could also expand Yahoo’s appeal to young people, an area in which it has slipped.
But Mr. Rohan said it would be a mistake to respond to the Google-YouTube deal with a big offer for Facebook. “Facebook is a nice small business,” he said. “I would prefer they spend less than $1 billion for it.”
The company’s stumbles are a puzzle, as Mr. Semel is widely considered to have built a mature and disciplined management team. He led the company out of the collapse of the Internet ad market and built a credible Internet search unit after it became clear that Google was more a rival than a partner. But in this market, what was once admirable discipline may now look like timidity.
Yahoo may well be slipping because of the sheer scope of its ambitions. It competes in news with CNN, in sports with ESPN, in e-mail with Microsoft, in instant messaging with AOL, in social networking with MySpace, and of course in searching with Google. And it does so in dozens of countries.
“It’s hard to figure out what they want to be when they grow up, even though they are grown up now,” said Tim Hanlon, a senior vice president of Denuo, the media futures consulting arm of the Publicis Groupe. “Are they a content company? Are they a services company? Or are they a portal to other things? You ask three people and you may get three different answers.”
Current and former Yahoo employees say the company has been bogged down by bureaucracy and internal squabbling. For example, the media group, which handles video programming, and the search group, which has a system to find videos on the Web, both wanted to offer a service for users to upload their own video clips. The search group won, but the delay allowed YouTube, a start-up, to dominate the market.
“When you become Yahoo’s size, you become a little complacent, a little fat and happy,” said Youssef H. Squali, an analyst for Jefferies & Company.
Companies that try to do deals with Yahoo also say they find it to be slow, demanding and inconsistent in negotiations. The discussions with YouTube floundered, in part, over Yahoo’s demands for assurances over how YouTube would handle copyrighted material, concerns that were not so important to Google, the executive briefed on the negotiations said.
“They can’t close a deal,” said a top executive of a large media company who said he was frustrated because negotiations over a partnership with Yahoo had bogged down. “They are smart guys, but they are having real problems,” said the executive, who declined to be identified because his company has other dealings with Yahoo.
Yahoo’s faltering image and plunging stock price may also be hurting its ability to recruit talented people. “A lot of entrepreneurs I talk to would rather work for a hypergrowth technology company than what they consider — and this is funny — a stodgy old Internet company,” Mr. Squali said.
Yahoo’s existing employees are grumbling that with the stock price so low, many of their options have become worthless. Some Yahoo veterans have bolted for trendier start-ups. For example, Mike Murphy, a longtime ad salesman, is now the chief revenue officer of Facebook, and Gideon Yu, Yahoo’s treasurer, quit last month to become chief financial officer of YouTube.
“They woke up and realized they had an attrition problem,” said one executive who quit for a start-up this year.
Yahoo has responded by giving substantial raises to favored executives it wants to keep, according to one current executive who spoke on the condition of anonymity because he did not want to jeopardize the raise he received.
Yahoo has also had trouble developing many new offerings that capitalize on the latest trends on the Web and offer innovative formats for advertisers. Many marketers, for example, have become intrigued by the possibilities of weaving their products into the fabric of social networking sites. Even more, they are sponsoring original Internet content, especially video programs.
Two years ago, Yahoo made an expansion in Hollywood in an attempt to produce new video-focused Web sites, but it later backed off from the plan amid internal bickering.
Perhaps the biggest area of strategic confusion for Yahoo is its advertising network, which sells ads on other sites. Its Yahoo Search Marketing division has been falling further and further behind Google in selling text ads on other search sites. Yahoo lost a major source of attractive search pages when MSN began selling its own ads this year. And the Yahoo Publisher Network, which is meant to sell ads on blogs, news sites and other content pages, has languished. Dow Jones, for example, withdrew The Wall Street Journal and other sites out of the Yahoo network this spring, hiring Seevast, a small New York firm, instead.
Moreover, Yahoo has made few moves to expand its ad network to sell other types of advertisements like banners and video commercials, even though it is a leader in selling such ads on its own site. With a plethora of blogs and Web publishers looking to earn money from their efforts, there is a booming business in selling ads for these sites. AOL has made a major play in this field, buying the leading banner network, Advertising.com, and Lightningcast, a video network.
Google has moved to expand its network from text ads to selling banners and video ads, and the YouTube purchase will no doubt accelerate its push into video. Moreover, Google wants to sell ads in print, radio and soon traditional television as well.
“Google is so much ahead,” said Peter Hershberg, a managing partner of Reprise Media, a search advertising agency. “Google is going into new channels like video and Yahoo is still trying to fix their core channel.”

A Kink in Venture Capital’s Gold Chain(NYTimes, 10/7/06)

October 7, 2006
A Kink in Venture Capital’s Gold Chain
By MIGUEL HELFT
The high-risk, high-return venture capital business may have turned into all risk and no return.
That, in a nutshell, is the message that a prominent venture firm delivered yesterday to its investors when it told them that it could not continue to take their money — at least not for the time being.
“The traditional venture model seems to us to be broken,” Steve Dow, a general partner at Sevin Rosen Funds, said in an interview.
Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.
“We have decided to take the radical step of returning the commitments you have given us for Fund X,” the firm wrote.
Explaining its decision, Sevin Rosen, which has offices in Dallas and Silicon Valley, said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.
But excess of capital is only part of the problem, the firm said. In its letter, it bemoaned what it described as “a terribly weak exit environment,” a reference to the dearth of initial public offerings and to a market for acquisitions at valuations that it considers too low to deliver the kind of returns that venture investors expect.
At a time when young companies like YouTube and Facebook are said to be entertaining acquisition offers in the $1 billion neighborhood, that pronouncement may seem surprising. But Mr. Dow said those “megadeals” were rare and were not enough to sustain an entire industry.
“While good returns from any given firm’s portfolio is certainly a possibility, the statistics have clearly shifted in an unfavorable direction,” the firm wrote. “The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels.”
Sevin Rosen’s credibility is bolstered by the roster of companies it has helped lead to public offerings in the past, including Compaq, Lotus and Cypress Semiconductor. It has been describing adverse market conditions, to its investors and to the news media, for at least two years. But it finally decided that it could not be telling investors of a poor market for venture investing while continuing to take their money.
“If we really believe that there are fundamental structural problems in the venture industry, should we raise our fund and just hope that the problems will get better?” the firm wrote. The answer was no.
Many venture capitalists have voiced similar concerns for some time. And over the last few years, many firms have turned away far more money than they raised.
But investors, perhaps hoping for a repeat of the eye-popping returns of the late 1990’s, have continued to put money into venture firms. At the end of 2005, venture capitalists had a combined $261 billion under management, more than at any time in the industry’s history, though some of it was raised in the Internet boom.
Venture capitalists have given back money to investors before, most significantly after the Internet bubble burst and the appetite for investing in risky technology start-up companies nearly vanished. But experts say this is the first time that a top-tier firm has decided to scrap a sizable fund that was nearly complete.
“I don’t know of any other firm that has gone through that process,” said Mark Heesen, president of the National Venture Capital Association, an industry group.
In many ways, Sevin Rosen’s decision is based not on where the market for public offerings and acquisitions is today, but on where the partners in the firm think it will be in five or more years, the typical life of a venture fund. While Sevin Rosen has concluded that things are unlikely to change, many others disagree, Mr. Heesen said.
“That’s where the real debate is, and I can see V.C.’s on both sides of that debate,” he said.
Indeed, even as they say they wish there was less money in the business, and hence less competition for deals, many venture capitalists say they remain confident about their ability to make money for their investors.
“My job is to find the best opportunities we can find,” said Kevin Compton, an affiliated partner at Kleiner Perkins Caufield & Byers, one of the top Silicon Valley firms. “In our opinion, there continue to be great opportunities.”
And sitting on the sidelines is a risk that a firm with a strong reputation can afford to take, Mr. Compton said. If Sevin Rosen changes its mind and decides to raise a new fund, “there are plenty of people who will want to invest in it,” Mr. Compton said.
Mitchell Kertzman, a partner at Hummer Winblad, a venture capital firm in San Francisco, said, “It is certainly true that there is a lot of cash in all parts of the venture capital supply chain.” But that oversupply mostly affects sectors that are trendy, like the consumer Internet market, he said.
Many firms that have raised large funds have shifted their investments from “two guys in a garage” ventures to more established companies. Those “late stage” deals typically require larger investments but are considered less risky and offer the promise of quicker returns. As a result, this is “one of the best times to be an early-stage investor,” Mr. Kertzman said.
Still, Sevin Rosen is known for investing in early-stage companies. While significant, the firm’s decision to kill its latest fund does not mean it is closing shop. Sevin Rosen will continue to invest millions it raised in earlier funds. And Mr. Dow said the firm’s partners planned to spend time thinking about new models of investing.
“Maybe there are different financing structures,” he said. “Maybe we have to look at fund sizes. Maybe we have to look at only doing deals that are going to take a limited amount of capital.”
At least one of Sevin Rosen’s investors appears satisfied with the firm’s decision.
“I think they are raising the right questions,” said Sandra A. Ell, treasurer and chief investment officer at the California Institute of Technology. “It’s not that there is a lack of investment opportunities,” she said, but rather “a lack of being able to pull out your money” through public offerings or large acquisitions.
While Sevin Rosen may have raised the good questions, Mr. Dow admitted that for now, it lacks any good answers.
“We have properly diagnosed the problem, but haven’t figured out for this patient what the therapy is,” he said.

Hedge Fund With Big Loss Says It Will Close (NYTimes, 9/30/06)

September 30, 2006
Hedge Fund With Big Loss Says It Will Close
By JENNY ANDERSON
Amaranth Advisors, the $9.2 billion hedge fund that lost $6.5 billion in less than a month, is preparing to shut down.
Nicholas Maounis, the founder of the hedge fund, sent a letter to investors last night informing them that the fund was suspending all redemptions for Sept. 30 and Oct. 31, to “enable the Amaranth funds to generate liquidity for investors in an orderly fashion, with the goal of maximizing the proceeds of asset dispositions.”
Investors have met with Amaranth throughout the week, many demanding the return of their money. “As you know, the multistrategy funds have recently received substantial redemption requests,” Mr. Maounis said in the letter.
The letter represents a turnabout for Mr. Maounis, who just a week ago expressed hope at the end of a conference call that he would be able to continue the fund’s operations. “We have every intention of continuing in business, generating for our investors the same consistently high risk-adjusted returns which have been our hallmark,” he said on Sept. 22.
When investors are allowed to take money out of the fund, redemption fees and charges will be waived, the letter said. Cash distributions will be divvied up proportionately.
The fund has lost $6.4 billion, according to the letter, which said assets were down 65 to 70 percent for the month and 55 to 60 percent for the year. Amaranth started the year with $7.5 billion and then soared to $9.2 billion before stumbling to less than $3 billion today.
Amaranth’s energy desk, run by a young trader, Brian Hunter, bet aggressively on natural gas. When certain prices fell this month, the fund found itself in positions too big to liquidate. Ultimately, it was forced to sell its energy holdings when some of its counterparties threatened to cut off its credit. J. P. Morgan Chase and Citadel Investments, another hedge fund, bought the book of energy trades for an undisclosed price, although Amaranth said the sale was done at a loss.
At different points, the fund was in discussions with buyers, including Citigroup, to possibly acquire some of the remaining assets. But with investors clamoring to get their money back, such a sale would be difficult. Amaranth said it continued to “pursue negotiations but have no announcement at this time,” a signal many investors took to mean any potential sale was off.
The letter said Amaranth planned to remain in business but was not certain what it would do. A spokesman for the fund, which is based in Greenwich, Conn., declined to comment beyond the letter.