Happy Holidays and Happy New Year! I hope you all enjoyed the holidays and I wish you a happy, healthy, prosperous, and peaceful 2010. May it treat you better than did 2009.

It’s been a few weeks since I’ve posted anything. My apologies for that. I took some time off to wrap up a busy semester and to spend some much needed vacation time with my family. First we had family come visit from California and Texas. We then went to New Hampshire to spend some time skiing. I am incredibly thankful to have spent the holiday surrounded by family, and incredibly fortunate for the privilege to travel.

Although most of my time in New Hampshire was spent skiing with family at Loon, I did take a one-day detour to ski at Bretton Woods and visit the fabled Mount Washington Hotel. It was at the Mount Washington Hotel where, in 1944, the Bretton Woods meetings took place and the Bretton Woods agreement was ratified (see also Bretton Woods System). Bretton Woods is where the IMF, the IBRD, and GATT were born; where a precursor to the WTO was proposed; and where an international system of exchange rate management was established that lasted for nearly 30 years. The visit to Bretton Woods was one of the highlights of my trip.

Anyhow, now that I’m back in the office and back to work, I’ll look forward to posting on a more regular basis. I have a few things already in mind to discuss, and of course, I shall shortly post the Q4 (and year end) 2009 list of notable bankruptcies.

I was recently informed that my blog had been named one of the “Best Blogs by Professors”.

That was a nice gesture, and it certainly feels good to be recognized, …so my sincerest thanks to whoever selected me for that list.

I even had a chance to look over their compilation of blogs. Although I thought that there were some glaring omissions (e.g., Krugman, Roubini, Vermeulen, EconoSpeak), I was generally impressed with the quality of the blogs on that site. I therefore encourage you to take a gander at what some of my academic colleagues have been writing.

I occasionally receive requests for interviews from media outlets. I try to be generous with my time, especially if the topic is one that I feel strongly about, and I feel informed enough to add value. But the latest request that I recieved has to go down as the oddest I’ve yet received, and one that, quite frankly, was a bit disturbing.

It began with the following email:

Dear Dr. Salomon:

Attached is a national press release that will be going to the media soon and we were hoping to get a couple of quotes from you for this endeavor…

That email was followed, almost immediately, by a call from the agency representing the firm. The gentleman from the agency reiterated the firm’s interest in quoting me. His selling point was, “This PR campaign is about to go national. It will make you famous.” What an odd thing to say to someone. I was dumbfounded. I could not believe what I had just heard. Was someone actually offering to make me famous in exchange for a quote?? Unbelievable.

After collecting my thoughts, I coolly responded, “Fame is not part of my objective function.” I then let him know that it was extremely (approaching infinitely) unlikely that I would be party to that kind of quid pro quo exchange. I also let him know that I thought the request was inappropriate.

But that’s not even the best part. Attached to the email that they sent was a draft of the press release. Paragraph 3 of the press release read as follows:

Dr. ____________________, __________________ of ____________ University, has studied the pending shift in operations and commented “As overseas labor becomes more costly and the process is bogged down with red tape, I think you’ll see many large operations attempting to do what XXX Company is pioneering right now.  Many companies can learn from their steadfast examination of these processes and innovative use of technology to cut costs, increase profits, protect their intellectual property and – when we need it most – bring jobs back to our own country.”

ARE YOU KIDDING ME?? A PRE-FABBED, FABRICATED QUOTE!!

So let me get this straight: They wanted to make me famous by filling my name in the blanks, citing my fictitious study, and fabricating my quote.

Guess they thought it would save me the trouble of actually having to do anything.

Crazy. Distasteful, dishonest, disgusting, and crazy.

Now I know I am not perfect. Very far from it. But this just seemed to cross a line, …even for the PR business. Where are the professional norms for honesty and integrity when you need them??

If it weren’t enough that Fiat is trying to expand on the North American front via its alliance with Chrysler (see Now Introducing Fiat/Chrysler), it now seems as if Fiat wants to simultaneously expand its empire closer to home (via an acquisition of Opel). According to various media reports, Fiat is likely to make an attempt to acquire Opel, GM’s European arm (see Fiat Turns to Opel or Fiat Aims for Opel Deal). From the Wall Street Journal:

Fiat SpA Chief Executive Sergio Marchionne is stepping up his plan to acquire a majority stake in General Motors Corp.’s German unit Opel, the next phase of his ambitious campaign to forge one of the world’s biggest auto makers by crafting a three-way alliance among Fiat, Chrysler and Opel.

Mr. Marchionne is expected to meet senior German government officials in Berlin on Monday, according to people familiar with the matter, in an attempt to get support for a potential alliance with Opel. Mr. Marchionne signed a partnership with Chrysler LLC in Washington last week.

Fiat’s board of directors met Sunday and authorized Mr. Marchionne to seek a potential merger between Fiat and GM’s European operations, including Opel and its U.K. unit Vauxhall, according to a statement issued by Fiat on Sunday.

My Comment: Are they nuts??? It is hard enough to pull off one integration the size of Chrysler, but now they are going to try to pull off two? And to top it all off, we’re talking about foreign integrations, where economic, political, and cultural differences compound the complexity. Frankly, I am surprised that Fiat’s board would give Marchionne the approval to simultaneously attempt both deals. A prudent board would counsel Marchionne to eat one cookie at a time, lest he get indigestion. So much for corporate governance.

From the Associated Press:

Marchionne’s proposal is part of a Fiat plan to put together the biggest European auto maker and the world’s No. 2.

Marchionne reckons that the only automakers to survive the crisis will need to be able to churn out between 5 and 6 million vehicles a year.

“From an engineering and industrial point of view, this is a marriage made in heaven,” he was quoted as telling the Financial Times on Monday.

My Comment: Or an integration made in hell. I just don’t get it. Why the preoccupation with size? I remain unconvinced that largess is a means to success. Just ask Jurgen Schrempp and the folks at Daimler, who ran around spewing the same nonsense about scale and survival before their acquisition of Chrysler.

Size certainly leads to increased revenues, which helps justify exorbitant managerial pay. But given the organizational complexities that go hand in hand with size, size does not always translate into increased profitability.

In order to truly benefit from size, there must exist extremely large economies of scale and scope. Perhaps such economies (the ability to economize on platforms, dealerships, suppliers, etc.) exist in theory in the auto industry. However, the power of the auto unions, coupled with the structural characteristics of the countries in which Fiat, Chrysler, and Opel operate make capturing synergies very difficult. As reported in the WSJ:

Mr. Marchionne has suggested that closing down plants isn’t a realistic option in Europe, where many workers are shielded by contracts that make it costly for companies to lay off workers.

My comment: This is a microcosm of the problems that Fiat would likely face in any deal with Chrysler (which would be 55% owned by the auto union), and especially with Opel (given European/German labor law).

Good thing Fiat doesn’t intend to put any of its own capital at risk in either deal:

Fiat is also likely to seek government aid from Berlin to prop up the potential alliance while Fiat retools Opel’s operations, according to a person familiar with the matter. Fiat, which is saddled with €6.6 billion, or $8.8 billion, in debt, doesn’t have the money to finance potential partners.

My comment: Great, so let’s take stock. Fiat almost went bankrupt in 2004. It took a massive debt restructuring to rescue them from the brink. Now, after only a few short years of operating as a quasi-healthy automobile manufacturer, they want to take on two near-bankrupt companies that would nearly triple their current size, …and do it simultaneously. They have very little cash available to make capital investments. And to top it all off, they still have nearly $9 Billion worth of debt they need to service on their own.

I am left to conclude that there only are few plausible explanations for such a set of maneuvers:

1. Fiat is trying to acquire assets in a down market, when valuations are cheap. In so doing, they can take advantage of governments that do not want to be in the position of running large automobile manufacturers. They are thereby engaging in a low risk/high reward strategy in which they are trying to acquire access to products/brands/markets for next to nothing in the off-chance that they can magically make the Fiat/Chrysler/Opel combination work. Given that they will put very little capital at risk up front, if the deals fail, so be it.
2. Marchionne is trying to create another automobile firm that is too-big-to-fail, but in the process, too-big-to-succeed.
3. Marchionne, aided by a board of directors that he has in his back pocket, is engaging in a form of empire building whereby his own personal interests in building the world’s second largest automaker are taking precedence over the best interests of Fiat’s long-term health and prosperity.

Fiat’s stock reacted positively to the deal announcement, which suggests that shareholders favor the first explanation. However, Fiat should not underestimate the potential to get bogged down in such a strategy and get stuck with a money pit.

In addition, given the histories of similarly troubled super-sized deals (e.g., DaimlerChrysler, RenaultNissan) and a preponderence of evidence to the contrary, I remain skeptical of what’s behind door #1.

Today I returned from Thanksgiving break to learn that Tanta had passed (see Remembering Tanta or Sad News). The news certainly made me sad.

Tanta was an incredible blogger. She was insightul, funny, and sharp as a whip. It is no exaggeration to say that I received a heck of an education from Tanta. She (among others) inspired me to start blogging.

In this time of reflection and giving thanks, there is much for which I am thankful. One of those is for the privilege of having been able to read Tanta’s blog posts. And while I am thankful for her posts, I wish I didn’t feel compelled to write about them today, because it stands as a reminder that she, and they, will be no more.

I didn’t know Tanta personally, but that does not mean I will not miss her. Unfortunately, to simply say that she will be missed is an understatement.

My deepest sympathies go out to her family.

I’ve been a little slow this week in keeping up with corporate news. I have been busy trying to catch up with e-mails and other, more pressing, assignments after a week’s vacation.

I spent the holiday week with my family in Cape Cod. We had a blast! And given the state of the economy, I feel very fortunate for the luxury of being able to take that kind of trip.

Although I will not bore you with the details of my trip, I do have several economic observations to share:

1. I have never in my life seen as many “For Sale” signs as I did last week, Cape-wide. Although this is not news to most of you, to behold it with your own eyes is astounding. In Manhattan, we don’t get to see many “For Sale” signs. There’s really no place to put them. So I only gain a full appreciation for the state of the housing market when I take trips outside the city. And even though I do get out of the city frequently and have seen conditions across many towns in the New York tri-state areas, I have never seen anything as bad as what I saw in Cape Cod.
2. My wife and I have been making the drive between New York and Cape Cod for the last 10 years. We have family up there, so we try to go as much as possible during the summer (at least every other weekend), and for several full weeks during the year. In my 10 years making that trip (the Deegan to the Merritt to I-95 to I-195 to Rt. 25 and then the Mid-Cape Hwy in case anyone is interested), I have never, ever encountered such light traffic en route. We frequently hit traffic around New Haven, CT; we almost always hit traffic at the Sagamore Bridge (leading onto, and off of, the Cape); and without fail, we get stuck on the FDR (both outgoing and incoming). We have not hit traffic this year at all – not on Memorial Day weekend, and not on July 4th. Again, this is probably no surprise to most of you since the highway miles driven by Americans are down for the first time in 17 years (see Americans Drive Less); however, it’s so strange to me to be able to make that drive at full speed (and in the time yahoo or google tells you it ought to take).
3. We are creatures of habit. We go to the same places every year. We like the Lobster Roll at Cooke’s. We live for the ice cream at the Four Seas. It’s ordinarily not easy to find an open table at Cooke’s during the height of the season during prime hours (12-2pm, 5-7pm). This year the restaurant was half empty – every time we went. Four Seas (a place where the line is usually out the door and around the corner) was uncharacteristically quiet. P-town was even relatively uncrowded. We saw empty parking spaces on Commercial St., the stores looked to have little traffic, the streets were not as lively, and it was even fairly easy to drive (yes drive) from one side of Commercial St. to the other. It was as if the entire island/peninsula seemed to have 1/2-2/3rds of its normal summertime population.

Now I realize that the anecdotes that I’ve shared simply represent one person’s observations (an n of 1 as we like to say in the business), but if my experiences thus far this summer are any indication, I think we’re in for a long and difficult slog. I have never seen anything quite like it…

UPDATE: The Wall Street Journal published the third part of a three-part series on Bear’s collapse today. In the aggregate, the three parts made for a fascinating account of the events. I cannot recommend them more highly. In the third part, the authors discussed some of the events leading up to JP Morgan’s agreement to raise the final price for Bear from $2 to nearly $10 (see Bear Stearns Neared Collapse Twice).

According to WSJ’s account, the reason JP Morgan agreed to raise it’s price was that

The hurried deal had a loophole that could give angry Bear Stearns investors powerful leverage to seek a higher price: J.P. Morgan had pledged to finance Bear Stearns’s trades for a year — even if shareholders rejected the deal.

Their explanation seems to suggest that their was a legal clause in the contract that made JP Morgan liable for Bear’s trades in the event that the deal did not go through. That would fall under the “bad lawyering on the part of JP Morgan” explanation.

While that may be partially true, I still believe that JP Morgan’s exposure to Bear as its counterparty on a variety of trades had a little something to do with it too (read on for my take).

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I do not know how many of you have continued to follow this story, but Bear Stearns shareholders are set to meet tomorrow to consider, and vote on, the proposed acquisition of Bear by JP Morgan. I was recently interviewed on the subject by German Public Radio. They asked my opinion of the acquisition and the likely outcome of the shareholder meeting. The interview is scheduled to air sometime tomorrow (I will provide an update if a link or a transcript becomes available).

Most of you are likely aware of my opinion of the deal. At the time, I actually saw the transaction as a bailout of JP Morgan more so than a bailout of Bear Stearns (see original post). Although some thought my ideas outrageous at the time, Nouriel Roubini recently expressed similar sentiment, as did Christopher Alleva in a recent post on the blog American Thinker (see Ex-Treasury Department Economist Says Bear Bailout was for JP Morgan).

But I digress. Back to the topic at hand.

The interview began innocuously enough. I was first asked how I thought Bear shareholders should vote. To me, this was a no-brainer. I unambiguously believe that Bear shareholders ought to approve the deal. What’s the alternative – bankruptcy and a share price of $0? At this point no other suitors are likely to emerge, the Fed is unlikely to provide as sweet a deal to any other interested party, and it is unlikely that Bear Stearns could ever restore the Street’s faith in it if it were to try to continue as an independent entity. So I say, just get it over with and accept the terms of the deal. 

We then began to discuss winners and losers in the deal. I thought that quite clearly, JP Morgan came out the winner. They were able to acquire some pretty valuable assets on the cheap, and with the Fed agreeing to absorb up to $29 Billion in losses. Not too shabby a deal if you can find one like it. For me, the losers are the employees of Bear Stearns (the ones who did not have a hand in creating their mess – and my sense is that there were many). These are smart and talented folks who find themselves either out of work, or in limbo, but whichever the case, certainly worse off.

Finally, we touched upon the specifics of the deal itself. The interviewer asked me why JP Morgan raised it’s bid from $2 to $10 per share. My response (and supportive of the sentiment that I expressed in my initial post) was that they likely felt compelled to raise their bid. If, as I argued, JP Morgan had a lot to lose if Bear went bankrupt (in the form of assets that JP Morgan would have been forced to take back onto its own books), JP Morgan had to capitulate and pay up. As long as the potential losses from the troubled assets that JP Morgan would have been forced to take back onto its books were greater than the additional cash that JP Morgan would have to pay, it made sense for them.

Think about it, if JP Morgan had little or no exposure to Bear, why would it have budged? JP Morgan could have easily responded by saying, “$2 is our final offer, and if Bear shareholders don’t like it, too bad, Bear can go bankrupt.” Why did JP Morgan add $8 per share (several billion dollars more) to a deal where without it, the target (Bear) was sure to fail? I’m not sure I can come up with any other explanation than, they had to.

So now that I’ve had the time to decompress and think carefully about my experience at the 2nd Sumantra Ghoshal Conference on Managerially Relevant Research (see Off to London for background), I’m more convinced that my time was well spent.

It was nice to be part of a conference with the explicit intention of bringing academics and practitioners together to discuss research papers, and the role of academic research in the everyday lives of managers. The conference was attended by academics from various of the top business schools in both Europe and the U.S. Moreover, there was ample managerial representation from firms such as Accenture, Hoffman-LaRoche, McKinsey, Saatchi & Saatchi, RBC, and the Financial Times (to name a few).

Some highlights from the conference included:

• The organizers of the conference administered a survey before the conference began and presented some interesting data on the most important issues managers and scholars believe are facing businesses moving forward (credit concerns aside). What I found most interesting is that managers generally agreed about the most critical issues facing their businesses. They identified the following strategic issues as crucial: How to attract and retain talent; How to build and leverage knowledge; How to Identify the next area of growth for the corporation; How to align the organization toward common goals; and, How to draw up an appropriate mission statement. The academics, by contrast, were all over the map. We didn’t agree on much of anything. About the most you could take away from the data for the academics is that all of us in attendance have very different research interests. Some of us thought that “Building and leveraging knowledge” was important, some thought that “Identifying the next area of growth for the corporation” was important, some thought that “governance” was important. But for the most part, there was little agreement among us.
• There was general agreement among most of us that academics influence practice in a multitude of ways, and that influencing practice is not always about getting our research directly in front of the eyeballs of managers. In fact, if anything, this is probably a small part of how we influence managers. We obviously have the greatest impact through our teaching, at the undergraduate, MBA, and executive levels. We also influence managers through consultants (who borrow and implement our ideas), and on occasion, by consulting directly with firms. Scholars also influence practice through our impact on policy – by proffering informed opinions to politicians or testifying on business practice. In this sense then, we help shape the game and inform the agenda – helping decide which issues are important and which are not.
• One of the McKinsey representatives suggested that she (and other management consultants) routinely scan and read academic research to extract the latest ideas, concepts, and tools to apply on client engagements. Interestingly, one research paper presented at the conference suggested that those ideas, concepts, and tools are often applied inappropriately, and sometimes without effect. However, the research also suggested that although sometimes applied incorrectly, they get people within the organization to openly communicate about strategic issues, thereby generating some value, if not exactly that originally intended.
• With respect to our research, there was considerable debate on the type of research we ought to be doing – whether research that directly addresses specific management problems, or research that we ourselves consider important, irrespective of whether it’s managerial relevance is immediately obvious. One view expressed (with which I must say I agree) was that we must not lose site of the fact that as business school faculty, we are a part of an applied, vocational program with a mandate to train business leaders. We therefore cannot lose sight of, or become completely detached from, our audience when conducting our own research, for taken to an extreme, research that is disconnected with the interests of our constituents will ultimately repay us with lower enrollments.

All in all, I got a lot out of the conference. It was fun to spend a few days interacting with a bunch of really smart folks (both academics and managers) discussing some really interesting issues.

I will be heading to London tomorrow to attend the 2nd Sumantra Ghoshal Conference on Managerially Relevant Research at the London Business School (LBS). I’m really looking forward to attending again this year. Last year’s conference was interesting, …and London is always fun (the painful £1:$2 exchange rate notwithstanding).

But back to the conference. The purpose of the conference is to address one salient issue facing business schools today – specifically, the relevance of research produced by business scholars. The central question of interest is, “Does our research matter to practice?” (see On Managerial Relevance for my insights from last year’s conference). I will report back again this year.

In addition to any insights I may glean from the conference, I also plan to write next week about private equity, and how the folks from that industry have been passing their idle time in the absence of any meaningful dealmaking activity. Until then…

I have been asked my opinion of the Delta/Northwest deal by several students and friends. Quite frankly, I do not know enough about either firm to comment in great detail. But that has never stopped me before. So here goes…

Provided that regulators and the employee unions at both firms allow this deal to go through, the success of this merger hinges on two specific factors:

1. The ability to wield increasing market power – restricting supply and eliminating routes in an effort to gain more pricing power, raise fares, and generate additional profits.
2. The ability to generate cost saving synergies – in fleets, gates, reservation systems, maintenance, management, etc. – thereby raising profits.

With respect to the former, there will no doubt be opportunities for the combined firms to exercise some pricing power. Moreover, with gasoline prices at an all time high, this rationale for their combination makes economic sense.

With respect to the latter, both of these firms are struggling. Each has recently emerged from bankruptcy, and both have cost structures that are too high relative to the competition. I have never been a big proponent of the idea that bringing two bad firms together suddenly yields one good firm. This deal is no exception. I am therefore skeptical about their ability to generate meaningful synergies by combining forces.

All told, although I believe that the potential for pricing power is there, the additional pricing power will not address the fundamental problems that each firm faces. Moreover, the synergies will not make up the difference. For this reason, my off-the-cuff priors would be to expect the combined firm to fail, …as would either firm left to its own devices.

The real question though is whether Delta and Northwest have more of a fighting chance together or separately. Unfortunately, my answer is that in this case, it likely doesn’t matters much either way.

The most recent issue of the Economist has a nice analysis of the deal (see Trouble in the Air). They write:

Darkening economic clouds, oil at $114 a barrel, cut-throat competition and disappearing credit lines are confronting airlines with their biggest crisis since the dark days after September 11th 2001. It is a measure of the panic sweeping the industry that Delta and Northwest said this week they would push ahead with their $3.6 billion merger to create the world’s biggest airline by traffic…[T]he two airlines have decided to take the risk of a potentially long-drawn-out and fractious integration of their operations because they calculate that a merger is their best chance of survival as the industry’s woes deepen.

Delta and Northwest…having only recently emerged from Chapter 11 bankruptcy protection themselves…know that time is not on their side. After a strong recovery by America’s airlines in the past few years, profitability has fallen fast this year. And balance sheets are still weak, even at the big network carriers.

Delta has 117 McDonnell Douglas MD-88s with an average age of 18 years; Northwest soldiers on with more than 90 DC-9s with an average age nudging 40 years. These planes are up to 40% thirstier than their more modern counterparts, a crippling burden given the price of fuel. They are also more difficult to maintain—as last week’s grounding of American Airlines’ similarly elderly MD-80s highlighted.

Delta and Northwest have little scope to cut front-line staff or replace their ageing fleets any time soon—production lines at Boeing and Airbus are fully booked until 2012. But they think they can secure cost reductions of about $1 billion a year by centralising their back-office operations and cutting management jobs. They also hope to boost revenue by combining route networks and strengthening their appeal to lucrative corporate customers.

So there you have it. My opinion on the deal given what limited information I have on each firm.