Case Blog

While we are experiencing an early taste of spring in the Bay Area and New York City remains locked in winter, this week is proving very cold for the U.S. dollar. It has weakened against every major currency, but particularly against the Euro and the British Pound. As the U.S. economy remains stalled, with very little growth in the fourth quarter of ‘07, and the U.S. financial markets remain troubled by various structured financial instruments, with a new acronym encountering trouble each week, global investors continue to move to other currencies. We are reminded by Ben Bernanke that a weak dollar helps our export businesses, but what is the impact on other sectors? BMW produces most of its cars within Germany with German workers, and then exports them to their #1 market, the United States. The company announced layoffs of more than 8,000 workers this week because of the impact of a strong Euro versus a weak dollar. I do not see the current administration changing this policy before the November elections. The large European media companies that earn a significant percentage of their profits in the U.S., Pearson and Reed Elsevier for example, will continue to be impacted by this phenomenon as well. It has surprised me that we have not heard a candidate in either party addressing this issue, but I guess they have not tried to plan a trip to Europe recently!

I have received many requests from the trade press to comment on the announced “for sale sign” on Reed Business. I have told each of them that at this time I will reserve comments, but that I do believe that the announced acquisition of ChoicePoint (CPS) by Andy Prozes and the LexisNexis team will turn out to be a brilliant acquisition. It is accretive and clearly strengthens LexisNexis’ position in the risk market, particularly within the attractive insurance vertical. There is much more to the business media than just trade magazines, and LexisNexis is well positioned to continue on a strong growth trajectory when this acquisition closes later this year. I particularly admire their “total workflow solutions” approach across several verticals.

For the moment it appears that strategic investors have made most of the early ‘08 news on the media acquisition front. It is early in the year, though, and I trust that we will hear from the private equity side of the house more and more as the year moves on and we adjust to dramatically changed credit markets. The early stage venture market continues to be very active, as well, with a number of companies making certain that they have enough cash on hand to ride out a challenging ‘08 business climate. I have also seen on this trip some business applications in the mobile area, with a focus on CRM, that look very promising for both the SMB and the Enterprise sectors. Is the enterprise version of the iPhone on the horizon?

While John McCain continues to move with some success to consolidate the Republican Party, the Democratic Party battle continues. If Senator Clinton loses both Ohio and Texas to Senator Obama, will she finally bow out and support the will of the voters or will she continue the hunt all the way to the convention? I have said many times over the past several months that this election clearly belongs to the Democrats if they do not find a way to hand it over to the Republicans. It could prove to be very late in the game to reunite Democrats and independents if the voters believe that their votes for Senator Obama were denied at a brokered convention.

Spring training has returned and the Mitchell Report is starting to fade into the background, with the exception of the perjury investigation that has begun surrounding Roger Clemens’ testimony before Congress. Joe Torre seems to be enjoying Dodger blue and being away from this controversy in New York. Barry Bonds and Roger Clemens, the home run king and premier pitcher, respectively, of their generation, remain without a team and under a cloud. It will be nice to hear “play ball” and to have Major League Baseball start to put this unpleasant phase of its long history behind it and to be vigilant to insure that performance enhancing drugs to not re-enter the game.

As the battle intensifies between Microsoft (MSFT) and Yahoo (YHOO), many writers continue to focus on the difference in corporate cultures between The Valley and Seattle. We also have some large Yahoo shareholders, like Bill Miller of Legg Mason, joining the Yahoo board in declaring that the $31 per share offer is inadequate. As I wrote several weeks ago, this is reminiscent of the Dow Jones versus News Corp battle of last year, where the directors looked for alternative offers, spoke about unique corporate culture and values, and then finally, when no competing offer materialized and they were faced with the threat of shareholder suits, they accepted News Corp’s bear hug. I sense that this battle of West Coast titans will have a similar ending, although, I must admit that Jerry Yang’s latest idea of enhancing the severance arrangements for all employees that are dismissed during a change in control is a unique tactic.

I was once faced with a similar internal threat in an Eastern European country while I was with IDG. It faded away as a new country manager was introduced and the company started to grow again. I do think that Alibaba and its partners in China will be heard from before this deal is done and we may witness a very interesting proxy fight waged by Microsoft, because Yahoo does not have a staggered board and all the members are up for election this spring. As innovation continues apace in The Valley, this battle starts to feel like Microsoft and Yahoo are fighting yesterday’s war. I sense that Google and News Corp will eventually decide to stay out of the battle and “MicroHoo” will move to consolidate and try to play a strong number 2 to Google for online advertising dominance.

The challenge for the Gates/Ballmer team will be to create a culture that the Yahoo team embraces and justifies the $40B+ price tag. It cannot be a case of Seattle beating The Valley, because Microsoft will certainly have overpaid. Did the Semel years have to lead to this ending? Was the early focus lost? Were they spread too thin to take on Google’s steamroller in search?

Those of us who look to acquire companies and refocus them need to understand their corporate cultures. If we are to be successful in putting them on a new growth trajectory, we also need to understand where they went off course. We should not accept the excuses of entrenched management teams or boards for their recent failures. We should rigorously seek out the team members that can help re-establish the culture that once gave them a swagger within their sector. A friend of mine sent me a quote from an ESPN anchor, “pressure is a privilege.” I believe this can be applied to both sports and business.

I am on the West Coast for two weeks and the winter rains remain. I keep reminding myself that this will yield to a glorious spring starting later in March and April and will give us the snow pack we need in the High Sierras to provide us with water, without restrictions.

I started to read on the plane trip west on Virgin America, which I highly recommend, David Halberstam’s final book before his untimely death, “The Coldest Winter: America and the Korean War.” Although today both political parties seem focused more on the economy than the War on Terror and the Iraq War, some perspective from the author who gave us the “Best and the Brightest” on the Vietnam War and now the definitive work on the Korean War will help us better understand the rhetoric from both parties when the fall campaign begins in earnest after the conventions.

Finally, those of you who know me well understand that in addition to collecting wine, I like to collect cars and watch them age gracefully, particularly German automotive legends. About 10 years ago I sold an ’88 911 Porsche Cabriolet that I had owned for 8 years. I always regretted that sale and even offered to buy it back, to no avail. This Christmas I discovered that a dear relative had an ’88 triple black 911 Cabriolet with only 26,000 miles on it that he was looking for someone to adopt. I could not resist, and in mid-March it will be moving to its new home on the West Coast. I have promised the former owner that he has visitation rights and driving privileges whenever he is in the Bay Area!

As we analyze the results from the Super Bowl and Super Tuesday, a common element to success emerges: Football teams and presidential campaigns must be built for the long term.

After last year’s loss in the first round of the playoffs, the Giants’ owners came very close to firing Tom Coughlin. To their credit and his, they decided to make adjustments both in style and in substance. They brought in a new defensive coordinator, Steve Spagnuolo, from Philadelphia. And after starting the season 0-2 and yielding too many yards and points, Spagnuolo’s defensive schemes began to work. By the end of the year, the defensive talent was a force to be reckoned with. Tom Brady had an afternoon at the Super Bowl that will long be remembered for the amount of time he spent under pressure. The blitzes were constant! The Giants and its fans survived a common post-win pitfall, losing a strong offensive or defensive co-coordinator. After being courted by the Redskins owner Dan Snyder earlier this week, it was announced that Spagnuolo is not leaving for Washington’s open head coach position, but will be staying with an enhanced, well-deserved $2M annual contract. And all I can say about Eli Manning is “Hail Manning” for his grace under pressure and the incredible last drive to win the game. The Manning to Tyree pass play was one for the ages!

My forecast in early January that Bill Belichick would be seen as the second coming of Vince Lombardi has faded with 18-1 and his quick exit from the field with 1 second remaining on the clock.

We then turned our attention to Super Tuesday and the races on both sides started to gain clarity. With the Republicans engaged in a three-man race, John McCain emerged from the day with the nomination within reach. The inevitability of his nomination led to Mitt Romney making a graceful exit and a call for party unity. Can McCain now reach out to the conservative wing of his party and rescue the Republicans from a crushing defeat in the fall that many have been predicting?

On the Democratic side the campaign moves on to Texas and Ohio and then further west, with Hillary Clinton and Barack Obama locked in a virtual dead heat in the delegate count. I believe that the superdelegates will play a deciding role in the nominating process and that this delegate search will be intense on the part of both campaigns. Money will also come into play. We have learned that Senator Clinton loaned her campaign $5M prior to Super Tuesday. At the same time, Senator Obama continues to show very strong fund-raising results, raising more than $32M in January vs. $13M for Senator Clinton. While I was in the gym this morning, Bob Dylan’s classic, “The Times They Are A-Changin’ ” shuffled on my iPod and I focused on, “And the first one now, Will later be last, For the times they are a-changin’.”

As we thought all of the excitement was fading from February, Microsoft (MSFT) went public with their $44.6B offer for Yahoo (YHOO). I expect that after some back and forth Yahoo will become part of the Microsoft Universe. Bill Gates and Steve Ballmer are demonstrating to us why strong balance sheets matter, especially during the current credit crunch. As with News Corp’s stunning offer for Dow Jones, I do not anticipate anyone stepping in to compete directly with the Microsoft offer. I doubt that Google (GOOG) can derail this inevitable marriage. One of the lessons in this battle is not to promise a quick 100-day assessment and then a new strategic plan, as Jerry Yang did when he took over as CEO and let another 100 days lapse without any significant changes. This year, ‘08, will result in more consolidations, and deal making will pick up with less leverage but with strong PE firms and strategics competing to lead a digital consolidation.

Finally, a strong thank you to Roland DeSilva and Reed Phillips and their colleagues for a very strong Media Dealmakers Summit earlier this week. The event excelled in all areas and certainly deserved the record attendance of 300+!