Case Blog

On Tuesday evening, Major League Baseball staged its annual All-Star Game at Yankee Stadium in the Bronx. Once again the American League All-Stars beat their National League counterparts, winning 4-3 in 15 innings and securing home field for the American League’s representative in the Fall Classic.  The pre-game show with All Stars from the past brought back many memories. It does seem strange that The House That Ruth Built will be replaced by a new Yankee Stadium right next to it for the start of next season, but the All-Star Game was a fitting curtain call for the ghosts of past seasons. Yankee Stadium has been the Yankees’ home for all of their 39 American League Pennants and 26 World Series Championships.

On Friday evening, Mary Claire and I joined our good friends Trish and Frank Cavuoto at Billy Joel’s farewell concert to Shea Stadium. The Mets will also have a new home next season, and while they have not been around New York as long as the Yankees, they have their loyal fans, many of whom were former Dodger and Giants fans prior to those teams deserting New York for California in the ’50s. Billy Joel at 59 struggled earlier in the set with the heat and humidity, which were stifling, and made it a classic New York City July evening.  Some wet towels and a number of guest appearances helped him through. Tony Bennett joined him early and they did a wonderful duet of  “New York State of Mind.” Roger Daltrey, of The Who, joined later with “My Generation” and finally Paul McCartney, just off a plane from London, joined Billy Joel on stage to close out the evening with “I Saw Her Standing There and Let It Be.”

Turning to the deal market, there has been one that I have followed with great interest but  not commented on previously — the takeover battle between Electronic Arts (ERTS) and Take-Two Interactive Software, Inc. (TTWO).  Several years ago during the options scandals, Strauss Zelnick and the Zelnick Media team very skillfully won control of Take-Two Interactive through a proxy fight. They proceeded to calm investors and refused to rush Grand Theft Auto IV to market, in spite of criticism at the time. As the release date of April 30th approached, Electronic Arts decided that they needed the Grand Theft Auto franchise to reinvigorate their growth. They made an initial offer of $26 per share, which was rebuffed, and then they slightly lowered it to $25.74.  The Zelnick team, this time with shareholder support, resisted the offer, prior to the release of Grand Theft Auto IV, and clearly stated that they believed the offer undervalued the company, but that they would consider an increased offer after the release. During this time, both sides held to their positions. In its debut week, Grand Theft Auto IV did over $500M in sales! This one release has clearly helped the more sophisticated technology platforms from Microsoft (MSFT) and Sony (SNE) gain market share at Nintendo’s (NDTOY) expense.

While this battle appears to be winding its way through the courts as anti-trust issues are examined and dates for the offer to expire have been extended several times, it will be interesting to see if EA is willing to finally raise its offer to secure its target, in light of the fact that a competing offer has not materialized.  I believe that EA’s bid will not carry the day without a higher offer for a company and franchise that have been very well managed for shareholders by the Zelnick team.  During this same time, France’s Vivendi (VIV) acquired Activision and merged their operations into Activision-Blizzard (ATVID) to became the world’s largest videogame publisher. This was a position long held by EA, which brings some additional perspective to the value of Take-Two.

Are there some lessons in this long-running takeover battle for Steve Ballmer and his new partner, Carl Icahn, as they approach the August 1st Yahoo (YHOO) shareholder meeting and the vote to oust Yahoo’s current board? On Friday, Bill Miller, chairman of Legg Mason Capital Management, the large mutual fund operation which holds a 4.4% stake in Yahoo, announced his support for the current board. As I write this, it was just announced that Yahoo and Icahn have reached an agreement to expand the board and to allocate 3 seats to the Icahn team.

Another legend from the past, Greg Norman, aka The Shark, held our attention this weekend at the British Open being played at Royal Birkdale Golf Club. Norman led at the end of three rounds played under classic Links conditions, lots of wind and rain, with a +2. Could he hold on to become at 53 the oldest person to win a major? Norman had won the British Open previously in 1986 and 1993, and had recently married tennis legend Chris Evert. In the final round  on Sunday he opened with 3 bogeys and found himself struggling for most of the day. Padraig Harrington, who won the Claret Jug in 2007, secured this year’s championship with an extraordinary eagle on the par 5, 17th hole.

The conditions, particularly the high winds, brought back fond memories of our trip to Bandon Dunes in early May. Many of you know that while I enjoy golf and play with great enthusiasm, the results are not often reflected in my handicap. Over time I have learned to be patient, if not more consistent. On Friday July 11th I was invited by Fred Goldberg, a longtime friend, to join him for a round of golf at The Franklin Hills Country Club in Franklin, Michigan. On the 14th hole, a 200 yard par 3, using a TaylorMade demo driver, I finally had my first hole-in-one. I trust that this alone will bring me back for many more rounds.

As the Bear Market continues and forecasts begin to come down for fiscal year ‘08, we will start to see some stars fall to earth. Yesterday, EMC CEO and VMware (VMW) chairman Joe Tucci moved to oust VMware’s cofounder and CEO Diane Greene. (VMware was spun out last year in a very successful IPO; EMC still owns 86% of VMware’s shares, post IPO.) Greene started the company with her husband, Mendel Rosenblum, a Stanford University computer science professor. Tucci was quoted in the Wall Street Journal that, “the board had concluded Ms. Greene lacked the experience to continue running a company that expects to have revenue nearing $2 billion this year.”  She was replaced by Paul Maritz, a veteran of Microsoft, who retired and then started Pi Corp., a company that EMC acquired. As in past downturns, boards start to question whether a CEO that has driven a fast-growth company to stardom can manage a decline and protect shareholders on the downside.  It is clear that we are once again seeing a slowdown in IT spending by the large enterprise clients.  I anticipate that this retrenchment in spending will carry over into the first half of ‘09.

As the malaise spreads, even boards of early stage, venture-backed technology companies are going to be faced with tough decisions regarding leadership over the next several quarters. The best training for a leader to ride out these downturns is to have lived through one or two before. I trust that the CEOs that survived the tech bubble in ‘01-’02 will move quickly to protect on the downside.

I predicted several months ago that the Microsoft (MSFT) vs. Yahoo (YHOO) battle would be over shortly. Then Carl Icahn jumped into the fray and put forth a slate to replace the Yahoo board. With Steve Ballmer now joining with Icahn and stating that he would be open once again to a Yahoo transaction if the current Yahoo board is replaced, it appears like this battle will move back to center stage. Jerry Yang, Yahoo’s cofounder and CEO, has now been widely quoted saying that Microsoft is trying to destabilize the company.  Between now and Yahoo’s August shareholders meeting, the rhetoric should heat up on both sides. Will Yang and Sue Decker be two more stars that will fall to earth  before they have a chance to execute their ambitious growth plans?

Finally, this past weekend we saw the announcement that Landmark’s Weather Channel will be sold to a consortium led by NBC Universal, Bain Capital and the Blackstone Group. It was speculated that the price paid is close to $3.5 billion. NBC Universal will provide management services, but the majority of the equity was provided by the two private equity firms. In the current credit crunch, I believe that this type of consortium deal will become much more in vogue, particularly for transactions over $2 billion.  Returns will be more modest than in the past, but deals will get done.

As stock markets around the globe continued their slump last week, the headlines proclaiming that we are in a bear market were omnipresent. The markets were all down very significantly from their October ‘07 highs. With oil and gold heading in the opposite direction and setting new daily highs, there was no denying that the bears were now in charge. Very quickly, most of the financial sector stocks were downgraded, many of them, including CitiGroup (C), to sell, by William F. Tanona, a Goldman Sachs (GS) analyst.

Have we finally seen blood in the street? Is this a buying opportunity for many equities that now provide excellent dividend yields,  or should you head to the beach, stay predominantly in cash, and not make any decisions until after Labor Day?

The weak balance sheets of the major banks and brokerage firms and their need for more capital continue to impact the private equity deal market. I do not anticipate that we will see the return of the mega deal in the fall. Deal flow in the media and telecommunications sector will continue to be concentrated in the middle market, most likely through year-end. I also anticipate that an activist Fed, with the support of the Hank Paulson, will continue to make certain that there are no failures that have a contagion effect.  The continued weak economy will provide the backdrop for this fall’s elections, both on the national and state levels.  Let’s hope that the political commentators will help us understand the real differences that the candidates have with regards to economic policy, and how this will impact a potential recovery.

I returned to New York this week, where summer has clearly moved in, from northern California, where we continue to be plagued by a earlier than usual wildfire season that is being fueled by the very dry winter we had.

As you head to the beach, I have three recommendations for new paperback releases to take with you:

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street, by Jonathan A. Knee and The Last Tycoons: The Secret History of Lazard Freres & Co., by William D. Cohan. I know both authors, and while they take a very different approach, I believe that both are must-reads.  Finally, if you are involved with intellectual property decisions and the law, I recommend Norman Pearlstine’s: Off the Record: The Press, the Government, and the War over Anonymous Sources.

On Thursday evening the NBA finals open in Boston, with the Celtics facing the Lakers. These fabled franchises have met eleven times in the NBA finals, but this is the first time since 1987. Back in the ’80s when they met three times in the finals, Larry Bird led the Celtics and Magic Johnson led the Lakers. Their personal rivalry started in the 1979 NCAA championship game, which was won by Magic and Michigan State.  These two champions gave us the most intense rivalry of the ’80s.  Will the Kobe Bryant led Lakers dominate or will the trio of Paul Pierce, Kevin Garnett and Ray Allen prove to be too much for the Lakers? Will Phil Jackson win another championship ring and go one up on the legendary Red Auerbach, who must be tuning in for this series?  This is what great rivalries are all about and I trust that most of the nation will be caught up in the intensity of the battle.

Over the years in business, I came to have a high regard and healthy respect for my best competitors. They are the ones that are able to help you take your game to another level. I started my media career in sales and marketing and to this day I can recite the legendary battles for market share with our competitors. In the ’80s for example, when I ran the special interest consumer magazines for Capital Cities/ABC, two of our titles, High Fidelity & Modern Photography, competed directly with Stereo Review & Popular Photography from Ziff-Davis, which was led by the publishing legend Bill Ziff.  In the ’90s when I joined IDG’s InfoWorld, we battled PC Week, another title from Ziff-Davis.  It is not the easy victories but the hard-fought ones that build character and over time produce winning franchises. These are the ones that you reflect on, as you look back on your career. You also recall the teammates that made these hard-fought battles worthwhile. You remember the days that you went to war and covered each other’s backs.

Several years ago, after a pleasant lunch in San Francisco with a former rival, I remember walking down the street and having him tell me that the ZD team always believed that they were the better team than the IDG team. I challenged him on this and we both understood that even though we were long removed from the IDG vs. ZD rivalry, those were years and battles that would live on for both of us forever.

Last week, as I flew west to Los Angeles, I settled in to catch up on my magazine reading. I had with me the most recent issues of BusinessWeek, Forbes, Fortune and Sports Illustrated. I am a longtime subscriber to all of them and still look forward to a block of uninterrupted time when I can read them cover to cover.  I found the current issue of Fortune of particular interest, as it ranked the largest private equity firms and had an up-to-date profile on each of those that made the cut. The lead article and a very flattering profile were on Jonathan Nelson, cofounder of Providence Equity. I have a high regard for Providence Equity and their focused approach to Media and Telecommunications buyouts. They have clearly been one of the most successful private equity firms over the past several years. Stephanie Mehta’s profile was insightful and quite flattering to Nelson and his partners. She focused on the record-breaking $51B buyout of BCE, the parent company of Bell Canada.  Providence partnered with the Ontario Teachers’ Pension Fund and Madison Dearborn Partners on this deal.

After reading the entire issue, I went back to the cover shot of Jonathan Nelson and all of a sudden the SI Jinx crossed my mind. For those of you who have not followed the SI Jinx, it is the phenomenon that simply appearing on the cover of Sports Illustrated with a flattering profile very consistently leads to a heart-breaking loss. The most recent SI Jinx that comes to mind is the Patriots’ and Bill Belichick’s loss to the Giants after being lionized by Sports Illustrated as the team of destiny that would go undefeated right through the Super Bowl to finish 19-0 and ended up 18-1.  Two days later the story broke that the banks that had agreed to fund the Bell Canada deal, Citigroup, Deutsche Bank and Royal Bank of Scotland, wanted to renegotiate  at a lower price to remove the risk they now saw in the current market environment.

Has Fortune now joined its Time Warner sibling Sports Illustrated in the cover jinx? Will CEOs start to resist cover stories in the same way many athletes do today with SI?

I hope those of you who love golf got to see Phil Mickelson’s amazing birdie on the 18th hole this past Sunday during the Colonial, in Fort Worth, Texas.  After launching a drive into the trees and rough on the left Michelson was left with an impossible shot. I sat there and said to myself, this is very reminiscent of the U.S. Open at Winged Foot, his driver has failed him, again.  He then proceeded to loft a wedge shot from 140 yards out onto the green, under one tree and over another. And with a friendly bounce the ball stopped less than 9 feet from the hole. He went on to sink the putt for a birdie and beat Rod Pampling by a stroke! Pampling was heard to remark that this is what the #2 players in the world do.  With Phil in fine form and with Tiger Woods returning from knee surgery, the U.S. Open at Torrey Pines should be an outstanding event.

It was not that long ago that all the large, well-known private equity firms in the United States and Europe were focused on the largest deals they could find. I remember meeting with many of them as I was deciding on what I wanted to do in my next chapter after Reed Business, and the question for many of them was how large were the deals I wanted to do or how large an equity check they could write.

After having spent many years in the B2B global markets, I had a clear understanding that most of the transactions took place in the middle market.  I placed the transaction values in a range of $50M-$500M.  This played a large part in my decision to partner with Austin Ventures to start Case Interactive Media.  As the credit crunch has continued, I have been surprised at how many large private equity firms are redefining themselves as having a middle market focus.

I read recently that Tony James, Blackstone’s president, defined their core to be the middle market. I was surprised at first to read this, but upon reflection it became clear that the middle market definition is being expanded to include deals up to $2.5B, which is still much smaller than we were seeing during the spring of ‘07 when covenant light deals were in vogue.  In some ways it feels like the Triple A minor league teams are now playing part of the season against the major league teams.

The good news in all of this is that I see the market window staying open for deal flow with a very strong second half of this year. Clearly the Reed Business transaction will be a major one in the second half, and I believe that we will see more deals along the lines of CBS acquiring CNet.  The activist funds, Jana and Sandell, got their desired outcome and CNet gained a parent. The larger media companies have strong balance sheets that will allow them to acquire digital properties to assuage the concern of investors that the media companies’ core revenue streams will be marginalized over time by the Internet.

We will get to watch the next round of the battle between Microsoft vs. Yahoo unfold over the next several weeks. I must admit that I find it somewhat strange to find Carl Ichan and now Boone Pickens in the middle of the fray! I do admire that both of them are still keeping score and have not retired to the sidelines.  I would love to hear their thoughts on Vista and search marketing! The ending to this story should unfold shortly.

Last week we saw several individuals and corporations declare victory. After Microsoft’s (MSFT) CEO Steve Ballmer decided not to go hostile and not to raise his $31 bid for Yahoo (YHOO) beyond $33, he walked away and said that Microsoft’s current online strategy was fine and that it would just take longer to offer a real challenge to Google (GOOG) without Yahoo. Then on the following Monday, with Yahoo’s shares dropping more than $4 but not as far as some predicted, Jerry Yang, Yahoo’s co-founder and CEO, weighed in on how he really was open to a deal, if only Microsoft’s offer realized the real value of Yahoo. Shortly thereafter, he and his independent directors were upbraided by significant shareholders, such as legendary media investor Gordon Crawford of Capital Research, for walking away from the only offer on the table and one that carried a significant premium to where the shares had been trading prior to the offer. I wrote in the blog “Corporate Culture” back in February, “As innovation continues apace in The Valley, this battle starts to feel like Microsoft and Yahoo are fighting yesterday’s war.” Now that the battle is over and victory has been declared by both sides, it still feels like both companies were focused on the past and that no one seems to understand either of their digital visions.

Then on Tuesday evening, we saw Senator Hillary Clinton declare victory in Indiana, even though every major network said it was too early to call. In declaring victory she vowed to fight on through the last primary, and if you listened to the nuances in her speech you could envision a fight at the Democratic convention in August. Later that evening, Senator Barack Obama declared victory in North Carolina, but stopped short of claiming he was the nominee. We woke up on Wednesday to the political pundits weighing in. Tim Russert of NBC showed us on a small white board how there was no mathematical way Senator Clinton could win the nomination unless another event like Reverend Jeremiah Wright’s press tour was to take place. Then on Thursday, Senator Obama realized that it was time for a victory lap through the House of Representatives, and that the Democratic nomination for President was clearly within his grasp.

Why is it that everyone wants to declare victory, even when it appears that they are on the losing side? This phenomenon is particularly true in business and politics, but less so in sports where we have overtime periods. Perhaps the Democrats should have declared sudden-death overtime after Super Tuesday and lined up behind Senator Obama, as the Republicans did behind Senator John McCain?

Our West Coast renovations are completed and we are looking forward to a mid-June wedding in Blackhawk. In preparation for the wedding, I was fortunate to join my son Jordan’s bachelor weekend with he and his groomsmen golfing at Bandon Dunes. Bandon Dunes is on the coast of Oregon, and I highly recommend it if you are looking to experience golf as it was once played in Scotland, its ancestral home. There is wind, rain and pot bunkers. There are no carts and the only activity other than meals is golf. We had a great time and no one declared victory!

In the fall of ‘07 I wrote a column titled “Global Brands,” where I stated, “As we transition to a digital world, managing our brands becomes ever more demanding….All of us in the B2B or B2C world tasked with transitioning to the digital world are looking for the Holy Grail, an umbrella brand that inspires confidence and trust and at the same time can support many vertical channels…” These challenges in the spring of ‘08 look even more daunting, with an economy that has stalled and a digital revolution that has accelerated. Clearly, ‘08 is turning out to be the most challenging year for our industry since ‘01-’02. The current economic malaise will accelerate the movement to digital from analog. Measurable marketing programs will be the demand of the day and will be married to social networks. In sectors like Information Technology, challengers like Tech Target and ITToolbox will gain share at the expense of the incumbents unless they respond with ever more speed to the demands of their customers. There are always clear winners and losers in transitions. Shareholders will not be patient as they see shareholder value diminished.

Look at the newspaper industry and the carnage that has taken place. Will McClatchy’s public shareholders and family board members continue to back current management while their stock has fallen from a 52-week high in the mid-30s to below $10 per share? What happened to CEO Gary Pruitt’s “once in a lifetime deal”? When one looks back to the announcement of the acquisition of Knight Ridder, the loss of shareholder value has been even more pronounced. Why did management double down and buy more newspapers, as opposed to digital assets? Will McClatchy become the target of an activist shareholder group, or will the family look to take it private with a change in management?

It is not just the traditional B2B companies that are faced with these challenges. Will CNet respond to their activist challenge to move from a Web 1.0 company to a Web 2.0 company and beyond? Is current management up to the task or do we find incumbents trying to protect themselves at the expense of the shareholders? These dramas will continue to play out, many of them under the spotlight of the public markets.

Our response time to these challenges has become shorter, out of necessity, and the margin for error has become very small. For the B2B industry to escape the fate of the newspaper industry, we must accelerate our response and put managers in charge that can deliver on their promises. We have never been a capital-intensive industry, but we need to find a way to make the resources available to our star performers to execute against a blueprint for change. As I have argued previously, private equity firms are ready to assist in this process at a time when many of the large strategic players have moved on to new horizons.

We will be judged as an industry and as individual companies and management teams by how well we manage these transitions. I sense that our industry knows that we can manage this transition as we have managed others, and that new leadership will emerge as it has in the past to guide us. But the next several quarters will clearly test us all.

While we are on transitions, with the Pennsylvania Democratic primary behind us, it is becoming very clear that the Clintons and Senator Obama cannot make a successful transition to the general election. I am coming to believe more and more, with each body blow back and forth, that Hillary and Bill are going to go to the convention and have a credentials fight over Florida and Michigan and that either side will leave the August convention with John McCain in the lead. I have been surprised by how many Obama supporters have told me that they would prefer to vote for McCain if the Clintons deny the nomination to what was once a fresh face, who brought with him a message of putting partisanship behind us.

Finally, the sports excitement in New York this weekend was the NFL Draft. I am certain that both Jake Long, from the University of Michigan, and Chris Long, Howie’s son from the University of Virginia, respectively the #1 and #2 draft picks overall, will make the transition from the collegiate ranks to starting in the fall for the Miami Dolphins and the St. Louis Rams. Matt Ryan, from Boston College, the #3 pick by the Atlanta Falcons, has a much more difficult transition facing him this fall, but I am confident that over time he will establish himself as a legitimate leader along the lines of Tom Brady and Peyton Manning.

There is one weekend every spring that I clear my calendar from early afternoon until early evening, the weekend of the Masters. I find myself seduced by the beauty of the course, particularly Amen Corner, combined with the challenge it holds for the world’s best golfers and its unique traditions. There is something special at the end of this tournament when the prior year’s winner puts the Green Jacket on the new champion. It was fitting that Phil Mickelson won his first major here several years ago and that Zach Johnson, last year’s winner, will have the honor of putting the Green Jacket on this year’s winner. Both of them entered Sunday at -2 and too far off the pace of Trevor Immelman at -11 to catch him.

Tiger Woods did not disappoint us on Saturday and played himself back into contention at -5. Tiger has won the Masters 4 times and has a profound understanding of the importance of this tournament. If anyone could close the gap of 6 strokes on the final day at the Masters it was Tiger, who has continued to play at a level and with a focus this year that clearly separates him from all the others on the Tour. With every new win we have the privilege of watching history being made. This Sunday he had his opportunities but could not capitalize on them and finished second.

Trevor Immelman remained cool under pressure on Sunday, with only one bad hole on the 16th, where he had a double bogey, and managed to become the first South African since Gary Player in 1978 to win the Masters. He finished -8 for the 72 holes. Gary Player was the golfer he followed growing up, and it was very nice to see a picture of Player holding him when he was 5 years old. With such a wonderful swing, I am certain that Immelman will be a force on the tour for many years.

I would have loved to follow up this weekend with a round of golf at Blackhawk on Monday, but I am in New York for the next several weeks, working on a number of deals that will keep us very busy and take top priority. Mary Claire and I were home two weeks ago and were delighted with the final results of our yearlong renovation. Tradition was respected and a contemporary flair has emerged.

When I do get back to Blackhawk in early May, I will schedule a round with George Riggs, who is in Augusta for the Masters on the Lakeside course. Jim Martin, a friend and former IDG colleague who now resides in Scottsdale, many years ago coined “Amen Corner” for our holes 12-14. Many times these 3 holes have reminded me of how much skill is required to play this game well, but the challenge brings us back each time.

While we are on tradition, I must point out that my alma mater, Boston College, won its third national championship in hockey with a 4-1 victory over Notre Dame. The first two were in 1949 and 2001. This team, which had lost in the finals the last two seasons, finally found the will to win on its third try. It was led by Nate Gerbe, who at 5′5″ has more heart and speed than I have seen in a college athlete in many years. Our ties to Boston College are deep. Mary Claire’s cousin Joe Fitzgerald was a three-sport star for BC and was the captain of the 1928 hockey team. He went on to play on the 1932 US Olympic team, which won the Silver Medal at Lake Placid in the first Winter Olympics hosted in the United States. He taught for many years at Wellesley High School. Our son Jordan recently earned both an MBA and a Masters of Science in Finance (MSF) from the Carroll School at BC and we will attend the graduation ceremony in late May.

Finally, several of you have pointed out that I have not written about any boutique wines since January, so I will close with several.

Robert Foley Vineyards: The longtime winemaker for Pride Mountain has gone out on his own. His early releases, including his ‘05 Petite Sirah (93 RP), have received acclaim. www.robertfoleyvineyards.com

La Sirena: This is Heidi Barrett’s own project. Earlier in the ’90s Barrett won critical acclaim as the winemaker for Screaming Eagle and other California cult wines. I have been ordering from her over the years and I am particularly partial to her Syrahs, which have depth, are very distinctive, and also represent great value. www.lasirenawine.com

Realm: I was introduced to this wine one evening at Per Se by Chris Ryerson, one of the sommeliers. (All of the English majors will recognize the origin of this vineyard’s name: This Blessed Plot, This Earth, This Realm, William Shakespeare; The Tragedy of King Richard II, Act II, Scene I.) I immediately went to their website and requested to join their list. I was fortunate to get on and received my first half case several weeks ago. Their cabernets are complex blends, which is understandable when you know that Mike Hirby, the winemaker, spent a number of years with Behrens & Hitchcock. www.realmcellars.com

Brewer-Clifton: For all those fans of exquisite Pinot Noirs and Chardonnays and of the movie, Sideways, I strongly recommend these outstanding wines, which are made in the Santa Rita Hills with great care and distinction. www.brewerclifton.com

Bond: Several years ago Bill Harlan, the proprietor of Harlan Estate, and his winemaker, Bob Levy, introduced another “first growth” almost equal to the famed Harlan Estate releases. The three wines are from hillside vineyards and are produced in small quantities. Melbury, St. Eden and Vecina are all 100% Cabernet Sauvignons and are magical. You will need to get on the wait list and over time your allocation will grow. www.bondestates.com

Two weeks ago I wrote that while I start every week with an optimistic outlook that the worst of the credit crunch is behind us, I soon find myself disappointed by the “other shoe dropping.” Unfortunately, my fears were confirmed on that Friday, March 14th, when we learned that the venerable Bear Stearns (BSC) was suffering from a classic run on the bank and that many of its traditional trading partners were refusing to trade with them. We also learned that the Federal Reserve, under Ben Bernanke, working with Treasury Secretary Hank Paulson had developed a 30-day rescue plan with the assistance of Jamie Dimon and his team at JPMorgan Chase (JPM). We awoke on Monday, March 17th to find out that the 30 days had lasted a weekend and that Bear Stearns, which had closed at $30 on Friday, was now being sold to JPMorgan Chase for $2 per share. In effect, they were declared bankrupt and a threat to the confidence that was needed to restore the markets’ equilibrium.

As much as I do not like government bailouts, I believe that given the severity of the credit crunch globally and the lack of confidence we have experienced since August, the Fed made the right decision to save The Bear. I would like to add at this point that I feel the pain of the Bear Stearns employees, who owned more than 30% of the firm and saw their holdings virtually wiped out. When you compound this with how many of them will lose their jobs in this merger, you can empathize with their plight.

Unfortunately, much of the anger has been directed at Jamie Dimon and JPMorgan Chase for stealing The Bear. I sense that this anger should have been directed at Bear Stearns’ Chairman Jimmy Cayne, who until this summer was their CEO and had been for more than a decade, and Alan Schwartz, the current CEO. While they did tap Jimmy Cayne’s old friend Joe Lewis for additional capital last fall, it was a minuscule amount compared to what their counterparts at Citigroup (C) and Merrill Lynch (MER) raised during the same time period because of the collapse of the subprime mortgage market. There was Bear Stearns, with two of their hedge funds collapsing and daily stories in the Wall Street Journal about Jimmy Cayne being out of the office at bridge tournaments or on the golf course, while we were reassured by Alan Schwartz that this highly leveraged enterprise had adequate capital. Clearly both Cayne and Schwartz did not understand that the leverage that works wonders on the upside can kill you on the downside. Jimmy Cayne may have been an extraordinary trader in his day, but those days were in the past. One needs to know when to exit. Brett Favre’s retirement after an outstanding NFL season and career was in stark contrast to Jimmy Cayne’s hanging on.

I wrote in a blog, Confidence, on November 8th of 2007:

“The lesson for those of us in the media business is very clear: companies need leaders that know their business and have come up through the ranks. Leaders need to rise from the operating side of the business and understand the markets’ need for transparency. Unfortunately, the trappings of power help many leaders forget that their board represents the shareholders and other stakeholders in the firm and that surprises and failure to deliver on promises can only be tolerated for so long. Sandy Weill’s legacy would have been much better served if JPMorgan Chase’s CEO, Jamie Dimon, Weill’s original heir apparent, had succeeded him, as opposed to his corporate counsel, Chuck Prince.”

There is no experience that can replace that which is gained on the operations side of a business. Jamie Dimon and his team have now moved to calm the waters and have appropriately raised their $2 per share offer to $10 to insure shareholder approval. While the effects of the subprime debacle will continue to be felt for the near term, I am more confident today that with The Bear’s demise we touched bottom and with solid leadership from the Fed, the Treasury and the large money center banks, we will start to emerge from this very cold winter.