By
Gary McWilliams
2,312 words
8 November 2004
The Wall Street Journal
A1
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
Corrections &
Amplifications
BEST BUY Co. had
net income of $705 million in the fiscal year that ended in February 2004 and
$570 million in fiscal 2002. A page-one article Monday transposed the net
income figures.
(WSJ Nov. 10, 2004)
(END)
Brad Anderson,
chief executive officer of Best Buy Co., is embracing a heretical notion for a
retailer. He wants to separate the "angels" among his 1.5 million
daily customers from the "devils."
Best Buy's angels
are customers who boost profits at the consumer-electronics giant by snapping
up high-definition televisions, portable electronics, and newly released DVDs
without waiting for markdowns or rebates.
The devils are its
worst customers. They buy products, apply for rebates, return the purchases,
then buy them back at returned-merchandise discounts. They load up on
"loss leaders," severely discounted merchandise designed to boost
store traffic, then flip the goods at a profit on eBay. They slap down
rock-bottom price quotes from Web sites and demand that Best Buy make good on
its lowest-price pledge. "They can wreak enormous economic havoc,"
says Mr. Anderson.
Best Buy estimates
that as many as 100 million of its 500 million customer visits each year are
undesirable. And the 54-year-old chief executive wants to be rid of these
customers.
Mr. Anderson's new
approach upends what has long been standard practice for mass merchants. Most
chains use their marketing budgets chiefly to maximize customer traffic, in the
belief that more visitors will lift revenue and profit. Shunning customers --
unprofitable or not -- is rare and risky.
Mr. Anderson says
the new tack is based on a business-school theory that advocates rating
customers according to profitability, then dumping the up to 20% that are
unprofitable. The financial-services industry has used a variation of that
approach for years, lavishing attention on its best customers and penalizing
its unprofitable customers with fees for using ATMs or tellers or for obtaining
bank records.
Best Buy seems an
unlikely candidate for a radical makeover. With $24.5 billion in sales last
year, the Richfield, Minn., company is the nation's top seller of consumer
electronics. Its big, airy stores and wide inventory have helped it increase
market share, even as rivals such as Circuit City Stores Inc. and Sears,
Roebuck & Co., have struggled. In the 2004 fiscal year that ended in
February, Best Buy reported net income of $570 million, up from $99 million
during the year-earlier period marred by an unsuccessful acquisition, but still
below the $705 million it earned in fiscal 2002.
But Mr. Anderson
spies a hurricane on the horizon. Wal-Mart Stores Inc., the world's largest
retailer, and Dell Inc., the largest personal-computer maker, have moved
rapidly into high-definition televisions and portable electronics, two of Best
Buy's most profitable areas. Today, they rank respectively as the nation's
second- and fourth-largest consumer-electronics sellers.
Mr. Anderson
worries that his two rivals "are larger than us, have a lower [overhead],
and are more profitable." In five years, he fears, Best Buy could wind up
like Toys `R' Us Inc., trapped in what consultants call the "unprofitable
middle," unable to match Wal-Mart's sheer buying power, while low-cost
online sellers like Dell pick off its most affluent customers. Toys `R' Us
recently announced it was considering exiting the toy business.
This year, Best Buy
has rolled out its new angel-devil strategy in about 100 of its 670 stores. It
is examining sales records and demographic data and sleuthing through computer
databases to identify good and bad customers. To lure the high-spenders, it is
stocking more merchandise and providing more appealing service. To deter the
undesirables, it is cutting back on promotions and sales tactics that tend to
draw them, and culling them from marketing lists.
As he prepares to
roll out the unconventional strategy throughout the chain, Mr. Anderson faces
significant risks. The pilot stores have proven more costly to operate. Because
different pilot stores target different types of customers, they threaten to
scramble the chain's historic economies of scale. The trickiest challenge may
be to deter bad customers without turning off good ones.
"Culturally I
want to be very careful," says Mr. Anderson. "The most dangerous
image I can think of is a retailer that wants to fire customers."
Mr. Anderson's
campaign against devil customers pits Best Buy against an underground of
bargain-hungry shoppers intent on wringing every nickel of savings out of big
retailers. At dozens of Web sites like FatWallet.com, SlickDeals.net and
TechBargains.com, they trade electronic coupons and tips from former clerks and
insiders, hoping to gain extra advantages against the stores.
At SlickDeals.net,
whose subscribers boast about techniques for gaining hefty discounts, a visitor
recently bragged about his practice of shopping at Best Buy only when he thinks
he can buy at below the retailer's cost. He claimed to purchase only steeply
discounted loss leaders, except when forcing Best Buy to match rock-bottom
prices advertised elsewhere. "I started only shopping there if I can
[price match] to where they take a loss," he wrote, claiming he was
motivated by an unspecified bad experience with the chain. In an e-mail
exchange, he declined to identify himself or discuss his tactics, lest his
targets be forewarned.
Mr. Anderson's
makeover plan began taking shape two years ago when the company retained as a
consultant Larry Selden, a professor at Columbia University's Graduate School
of Business. Mr. Selden has produced research tying a company's stock-market value
to its ability to identify and cater to profitable customers better than its
rivals do. At many companies, Mr. Selden argues, losses produced by devil
customers wipe out profits generated by angels.
Best Buy's troubled
acquisitions of MusicLand Stores Corp. and two other retailers had caused its
share price and price-to-earnings ratio to tumble. Mr. Selden recalls advising
Mr. Anderson: "The best time to fix something is when you're still making
great money but your [price-to-earnings ratio] is going down."
Mr. Selden had
never applied his angel-devil theories to a retailer as large as Best Buy,
whose executives were skeptical that 20% of customers could be unprofitable. In
mid-2002, Mr. Selden outlined his theories during several weekend meetings in Mr.
Anderson's Trump Tower apartment. Mr. Anderson was intrigued by Mr. Selden's
insistence that a company should view itself as a portfolio of customers, not
product lines.
Mr. Anderson put
his chief operating officer in charge of a task force to analyze the purchasing
histories of several groups of customers, with an eye toward identifying bad
customers who purchase loss-leading merchandise and return purchases. The group
discovered it could distinguish the angels from the devils, and that 20% of
Best Buy's customers accounted for the bulk of profits.
In October 2002,
Mr. Anderson instructed the president of Best Buy's U.S. stores, Michael P.
Keskey, to develop a plan to realign stores to target distinct groups of
customers rather than to push a uniform mix of merchandise. Already deep into a
cost-cutting program involving hundreds of employees, Mr. Keskey balked,
thinking his boss had fallen for a business-school fad. He recalls telling Mr.
Anderson, "You've lost touch with what's happening in your business."
Mr. Anderson was
furious, and Mr. Keskey says he wondered whether it was time to leave the
company. But after meeting with the chief operating officer and with Mr.
Selden, Mr. Keskey realized there was no turning back, he says.
Best Buy concluded
that its most desirable customers fell into five distinct groups: upper-income
men, suburban mothers, small-business owners, young family men, and technology
enthusiasts. Mr. Anderson decided that each store should analyze the
demographics of its local market, then focus on two of these groups and stock
merchandise accordingly.
Best Buy began
working on ways to deter the customers who drove profits down. It couldn't bar
them from its stores. But this summer it began taking steps to put a stop to
their most damaging practices. It began enforcing a restocking fee of 15% of
the purchase price on returned merchandise. To discourage customers who return
items with the intention of repurchasing them at an "open-box"
discount, it is experimenting with reselling them over the Internet, so the
goods don't reappear in the store where they were originally purchased.
"In some
cases, we can solve the problem by tightening up procedures so people can't
take advantage of the system," explains Mr. Anderson.
In July, Best Buy
cut ties to FatWallet.com, an online "affiliate" that had collected
referral fees for delivering customers to Best Buy's Web site. At
FatWallet.com, shoppers swap details of loss-leading merchandise and rebate
strategies. Last October, the site posted Best Buy's secret list of planned
Thanksgiving weekend loss leaders, incurring the retailer's ire.
Timothy C. Storm,
president of Roscoe, Ill.-based FatWallet, said the information may have leaked
from someone who had an early look at advertisements scheduled to run the day
after Thanksgiving.
In a letter to Mr.
Storm, Best Buy explained it was cutting the online link between FatWallet and
BestBuy.com because the referrals were unprofitable. The letter said it was
terminating all sites that "consistently and historically have put us in a
negative business position."
Mr. Storm defends
FatWallet.com's posters as savvy shoppers. "Consumers don't set the
prices. The merchants have complete control over what their prices and policies
are," he says.
Shunning customers
can be a delicate business. Two years ago, retailer Filene's Basement was
vilified on television and in newspaper columns for asking two Massachusetts
customers not to shop at its stores because of what it said were frequent
returns and complaints. Earlier this year, Mr. Anderson apologized in writing
to students at a Washington, D.C., school after employees at one store barred a
group of black students while admitting a group of white students.
(MORE)
Mr. Anderson says
the incident in Washington was inappropriate and not a part of any customer
culling. He maintains that Best Buy will first try to turn its bad customers
into profitable ones by inducing them to buy warranties or more profitable
services. "In most cases, customers wouldn't recognize the options we've
tried so far," he says.
Store clerks
receive hours of training in identifying desirable customers according to their
shopping preferences and behavior. High-income men, referred to internally as
Barrys, tend to be enthusiasts of action movies and cameras. Suburban moms,
called Jills, are busy but usually willing to talk about helping their
families. Male technology enthusiasts, nicknamed Buzzes, are early adopters,
interested in buying and showing off the latest gadgets.
Staffers use quick
interviews to pigeonhole shoppers. A customer who says his family has a regular
"movie night," for example, is pegged a prime candidate for
home-theater equipment. Shoppers with large families are steered toward larger
appliances and time-saving products.
The company hopes
to lure the Barrys and Jills by helping them save time with services like a
"personal shopper" to help them hunt for unusual items, alert them to
sales on preferred items, and coordinate service calls.
Best Buy's
decade-old Westminster, Calif., store is one of 100 now using the new approach.
It targets upper-income men with an array of pricey home-theater systems, and
small-business owners with network servers, which connect office PCs, and
technical help unavailable to other customers.
On Tuesdays, when
new movie releases hit the shelves, blue-shirted sales clerks prowl the DVD
aisles looking for promising candidates. The goal is to steer them into a back
room that showcases $12,000 high-definition home-theater systems. Unlike the
television sections at most Best Buy stores, the room has easy chairs, a
leather couch, and a basket of popcorn to mimic the media rooms popular with
home-theater fans.
At stores popular
with young Buzzes, Best Buy is setting up videogame areas with leather chairs
and game players hooked to mammoth, plasma-screen televisions. The games are
conveniently stacked outside the playing area, the glitzy new TVs a short
stroll away.
Mr. Anderson says
early results indicate that the pilot stores "are clobbering" the conventional
stores. Through the quarter ended Aug. 28, sales gains posted by pilot stores
were double those of traditional stores. In October, the company began
converting another 70 stores.
Best Buy intends to
customize the remainder of its stores over the next three years. As it does, it
will lose the economies and efficiencies of look-alike stores. With each
variation, it could become more difficult to keep the right items in stock, a
critical issue in a business where a shortage of a hot-selling big-screen TV
can wreak havoc on sales and customer goodwill.
Overhead costs at
the pilot stores have run one to two percentage points higher than traditional
stores. Sales specialists cost more, as do periodic design changes. Mr.
Anderson says the average cost per store should fall as stores share winning
ideas for targeting customers.
---
PORTALS
By
Lee Gomes
895 words
8 November 2004
The Wall Street Journal
B1
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
YOU KNOW ALL about
Google, the Internet-based IPO that has been the big story much of this year in
technology. There is, though, another recent but less well-known initial public
offering that says just as much as Google about the state of play in the tech
world: Jamdat Mobile.
The Los Angeles
company went public last month based on the strength of Jamdat Bowling, one of
the most popular of a new breed of games that run on cellphones. The game,
which you download from your cell carrier, lets you use the keypad to launch a
bowling ball down a lane. I don't quite get the appeal either, but it's
apparently extremely popular and quite addictive, in a Tetris kind of way.
Jamdat Mobile is
far from a Nasdaq powerhouse. While its stock has risen 25% since trading began
Oct. 1, its market capitalization is just over 1% of Google's or Yahoo's, and
the company has yet to prove it will be more than a one-hit wonder.
Still, for those
who fretted that the mojo seemed to be missing from the tech scene since the
popping of the Internet bubble, the fact that a company could hit the IPO
jackpot by marketing a $1.99 game should be all the proof you need that
exuberance, possibly even the irrational sort, is alive and well.
THE EVIDENCE
CONTINUES to mount that games, ring tones, rudimentary online video and
everything else involving cellphones are becoming tech's fabled Next Big Thing.
Wireless conferences are drawing big crowds; venture capitalists are putting
money into start-ups; aspiring entrepreneurs who a few years back might have
concocted a me-too e-commerce company are instead writing business plans for,
well, me-too cellphone bowling games.
The fact that Japan
and Europe were years ahead of the U.S. in their embrace of cellphones has
always been well-known but not considered particularly relevant to anything.
Now, American executives ask endless questions about the overseas wireless
experience and what it does and doesn't portend for the U.S. market.
One of the
surprises of this particular turn of the technology wheel is the extent to
which it doesn't involve the personal computer. For a generation, the desktop
PC has been the lodestone around which tech players arranged themselves.
No one thinks the
computer is going to go away. It's just that suddenly, the world of telephony
looks more vibrant and exciting, and seems to offer more of the open frontiers
and unlimited growth potential that folks used to associate with computers. The
hits seem to keep on coming, too: The next step in cellphones will be the
spread of instant-messaging capabilities, the very same sort of IM that so
engrosses many PC owners.
While cellphones
are clearly emerging as a new "platform," one thing that is not at
all clear is what the rules of engagement for this platform are going to be. In
the past few weeks, there have been a handful of cellphone conferences in and
around Silicon Valley, and the most frequently asked questions at all of them
involved who, if anyone, would be the big cellular winners.
THERE ARE MANY
aspirants. Game companies -- there is a growing list of them -- think they will
become important new online brands. Existing household names -- Disney, Fox,
ESPN -- see the cellphone world as a way to repackage their existing
programming, as well as a new avenue for marketing future movies, reality shows
and sports events. The big cellphone system operators like Verizon and Sprint
currently enjoy a position as gatekeepers, able to control access to their
networks. They are going to fight to keep that tollbooth function by preventing
cell networks from morphing into Web-style open roads to which anyone can have
access.
The epic success
stories of the PC world, like Microsoft, are still trying to make a big
wireless play. So far, they haven't exactly set the cellphone world on fire,
and a lot of people would just as soon keep it that way.
It will be a great
story to watch unfold. And it will be happening on a global scale. This is one
technology revolution that won't just be limited to the most affluent homes and
offices of the industrial West. The World Wide Web is a phenomenal edifice, but
the emerging planetary cellular system is likely to dwarf it. The manufacturing
efficiencies of semiconductor chips, which are the main building blocks of
cellphones, are making them so cheap that soon, a huge percentage of the world
will either have a cellphone or have reasonably easy access to one.
Before, that used
to mean people could talk to each other. Now, it is becoming clear that phones
can be used for so much more -- anything, in fact, that a smart entrepreneur
can think up, from bowling games on up.
No wonder the tech
world is so excited. There will surely be froth and excess in all of this.
There always is. But it seems a little early to take away the punch bowl. Let
people have their fun.
By
Martin Peers
854 words
8 November 2004
The Wall Street Journal
A2
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
NEW YORK -- In a
sign that Rupert Murdoch is anxious about a possible threat to his control of
News Corp., the media giant abruptly adopted a "poison pill" aimed at
blocking any hostile advances by Liberty Media Corp. or anyone else.
News Corp. last
night announced the board's adoption of the plan, just days after Liberty Media
-- the investment vehicle of cable pioneer John Malone -- bought the right to
nearly double its voting stake in News Corp. to about 17%. The family of Mr.
Murdoch, chairman of News Corp., owns roughly 30% of the voting stock.
If it exercises the
right, Liberty would pay about $1.5 billion for the extra stock.
News Corp.'s array
of global media properties include the Fox broadcast-television network, Fox
News Channel, 20th Century Fox movie studio, the New York Post and a
controlling stake in DirecTV Group, as well as satellite TV and newspapers
elsewhere in the world.
The development
suggested that Mr. Murdoch, who has run News Corp. unthreatened for roughly 50
years, is worried about Mr. Malone's intentions towards the company. People
close to the situation estimate that Liberty could easily lift its voting stake
to signficantly more than 17%, financing stock purchases by selling non-voting
stock it already owns. A heavy volume of News Corp. shares is beginning to come
onto the market because Australian investors are selling News shares as the
company is shifting its corporate domicile to Delaware from Australia. That
domicile switch becomes fully effective this week.
Liberty Media has
so far insisted it isn't a hostile investor in News Corp. A spokesman for the
Liberty Media repeated that view last night, saying "we view ourselves as
allies, not as hostile." A person close to News Corp. said the company
also doesn't think Liberty is hostile, but said "you have to protect
yourself."
News Corp. said in a
statement the stockholder-rights plan was intended "to protect the best
interests of all shareholders."
Still, while Mr.
Murdoch doesn't think Mr. Malone's intentions are hostile, he isn't happy about
Liberty's buying. Mr. Murdoch is in "a little bit of a vulnerable
position," said a person close to both companies, given that his family
owns only about 30%. Another person close to the situation said Liberty's
buying had reminded senior News Corp. executives that the Murdoch family's
control of the company could be threatened by hostile raid mounted by anyone.
Speculation about
Mr. Malone's intentions have swirled since he disclosed earlier this year a 9%
voting stake in News Corp. that made Liberty the second biggest voting share
holder behind the Murdoch family. Liberty last week gained the right to buy
additional voting stock owned by Merrill Lynch & Co. Liberty expects to buy
the stock if it gets regulatory approval from authorities in Australia and the
U.S., the company said last week.
News Corp. said in
its statement that its board had adopted the poison pill, technically called a
"shareholder rights plan," partly because Liberty had bought the
right to buy more stock "without any discussion with, or prior notice to,
News Corp."
The plan would be
triggered if someone buys more than 15% of NewsCorp.'s voting stock. If that
occurred, the buyer would be massively diluted because all other shareholders
would be able to cheaply buy extra News Corp. shares.
Existing holdings,
including exercise of Liberty's recently-acquired option, wouldn't trigger the
poison pill. But the additional acquisition of any meaningful amount would
trigger it.
That suggests
Liberty can purchase the extra stock it now has an option on, but it won't be
able to buy any significant amount more. News Corp. added that, within a month,
its board is expected to review whether the shareholder rights plan should be
maintained.
Poison pills are
the "only available defensive structure" that companies threatened
with a corporate raider can adopt, according to Chuck Nathan, co-chair of the
Latham & Watkins mergers-and-acquisitions practice.
Still, News Corp's
adoption of such a plan is likely to prompt complaints from
corporate-governance advocates as it will be seen as an effort by Mr. Murdoch
to cement his control of the company.
Analysts speculate
that Mr. Malone is making the purchases as a way to put pressure on Mr. Murdoch
to buy some of Liberty's assets. Earlier this year Mr. Malone hinted he was
interested in such a transaction, saying there were certain assets within
Liberty that would fit better with News Corp.
The most likely
assets that would fit with News Corp. would be Liberty's cable-programming
interests, including its 50% stake in Discovery Communications and its
Starz-Encore movie network company. One theory is that Mr. Malone wants to put
these assets into a company, together with the News Corp. stake, and either
spin it off or sell it.
While Mr. Murdoch
may be interested in buying some of these assets, it isn't clear the two could
reach agreement on the price.
By
Chip Cummins
579 words
9 November 2004
The Wall Street Journal
A6
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
One of the most
influential U.S. institutional investors is pushing major oil companies to
subject their energy-reserve estimates to independent audits, boosting pressure
on the global oil industry to improve the transparency of its reserves
accounting.
The call by the
California Public Employees' Retirement System, the largest U.S. public pension
fund, comes in the wake of major reserves-accounting controversies at several
large oil companies this year, including Royal Dutch/Shell Group and El Paso
Corp. In the wake of these disclosures, the Securities and Exchange Commission
has weighed whether auditors should be required to provide more oversight of
reserves estimates, a step that large oil companies have resisted.
In a joint
statement expected to be released today, Calpers and New York-based Knight
Vinke Asset Management, a fund that campaigns for improved corporate
governance, praised Shell for a sweeping corporate restructuring unveiled late
last month in response to its reserves overstatements. Shell's parent
companies, Royal Dutch Petroleum Co., of The Hague, and Shell Transport &
Trading Co., of London, last month agreed to merge.
But fund executives
also called for Shell and others to bring in independent auditors to examine
their reserve numbers.
"If Shell
agrees to an external audit of its reserves, this would strongly encourage
others in the industry to do likewise and would help to eradicate
inconsistencies in the application of SEC standards . . . that have undermined
the market's confidence in the sector," said Eric Knight, managing
director of Knight Vinke, in the statement. Knight Vinke coordinated a
public-relations campaign with Calpers this year calling for changes at Shell.
Reserves are the
estimate of oil and natural gas an energy company has in the ground that it is
reasonably certain to pump and sell. The SEC requires so-called proved reserves
to be reported each year as supplemental information to a company's financial
statements.
The move by
Calpers, a giant institutional investor, significantly bolsters calls by some
industry experts for more-consistent reserve-reporting rules among
international oil companies. Reserves are an important metric for oil-sector
investors. But American accounting guidelines leave companies with wide
discretion in coming up with their estimates. That has left reserves accounting
in somewhat of a gray area.
Outside auditors
who sign off on a company's financial statements aren't required to certify
reserve estimates, though U.S. accounting guidelines require them to check that
internal processes for making those estimates are sound.
A handful of
independent petroleum consultants are often used by smaller oil companies to provide
outside assurances that reported reserve tallies are accurate. Larger oil
companies typically have shied away from using them extensively, however,
preferring to rely on in-house expertise to make the complicated assumptions
about geology and economics that go into the estimates.
Shell, in response
to its energy-accounting scandal, now relies on outside contractors to help
review its tally, though it hasn't committed to a full-blown external reserves
audit. BP PLC executives have said they support moves to provide consistent,
industrywide standards for reserve reporting, but the London-based giant has
stopped short of calling for outside auditing.
Exxon Mobil Corp.
has opposed such a move. A spokeswoman for Exxon, of Irving, Texas, said Exxon
doesn't "understand what value would be added" by a review by
outsiders, who may not have the same technical qualifications as its in-house
staff.
Deals
& Deal Makers
By
Lingling Wei Dow Jones Newswires
440 words
10 November 2004
The Wall Street Journal
C5
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
NEW YORK --
Accounting-rule makers will clarify how companies should book a huge tax break
under the newly enacted tax law.
The legislation,
dubbed the "American Jobs Creation Act of 2004," cuts by three
percentage points, to 32%, the top tax rate on American manufacturers that
engage in "domestic production." The reduction will save an estimated
200,000 companies $76.5 billion over 10 years.
The Financial
Accounting Standards Board, at a meeting today, will decide whether the tax
break should be accounted for as "a special deduction" or as "a
rate reduction," said Russell Golden, a senior technical adviser at the
FASB.
A special deduction
would reduce companies' taxable income over time -- just as long as they
perform, on a continuing basis, the manufacturing activity that qualifies them
for the tax benefits.
A rate reduction,
by comparison, would require companies to immediately recalculate their
deferred income-tax balances, resulting in a one-time effect on earnings.
Specifically, the effect of "a tax rate reduction" on earnings would
depend on whether a company carries on its balance sheet more in deferred tax
liabilities or deferred tax assets.
Those that have
booked more in liabilities, which represent expected future tax payments, would
recognize a one-time gain to earnings. Those that have booked more in assets,
which reflect future tax deductions, would recognize a one-time charge against
earnings.
Robert Willens, a
tax and accounting specialist at Lehman Brothers Holdings Inc., said most
companies, namely those that carry net deferred tax liabilities, would prefer
that the tax break be booked as a special deduction because that would help
their "income from continuing operations" over time, rather than just
one time.
The current
standard on income taxes, known as Statement No. 109, doesn't define clearly
what amounts to a "special deduction," experts say, thus making it
necessary for the FASB to offer further guidance. The FASB, in Norwalk, Conn.,
plans to propose related guidelines in a week and to finalize them by year end.
Another top
provision of the tax bill, signed into law by President Bush on Oct. 22, cuts
for about one year to 5.25% from 35% the tax rate on profits repatriated from
abroad. However, many companies have said they won't be able to evaluate the
effects of this provision on their financials until the Treasury Department
issues guidelines for applying the provision of the law. The FASB will decide
whether companies should be allowed more time to assess the effects of the
repatriation provision.
By
Siobhan Hughes Dow Jones Newswires
352 words
10 November 2004
The Wall Street Journal
C3
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
WASHINGTON --
Securities regulators took steps toward strengthening governance of the
nation's stock markets and requiring exchanges to separate their regulatory functions
from market operations to avoid conflicts such as those that plagued the New
York Stock Exchange.
The Securities and
Exchange Commission voted unanimously to seek public comment on a proposal that
would require the NYSE, the Nasdaq Stock Market and eight other exchanges to
have more independent members on their boards and to disclose details about
executive compensation.
The exchanges
"are not immune from governance missteps," said SEC Chairman William
Donaldson, who once ran the NYSE. "After a period of intense focus on
public-company governance, we would be remiss if we did not seek to apply the
lessons learned."
The SEC also raised
the possibility of even broader changes by voting 5-0 to publish a
"concept release" seeking comment on "self-regulatory
organization" governance. Among the options the SEC plans to float:
whether to create a single agency to replace the multiple self-regulators at
each of the U.S. stock exchanges.
The SEC regulates
the markets in partnership with the stock exchanges, which are known as
self-regulatory organizations because they have their own regulatory arms to
oversee trading and other activities. This arrangement has created potential
conflicts of interest, as the markets essentially wear two hats as a regulator and
a marketplace.
Under the SEC rule
proposal, the exchanges would be required to separate their regulatory and
business units, formalizing structures that already are in place at exchanges
such as the NYSE.
The Nasdaq Stock
Market already operates separately from its regulatory arm.
Scott Peterson, a
spokesman for the NYSE, said the exchange planned to review the details of the
proposal. As for the SEC's concept release, he said the NYSE believes "the
most effective regulation occurs when the regulator is as close as possible to
the regulated activity."
A Nasdaq
spokeswoman said the exchange needed to review the details of the plan before
commenting.
By
Carrick Mollenkamp and David Enrich
354 words
10 November 2004
The Wall Street Journal
B2
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
The Internal
Revenue Service is auditing the 1998 and 1999 tax returns of Bank of America
Corp.'s pension plan and 401(k) plan in a review that is looking at whether it
was legal for the bank's employees to transfer 401(k) assets to the company's
pension plan.
The Charlotte,
N.C., banking company disclosed the audit in its quarterly filing with the
Securities and Exchange Commission. Bank of America's report didn't elaborate
on the nature of the IRS review or the company's position on the legality of
transferring 401(k) assets to the pension plan.
The report of the
audit comes on the heels of a lawsuit filed this summer by Bank of America
employees. The suit asserts that the company used its cash-balance pension plan
as part of an "arbitrage scheme" to boost the company's bottom line
at the expense of plan participants.
According to that
complaint, the bank, the nation's third largest in terms of assets, encouraged
employees to transfer more than $2.7 billion of 401(k) assets into the bank's
pension plan in 1998 and 2000. The employees' lawsuit, filed June 30 in a
federal district court in Illinois, alleges that those transfers allowed Bank
of America to invest the money for higher returns than what the bank would dole
out to employees. The suit says the asset transfers violated the Employee
Retirement Income Security Act, or Erisa.
The bank has said
that its cash-balance plans were designed and operated in accordance with
applicable law and that it planned to defend itself against the claims in the
lawsuit.
In addition to the
original employee lawsuit, a lawsuit was filed Sept. 29 against FleetBoston
Financial Corp., which Bank of America acquired, according to yesterday's SEC
filing. That suit, filed in federal court in Connecticut, contends that
FleetBoston violated Erisa by changing Fleet's retirement plan to a
cash-balance plan without notifying plan participants about the impact of the
change.
By
Mark Maremont
1,620 words
11 November 2004
The Wall Street Journal
A1
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
In a case that
shows how the insurance industry's woes could spread to its auditors, Deloitte
& Touche LLP faces a potential $2 billion legal claim related to the type
of earnings-management insurance products that are the subject of government
investigations at other companies.
The dispute
involves Deloitte's audits of Fortress Re Inc., a closely held North Carolina
insurance company. Fortress, which specialized in reinsurance for aviation
risk, collapsed after the Sept. 11, 2001, terrorist attacks. Two Japanese
insurers that had relied on Fortress to minimize their risk with additional
insurance charge that its use of unconventional coverage and its fraudulent
accounting resulted in an estimated $3.5 billion in total losses for them and
for a third insurer that was forced into bankruptcy. Deloitte denies any
liability in the dispute.
The case, which is
entering court-ordered mediation this week, could be one of the most
troublesome legal claims Deloitte faces. The accountant also is being sued in
connection with its audits of Italy's scandal-plagued Parmalat SpA and cable-TV
firm Adelphia Communications Corp.
In the broad
crackdown on corporate fraud of recent years, the trail often has led to legal
problems for auditors. Arthur Andersen LLP essentially dissolved after being
convicted of criminal behavior in connection with its audits of Enron Corp.
The current probes
into the insurance industry are at a relatively early stage, but they already
have touched on the accounting profession. The Securities and Exchange
Commission, the Justice Department and New York Attorney General Eliot Spitzer
recently have launched investigations into the industry's use of products
similar to those involved in the Deloitte case.
Last year,
now-defunct Andersen was faulted by an Australian government investigator for
an "insufficiently rigorous" audit in connection with the 2001
collapse of HIH Insurance, Australia's largest bankruptcy. Andersen wasn't
directly blamed in the case, in which Australian authorities found that
"audacious" and suspect insurance transactions played a role in the bankruptcy.
For nearly three
decades, Fortress managed a large reinsurance business for the three Japanese
companies. They put up all the money while Fortress arranged policies, kept the
books and charged a management fee. Reinsurance provides protection for insurance
companies, which can collect on the policy if they get slammed with big claims.
By the late 1990s, the Fortress pool was among the world's largest players in
the field of aviation reinsurance -- meaning it would have to pay up if a plane
crashed almost anywhere on the globe.
In suits being
heard jointly in North Carolina state court, Sompo Japan Insurance Inc. and
Aioi Insurance Co. claim that Deloitte failed to tell them of huge hidden
liabilities that Fortress had incurred on their behalf. The Japanese companies
say Fortress told them it had obtained insurance that would cover losses on
their policies, but they eventually learned that Fortress was relying instead
on "financial reinsurance."
This type of
coverage is cheaper and like a loan, and it had the effect of forcing the
Fortress pool to absorb additional losses on every claim. While Fortress was
telling the Japanese insurers that their business was profitable, they claim
that instead they were incurring the loan liability as well as the initial policy
loss.
In a statement,
Deloitte said that "the entire premise of this lawsuit -- that two of
Japan's largest and most sophisticated insurance companies did not understand
their own high-risk business strategy -- is demonstrably false and incredible
on its face." The accounting firm said it communicated the extent of the
liabilities to its client, Fortress. If Fortress failed to provide the Japanese
insurers with accurate information, Deloitte added, "any claim would be
against their own agent, Fortress, not Deloitte."
In a court hearing
earlier this year, Robert S. Bennett, a former defense attorney for President
Bill Clinton hired to defend the accounting firm, called the case "a life
and death situation" for Deloitte. Deloitte said this week that was an
overstatement and it believes "it will win this case."
Sompo already has
won a ruling that it was defrauded. An arbitration panel earlier this year
ruled that Fortress's two principals had committed fraud by using misleading
accounting, ordering the duo to pay more than $1 billion. The men later settled
with all the Japanese insurers by turning over nearly their entire net worth,
including lavish homes, antiques, a Gulfstream III jet, and other assets valued
at more than $400 million.
Now the Japanese insurers
have focused on Deloitte. In discovery, they have found what they believe is a
smoking gun -- a series of e-mails and other memos from a Deloitte actuary who
raised questions about why the liabilities related to the loan-type of
insurance weren't being recorded.
"I have a
concern over the lack of recognition" of future liabilities, the actuary,
John Slusarski, wrote in one 1999 e-mail quoted in plaintiff filings. A year
later, he quantified the unbooked liabilities at $1.4 billion, the filings say.
The actuary's warnings were ignored by Deloitte partners, the plaintiffs claim.
Deloitte is
expected to argue that the Japanese insurers were well aware of the use of the
loan-type of insurance, and indeed took advantage of the unusual accounting
practices to post large profits from the Fortress pool. The Japanese insurers
cried foul only after the Sept. 11 attacks made the situation untenable, the
accounting firm is expected to claim.
It's unclear if the
two sides will be able to resolve their differences in the nonbinding mediation
that started yesterday and was ordered by Judge Ben Tennille, who is presiding
over the North Carolina suits. People familiar with the case believe it's
unlikely Deloitte will offer enough money to satisfy the Japanese firms, in
which case the companies would resume their court battle.
Sompo has estimated
that the Fortress debacle resulted in about $3.5 billion in losses for the
three Japanese insurers in the pool. One, Taisei Fire & Marine Insurance
Co., became only the second Japanese casualty insurer since World War II to
file for bankruptcy.
The dispute started
after the Sept. 11 attacks, when Sompo, alarmed by the potential claims that
could arise from the destruction of four commercial airliners that day, ordered
an audit. The Fortress pool also had been exposed to big losses in the late
1990s from a series of airline disasters with substantial fatalities, including
the 1998 Swissair crash off Nova Scotia.
Sompo says it had
previously thought its real losses would be minimal, because Fortress was
contractually obliged to buy the Japanese insurers reinsurance. In other words,
most losses incurred by the Fortress pool when a plane crashed would then be
passed on to somebody else, in a kind of global daisy chain.
Sompo says its
auditors discovered that Fortress had instead been purchasing the cheaper
financial-reinsurance product that was akin to a line of credit. Sompo claims
it wasn't fully informed about the switch, and if it had been, it would have
withdrawn from the pool earlier and limited its losses. By saving money on
insurance, Sompo contends, Fortress executives were able to inflate their
profit figures and gain hundreds of millions of dollars in commissions.
In traditional
risk-transfer reinsurance, if a plane crash caused a $100 million claim on the
Fortress pool, Fortress would pay it, and then collect the same amount from its
own reinsurers. Under U.S. accounting the net loss to Fortress would be zero.
But with loan-type
insurance, Fortress would be obliged to repay the $100 million to its
reinsurers -- with interest -- in, say, five annual "premiums" of $25
million. U.S. accounting rules would require Fortress to show both a $100
million loss and a corresponding liability on its balance sheet to cover the
repayment obligation.
In its books, which
are part of court documents, Fortress had been treating the second type of
insurance as though it were identical to the first. That allowed Fortress to
continue telling the Japanese the pool was extremely successful. It reported
profits of $275 million from 1998 to 2000 before Fortress's commissions. Under
U.S. accounting practices, all that would have been improper.
But Fortress's
accounting treatment and financial reports to its Japanese pool members were
governed not by U.S. rules but by a contract between Fortress and the pool
members. Such contractual accounting is unusual, and is limited to private
dealings between parties.
The annual opinion
Deloitte provided to the Japanese companies specifically warned that Fortress's
financial statements "were not intended to be a presentation in
conformity" with U.S. accounting principles. An annual footnote to the
statement generally described differences from U.S. accounting practices, but
didn't provide many details.
One piece of
ammunition the plaintiffs believe they have is the unusual nature of Deloitte's
engagement for Fortress, in which the auditing firm helped prepare the
insurer's financial statements as well as audited them. According to Sompo's
suit, Fortress's executives in annual letters told Deloitte that "we do
not have expertise" in financial accounting matters, and therefore hired
Deloitte to "assist us in the preparation of our financial statements and
to advise us in matters related to generally accepted accounting
principles."
Big accounting
firms typically act only as independent auditors, and defend themselves in
fraud suits by saying they were only offering opinions on statements prepared
by management. A lack of independence would leave Deloitte vulnerable to
charges it was a participant in any fraud.
Deloitte says it
"gave advice" on the financial statements, but Fortress prepared
them, and "Deloitte was independent in all respects."
Technology
Journal
By
Mark Boslet and Don Clark
436 words
11 November 2004
The Wall Street Journal
B10
English
(Copyright (c) 2004, Dow Jones & Company, Inc.)
PeopleSoft Inc.'s
board rejected Oracle Corp.'s $9.2 billion bid for the company, arguing that
the software company's business is now worth substantially more to its suitor.
The rejection of
the recently sweetened bid sets the stage for what could be a conclusion to the
long-running takeover battle next week. Oracle, based in Redwood Shores,
Calif., has set a Nov. 19 deadline in its 17-month campaign to acquire
PeopleSoft, of Pleasanton, Calif., and vowed that its $24-a-share bid will be
withdrawn if a majority of its rival's shares aren't tendered by midnight on
that day.
PeopleSoft
executives, meanwhile, vowed to continue to resist Oracle even if a majority of
holders tender their shares. Unless Oracle persuades a Delaware judge to lift
PeopleSoft's "poison pill" takeover defense, the two sides are likely
to mount a proxy fight at the company's annual meeting next year that would
settle the battle.
"We recognize
a tender offer for what it is: a nonbinding straw poll," said Kevin
Parker, PeopleSoft's chief financial officer. Any such poll could lead to a
proxy fight, "which we certainly see in our future."
Oracle has shown
little willingness to increase the offer further after recently boosting it
from $21 a share. The big database company appears to be betting that the
prospect of a potential drop in the value of PeopleSoft's shares will persuade
institutional holders to tender their shares.
PeopleSoft
executives said they would be willing to discuss an offer but indicated they
would hold out for well above $24 a share. Any offer from Oracle must reflect
"the fact that PeopleSoft is materially more valuable to Oracle now than
it was when Oracle made its inadequate $26-per-share offer" in February,
said director A. George "Skip" Battle, chairman of PeopleSoft's transaction
committee.
Oracle fired back,
reiterating that its board had concluded $24 was the "absolute
maximum" that it is prepared to pay. "Beyond that, there are better
uses of our capital, including other acquisitions and repurchasing our own
shares," said Larry Ellison, Oracle's chief executive officer.
The shareholders'
will remains unclear. Clark Chang, an analyst for Fulcrum Global Partners,
noted that the stock price hasn't fallen sharply, suggesting that holders feel
a deal may get done.
At 4 p.m. in Nasdaq
Stock Market trading, PeopleSoft shares were off 23 cents at $22.79. Following
the announcement, in after-hours trading, they eased to $22.45.