Business Week - Feb 27, 2006

CLASS DIVIDE AT AMHERST (P. 64) lA DIFFERENT DIET PILL (P.
74)
FEBRUARY 27, 2006
www.businessweek.com
Going Private
BY EMILY THORNTON (P. 52)
Hotshot executives are eeing the scrutiny of public companies for the mad money of the private-equity boom
February 27, 2006
52
FOLLOW THE MONEY
Cover Story
52 Going Private
Money and freedom. Thats whats driving hotshot managers, midcareer folks, and newly minted MBAs alike to private equity, a world where investors buy slumping companies, turn them around, then sell or take them public. Pay is high even at the entry leveland can be spectacular for stars like ex-ibm chief Lou Gerstner. As for freedom, ceos can build for the long term without shareholders second-guessing every move. Not to mention that pesky Sarbanes-Oxley...
58 Buyout Manias Mountain of Debt
By 2008 there may be a wave of defaults
WIth so much private-equity cash sloshing around, no wonder top talent is kissing off public companies
62 A Chat With Lou Gerstner

Why he doesnt miss the quarterly grind
BAND WIDTH
Your own kind of music, online
News: Analysis & Commentary

28 How the IPO Market Got Its Buzz Back
Investor appetites have returned, but this time theyre drawn tomostly saner offerings
BusinessWeek (ISSN 0007-7135) Issue number 3973, published weekly, except for one week in January and one in August, by The McGraw-Hill Companies, Inc. Executive, Editorial, Circulation, and Advertising Offices: 1221 Avenue of the Americas, New York, N.Y. 10020. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Canada Post Publication Mail Agreement Number 40012501. Return undeliverable Canadian addresses to: DPGM Ltd., 2-7496 Bath Road, Mississauga, ON L4T 1L2. Email: bwkcustserv@cdsfulllment.com Postmaster: Send address changes to BusinessWeek. P.O. Box 8418, Red Oak, IA. 51591-1418.
44
NON GRATA
Icahns frosty reception in Korea

2 | BusinessWeek | February 27, 2006
cover photo illustration by john kuczala; (bottom left) rick maiman/bloomberg news
84
The Business Week

26 News You Need To Know
Retail sales; oil production; Merrill and BlackRock; Warner Music; and more
31 Class Actions Great Divide

More plaintiffs opt out of settlementsa headache for companies being sued
32 Commentary: Housing
Falling prices will bring on the pain. Wholl get blamed if the roof caves in?
64
BIG PLAN ON CAMPUS
34 The Rising Stock of Black Directors

Companies seek to broaden their boards
36 Wanna Buy a Money Manager?

Banks and brokerages are selling
38 Tescos California Dream

A British supermarket heads for the U.S.
Even with nancial aid, most low-income kids cant afford college. Amherst President Tony Marx wants to change that
Government
41 Washington Outlook
A congressmans guilty plea shines light on Capitol Hills black budget
Science & Technology

74 Girth of a Nation
Many doctors may decide obesity is best fought with a pill nearing fda approval
90 Your Very Own Hit Factory

A digital home recording studio requires the right software and a lot of patience
Global Business
42 Electrolux Cleans Up
ceo Straberg reverses a slide by jettisoning old ways and boosting r&d
92 Tuning Up a New Generation

Teaching computer-savvy kids to compose
Marketing
76 Video Games: The New Ad Game
Why theyre becoming the hot spots for product placements
94 Singing Beyond the Shower

Web sites to expand your audience
44 Icahn: Foreign Raiders in Korea

His kt&g ght may be the rst of many
Columnists
18 Wildstrom: Technology & You
New security services for the home pc
45 Indias Generic-Drug Wars

Suddenly, Dr. Reddys and Ranbaxy are up against a fresh crop of competitors
Finance
78 Golden Wests Golden Strategy
How its able to ride a housing bubble
20 Fine: Media Centric

And the competition is...teen consumers
46 What the U.S. Can Learn from Sasol

The South African company makes liquid fuels from coal, not Mideast oil
23 Cooper: Business Outlook

An increasingly global economy will hamstring Bernankes domestic efforts Currencies: The case for a dollar decline
Managing
48 The Org Chart That Really Counts
How mapping unofficial job links pays off
Entrepreneurs
80 Steering Patients Through the System
Quantum Health points people to the best care and saves employers big bucks
96 Marcial: Inside Wall Street 102 Jack and Suzy Welch: The Welch Way
Weighing worklife trade-offs
The Corporation
50 Dot-Com Fever, Again
Small sites are pursued by Big Media
Information Technology
82 A New Chapter for Digital Books
In 2006 they may become best-sellers, thanks to big tech advances
Ideas
100 Books
Spar: The Baby Business
Special Report
64 Amhersts Campus Revolutionary
President Tony Marx is developing a radical plan to get more poor kids into top colleges, starting with his own school
104 Outside Shot: Barney Frank

The free market is producing more inequality than is socially healthy
Personal Tech/Music
84 Boot Up the Band
Technology makes it easier to compose, record, and promote your own music
Features
People
72 Death, Dying, and the CEO
kpmgs Eugene OKelly and his wife collaborated on a remarkable chronicle
85 Plug n Play Pianos

Theres a digital keyboard for everyone
88 Go, Go, Go Johnny B. Digital

Bringing guitars into the 21st century
7 UpFront 14 Readers Report 16 Corrections & Clarications 98 Figures of the Week 99 Index of Companies
February 27, 2006 | BusinessWeek | 3
Its about money. Earning it. Investing it. Spending it.
WWW.BUSINESSWEEK.COM Updated every business day. BusinessWeek magazine is available online free to subscribers: Go to www.businessweek.com and follow instructions to register.
Check out this weekends show February 18 and 19: Overlooked deductions: Tips to help lower your tax bill and boost your refund. Teaching tunes: Kids review software that teaches them how to compose and play music. Destination CEO: Meet Barbies maker. Mattel CEO Bob Eckert talks about his rise to the corner office. Barking for bucks: Dog-related products and services are making big bucks for business owners.
Mourning the closing of Chicagos landmark eatery
Keeping it All in the Family

As baby boomers gray, hundreds of thousands of family-owned businesses are facing a major decision: What will they do with the business? Options abound: selling to investors, giving the business to children, bringing in outside management. In this Online Special Report, we take a look at what families need to consider as they decide whether and how to pass their businesses on. Meet Chicagos Berghoff Family, who after three generations has decided to close the 108 year-old restaurant that bears their name. Visit Execs Craigie and Debbie Zildjian keep with the 14th generation of Zildjians to the cymbal maker marching on nd out how theyve managed to keep the familys cymbal business running for nearly 400 years. Our report also examines the generation ready to take control and offers a gallery of familyowned businesses that have stood the test of time. Youll nd all this and more at www.businessweek.com/go/familybusiness
(top to bottom) jeff roberson/ap/wide world; asia kepka
Airs Saturday/Sunday nationwide. Check your local listings or view segments at www.businessweekweekend.com
I am stunned that he would be out speechifying the rst week he was off the job.
Donald Straszheim of Straszheim Global Advisors on Alan Greenspan possibly upstaging successor Ben Bernanke with his public appearances and planned memoir, to USA Today
EDITED BY DAN BEUCKE
MOTHER INDIA
AS THE CALL CENTER TURNS

MAYBE IT SEEMS like you spend half your life on the phone with a call center in India. But in India itself, call centers actually are seeping into everyday life, appearing in a wave of popular sitcoms and books. India Calling, a hot Indian tv show (below) on Rupert Murdochs STAR channel, depicts a small-town girl who lands in Bombay in search of her absconding sister. She nds a job in a call center instead. Viewers follow the highs and lows of the work, which attracts thousands of young Indians. Call center jobs are now part of Indias social fabric, offering immense scope for
romance, politics, hatred, all creating high drama, says Shristi Behl Arya, who is the shows producer. Indeed, the customer service scene in India is anything but boring. Centers can be a hotbed of hormones; some average a marriage a month, often outside traditional bounds of caste and economic status. The Call Center, a show coming soon to channel NDTV, takes potshots at Americans venting their angst about losing jobs to the Indians on the other end of the wire. A best-selling book, One Night @ The Call Center, touches on love, bad bosses, even God (appearing, naturally, in a phone call). Then there are the jokes making the rounds: When a man complains to a doctor about insomnia, the doctor suggests working at a call center as the remedy. Nandini Lakshman
HAPPIER DAYS Eisner and Jobs after A Bugs Life premiere
SHOW BIZ
Eisner: Lets Break a Deal

MICHAEL EISNER now knows they can put your name on the
THE BIG PICTURE

(right) rose prouser/reuters
companies, and good luck guring out what they do from their names. Try to match the startup with its description:
1 2 3 4 5
WHATS IN A NAME Theres a new breed of Web
Diigo Etsy Meebo Pheedo Zingee
a Multiclient instant messaging application b Advertising tools for blogs and RSS feeds c Online le sharing d Social bookmarking and annotation tool e Person-to-person e-commerce of handmade items
Answers: 1-d, 2-e, 3-a, 4-b, 5-c
building, but that doesnt guarantee a warm welcome back. Eisner, who left Walt Disney as ceo on Sept. 30, was honored on Jan. 23 when Disney named its Burbank headquarters building after him. But later that day, the board turned down Eisners last pitch: a plea to pull out of talks to buy Steve Jobs Pixar Animation Studios. For nearly a half-hour, Eisner argued that $7.4 billion was too much to pay for a studio that had only six lms to its credit, albeit blockbusters such as Finding Nemo and Toy Story. Eisner argued that Pixars streak was bound to end and, when it did, Disney would look like it acted rashly. Those with knowledge of the talks, rst reported by the New York Post, say the board felt it owed it to Eisner to listen. After all, he still holds 1.7% of Disneys stock. But directors factored in Eisners feud with Jobs, who last year said he would walk away from Disney deals if Eisner stayed. Eisner also may have lost sway after deciding in October to quit the board a year earlier than anticipated, say Disney insiders. His contract allowed him to serve as a creative consultant to the company, they say, but he chose to pursue other opportunities. Eisner has said he backs his successor, Robert Iger, who put the Pixar deal together. Disney had no comment. Ronald Grover
DRUG WATCH
AMGENS BICYCLE RACE: CHEEKY?

ON FEB. 19 SOME of the biggest names in cycling will line up for the inaugural Tour of California. The race, which covers 600 miles in eight days, is billed as cyclings
BLOGSPOTTING
DRAWN & QUARTERED
WATCHING THE TRENDS IN DESIGN

http://www.designobserver. com/
WHY READ IT To listen in on

the cyberchatter of some of the best designers in the businesssix talented writers and a bevy of guest observers comparing notes.
NOTABLE POST Design is,

more than ever, a way to relate to the world around us. Our fascination with design, as both a process and an ideal, is reected in the products and services that are increasingly available to the general public. We can customize nearly all the things we consume, turning mass-produced stuff into our stuff.
(clockwise from left) photographs by charles c. place/getty images; david stluka/icon smi; jeff stahler/the columbus dispatch/united feature syndicate
biggest event this side of the Atlantic. Yet much of the buzz surrounding the race hasnt been about its elite eld or scenic course but its title sponsor, Amgen. The Thousand Oaks (Calif.) companys red cell-boosting
drugs Aranesp and Epogen (commonly known as Epo) were developed to help cancer and kidney patients but they also happen to be among the banned performance-enhancing drugs used by athletes. Amgen has backed charity cycling events, but this is its rst pro race. When the company announced its three-year sponsorship of the tour, cyclists snickered and the World Anti-Doping Agency voiced concern that Amgen was sending a mixed message. We realized there would be critics, says Mary Klem, a company spokeswoman. Nevertheless, she says, Amgen put its name on the event to build recognition and campaign against blood doping, not to promote Epo to athletes who purchase it on the black market. That market is inconsequential, says Klem. It would be in our best interest for it to go away. Sarah Max
SCHOOL TIES
likely than predecessors to be company loyalists or military veterans,says the latest census by recruitment outt Spencer Stuart. Theyre also more apt to know the words to If You Want to Be a Badger. In 2005, 14 of the CEOs at S&P 500 companies held undergrad degrees from the University of Wisconsin. That puts it in a tie with Harvard for rst place, ahead of Princeton, Stanford, Yale, and the University of Texas. Top Badgers include Halliburtons David Lesar (zoology), KimberlyClarks Thomas Falk (accounting), Exelons John Rowe (history), and Qwests Richard Notebaert (political science). Michael Arndt
TODAYS CEOs are less
EXPERT ADVICE ROBERT PARKER
BOARD BRAWLS
A SIZZLING FAMILY FOOD FIGHT

QUINTESSENTIAL California
FOR INTENSE AND FRUITY, PRESS 7

Wine enthusiasts no longer have any excuse for buying a bad bottle. With the launch of Robert Parker Mobile, they can consult the wine critics renowned million-dollar nose anytime, anywhere, by cell phone. The service, developed by mobile publisher mFoundry, will deliver Parkers wine-tasting notes and ratings from The Wine Advocate to any Sprint Nextel phone (other carriers are being added) for $4.99 per month, plus Internet charges. Subscribers can get Wine of the Day suggestions and special buying opportunities from Parkers newsletter. Or they can search by keyword or category (region, vintage, variety, rating, producer, cost) using their phones numeric pads and arrow keys. Theres even some original content, such as previously unpublished tasting notes. Parker says he expects people to use the service mostly in wine shops. But, he jokes, Im sure were going to hear some howls from sommeliers at ne restaurants.Elizabeth Woyke
drive-in chain In-N-Out Burger has built a cult-like following among fast-food gourmands for its juicy grilled patties and secret menu items. But the beef these days at the familyowned, 200-plus restaurant outt isnt its trademark Double-Doubles but allegations that the chains 23-year-old heir, Lynsi Martinez, and others are plotting to force out her 86-year old grandmother, the wife of the founder. Its a soap opera that includes allegations of fraud and a backroom power play. Matriarch Ester Snyder is alleged in court documents
to have told ex-employee Richard Boyd that they only want me dead. The saga is playing out in a state court in Los Angeles where Boyd, a former In-NOut real estate vice-president and board member, claims Martinez and her stepsisters husband, Vice-President Mark Taylor, maneuvered to oust Boyd and take over the chain. Under the guidelines of a trust set up when Martinez father, H. Guy Snyder, died in 1999, she would gain control of the company on her 30th birthday. Boyd, one of two
trustees, claims Martinez wants control now. Now Boyd is ghting from the outside: On Jan. 31 the company red him, claiming an outside audit discovered he had used company funds to do work at his Arizona home. Boyds lawyer, Philip Heller, disputes the audit. He says Boyd was red in a meeting not attended by Snyder, who had said in a declaration weeks earlier that she trusted him completely. In-N-Out general counsel Arnold Wensinger calls Boyds claim a vicious and baseless attack. Martinez says Boyd circulates outrageous fabrications and untruths about me and my grandma in a desperate effort to draw attention away from his own misdeeds. Ronald Grover
potent source of alternative energy. Last year artist Laurie Palmer called for speculative proposals to redesign exercise equipment to generate and store energy. The resulting ideas, on display at the University of Illinois Web site*, are mostly whimsical. But as energy costs rise, is the Pedal Powered Office (above, by artist Beate Engle) really that far off? Here are some of the other proposals. Megan Tucker
PROJECT DESCRIPTION
PRESIDENT BUSH MAY BE overlooking a
SPIN CYCLE
By Clay Ward and Heather Clark
Bring your toughest suds to this 24-hour gym-powered Laundromat. Bikes rigged to washing machines require erce footwork to power your clothes through a permanent press cycle. Pandian, a Tulane University professor, is serious about this prototype seesaw. In time, childs play could be converted into power for a schools lights and fans in developing nations. Even the biggest brains cant ditch P.E. when the gym comes to the Science Center. Faculty and students stepping up a steep spiral staircase supply the power for the relaxing elevator ride back down.
*www.uic.edu/aa/college/gallery400/notions/home.htm
HUMAN POWER CONVERSION

By Raj Pandian
HARVARD SCIENCE CENTER GYM

By Oliver Knill
(top, l to r) rey jerome/reex news; marianna day massey/zuma press
ReadersReport
EDITOR-IN-CHIEF: Stephen J. Adler EXECUTIVE EDITORS: Joyce Barnathan, John A. Byrne, Kathy Rebello ASSISTANT MANAGING EDITORS: Paul M. Barrett, Frank J. Comes, Robert
J. Dowling, Mary Kuntz, Bruce Nussbaum, Christopher Power, Ciro Scotti

ART DIRECTOR: Malcolm Frouman TV EXECUTIVE PRODUCER: Eric C. Gonon CHIEF OF CORRESPONDENTS: James E. Ellis CHIEF ECONOMIST: Michael Mandel SENIOR EDITORS: James C. Cooper (Bus. Outlook), Peter Elstrom,
Mike France, Neil Gross, Robert Hunter, Jeffrey M. Laderman, John Templeman, Elizabeth Weiner NATIONAL CORRESPONDENTS: Anthony Bianco, Mark Morrison, Jane A. Sasseen SENIOR WRITERS: Catherine Arnst, Stephen Baker, Aaron Bernstein, Diane Brady, Nanette Byrnes, Steve Hamm, David Henry, Tom Lowry, Gene G. Marcial, Michael Orey ECONOMICS: Peter Coy (Economics ed.), James Mehring, Christopher Farrell (Contributing ed.) NATIONAL NEWS EDITOR: Patricia Kranz; Robin Ajello (Deputy) INTERNATIONAL: Eric Schine (European ed.); David Rocks (Sr. news ed.); Pete Engardio, Rose Brady (Sr. writers); Cristina Lindblad (Europe) ASSOCIATE EDITORS: Susan Bereld, Dan Beucke, Michelle Conlin, Amy Dunkin, Hardy Green, Toddi Gutner, Harry Maurer, Christine Summerson (Business Develop.), Anne Tergesen, Emily Thornton, Kimberly Weisul (SmallBiz), Suzanne Woolley MEDIA COLUMNIST: Jon Fine PICTURE EDITOR: Larry Lippmann MANAGING ART DIRECTOR: Jay Petrow SENIOR ART DIRECTOR: Steven Taylor INTERNATIONAL ART DIRECTOR: Christine Silver GRAPHICS DIRECTOR: Joni Danaher MULTIMEDIA PRODUCTION DIRECTOR: James Leone DEPARTMENT EDITORS: B-Schools: Louis Lavelle. Computers: Spencer E. Ante. Corporate Strategies: Brian Hindo. E-Business: Timothy J. Mullaney. Banking: Mara Der Hovanesian. Industries: Adam Aston. Internet: Heather Green. Management: Jena McGregor. Marketing: David Kiley. Personal Business: Lauren Young. Science: Arlene Weintraub. Scoreboards: Frederick F. Jespersen. Small Business: Susan Price. Wall Street: Roben Farzad. CONTRIBUTING EDITORS: Mark Hyman (Sports Business) STAFF EDITORS: Geoff Gloeckler, Jessi Hempel, Elizabeth Woyke COPY EDITORS: Prudence Crowther, Larry Dark, Marc Miller, Jim Taibi (Deputy chiefs); Alethea Black, Aleta Davies, Sarah B. Davis, Monica Gagnier, Joy Katz, Cline Keating, Barry Maggs, Anne Newman, David Pengilly, David Purcell, Robert J. Rosenberg, Doug Royalty, Victoria Rubin, Lourdes Valeriano. Researchers: Maria Chapin, Gail Fowler, Aida Rosario ART: Don Besom, Alice Cheung, Jamie Elsis, Gary Falkenstern, Edith Gutierrez (Assoc. dirs.); Annie Russinof (Asst.). Graphics and Animation: Rob Doyle (Deputy dir.); Laurel Daunis-Allen, Joe Calviello, Alberto Mena, David Rudes, Ray Vella; Eric Hoffmann. Multimedia Production: Alan Bomzer (Asst. mgr.), Neal Fontana, Rich Michiel, Joseph Rhames, Shakena Thornton, Adam Wiesen PHOTO EDITORS: Scott Mlyn, Ronnie Weil (Deputies); Kathleen Moore, Andrew Popper (Sr.); Sarah Greenberg Morse (Assoc.); Mindy Katzman (Asst.); M. Margarita Eiroa (Traffic mgr.); Burte Hughes, Lori Perbeck (Researchers) EDITORIAL OPERATIONS: Susan Fingerhut (Director); Ken MachlinLockwood (Mgr.). Karen Butcher, Francisco Cardoza, Thomas R. Dowd, Peter K. Niceberg, Jane M. Perkinson, Karen Turok, Ilse V. Walton (Edit map mgr.), Ramon Chamorro EDITORIAL TECHNOLOGY: Mauro Vaisman (Director), Diane Bartl, Y. Steve Ben-Ari, Yo-Lynn Hagood, Steven McCarthy, Craig Sturgis ONLINE: Douglas Harbrecht (Executive ed.); Arthur Eves (Creative dir.); Martin Keohan (Content dir.); Beth Belton, Patricia OConnell, Ira Sager (News eds.); A. Peter Clem, John Johnsrud; Will Andrews, Jaime Beauchamp, Meredith Bodgas, Jeff Colchamiro, Francesca Di Meglio, Angelos Dosoulas, Roger Franklin, Jeffrey Gangemi, Tom Giles, Pallavi Gogoi, Burt Helm, Arik Hesseldahl, Marc Hogan, Reena Jana, Olga Kharif, B. Kite, Matt Kopit, James Kutz, Sarah Lacy, Karyn McCormack, Justin McLean, Phil Mintz, Stacy Perman, Jessica Podell, Rebecca Reisner, Steve Rosenbush, Sonja Ryst, Jessie Scanlon, David Sleight, Kathy Vuksanaj, Charles Wolrich CORRESPONDENTS: Atlanta: Dean Foust (Mgr.), Brian Grow. Boston: William C. Symonds (Mgr.), Aaron Pressman. Chicago: Joseph Weber (Mgr.), Roger O. Crockett (Deputy mgr.), Michael Arndt (Sr. correspondent), Robert Berner, Adrienne Carter. Detroit: David Welch (Mgr.). Los Angeles: Ronald Grover (Mgr.), Larry Armstrong, Christopher Palmeri (Sr. correspondents). Philadelphia: Amy Barrett (Mgr.). Seattle: Jay Greene (Mgr.), Stanley Holmes. Silicon Valley: Robert D. Hof (Mgr.), Peter Burrows (Computer ed.), Cliff Edwards, Ben Elgin, Justin Hibbard, Louise Lee. Washington: Mike McNamee (Deputy mgr.), Richard S. Dunham (Washington Outlook ed.); John Carey, Howard Gleckman (Sr. correspondents), Amy Borrus, Eamon Javers, Stephen H. Wildstrom (Tech. & You), Lorraine Woellert, Catherine Yang. Beijing: Dexter Roberts (Mgr.). Bombay: Manjeet Kripalani (Mgr.). Frankfurt: Jack Ewing (Mgr.), Gail Edmondson (Sr. correspondent). Hong Kong: Brian Bremner (Mgr.), Frederik Balfour, Bruce Einhorn. London: Stanley Reed (Mgr.),Kerry Capell. Mexico City: Geri Smith (Mgr.). Moscow: Jason Bush. Paris: Carol Matlack (Mgr.), Andy Reinhardt. Seoul: Moon Ihlwan. Tokyo: Kenji Hall, Ian Rowley. EDITORIAL SERVICES: Broadcasting: Ray Hoffman. Communications: Kimberley Quinn (Director), Heather Carpenter, Patricia A. Straus. Information Services: Jamie B. Russell (Director), Susann Rutledge (Deputy mgr.), John Cady (Technology mgr.), Fred Katzenberg, David Polek, Susan Zegel. Readers Report: Yvette Hernandez. Reprint Permission: Nancy Johnson. Editorial Assistant: Megan Tucker.
BusinessWeek
Re the Disney-Pixar deal: Jobs may now have a Magic Kingdom, but [Apples] customer service is Mickey Mouse.
Paul Baudisch Wellesley, Mass.
HEY, STEVE, STICK WITH THE TURTLENECK BUT DROP THE CAPE
its clear the artist of your cover cartoon of Jobs did not see The Incredibles (Steve Jobs Magic Kingdom, Cover Story, Feb. 6). Super Steve is shown with a cape, and even 6-year-olds who saw the ick know that when it comes to superhero costumes, no capes is the rule. Marc Pfeiffer Bedminster, N.J. re the disney-pixar deal: Jobs may now have a Magic Kingdom, but his customer service is Mickey Mouse. As the father in a household of two Apple iBooks and three iPods, Im on the receiving end of Apple Computers indifference. Owners of sick products are supposed to take them into the nearest Apple store, where they wait for hours to see a technician at the Genius Bar, even if they have purchased a ProCare card entitling them to make a service appointment. And if they ever have a problem with a transaction at Apples iTunes Music Store, well, they should just forget it. When I didnt receive the iTunes Gift Certicate I ordered for my son, Apple made it impossible for me to reach anybody by
PRESIDENT: William P. Kupper Jr. SR. VP, OPERATIONS: Gary B. Hopkins SR. VP, PUBLISHER, NORTH AMERICA: Geoffrey A. Dodge SR. VP & GENERAL MANAGER: David K. Nagourney VP, WORLDWIDE CIRCULATION DIRECTOR: Joyce Swingle VP, TECHNOLOGY: Anoop Srivastava VP, ADVERTISING BUSINESS & PRODUCTION: Linda F. Carvalho VP, SALES DEVELOPMENT: Kimberly L. Styler
telephone, and my e-mails were met with useless automated responses. Paul Baudisch Wellesley, Mass.
GENERATION DEBTS LEGIT GRIPES OR SELF-INDULGENT WHINING

authors tamara Draut of Strapped and Anya Kamenetz of Generation Debt bemoan the prospects facing students who are leaving college to face a difficult world (Up against it at 25, Books, Feb. 6). Their challenges are almost microscopic compared with the situation my generation faced: We survived the Great Depression, won World War II, rebuilt Germany and Japan, built schools, colleges, universities, suburbia, and infrastructure on a grand scale. On top of that, we prospered individually. The parents of the new generation continued along the same path. With ingenuity and common sense the new generation will prosper likewise. Newell D. Sanders Retired NASA engineer Olmsted Township, Ohio i have been waiting to hear about a growing rift between boomers and GenerSR. DIRECTOR OF FINANCE: Brian S. Dvoretz VPs, SALES: Beth Gregg (Midwest reg.), Robert J. Maund (West reg.), Louis Tosto (Eastern region) U.S. REGIONAL SALES DIRECTORS: Terri Dufore (Northwest), Rik Gates (New York and Intl.), John McShea (New York) VP, INTERNATIONAL MANAGING DIRECTOR: Michael Toedman VP, INTERNATIONAL SALES DIRECTOR: Jonathan Foster Kenny ASIA REGIONAL DIRECTOR: Christina Lee
PRESIDENT, INFORMATION & MEDIA, THE McGRAW-HILL COMPANIES: Glenn S. Goldberg

Title registered in U.S. Patent Office. European Circulation Office, McGraw-Hill House, Shoppenhangers Road, Maidenhead, Berks SL6 2QL, England. Telephone: +44 (0) 1628 502900; Fax: +44 (0) 1628 630545.
FEBRUARY 27, 2006 (ISSN 0007-7135) ******
3973
Published weekly, except for one week in January and one in August by The McGraw-Hill Companies, Inc. FOUNDER: James H. McGraw (1860-1948). EXECUTIVE, EDITORIAL, CIRCULATION, AND ADVERTISING OFFICES: The McGraw-Hill Companies Building, 1221 Avenue of the Americas, New York, N.Y. 10020. Telephone: 212-512-2000. Telex: Domestic 127039; Intl. 2360127039. For single copy sales call 1-800-298-9867 or email: busweek@nrmsinc.com. Subscriber Services: 1-800-635-1200. TDD: 1-800-554-1579 POSTMASTER: Send address changes to BusinessWeek, P.O. Box 8418, Red Oak, IA 51591-1418. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Canada Post Publication Mail Agreement Number 40012501. Registered for GST as The McGraw-Hill Companies, Inc. GST #R123075673. Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
OFFICERS OF THE McGRAW-HILL COMPANIES, INC.: Harold W. McGraw III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice President and Chief Financial Officer; John C.Weisenseel, Senior Vice President, Treasury Operations. PHOTOCOPY PERMISSION: Where necessary, permission is granted by the copyright owner for those registered with the Copyright Clearance Center (CCC), 222 Rosewood Drive, Danvers, MA 01923, to photocopy any article herein for the at fee of $2.00 per copy of each article. Send payment to the CCC. Copying for other than personal or internal reference use without express permission of The McGraw-Hill Companies, Inc. is prohibited. Address requests for customized bulk reprints to BusinessWeek Reprints, 1221 Avenue of the Americas, New York,NY 10020 or call 212-512-3148. ISSN 0007-7135/00/$3.95 PRINTED IN THE U.S.A.
Aetna Pharmacy
Predicting cost trends with greater accuracy.

In order to manage your annual prescription drug expenditure, you need reliable cost trend predictions. As a health care insurer, Aetnas extensive experience in the industry helps us forecast your pharmacy costs more accurately. And our incentive to be accurate is even greater than pharmacy-only benefits managers because we are financially responsible for the members we insure. To find out how we can help your business, call your broker, Aetna representative, or visit us today at aetna.com.
Health Dental Pharmacy Behavioral Health Long Term Care Disability Life 2006 Aetna Inc. Plans are offered by Aetna Life Insurance Company. Health insurance plans contain exclusions and limitations. Policy form numbers include GR-29 and GR-700-W. 200601
ReadersReport
ation Y. The Greatest Generation was followed by the worst. The boomer generation has put the country in massive debt, moved millions of good-paying jobs overseas, reduced future private and public retirement for the younger generations, allowed money to consume our democracy, and even started a war and passed on the tab. Its time the younger generations wake up and take action before it is too late, for themselves and for America. James Brown Yardley, Pa. oh, please! Give us boomers a break. The only place boomers have failed the X, Y, and Z generations is in failing to instill in them a sense of personal responsibility. The expectations of material comfort that may not be met for young people derive from pampered and coddled kids who have grown up thinking they are entitled to live a lifestyle immediately, well because they want to! Where is the government when a slacker needs it? G. Keenan Albuquerque at age 35 i sit rmly in Generation X. I went to college when I was 19 and lasted one semester. I returned 10 years later and nished my bachelors degree, walking away with about $10,000 in loans. I recently married, and my wife and I paid for our own wedding. I am about to pay off all my extraneous debt aside from school loans. I do not for one second buy into the lament that I have gotten a bum deal from my parents or anybody else. I do not believe that I am entitled to anything that I do not earn for myself and my family. If you dont have the skills, learn them. If you dont have the money, take a hard look at at your spending and stop buying that $5 cup of coffee. Glenn W. Meeks Old Bridge, N.J. i am amazed the author of Thirty & Broke (Special Report, Nov. 14) could maintain any sympathy, or a serious expression, as the crybaby tales of these selfindulged subjects unfolded. It might be time for those people capable of balancing a checkbook to circle the wagons. J. Cobb Phenix City, Ala. poor and coastal cities vs. those inland. China is still 80% agricultural and rural. Your article focused on the prosperity of the major cities and ignored the underlying poverty. Before Mao, the same disparity existed and gave rise to the communist revolution. Now the disparity is even more noticeable because of news coverage. In Beijing and other cities, one side of the street has new skyscrapers while on the other side there are slums housing people trying to eke out a living. This can only lead to another revolution unless the living standards of the poor are brought up. John Ngai Rego Park, N.Y.
CORRECTIONS & CLARIFICATIONS

In Is STM on the mend? (Inside Wall Street, Feb. 20), Antoine Badel of Credit Suisse estimates that STMicroelectronics will earn 95 per share in 2006, not 2003.
diately. While all banking, atm, and credit-card facilities were out of service all over Cancun, Wal-Mart miraculously (and fortunately for those of us who were running out of cash) was allowing customers to charge their purchases to a credit card. Maj. Dorian de Wind, USAF-Ret. Austin, Tex.
EXECUTIVE CRIME STILL GOES LARGELY UNPUNISHED

punishment of corporate criminals may be harsher today than in the 80s, but the continuing spate of executive misdoing means the sentences handed out are not tough enough (White-collar crime: Who does time? Enron Special Report, Feb. 6). Senior executives continue to look for loopholes to fatten their already bulging wallets. Grants of millions of stock options are being replaced with grants of millions of shares of restricted stock. Compliant and conniving boards of directors still shower favors on their senior executives (Not your ordinary gold watch, News: Analysis & Commentary, Feb. 6). Theres little difference between the criminal wrongdoing of a Bernie Ebbers and the excess compensation of a Hank McKinnell of Pzer, other than the latter gets away with it because of loopholes. The laws need to be tightened to remove these loopholes. Chandran Cheriyan Saratoga, Calif.
SAFE SUPPLEMENTS: WHAT TO LOOK FOR ON THE LABEL

how safe are diet supplements? (Science & Technology, Jan. 30) neglected to note the nsf/ansi Standard 173: Dietary Supplements, developed by nsf International in accordance with the American National Standards Institute (ansi) and the Standards Council of Canada. The nsf mark means the supplement has met American National Standard requirements. It also means products are tested and production facilities are inspected to ensure that whats on the label matches whats in the supplement. Kathleen Jordan Dietary Supplements Certication NSF International Ann Arbor, Mich. Editors note: Three organizations set standards and offer certications for dietary supplements that meet those standards: the U.S. Pharmacopeia Convention (usp), the National Nutritional Foods Assn. (nnfa), and nsf International, in addition to ConsumerLab.com llc, a for-prot company.
AFTER HURRICANE WILMA, WAL-MART TO THE RESCUE

re a social strategist for WalMart (Up Front, Feb. 6): While WalMart Stores Inc. has been under erce attack for its alleged lack of social, environmental, etc., responsibilities, and I have been one of those critics, I would like to relate an incident that reects credit on this embattled company. My family and I recently survived Hurricane Wilma, along with dozens of other Americans, in a church shelter in Cancun, Mexico. When the three-day-long hurricane nally left the Yucatan Peninsula, all surrounding pharmacies and supermarkets had been looted, destroyed, or severely damaged except for Wal-Mart. Although commercial power was still down, Wal-Mart opened its doors imme-
How to reach BusinessWeek

LETTERS FOR READERS REPORT
We prefer to receive letters via e-mail, without attachments. Writers should disclose any connection or relationship with the subject of their comments. All letters must include an address and daytime and evening phone numbers. We reserve the right to edit letters for clarity and space and to use them in all electronic and print editions. E-mail: bwreader@businessweek.com Fax: (212) 512-6458 Mail: BusinessWeek Readers Report, 1221 Avenue of the Americas, 43rd oor, New York, NY 10020
IN CHINA, SOME ARE RICH, BUT MANY MORE ARE POOR

to get rich is glorious (Global Business, Feb. 6), on the superrich in China, masks the disparities between rich and
www.businessweek.com
The full text of BusinessWeek, BusinessWeek Top News, and access to BusinessWeek archives starting in 1991 are available on the World Wide Web at: www.businessweek.com and on America Online at Keyword: BW
Technology&You
BY STEPHEN H. WILDSTROM
Aiming for a Pest-Free PC

Keeping a home computer safe from the swarms of pests that infect the Internet has become a major chore for many consumers. You need software to protect you from viruses, spyware, spam, phishing frauds, and assorted electronic assaultsand you need to keep the programs up-to-date to stay ahead of the evildoers. Now the good guys are riding to the rescue.
In the past couple of years security software vendors such as Symantec, McAfee, and Zone Labs have helped a bit by bundling their products into security suites that provide antivirus, antispyware, and antispam software, a rewall, and parental controls for the Web. But the components dont act like a single program. And the software keeps peppering users with incomprehensible challenges such as Windows Generic Host Server wants to access the Internet. Allow/Block. Security vendors are working to make safe computing easier. A startup called Trusteli has a novel offering that manages your security on the router that connects your home network to the Internet, not on the pcs themselves. You buy the wireless router for $200, subscribe to a $10-a-month service, and follow some simple steps to congure the network. Trusteli then takes over management, including the installation of software updates on the router. THE ADVANTAGE OF THIS APPROACH is that it is completely invisible to the user, but it has some drawbacks. Because the security is on the network rather than individual pcs, a laptop could pick up a worm if it is used on another network, say, at school, then infect other machines from inside when reconnected to the home network. Running the built-in Windows xp rewall on each pc provides a measure of protection, but some malware can get around it. More troublesome, the Trusteli approach requires that any Web content ltering apply to all computers on the network; if you dont want the kids to see the online Victorias Secret catalog, you dont get to either. Trusteli says it plans to add userspecic ltering in an update. Net service providers are also moving to make computer security management a bit easier for their customers. Earthlink provides subscribers with the Protection Control Center (available to nonsubscribers for $5 a month), while America Online offers the Safety and Security Center. Both provide a single screen that lets you manage all the security applications and helps make sure that computers are properly
For past columns and online-only reviews, go to Technology & You at businessweek.com/go/techmaven/. To hear Steve Wildstrom's podcast on his latest column, go to www/businessweek.com/search/podcasting.htm.
photograph by ethan hill; illustration by michael witte
Vendors such as TrustELI are trying to make security easier to manage
set up for automatic updates, a vital step. But behind the pretty faces lie the same old programs. aol, for example, repackages programs from McAfee. And one of the rst things it does when you install it is try to sell an upgraded rewall for $3.95 a month. Security vendors are moving toward deeper integration and, with luck, smarter software that needs less user intervention. This summer, Symantec plans to release a new integrated security application and service. Code-named Genesis, it is designed, among other things, to monitor your system to ensure that your security conguration is correct. The wild card in the consumer security eld is Microsoft. The company has announced that its antispyware product, which has been renamed Windows Defender, will be built into the Vista version of Windows due this fall. But in June, Microsoft also will offer an integrated security service called OneCare for Windows xp and, later, for Vista. If nothing else, Microsofts entry will shake up pricing in the industry. It will charge $49.95 a year for use on up to three computers in a home, about what Symantec charges for a single pc. Steps to make security software simpler and to integrate it more effectively are welcome, but the industry has to improve its products so that the nontechnical consumer wont be required to make highly technical decisions. Otherwise, the bad guys will likely stay ahead in the race. E-mail: techandyou@businessweek.com
MediaCentric
BY JON FINE
Media, Marketing, and Advertising in the 21st Century
Its So Hard To Relate

Lets begin by admitting that grown-ups have always been terried by teenagerstheir noise and warp-drive energy, their hyperactive libidos. There are ngerprints all over cultural history. Think of movies, from The Warriors to Blackboard Jungle. Think of the uproar over appers in the 20s. Think of Romeo and Juliet. This fear easily transposes to media realms.
Yesterdays version was that Grand Theft Auto and rap lyrics would turn teens into violent, sex-crazed thugs. The newish, slightly-higher-brow version is this: Teens are too good at absorbing new technologies, too skilled in processing multidimensional streams of information. Their brains are getting too big. Soon, theyll be too far ahead of us overwhelmed grown-ups. (This, presumably, is progress.) But if you work in media and seek realistic grounds for your next panic attack, consider this. Todays teens are the rst for whom self-created content competes with teen-aimed media like videogames. There are now widespread means with which they can create and share their stuff, be they blogs, or the music recording software and design tools found on many computers, or sites like myspace.com. Established media has to grapple with the novel fact that its next generation of consumers is also competition. The generation under 25 is the rst to grow up watching its entire life on video, says Aaron Cohen, ceo of Bolt Media. Bolt runs teen and twentysomething site bolt.com, on which self-created video documenting, say, tongue-piercings, is a major draw. (This generation also grew up with mash-ups, in which parts of different songs are digitally reconstituted into new ones, and thus expects content to be played with as much as absorbed.) As you grow up watching your life, you want to be [seen], says Cohen. Not everyone wants an American Idol-size audience, so that show hasnt collapsed from the weight of millions of auditioners. But everyone does want an audience, he says. Keeping it small is easy: Users can ensure that their videos posted on bolt.com are viewed only by their closest online buddies. Hints of todays trends surfaced in past eras. A zine revolution of self-published periodicals exploded in the 1980s and 90s, particularly among the younger set. In that era, the plugged-in could create an alternate mediasphere from these zines and, say, small-label punk-inected bands. But nding what you needed to build your own media life took tenacity. You had to know people who knew people. You had to dig
For Jon Fines blog on media and advertising go to www.businessweek.com/innovate/FineOnMedia
(top) photograph by ethan hill; illustration by mark matcho
through stacks of records. You had to know when you could hear underground bands on which college radio station. Creating, and sharing, mediaspheres is easier now. Sarah Chubb, president of Cond Nast Publications CondNet likens social network sites to teens fervently decorated rooms and notebooks, and says, in the olden days, [friends] saw the room or the notebook. Now they can see it, comment, and change it. This is why executives at places like Cond Nast, which publishes Teen Vogue, spend a lot of time thinking about new ways to reach teens. CondNet is readying a teen site, on which Chubb is mum. America Online, as previously reported here, will launch a suite of tools and services to enable a MySpaceization of its wildly popular aol Instant Messenger service. These efforts are worth watching, but theyre no slamdunk for teens whose allegiance to established media brands is tenuous. Id much rather use [social networking site] myyearbook.com, says one 17-yearold. Its much more fun than watching tv. You can do a lot more. This teen is David Cook, and hes kind of biased because one year ago he, his younger sister, and older brother started myyearbook.com. Cook, who lives outside Princeton, N.J., makes frequent fervent declarations about how badly he wants to defeat MySpace. He hasnt yet. But myyearbook.com, which launched last May, attracted 2.3 million unique visitors last month, up from 1.7 million in November. Not only can teens now compete when it comes to making content, they can compete for the business as well. Man. Grown-ups should be terried.
Your teen consumers have now become your competition
Business Outlook
BY JAMES C. COOPER
Whats Complicating Bernankes Balancing Act

Finding the right level for interest rates is trickier in a more global economy
Ben Bernanke just passed his rst test as Federal Reserve Board chairman. On Feb. 15-16, he held his own during a Capitol Hill grilling by both houses of Congress. But that challenge pales in comparison with those that await him. The toughest will be shaping monetary policy in a global economy. Globalization makes it
U.S. ECONOMY
harder than ever to nd the right level of interest rates to foster solid economic growth while keeping ination at bay. That complication increases the chances the Fed could make a policy mistake by pushing rates too high or leaving them too low. Correcting the error could cost the economy dearly later on. Globalization and its impact on monetary policy is not just about how worldwide competition suppresses prices of U.S. products. More and more, prices of everything from steel to corporate bonds to even labor are determined by market forces overseas, not just those in the U.S. Bernanke stressed the importance of exibility in policy decisions, saying that policymakers must keep an open mind about the many factors, including myriad global inuences, at play in the economy. Against this global backdrop, measures of labor market tightness or constraints on output capacity traditionally used by the Fed to gauge wage and price pressures have become increasingly less reliable. That is, in a global economy, the ination potential of, say, Januarys 4.7% jobless rate or last months nearly 81% utilization rate for industrial capacity is much harder to interpret. Moreover, an increasingly pervasive international capital market complicates the Feds search for a neutral interest rate that neither stimulates nor restricts economic growth. Some economists even argue that, because of a lack of investment opportunities outside the U.S., the neutral rate might even be lower than the current policy stance. Bernanke himself has explored this view, but that interpretation would imply that the Fed already may have overtightened. Right now, that seems unlikely. If anything, strong economic data for January, especially the powerful 2.3% rise in retail sales and a hefty 0.7% gain in manufacturing output, imply that rates may be too low. Heading into 2006, trade volume accelerated. Both exports and imports posted strong advances in December2.1% and 1.9%, respectivelyand the growth rates of both sped up in the nal three months of the year. During the past two years, the sum of U.S. exports and imports grew at an annual rate of 13.2%, the fastest twoyear increase since 1988, when the dollars plunge fueled an explosion of exports. Given the resilience of THE FED SEES A STRONG U.S. demand, the AND STEADY ECONOMY continued strength in FEDS CENTRAL China and emerging TENDENCY FORECAST Asia, and the gathering (4Q TO 4Q PERCENT CHANGE) 2006 2007 momentum in Japan and REAL GDP 3.5 3.0-3.5 the euro zone, trade CORE INFLATION* 2.0 1.75-2.0 volumes will swell UNEMPLOYMENT further this year. RATE (4Q AVG.) 4.75-5.0 4.75-5.0 Clearly, one alarming *PRICE INDEX. PERSONAL CONSUMPTION symbol of the new EXPENDITURES EXCLUDING ENERGY AND FOOD Data: Federal Reserve globalization is the growing imbalance in world trade, illustrated by the ever-widening U.S. trade decit. The gap for goods and services hit a record $725.8 billion in 2005, based on preliminary data. The gap has ballooned to 5.8% of gdp in only the past eight years.
THE GROWING SCOPE OF GLOBALIZATION is evident

in the governments December report on international trade. The full-year tally for the volume of U.S. trade shown as the sum of foreign-made goods and services bought in the U.S. and American-made products purchased overseasstood at $3.3 trillion for all of 2005. That volume has doubled in only 10 years.
THAT DRAMATIC WIDENING illustrates how economies are becoming increasingly dependent on one another for rising living standards. For example, China looks to foreign markets, especially in the U.S., to generate funds to develop its economy. Cheap imports boost the purchasing power of U.S. consumers, and emerging Asian nations benet as China outsources some of its production of materials and parts. Most important, the U.S. and other nations get Chinas surplus savings to help nance their investment and growth. One result is that the Fed has less control over the cost of capital, its primary tool in keeping the economy running smoothly. With the world outside the U.S. awash in excess savings looking for a place to be invested, heavy global demand for U.S. securities is at least one of the factors holding down long-term interest rates. More broadly, overall nancial conditions are no
charts by eric hoffmann/bw
Business Outlook
tighter now than when the Fed began lifting rates in June, 2004, despite the Feds hikes in short-term rates, totaling 31/2 percentage points. Not only do long-term rates remain low enough to support both housing and corporate borrowing, but the credit markets see less risk in lending now than when the Fed rst started tightening. Thats implied by the interest rate spread between corporate bonds and riskless Treasury bonds, which is narrower now than it was then. And banks continue to be aggressive in seeking out new borrowers. The Feds January survey of bank senior loan officers shows that banks continue to ease the terms and conditions on commercial and industrial loans to businesses. Also, the survey indicated that banks are still not toughening up their lending standards on mortgage loans, despite reports of the Fed urging them to do so.
RELATIVELY EASY FINANCIAL CONDITIONS are one

factor stoking U.S. demand in early 2006. Consumers got off to an explosive start this year, taking advantage of Januarys balmy weather and the redemption of all those holiday gift cards. The 2.3% jump in retail sales from December to January was the largest monthly gain since October, 2001, when sales were boosted by generous incentives by carmakers right after September 11 (chart). The data mean that consumer spending and overall economic growth are rebounding with gusto this quarter, after the fourth quarters weak showing. In fact, the strong start suggests that the Feds latest forecasts for growth and ination in 2006 might be too low (table, page 23).
Those numbers also imply that a lot of that demand will be going abroad, placing additional pressure on the trade decit and the need for foreign capital to nance it. Two other globalization issues might also create problems for the Bernanke Fed. One is the growing threat of protectionism. Congress seems likely to consider the bill by Senators Charles Schumer (D-N.Y.) and CONSUMERS WENT ON Lindsey Graham (R-N.C.) A BINGE IN JANUARY to impose a 27.5% tariff PERCENT CHANGE FROM PREVIOUS MONTH on all Chinese imports, 3 perhaps within the next TOTAL EXCLUDING month or two. That 2 AUTOS AND GASOLINE would effectively raise RETAIL SALES import prices and nudge 1 up overall ination. 0 The other is the OCT. NOV. DEC. JAN. likelihood of a renewed '05 '06 decline in the dollar. The Data: U.S. Census Bureau, Global Insight Inc. economic fortunes of both Japan and the euro zone are turning up. More Japanese and euro zone savings will be staying at home, even as both economies attract more foreign investment. That leaves fewer global funds going to U.S. assets, which would cause the dollar to weaken. Given the new global interdependency across economies, a full-blown dollar crisis seems unlikely, but a renewed dollar decline would generate some additional ination pressures in the U.S. via higher import prices, giving the Fed yet another global issue to work around.
THE DOLLAR
Less Foreign Capital Than Meets the Eye

are increasingly popular as a sign of THE U.S. TRADE decit hit a record the ability of the U.S. to meet its last year, but foreigners invested external nancing obligations, more than enough in U.S. stocks and because they come out more often bonds to cover the gap. Thats why than the quarterly data from the the U.S. dollar didnt tumble. However, those supportive inows are Bureau of Economic Analysis. But the tic report is not as comprehensive. not as large as believed and are For example, it excludes ows unlikely to last, leading to a probable involving securities with a duration of retreat in the greenback this year. less than a year. As a result, net On Feb. 15, the Treasury inows were overreported by an International Capital (tic) report average of $20 billion showed that U.S. per month through securities purchased FOREIGN INFLOWS the rst three quarters by investors and COOL DOWN of 2005, say government agencies BILLIONS OF DOLLARS economists Jens overseas minus U.S. 120 Nordvig and David purchases of foreign Heacock of Goldman, 90 securities was $56.6 Sachs & Co. billion. In 2005 the 60 The tic report is total net inow was also a little fuzzy on $910.7 billion, far 30 money from private more than the trade TRADE DEFICIT NET LONG-TERM INVESTMENT FLOWS investors vs. official gap of $725.8 billion. 0 '04 '05 institutions, such as The Treasury Data: Global Insight Inc., Treasury Dept. central banks. The Dept.s monthly data
Treasury Dept. categorizes inows based on who makes the transaction. So a central bank move made through a nongovernment third party would be counted as a private transaction. Given that inows are smaller than reported and that more of them are controlled by foreign central banks, the risks of a weaker dollar appear to be greater. Stronger economies in Japan and South Korea, pressure on China to let the yuan appreciate further, and the chance of greater diversication of foreign reserves among central banks all point to reduced demand for U.S. assets. Making matters more delicate: Until December, inows accelerated beyond their longer-term trend over 2005s second half, says Nordvig. Net inows dont persistently outrun trade decits. The smaller December total may be the start of a correction that touches off the dollars decline. By James Mehring in New York
Week
News you need to know
EDITED BY HARRY MAURER
The Business
producers off the hook for royalties. So how come there are only 75 rigs at work in the Gulf, down almost 25% from a year ago, according to Baker Hughes? Partly we can thank Misses Katrina and Rita, but a major factor is overseas competition for ocean rigs. For now, Washingtons pricey incentives probably wont spark much new supply.
Merrill Unloads a Unit Is money management more trouble than its worth? Merrill Lynch, which said on Feb. 15 that its selling its asset management unit to BlackRock, apparently thinks so, and other banks and brokerages could soon take the same path. See Money Managers on the Block, page 36 A Trade Spat Decision Touch! Score one for the European Union in its decade-long duel with Washington over how the U.S. taxes exporters. On Feb. 13 a WTO appeals panel ruled that certain tax breaks are illegal. The downside for U.S. business: Exporters of products such as textiles, steel, and electrical machinery could be skewered with up to $4 billion in Euro-tariffs. The upside: Most of the $145 billion in breaks that Congress O.K.d in 2004 the last time it tried to x the export-tax messwill stick. The U.S. has three months to appeal. The New Beat in Music
Download fever: Thats the tune industry execs dance to these days. Warner Music said doubled downloads helped hike rst-quarter net by 92%, while overall music sales fell by 2% as folks shied away from cds. And RealNetworks boogied to a record $325 million in annual revenues thanks to 50% more downloads and subscription sales through its Rhapsody service. See RealNetworks is Game for Games, www.businessweek.com/go/tbw
A Gold Medal Quarter?
After slowing late last year, the U.S. economy is accelerating in 2006 like a four-man bobsled on a straightaway. Some experts gure rst-quarter growth may exceed a 5% annual rate, up from the 1.1% initially reported for the fourth quarter of 2005. Both consumers and business seem revved up: On Feb. 14 the Commerce Dept. said retail sales grew an eye-popping 2.3%, seasonally adjusted, from December to January, aided by the warmest January on record. And on Feb. 15 the Fed said factory output rose a solid 0.7% in January. This means the Fed will likely lift the federal funds rate another quarter point, to 4.75%, at its Mar. 27-28 meeting, the rst with Ben Bernanke as chairman. Bernanke played it cool in Feb. 15 testimony, simply saying I concur with the Greenspan Feds statement that more tightening may be what the economic doctor ordered. See Whats Complicating Bernankes Balancing Act, page 23, and Chairman Bernanke Goes Up the Hill, www.businessweek.com/go/tbw
No one can accuse Warren Buffett of being a shrinking director. In his 17 years on the Coca-Cola board, he helped shove two struggling ceos into early retirement and engineered an 11th-hour veto of a deal to buy Quaker Oats. But on Feb. 14 the 75-year-old investment legend announced plans to step down in April. (Hell hang on to Berkshire Hathaways 8.4% stake.) Buffett is pushing exGillette CEO James Kilts as his successor, though with former Dow Chemical CFO Pedro Reinhard and SunTrust Banks exec Maria Elena Lagomasino also set to step down in April, leaving Coke with only two minorities on its board, the beverage giant may decide that diversity is it.
Buffett Bows Out
Where Are the Oil Rigs?
The Gulf of Mexico ought to look mighty good to oil companies these days. Even with oil below $58 a barrel on Feb. 15, the lowest close in nearly two months, and natural gas costing less than half what it did in December, prices remain high enough to support risky ventures. And as The New York Times revealed on Feb. 14, the industry will benet from an estimated windfall of $7 billion over the next ve years from a policy that lets
Hories Annus Horribilis The former ceo of oncetrendy Internet portal Livedoor may be hearing another kind of door clang shut behind him. Japans 33-year-old Net guru, Takafumi Horie, was indicted on Feb. 13, together with the former cfo and two others, for allegedly cooking the books. Horie could face nes and prison time. Since Livedoors collapse began on Jan. 16, it has lost $6 billion, or 90%, of its market cap and will probably be delisted by the Tokyo Stock Exchange.
tim boyle/getty images
Googles Swoon
Bulging bank accounts in Silicon Valley look a mite slimmer because of sinking Google shares. After a torrid 2005, in which the search titan more than doubled to a peak of 475 on Jan. 11, the stock has plunged 28%, closing at 342 on Feb. 15. Investors changed their minds after weak fourth-quarter numbers made them look closely at Googles dependence on search. Still, at a market cap of $101 billion, the companys valuation has clicked up more than 300% since its ipo 18 months ago. A valentine it wasnt. On Feb. 14, U.S. Trade Representative Rob Portman issued a report that marks a rare break in the Bush Administration effort to cool anti-Chinese rhetoric. Portman says China refuses to play by trade rules, so the U.S. will ratchet up pressure on Beijing to curb piracy, cut hidden subsidies, and open its own markets. The report came just days after word that the U.S. trade decit hit a record $725.8 billion in 2005, including a $201.6 billion gap with China. Portman didnt ask for new powers to retaliate, so his latest isnt likely to blunt Capitol Hills push for more sanctions. See Chinas Changing Economic Balance, www.businessweek.com/go/tbw
Firing a Shot at China
HP Wows the Street Its been a year since the ouster of Carly Fiorina, and new Hewlett-Packard CEO Mark Hurd is making the most of what she left for him. Crisp restructuring and smoother operations helped hp blow past Street expectations for its rst quarter, posting 30% brawnier profits. Hurd has also nabbed new talent and has segments such as laptops and photo printing gear steaming. The stock jumped nearly 4% in after-hours trading on Feb. 15. Blitz of the Week
His legions of enemies like to call him Dr. Evil, but that doesnt stop Richard Berman. The Washington lobbyist and pr maestro for the fast-food industry just launched the Center for Union Facts, an attack Web site. While he wont name his backers because we are talking about union people who have allegedly been involved in crime in some cases, so nobody wants to be targeted, Berman took out full-page ads on Feb. 14 intended to stymie labors stepped-up recruitment. His line: Many unions are corrupt and fail to benet members. The in-your-face campaign is vintage Berman. Over the years the cigar-chomping ball of re RICHARD BERMAN has helped liquor makers go after Mothers Against Drunk Driving for proposing stiffer alcohol limits for drivers and raged against minimum wage hikes for the National Restaurant Assn. Last year he dissed the food police in a drive for soda makers that targeted obesity myths. Harsh? Sure. Why shouldnt Big Business have its own Michael Moore?
Im a card-carrying Yes-man.
Say yes to high-speed Sprint Mobile Broadband for your laptop.
Introducing Sprint Mobile Broadband from the #1 wireless provider to business. Say yes to downloading large email attachments, inventory data, presentation videos, rich Web content huge files at blazing speed from anywhere on the Sprint Power Vision Network. Its the most powerful way to extend your office far beyond the office. And one more way Sprint Business helps todays Yes-man, or Yes-woman, make just about any place a workplace.
1-8SPRINT-BIZ
sprint.com/business
#1 wireless provider to business claim is based on independent survey of corporate-liable users. Sprint Power Vision Network covers over 140 million people in 213 major metropolitan markets. Coverage not available everywhere. See in-store materials or sprint.com for details. 2006 Sprint Nextel. All rights reserved. Sprint, the Going Forward logo and the NEXTEL name are trademarks of Sprint Nextel.
News Analysis & Commentary

STOCKS
HOW THE IPO MARKET GOT ITS BUZZ BACK

Hungry investors are making 2006 the busiest year for new issues since the tech crash.
BY AARON PRESSMAN
ing ipo, that of Internet telephony hipotle mexican grill Standard & Poors 500-stock index. How warm are things getting? Eight of provider Vonage, seems shaky, too. Inc. is used to seeing cusBut investors, grappling with the sidetomers line up for its bur- this years deals have been priced higher ritos, but at the end of Jan- than underwriters had anticipated, vs. ways stock market of the past 27 months, uary the McDonalds three to this point last year. The market arent in a mood to quibble just yet. Its Corp.-owned chain expe- is off to a very healthy start, says Craig not only the number of offerings thats rienced an even bigger Farr, co-head of U.S. equity capital mar- grabbing their attention but also the kinds of companies going public. Many rush. In an initial public offering, Chipo- kets at Citigroup. are so-called reverse leveraged buyouts tles shares jumped from 22 to 44 in one former poor performers that were bought day, the rst time since 2000 that a U.S. NO MOOD TO QUIBBLE ipo of more than $10 million had dou- perhaps too healthy, say some ob- up by private equity rms betting they bled so quickly. servers. The downside to a strong ipo could x them up and sell them back to Investors appetite for ipos isnt limit- market is dumb dealsand theyre here. the public for a prot. The top performers ed to Chipotle. With 32 offerings priced The offering of shoemaker Crocs Inc. on recently have been fast-growing upstarts since Jan. 1, up 14% from the same time Feb. 8 showed investors turning a blind such as Chipotle, Baltimore-based clothlast year, 2006 is shaping up to be the eye to glaring problems. Another upcom- ier Under Armour, and Latin American steel company Ternium, all of busiest year for new issues which are seeing rapid sales since before the tech crash. and earnings increases. There And ipos are performing has been a return to the trawell in the aftermarket. They ditional growth ipos, says returned an average of 18% in ENERGY HEALTH CARE RESTAURANTS Citigroups Farr. Thats good 2005 and 10% so far this McDonalds Chipotle Persistently high Amid fears of an news, of course, for corporayear, according to Renaisspin-off encourages commodity prices economic slowdown, tions looking to raise money. sance Capital in Greenwich, the likes of Mortons make going public the sector looks like And when promising compaConn., vs. returns of just 5% attractive to follow a defensive play nies have an easier time and 1%, respectively, for the
Three Hot Sectors for 2006
john craig
ALSO IN THIS SECTION:

Big 31| Class actions:opting out 32| The political fallout if 36| Why banks are eeing 38| Britains Tesco boldly investors are housing goes south money management leaps across the pond

forming capital, the STYLISH MOVE economy as a whole J. Crews IPO is expected in the benets. It was a long win- next few months ter, though. When the bear market began, unprotable startups with shaky business plans fell out of favor. Instead, well-established companies generating lots of cash, such as Kraft Foods Inc. and Genworth Financial Inc., stole the spotlight. The percentage of protless ipo companies fell from 80% during the tech boom to 40% during the bust, and has stayed there. The average age of companies going public shot up from four years in 1999 to 15 in 2002, according to research by University of Florida nance professor Jay Ritter. Investors, in other words, gave money only to companies already demonstrating that they deserve it. The reverse leveraged buyouts were received particularly well, making up about 40% of all ipos in 2003 and 2004. Most of those companies were in good standing and had been managed smartly while in private hands. Now, with growth companies back in vogue, reverse lbos are making up a smaller percentage of deals. The average age of companies going public slipped to 11 in 2005, and its heading lower. But the hottest niche by far has been consumer-oriented companies, especially restaurants. Despite fears that Americans are tapped out, retailers and restaurant operators have been thriving. Chipotles net loss of $17 million in 2002 swung to net income of $33 million in the rst nine months of 2005. Clothier Under Armour, meanwhile, posted revenues of $194 million in the rst nine months of 2005, triple the 2002 level, and a net income of $14 million, ve times the 2002 amount. Investors paid a premium for those brands, and their success has encouraged followers. Steakhouse chain Mortons Restaurant Group Inc. raised $161 million on Feb. 9, while Ian Schragers hip hotel chain, Morgans Hotel Group Co., garnered $360 million on Valentines Day. Among the How ve expected IPOs stack up hotly anticipated issues INITIAL are MasterCard, Wendys PUBLIC OFFER REVENUES NET PROFITS doughnut-chain spin-off MILLIONS MILLIONS* MILLIONS* Tim Hortons, Mexican airMasterCard $2,450 $2,222 $320 port operator Pacic AirPacic Airport Group 954 175 63 port Group, and retailer J. Crew Group, all expected to Tim Hortons 600 1,078 175 offer shares in the next few months. Burger King Corp. J. Crew 355 663 -0.4 has said it will le soon, Vonage Holdings 250 174 190 and Levi Strauss & Co. * For most recent nine-month period Data: Companies might le this year. The consumer conraise $250 million, but it hasnt dis- dence and spending numbers have been closed how many shares it will sell or so good, says Chad Abraham, head of what the companys total value will be equity capital markets at Piper Jaffray after the deal. Its business plan empha- Cos. in Minneapolis. Investors are looksizes market share growth over prots ing for ways to play that. The trend and cash ow. Skeptics point out that shows no sign of slowing: The Commerce whats really growing are Vonages ex- Dept. reported on Feb. 14 that January repenses and customer acquisition costs, tail sales increased 2.3%, the biggest which are rising faster than revenue. monthly gain in almost two years. With saner practices and mostly sane Vonage declined to comment, as did Citigroups Farr, whose rm is under- offerings, the ipo market seems to be on writing the offering. Investors need to solid ground. Activity could slow if the take some responsibility for due dili- broader stock market tumbles; falling gence, says Lynn Turner, managing di- equity prices last March and April hurt rector of research at independent re- new issues, as did Hurricane Katrina search rm Glass Lewis & Co. and the later in the year. But for now, the business is healthy. Finally, theres some real former chief accountant of the sec. For the most part, however, the busi- demand out there for growth stories, esness models of successful ipos have pecially for companies selling burritos been decidedly 21st century. Energy and or T-shirts. With Michael Arndt in Chicago health-care issues have been plentiful.
Ready to Roll
WORRISOME DEBUTS
but thatll likely be only a temporary phenomenon. The private-equity market has been booming (page 52), with huge investment inows fueling more and bigger lbos. Assuming the ipo market stays strong, the reverse lbo pipeline should soon be gushing. Observers worry, however, about the Feb. 8 offering of Niwot (Colo.)-based shoemaker Crocs. Yes, the companys nancial outlook seems strong, with a 2004 net loss of $1 million turning into a $13 million prot for the rst nine months of 2005. But Crocs went off for almost 10 times its revenues, a staggeringly high multiple. And material in its lings with the Securities & Exchange Commission gives reason for pause. The company found material weakness in its internal controls during its most recent audit, according to the ling. The ling also showed that Crocs has instituted takeover defenses to protect management. And it has a history of consulting deals with companies controlled by officers. Crocs declined to comment. Also on Feb. 8, Internet telephony provider Vonage Holdings Corp. led to go public, despite posting a net loss of $190 million in the rst nine months of 2005. The company said it wants to
andrew popper
LAWSUITS
FRACTURED CLASS ACTIONS

Opt-outs are a growing headache for companies
BY LORRAINE WOELLERT hen time warner Inc. said it would spend $2.4 billion to settle an investor class action alleging securities violations, Chairman and ceo Richard D. Parsons crowed that the company had made swift work of its litigation woes. By acting now to put these matters behind us, we avoid the costs and distractions of protracted litigation, he said in August. Not so fast. Even as a federal judge prepares to give nal approval to the deal on Feb. 22, it could be some time before Parsons can rest easy. Giant shareholder Janus Capital Group Inc., which owned over 10% of Time Warner and over 3% of America Online when the companies announced their merger in September, 2000, is pursuing its own settlement, BusinessWeek has learned. So are several state pension accounts and more than 100 other institutional investors with alleged losses ranging from less than $50,000 to more than $500 million. All are exercising their right to opt out of a class settlement in hopes of winning more money by going it alone. Plaintiffs attorney William S. Lerach is at the forefront of what has become the latest headache for defendants in securities cases. No hard statistics are available, but opt-outs appear to be a more popular tactic for plaintiffs lawyers. Theres no doubt that the numbers are up, says Stanford Law Schools Joseph A. Grundfest, who monitors the litigation. Lerach, founding partner of San
Diegos Lerach Coughlin Stoia Geller Rudman & Robbins llp, was among a handful of lawyers dominating such suits more than a decade ago, when rms seeking to win control of a big caseand the resulting fat paychecksimply had to race to the courthouse to be the rst to le a suit. Lerach and a few others had the practice down to such a science that the Justice Dept. is investigating whether they paid kickbacks to plaintiffs. Lerach has denied wrongdoing. In 1995, Congress rewrote the rules, making it harder for the small coterie of securities fraud plaintiffs attorneys that had dominated the business to continue
doing so. Thats one key reason why Lerach is frequently trying another tack: detaching from class action settlements negotiated by others and striking out on his own. While Lerach has helped hammer out plenty of class-wide deals in his time, he now lauds the virtues of opting out. Why should investors sit passively by and take a couple cents on the dollar? he says. This is an extraordinarily powerful tactical weapon. The trend is causing concern in courtrooms and boardrooms. On Feb. 8 a federal judge in New Jersey postponed approval of a $195 million settlement between kpmg International and tax shelter investors because more than 60 of the 284 investors had chosen to pursue their own litigation. Cheryl L. Evans, special counsel for the U.S. Chamber Institute for Legal Reform, says opt-outs increase costs for companies. When you have this fragmentation, companies are paying to settle several cases when its more efficient to work on one front, she says.
LAWYER LERACH His clients sue separately to win more cash
BETTER RETURNS
last year, lerach got 65 clients, including several state pension funds, to bypass a $6.1 billion settlement of claims against banks for WorldCom Inc. The group reached a $651 million deal. Now hes persuaded 93 funds to seek separate lawsuits against Time Warner. Edward I. Adler, executive vice-president of Time Warner, calls the number of opt-outs very, very small. Lead class counsel Samuel D. Heins of Minneapolisbased Heins Mills & Olson plc says the settlement has drawn a negligible number of complaints from class members. Time Warner has set aside $600 million to wrap up its remaining liability, but the growing roster of opt-outs could force that number up. Theres always a risk that breakaway investors could do worse by striking out on their own, but theres enough evidence to the contrary to keep fueling the trend. When the California Public Employees Retirement System quit the WorldCom deal, it recovered $187 million, or 67% of its claimed bond losses, Lerach says. New York City Pension Funds also opted out of WorldCom, recovering close to 100% of losses, its lawyers say. The nal return for WorldCom class members remains to be seen, but its expected to be far less.
Taking A Pass
Examples of big investors that opted out of class-action settlements
Enron WorldCom
7.1
BILLION
6.1
BILLION
OPT-OUTS AIG,
OPT-OUTS SunTrust
Alabama and Ohio state pension funds
Banks, New York City pension funds
Time Warner
Qwest Communications
2.4*
BILLION
400
MILLION
OPT-OUTS Janus
OPT-OUTS State
ray ng
Capital and nearly 100 other institutional investors

*Awaiting court approval
Univ. Retirement Systems of Illinois, Calif. State Teachers Retirement System

C O M M E N TA RY
BY MICHAEL MANDEL
Who Gets Blamed If the Roof Caves In?

A tumble in housing prices would cause voters more pain than falling wages
In 2000 the average interest rate for a new 30-year mortgage was about 8%. From 2003 to 2005, however, a homeowner could easily get a 30-year rate of less than 6%, well below the lowest rates available in the 1990s. As a result, almost everyone could cut the interest costs by renancing. For example, if you had a $150,000 mortgage at 8% in 2000 and renanced to a 6% mortgage in 2005, your interest payments on your house would have dropped by roughly $3,000 a year. Thus, many Americans may be seeing a pretax gain from the lower interest payments that more than compensates for the decline in wages. And we havent yet factored in soaring home values, up about 33% over the past ve years, after adjusting for ination. No wonder most voters, while worried, still havent turned totally pessimistic. Thats why the Democratic response to a housing slump, especially if the bottom falls out of the U.S. market, could be politically crucial. What could the party offer? Democrats could start thinking about ways to ease the countrys bankruptcy laws to help homeowners whose house values have dropped sharply, suggests Kashif Mansori, an economist at Colby College in Waterville, Me., who is one of the main posters on the liberal blog Angry Bear (angrybear.blogspot.com). Another possibility, he notes, is more favorable tax treatment for people who have suffered capital losses on their house. By contrast, Robert Atkinson, vice-president of the Progressive Policy Institute, the research arm of the centrist Democratic Leadership Council, wouldnt try to cushion a bust. Instead, with a lot of people currently locked out of the market by extremely high prices, says Atkinson, I would gure out how to reduce barriers, especially zoning and planning restrictions, that keep more homes from being built. Of course, Republicans wont be standing still in the event of a housing downturn. The Bush Administration is likely to push even harder for tax cuts to help Americans who can no longer draw on their home equity. After the boom is history, political supremacy in Washington may well depend on which party can best reassure the worried American homeowner.
W
WATCH
hen the housing boom nally goes bust, the real political battles for the 2006 and 2008 elections will begin. Thats my conclusion as I watch Democrats struggle to score economic points against the Bush Administration. Real wages are falling, and many Americans are scared of globalization, issues that should play well for the
Democrats. But their attacks arent resonating with voters, in large part because of the rosy glow of housing-induced prosperity. To see why the housing market matters so much, let me introduce you to the typical American worker. He or she is 35 to 44 years HOUSING old and has less education than you probably realize, with some exposure to college but without even a two-year degree. These folks have seen a decline in real wages since President George W. Bush took office. Between 2000 and 2004, real earnings for such workers fell by 2.4%, or about $1,100 a year. Thats why many Democrats think that they should be doing better in the polls. But wait. The typical American also owns a house. Homeownership climbed from 67% in 2000 to 69% today. Toss a wad of paper into a crowd, and you are likely to hit someone who is paying a mortgage or grousing about real estate taxes. For these people, declining wages are less important than low interest rates and rising home prices. Lets run some numbers.
How Dems respond to a bust could shape the 2006election
photograph by jeff topping

THE BOARDROOM
THE RISING STOCK OF BLACK DIRECTORS
seen boards look at a list in a black magazine and say, I want No. 32, says Julie Hembrock Daum, who leads Spencer Stuarts U.S. board practice. But there are a lot of people that dont appear on those lists.
EXTRAORDINARY OPPORTUNITY
perhaps the most prominent member of this second tier of African American directors is John W. Rogers. The founder and ceo of Ariel Capital Management, a Chicago mutual fund, Rogers was appointed to the Aon board in 1993, when he was just 35. It was an extraordinary opportunity to learn from the best, he recalls. Today, Rogers also sits on the boards of McDonalds, Exelon, and Bally Total Fitness. Besides advising the BY ROGER O. CROCKETT investment and audit comTAKE A SEAT mittees, Rogers co-hosts an errill lynch & co. John Rogers annual event to train scores ceo E. Stanley co-hosts an of black directors. If a ONeal had barely reannual board doesnt have black signed from the Genevent to directors to get issues on eral Motors Corp. train black the table, he says, its not board on Feb. 6 bedirectors doing its job. fore gm began thinkAnother African Ameriing about recruiting another African can named Rogers has American to ll his slot. emerged as a director to Typically, a corporation like gm would watch. Steven Rogers, a look to replace him with another marquee former entrepreneur who African American name. Someone like teaches at the Kellogg Time Warner ceo Richard D. Parsons, School of Management, who sits on the Citigroup, Estee Lauder, became a director at sc and Time Warner boards. But in an era of Johnson & Son Inc. in the stepped-up corporate governance, ceos late 90 s. Then-ceo are taking on fewer directorships. William Perez took a risk, Thats prompting companies to broadsince Rogers was 41 and en their reach beyond the likes of ONeal lacked major board experiand Parsons. As it happens, theres a large ence. But Perez was soon pool of black directors from which to taking Rogers advicefor choose. You may not have heard of these example, investing in venfolks. But at a time when many markets ture capital rms that back are fragmenting along ethnic lines, black businesses. Its not African American directors American talent. Since like I fell off the watermelon truck, says are increasingly sought-afTHE STAT 2000, the recruiter has Rogers, who is also a director at ter. According to executive placed 277 women and 150 SuperValu and Amcor Financial. Boards recruiter Spencer Stuart, minority candidates on sometimes have to go outside their nor162 black directors sit on boards. Recruiters often mal blueprint to nd people. the boards of the top 200 work with Washington When Arbitron Inc., the radio-industry s&p 500 companies. Thats (D.C.)-based elc, a rich researcher, was looking for a black perdouble the number in 1987, Proportion of top source of largely untapped spective, it made Shellye L. Archambeau a says the Executive Leadertalent. Telecom giant director. The ceo of San Francisco busiship Council (elc), which 200 S&P software maker promotes board diversity. companies with at Verizon Communications ness a big name. But MetricStream Inc. Inc. recently lured elc isnt she has operating A diverse board translates least one African member Clarence Otis Jr., experience and technology expertise, into a more protable business, says Patrick G. Pat American director the 49-year-old ceo of both skills Arbitron needed. Plus, she Darden Restaurants, to adds a fresh point of view about the data Ryan, executive chairman Data: Spencer Stuart serve on its board. And Arbitron produces for its minority-owned of Aon Corp., which has a Donna A. James, 48, presi- media customers. Its important to have black man, an Hispanic woman, and an Asian American woman dent of the strategic investments unit of someone on the board [who] underNationwide Mutual Insurance Co., is gain- stands that, says Philip Guarascio, chair on its board. Theres no doubt about it. Recruiting rms such as Spencer Stuart ing notice as a director at Coca Cola Enter- of the boards nominating committee. It are scouring the country to uncover African prises Inc. and Limited Brands Inc. Ive adds to the richness of the discussion.
Corporations look to broaden their boards beyond big names like Parsons and ONeal
84%
michael l. abramson

WALL STREET
MONEY MANAGERS ON THE BLOCK

Banks and brokerages are selling, and plenty of deep-pocketed bidders await
BY MARA DER HOVANESIAN money management outt is a great business to ownexcept for a bank or brokerage. Thats the lesson from the recent news that Merrill Lynch & Co. Chief Executive Stan ONeal is merging the companys $539 billion asset management unit into BlackRock Inc., run by ceo Laurence D. Fink. For BlackRock the move represents a chance to diversify its bond management business into equities. Merrill takes a near 50% ownership stake in a lucrative and growing business with $1 trillion in assets under management. Wall Street watchers expect more deals soon. Still reeling from the aftermath of a mutual fund scandal in 2003 that shined a harsh light on the practice of retail brokers pushing their rms mutual fund products over
those of others, many companies are deciding that owning a money management unit is more trouble than its worth. True, money managers enjoy some of the highest prot margins in nancial services. And, with baby boomers retiring just over the horizon, growth prospects look excellent. But these days, if an investor asks, [companies] have to tell them they give their brokers higher payouts and Ferraris to sell in-house products, says Eric C. Weber of Freeman & Co., a boutique mergers-and-acquisitions advisory rm. Investors dont like that. ONeal isnt the rst Wall Street big shot to want out of money management. In December, Baltimores Legg Mason Inc. bought Citigroups $437 billion asset management business in exchange for its
brokerage in a $3.7 billion deal. The two biggest retail brokerage distribution companies in the world have done the same thing, says Gary Shedlin, an investment banker in Citigroups nancial institutions m&a group, which advised BlackRock on the Merrill Lynch negotiations. This deal is affirmation of a logical trend that will continue. The only question seems to be which company will be the next to bail out or merge. Many think it will be Morgan Stanley, which has a large brokerage force and was outbid by Merrill for BlackRock. Don Putnam, managing partner at Boston-based consulting rm Grail Partners llc, expects three or four major brokerage rms and banks to sell off their asset management units in the next 18 months. Among them: Bank of America Corp. and Wachovia Corp. Insurer Marsh & McLellan might also want to unload its Putnam fund business, while Mellon Financial could sell Dreyfus.
WHOS ON THE PROWL?
buyers are in the wings. jpmorgan Chase & Co., which has no retail brokerage unit, intends to build the companys money management group partly by acquisition. Another promising bunch may be publicly traded asset managers. These rms are generally ush with cash, and many are looking for incremental acquisitions to ll out product lines, says Keefe Bruyette & Woods Inc. analyst Robert Lee. One company that may be on the prowl, Lee says, is San Mateo (Calif.)-based HOT PROPERTIES Franklin Resources Inc. Already, deal volume is Mergers and acquisitions, plus big cash inflows, are up. By mid-2005 transacsending the stocks of public asset managers soaring tions, as measured by as180 sets under management, S&P 500 ASSET MANAGEMENT & CUSTODY BANKS INDEX were at the highest level 160 since 2001, with 83 deals and $755 billion in global FEB. 20, '04 140 assets acquired, according to Freeman & Co. Yet 120 theres a downside to the deal mania. Talented mon100 ey managers are getting JAN. 7, '05 FEB. 10, '06 fed up with all the horse Data: Bloomberg Financial Markets trading and starting their own rms. For all the jockeying for who BLACKROCKS FINK The Merrill deal owns whom, theres going to be a lot of adds equities to friction, says David Silvera of Rosemont his rms bond Investment Partners llc, an investor in management private equity rms that specializes in asset management rms. Managers want to be masters of their own destiny and dont see the benet of being part of a larger group. Let the buyer beware. With Lauren Young in New York.
evan kafka

SUPERMARKETS
TESCO: CALIFORNIA DREAMING?

The British retailer is counting on high tech to crack the U.S. convenience market
BY KERRY CAPELL t was a covert operation. A year ago, when giant British retailer Tesco was planning its foray into the U.S. market, the company dispatched an advance team of senior managers stateside. This was no routine intelligence-gathering trip, though. Hoping to keep their plans secret from rivals, the Tesco executives posed as Hollywood lm producers making a movie about supermarkets. The operatives set up a trial convenience store in a West Coast warehouse. Loath to leave a paper trail that could tip off competitors, they used plastic bags of cash rather than corporate charge cards to buy goods for their mock store. The result was a huge surprise for the U.S. retail industry. On Feb. 9, Tesco ceo Sir Terry P. Leahy announced that the worlds No. 5 retailer will spend $453 million to open a chain of convenience stores on the West Coast next year. On the face of it, the move sounds not only bold but harebrained. European chains have long tried, mostly unsuccessfully, to make inroads into the U.S. Meanwhile many U.S. retailers, squeezed by rising costs and big-box players such as Wal-Mart Stores Inc., are scaling back or selling out. Operating a store in the U.S. these days is not for the fainthearted. If that all werent daunting enough, Tesco will be starting from scratch, with no brand recognition, no customers, and no distribution system in place. Theres even new competition to worry about. This month, Home Depot Inc. is launching a chain of gas-station convenience stores called Home Depot Fuel. Canadas Alimentation Couche-Tard Inc. is expanding in the U.S., where it already has 3,000 outlets, including those under the Circle K name. Industry leader 7-Eleven Inc., which was acquired by a Japanese af38 | BusinessWeek | February 27, 2006
liate last year, is upgrading. Going from zero to a well-known brand in any country takes a long time, but in the U.S. it will take a lot longer, says Jonathan Pritchard, food retail analyst at Oriel Securities Ltd. in London. Tesco executives were not available for comment.
GLOBAL BUYING POWER

yet tesco is a powerhouse in Britain, where it has blunted Wal-Marts drive to dominate the retail scene. Wal-Marts superstore format has been outanked there by a swarm of Tesco stores, from huge emporia to tiny express shops. Today the company controls more than 30% of the grocery market in Britain, a fact that has led Wal-Mart, which operates under the name of asda Group Ltd. in Britain, to call for a government investigation of its rival. Tesco has been expanding in Eastern Europe and Asia. And like Wal-Mart, it used its global buying power to achieve operating margins last year of 5.7%, just under Wal-Marts 5.9%. High tech is another Tesco strong point. It runs the worlds biggest online grocery: British shoppers can even buy their groceries via cell phone. Tesco, like Wal-Mart, was an early adapter of radiofrequency identication technology and other methods to get goods to stores in the most cost-efficient way. Tesco is ruthless in supply chain management, says Scott Langdoc, vice-president of Boston consultancy amr Research Inc. Tesco will model its California outlets on its successful Express stores, a chain QUICK SHOPPING Tescos plan of 800 mini-supertargets a weak markets. The compaspot at Wal-Mart ny, which operates some Express stores in conjunction with Exxon Mobil Corp., plans to go far beyond the traditional convenience-store format of gas, snacks, and smokes to include groceries, produce, and private-label ready-to-eat meals. Is Tesco itching to mix it up with WalMart on the American retailers home turf? The British actually are targeting an area where Wal-Marts are relatively scarce. The Bentonville (Ark.) company has 266 stores in California, Oregon, and Washington, compared with 415 in Texas alone. Wal-Mart is experimenting with its smaller-format Neighborhood Markets, but these are more like supermarkets than convenience stores. To grow, WalMart needs to go beyond big stores, says Frank Badillo, director of global research and senior economist at consultancy Retail Forward Inc. in Columbus, Ohio. Tesco is beating them to the punch.
Tesco At a Glance
REVENUES $59 billion* OPERATING PROFITS $3.4 billion* STORES 1,819 stores in Britain, 648 others in 12 countries in Europe and Asia STRATEGY Offering reasonable prices for private-label food products, clothing, cell phones, home-entertainment gear, and nancial products SHOPPING EXPERIENCE Four types of stores: Tesco Express, a convenience chain; Tesco Metro, a large, city-based store; Superstore, up to 50,000 square feet with nonfood products; and Extra, one-stop hypermarkets up to nearly 200,000 square feet
*2005 Data: Company reports
alex segre/nancial times
News Washington Outlook

EDITED BY RICHARD S. DUNHAM
Dirty Secrets of the Black Budget

FORMER CALIFORNIA REPRESENTATIVE Randy Duke Cunning-
CAPITAL INSIDER
WANTED: A CEO TO RUN FOR THE WHITE HOUSE
americans would rather have a ceo as commander-in-chief than a politician. A Feb. 7-8 Fox News/Opinion Dynamics poll found that 33% of voters preferred a business leader for President, while a politician or general each were favored by 21%. Independents, at 42%, were the biggest ceo backers.
hams guilty plea to bribery and tax evasion exposed Washingtons backroom ways, where gifts to lawmakers are sometimes followed by official actions that benet the officeholders benefactors. But Cunninghams intervention on behalf of companies
went far beyond the projects disclosed in tees that control the nations purse strings. court lings. Capitol Hill sources say Cun- Lobbyist Jack Abramoff, now a cooperating ningham also delivered for the businesses witness in a federal investigation, called the that bribed him by slipping projects into appropriations panels Washingtons favor the super-secret black budget that funds factory. Senator John McCain (R-Ariz.) has launched a war on earmarking, saying the classied intelligence work. The San Diego Republicans alleged ac- practice is ripe for corruption and drives up tions cast light on one of the dirty secrets of the federal decit. The details are hard to dig Capitol Hill: Nothingnot even the spy out, though, because earmarks are often hidbudgetis exempt from lawmakers ear- den in bills that run to hundreds of pages. marks designed to steer federal spending And in the hush-hush intelligence world, unto favored projects and recipients. Theres earthing earmarks is all but impossible. But general concern about transparency and classied pork is just as wrong as any other oversight of earmarks in both the black earmark, says McCain. In fact, it deserves and the white worlds, says John extra scrutiny now because Duke CunningSchoeld, spokesman for the House Ap- ham was able to perpetrate some of his egregious crimes through expropriations Committee. actly that vehicle. While the white budget Indeed, Cunninghams is available for public inspecintervention for San Diegotion, the top-secret black based defense contractor annex to the annual intelliadcs and Washington intelgence-spending bill is kept ligence rm mzm so in a secure room. Only a few alarmed Hill leaders last staffers are allowed to work summer that then-Approprion it. Even the members of ations Committee Chairman Congress who vote it into C.W. Bill Young (R-Fla.) law arent allowed to read ordered a probe to see what the bill unless they are Cunningham put in the spy deemed to have a need to budget. The committee found that the know, a status limited to a CUNNINGHAM projects were legitimate. few dozen who oversee the Did he hide Total spending in the intelligence Pentagon and spy agencies. earmarks in the bill is condential. People familiar Legislators with access to spy budget? with intelligence point out that secret the classied portion of the bill can earmark spending for favored proj- earmarks represent an extremely small ects and technologies, say multiple share of the $27.3 billion spent on pet projsources. These guys can basically give ects. Lawmakers are more circumspect money to whomever their heart desires, about favoring special interests in the and we have no idea whos getting the black budget, these sources say, in part bemoney, says Keith Ashdown, vice-presi- cause they cant send out press releases dent of the conservative watchdog group boasting of bringing home the bacon. One source says the bill includes fewer than 10 Taxpayers for Common Sense. The ethics scandals engulng Washing- earmarks a year. Of course, theres no way ton have put the spotlight on earmarking by to know for sure. Its classied. By Eamon Javers the congressional appropriations commit-
SENATE HEAT ON THE CREDIT RATERS

credit-rating agencies will be on the hot seat on Mar. 7, when the Senate Banking Committee plans hearings to consider tighter regulation of the raters. Corporate cfos will urge lawmakers to bar the agencies (including Standard & Poors, which, like BusinessWeek, is owned by The McGraw-Hill Companies) from offering consulting services to corporate clients whose debt they rate. Critics argue that creates potential conicts of interest. But a spokesperson for s&p says: We have policies, procedures, and rewalls in place to insure the independence and objectivity of everything we do.
AN IRS PHISHING EXPEDITION

net scammers have been doing some especially nasty phishing lately: sending out emails under a legit-looking irs logo that promise info about your tax refund. All you need do is send back your name, Social Security number, and creditcard details. An irs spokesman wants you to know you can nd the status of your refund at www.irs.gov and that the agency never asks for info by e-mail. And the irs wants the scammer to know impersonating the taxman is a felony.
john r. mccutchen/sdut/zuma press
News Global Business

MAKEOVERS
ELECTROLUX CLEANS UP all units Boosting R&D and getting

on the same page delivers a rebound
BY ARIANE SAINS AND STANLEY REED ou will never meet Catherine, Anna, Maria, or Monica. But the future success of Swedens Electrolux depends on what these four women think. Catherine, for instance, a type A career woman who is a perfectionist at home, loves the idea of simply sliding her laundry basket into a washing machine, instead of having to lift the clothes from the basket and into the washer. That product idea has been moved on to the fast track for consideration. So just who are Catherine and the other women? Well, they dont actually exist. They are composites based on in-depth interviews with some 160,000 consumers from TAKE NOTE around the Divisions brainstorm globe. To di- together vine the needs of these mythical customers, 53 Electrolux employees, including designers, engineers, and marketers hailing from various divisions, gathered in Stockholm at the end of November for a weeklong brainstorming session. The Catherine team began by ripping photographs out of a pile of magazines and sticking them onto poster boards. Next to a picture of a woman wearing a sharply tailored suit, they scribbled some of Catherines attributes: driven, busy, and a bit overwhelmed. With the help of these characters, Electrolux designers and engineers are
searching for the insights theyll need to dream up the next batch of hot products. Its a new way of doing things for Electrolux, but then again, a lot is new at the company. When Chief Executive Hans Straberg took the helm in 2002, the worlds No. 2 maker of home appliances after Whirlpool Corp. faced spiraling costs while its middle-market products were gradually losing out to cheaper goods from Asia and Eastern Europe. Competition in the U.S., where Electrolux gets 40% of its sales, was ferocious. The companys stock was treading water. Straberg had no choice but to do something radical. He began shuttering plants in Western Europe and the U.S. and shifting work to lower-cost locales in Asia
and Eastern Europe. He also is spinning off the outdoor products division. But this is no ordinary corporate makeover. Straberg is also breaking down barriers between departments and forcing his designers, engineers, and marketers to work together to come up with new products. To speed the transition, he has recruited executives from companies with strong track records in innovation, including Procter & Gamble and PepsiCo. At the Stockholm brainstorming session, for example, the group leader, Kim
Electrolux Hit List

CURRENT WINNERS
ICON CONVECTION WALL OVEN ($2,000 and up) The ICON oven is outtted with a
HOT PROSPECTS
BREEZE HAND-HELD STEAMER This cordless device doubles as a stain remover. Comes outtted with a scent dispenser. GENTLE DRYER Its designed to leave clothes free of wrinkles and has a lighted yellow drum to simulate sunshine. WATERLESS WASHING MACHINE This machine will use ultrasound, ultraviolet, or ion technology to clean clothes gently without water.
Data: Electrolux, BusinessWeek
glass door that doesnt get hot during cooking and racks that glide out smoothly thanks to a patented ball-bearing system. PRONTO UPRIGHT VACUUM ($99) This cordless vacuum with a detachable handheld is so attractive it doesnt deserve to be hidden away in the closet. OXYGEN VACUUM (Around $500) All controls on this canister model are on the handle, so theres no need to bend down.
(this page) photographs by rob schoenbaum
The appliance makers new emphasis on design is yielding a crop of products and hot prospects
TRY, TRY AGAIN Rening a product prototype at the brainstorming session
Scott, is a recent p&g defector. She urges everyone to think of yourselves as Catherine. The room buzzes with discussion. Ideas are rened, sketches drawn up. The group settles on three concepts: Breeze, a clothes steamer that also removes stains; an Ironing Center, similar to a pants press but for shirts; and Ease, the washing machine that holds a laundry basket inside its drum. Half the group races off to the machine shop to turn out a prototype for Breeze, while the rest stay upstairs to bang out a marketing plan. Over the next hour, designer Lennart Johansson carves and sandpapers a block of peach-colored polyurethane until a contraption that resembles a cross between an electric screwdriver and a handheld vacuum begins to emerge. The designers in the group want the Breeze to be smaller, but engineer Giuseppe Frucco points out that would leave too little space for a charging station for the 1,500 watt unit. For company veterans like Frucco, who works at Electrolux fabric care research and development center in Porcia, Italy, this dynamic groupthink is a refreshing change: We never used to create new products together, he says. The designers would come up with something and then tell us to build it. The new way saves time and money by avoiding the technical glitches that crop up as a new design moves from the draft-
ing table to the factory oor. To support the innovation drive, Straberg has bumped up spending on r&d from 0.8% of sales to 1.2% and is aiming for 2% eventually. What hes gunning for are products that consumers will gladly pay a premium for: Gadgets with drop-dead good looks and clever features that ordinary people can understand without having to pore through a thick users manual. Consumers are prepared to pay for good design and good performance, he says. Electrolux isnt the only appliance maker on an innovation kick. In 1999, Whirlpool Corp. launched a program that allows all of its 68,000 employees to contribute design ideas, yielding a ood of new products.
EYE-CATCHING DESIGN
but few have pulled off the range of hot new offerings that Electrolux has. One clear hit is a cordless stick and hand vacuum, called Pronto in the U.S. Available in an array of metallic hues with a rounded, ergonomic design, this is the Cinderella of vacuums. Too attractive to
be locked up in the broom closet, it calls out to be displayed in your kitchen. In Europe, it now commands 50% of the market for stick vacs, a coup for a product with fewer than two years on the market. The Pronto is cleaning up in the U.S., too. Stacy Silk, a buyer at retail chain Best Buy Co., says it is one of her hottest sellers, even though it retails for around $100, double the price of comparable models. The biggest thing is the aesthetics, Silk says. That gets people to walk over and look. Straberg, who spent decades running Electrolux operations in the U.S., is crafting these new products even while moving away from many traditional tools of customer research. The company relies less heavily on focus groups, and now prefers to interview people in their homes where they can be videotaped pushing a vacuum or shoving laundry into the washer. Consumers think they know what they want, but they often have trouble articulating it, says Henrik Otto, senior vice-president for global design, whom Straberg lured away from carmaker Volvo. But when we watch them, we can ask, why do you do that? We can change the product and solve their problems. The new approach is starting to yield results. After dropping for two straight years, annual sales rose 8%, to $16.5 billion, in 2005. Operating income jumped 42% in the fourth quarter, compared with the year before, though it rose by less than 2%, to $881 million, for the year as a whole. Johan Hjertonsson, director of the consumer innovation program, says product launches have almost doubled in quantity. And the number of launches that result in outsized unit sales is now running at 50% of all introductions, from around 25% previously. The stock? Up a third in the last year. Catherine would be pleased. With Michael Arndt in Chicago
For a slide show of Electrolux best-selling appliances and some of its more intriguing prospects, go to www.businesweek.com/extras. February 27, 2006 | BusinessWeek | 43
The Pronto vacuum swept the U.S. and Europe

The Korean won has gained some 20% against the greenback in the past two years, boosting dollar gains for foreigners. And the market is relatively cheap, trading at just 10.2 times estimated 2006 earnings, compared with 18.8 in Japan, 16.2 in Hong Kong, and 15.7 in India, according to Morgan Stanley.
UNLIKELY TARGET
by many measures, kt&g wouldnt seem to be in the kind of distress that normally draws corporate bottom feeders. kt&g controls three-quarters of Koreas cigarette market, and its net prots$528 million in 2005have jumped an average of 14.1% annually in the past four years. Its share price has more than tripled since 2003, thanks partly to shareholderfriendly policies such as doling out half its prots as dividends. And its often praised for its corporate governance. Nonetheless, Icahn and Lichtenstein think Chief Executive Kwak Young Kyoon could do better. They say he has depressed prots by holding on to former factory sites instead of selling the real estate. And they want Kwak to unload noncore assets, such as a convenience store chain and a pharmaceutical unit, and list shares in a fast-growing subsidiary that makes drinks and other products from ginseng, an herbal tonic. Icahn and Lichtenstein, head of private investment partnership Steel Partners II, declined to comment for this story. At a news conference, Kwak said their demands were excessive measures that would hurt longterm protability. Now the stage is set for a proxy ght. When Lichtenstein announced on Feb. 9 that he would seek a board seat, kt&g shares the next day climbed 8.9%. Kwak has signed up Goldman Sachs & Co. to help manage the ght. The Korea Center for International Finance, a state-funded research group, says the outcome is tough to predict, with some 30% of shareslargely held by Koreanslikely to back management, and 16% currently lined up behind the challengers. Whoever prevails, it seems a new wave of corporate pirates is sure to set sail for Korea.
CORE PRODUCT Icahn wants KT&G to sell off other businesses
SOUTH KOREA
AN UNRULY GUEST FROM THE WEST

Icahns ght at tobacco giant KT&G may spark more activity by foreign investors
BY MOON IHLWAN ou might think carl Icahn has his hands full with the battle over Time Warner Inc. But hes also been busy making a name for himself in Korea. Corporate Pirate, Wall Street Naughty Boy, and Cold Negotiator are some of the nicer things Korean newspapers have called the U.S. nancier lately. Why the vitriol? Icahn and fellow investor Warren G. Lichtenstein now control 7.3% of the shares of kt&g Corp., Koreas former tobacco monopoly, and are demanding changes they hope will boost the stocks value. The countrys opinion leaders, meanwhile, apparently nd the notion of foreigners calling the shots tough to stomach. Its a taste they had better get used to. Until a decade ago, outsiders had a hard time penetrating the erstwhile Hermit Kingdom. But today foreign investors own 42% of the shares on the Seoul bourse, ICAHN compared with 13%
Why
Korea is
OWNERSHIP Many companies lack strong controlling shareholders, making it easier for smaller investors to inuence management PRICE Korean shares are comparatively cheap, trading at 10.2 times
Ripe for Raiding
expected 06 earnings, vs. 18.8 in Japan and 16.2 in Hong Kong

TRANSPARENCY The 1997 Asian nancial crisis forced Korea Inc.
to clean up its act, so accounting statements are now more reliable

CURRENCY The won has risen by 20% against the dollar in the past two years, boosting dollar prots for foreign investors
Data: BusinessWeek, Morgan Stanley
(top to bottom) ki ho park/kistone; mat szwajkos/getty images
before the Asian nancial meltdown of 1997-98. And at some big companies, foreign ownership is much higher. At kt&g its 63%. At Koreas largest lender, Kookmin Bank, its 85.7%; at Posco, the countrys top steelmaker, its 68%; and at Samsung Electronics, its 54%. All told, 109 foreign investors hold more than 5% of at least one Korean company and have led papers saying they intend to inuence management. Icahn heralds a new wave of activism by international investors, says Young Chang, head of research at ubs Korea. Soon such a campaign wont be a novelty. Other factors may accelerate the trend. At least a dozen Korean blue chips, including kt&g, Posco, and Kookmin, lack a controlling shareholder, making it easier for discontented investors to be heard.
INDIA
SELLING GENERICS USED TO BE SO EASY

Suddenly, drugmakers Dr. Reddys and Ranbaxy have a host of copycat rivals
BY BRUCE EINHORN AND MANJEET KRIPALANI t was supposed to be the Next Big Thing from India: Its pharma companies would do to the drug industry what Bangalore did to software and the back office. And in fact, rival Indian drugmakers Dr. Reddys Laboratories Ltd. and Ranbaxy Laboratories Ltd. have turned into some of Big Pharmas ercest competition. The two have plowed huge resources into the generics business, providing U.S. consumers with low-cost versions of brandname drugs such as Prozac and Augmentinand sapping prots at the major pharmaceutical companies that once held the patents to those formulas. But this is not a story of untrammeled triumph for the subcontinent; the big Indian pharma companies are now getting a taste of their own medicine. The success of Dr. Reddys and Ranbaxy has inspired a wave of copycats. A dozen or so Indian companies now sell generics in the U.S., and Indians today account for $8 billion of the worlds $48 billion market for generics. There is a huge gold rush into the U.S., says G.V. Prasad, chief executive of Dr. Reddys. Its getting harder to nd the gold, though, as major Western drugmakers ght back. For instance, Ranbaxy recently lost a high-prole battle with Pzer Inc. over generic rights to the cholesterol drug Lipitor. And Big Pharma companies have started selling their own generic versions of blockbuster drugs once their patents expire. The result has been pricing pressure that is quite brutal, says Brian W. Tempest, executive vice-chairman at Ranbaxy. A few years ago companies launching a generic of a big-name drug could expect to make about 25% of the original price. Today it is south of 5%, says Prasad. Thats hitting the two companies
TESTING, TESTING A Ranbaxy research lab
where it hurts. In mid-January, Ranbaxy announced that fourth-quarter prots dropped 56%, to $15.5 million, largely because of falling prices for U.S. generics. Dr. Reddys reported a big jump in prots to $14 million, but that was driven mostly by one-time savings from the sale of a facility in India and other cost-cutting measures. Indian drugmakers have to be sprinting to stay in the same place, says Vinay Parikh, a fund manager in Bombay. What to do? Cut deals, for one thing, especially in the U.S. Last year, for instance, Indias Sun Pharmaceutical Industries acquired Able Laboratories, a generics maker from New Jersey, and bought an Ohio factory from California-based Valeant Pharmaceuticals International. In December, Bombays Glenmark Pharmaceuticals announced a deal with InvaGen Pharmaceuticals, a New York producer of generics, to work together to sell seven drugs in the U.S. And on Feb. 1, Dr. Reddys reached a deal to sell authorized generics of Merck & Co.s cholesterol drug Zocor and prostate formula Proscar in the U.S.
TROUBLE AT HOME
europe beckons, too. Both Dr. Reddys and Ranbaxy are bidding to acquire German generics maker Betapharm. On Feb. 10, Aurobindo Pharma, based in the southern Indian city of Hyderabad, announced it was acquiring Milpharm, a British generics maker. And other Indian companies are raising funds for overseas deals. Even as they explore markets abroad, though, the Indians are facing increased competition at home. India is opening up, and foreign generics makers are eager to take advantage of the low costs that have helped the locals. Israels Teva Pharmaceutical Industries Ltd., the worlds No. 1 maker of generics, is on the prowl. And Tevas biggest rival, Novartis subsidiary Sandoz Inc., has more than 1,000 employees in India working on product development and manufacturing. Big Pharmas enemies, it seems, are facing a big-time brawl of their own. With Kerry Capell in London
Outward Bound
German generics maker Betapharm
As generic prices fall, Indias drugmakers are looking abroad for growth
RANBAXY Competing with Dr. Reddys to buy DR REDDYS Bidding for Betapharm; will sell
authorized generics of two Merck drugs in the U.S.

WOCKHARDT HOSPITALS Arranging a $250 million
loan to fund U.S. and European acquisitions

SUN PHARMACEUTICAL Last year bought Able
indiapicture.com
Laboratories, a New Jersey-based generics maker

CIPLA In November signed deal with Illinois-based
Akorn to sell an anti-infective drug in the U.S.

MATRIX Plans to raise $200 million in a stock
offering, with overseas deals likely to follow

FILL ER UP Sasol supplies 28% of SouthAfricasneeds
rening the technology and now has a money-spinner. Assuming oil prices stay in their current range, synfuels alone should earn Sasol $2 billion in operating prots for the year ending June 30, 2006, says Picchi. The fat prots have prompted some South African policymakers to call for a windfall tax on Sasol, a development that recently affected the stock.
GOING ON THE ROAD

sasol is supplementing its home operations with overseas ventures. The rst to come online will be gas-to-liquids (gtl) plants in Qatar and Nigeria. gtl plants use a version of the coal-to-liquids technology to make liquid fuels and petrochemicals from natural gas, which Qatar has in abundance. The Qatar plant will eventually produce 34,000 barrels a day of super-clean diesel fuel and other products for Europe. Sasol is also allying its gtl technology with Chevrons exploration and production skills. The two are building a facility at Escravos, Nigeria, and planning another plant in Qatar. One drawback: cost. Building a gtl plant can cost $40,000 per daily barrel of capacity vs. $15,000 for a conventional oil renery. But by Sasol gures, the company can still make $30 a barrel if it gets low-cost gas feedstock and crude stays fairly high. Picchi gures Sasol will be getting gas in Qatar and Nigeria at the equivalent of $5 to $10 for a barrel of oil. He sees Sasol earning $350 million per coming out of the U.S. makes us think year from those ventures. there is a real business opportunity for Making money out of coal-to-liquids is us, says Sasol ceo Pat Davies. tougher, since the plants cost more. No wonder investors have boosted Nonetheless, coal-rich Pennsylvania has Sasols New York Stock Exchange-traded assembled a package of federal and state shares by almost 60% in a year, to 34. funding that comes close to the $625 milYou have to tip your hat to them, says lion estimated price tag of a pilot project. Bernard J. Picchi of The facility, to make New Yorks Foresight diesel from waste SASOL SURGES Research Solutions coal, would use techllc. Theyve been nology from Royal U.S. DOLLARS* 45 doing [synfuels] longer Dutch Shell and Sasol. WEEKLY CLOSE than anyone else. Davies thinks such 40 Sasols technology projects could be vi35 for making gasoline able in the U.S. with 30 from coal is named oil prices at $40 a 25 Fischer-Tropsch, after barrel with the right the Germans who deincentives. Even so, 20 veloped it in the 1920s. Sasol would have to 0 The Third Reich used overcome concerns FEB. 18, '05 FEB. 10, '06 Data: Bloomberg Financial Markets *U.S. TRADED ADRS the processwhich about co2 emissions. employs heat, presDavies gures that by sure, and catalysts to transform carbon the time Sasol invests in the U.S., its monoxide and hydrogen into fuelsto processes will meet environmental regumake diesel during World War II. Simi- lations. The hurdles are high. But Sasol larly, South Africas apartheid regime em- has a technology that every energy-hunployed it to ease the effects of the embar- gry country wants to tap. go in the 80s. Sasol has spent decades With Adam Aston in New York
SOUTH AFRICA
WHAT THE U.S. CAN LEARN FROM SASOL

BY STANLEY REED ome 90 miles southeast of Johannesburg, the cooling towers and pipes of a giant industrial installation sprawl across ve square miles. What happens at Secunda, as the place is known, is of great interest these days. At a time of sky-high oil prices, Sasol Ltd., Secundas owner, churns out 160,000 barrels of gasoline, diesel fuel, and jet fuel a day, enough to cover 28% of South Africas needs, without using a single drop of crude oil, imported or otherwise. Sasol is not a household name, but maybe it should be. President George W. Bush wants to curb Americas dependence on Middle East oil. Analysts worry about a future gap between supplies and relentless demand. Yet Sasol, with $11.2 billion in revenues, is already enjoying huge commercial success in an arena that has eluded U.S. companiesmaking fuel from coal. It is embarking on a program to brew clean-burning diesel from natural gas. It may even link up with coal producers in the U.S. heartland. What is
The company makes liquid fuel from coal, not Mideast oil. And its margins are huge
photograph by per-anders pettersson/getty images
Managing Networks
The Office Chart Thatinformal relationships at a Really Counts Mapping

company is revealingand useful
BY JENA McGREGOR wo years ago, ken Loughridge, an information technology manager living in Cheshire, England, uprooted his family and moved to the other side of the world. His company, engineering and environmental consulting rm mwh Global, was reorganizing its various information technology offices into a single global division, establishing its main service center on New Zealands more cost-effective shores and promoting Loughridge to manage the companys worldwide network, system, and desktop needs. By and large, the staff Id adopted were strangers, he says. To help adjust to his new surroundings, Loughridge took a map with him. A map of his organization, that is. A few months before, mwh had surveyed its it employees, asking them which colleagues they consulted most frequently, who they turned to for expertise, and who either boosted or drained their energy levels. Their answers were analyzed in a software program and then plotted as a web of interconnecting nodes and lines representing people and relationships. Looking a little like an airlines hub-and-spoke route maps, the web offered Loughridge a mapa corporate X-ray, in a senseto how work really got done among his charges. It helped him visualize the invisible, informal connections between people that are missing on a traditional organizational chart. Loughridge used the map to identify well-connected technical experts he should immediately visit face-to-face. And six months into the job, when a key manager in the Asia region left the company, he referred back to it, reaching out to the departed managers closest con48 | BusinessWeek | February 27, 2006
tacts to help minimize the fallout. Its as if you took the top off an ant hill and could see where theres a hive of activity, he says of the map. It really helped me understand who the players were.
BIRDS-EYE VIEW
while not brand-newindependent consultants and researchers at ibm have been mapping informal networks for a number of yearsthe use of social network analysis as a management tool is accelerating. Given the current emphasis on managing talent, companies are hungry for ways to nd and nurture their organizations most in-the-know employees. And as innovation becomes more critical to corporate survival, the tool lets managers survey the informal interactions between different groups of employees that lead to exciting new ideas. Such a birdseye view also exposes the glaring gaps where groups arent interacting but should be. Making the collaboration visible makes it much easier to talk about, says Kate Ehrlich, a researcher at ibm who studies collaboration. Management consultants and academics, along with technological advances, are also driving the trend. Accenture Ltd. and Katzenbach Partners llp have begun analyzing the informal con-
nections in their clients organizations during the past year. Boston Consulting Group, meanwhile, is using the approach to map ideas: In November, it launched a proprietary software program that tracks its clients, and in some cases their competitors, patents and research papers so bcg people can chart their internal and
PLAYBOOK: BEST-PRACTICE IDEAS
Reasons For an X-Ray

A map of social networks can help in these common situations:
INTEGRATING MERGERS & ACQUISITIONS

Social network maps can help identify key players that you dont want to lose and, postmerger, tell whether integration is taking place.
MANAGING CHANGE
Knowing which people have the respect of their peersand communicating new strategies or reorganizations through themcan help bring about change more effectively.
ray bartkus
Procter & Gamble, Merck, and Lehman Brothers as participants. One company in that roundtable is Capital One Financial Corp., which began using the maps in October to help maintain links between people with similar jobs after a reorganization along product lines. These online communities for groups such as project managers, creditrisk experts, and even administrative assistants serve as forums for people who dont regularly work together to share best practices. In hopes of drawing more participation, the McLean (Va.) nancial services company used the maps to encourage well-connected folksthose who show up as hubs on the mapto take formal, central roles on the forums. While knowledge sharing is one of the most common reasons that companies employ the practice, managers are nding other useful applications. Last year, Solvay, a Belgian pharmaceutical and chemical company, began using maps to help with leadership transitions, or baton passing, as Philippe Drouillon, a knowledge management project specialist, calls it. You have a map that you can provide to successors and say: These are the interactions I have with the people that you should know, he says.
Those with high perches could be shown as isolated on a social chart
FEELING THREATENED
solvay is also using maps to spur its innovation efforts. In October it held several scientic days, inviting outside university researchers for two days of face-to-face discussions. To ensure that the occasion wasnt just a one-off with little follow-up, Drouillon and his team mapped its scientists internal and external networks before and after the event to see where research interests overlapped and where potential existed for collaboration. The hope, says Drouillon, is to increase our innovation impact
external networks. Many point to University of Virginia management professor Rob Cross as a key player in making social network analysis, which has its roots in sociology, more applicable to practical business needs. Cross has formed a roundtable that boasts 53 members after just 18 months. It counts biggies such as
SPARKING INNOVATION
Ideas are sparked when people go outside their traditional networks. Seeing where the lines of collaboration are missing can help managers nd opportunities for growth.
SPOTTING TALENT
Some of the best respected employees arent visible on the traditional organizational chart but are exposed by a network map. Tap them for key projects but know that formalizing their status could harm peers trust.
PLANNING FOR SUCCESSION

Social network analysis can help assure managers that potential successors are trusted by the organization and shine a spotlight on key experts whose departure would be disruptive.
after the event was over. We wanted to invite connections that could be implemented between [Solvay] scientists, not just outside scientists. For all of the benets, charting informal networks can be disruptive. Leaders feel pretty threatened by this, says Katzenbach principal Zia Khan, speaking of people who hold high perches on the organization chart but are more isolated on the informal map. When using social network analysis, suggests University of Virginias Cross, its important to communicate to employees that more connections arent necessarily better: Its O.K. for some people, such as those who spend a lot of time with customers or have expertise in niche areas, to show up on the periphery of the web. Maps can also highlight which employees might be too connected and therefore a potential bottleneck. Condentiality is also a touchy issue. A map that reveals who is well-connected and who is not can be destructive if it is shared too widely. I know who I named, but when I look at the map, I might see [that person] didnt name me back, says Tracy Cox, director of enterprise integration at aerospace and defense contractor Raytheon Co. Now, says Cox, who does network analyses for the companys seven businesses, that hypothetical employee knows that he is not valuable to his boss. And not only does he know it, but 50 of his closest friends know it, too. Instead, the maps Cox shares with the groups that he works with are carefully coded; employees are described only by generic characteristics such as job titles. Cox provides a separate list of the groups most connected people to everyone. Individuals can ask to see their portion of the maps and are offered one-on-one coaching to interpret them, but their supervisors arent allowed to see them. Are the maps still helpful if individuals locations arent revealed? Cross says yes. In 95% of the companies that he works with, only the very top two or three managers actually see a complete map with names. Everyone else can see where silos are occurring, where acquired teams arent integrating, or where collaboration could be happening but isnt yet. Putting that diagram in front of everyone is powerful because its not just the boss whos walking around saying: Were not collaborating, Cross says. Its what everyone is saying.
The Corporation The Net
Who Says Money Cantare fetching lofty prices as Buy Hipness? Small sites
Big Media chases their young followers
BY JESSI HEMPEL AND TOM LOWRY ailycandy, the popular Web site of fashion, beauty, and lifestyle trends, was founded in 2000 at the height of the last Internet bubble. Now it looks as if DailyCandy Inc. could wind up heralding the arrival of Bubble 2.0. A Wall Street Journal report on Feb. 15 that former aol Time Warner Inc. executive Robert W. Pittman, whose private investment rm Pilot Group lp is DailyCandys majority owner, was putting the site on the block fueled speculation that it could garner offers of $100 million or more. DailyCandy, which breathlessly describes itself as the ultimate insider guide to whats new, hot, and undiscovered, is the brainchild of Dany Levy, a 33-year-old onetime New York magazine editor. It has 11 daily city editions and a vibrant e-mail newsletter, and its trend-setting editors have steady gigs on the Today show to talk about the next hot sneaker or spa service. DailyCandys Levy declined to comment; Pittman couldnt be reached. Buzz machines like DailyCandy have become all the rage among corporate buyers looking to connect with the hordes of young people living and spending online. Because the sites always seem a few paces ahead of the action, venture capitalists are loosening purse strings, while larger outts are looking to buy up existing sites rather than trying to create their own from scratch. When someone like News Corp. Chairman Rupert Murdoch sets aside $1 billion for Web buys, its clear that prices are des50 | BusinessWeek | February 27, 2006
The third contender has an office near the Cooks Skillman (N.J.) homea big plus. After all, says 17-year-old David, were in high school. The Cooks got their rst investment, $250,000, from their 27-year-old brother Geoff, whod founded and sold his own Web business. They outsourced design to programmers in India and launched the site on rented servers. At high schools they offered free T-shirts or thongs to students who signed up ve friends. After traffic jumped twelvefold in November, myYearbook.com made it onto traffic ranking site Alexa.coms list of movers and shakers, and buyout offers rolled in. In this market, Web site sellers have a lot of competition. The Cooks rivals include Jay Gould, 26, who launched two video-sharing sites in the fall of 2004 and sold them in December, 2005. Users of the sites, Musicvideocodes.com and Yashi.com, can search databases of videos and attach them to everything from e-mails to MySpace proles. Gould outsourced the site design and set up shop in his grandfathers Bayville (N.J.) basement. In December the sites attracted 3.3 million unique views, according to comScore Media Metrix. Gould sold them to New York media company Bolt Inc. that month in a mostly equity deal that makes him a partner in the company.
CANDY MAN Pittmans Pilot Group is expected to see offers of $100 million or more for the site
tined to inate. In July, Murdoch plunked down $580 million to buy MySpace.com, the social networking leader. Because users of sites such as MySpace are largely under 25, investors and Big Media companies see them as a direct route to a highly coveted but elusive demographic. The risk, of course, with these sites is if they turn out to be fads instead of something thats sustainable, says Aryeh Bourkoff, a ubs analyst. For now, at least, Levy and other Web entrepreneurs are in a seriously enviable spot. Take David Cook and his sister Catherine. A venture capital rm, a tech startup, and a small public company have all made offers for myYearbook.com, the social networking site the siblings started last April (page 20). Cook says one suitor is offering big bucksinto eight gures while another promises creative control.
Two other twentysomething online entrepreneurs, Greg Tseng and Johann Schleier-Smith, also attracted money quickly for their teen portal Tagged.com. But Tseng and Schleier-Smith wanted venture capital for the 35-person company. Their ambitions are nothing if not grand: We want to build a Teen Yahoo! or the next mtv, says Tseng. They didnt have to wait long for their growth capital. The site launched in mid-2004 with about $1 million from their savings. Traffic hit 1.6 million unique page views in December. The same month the duo reeled in $7 million from Mayeld Fund of Menlo Park, Calif. Those thinking of starting similar sites better move fast. Buyers may nd that site loyalty can be eeting. But that isnt likely to discourage the frenzied interest. Meanwhile, a new generation of dot-com millionaires, some not old enough to celebrate at the local bar, is being born.
photograph by jimi celeste/patrickmcmullan.com
COVER STORY
Going
BY EMILY THORNTON
Private
A
sk j. crew group inc. chairman and chief executive Millard S. Mickey Drexler what its like to run a public company, and he curls his ngers into the shape of a pistol. You have a gun to your head, he says. Drexler knows of what he speaks. He spent four years running AnnTaylor Stores Corp. and seven years as ceo of Gap Inc., where he gained his reputation as a turnaround artist before being ousted in 2002. Drexler, 61, could be enjoying an uncommonly comfortable retirement right now. Instead hes working harder than ever, trying to revitalize the fashionable clothier. He loves the challenge of transforming companies, and retailing is in his blood. But the best part about the new gig is that he doesnt have to answer to public shareholders every step of the way. Drexler works for Texas Pacic Group, a $22 billion Fort Worth pri1. Jack Welch, Clayton, Dubilier & Rice 2. MGM 3. Lou Gerstner, Carlyle Group 4. Burger King 5. Unemployed actor 6. Mickey Drexler, runs J. Crew Group, majority owned by Texas Pacic Group 7. Jacques Nasser, One Equity Partners 8. Toys R Us 9. Houghton Mifflin 10. Ann Jackson, CEO of WRC Media, owned by Ripplewood Holdings
Data: BusinessWeek, companies
Hotshot managers are eeing public companies for the money, freedom, and glamour of private equity
2 3 4
6 5 7
12
11 10
9 8
robert risko
11. Dunkin Brands 12. Paul ONeill, Blackstone Group
COVER STORY
In a private setting, you eliminate the dysfunctional short-term focus on quarterly results.
LOU GERSTNER, Chairman of Carlyle Group
vate-equity rm. It hired Drexler in 2003 and supported him through a long overhaul that included chucking a years worth of J. Crew skirts, pants, and sweaters. Now, he says, he has an ownership that truly cares about long-term shareholder value, in stark contrast to public investors who obsess over quarterly earnings. Luminaries like Drexler are bolting in droves for private equity, the freewheeling world where investors buy slumping companies and try to turn them around to sell or take public, risking billions of dollars in the process. Former General Electric ceo Jack F. Welch now evaluates investments at Clayton, Dubilier & Rice Inc., a $6 billion New York rm. (Welch and his wife, Suzy, write a column for BusinessWeek.) Onetime ibm chief Louis V. Gerstner Jr., who has alternated between private and public companies for two decades, is back in the private sphere as chairman of the Carlyle Group, a Washington (D.C.) rm with $35 billion in committed capital. Former Ford Motor Co. ceo Jacques Nasser is a partner at the $5 billion One Equity Partners, an affiliate of jpmorgan Chase & Co. Former Continental Airlines Inc. President Greg Brenneman xed up Burger King for private-equity rms and is about to take it public. Viacom Inc.s former chief nancial officer, Richard J. Bressler, works for Thomas H. Lee Partners lp, a Boston fund with $12 billion of committed capital. Gerald Storch, former vice-chairman of Target Corp., has been tapped to run Toys R Us for private-equity owners Bain Capital ($27 billion) of Boston and Kohlberg Kravis Roberts & Co. ($11.5 billion) of New York (along with Vornado Realty Trust). And on and on. It isnt only ceos who are making the move to private-equity rms. Fast-rising midcareer folks are lining up, too. The interest has really gone through the roof, says Anthony Lando,
partner and director of Benchmark Search Group, a nancialexecutive recruiter in Stamford, Conn. Newly minted mbas are joining them. Back in the 1980s most B-school students wanted to be investment bankers. In the 1990s it was tech-related venture capital and dot-coms. Now, private equity is hot.
Long-Term Luxury
the attractions are twofold: money and freedom. The pay can be outrageously good even at the entry levels; for ceos, it can be spectacular. The exibility is alluring, too. In private equity theres less annoyance from the Sarbanes-Oxley Act, the controversial regulations passed in 2002 to police publicly held companies. And many private ceos will avoid the Securities & Exchange Commissions new proposal that would require the highest-paid executives at public companies to disclose their compensation in excruciating detail. (These rules and proposals still apply to companies that issue registered public debt.) Regulatory issues aside, the fundamental nature of private-equity work is different. ceos have a freer hand to do the tough but necessary things to repair companies for the long term, with less focus on quarterly results and placating public shareholders and more on meeting the strategic yardsticks of a multiyear turnaround effort. Drexler, for one, says he never could have scrapped so much
Money Is Flooding Into Private Equity Firms... ...Fueling Big Deals
brian smith

inventory at a public company focused on short-term results. Going private dodges another nuisance: activist hedge funds. Youre seeing more instances of hedge funds taking major stakes in companies to cause a sale or major restructuring of a business, says Daniel S. OConnell, ceo and founder of 18year-old Vestar Capital Partners, with $7 billion of committed capital. That will lead to more [companies] going private. Private-equity ceos, in other words, dont feel like the gun is pointed at their heads at all times. That allows them to take risks that public shareholders wont, says Donald J. Gogel, ceo of Clayton Dubilier. For example, since Bear Stearns Merchant Banking bought what has become New York & Co. from The Limited in November, 2002, it has refurbished or opened 260 stores, more than half the chains outlets. A public company would have found it more difficult to make so large an investment in a languishing, minor business. Managers now understand that involvement in the private-equity world is potentially more interesting, more lucrative, and less of a hassle, says Texas Pacic Group founding partner James Jim Coulter.
2002 2003
Theres no clear road map of what to do; you really feel very independent. That is good but challenging.
ANN JACKSON, CEO of WRC Media
FUND INFLOWS WORLDWIDE*
$17
2002
24
2003
42
PRIVATE EQUITY M&A*

*Billions of dollars, estimates
$130 152
259 370
Data: Thomson Financial; Buyouts magazine, a Thomson publication
The Carlyle Groups Gerstner says hes thrilled he went private. The private-equity industry allows an organization, or a part of [one], that is operating at a subpar level to be spun off, renanced, reenergized, refocused, he says. Its a very significant part of what is going on in the world today. For Ann W. Jackson, a 23-year veteran at Time Inc., the appeal of private companies is their nimbleness. She joined Ripplewood Holdings llc, a $10 billion New York rm, last April, and in November became the ceo of educational publisher wrc Media Inc. Jackson and her three division presidents review their progress each week to see if theyre slipping off their targets, and move quickly when necessary. Its a 30-second decision, says Jackson, who has limited her executive team to six to keep down bureaucracy. At public companies, Jackson says, rigid hierarchies prevent such decisive moves. Vivek Paul, vice-chairman of Indian software maker Wipro Ltd. until September, 2005, likes the variety of private equity. Hes now part of a team at Texas Pacic investing in different sorts of technology and life sciences companies. I felt I was a frog in a well at Wipro, says Paul. Now I have a 2004 2005 panoramic view of business across various industries and companies and countries. Former Paine Webber Group Inc. ceo 2004 2005 Donald B. Marron enjoys running his own $2 billion private-equity rm Lightyear Capital Inc., which invests in businesses providing nan-
allison leach
174
COVER STORY
[We have] an ownership that truly cares about long-term shareholder value.
MICKEY DREXLER, CEO of J. Crew Group
cial services ranging from crop insurance to college funding. Not that private equals perfect. The business is fraught with risk, and fund partners, with hundreds of millions of dollars at stake, can be stern taskmasters. There are also legitimate reasons for public shareholders to be wary of the privatization trend. And for all the faults of the public life, there are still plenty of ceos who are perfectly happy to remain in the shbowl. To a large extent the private-equity phenomenon is cyclical. Another bull market for stocks could slow or even reverse the movement. Wave millions of in-the-money stock options in front of a ceo and suddenly Sarbanes-Oxley and the other headaches of public companies will seem less painful. Sooner or later, the private-equity market will cool off (page 58). But for now it is sizzling. The industry controls $800 billion in capital, estimates researcher Thomson Venture Economics, more than the $756 billion that Americans spent building new homes and renovating existing ones last year. Fifteen years ago there were only a handful of rms managing at least $1 billion; now there are at least 260. Just three rmsCarlyle, kkr, and New York-based Blackstone Grouppreside over businesses that employ 907,000 people. In 2005, estimates Buyouts magazine, $174 billion in new money owed into U.S.-based private-equity rms (table, page 54-55). Whos investing? Well-heeled institutions such as pension funds looking for higher returns than the single digits delivered by the stock market the past few years.
Flush with cash, rms are buying bigger-name companies and enticing higher-prole public executives to come onboard. Private-equity funds have scooped up Dunkin Brands Inc., Neiman Marcus, Metro-Goldwyn-Mayer, and Toys R Us, to name a few purchases since the start of 2005. Hear that noise? Its the giant sucking sound of capital and talent exiting the public realm.
The Money Beckons

no one knows the full extent of the privatization wave. Firms, and the companies they run, are intensely secretive. But word of the massive amounts of money being made is spreading. Heres how the millions pile up. Partners typically take 1.5% or so off the top as a management fee each year. So four to six partners of a $1 billion fund might split $5 million every year among themselves, after paying out, say, $10 million for staff and other costs, estimates Brian Korb, a partner of Glocap Search, a New York executive recruiting rm. Partners also get a share of prots, usually 20%, when a company is sold or taken public. Say the value of the companies owned by a private-equity rm doubles, to $2 billion, when they sell them. The partners would split $200 million of the $1 billion increase. (The funds investors would get the other $800 million.) And any money that partners co-invested with shareholders would also double. To top it off, their investment booty
2006 Sun Microsystems, Inc. All rights reserved.
peter gregoire

would be taxed at 15% as long-term capital gains (assuming the investment was held at least a year), vs. the 35% that public company ceos must shell out for their ordinary income. Not all ceos are partners, but they dont need to be to earn huge sums. When private-equity rms recruit executives to run companies for them, they typically offer them small cash salaries but also a chance to invest their own money for a stake in the company, sometimes as much as 20%. This is highly risky for the ceo, of course. But its proving, for now, to be a better incentive than the stock options grants available at public companies, which havent paid off in the sideways stock market of the past few years. Consider Drexler. He earns a modest annual salary of $200,000, but he was allowed to co-invest $10 million with Texas Pacic, and now owns a stunning 22% stake in J. Crew. That could turn into as much as a $300 million payday for Drexler if the company goes public; the more he succeeds in turning the company around, the more money he will make. (Drexler declined to comment on the prospect of an ipo, but market watchers expect one this year.) Its difficult for public companies to compete with that. When we recruit a ceo to a public company, we cant offer them [even] 5% of the company, says Dennis Carey, vice-chairman of executive recruiting rm Spencer Stuart. Buyout rms can afford to be generous. Most big ones boast annual returns in excess of 20%, vs. the average 5% return dejennifer s. altman
Youre out buying other companies, so you can range as far aeld as you like.
DON MARRON, CEO of Lightyear Capital
livered last year by companies in the s&p 500. If an executive makes his numbers, and we get a 25% to 30% return, he should be paid a lot, says Daniel F. Akerson, who ran wireless outt Nextel Communications Inc. as well as telecom and broadband services rm xo Communications Inc. before joining Carlyle to co-head the rms U.S. buyout group in 2003. Private equity is changing the traditional career cycle for many public company executives. ceos are no longer content to grind out their last few years running public companies or sitting on their boards. Instead, theyre joining private-equity rms as partners to review companies strategies and to hunt for deals. Or theyre heading the companies in rms portfolios. Or both, as in the case of Jacques Nasser, who at one point was simultaneously chairman of Polaroid Corp. and partner at owner One Equity. Private equity is becoming a new life-stage for ceos, says Jeffrey A. Sonnenfeld, professor of management at Yale University. Its something we have never seen before. Some executives who fulll their private-equity mission by taking a company public again are looking to return to the private life. If you ran a buyout and the exit was to go public, you might stay for a while, says Lawrence Schloss, who ran Credit Suisse First Bostons private-equity business before starting a rm called Diamond Castle Holdings llc, based in New York, last year. But hopefully youd get out, and do the cycle again. Two of Schlosss six partners are former ceos. Midcareer executives see private-equity rms as the new fast
SHARE YOUR THOUGHTS.

Sun believes sharing is the way to create better ideas. Thats why weve teamed up with BusinessWeek to offer you an opportunity to share your comments. Join the conversation about this weeks Cover Story at businessweek.com/coverstory.
COVER STORY
track to running their own shops someday. Jackson says the choice to work for a private-equity rm for the second half of her career was obvious. I love being the ceo, she says. Business school students, meanwhile, are angling to get on the partner track. At the University of Chicago, says Julie Morton, associate dean of mba career services, rsum writing courses for private-equity candidates are oversubscribed. Stanford University is seeing more interest. More 2005 Stanford mba grads went into private equity than any other area except consulting and consumer products and services. These students, not yet wary of the public life, are chasing the huge dollars in private equity. The median annual compensation for a 2005 Harvard Business School grad who went to work for a private-equity rm was $174,500, compared with $135,000 for the rest of the class. Last years Stanford grads did better, with median total compensation of $232,000, compared with $140,000 for the class. Some private-equity funds pay as much as $300,000 to fresh mbas. Michael A. Barzyk is a second-year mba student at Chicago. He worked for a private-equity rm for three years before grad school and saw his two years on campus as a way to polish his skills. The Chicago native took an operations course to get a better handle on management, and spent this past summer working at Sandbox Industries, an incubator. While peers were recently attending bank week in New York and doing oncampus interviews with consulting rms, Barzyk was working his contacts, calling on friends, trying to get wind of an opening in a suitable buyout shop. These rms dont recruit on campus, so its up to candidates to hunt up their opportunities.
No Looking Back
an awful lot of high-prole converts say theyll never go back to a public company. Gerstner, 63, says he doesnt miss running one for a second (page 62). Thats especially telling because Gerstner worked for a buyout rm before, and things didnt exactly end well. In 1989, kkr tapped Gerstner, then president of American Express Co., to run rjr Nabisco. He says he came to realize that kkr had paid too much for the company and couldnt reach its expected returns. When he got the feeling in 1993 that kkr was trying to pull out of rjr, he says, he left to run ibm. (kkr declined to comment.) With baggage like that, working for a private-equity rm
bond defaults, at just 1.9% in 2005, remain well below the long-term average of around 5%, according to Moodys. Buyout executives say the higher prices and debt levels are easily supported by the faster growth and stronger earnings they achieve. If we execute against our plans, we improve operations and generate a lot of free cash ow that can go to pay down debt, says Scott M. Sperling, co-president of Thomas H. Lee Partners LP. At Dunkin, for example, greater expansion of the fast-growing coffee and donut chain beyond its Northeast base is planned, while Colony Capital expects big gains in cash ow at Fairmont thanks to recent renovations. A spokesman also adds that the deal is cheap judged by the price paid per room rather than EBITDA multiples. The question is, what will happen if the economy slows, interest rates climb sharply, or buyout rms stumble in boosting growth or cutting costs? Some of these deals are priced to perfection, says Michael H. Anderson, U.S. high-yield strategist for Lehman Brothers Inc. Theyll need a strong economy, and management will have to execute perfectly to survive. If they dont, this buyout boom could go bust, leaving a pile of junk-rated companies, defaulted debt, and lost equity in its wake. Thats likely to remain a while off, probably no sooner than 2008, says Martin Fridson, CEO of high-yield bond-market strategist FridsonVision LLC. But with credit quality sharply deteriorating, he expects default rates to climb back to peak levels. The good times, in other words, wont last forever. By Jane Sasseen, with David Henry, in New York
Buyout Manias Mountain of Debt
'00
'01
'02
'03
'04
'05 Q4 '05
*BEFORE INCOME TAX, DEPRECIATION, AND AMORTIZATION NOTE: FOR PRIVATE EQUITY PURCHASES OF COMPANIES WITH EBITDA OF MORE THAN $50 MILLION; EXCLUDES MEDIA, TELECOM, ENERGY, AND UTILITY DEALS Data: Standard & Poors LCD unit
eric hoffmann/bw
s there a bubble brewing in the buyout business? With investors and executives ocking to private equity, its not just the money pouring into leveraged buyouts thats soaring, or the returns funds are pulling out. Deal prices and leverage are skyrocketing, too. And that has even some seasoned private-equity executives starting to worry that funds are overpaying on deals and loading companies up with too much debt, sowing the seeds of a big rise in defaults. If this were emerging-market debt, at these numbers no one would touch it, says one fund manager. Consider some recent deals. To beat out Carl Icahn for luxury chain Fairmont Hotels & Resorts Inc., Los Angeles investment rm Colony Capital LLC and Saudi Prince Alwaleed bin Talals Kingdom Hotels International agreed in late January to pay $3.3 billion and assume an additional $500 million in debtroughly 21 times earnings before income taxes, depreciation, and amortization (EBITDA) in 2004. Meanwhile, earlier in the month, a group of buyout rms paid 12.8 times EBITDA for Dunkin Brands Inc., well over the 7 to 8 times typically paid in the restaurant industry. Marvels Tom Marshella, a managing director in leveraged nance for credit-ratings agency Moodys
Corp.: Those are just extraordinary multiples. Leverage has also ticked up sharply. In the average deal from 2000 through 2002, companies took on debt equal to four times EBITDA. By the end of 2005 that number had crept up to over 5.6, according to Standard & Poors LCD unit, which tracks the leveraged loan market. Theres a massive amount of liquidity available, and right now lenders are not being conservative about holding the line, says LCD director Chris Donnelly. So far they havent had to worry. Junk-
Deals Get Pricier

10 8 6 4 2
AVERAGE PURCHASE PRICE-TO-EARNINGS MULTIPLE*
COVER STORY
shrouded in secrecy, with few outside observers able to question the numbers. Thats why regulators restrict private equity to wealthy investors. Its denitely caveat emptor, says Nell Minow, co-founder of the Corporate Library, a corporate governance research rm. Theyd better kick the tires carefully. Whats more, the mechanics of a typical private-equity turnaround dont always favor public shareholders. When buyout rms acquire companies, they often load them up with debt quickly to MICHAEL BARZYK, recoup their investment. For example, within 14 months of buySecond-year MBA student at the ing Warner Music Group from University of Chicago Time Warner Inc. for $2.6 billion in March, 2004, a group of four private-equity rms led by Thomas H. Lee had borrowed an additional $700 million in debt and extracted $1.4 billion in dividends and capital repayments, more than recouping their $1 billion investment. Lee co-presiseemed highly unlikely when Gerstner retired from ibm in dent Scott M. Sperling says Warners cash ow improved 2002. His plan was to help x public schools, advance cancer enough after the buyout to support the debt, pay the dividends, research, and sit on a few public company boards. Then the and fund the companys growth. phone started ringing. I got calls from seven private-equity When private-equity rms bring their companies public rms, he recalls. again the capital structures of some are shaky. Their goverGerstner added Carlyle to his list of commitments in 2003 nance could be compromised as well. Most of the time when because he thought the private-equity business was changing these things go public ... private-equity rms want to get the dramatically. Carlyles three founders convinced him they hell out of there, says Jay W. Lorsch, a professor of corporate were serious about making [Carlyle] a meaningful entity, governance at Harvard Business School. They want to moneGerstner says. tize their investment and get their guys off the board, because These days, Gerstner is Carlyles operational voice on they dont want to be caught in a conict of interest. investment decisions. Its very easy [for someone evaluating But private-equity rms are also doing things that are a deal] to say, The margins are going to go from 14% to 18%, decidedly positive for the nancial system. As they pay larger and were all going to make money, he says. Well, who is gosums for companies, theyve come to realize that they need beting to get the margins up? How is that going to happen?... I get ter managers to turn those companies around and make their a little antsy when I dont learn a lot about the management investments pay off. At this stage, the easy deals have already group thats going to run [the company] from the rst 10 pages been done. And so, more than ever, the nancial whizzes are of a report. Gerstner also heads a committee thats responsiwooing top operations executives. Texas Pacic now has 16 opble for ensuring that Carlyle will last beyond its founders. erating partners, up from two a decade ago. A third of kkrs 27 George W. Tamke isnt going back to a public company, either. senior executives have an operational background, up from You couldnt write a big enough check, says Tamke, 58, who was a co-ceo of Emerson Electric Co. until 2000 and became a partner at Clayton Dubilier that same year. Tamke was chairman Private vs. Public of copy chain Kinkos from 2001 to 2004. Now hes chairman of water supply company Culligan International Co. and the rental What Was He Thinking?: Edward J. Zander on leaving private equity rm Silver Lake Partners to become CEO of Motorola. car company Hertz Corp. And hes relishing every moment.
I dont know if its because I have a little bit of ADD. But I dont get bored in private equity.
Reason to Worry
the privatization trend has made scholars and recruiters take notice. Brain drains are never easy on the parties losing the talent. Some business thinkers, like management professor Michael Useem at the University of Pennsylvanias Wharton School, see the exodus as a sign that the ascent of widely held companies over the past century might be cresting. With capital in fewer hands, there are fewer checks and balances coming from other stakeholders on how that capital is deployed. Another drawback: Private companies nancial results are
matthew gilson
The Company He Keeps: Dunkin Brands CEO Jon L. Luther on why he prefers to work for buyout rms in an online video view. Stuart Weitzmans Private Reasons: Rather than take his company public, the shoe impresario sold a minority stake to Bear Stearns Merchant Bankingand it wasnt for the money. The Story Behind the Story: For a podcast interview with Associate Editor Emily Thornton by Executive Editor John A. Byrne, go to businessweek.com/search/podcasting.htm
www.businessweek.com/extras
COVER STORY
none 10 years ago. Weve added more people at a senior level with an operational orientation to balance [the investment professionals], says Marc Lipschultz, a kkr partner. As a result, the companies being brought public again are operationally stronger, leaner, and better, even if they do carry debt. This is a positive development after the go-go 1990s. We had a period in which companies went public entirely too quickly, says Minow. Some of them never should have. Healthier public companies are good for shareholders, obviously. Im fairly optimistic about how private-equity-backed deals will do from an investors point of view, says ipo market expert Jay R. Ritter, Cordell Professor of Finance at the University of Florida. He notes that private-equity-backed ipos are generally mature, sound companies with annual sales of more than $50 million. Historically, ipos for companies with at least $50 million in sales meet or beat the benchmarks, he says. For better and for worse, the private-equity boom still has plenty of life. Even if the cycle turns and public companies get hot again, private equitys true believers wont go back. ceos say the freedom to run their companies as they see t is exhilarating. Private equity is simply more glamorous than public ceo-dom, says recruiter Stephen R. Bochner at Sextant Search Partners llc in New York. Its the difference between driving a speedboat and driving an ocean liner, he says. When you want to turn a speedboat, you turn the wheel. For an ocean liner, you have to plan two days ahead. With Nanette Byrnes and David Henry in New York, and Manjeet Kripalani in Bombay
being tolerant of poor performance and being intolerant of 90-day numbers without an awareness that maybe [the executives] were investing over that period and doing the right thing.
Glad to Be Out of The Quarterly Grind

hen Lou Gerstner left IBM in 2002, working for a privateequity rm was not even remotely on his mind. Now he is chairman of the Carlyle Group. Gerstner recently explained his decision to Associate Editor Emily Thornton.
Is there anything to be done?
combination of excess capacity and new technology enables people to create a competitive advantage where they couldnt before. Thats driving the restructuring of enterprises around the world.
In your view, is it easier to x a private company than a public one?

In theory, no. If youve got a really good CEO with strong backing from his or her board, you should be able to go to your shareholders and say: Look, were going to go through some tough years. The industry has changed. The competitive environment has changed. Were going to go and fundamentally change this company. Thats what I had to do in 1993. I had no choice. We went through a substantial transformation at IBM in a public environment. In a private setting, you eliminate the dysfunctional short-term focus on quarterly results that dominates the market today. I think there are a lot of executives who are frustrated by the extraordinarily short-term nature of measuring the performance of public companies. Im amazed to see that some company made 65 a share over a 90-day period, and some collection of people thought it should have made 66. And it loses $1 billion in market cap. Theres something wrong. And Im sure thats frustrating. The benet of being a private company is that you have a longer time frame, and you have a direct alignment of the shareholders with the management to x the company, to build value over time, and be patient with the changes. Theres a big difference between
You worked for Kohlberg, Kravis & Roberts in the 80s. From your point of view, how has the private-equity industry changed?
In the 80s it was a smaller business. A few rms. A few deals. And the fees charged in the 80s almost precluded the necessity of major returns to investors. Today the requirement that you produce operational improvements in companies is a lot [tougher]. It has evolved to the point where your ability to raise new money and your ability to generate a substantial fee come from producing positive operating benets from the companies you run. [Operational improvements have] become more important than [they were] before.
We have a great deal of attention by regulators to protect small investors. But I dont see a lot of attention being paid to nding a way to have large investors benet from [focusing on the] long term. I propose that we should tax gains differently for long-term investors than for short-term investors. Until we gure out a way to get [large investors in public companies] to deal with long-term performance, then all of the other things were doing will not change the preoccupation with short-term results. When we [at Carlyle] decide to buy a company, we lay out a ve-year plan. We sit down quarterly and review all of the companies in the portfolio. But were not reviewing that quarters results. Were looking at it against the long-term plan. We dont have to deal with a change in the valuation of our investment because in one 90-day period something happened.
Is there a big difference between the culture of a private-equity rm like Carlyle and a public company?
When I was running a company and one of my divisions was looking to invest hundreds of millions or billions of dollars, we had a very tough-minded approach to when documentation had to be provided. We dont work that way at Carlyle. Sometimes I get an investment document four days in advance. Sometimes someone sends me a heads-up memo two weeks in advance. And sometimes I get [an investment] document the day before.
Whats driving private equity today?

The predominant and most important economic activity today is restructuring. Excess capacity has been growing in almost every industry. Its why we dont see any pricing power [anywhere] in the world. Companies are having to restructure, and theyre having to get more competitive. They cant just do what they did before. The second most important factor is the impact of information and networking technology. Networking technology is fundamentally altering almost every industry. So the
Do you miss running a public company?

Not at all.
SPECIAL REPORT
Im not interested in being a custodian over a privileged place

Amherst College President Anthony Marx
Campus
BYWILLIAM C. SYMONDS
nthony w. marx had never even thought of being a college president. I was minding my own business as a Columbia University political science professor in 2002, he says, when a friend who was an Amherst College alum put Marxs name in the hopper to be president of the Massachusetts liberal arts institution. Sure, Marx was attered, but he also felt underqualied. A career academic, his most important administrative experience had come before graduate school, when he helped found a college in South Africa to educate blacks deprived by apartheid. That is very nice, he wrote back to his friend. But Ive never been a chairman, a dean, or a provost, and besides, I didnt go to Amherst. Amhersts search committee felt the same way and tossed his le into the reject pile. But after grilling many top college honchos, a student member remembered Marx and suggested that the group give him a second look. When Marx nally met the committee, he made an impassioned appeal. Elite U.S. colleges such as Amherst, he said, are perpetuating deep inequalities in American society. They equate success with serving the privileged elite and have largely abandoned talented youth from poor families, he charged. This deepens the countrys growing class divisions and exacerbates the long-term decline in economic and social mobility. Feeling he had nothing to lose since he hadnt sought the job, Marx exhorted the trustees to tackle the problem head-on. Im not interested in being a custodian over a privileged place, he remembers telling the gathering of wealthy alums and academic stars that day. As it turned out, Marxs radical message was just what Amherst trustees wanted to hear. Over the past two decades the
Revolutionary
TONY MARX HAS A RADICAL PLAN TO GET MORE POOR KIDS INTO TOP COLLEGES, STARTING WITH AMHERST
college had committed to increasing minorities to a third of the 1,650-student campus, up from 13% in 1985. But while this brought in more low-income students, Amherst remains an incubator of the elite. More than half its students come from families prosperous enough to pay the full $42,000 annual tab out of their own pockets. Many shell out thousands more for cars, meals out, and other extras. (One student showed up recently with two bmwsone a convertible for sunny days.) We were blown away by Marxs passion and commitment, recalls Jide Zeitlin, a partner at Goldman, Sachs & Co. who has since become chair of Amhersts board. Since Marx, now 46, took over in 2003 as Amhersts youngest president ever, he has waged a ceaseless crusade to make the college a leader in welcoming more lower-income students. Its a formidable goal considering how programmed the place is to seek out the best and the brightest: A record 6,300 students applied for just 431 spots in last falls entering class. Now, Marx is challenging everything from an admissions process tilted toward affluent students to social customs that divide rich and poor students on campus. Essentially, he has set in motion a new affirmative action initiative, this time based on class rather than race. Marx began making his case soon after he showed up at Amhersts clublike campus, with its rolling lawns and acres of tennis courts. Realizing that a college president is no ship captain who can change course by barking commands, he set out to woo students, administrators, faculty, trustees, and alumni. One volatile issue he faced was the potential for a backlash from affluent parents worried that their high-performing kids might be displaced by poor students with less glittering rsums and lower test scores. To head off such concerns, Marx wants to expand overall admission by 120 or so slots to be reserved for low-income students. Such a move requires an aggressive campaign to raise hundreds of millions of dollars, but
Photographs by Henry Leutwyler
SPECIAL REPORT
it also protects affluent kids from facing lower admissions odds. At the same time, welcoming students who lower the schools 1420 sat average also could jeopardize its No. 2 position in the U.S. News & World Report ranking of liberal-arts collegesmaking Amherst less attractive to affluent students. (Williams College is No. 1.) Meanwhile, the inuential athletic department is fretting over the impact of Marxs campaign on the schools 67 athletic admits, who tend to be lower-qualied academically than other Amherst students. And professors fear that since many low-income students, however smart, come from inferior high schools, they will require a lot of help to get up to speed in writing, math, and science. Because most professors are not fully equipped to handle this, there will be a big debate about how far to go, predicts veteran English professor Barry OConnell, an ardent Marx supporter. Marx already has won over many of Amhersts largely liberal professors to the basic concept. Hes hoping that by the fall, faculty and trustees will approve a formal plan to give more of Amhersts coveted slots, per- LACROSSE MATES haps as many as 25%, to stu- Coaches fret over the dents poor enough to qualify plans impact on for a Pell Grant (usually mean- athletic admits ing a family income of less than $40,000 a year). Doing so would vault Amherst far ahead of other elite privates such as Harvard University, where 10% of undergrads are low-income. If we are sufficiently aggressive, we will force the rest of elite higher education to be much more serious about this, says Marx. Boosting socioeconomic diversity is already a frontburner issue on the campuses of elite colleges. Everyone from Harvard President Lawrence H. Summers to William G. Bowen, ex-president of Princeton University, is grappling with a deeply troubling fact of American life: that 30 years of inequality have all but shut off top colleges to the poor. Kids from the lowest socioeconomic quartile represent a mere 3% of students at the 146 most selective U.S. universities, vs. 74% from the top quartile, according to the Century Foundation, a New York think tank. Its not just a problem at elite schools, either. By age 24 only 8% of these bottom-quarter students have earned a ba from any U.S. college, vs. 46% of those from top-quarter families, according to Stephen Rose, co-author of the Century study. As educated baby boomers retire over the next 15 years, they will be followed in the workforce by more minority youth who are poor and less likely to have a degree. Says Harvards Summers: Social mobility is a central challenge for our country. Harvard already has a high-prole initiative to bring in more low-income kids. Yale, Princeton, and Williams are undertaking similar plans, though none is as ambitious as Marxs. Bowen, who now heads the Andrew W. Mellon Foundation, a big funder of higher-education research, is on a crusade to win over admissions officers with statistics showing that low-income students succeed at elite colleges. Americas most selective institutions need to put a thumb on the scale in favor of these students, Bowen argues. Marx may not have been looking for a job as a campus revolutionary, but in some ways he has been preparing for the role ever since college (yes, an elite: Yale University, class of 1981). He grew up in Manhattan, where his parents settled after eeing Germany during Hitlers rise to power in 1933. Marxs mother worked as a physical therapist after graduating from the University of California at Berkeley; his father never got a degree but earned a comfortable living as a middle manager at a metals-trading rm. At Yale, Marxs interest in politics propelled him into the anti-apartheid movement. That led to a job with a South African educational group that was starting a school called Khanya College to help disadvantaged blacks get into the countrys elite colleges. It was a formative experience: Security policed raided the house he sharedillegallywith several blacks, and friends were tortured and some even killed. After a year in South Africa, Marx returned to the U.S. to enroll in graduate school at Princeton. But he returned frequently to work on Khanya, spending nearly three years in South Africa on and off while pursuing a PhD in international politics. He learned, he says, that if you can do this with kids who have suffered under apartheid, then you cant tell me we cant do better in the U.S., with all the resources we have.
Poor kids are less prepared academically

Share of U.S. students scoring above 1420* on the SAT in 2003, by family-income quintile
* The average score of students at Amherst College Data: Williams College
HIGHEST INCOME
LOWEST INCOME
46% 4%
...so theyre shut out of top colleges...

Share of U.S. students at the 146 top* U.S. colleges since 1988, by socioeconomic quartile**
HIGHEST QUARTILE LOWEST QUARTILE
74%
3%
* Measured by student grades, class rankings, SAT scores, and share of applicants admitted ** Dened by the family income, occupations, and education levels of a students parents Data: The Century Foundation
...a result Amhersts Marx hopes to change

He aims to enroll more poor kids by:
Raising up to $500 million, partly to create 120 or so new slots for them. That way, affluent students admission odds wont be lowered. Doing much more outreach in low-income high schools to nd qualied kids. Accepting some poor students with lower test scores. Offering more help to those who are less academically prepared.
Data: Amherst College
College costs are high, even with nancial aid

Share of HIGHEST INCOME family income needed to pay for college* in 2003/04, by family-income quartile
LOWEST INCOME
11% 47%
* Average annual cost of tuition, fees, and room and board at a four-year public university, minus average annual nancial aid received by each group Data: College Board
so most low-income kids never enroll in college

Share of students going to college since 1988 by socioeconomic quartile*
HIGHEST INCOME LOWEST INCOME
FOUR-YEAR COLLEGE NO COLLEGE
64% 14% 11% 64%

HIGHEST INCOME LOWEST INCOME
or get a degree
Share of students with a BA by age 24 since 1988 by socioeconomic quartile*
46% 8%
* Dened by the family income, occupations, and education levels of a students parents Data: Stephen Rose, Macro International Inc.
TRUSTEES AND ALUMNI
even though the board hired Marx to remake Amherst, hes not taking that mandate for granted. First, to give his vision dramatic force, he asked the trustees last year to award an honorary doctorate to Nelson Mandela, whom he came to admire deeply during his years in South Africa. At a ceremony last May in New York, Mandela warned 500-plus trustees, faculty, alumni, and students that economic inequality [in the U.S.] is growing, not declining. Americas great colleges and universities...must open the door more widely. Let Amherst set the pace. The next month, Marx took 30 people, including most of the board, on a retreat to discuss his initiative. To highlight Americas rich-poor gaps, he chose Kykuit, the breathtaking Hudson River estate built by John D. Rockefeller Jr. in 1913, when he was the worlds wealthiest man. Amid the extensive ceramic, art, and antique car collections, Marx got down to business. He asked the trustees to fantasize about how Amherst could meet Mandelas challenge. Imagine that Amherst could be free to everyone, he posited. Get rid of the economic constraints completely. Now, which students would you take? Marx also laid out the economics of his campaign. Amhersts
endowment surged 19% in scal 2005, to nearly $1.2 billion, or $712,000 per student. The college was also wrapping up a $120 million renovation that will make room for about 100 more students. But it would take hundreds of millions more to maintain Amhersts enviable 8-to-1 student-faculty ratio, plus cover the tuition and extra teaching costs for the new students Marx wants to draw. Could they raise that kind of money? he challenged. By the end of the three days the trustees had begun to plan the largest fund-raising campaign in the colleges 184-year history$400 million to $500 million over ve or so years.
THE ADMISSIONS OFFICE
the centerpiece of Marxs crusade is to change what happens in the converted 19th century farmhouse where Amhersts 14 admissions officers work. Marx is convinced that the process is stacked against poor kids. But changing that threatens the entire admissions rationale of elite colleges. The key issue: how much to lower academic credentials. Amherst got to No. 2 in the rankings in part because of its incoming students stellar grades and test scores. Those factors are just one part of college rankings, so Amherst might slip only a few spots if other selective colleges dont follow its lead. Still, that could
SPECIAL REPORT
STUDENT GOVERNMENT PRESIDENT Michael Simmons rebounded from a rough rst year
hurt. If Marx lets in more low-income kids, hes going to risk his schools reputation, cautions Anthony Carnevale, a senior fellow at the National Center on Education & the Economy. Right now, Amherst ranks each of the thousands of applications it receives every fall on an academic scale of one (outstanding) to seven (inadmissible). Most students admitted for academic reasons alone are ones, meaning they were at or near the top of their high-school class and scored 1520 or higher on the sat. Such over-the-top performance typically aligns with afuence. In fact, only 11% of U.S. kids scoring that high on the sat come from the bottom 40% of family-income brackets, while 75% are from the top 40%, according to a study by the Williams Project on the Economics of Higher Education. Fortunately for Marx, the person he inherited to run admissions already had a passion for democratizing elite colleges. The son of a high school football coach, Amherst Dean of Ad-
The Buzz on Campus

A Talk with Tom Parker: Amhersts Dean of Admission on the secrets of getting into an elite college. Class Voices Slide Show: Rich and poor students at Amherst discuss their different backgrounds and experiences. Harvard, West Point, and Smith: What theyre doing to attract low-income students.
www.businessweek.com/extras 68 | BusinessWeek | February 27, 2006
mission Tom Parker was one of the four lowest-income students in the 1969 class at Williams Collegeso I know how these places can transform poor kids, says Parker. Since Marx came along, Parker has been speaking out about a virtually taboo subject: how top universities already bend their standards for all kinds of kids. There are the affirmative action programs for minorities, which most elite schools still run. There are also so-called legacy admits, for whom Amherst reserves roughly 10% of its seats, says Parker. Alumni kids get red-carpet treatment, often including a personal audience with Parker. Yet they rank as twos, on average, he saysmeaning that some score three or less and wouldnt be admitted on their academic credentials alone. But top universities simply cant ignore legacy donations. The way you nance a place like this is with alumni contributions, says Parker. Then there are the athletic admits, who get 16% of each years slots. They rank even lower, just 3.5. Amherst reaches clear down to vesmeaning sats of 1250 to 1300to snag some hot football and ice hockey players. Given the importance of sports to most elite schools images, athletic admits are a necessity, too. If we dont take any ves for football, the team will turn into a travesty, says Parker. With ice hockey, wed be talking about not having a team at all. Bringing in more low-income kids would require added compromise. To meet Marxs 25% goal, Amherst would have to take more threes, says Parker, meaning those who may have straight As but sats as low as 1360. Even though Amherst already does so for minorities, legacies, and athletes, faculty members are worried. This could be a radical departure that fundamentally changes the character of our institution, warns physics professor David Hall, who heads the Faculty Committee on Admissions & Financial Aid. Marx hopes to ease such concerns by nding more top-notch low-income applicants. Certainly, many students have never even heard of Amherst. So Marx is asking his admissions officers to visit more low-income high schools. And hes enlisting Amherst students in a tele-mentoring program in which they walk seniors from those schools through the college application process. Marx also started using QuestBridge, a Palo Alto (Calif.) nonprot that has enlisted 8,000 high school teachers to identify talented low-income students for elite colleges. However noble his goal, Marxs push for a new admissions policy may be opening a Pandoras box. Some supporters think that to make room for poor kids, Amherst should rethink its rationale for letting in less-qualied legacies and athletes. There is no principled reason to have a hereditary system of prefer-
ences, says Hall. Moreover, the athletics arms race excludes people who want to learn. Others resent such views. Some faculty may see the athletes as dumb jocks, but in reality theyre some of the smartest kids in the country, says Peter Gooding, who stepped down last spring after 27 years as athletic director but has stayed on as soccer coach.
How to get into a school like Amherst

Heres the system the college used to rank the 6,300 students who applied for last falls entering class of 431:
RANK SAT SCORE GRADES As; valedictorian or near top of class Mostly As; top 5% of class Many As; top 10% of class WHO TYPICALLY MAKES IT Most of those admitted solely on their academic performance. Average ranking of entering class. The likely range for some new lowincome kids. (Athletes average 3.5.)
STUDENTS
getting into a place like Amherst doesnt mean low-income students will As and Bs; Some minorities automatically thrive, either. Rachel Car1310-1350 top 15% of class and athletes. dona showed up on the Amherst quad in 2000 from a high school in Harlem, the Highly desirable football and B average; 1250-1300 Manhattan Center for Science & Mathehockey players. top 20% matics. When she was 16 and living in a Not admissible Mostly Bs; Brooklyn housing project, her mother 1150-1240 since 2004. top 25% demanded that she quit school to care for her four younger siblings. Cardona Not admissible. (The national SAT Bs or lower refused and moved out. She spent the Below 1150 average is under 1050.) next two years bouncing around, staying Data: Amherst College with her grandmother, her debate cial markers at Amherst. During meals inside the sprawling coach, even in shelters. Still, she managed to graduate as the top Georgian complex, students sort themselves out by race and female student in her class. status. On a fall evening during the supper rush, Michael SimTo Cardona, Amherst was as foreign as mons, a black student from Chicago, looks over the balcony Mars. I didnt have much exposure to and decodes the scene. Down there is what they call the brand names, she recalls, so when I Black Hole, where mostly low-income minority students sit, heard students talking about Abercromhe says. Over there, at the far end of the cafeteria, is where bie, I thought it was a person. Her dorm the athletes congregate. You cant walk over there unless you mates got regular phone calls, care packplay a sport or know a lot of people. Its an unspoken at, but ages, and visits from their parents, while it is very well-followed. Rachel didnt. Simmons, whose single mother runs a small hair salon, got The worst indignity was when she put off to a rough start. He did so poorly in his rst semester that on her apron to work in Valentine Hall, or Amherst asked him to take a year off. After taking college classVal, as the campus cafeteria is known. Ales back home, he returned in 2003 determined to buckle down. though the job was part of Cardonas Now an articulate senior, he sports a B+ average and is the popnancial-aid package, it was an alienatular president of the student government. Last summer he ining experience. A lot of the affluent terned for Senator Barack Obama (D-Ill.) and now has his students have no consideration for sights set on law school. Simmons says poorer kids are often the staff, she says. Even my friends put off by the preppy attire and lavish living they cant afford. wouldnt look at me when I was in Low-income students can come out of here feeling diminmy apron. After work, Cardona ofished, he says. ten went back to her room to sleep To lessen the social dissonance, Marx has set out to get the before getting up to study all night whole campus talking. He holds meetings for students to disa grueling routine she found necescuss class differences and invites smaller groups to come for sary to keep up with classes. After reside chats. His mission has become very palpable on Cardona graduated in December, campus, says Jake Maguire, a junior from Attleboro, Mass. In 2004, Marx hired her as a special ashis talks, Marx discusses ideas such as beeng up an already sistant to help recruit low-income generous nancial-aid program. At Amherst a full ride, which students and better integrate them about 15% of students now receive, includes tuition, room, and on campus. board, plus up to $5,000 extra a year to cover travel, books, and Val, it turns out, is the crucible other expenses. Marx wants to add more aid to help poor stuof class and other identifying sodents buy computers or bring their families to the campus for parents weekends. NEW MIX Marx wants low-income Marx also is talking with low-income students about how to enrollees like Isabel Duarte-Gray integrate the campus better. Cardona is urging him to require to make up 25% of the school all students to work at Val or at an off-campus job. Simmons without losing high-income wants the college to send all students to off-campus retreats to students like Conor Clarke mix outside the exclusive Amherst bubble. We have to gure
1 2 3 4 5 6 7
1520-1600 1440-1510 1360-1430
SPECIAL REPORT
The plan brings to the fore a little-discussed truth: Schools already bend their standards for alumni kids and jocks
arrive with three semesters of calculus plus linear algebra, while some poor ones struggle just to get through the introductory level. Adds sociology professor Jan Dizard: Theres also a cultural mismatch: Working-class kids tend to come from schools that emphasize following orders, while Amherst values thinking outside the box. Tim Zeiser agrees. A junior whose single mother is a bank teller, he says he wasnt pushed in high school economics professor Geoffrey Woglom is the quintessenon Long Island and never had to write long papers. In the rst tial Amherst prof. Engaging and erudite, he has been teaching semester I had a 10-page paper due, and I just bombed it. economics since he arrived in 1978 from Yale, where he played Marx is all too aware of the problem, which he says reects lacrosse with Senator John F. Kerry (D-Mass.). In his spacious the sorry state of U.S. high schools in general. He estimates that office where his playful spaniel sprawls across the oor, 10% to 15% of Amherst studentsnot just poor kids, either Woglom admits hes nervous about Marxs crusade. The faculhave difficulty keeping up. Thats a remarkably candid assessty is already struggling to educate all those other students adment from an elite college president. Marx thinks Amherst can mitted for nonacademic reasons, he says. I want to make sure meet the challenge. It already invites incoming students with were doing a good job with the diversity we already have. relatively low test scores to a three-week summer science and Woglom and the 200-odd other faculty members have a lot math program. When schools in session, they can turn to writof power. They showed their clout a decade ago when a previing and math centers, both staffed by professors and student tuous administration lowered admission standards to beef up a tors. Last year they handled several thousand requests. woeful football team, the Lord Jeffs (short for Lord Jeffery Now, Woglom and Cox are taking part in an experiment to Amherst, who gave the college its name). Outraged professors make rigorous beginner courses more successful. Last fall, demandedand wonthe dismissal of the admissions dean, as Woglom taught introductory economics to 10 invited students well as a nearly 40% cut in football admits, to the current 14 a instead of the usual 28. Week after week he painstakingly helped year. Since the professors will be teaching any new crop of poor them work through problems his brightest students would students, Marx must assure them they can handle the inux. grasp in an instant. I spent one hell of a lot of time on just 10 So far the response has been mixed, says Faculty Dean Grestudents, he says. The payoff: They nished with basically the gory S. Call. Professors understand that just as class backsame average as students in normal sections. Woglam and his ground divides students socially, so does it separate them acacolleagues argue that Amherst will have to hire more professors demically. Math professor David A. Cox says his top students to handle additional low-income kids. Marx expects to sew up his plan in the BIO spring, taking into account faculty suggestions. A nal pitch will go before the board either in late spring or the fall. If he gets the campus behind him, Marx hopes, it would help shift the focus of the AmerBORN Feb. 28, 1959, in New York. Both ican public toward this issue. But even if parents ed Hitlers Germany in 1933. His he succeeds, the practical impact of his father, who worked for a metals-trading rm, crusade isnt clear. Only 20 or 30 colleges never attended college. His mother graduated SOWETO, 1984 have the nancial might to contemplate from the University of California at Berkeley this kind of gold-plated approach. He also FAMILY Wife, Karen Barkey, is a professor of and worked as a physical therapist for kids fears that if Amherst and others succeed, history and sociology at Columbia and an with cerebral palsy. they may just wind up stealing the best expert on Turkey. In 1998 they became the EDUCATION Public schools in New York ; poor kids from less prestigious schools. rst couple in Columbias history to win BA, Yale, 1981; MA, Princetons Woodrow The questions wont stop him, though. tenure at the same time. Two children: Wilson School, 1986; PhD, Princeton, 1990. In the end he hopes more students like CarJoshua, 11, and Anna-Claire, 7. CURRENT JOB President of Amherst dona and Simmons will inspire the U.S. to TV-FREE HOUSE No television in the College since July, 2003. work harder to cultivate talent among its president's residence on the Amherst poorest children. To Marx this isnt a revoCAREER PATH Political science professor at campus because the kids were ghting lutionary goal; he sees it as a return to Columbia University for 13 years while also over what to watch. Amhersts roots. The college, he notes, was working on public school reform. WHEELS A Volvo, but he plans to switch to founded in 1821 by Noah Webster, creator LIFE-CHANGING EXPERIENCE Spent three a hybrid soon. Likes to bike around Amherst of the American Dictionary, whose portrait years on and off in South Africa (above) during with his kids. hangs in Marxs office. The object of this apartheid, helping to found Khanya College, FREE TIME Spends most of it with his institution, Webster wrote, is educating which prepared 1,000 young blacks to attend children. Vacations in Maine, Cape Cod, Italy, young men in indigent circumstances, but white universities. There he was engulfed in and Turkey, where his wife grew up. of hopeful piety and promising talents. near-civil-war conditions. The house where he The wording is antiquated, and women HERO Nelson Mandela, our greatest living livedillegallywith blacks was raided by werent allowed back then. But theres moral icon. police, and friends were tortured or killed. nothing dated about the sentiment. out ways to make sure students feel more welcome here, says Simmons, whom Marx appointed to Amhersts Committee on Academic Priorities, a key faculty committee.
THE FACULTY
Anthony Marx
People Passages
IN MOURNING Corinne OKelly at the New York apartment she and her husband moved to last year
Even in Death, Gene OKelly Wantedofto Succeedterminal brain cancer, When the CEO KPMG learned he had
he set out to chronicle his last days
BY SUSAN BERFIELD n the spring of 2004, eugene OKelly had a premonition: Trouble was coming. He couldnt make out its shape or size, and the only response he could think of was to move from the townhouse in Manhattan he shared with his wife, Corinne, and their 12-year-old daughter, Gina, to a smaller apartment in the city. At the time, OKelly was chairman and chief executive of kpmg Inter72 | BusinessWeek | February 27, 2006
(left) nina berman/redux
national, the accounting rm where he had worked for three decades. He was 52, at the peak of his career, feeling, as he would later say, vigorous, indefatigable, and damn near immortal. A year later he and Corinne had sold their house and most of their furniture and found a light-lled aerie overlooking the East River. Around the same time, Corinne noticed that the right side of her husbands face was sagging. He agreed to see a neurologist after he returned from a business
trip to China by way of Seattle, where he would attend the Microsoft ceo Summit. Back in Manhattan the weekend before his appointment, he and Corinne were at a U2 concert with longtime clients when suddenly Corinne bolted from her seat. I feel like our world is about to blow apart, she told her husband. Within a week, Gene was diagnosed with inoperable late-stage brain cancer and, though no doctor would come right out and say so, he knew he couldnt ex-
pect to live past the summer. He died at home on Sept. 10. During those 100 days he worked with his wife and writer Andrew Postman to chronicle his attempt to face death with as much brightness, if not hope, as possible. Chasing Daylight: How My Forthcoming Death Transformed My Life was published this month by McGraw-Hill, which, like BusinessWeek, is a unit of The McGraw-Hill Companies. The book wasnt intended as a guide, Corinne says, but Gene was a mentor, and that instinct remained intact. His advice is simple: Confront your own mortality, sooner rather than later. As he says: Ill be glad if my approach and perspective might provide help for a better deathand for a better life right now. Gene was methodical, organized, unequivocating, thorough. He was an accountant by temperament as much as by training. Faced with imminent death, he wanted to be the master of his farewell. I wanted these things, and only these things: Clarity. Intensity. Perfection . .. . I was motivated to succeed at deaththat is, to try to be constructive about it, and thus have the right death for me. To be clear about it and present during it. To embrace it. In early June he resigned from kpmg, started six weeks of radiation treatment to try to shrink the three tumors and diminish the symptoms (blurred vision, garbled speech, and certain cognitive impairments) that had begun to emerge. And he made a to-do list for his nal days: get legal and nancial affairs in order, unwind relationships, simplify, live in the moment, create (but also be open to) great moments, begin transition to next state, plan funeral. He recognized how Type A this was, yet what it required of him was the very opposite to let go. As he says: While I do believe that the business mindset is, in important ways, useful at the end of life, it sounds pretty weird to try to be ceo of ones own death . . . . Given the profoundness of dying, and how different its quality felt from the life I led, I had to undo at least as many business habits as I tried to maintain.
I wanted these things, and only these things: Clarity. Intensity. Perfection.
With Corinnes guidance he began to meditate in the morning to help develop the mental discipline they both believed he would need in those last moments of life. It was on one of those mornings, when he had been sitting in the courtyard of the Cloisters, a museum of medieval art in Upper Manhattan, with a fountain running in the background, that he told her he wanted the two of them to write a book about his dying.
SPIRITUAL JOURNEY
corinne says now that she was initially ambivalent about the idea: At the time she was managing Genes medical care, meeting with lawyers, concerned about Gina and their elder daughter, Marianne. She knew the project would sap Genes energy. But he wanted to share what he called his spiritual journey, and he wanted to leave his daughters something. The last gift I could give him was to let him do it his way and to make his dying as beautiful as possible, Corinne says, sitting in the living room she has only recently furnished. From that moment in the Cloisters until the last week of his life, Gene wrote
down his thoughts on a yellow legal pad or dictated them to his assistant. He worked intermittently throughout the day while also meeting with colleagues, friends, and family to, as he says, close their relationships. He also kept in touch with the new chairman of kpmg by phone. That summer the rm would admit to criminal tax fraud and agree to pay $456 million in penalties, a settlement that he had been working on. (He would say to Corinne: This cant be another Enron.) Corinne says the fact that the case had been resolved helped Gene die peacefully. At kpmg one of Genes priorities had been to change the rms cultureto make it more compassionate, a place where, he would later say, we felt more alive. He wanted his staff to get the most out of each moment and dayfor the rms benet and the individuals and not just pass through it. But as the head of the 20,000-employee company, he had remained relentlessly focused on the future, willing to sacrice his home life for the satisfactions of the job. In those last few months, though, he came to realize, he says, that his thinking had been too narrow, his boundaries too strict. Had I known then what I knew now, he says, almost certainly I would have been more creative in guring out a way to live a more balanced life, to spend more time with my family. That, says Corinne, was his one regret. He had been getting better at nding that balance before he became sick, she says, but then he ran out of time.
Genes Final Farewells
ne of Eugene OKellys hopes in the last days of his life was to be able, as he would say, to unwind relationships of all kinds. He placed his many colleagues, friends, and family in ve concentric circles; those closest to him were in the innermost ring. He began to say goodbye through e-mail, phone conversations, walks in Central Park, over a good bottle of wine. And always on his terms. He wanted the conversations to be positive, to focus on what he had learned. And, for many people, he wanted these encounters to be the last ones. Toward the end, he says, he realized that during his previous life as a business leader he might have been too consumed by the outermost circle. As he puts it: Perhaps I could have found the time, in the last decade, to have had a weekday lunch with my wife more than ... twice?... I realized that being able to count a thousand people in that fth circle was not something to be proud of. It was something to be wary of.
Science&Technology Fat City
The Spirit Is Willing But Pillsweight loss is best Work Doctors may decide
accomplished with the new Acomplia
BY CATHERINE ARNST or more than a decade, magazines, books, and innumerable diet gurus have nagged us to exercise more and eat less, to no avail. A third of U.S. adults are now obese, compared with 23% in 1994. Americans may set great store by a can-do spirit, but in this critical area, we cant. Overweight or obesity seems almost inevitable in adulthood, laments an editorial in the Feb. 15 issue of the Journal of the American Medical Assn. (JAMA). We live in a society that does everything it can to encourage a ceaseless march toward the far side of the scale. As a result, a consensus is forming in the medical community: Putting pressure on obese patients to exercise and diet is all well and good, but pills are more likely to take off the pounds. One pill in particular is on the cusp of winning marketing approval, and it is already galvanizing the weight-loss community. Acomplia, from Sano-Aventis, blocks brain signals that stimulate food cravings, with minimal side effects. A study in the Feb. 15 JAMA found that 46% of obese patients who took Acomplia for two years were able to lose 5% to 10% of their body weight and keep it off. Grant-
disease with a 5%-10% weight reduction. Doctors who treat the weight-challenged will be prescribing the drug with some regret. I would love to see people turn this around with a change of behavior, says Roger D. Cone, director of the Center for the Study of Weight Regulation & Associated Disorders at Oregon Health & Science University. Our bodies hate behavioral changes, however, and can overcome the best of intentions by ghting hard to keep fat stores constant. Studies have found that 95% of people who lose weight put it back on within three years. The need for better solutions is huge, and medication will play a role, Cone acknowledges.
BLOCKBUSTER POTENTIAL
ed, the dropout rate was high (51% of patients quit the trial before a year was out) and the weight loss doesnt sound like much if your starting point is 300 pounds. But health experts say that even morbidly obese people can greatly lower their risk of diabetes and cardiovascular
even patients who lost weight with Acomplia werent home free. Those who went off the drug regained it all. The pill would therefore have to be taken for years to be effective. Thats a recipe for a blockbuster. Some investment analysts estimate that Acomplia sales could total $4 billion within two years. The drug has only two rivals on the market now: Abbott Laboratories Meridia, an appetite suppressant, and Roche Holding Ltd.s Xenical, which prevents fat absorption. But Meridia can increase blood pressure, and Xenical causes diarrheaside effects that limit the products usefulness. Doctors are calling for better medications, and the industry is listening: At least 60 weight-loss medications are currently in development. Their time has come. An estimated 65% of U.S. adults are overweight or obese, and almost 20% of children. We
Better Dieting Through Chemistry

For some people, a pill may be the answer to prayers
ACOMPLIA PRAMLINTIDE APD356 PYY3-36
Sano-Aventis
Amylin
Arena
Nastech/Merck
STATUS
STATUS
FDA decision expected soon
STATUS
STATUS
Phase 2 clinical trials
Phase 2 clinical trials
Entering Phase 2 trials
chris gall
The pill blocks brain receptors that stimulate food cravings
A version of diabetes drug

Smylin, this injected drug slows digestion and dampens hunger
Pill targets brain receptors that play an important role in regulating food intake and metabolism
Nasal spray based on a hormone that makes you feel full
Marketing Product Plugs

live in an obesity-genic environment, says Dr. George L. Blackburn, associate director of the Nutrition Div. at Harvard Medical School. [Its] driving us to the inevitable, the entire population becoming overweight. This environment is constructed out of extremely cheap calories. Waistlines in the U.S. started expanding dramatically only 25 years ago; in 1980, just 46% of adults were overweight. A 2003 study by three Harvard University economists, David M. Cutler, Edward L. Glaeser, and Jesse M. Shapiro, found that Americans are as active these days as they were in 1970, so sedentary lifestyles alone arent to blame. Rather, we are eating 200 calories more a day than we did 10 years ago, which can add 20 extra pounds a year.
Rated M for Mad Ave now Video games are white-hot

that Nielsens rate their ad impact
BY DAVID KILEY layers of AMERICAN Wasteland, pro skateboarder Tony Hawks latest video game, cant help but see that the undisputed king of the ramps is a Jeep fan. As gamers joystick their way around a digital likeness of Los Angeles, from Venice Beach to the Staples Center, they are bound to run across, or into, Jeep Wranglers, Grand Cherokees, and Liberties. Of course, the vehicles and the Jeep billboards arent there by happenstance: Theyre paid for. Plenty of advertisers, most prominently Coca-Cola, McDonalds, and Nike, have been putting their products in video games for several years now. But marketers and gamemakers successfully pushed Nielsen Entertainment last year to start measuring the impact of in-game product placement, where there had been none before. This in turn is drawing more ad dollars and making gamemakers as eager as tv networks, perhaps more so, to open up their stories to the highest bidders. The video-game business, already bigger than movie-house box office, did $10 billion in sales last year. With 100 million gaming U.S. households, according to Forrester Research Inc., and folks increasingly interacting with a video screen instead of passively watching tv, no wonder Nielsen forecasts that ad spending on brand placement in games will balloon from $75 million last
TERRIBLE TEMPTATION
the harvard study concluded that improvements in processing, the rise of fast-food restaurants, and the huge variety of convenience dishes have made calories inexpensive, plentiful, and deadly. One bad player is high-fructose corn syrup, a cheap and easy-to-use alternative to granular sugar that is also metabolized differently. Corn syrup gained popularity in the 1980s and now accounts for more than 55% of the sweetener market. Studies have correlated its use with skyrocketing rates of Type 2 diabetes. Cheap, tasty food has put us in hedonic overdrive, says Dr. George Bray, an obesity specialist at Pennington Biomedical Research Center at Louisiana State University. I conclude that this trend is unstoppable. Doctors do harbor plenty of concerns about handing out weight-loss pills, especially to people who are only slightly chubby. They remember fen-phen, a diet pill combination whose use exploded in the mid-1990s. Some 14 million prescriptions were written in 1995-97, before fen-phen was discovered to cause fatal heart problems and was pulled from the market. Acomplia seems well-tolerated so far. But what if the drug were taken for years? We have no idea what the side effects would be, warns Dr. Denise G. Simons-Morton, an obesity specialist at the National Institutes of Health. She would prefer to see society change in ways that would emphasize an active lifestyle, smaller portions, and other forms of prevention, but I dont see much going on in that direction. Until there is, for most of us the choice may lie between a pill and a plus size.
Gaming performs much better than TV with a coveted audience
year to as much as $1 billion by 2010. Pumping the numbers are the launches of Xbox 360 and Sony PlayStation 3, which connect console gaming to the Internet in a far richer way than previous versions. This is a new world of interactivity that puts gaming on the same plane with advertisers as cable tv, says Tim Harris, who heads the gaming unit of media agency Starcom MediaVest Group. Meanwhile, Nielsens system is generating a lot of compelling data for marketers. In American Wasteland, from gamemaker Activision Inc., for example, Jeep learned that all players were shown the 3-D vehicles an average of 23 times in 20 minutes. And 96% of those who recalled seeing the Jeep felt the vehicles t well in the game. Feedback even more welcome to Jeep: 51% of American Wasteland players, including some not yet driving, said they would recommend Jeep to a friend, and 65% would consider eventually buying one. Gaming performs much better than tv in turning brand awareness into an actual preference, says Bonita Stewart, DaimlerChryslers director of interactive communications. Advertisers like the extra control game producers allow them, compared with tv placements. Ford Motor Co. didnt know until episodes of Foxs 24 were in the can just how its vehicles came off looking on screen, but Chrysler and Activision executives have extensive back-and-forth dis-
ware Inc. to put its brand into the nba 2K Sports basketball games. Some 200 athletes in the games wear the Nikes they wear on the court. But the new version integrates the companys Web-based Nike iD shoe customization software, which enables players to design and personalize shoes worn by the digitized pros.
SEEDIER SIDE
but as the placements proliferate, some advertisers are committing a few fouls. One recent ap involved Engage In-Game SELLING JEEPS Advertising, a company What would Tony that inserts ads into onHawk drive? line games via a Net ad server. Engage modied the clicking on a popular game Counter-Strike, created by branded cell phonewith changing mes- Valve Corp., and dropped in ads from its cussions during the games devel- sages from Hawk that alter the game ex- client, the Subway sandwich chain, over opment. I understand that the tv and perience. Staying competitive in a new three weeks in December. The problem: lm writers in Hollywood see it as an in- era absolutely depends on ad support, They changed the game without asking vasion of their space, but with gamers we and were not interested in ads that dont Valve for permission. Engage has drawn are treated more like a private equity in- make sense or [that] annoy, says Kotick. ire from the game creatorand brickbats So far, gaming companies and mar- on message boards and blogs. Advertisvestor, says Stewart. Activision ceo Robert Kotick says the company took in keters are exhibiting good sense for what ing within video games...does have its $2 million in brand placement dollars is natural product placement. Jeep ve- seedier side, writes arstechnica.com, a from Chrysler, Nokia, and Motorola. That hicles and Nokia phones are, after all, tech enthusiast Web site, about the Enoffset 10% of American Wastelands $20 popular with young men. And Nike re- gage incident. cently inked its largest gaming deal ever, Now that Nielsen can quantify the aumillion development costs. Game cartridges that are bought and joining with Take-Two Interactive Soft- dience for advertisers, game producers would like to move toward a more stable rented are attractive to adsystem by which advertisers can buy ads, vertisers, but the surge in such as a cost-per-thousand formula, the online gaming predicted same way they buy time on tv. That to come as gamers replace means stiffer competition for media alold sets with Xbox 360 Ad dollars are piling into video games now that the ready under pressure from youthful eyes and PlayStation 3 has the payback for brand placements is being measured deserting afterschool and prime-time tv marketers lining up. by Nielsen Entertainment. Advantages include: for gaming. The cost of a 30-second spot Rather than simply burnfor shows like The Simpsons and csi can ing billboard ad images and inserting products MORE NATURAL THAN TV A majority of players in a study range from $250,000 to $400,000, but into game scenes, adver- by Nielsen said that advertising relevant to them and to 18- to 34-year-old males represent only tisers will be able to buy the game actually enhanced the quality of play. an average 37% of those audiences, while ights of ads and place- A DEMOGRAPHIC TO KILL FOR Video games are strongest 65% of video-gamers fall into that valuments that last a day, a among 13- to 25-year-old males, who are watching less able demographic. If the goal is to reach week, or a month and TV. Women and even baby boomers are also turning to [young] males, there is a lot of waste in help producers keep the games for fun, as well as to bond with kids and grandkids. buying network television, says Nielsen games fresh by collaboratEntertainment Senior Vice-President ing on sponsored Web FRIENDLY PERSUASION TV ads generate awareness, but Michael Dowling. content that ties into the the interactive and repetitive nature of video games packs Why are consumers drifting away from story. The next Tony the power to get gamers to consider purchase, according tv for more gaming? Players see themHawk game, says Activi- to the new gamer data. selves in the games, something thats diffisions Kotick, could in- REAL INTERACTIVITY Linking the Internet with games in a cult with tv shows. And far from rebelling volve not only brand por- bigger better way, made possible by Xbox 360 and Sony against ads in their players, gamers seem tals that draw gamers in PlayStation 3, opens up a new universe of ad possibilities, to be telling advertisers they want to see to connected sites but also including changing ads daily and giving online brand more of the brands that help dene who features such as Internet portals a bigger role in the game. they are. No video-game TiVo or ad zapper phone callsby way of needed, at least not yet.
The Gaming Gold Rush
Finance Real Estate
How to Ride a Housing Bubble Golden West specializes in exotic

mortgagesand in surviving downturns
BY JUSTIN HIBBARD he story is familiar to anyone following the housing boom. A California savings and loan did a brisk business in adjustable-rate mortgages. People who previously couldnt afford homes piled in. Then the Federal Reserve started hiking interest rates, and mortgage payments began to climb. Home prices eventually started falling, making it harder for owners to sell or renance. Analysts predicted a wave of defaults and much pain for shareholders. The thing is, our yarn took place in 1994. The s&l in question was Oaklandbased Golden West Financial Corp., which has offered its Pick-A-Payment But arms arent frightening to Herbert loans since the U.S. government rst al- M. Sandler. He and his wife, Marion O. lowed adjustable-rate mortgages, or Sandler, have been co-chairman and coarms, in 1981. ceo of Golden West since they The naysayers couldnt have been founded the company in 1963. For 25 more wrong about $20.6 billion Golden years the pair has offered so-called payWest. It wasnt crippled by defaults dur- option arms, which let borrowers choose ing the last housing bust. In fact, it held from among various low-payment sceup better than anyone expected. And narios each month, with the principal and Golden West should do interest recalculated the same this time, too. accordingly. These A d j u s t a b l e - r a t e TRADERS ARENT WORRIED loans are the most mortgages are once sensitive to rising inGolden West has handily again high on analysts terest rates, because outperformed its peers worry lists. Given the their rates reset every INDEX: 0=JAN. 30, '04 40 Feds recent rate hikes, month. While option PERCENT some lenders will be hit arms are big at CHANGE 30 GOLDEN WEST by defaults as borrowWaMu and the othPHILADELPHIA ers nd it more difficult ers, theyre Golden BANK INDEX 20 to make their payWests No. 1 loan ments. Analysts have product by far. 10 already issued warnBut the Sandlers ings about Washington have survived rate 0 Mutual, Countrywide hikes before, and Financial, and FirstFed 10 their long-term sucJAN. 30, '04 JAN. 31, '06 Financial, along with cess is unrivaled Data: Bloomberg Financial Markets Golden West. among mortgage
lenders. Over the past 39 years of housing booms and busts, Golden Wests earnings have grown at a compound annual rate of 19%, a record matched in U.S. business only by Warren Buffetts Berkshire Hathaway Inc.
PERFECTING THE BASICS

the sandlers 1994 performance was impressive. In California, where 78% of the companys loans were concentrated, the jobless rate jumped to 9.4%, while home prices fell 4.5%. Moreover, the Fed raised banks overnight lending rate from 3.25% to 5.5% that year, often in big halfpoint leaps. Yet Golden West charged off a mere 0.43% of its loans in 1994above average for its conventional-mortgageoriented peers, but hardly disastrous. The following year charge-offs fell to 0%. Golden Wests secret? It excelled at the basics of mortgage lending: conservative underwriting practices, funding loans with core deposits, and balancing interest paid on deposits with interest earned from loans. Even though the loans were risky, the customers, for the most part, werent. Herbert Sandler dismisses the handwringing now. We have been through high interest rates, low interest rates, and sideways interest rates, and not very much exciting has happened, he says. Still, analysts are sounding the alarm. In a recent report, Christopher Whalen of independent research rm Institutional Risk Analytics reiterated his sell rating on Golden West, calling it the poster child for the U.S. real estate bubble. In an interview, Whalen added: There is no exibility in its portfolio. He has a point. Last year pay-option arms made up 99% of Golden Wests loan pool. (It also offers home-equity lines of credit.) And 62% of the loans were secured by homes in California, where housing prices could fall in coming years. But Golden Wests risk management is among the best in the industry. Its annual default rate has been lower than that of its peers for years. Golden West maintains a higher-than-average percentage of assets in cash to cover losses. And the Sandlers dont lend to the riskiest borrowers with spotty credit histories. Golden Wests conservative strategy will be put to the test if housing tanks. For now, though, it looks like history is on the Sandlers side.
illustration by serge bloch; chart by alberto mena/bw
Entrepreneurs Health Care
Steering Patients Through the System

Quantum Health points people to the best careand saves employers big bucks
BY PALLAVI GOGOI or kara j. trott, becoming an entrepreneur meant leaving her corporate law career. It meant resigning from a nonprot board she no longer has time for and giving up her vacations. And in the early days it meant taking out a home-equity loan and moving to a smaller house. But the new Kara Trottthe superbusy one in the more modest homehas never been happier. The company she started in 1999, Quantum Health in Columbus, Ohio, helps patients navigate the complexities of the health-care system. When someone is diagnosed with cancer or diabetes, it is the most difficult time in their lives, says Trott, 44. It gives me the greatest satisfaction that I help people make the right decisions during those critical moments. In her prior life many of Trotts legal clients had been hospitals or doctors. She witnessed the insurance industrys attempts to shift health-care costs by cutting reimbursements to physicians and hospitals and by increasing employees deductibles and co-payments. Trott also had worked as a consumer products consultant, and she thought some of the techniques used in that industry, such as providing incentives to get people to buy, could be applied to health care to encourage patients to reduce spending. That would help everyone in the system, from patients on up. I wanted to SELLING WELLNESS create something Trotts pitch isnt a n d m a k e a just about money change in peoples
For more on entrepreneurs, visit businessweek.com/smallbiz
bruce zake
patients left their physicians offices not knowing what to do. Only 15% got answers to their questions, and 61% of the time patients chose the wrong type of specialist. That misstep generated an average of $3,500 in extra costs. And Trott found that most patients wanted more guidance in choosing health care. Data in hand, Trott quit her job. She told employers that her company would call their employees when they made doctors appointments. Quantum would arm the employees with pertinent questions, help them choose the right specialists, give them advice about which tests to take, and ensure that tests werent duplicated. Quantum would get a percentage of any savings the employers reaped. It would also offer workers incentives to lives, says Trott. Of course, everybody stay well, such as by slashing co-pays for preventive care visits. was skeptical. Her pitch worked. Trotts rst cusUndeterred, she tracked health-care decisions from 2,800 patients, 260 physi- tomers, mostly small, self-insured compacians, and 140 employers, using data sup- nies, averaged 6% increases in their health-care expenditures in plied largely by her law rms clients. She found that half of B U S I N E S S W E E K 2001, compared with a national average of about 11% at the time. In 2004, according to a study of 600 patients by Appleton (Wis.) benets consultant Associated Health Group, Quantum made 970 telephone calls to patients, compared with 27 by a disease management company assigned to assist employees with chronic ailments. Quantum takes disease management to the nth degree, says Associateds vice-president, Jeff Prickette. Still, the rst few years were slow going. In the health-care business it takes an average of three years before people believe that results youre generating arent an anomaly, says Trott. She invested $400,000 of her own money and raised $300,000 from family and friends before taking out a Small Business Administration-backed loan in 2004 for $730,000. In 2002 she hired a professional management team, including her husband, strategy consultant Randy Gebhardt, as coo. Now, Quantum is on a tear. Last year the number of patients Quantum oversees doubled, to 52,000. Trott doubled her own employee base, to 55, and 2005 revenues shot up 40%, to $7 million. If we had gone to employers in 1999 talking about the importance of wellness and disease management, they would have laughed me out, says Trott. Now theyre begging her to come in.
Information Technology E-Media
Digital Books Start A New Chapter the Lighter devices, better displays, and
iPod craze could make them best-sellers
BY BURT HELM images with an electronic charge. Beichard d. warren, a cause no power is used unless the reader 58-year-old lawyer in changes the page, devices with the techCalifornia, is halfway nology could go as long as 20 books bethrough Ken Folletts tween battery charges. The text also looks novel Jackdaws. But he just as sharp as ink on a printed page, doesnt bother carrying since each capsule is the size and pigment around the book itself. of a grain of laser-jet toner. Sony is the rst major player to take adInstead, he has a digital version of Follett he reads on his Palm Treo each morning vantage of the technology. This spring, it as he commutes by train to San Francisco will debut the Sony Reader, which uses E from his home in Berkeley. Hes a big fan Ink and closely mimics the size, weight, and feel of a book. The Reader will sell for of such digital books. Usualabout $400. Sony also ly, there are around seven tiwill offer roughly tles on his Treo, and he 10,000 book titles for buys at least two new ones download from its online each month. Its just so store, along with news versatile, he says. Ive stories and blog items. tried to convert some Other players sniff opfriends to this, but they portunity, too. At least two think its kind of geeky. more companies are introGeeky? For now, ducing digital readers this maybe, but not for much year. And scores of compalonger. Many experts are nies, from Google to Ranconvinced that digital books, SONY READER dom House Inc., are angling after plenty of false starts, are Going for the for other ways to prot from nally ready for takeoff. look and feel of a digital books. Chalk it up to Every other form of media bound book the inuence of Apple Comhas gone digitalmusic, puter Inc. With its iPod, Apnewspapers, movies, says Joni Evans, a top literary agent who just ple has demonstrated that millions of peoleft the William Morris Agency to start her ple are willing to carry around digital own rm. Were the only industry that devices with their favorite content. After hasnt lived up to the pace of technology. A music, why not novels and nonction? The iPod led the way in getting people revolution is around the corner. What developments have won over comfortable with [a similar device for people like Evans? Portable devices are books], says Jack Romanos, ceo of Sibecoming lighter and more appealing. mon & Schuster Inc. These things are not Books are being scanned into digital form only inevitable, but a good idea. No book company has come close to by the thousands. The most important step forward may be in digital ink, the Apples magic touch. But the technology, technology used for displaying letters on availability of content, and consumer bea screen. A small company called E Ink havior may be aligned for a breakthrough has created a method for arranging tiny this year. The puzzle pieces are on the black and white capsules into words and table, says Timothy OReilly, founder of
the tech publisher OReilly Media. Youve got the critical mass of content, and youve got attractive hardware. What we dont have yet is an attractive business model that connects them all together. Sony is clearly attempting to pull off this feat. Its combination of device and online store is reminiscent of Apples approach. The Reader is impressive: a slim, sturdy package that weighs nine ounces and comes bound in heavy faux leather. But its unlikely just yet to become the kind of cult hit Apple has on its hands. The Readers controls can be clumsy to use. Plus, new books for the device will cost about the same as books from megastores like Borders, and readers will have to search the Web on their own to get classics that have gone off copyright for free. The other makers of digital readers are treading cautiously. Jinke, a Chinese company, plans to sell into the education eld in China and other markets. But it declined to comment in detail on its plans. IRex Technologies, a spin-off from Royal Philips Electronics, says it will make a device available for sale by April. ceo Willem Endhoven says the company
searchable online. The effort has drawn the ire of publishers and authors, since its digitizing some books still under copyright. Publishers sued last fall for copyright infringement and the case is pending. (One of the plaintiffs in the case is The McGraw-Hill Companies, the parent of BusinessWeek.)
NEW LITERARY MODELS

yet google is helping ignite the digital market. In November, following the lawsuit, Random House announced plans to digitize 25,000 titles. It will sell access to them to consumers, charging a per page rate for everything from novels to recipes out of a cookbook. In December, HarperCollins Publishers Inc. said it would build a digital warehouse of its entire holdingsanother 25,000 titles or sowhich it may later sell over the Net. Amazon.com is moving aggressively into digital books, too. It sells digital versions of most of its titles, available for download instantly. In August, it launched Amazon Shorts, a collection of stories, novellas, and essays that can be downloaded for 49 apiece. Later this year it plans to offer shoppers who purchase traditional books the chance to buy a version they they can read on the Web, too. That way they could keep Stephen Kings Cell: A Novel on their nightstand and read a chapter from any computer with Net access. We think consumers increasingly are ready for it, Theres even speculation that Apple says Steve Kessel, vice-president for will begin by selling to companies, such as newspaper or textbook publishers, could come out with its own device, an worldwide digital media. Authors are intrigued by the opportuiPod designed for books. The secretive rather than directly to consumers. There are sure to be other companies company hasnt said anything publicly nities to go digital. George Saunders, a that introduce readers in the months and and declined to comment for this article. short story author and professor of EngJust as digital readers are hitting the lish at Syracuse University, says hed like a years ahead. Plastic Logic Inc., a British startup, is working on a exible display market, the number of books on the Net is way to get his work out to readers more the size of an 81-in.-by-11-in. piece of pa- swelling to Library of Congress propor- quickly. After the scandal broke over 2 per that can receive books, news, or e- tions. Google, through an initiative it be- James Freys falsehoods in his hit book A mail wirelessly. Its partnering with gan a year ago, is scanning millions of Million Little Pieces, Saunders penned a Japans ntt DoCoMo and plans to have a books from ve of the worlds largest li- humorous essay stemming from the braries and plans to make the contents events. It was a confession to Oprah Winproduct on the market by early 2008. frey that all of the ction hed written had, in fact, been true. But Saunders had a hard time getting NEW TECHNOLOGY A display technology called E Ink makes the piece published Digital devices for words look as sharp as text printed on a piece of paper. A single battery quickly, and now it feels reading novels and can last for months. Plastic electronics will let devices be exible like dated. There might be a nonction have had a magazine. different model for a literplenty of false starts. ary community thats THE GOOGLE EFFECT The search giant is scanning books as fast as it can quicker, more real-time, and then putting them online. Publishers and tech players are pursuing But 2006 could be and involves more sponsimilar projects. More books will be available online than ever before. different. taneity, he says. If digital READERS' HABITS People are warming up to reading on digital displays. books nally do take off, More people scan blogs and news sites by computer and browse text they could change not messages on mobile phones. only how we read, but what we read, too.
Read all about it... Digitally
illustration by michael witte
igital Music PERSONAL TECH D
Boot Upthe Band
Technology is making it easier to compose, perform, record, and promote your own music.
YOU MAY NOT REALIZE IT, BUT IF YOU HAVE a pc or Mac at home youve already got the guts of a professional home music studio. Whether youre a lapsed amateur or a newbie musician, well help you gure out the gear youll need to start making your own kind of music. Weve looked at everything from portable keyboards to digital guitars. Well point you to the software youll want to use to converse in midi, the Musical Instrument Digital Interface that is the computer language of music. Well help you hook everything up. (Its pretty easy, actually: Music Trades magazine called last year the year of the usb port, as everything from microphones to digital pianos sprouted the ubiquitous computer connection.) Rockfest or recital, once youve performed or composed, and recorded and edited your music, what can you do with it? Weve taken a look at Web sites that will host it, judge it, and even promote it. Pretty soon, you can quit your day jobor not. Stay tuned for our May 15 issue, when our next Personal Tech guide will help you work more effectively on the road. That should leave you with more time for jam sessions when youre home.
KEYBOARDS
Plug N Play Pianos

Theres a digital keyboard to tickle everyones fancy.
BY LARRY ARMSTRONG
ike many people, i used to playa piano here, a church organ there, a couple of brass instruments in my high school and college marching bands. Then my adult life intruded, leaving me with neither the space nor budget for a piano, nor the time to do anything with music except listen to it. Now I want to play piano again. But, man, has the landscape changed. The familiar acoustic piano, with hammers that hit strings, seems almost quaint. As a piece of furniture, its still impressive. But unless you spend big, it wont sound half as good as even a low-end portable keyboard that stores digital samples of actual notes played on a grand piano. Consider the portable keyboards other advantages. You can bring it home from the store in a car. You can easily move it from room to room, to a vacation home, or into a closet. You never have to tune it. You can plug in headphones and play it without disturbing your family or neighbors. With most keyboards, you can press a button and it wont sound like a piano anymore: It can mimic a violin or guitar or any other instrument you want to hear. Prepare to be overwhelmed by the choices. Besides your budget, you need to think about your level of musicianship and what you want a keyboard for before you head out to the store. Do you want to learn to play the piano? Or do you just intend to pick out the melody while a bandFebruary 27, 2006 | BusinessWeek | 85
calef brown

in-a-box follows along as you play? Do you plan to hook up the keyboard to a computer to compose and record your own accompaniments or songs? Lets say that you or your child is serious about wanting to learn to play the piano or, like me, were trained on an acoustic piano. Youre interested in piano music instead of, say, sounding like a rock group or a string ensemble. Then, most likely, you want a digital piano; the portable varieties are usually called stage pianos. It will look like a traditional piano keyboard, with 88 beefy, block-shaped keys (most portables have 61). The keys will have a weighted or hammer action that simulates the touch or feel of the mechanism of an acoustic piano key. Just a few years ago, you couldnt get that kind of digital piano for less than $1,000. Now, Casios 18-month-old Priv-
Spend more, and youll get more but even the cheap models come loaded
tones. Or maybe youll nd you prefer other sounds, such as the articial sounds of a synthesizer, and decide youd rather spend your money there. The most inexpensive portables have more than a hundred sounds, from a basic piano to strings and woodwinds, guitars, brass instruments, synthesizers, and even sound effects. And they come with about a hundred built-in songs to listen to and learn to play. Their touch is lighter, more like a synthesizer or organ. Even the most basic ones come with on-board software that teach you to play by showing you which keys to press. On some of them, the appropriate keys light up. Yamaha and Casio pretty much domi-
tar, and stringsas your right hand plays the melody, it can turn you into a one-person band. Yamahas dgx-505, which sells from $500 to $600, looks and plays more like an 88-key piano, but with nearly 500 sounds. For about the same price, Rolands 61-key e-09, with close to 900 tones, is more like a synthesizer. If you decide you dont like the idea of canned accompaniments, the cheapest way to write your own is to use your computer. Hook up a keyboard controller, such as e-mus Xboard 49 or mAudios Oxygen 8. They dont have speakers; instead, they send data, such as which key was pressed and for how long, to the computer, which uses its sound card to play the music. (Even the cheapest portable keyboard, outtted with a pair of midi cables, can do the same thing.) Or you can buy a keyboard workstation
IVORIES TO GO
Portable keyboards now have a wide range of capabilities and prices. We looked at these popular models:
ENTRY LEVEL KEYBOARDS MODEL 88-KEY DIGITAL STAGE PIANOS SYNTHESIZER MIDI CONTROLLER
Casio CTK-700 $93 - $100 Full-size keys and built-in songs and styles make this a good starter keyboard
Yamaha PSR-293 $198 - $230 This beginners model can record your songs, and theres a USB port for your PC
Casio Privia PX-110 $400 - $500 This portable is the least expensive model to mimic the touch of an acoustic piano
Yamaha P-70 (above) $600 - $718 This new model best captures the sound and action of a grand piano at a low price
Korg Triton Extreme 61 $1,900 Its got plenty of sounds, and the touch screen makes programming songs easier
E-MU Systems Xboard49 $165 - $170

The rock-solid keybed makes this the best for sending music data, not sound, to a computer
Data: BusinessWeek
PRICE THE LOWDOWN
ia px-110 goes for $400 to $500. Yamahas new p-70 electronic piano is not much more. Each has about a dozen sounds, usually a half-dozen different pianos (perhaps two grand pianos, the Wurlitzer and Fender Rhodes pianos from the 60s and 70s era of classic rock, and a honky-tonk piano), an organ or two, and a harpsichord. There arent many nonpiano sounds; these keyboards are designed mostly for playing a piano repertoire. If youre a beginner, youre probably better off starting with a cheaper, entrylevel portable keyboard that has a lot more sounds and without the heavy touch of a digital piano. Later, if you nd that pianos your gig, you can invest in a keyboard with a more lifelike feel and
nate the electronic keyboard market, and both sell keyboards in the $100 range. Two picks for beginners: Casios $100 ctk-700, or Yamahas $200 psr-293. The biggest difference? The more expensive one can record your songs, and it has a usb port that makes it easy to save your recordings on a computer, or download prerecorded songs from the Internet. The more youre willing to spend, the more youll get: More songs and styles, which are rhythmic backgrounds such as rock, jazz, hip-hop, salsa, or even polka; a slot for a memory card so you can save your performances; a liquid-crystal display that shows the sheet music or lyrics. Next up is the so-called arranger keyboard. By automatically playing backing trackssuch as drums, bass, piano, gui-
to compose, arrange, and mix complex songs without a computer. This all-in-one machine has a keyboard, synthesizer, and sampler for creating sounds, and a sequencer that can record, edit, and play back music data. Adventurous amateurs like Korgs 61-key Triton Extreme for its touch screen, which makes navigation quick and easy. When youre shopping, take headphones so you can hear the sound quality over the din of the store. Play several models to pin down what kind of touch you like best. If youre a beginner, consider taking along a friend who plays. Dont be intimidated: Todays portable is a breeze to play, and youll be amazed at the incredible sounds youll hear within ve minutes of taking it out of the box.

GUITARS
A New Twang For Six Strings

A few pioneers are working to bring the trusty old electric into the 21st century. BY DAVID ROCKS
rab just about any electric guitar these days, plug it into an amp, crank up the volume, and youll hear a sound not that far removed from what the pioneers of the industry heard seven decades ago. Pickups, which work sort of like tiny microphones, sense the vibration of the strings and translate that into electric waves. The signal ows through a wire to your amplier, and you get to wake up the neighbors. And digital electronics? Sure, effects pedals such as delays, choruses, and
angers have been digital for a couple of decades, but the guitar itself remained a largely analog affair. Now a handful of pioneers are nally experimenting with ways to adapt the trusty old electric guitar to the digital era. Three have newfangled pickups that digitize the sound before sending it to the amplier. A fourth uses standard pickups, but has tiny lights along the fretboard to help guitarists learn how to play new chords and scales. Perhaps the coolest of these new axes come from Line 6. The California company got its start as a maker of digital effects pedals and ampliers that mimic the sounds of classic gear from the 50s, 60s,
and 70s. Then a few years ago it gave its engineers a related but more complex task: Make a guitar that can emulate classics such as the Fender Telecaster, Gibson Les Paul, or Rickenbacker 360. They came up with the Variax, among the oddest-looking instruments on the market. The reason: The Variax has no standard pickups, so it appears almost naked. Instead, the Variax uses a pickup in the bridge (where the strings are anchored to the guitars body) that turns the vibrations into a digital signal. This signal is modied to make the Variax sound like classic electrics as well as other instruments such as the banjo, an acoustic or 12string guitar, and moresome 25 in all. Today, Line 6 makes several variants of the Variax, including a bass and an acoustic, priced from $500 to $1,500. Another digital offering comes from Gibson Guitar. The Nashville-based manufacturer has updated its classic Les Paul guitar with a patented pickup that converts the sound to bits and bytes before sending it down the cable to the amp. Whats the advantage of this? For starters, its a lot quieter. Standard electrics make a lot of hissing and humming noises that are the bane of guitarists. Another benet is that the sound can be divided up into six separate streams, one for each string. That lets you send the sound of each one to a separate amplier with different effects, opening up a huge range of mind-bending
DIGITAL AX
Most electric guitars work much as they have since their invention seven decades ago. But some new models have been adapted for the digital era
BRAND PRICE THE LOWDOWN
iGuitar $800 This small New York company, formerly called Brian Moore Guitars, makes an ax that can plug directly into a computer to control software-based synthesizers.
Optek $500 Opteks Fretlight, a clone of the Stratocaster, has lights on the fretboard that show guitarists where to put their ngers as they learn new chords and scales.
Gibson $3,000 The maker of the venerable Les Paul solid-body offers a digital model that can separate the signal from each string for individual processing.
Line 6 $500-$1,500 Its Variax modelsboth acoustic and electricdigitize the sound of the strings, then tweak it to emulate the tones of classic guitars.
Data: BusinessWeek

possibilities. For traditionalists, the guitar also has a pair of classic humbucking pickups that sound, well, just like a Les Paul. The downside: the $3,000 price tag. As pcs become the hub of music production and more home musicians start recording in the spare bedroom, one problem is getting the sound of the guitar into the pc. iGuitar, a small custom shop based in Poughkeepsie, N.Y., has for several years made guitars that can plug into a pc. But they always required a connecting box, special software, and various cables. Later this year iGuitar plans to introduce an $800 model that can connect directly to a pc via a single usb cable.
HOME RECORDING
Your Very Own Hit Factory

With the right software and a lot of patience, that spare room can be a serious studio. BY DAVID ROCKS
GUIDING LIGHT
this simplies things considerably. The pc immediately recognizes the guitar as a peripheral such as a printer or external hard drive. The cable can handle both the audio signal from traditional pickups and a digital signal that allows guitarists to control software-based instruments in the pc that can produce the sound of, say, a piano, a drum kit, or an orchestra. And it can be used to trigger software that will translate notes played on the guitar into musical notation. A fourth company uses electronics to make learning to play easier. Optek Music Systems sells the $500 Fretlight, a guitar that looks much like a classic Fender Stratocaster. But as its name implies, the Fretlights fretboard has tiny red lights at every string position on every fret. When the guitar is plugged into a pc (via the usb port with a special cable), the lights show where to put your ngers to play various chords and melodies. When used with a software package called M-Player, the lights can guide you through songs. And you can put on the brakes to slow the tempo to as little as 10% of the original beat, which lets you see the lights before its time to move on to the next chord. Will digital guitars ever replace analog? Probably not. A lot of the reason musicians like electric guitars in the rst place is their unpredictable analog sounds. Much of the beauty of the Stratocasters and Les Pauls that Line 6 seeks to emulate comes from aws in the analog signal, which create a distinctive, distorted sound. But as pcs get more powerful, digitals will surely take an ever-bigger piece of the market. Dont worry, though: Whether youre playing an analog or digital guitar, you can still wake up the neighbors. Just crank up the volume.
t seems like a common career trajectory: Pimply faced rock star wannabe. Member of a band thats gonna be really big, really soon, Mom, I promise! Ex-member of band that no one remembers. Responsible working stiff and parent. Grayhaired rock star wannabe. In my 20s, I played guitar, sang, and wrote songs for a long-forgotten Burlington (Vt.) quartet we dubbed The Jetsons. Then a couple of years later, while living in Eastern Europe, I was the lead singer for Pudelsi (The Poodles), a combo that actually went on to be a top-selling act. In Poland. A decade after I left the country. When I quit Pudelsi in 1987, I thought I was hanging up my guitar for good. But left over from those days as an aspiring rocker were dozens of songs I never got around to putting on tape. So when I rekindled my interest in music a couple of years ago, I thought the time had come to nally esh out and record those songs mostly just lyrics and guitar chords, the musical equivalent of a sketch. In the digital era, I had heard, all you needed to make really great recordings was a guitar, a microphone, a computer, and some inexpensive software. Thats true, but it isnt exactly easy. Two-plus years into my transition from rocker wannabe to budding recording engineer, Im nally starting to turn out tunes that sound pretty good to me and to friends who are polite enough not to tell me otherwise. Still, professionals assure me there are plenty of aws, so I know I have a long way to go. If youre planning your own home hit factory, the most important thing youll need is software. There are now at least a dozen music recording packages available, ranging from basic to extravagant. For anyone with a Mac, the choice
is easy: Apple Computers excellent GarageBand program comes free with any new computer. Mac owners who want to graduate to a more complex offering can use Apples Logic, available in $299 and $999 versions. For pc users, things get a bit more complicated. At least a half-dozen companies offer decent packages, many priced under $100. I use Cakewalks Sonar Home Studio ($100-$160) and have tried its $40 Music Creator and Steinbergs $100 Cubase se, all of which let you record various instrument and vocal tracks and add software-based synthesizers to round out your sound. Once I had my software, I thought Id be ready to plug in and go. Not so fast. Few guitars generate a signal thats strong enough for a computer to hear clearly. I was stymied until I gured out that I needed some kind of amplication
GEAR UP
EDIROL UM-1EX USB MIDI INTERFACE

$40 edirol.com If you want to save or edit your songs on your computer, but the music keyboard or controller you own doesnt have a USB port, this is the easiest way. It works with PCs and Macs, and is ideal for laptop computers, where connections are limited. The cables are built in, and there are indicator lights to show which way the music signals are moving. And unlike traditional MIDI interfaces, this one doesnt need an AC adapter.
to goose the sound. Theres no shortage of options. I settled on the $250 M-Audio Ozone, a preamp with two inputs (one for a microphone, one for a guitar) plus a 25-key piano keyboard. Manufacturers such as Tascam, Line 6, and Edirol offer preamps for about $80 to $500 or more. And Cakewalk, Steinberg, and other software makers now bundle a pre-amp with some programs.
NO PREREQUISITES
once I had gotten past the pre-amp roadblock, I was ready to roll. The foundation of any rock song is the drums, so I started there. At rst, I used loopsshort snippets of a drummer playing a beat pattern that can be sped up or slowed down to match the songs tempo. Later, I wanted a more complex sound, so I started using a samplersoftware that takes a beat pattern I create and repeatedly triggers supershort recordings of individual drum sounds to play a drum track. With the drums setting the tempo, you can move on to the rest of the song. The software lets you create scores of separate tracks, so you can add a virtually unlimited number of instruments and vocals. I played the guitar and sang, invited a friend over to play bass, and added piano and synthesizer sounds with my tiny keyboard. If you dont like a track, you can record over it or mute it while you try a different approach. One or two bad
notes? You x them by recording over just a tiny sliver of a song. You can cut and paste passages of music or even individual notes just like you might a bit of text in a word processor. And most software also lets you insert loops of different instruments if your playing isnt up to snuff. In short, musical talent isnt really a prerequisite. Once I had my tracks down, it was time to get creative. The software lets you add reverb (an echo that gives recordings a livelier feel), compression (which evens out the volume of an instrument or a vocal
track), and a dozen or more other effects that tweak sounds to make them richer, deeper, or just weirder. Then came mixing. The rst step is panning each track toward either the left or the right, to put the song in stereo. Then I set the volume of each track so it didnt overwhelm the others, giving the song a balanced feel. It sounds simple, but it takes a lot of time, and the learning curve is steep. I typically spend at least 10 hours recording and mixing a three- or four-minute song. And most programs, even some scaleddown versions for relative neophytes, are written for knowledgeable professionals. For instance, the manual or help le might tell you how to add reverb, or pan to the left or right, but it wont tell you when or why you should do it. Tip: Go to Web sites such as Sweetwater.com or user forums hosted by the software manufacturers, where youll nd aspiring musicians trading tips on how to make your recordings sound professional. The Web is also a great place to let the world hear your songs (page 94). I post mine on a site called SoundClick, which hosts tunes for free. Anyone can stream or download them, also for free, and it has dozens of charts that rank the popularity of songs in such genres as pop, rock, and country. Truth be told, Ive never broken the top 50 in any category, so Im still as far from stardom as I was two decades ago. Thats ne with me. I know Im going to be really big, really soon. Really. Just ask my Mom. And this time, I have the recordings to prove it.
To download an MP3 version of a David Rocks song go to www.businessweek.com/extras
I WANNA BE A PRODUCER
With todays music software, computers can make remarkably professional-sounding recordings.
APPLE
Its GarageBand is the easiest-to-use program on the market provided you have a Mac. For more ambitious projects, Apple offers the $299 Logic Express and the $999 Logic Pro 7. Has a wide range of offerings, from a $40 entry-level package called Music Creator to the $500 Sonar, which just might suffice for your next Grammy-winning song. The gold standard for professional recording studios, Pro Tools will do just about anything you need. The downside: Mastering all of its rich features can take years. Sonys Acid programs ($40-$350), have long been tops for making loop-based music. Acid Pro 6, due this spring, lets users add multiple software instruments, too. Its Cubase is a favorite of home musicians and pros alike, and will run on both Macs and PCs. Steinberg offers three versions, costing from $100 to $600.
Data: BusinessWeek
CAKEWALK
DIGIDESIGN
john corbitt
SONY
STEINBERG

KIDS SOFTWARE
Learning Music, Yawn-Free

Engaging ways to teach todays computer-savvy kids how to compose and play. BY ANDREW PARK
T
TITLE
he ipod generation isnt just listening to music differently. Its learning about it differently, too. These days, a kids rst introduction to making music is just as likely to come on the keys of a pc as on a piano. With inexpensive edutainment software, children can learn to appreciate, understand, and even write music. The best programs use animation and games to turn drab music theory into engaging fun. An excellent example is the new Groovy Music series from Sibelius. The British company is known for its sophisticated composition and instruction software, but dont let Groovys pro pedigree intimidate you. Groovy Music is a colorful and charming introduction to important musical concepts for 5- to 11-year-olds. Each of the three Groovy programs ($69 apiece) is divided into two parts. The Explore section uses a variety of games
to teach key ideas. In the rst lesson, for example, to learn the difference between a trumpet and a piano, kids match melodies they hear to pictures of the instruments. Then, in the Create section, they use those instruments and scores of other beats and sounds to compose their own songs. As the music is played back, an animated character saunters across the screen to represent tempo and duration. Another screen displays the notes on a staff to introduce kids to reading music. With Music Ace Deluxe from Harmonic
LET THEM EDUTAIN YOU

Fun, easy-to-use software can supplement a child's exposure to music at school.
Harmonic Vision Music Ace Deluxe Sibelius Groovy Shapes Sony Super Duper Music Looper and Jam Trax $14 - $20 A simple way for children to create music on a PC, but the educational value is limited
PRICE THE LOWDOWN
$46 - $80 Primitive graphics are the only weakness of this thorough introduction to beginning music theory
$59 - $69 Engaging and intelligent tools that teach key concepts and then help kids compose songs
Vision (about $50), your child gets 36 lessons beginning with a primer on the musical staff and moving through complex concepts such as harmony and time signatures. A cartoon conductor named Maestro Max delivers each lesson followed by games that test what has been taught. Music Ace is popular with schools wanting to cover beginning theory. Deluxe, aimed at ages 8 and up, combines the best of the two previous versions, including a digital Doodle Pad for writing simple compositions. The only downside: Primitive graphics like smiling notes and bouncing balls might not engage kids used to sophisticated video games. If you really want to grab kids attention, throw out the lesson plans and let them play. The beauty of software for making and mixing digital music is that no skill is required. One popular program, GarageBand, part of Apple Computers $79 iLife suite, is now in many classrooms because it also allows students to see how musical sounds are combined to make songs. But GarageBand works only on Macs, and its loaded with advanced features. Fortunately, Sony just THEORY LESSON came out with a pair of ne kids music creMany schools use Music Ace ation programs for pcs: Deluxe Super Duper Music Looper for ages 6 to 9 and Jam Trax for 11 and up (less than $20 each). Their clean designs make them a snap to master, but they otherwise work just like Sonys top-selling pro editing software, Acid Music Studio. Like Acid, they come with hundreds of loops, prerecorded musical riffs and beats played on a variety of instruments. To create a song, kids simply layer together loops, or plug a microphone, guitar, or keyboard into their pc. Once theyve saved a song, they can export it to a portable music player or e-mail it. Critics question the educational value of looping software, but a motivated kid can learn a lot just by controlling and visualizing sound for the rst time. For parents, it beats listening to them bang on drums.
For more on this story, watch BusinessWeek Weekend (check local listings) or go to businessweekweekend.com
Data: BusinessWeek

First, the Digital Revolution gave us inexpensive recording gear and easy-to-use software, helping amateur musicians record professional-sounding works. Now, the Internet has democratized how music is distributed and even sold. Leading the charge are social networking sites like MySpace, Friendster, and FaceBook, which have built communities around music and other shared interests. Members appreciate recommendations from friends on the sites, notes Rishon Blumberg, a partner at Brick Wall Management, a traditional music company that handles Marc Broussard, Citizen Cope, and other artists. Putting an artist on MySpace is like opening a store in a heavily trafcked shopping mall, he says. Here are some of the best places to get your own music heard: MYSPACE In the 13 months since its launch, MySpace has emerged as the mack daddy of all social networking sites, boasting 54 million members and more monthly page views than eBay or Amazon.com, says comScore Media Metrix. While Friendster has been around longer, MySpaces easy-to-use interface and early focus on music and blogs helped propel it past its competitor. Whether youve recorded a few tunes in your basement or a major label is heralding you as the next big thing, having a MySpace page is de rigueur, almost like owning a ripped pair of jeans and a leather jacket. With each account, you can post bios, blog entries, tour info, and photos. You can upload up to four songs, and theres a counter that tracks plays and downloads. MySpace recently launched a beta version of a video section, and it has promised a more robust instant-messaging system soon. Bands love the site both for its active, vocal membership, and for the ease of nding other bands. The url is always myspace.com/thebandname. GARAGEBAND.COM Born in the dot-com gold rush, GarageBand.com (not to be confused with Apple Computers GarageBand software) was co-founded by erstwhile Talking Head Jerry Harrison, among others. Eschewing the major-label system, the site awarded top-rated indie bands $250,000 recording contracts. The
PUBLISHING
Singing Beyond The Shower

With Web outlets like these, your music can travel farther than youve dreamed. BY JAMES K. WILLCOX
calef brown
n the 1990s, sam pinola played in a band, toured the country in a van, and dreamed of rock stardom. Today music is more of a hobby for the 32-yearold project coordinator at William C. Cox, a construction company outside Philadelphia. With a full-time job, a mortgage, and a girlfriend who will soon be his wife, Pino-
la no longer tours. But more people may be hearing his music than ever before, thanks to the Web page his band, The Support Group, created on myspace.com. We all now have day jobs, so we cant just jump into a car and drive to New York to play a gig, Pinola explains. Having a MySpace page has helped expose our music to fans we wouldnt previously have been able to reach.
business model wasnt sustainable, and the Web site went dark in 2002. Then GarageBand was relaunched by former employees armed with fresh nancing and committed to helping independent musicians gain exposure. The heart of the service is now a review-based process: You have to rate 30 other songs before you can submit one of your own. GarageBand uses a proprietary algorithm to rank songs based on the feedback it receives from the community, with the idea that better songs will get more reviews, move up the sites charts, and perhaps garner so much attention that the artist will be offered a publishing deal. For those of us with less lofty goals, the site is still a great way to get constructive feedback. It promotes its top-ranked songs on college and Internet radio stations, including msn Music. You can also create and distribute podcasts. CD BABY Have you ever wondered if smaller artists can get music up on iTunes and other services? Thanks to cd Baby, the answer is yes. The site has earned a devotion that borders on the cultish. Want to sell your cd? Just pay a at fee of $35 to set up an account, set your price, and wait for orders to roll in. cd Baby gets a cut of $4 per disk, a more equitable split for the artist than any traditional retailer. Need a bar code so your cds can get scanned? cd Baby will give you one for $20. The company warehouses all its artists cds, ships them promptly, handles all the nancial transactions, and even sends your customers endearing thank-you notes. Since its launch in 1998, cd Baby has paid out more than
GEAR UP
M-AUDIO PODCAST FACTORY
$150 m-audio.com Creating your own podcast is a great way to get your music heard. M-Audios Podcast Factory bundles everything youll need to record, edit, and distribute a broadcast-quality podcast. The basic package includes a USB audio interface, dynamic microphone with stand, and the necessary software. The deluxe version, shown here, cranks it up a notch with two higher-quality condenser mics and the ability to record interviews using voice-over-Internet phone calls.
tributor of your digital music. But with 30 days notice, you can always cancel out. TAGWORLD Newcomer TagWorld is like MySpace on steroids, allowing members to attach tags, or keywords, to photos, blogs, and even songs so others can nd them more easily. Anytime you come across a new artist you like, just click the Add to My Tunes button and that song will instantly be available on your own page. While MySpace lets you keep just one song on your personal prole page, on TagWorld you can create entire playlists, tagged by genre, which will begin streaming whenever someone visits you. Your My Tunes selections are online so you can listen wherever you browse. You can also create a multipage Web site using drag-and-drop modules for including music, videos, blogs, etc. And you can set the permissions for how others access the songs that you have uploaded and tagged. You can monitor how many times your song gets played, how many people have added it to their My Tunes list, and even the age and gender of your fans. While MySpace has a four-song limit, on TagWorld you can upload as many songs, photos, and videos as your 1 gb of storage will hold.
PANDORA This site is part of the aptly named Music Genome Project. Pandora and its team of 35 musician-analysts listen to songs in every genre, breaking them down into 400 attributes ranging from melody and harmony to rhythm and lyrical content. That lets Pandora create playlists of tunes that are genetically similar, if you will, to the songs you like. Wanting to test its limits, I selected a disparate group of artists, including Richard Thompson, Fountains of Wayne, and The Who. Pandora sent me Echo After creating your masterpieces, posting them on these sites might bring you an audience and the Bunnymen, Free, and Yo La Tengopretty TagWorld Pandora MySpace GarageBand CD Baby WEBSITE impressive. tagworld.com pandora.com GarageBand.com myspace.com cdbaby.com The site is free with ads, or $36 a year withPRICE Free Free (with ads) Free Free for digital $99 for unlimited out, and accepts submisdistribution hosting sions from unsigned THE artists, once an audition Offers drag-andHelps members Offers easy-toAfter you have Site is free to join, LOWDOWN is cleared. If chosen, your drop modules discover new build home set up an and for different song might get sandto help you build music that pages you can account ($35) to fees you can wiched between two a personal Web matches their personalize with sell CDs, you can create Web of your favorite artists, site, not just tastes. Music favorite songs, get free digital pages, host which means the person a Web page, from unsigned including your distribution of MP3s, and streaming your song may and backs it artists must go own, and a your music to manage mailing be strongly predisposed up with one through an community of sites such as lists. Popular to like your music. For gigabyte of audition process more than 50 iTunes, Napster, songs earn chart an artist, thats as good storage per user. to be included. million friends. and Rhapsody rankings. as it gets.
$23 million to independent artists. Now the company is helping independent artists get their music placed on download venues such as iTunes, Rhapsody, Napster, aols MusicNet, and Yahoo! Music. You keep all rights to your music, you dont have to pay a start-up fee, and you get 91% of the artists share of the sale (cd Baby gets the other 9%), which they provide one week after they receive payment. The one caveat: cd Baby insists on being the exclusive dis-
SITES THAT EXPAND YOUR REPERTOIRE
Personal Business Inside Wall Street

BY GENE G. MARCIAL
WEB SHOPPERS, PLUS CHINA AND INDIA, HAVE UPS SOARING. PNC FINANCIAL PROFITS AS MERRILL LYNCH BUYS BLACKROCK. A NEW MIGRAINE REMEDY COULD SOON PAY OFF FOR POZEN.
UPS Delivers the Goods
BlackRocks Sale Will Line PNCs Pockets

nc nancial services group (pnc) is a big winner in the deal between Merrill Lynch and investment manager BlackRock announced on Feb. 15. Before the agreement, pnc owned 70% of BlackRocks shares and had 84% of the voting rights. pnc shares have shot up from 55 in October, when rumors rst swirled that it might cut its BlackRock stake, to 69 on Feb. 15. Merrill edged out Morgan Stanley in making a deal with BlackRock (page 36). pnc halved its BlackRock holdings, to 35%. pnc says it will record
Gene Marcials Inside Wall Street is posted at businessweek.com/investor at 5 p.m. EST on the magazines publication day, usually Thursdays.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their rms hold positions in the stocks under discussion. Similarly, they have no investment banking or other nancial relationships with them.
photograph by ethan hill; charts by eric hoffmann/bw
nited parcel service (ups) may soon bring shareholders a nice surprise package. The worlds largest express company, with an AAA credit rating, is rich in cash and prots. So it might look as if its stock, up from 66 in September to 75 on Feb. 15, already reects these goodies. Not by a GETTING UP long shot, says Stephen Leeb, who TO SPEED heads Leeb Capital Management, STOCK PRICE (DOLLARS) which owns shares. He expects the 80 stock to hit 100 in 18 to 24 months 75 because of its super-growth 70 prospects. Not only does ups dominate the U.S. market, where it 65 UNITED PARCEL SERVICE picks up 75% of its revenues, but its 0 AUG. 10, '05 FEB. 15, '06 also building up in China and India. Data: Bloomberg Financial Markets The global delivery market is estimated to be worth more than $100 billion a year. In the U.S., explosive growth in Internet retailing is also adding to ups volume. But the stilluncounted big plus, argues Leeb, will come from Asia, where its competitive edge may even be greater. ups operates 560 airplanes and 88,000 ground vehicles worldwide. We cant think of any other company that can benet as strongly from China, India, and the Internet, Leeb notes. Jim Corridore of Standard & Poors, who rates ups a four-star buy (ve is tops), expects overseas volume and revenues to rise some 20% this year, aided by robust export activity from Asia. Higher oil prices wont crimp operating earnings, he says, because ups adds fuel surcharges to deliveries. At 19 times Corridores 2006 prot estimate of $4 a share (vs. 2005s $3.47), the stock is trading at the low end of its price-earnings ratio range of 19 to 30 over the past ve years.
an aftertax gain of $1.6 billion. That OFF AND gives it the exibility, says pnc, to RUNNING repurchase shares. Gary Townsend of STOCK PRICE (DOLLARS) Friedman, Billings, Ramsey Group 70 gures the deal could boost pncs pro 65 forma earnings to as much as $5.62 a 60 share in 2006 and $6.22 in 2007, up 55 from his pre-deal forecasts of $5.12 PNC FINANCIAL and $5.67, respectively. The stock 0 AUG. 10, '05 FEB. 15, '06 trades at 12 times his new 2006 Data: Bloomberg Financial Markets estimate. pnc is worth 74 a share on a sum-of-the-parts valuation, says Townsend, who rates the stock outperform.
Pozens Trexima: Going to Market with Glaxo
ttention, migraine sufferers: Help is on the way from Pozen (pozn) in the form of Trexima, a new drug for severe headaches that analysts claim is more effective and faster-acting than GlaxoSmithKlines $1 billiona-year blockbuster Imitrex. Its expected to get U.S. approval in the second quarter. Imitrex patent expires in 2009, and Pozen has teamed up with Glaxo to market Trexima in the U.S. It will focus on Trexima once it gets O.K.d, says Pozen ceo John A GIANT Plachetka. Joshua Schimmer of LEAP investment rm S.G. Cowen expects STOCK PRICE (DOLLARS) the stock to outscore the market once 20 the new drug is launched. It has 15 already been on a tear, leaping from 8 10 in August to 17 on Feb. 15. Schimmer gures Pozen will earn 50 a share in 5 POZEN 2009 and $1.55 in 2010. Nadav Hazan 0 AUG. 10, '05 FEB. 15, '06 of SunTrust Robinson Humphrey says Data: Bloomberg Financial Markets Pozen should get $20 million from Glaxo once Trexima is approved, on top of the $60 million it has already received. Through 2009, Hazan gures Pozen will get a 6% royalty on U.S. sales of up to $600 million, and 17% above that. In addition, Pozen has an arthritis drug in clinical trials, which the company claims is a lot safer than its rival painkillers.
Personal Business Figures of the Week

STOCKS
S&P 500
FEB. 1340 AUG. FEB. FEB. 9-15 1295
U.S. MARKETS
S&P 500 Dow Jones Industrials NASDAQ Composite S&P MidCap 400 S&P SmallCap 600 DJ Wilshire 5000
FEB. 15
WEEK
% CHANGE YEAR TO LAST 12 DATE MONTHS
GLOBAL MARKETS
FEB. 15
WEEK
% CHANGE YEAR TO LAST 12 DATE MONTHS
1280
1280.0
1265
1280.0 11,059.0 2276.4 767.9 373.9 12,867.5
1.1 1.8 0.4 0.0 0.4 0.9
2.5 3.2 3.2 4.0 6.6 3.0
5.8 2.0 9.0 15.6 13.7 8.0
1220
SECTORS
BusinessWeek 50* BW Info Tech 100** S&P/BARRA Growth S&P/BARRA Value S&P Energy S&P Financials S&P REIT S&P Transportation S&P Utilities GSTI Internet PSE Technology
754.6 385.8 607.1 669.2 385.1 433.9 164.0 264.4 160.6 195.7 872.2 0.0 0.4 0.8 1.5 3.8 2.1 2.0 4.2 0.3 1.9 0.1 1.7 1.4 1.8 3.3 3.3 1.7 7.2 5.8 0.6 4.6 4.3 4.8 5.9 4.5 7.1 19.8 5.6 18.0 17.8 8.4 20.8 14.7
S&P Euro Plus (U.S. Dollar) 1586.5 London (FT-SE 100) 5791.5 Paris (CAC 40) 4934.1 Frankfurt (DAX) 5764.4 Tokyo (NIKKEI 225) 15,932.8 Hong Kong (Hang Seng) 15,423.3 Toronto (S&P/TSX Composite) 11,557.3 Mexico City (IPC) 18,169.2
0.5 1.2 0.8 1.7 2.1 0.3 1.5 1.3

FEB. 14
5.0 3.1 4.6 6.6 1.1 3.7 2.5 2.1

WEEK AGO
13.7 14.5 22.4 30.9 36.8 10.2 20.8 32.7

YEAR AGO
1160
1250
1100
1235
FUNDAMENTALS S&P 500 Dividend Yield
COMMENTARY After a subdued start to the trading week, markets rallied on Feb. 14, turning Valentines Day into a lovefest. The Dow closed above 11,000, while the S&P 500 neared a new high. The next day, Fed Chairman Bernanke went before Congress to discuss the economy. His messagerate hikes will continueset stocks back, though by the end of the day they had recovered.
Data: Bloomberg Financial Markets, Reuters
1.78% S&P 500 P/E Ratio (Trailing 12 mos.) 18.0 S&P 500 P/E Ratio (Next 12 mos.)* 14.9 First Call Earnings Revision* 1.59%
FEB. 14
1.81% 17.9 14.6 1.42%

WEEK AGO
1.93% 20.6 16.4 0.80%

READING
*First Call Corp.
TECHNICAL INDICATORS
*Mar. 19, 1999=1000
**Feb. 7, 2000=1000
S&P 500 200-day average 1226.5 1223.7 Positive Stocks above 200-day average 65.0% 63.0% Neutral Options: Put/call ratio 0.71 0.80 Positive Insiders: Vickers NYSE Sell/buy ratio 4.05 4.02 Negative
BEST -PERFORMING GROUPS

Railroads Steel Constr. Materials Agricultural Products Constr. & Farm Mchnry.
LAST MONTH %
LAST 12 MONTHS %
16.4 16.0 15.5 14.2 10.3
Railroads Oil & Gas Equipment Divsfd. Metals & Mining Oil & Gas Exploration Oil & Gas Rening
53.8 51.3 51.0 46.8 46.7
WORST -PERFORMING LAST LAST 12 GROUPS MONTH % MONTHS % Internet Software 17.6 Automobiles 38.4 Internet Retailers 16.6 Photographic Products 23.1 Oil & Gas Rening 14.2 Auto Parts & Equip. 21.6 Tires & Rubber 13.8 Divsfd. Commercial Svcs. 19.4 Homebuilding 12.0 Home Entrtnmnt. Software 17.7
MUTUAL FUNDS
4-WEEK TOTAL RETURN
WEEK ENDED FEB. 14 S&P 500 U.S. DIVERSIFIED ALL EQUITY
EQUITY FUND CATEGORIES

4-WEEK TOTAL RETURN LEADERS % 52-WEEK TOTAL RETURN LEADERS %
INTEREST RATES
KEY RATES
Money Market Funds 90-Day Treasury Bills 2-Year Treasury Notes 10-Year Treasury Notes 30-Year Treasury Bonds 30-Year Fixed Mortgage
FEB. 15 WEEK AGO YEAR AGO
Latin America Communications Pacic/Asia ex-Japan Diversied Emerg. Mkts.

LAGGARDS
3.8 2.8 2.3 2.1 5.1 2.0 1.6 1.5
Latin America Precious Metals Diversied Emerg. Mkts. Natural Resources

LAGGARDS
62.0 45.5 39.4 34.2 6.2 7.7 8.0 8.3
4.01% 4.55 4.69 4.60 4.57 6.25
3.99% 4.51 4.63 4.59 4.68 6.19
1.98% 2.58 3.35 4.10 4.49 5.49
Natural Resources Japan Utilities Large-cap Growth
Domestic Hybrid Large-cap Blend Large-cap Value Miscellaneous
BanxQuote, Inc.
52-WEEK TOTAL RETURN

WEEK ENDED FEB. 14 S&P 500 U.S. DIVERSIFIED ALL EQUITY
EQUITY FUNDS
4-WEEK TOTAL RETURN LEADERS % 52-WEEK TOTAL RETURN LEADERS %
Oberweis China Opps. ProFds. UltTelcmms. Inv. Eaton Vance Grtr. India A Janus Asp. Life Scncs. Srv.
LAGGARDS
12.0 11.2 9.8 9.7
ProFunds Ultra Japan Inv. 90.7 ING Russia A 89.0 iShares MSCI Brazil Idx. 71.2 T. Rowe Price Latin Am. 70.0
LAGGARDS
BLOOMBERG MUNI YIELD EQUIVALENTS Taxable equivalent yields on AAA-rated, tax-exempt municipal bonds, assuming a 30% federal tax rate.
10-YR. BOND 30-YR. BOND
General Obligations Taxable Equivalent Insured Revenue Bonds Taxable Equivalent
3.84% 5.49 3.96 5.66
4.40% 6.29 4.45 6.36
12
15
18
Data: Standard & Poors
Ameritor Investment American Heritage Rydex Commodities H ProFunds Internet Inv.
14.3 11.1 10.2 10.0
Ameritor Investment 68.4 American Heritage Grth. 42.9 Frontier MicroCap 29.6 American Heritage 27.3
THE WEEK AHEAD

LEADING INDICATORS Tuesday, Feb. 21, 10 a.m. EST The Conference Boards January index of leading economic indicators probably rose 0.5%. Thats the median forecast of economists surveyed by Action Economics LLC. Lower initial jobless claims and higher stock prices should help the January reading. In December, the index edged up 0.1%. FOMC MINUTES Tuesday, Feb. 21, 2 p.m. EST The Federal
Reserves Open Market Committee releases the minutes to its Jan. 31 monetary policy meeting, the last of Alan Greenspans tenure. Fed watchers will scour the notes for clues on how close the central bank is to halting its rate hikes.
CONSUMER PRICE INDEX
Wednesday, Feb. 22, 8:30 a.m. EST Consumer prices for goods and services most likely increased by 0.4% during January on a rebound in crude oil prices.
The index ticked down by 0.1% in December. Excluding food and energy, January prices are expected to have posted a 0.2% gain for the fourth consecutive month. DURABLE GOODS ORDERS Friday, Feb. 24, 8:30 a.m. EST Durable goods orders most likely pulled back by 1% in January. During December, orders jumped 1.8% on strong gains in computers and machinery.
The BusinessWeek production index moved up to 270 for the week ended Feb. 4, up 13.4% from a year ago. Before calculation of the four-week moving average, the index moved up to 271.2.
For the BW50, more investment data, and the components of the production index visit
www.businessweek.com/magazine/extra.htm
IdeasBooks
And Baby Makes...a Market

THE BABY BUSINESS How Money, Science, and Politics Drive the Commerce of Conception
By Debora L. Spar; Harvard Business School Press; 298pp; $26.95
The Centers for Disease Control & Prevention reports that 12% of U.S. women between the ages of 15 and 44 some 7.3 million in totalexperienced infertility in 2002. In addition, an estimated 30% of adult men are infertile. That means one in every eight couples is unable to conceive children by natural
means. Behind that number is a lot of heartbreak, yearning, and a huge market: Fertility clinics in the U.S. collected $2.7 billion in 2002. Its a market unlike any other, however, because no one wants to acknowledge its existence. Baby selling may be outlawed in every nation, yet every day, in every country, money and the means for having children change hands with little government oversight. When parents buy eggs or sperm; when they contract with surrogate [mothers]; when they choose a child to adopt or an embryo to implant, they are doing business, writes Debora L. Spar, a professor at Harvard Business School. Over the past 30 years, advances in reproductive medicine have indeed created a market for babies. Spar dissects this thriving industry in her provocative The Baby Business: How Money, Science, and Politics Drive the Commerce of Conception. The book, though well worth reading, is somewhat unnerving in that it brings matter-of-fact business analysis to the creation of children, surely one of the most unbusinesslike of subjects. Still, it is a valuable if occasionally dry look at a sector of the economy whose customers are usually far too emotional to clearly assess just what it is they are paying for. Spar starts with a history of the baby-making business, going back as far as the Old Testament story of Jacobs wife. After failing to conceive she sent Jacob to sleep with her maid and adopted the resulting child. There were few other means for coping with infertility until the 1920s, when the hormone estrogen was discovered and mass-produced. By the late 1930s, most major U.S. cities had at least one fertility practice administering estrogen. After a woman using hormones gave birth to quintuplets in 1970, demand soared. The industry really took off in 1978 with the birth of Louise Brown, the rst test-tube baby. She was created by in vitro fertilization (ivf), in which an egg is extracted and combined with sperm in a test tube. The fertilized egg is then implanted in the mothers womb. An international outcry
ensued, typied by the reaction at the time of biologist Leon Kass (who went on to chair President George W. Bushs Council on Bioethics): This blind assertion of will against our bodily nature...can only lead to self-degradation and dehumanization. In the wake of Louises birth the federal government set up a commission to gure out what to do about ivf, but it never issued any recommendations. Instead, by 1983 some 150 babies had been conceived in vitro, and the furor had disappeared. Today, desperate couples go through round after round of ivf, at an average cost of $12,400 per try, even though the average success rate is only 25% and drops as low as 9% if the woman is over 40. High cost and poor results would be a death knell for most businesses, but in the emotional world of infertility, couples often keep paying until they run out of money; very few run out of will. Those who do give up can turn to adoption along with about 120,000 other U.S. families each year, shelling out up to $35,000 per child. The most disquieting parts of the book are those chapters that detail some very advanced reproductive technologies. Doctors can now remove one or two cells from a two-day-old embryo in a test tube, tell the parents its gender, and test for certain genetic defects. The parents then choose which embryos they want implanted. Scientists are also only steps away from cloning a human. Of course, the fact that couples can use such high-tech methods doesnt mean that many will. As one fertility expert says: Most people would rather have sex. Then again, the desire to have ones own biological offspring can be insatiable. Spar quotes an infertile woman who says cloning may not be right for everyone, but if the only way for a person to have a child of their own is to do this, and if they are willing to take a chance, then they should be able to. Spar raises some troubling ethical issues surrounding the baby-making machinery. Science is handing us the ability to choose the method of conception and its likely results, yet there is little public debate and even less regulation surrounding these choices. We can moralize about these developments if we desire, she concludes, or we can plunge into the market that desire has created, imagining how we can shape our children without destroying ourselves. By Catherine Arnst
Costs are high, results are poor, and laws are few. Welcome to the fertility biz
MARKETPLACE
Authors Wanted Business/Career Opportunities
AN INCREDIBLE INVENTION
Proven to cut electricity costs by up to 40%.
Manufacturer seeks USA & overseas distributors for this top quality high tech product with amazing consumer demand.
For more advertiser information, log onto www.businessweek.com/classieds For Ad Rates and Information Phone: (312) 464-0500 Email: MMiller@classiedinc.com Yacht Charters
PUBLISH YOUR BOOK

With Americas leading subsidy book publisher. Dept W-55, Vantage Press 419 Park Ave. S. New York, NY 10016 www.vantagepress.com
Rent A Greek Cruising Palace

And sail among the 4,000 Greek islands
FOUNDED IN 1969
Tel: +44 (0) 1872 223 000 Contact: www.somars.com for further information
Network Business
Chinas Top Manufacturing Network Solution!
Sourcing and establishing best t supply network Process mapping and on site QA Cost reduction & execution Logistics consolidation Order and shipment management Over 2,000 project management experiences, ISO 9001 certied
OWN YOUR OWN PRIVATE BANK

800-733-2191 (in US) 310-376-3480 (outside US)
United States Patent
No Competi tion - Billion Dollar Industry. Make more money in one month than most people earn in one year. If you can comfortably afford an investment of $14,900 a high six gure income is very probable. Call: 888-369-1646
THEN YOU CAN SELECT YOUR OWN ENVIRONMENT, YOUR OWN SCENERY, YOUR OWN ISLAND!
Charter a motor yacht, motor sailer or sailing yacht (for 4 to 200 guests, from 60' to 490' and $1,500 to $200,000 per day for entire yacht withits full crew) from VALEF YACHTS, agents for the largest eet of crewed yachts for charter in Greece.
NETWORK MARKETING PROFESSIONALS

Billion $$ Total Wellness Company. Unlimited Earning Potential with one of the fastest growing networkmarketing/direct sales companies in the world.
www.e-bi.net 503-644-2290 e-BI - Maximizing your China

outsourcing results!
TimeShare
BalancedLifeIntl@aol.com
877-747-6629
IT COSTS NO MORE THAN BEING
ON A CRUISE SHIP But
Business Services Personal Hygiene

Since 1992
You can plan your own itinerary

with your own captain or leave it up to them topamper you.
International Headquarters: 7254 Fir Rd., P.O.B. 385, Ambler, PA 19002 U.S.A. Tel: (215) 641-1264 (800) 223-3845 Fax: (215) 641-1746 E-mail: INFO@VALEFYACHTS.com Website: VALEFYACHTS.com
Your food with your own chef Your drinks with your own steward,
CHINA OUTSOURCING
Contract Manufacturing
PARTS TO PRODUCTS
Call ACME @ 732-341-0355
Timeshares
60-80% Off Retail!
Best Resorts & Seasons Call for Free Catalog!
VALEF YACHTS LTD.
www.ChinaOutsourceSite.com
1-800-941-2054
www.holidaygroup.com/bw
Consulting Services MarketPlace Advertisers
American Diagnostic Centers

The BusinessWeek MarketPlace...It Works!
Advertise in the BusinessWeek MarketPlace and reach 5 million responsive readers. Reaching more business professionals than any other business magazine...
Managing Partners are needed

We establish Medical Diagnostic Facilities for our clients. Minimum prots provided by a typical center is $500,000 a year. We are now interested in establishing some company owned centers and are seeking experienced business people who are interested in partnering with us. We have a proven business model and provide up to 70% of the startup capital. If you are an experienced manager with PROVEN background, and can invest a minimum of $100,000 you might qualify for this unique opportunity. Fax or email your resume to:
BusinessWeek is the place to be with your ad!

Call for special advertising rates and value added features:
312-464-0500
or email:
MMiller@classiedinc.com
(For customer service/subscription call 800-635-1200)
Fax 818-474-7158 info@americandiagnosticcenters.com www.americandiagnosticcenters.com
IdeasTheWelchWay BY JACK AND SUZY WELCH
Knowing When to Fold Em

You make the case that leaders should be candid. But what would you advise a middle manager whose leaders place challenging questions in the parking lot and tend to stunt (or end) the careers of people who keep asking them?
Anonymous, Minneapolis Before answering, can we ask you an awful question? With all due respect, is the problem possibly you? Now and again, leaders ignore challenging questions because theyre more annoying than constructive, and the people asking them are, too. If thats you, and you have the self-awareness to accept that unpleasant fact, our only suggestion is to redirect your energies toward real work, or youll be in the parking lot before long. But lets assume thats not you, and that your questions are meaningful, if maybe a bit irritating. In that case, youre in one of two situations, neither of them optimal but both actionable. It could be you have a boss problem. That is, your boss is something of a jerk and cant handle open dialogue, particularly if it is potentially contentious. In that case, if you like your job well enough, your best bet is to wait it out for a while. In time, most good organizations identify stultifying idea-blockers and move them elsewhere or out. On the other hand, you could have a culture problem. Maybe the leadership in general does not relish constructive curiosity. In that case, you have a question to ask yourself: Does your job have enough upside to live with this overarching downside? About 12 years ago a friend of ours became marketing director of a consulting rm. Since then the rm has fared pretty well, but its three partners have remained steadfastly opaque. Employees never know what the partners are thinking about the rms direction or how they rate each persons performance. The result: a sense of constant anxiety and confusion. Our friend, however, has no plans to give up the good money and the short commute. The work is interesting enough, he says, and he likes most of his colleagues. Yes, the leaderships lack of candor drives him nuts (intermittently, as he puts it), and he feels that it has signicantly hindered the rms growth. But, he says, Ive traded an O.K. quality of work for a great quality of life. Like our friend, you can make peace with your situation. Or if you know you have reached your limit, you can look for another job. To hang around and complain under your breath is a fast track toward probably the worst workplace hell imaginable: victimhood. People with this self-iniction conceive of themselves as vanquished heroes. Their bosses see them as energy-sapping boors. Do not go there! Only you know what choice you will ultimately make. Just be sure you make itone way or another.
For four years I ran a single store in a large national retail chain, but I was recently promoted to oversee multiple stores. I am nding, however, that I still worry more about the performance of my old store than whats going on at all my stores.
Jerry Martellaro, Huntington Station, N.Y. Youve nailed it, and bravo for that. Most people in your position dont have the self-condence to realize they have fallen into one of the most common traps of moving up, namely, taking on a new job with enthusiasm but keeping one foot in the old. With your promotion, two people got new jobs: you and your replacement. As a leader, your task is to unleash the innovative ideas you both have. Neither of you can do that if you are spending your energy going home all the time. Instead, get to know your expanded world and raise the bar for all your stores. How? Start by thinking of your stores as labs. Yes, they all do roughly the same thing, but certainly some of them have methods or procedures that are more effective. Your job is to spot those best practices. You want everyone in all your stores talking about each others best ideas and and improving them. That will add more value than looking over someones shoulder. Transparency is another great tool to raise the bar. Make sure to share the comparative metrics of every store, ranked from best to worst. Such clarity works wonders. Its motivating for top-performing stores and signals to poor performers exactly where they can look for more effective approaches. A nal way to raise the bar and avoid the foot-in-the-old trap is to conduct regular, rigorous performance evaluations. That allows you to reward managers who demonstrate the values you have laid out, coach your middle group, and weed out underperformers. The outcome: higher standards for all. Your new job is bigger than your old one. More important, it is different. Youve got a lot to do, but it doesnt include what you used to do. Leave that to your replacement, who can get busy reinventing the perfect situation you left behind. Jack and Suzy Welch are the authors of the international best-seller Winning (HarperCollins, 2005). They are eager to hear about your career dilemmas and challenges at work and look forward to answering your questions in future columns. Please e-mail them at thewelchway@businessweek.com.
Feel youve reached the limit? Then look for a new job. No sense playing the victim
photograph by brad trent
IdeasOutsideShot
BY REPRESENTATIVE BARNEY FRANK
When the Bounty Isnt Shared

Adlai Stevenson, the story goes, was once congratulated after a speech by a woman who told him it would get him the votes of all thinking people. Thats wonderful, he is said to have replied, but unfortunately I need to get a majority. It may have been Stevensons propensity for making such amusingly deprecatory comments about voters that kept him from winning
that majority in his two 1950s Presidential bids. But Stevensons observation is relevant today to those of us in the minority who believe the most serious problem America faces is excessive economic inequality. Excessive is the operative word here. Inequality is not a bad thing in a free market economy; indeed, its essential if were to benet from the incentives and efficiencies that make the market so effective a producer of wealth. But left entirely to its own devices, the free market will produce more inequality than is necessary for efficiency or a healthy society. Thats especially true in an economy marked by globalization, the increased use of information technology, and the rapid ow of capital across borders. Alan Greenspan said as much when he told Congress Joint Economic Committee in 2004 that nearly all the benets of recent productivity growth were going to corporate prots, resulting in a marked fall in employees share of the gains. Nothing in the past two years has alleviated that problem. Real wages for the average worker have eroded, and health and pension benets have faded. Meanwhile, corporate prots and pay for the top 2% of the population have soared. For many of us, this is morally objectionable because it means that a large majority of people live at a lower standard of living than we think Americans ought to. But the counterargument, supported by many in Corporate America, is that focusing on inequality is a mistake, so long as the absolute level at which the majority lives is acceptable. So any reduction in inequality can only be won by a majority that includes people who do not share my values-based objections. Thats why business must understand that it too benets by reducing inequality. In testimony last summer, Greenspan lamented the growing evidence of antiglobalization sentiment and protectionist initiatives, which threatened economic exibility. And he agreed when I suggested that this is not simply a case of crankiness but a broad public reaction to the perception of inequality he cited in 2004. Indeed, when people see their real wages stagnating or falling, health benets threatened, and pensions insecure, theyre unlikely to support
Of course globalization is a tough sell if it only benets the top 2% of Americans
Barney Frank, a member of Congress since 1981, is ranking Democrat on the House Financial Services Committee.
tom williams/roll call photos
policies that help the economy at their own expense. Look overseas. In 2004, Indias ruling Bharatiya Janata Party (bjp) called elections in a campaign based on overall economic growth that had exceeded expectations with the slogan India Shining. But with hundreds of millions of ordinary Indians feeling they had not shared in the benets of economic reform, voters response was essentially shine this, and the bjp lost. More recently, Latin American voters have backed leaders hostile to deregulation, globalization, and economic exibility. So its important for business leaders to understand that overall gross domestic product growth is not enough to win political support for the tax code changes and curbs on public spending they support. This was brought home at a dinner I attended last month at the World Economic Forum in Davos, where a leader of a large nancial institution voiced frustration with the average Americans lack of support for globalization. After all, he said, a recent study by the Institute for International Economics showed that globalization adds a trillion dollars a year in value to the American economy, which, he noted, was worth $9,000 a year to the average American family. The problem, of course, is that the average American hasnt seen that $9,000. Instead, many of them believeresentfullythat corporate executives have been keeping it all for themselves. Therefore, its time to make a deal. I am prepared to help persuade my fellow liberals that many of the public policies they have been resistant to, or skeptical of, are in the national interest, if those in the business community work with us to ensure that the bulk of Americans get a larger share of our increased wealth. Our nation has both the resources and the intellect to implement public policies that diminish inequality so that it does not become socially corrosive, without reaching the point where that diminution threatens the needs of the capitalist system. Is Big Business ready to come to the table?

Business Week - Feb 27, 2006

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Business Week - Feb 27, 2006

Încărcat de

Drepturi de autor:

Formate disponibile

CLASS DIVIDE AT AMHERST (P. 64) lA DIFFERENT DIET PILL (P.

FEBRUARY 27, 2006

February 27, 2006

FOLLOW THE MONEY

62 A Chat With Lou Gerstner

Your own kind of music, online

News: Analysis & Commentary

Icahns frosty reception in Korea

The Business Week

31 Class Actions Great Divide

BIG PLAN ON CAMPUS

34 The Rising Stock of Black Directors

36 Wanna Buy a Money Manager?

38 Tescos California Dream

Science & Technology

90 Your Very Own Hit Factory

92 Tuning Up a New Generation

94 Singing Beyond the Shower

44 Icahn: Foreign Raiders in Korea

45 Indias Generic-Drug Wars

20 Fine: Media Centric

46 What the U.S. Can Learn from Sasol

23 Cooper: Business Outlook

104 Outside Shot: Barney Frank

85 Plug n Play Pianos

88 Go, Go, Go Johnny B. Digital

Its about money. Earning it. Investing it. Spending it.

Mourning the closing of Chicagos landmark eatery

Keeping it All in the Family

EDITED BY DAN BEUCKE

AS THE CALL CENTER TURNS

HAPPIER DAYS Eisner and Jobs after A Bugs Life premiere

Eisner: Lets Break a Deal

THE BIG PICTURE

WHATS IN A NAME Theres a new breed of Web

Diigo Etsy Meebo Pheedo Zingee

AMGENS BICYCLE RACE: CHEEKY?

DRAWN & QUARTERED

WATCHING THE TRENDS IN DESIGN

WHY READ IT To listen in on

NOTABLE POST Design is,

TODAYS CEOs are less

EXPERT ADVICE ROBERT PARKER

A SIZZLING FAMILY FOOD FIGHT

FOR INTENSE AND FRUITY, PRESS 7

PRESIDENT BUSH MAY BE overlooking a

HUMAN POWER CONVERSION

HARVARD SCIENCE CENTER GYM

10 | BusinessWeek | February 27, 2006

(top, l to r) rey jerome/reex news; marianna day massey/zuma press

J. Dowling, Mary Kuntz, Bruce Nussbaum, Christopher Power, Ciro Scotti

GENERATION DEBTS LEGIT GRIPES OR SELF-INDULGENT WHINING

PRESIDENT, INFORMATION & MEDIA, THE McGRAW-HILL COMPANIES: Glenn S. Goldberg

FEBRUARY 27, 2006 (ISSN 0007-7135) ******

14 | BusinessWeek | February 27, 2006

Predicting cost trends with greater accuracy.

CORRECTIONS & CLARIFICATIONS

EXECUTIVE CRIME STILL GOES LARGELY UNPUNISHED

SAFE SUPPLEMENTS: WHAT TO LOOK FOR ON THE LABEL

AFTER HURRICANE WILMA, WAL-MART TO THE RESCUE

How to reach BusinessWeek

IN CHINA, SOME ARE RICH, BUT MANY MORE ARE POOR

Aiming for a Pest-Free PC