Insider Scathing

Galleon hedge fund founder, Raj Rajaratnam, has been in the news lately for operating a ring of hi-tech corporate insiders and analysts who willingly divulged nonpublic information, which in turn allowed Galleon to reap less-risk, mo'-money profits. In his case, the moniker "hedge fund" was used to describe a hedge against the efficient-market hypothesis by obtaining illegal information to consistently outperform the broader market through "sure bets."

There are a number of academics and pundits who believe that Rajaratnam's transgressions are in fact helpful to the markets; after all, it was he who first provided information that brought prices into equilibrium. Besides, he really wasn't an "insider," but an outsider who got insiders to talk freely by, in some cases, paying them tens of thousands of dollars. Of course, he made $8 million short-selling Google from this information, among many other prescient trades.

The Securities and Exchange Commission defines illegal insider trading as the "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security." It seems that they are behind the times, outmoded, and anachronistic; they actually believe that insider trading "undermines investor confidence in the fairness and integrity of the securities markets." The SEC seems to be enamored with this thing called risk; they think that if risk is equally distributed, then the markets will operate as they should. But more advanced minds disagree, saying that if everyone traded on nonpublic information, then our markets would be absolutely lighting-fast and efficient. Or perhaps we wouldn't have markets at all because very few will buy shares for which a select few are guaranteed a risk-free profit.

Rajaratnam's public service by trading in advance of released news should be examined - perhaps we should all sell out our fiduciary responsibility in order to provide the fastest possible correction in the markets. Just imagine, every insider from every public company selling materially significant news to outsiders whose role is to provide rapid price equilibrium. But if the company is not making fraudulent representations of its financial performance, does it matter how quickly the news is acted upon? If everyone has the same information, a price correction that occurs next Tuesday will have exactly the same effect as one occurring this afternoon. Sure, someone could buy an equity 10 minutes before a catastrophic free fall, but they could also purchase 10 seconds before a huge uptick. Armed with identical information, everyone has a equal risk, the definition of a level playing field. Here's the difference: unless they're a small-time player, anyone acting with insider information will telegraph news through their large long-buy or short-sell orders. The market will then react to this risk-free adventurer with the timidity of having news in advance of its official release, dramatically increasing the buy or sell orders that would have occurred under normal circumstances, which then increase the volatility of the price swings.

In effect, insider trading increases beta for everyone but the insider, whose beta is almost zero.

The reason why we have so many commerce regulations is because most businesses want to manipulate risk, and many executives will do anything to lower their risk profile. Unfortunately for society, risk is a zero-sum game; when a single entity lowers their beta through illegal means, the risk goes up for everyone else.

Personally, I believe that insider trading should be treated the same way that old-school Las Vegas casinos handled card cheats, loaded dice, and rigged slots. If you've seen the movie "Casino," you'll know that the lucky ones got the hammer.

Microsoft's Brilliant Failure

The Microsoft Sidekick phone, which sports address book, photo storage, password, and to-do list services, became a member of Amnesiacs International today when a server crash caused every phone in every market to lose all of its data. Permanently. The phones are made by a MS subsidiary, aptly named Danger, and sold through T-Mobile, who is offering the princely sum of $20 for the inconvenience caused by this loss of mobile memory and function.

Microsoft is suitably apologetic, and their engineers are working feverishly trying to restore at least a few bits of the missing data, but I can't help thinking that this was a conspiracy on par with Roswell and the Kennedy assassination.

Everyone knows that Microsoft hates cloud computing; it's very existence decries the end of the licensed software model upon which Microsoft rests its gigantic carcass. And there is no doubt that this "outage" is causing many to reconsider hosting their data offsite and on the Net. And Microsoft has shown multiple ethical lapses in the past (antitrust violations and patent infringement, to name a two major areas). And doesn't Microsoft know about backing up data? After all, they built Windows.

At this point, the only thing I don't suspect Microsoft's involvement in is with the Unabomber - that's because he wrote everything with paper, pen and ink.

A Case of Irrational Diversification

It was reported this morning that InBev, the new owner of Anheuser-Busch, is selling the Busch theme park properties to the hedge fund Blackstone Group for $2.3 billion. Busch Entertainment, legal owner of the amusements, consists of Busch Gardens (Tampa, FL and Williamsburg, VA) and SeaWorld in San Diego, CA.

Getting beyond the fact that Shamu is now owned by a hedge fund, the question arises, "how did a beer company get into theme parks in the first place?" I think I have the answer.

There is an old story that was circulating years ago about how Walt Disney came to choose Orlando as the site for Walt Disney World. According to the tale, Disney's first choice was St. Louis because of its central location and ease of travel - a TWA hub as well as interstate highways - for the entire country. Disney went to meet with the city fathers and business potentates, which naturally included August "Gussie" Anheuser Busch, Jr., the man who built an empire out of beer.

It seems that Disney was absolutely adamant - there would be no alcohol sales on Disney properties, and certainly not within any Magic Kingdom. Apparently, Gussie took offense at this position and said something to the effect, "any man that doesn't serve Budweiser beer in his theme park is an idiot."

The story goes that on the plane back to California, Disney, recognizing the potential problems that Busch could create for him in St. Louis, told his assistants to, "make it Orlando," which was the second choice.

It would seem that Gussie's ego got the better of him and he decided to launch his own brand of theme parks, family-fun places where Budweiser beer would be flowing profusely. He would go mano-a-mano with Disney, and in the end, Disney did begin serving alcohol at Walt Disney World because prohibition just doesn't work in America.

This could be a case of unrelated diversification engaged in solely because of a single conversation, a slight against a beer man's product, in St. Louis so many years ago.

A Primer in Business Intelligence

As a member of several groups at LinkedIn, I regularly receive emails offering anything from resume writing assistance to executive positions in my old industry, operations support systems software (OSS) for telecommunications providers. Yesterday, an offer of the latter crept into my inbox; any opportunity to regain a vice presidency of marketing deserves a ROI review, and this is no exception.

The VP of global sales for RateIntegration, inc. is seeking a VP of marketing for North America. Among other things, the position description says, "Individual must be equipped for high activity marketing campaigns and work multiple simultaneous campaigns. 10-15 years of successful track record marketing telecom OSS/BSS solutions resulting in measureable improvement in sales results is required." Seems all very nice, but let's dig a little deeper.

First, the company name leaves me confused. On their website, they are "rateintegration," yet the position request has "RateIntegration." Which is it? Or do they not believe that a consistent spelling of the company name is important? Perhaps their venture capital partners, Dolphin Equity Partners and JT Venture Partners, felt that would be too intrusive to mandate a modicum of marketing. But do they really lack marketing skills or is this an ingenious plan?

Some research into the executive management team shows the following pedigrees:

CEO: Bachelor's in Electrical Engineering, Master's in Information Management
CTO: Ph.D. in Computer Science (Carnegie-Mellon, no less!)
VP, Engineering: Bachelor's in Math (Harvard, no less!), Ph.D. in Computer Science
EVP, Finance and Strategy: Bachelor's in Electrical Engineering, MBA
VP, Product Development: Ph.D. in Computer Science
VP, Global Sales: Bachelor's from UC Berkeley

There is certainly no lack of scientific intellect, and at the same time, there is almost no marketing expertise. This tells me that the company is engineering/product focused, almost ensuring marketing myopia (cool product, no market). But what exactly is the product?

rateintegration (or RateIntegration) has developed a neat pricing/rating engine that would allow a telecommunications operator to create a separate usage plan for each and every customer. Imagine "Friends & Family" on steroids and hallucinogens. But who would want to do that? Mass customization only works when you can achieve the efficiencies of mass production with individual customization. Think of the difficulties encountered by Customer Service if every customer had a different rate plan! Yet, the technology is slick and has been adopted by some big players.

Evaluating their customer base, it can be seen that most are large companies with a few million subscribers and all are outside of this hemisphere. While the size bodes well for the software's performance, how will it work in the North America? Based on what I've read, it is questionable as to whether this software is economically viable for Tier 3 operators, but even if it is, what does that business model look like and how many rural phone companies need a NASA-grade pricing and rating engine? As to the larger customers, for the past decade, consolidation in the telecommunications industry has been unprecedented. Most of the Tier 2 operators (1-10 million lines) have been swallowed up by the Tier 1 players. And those Tier 1 companies have established contracts with either AMDOCS, Convergys (the two largest OSS software houses on the planet), or a major systems integrator like Accenture. If you are not working with them, you won't gain entry to the Big Dogs. Which leads me to the next issue - rateintegration is also looking for a VP of channel development, separate from a VP of marketing.

Anyone who has taken an introductory marketing course can explain the 4 Ps of all marketing strategies - Product, Price, Place, and Promotion. In the case of rateintegration, make that 3 Ps because Place, or the supply chain, is separate from the marketing function. How successful will any VP of marketing be in an environment where 25% of your strategy is outside of your control?

To top it off, RateIntegration is also seeking agents and resellers in every major market area around the world simultaneously: NA, EU, EMEA, and Asia. So what does all this information mean? What is the final analysis?

Here's my interpretation of the situation:

1. rateintegration developed a very neat product using venture capital that has unbelievable capabilities, some of which are even desirable by the marketplace.

2. Being a product-focused company, they worked their Rolodexes and found some initial customers. Because the product exceeds requirements and expectations, they are referenceable accounts of good stature.

3. As a group of engineers, they hired a sales person to expand the business. He's hit a brick wall, so now he's trying to hire marketing, channels, agents, and resellers. I find it interesting that the marketing position description calls for the ability to manage multiple campaigns, even before there is a strategy in place. Or have they already developed a marketing plan for the VP of marketing to implement? Maybe they should just outsource the project, because marketing reporting to sales has "doomed to fail" written all over it anyway. Where else would a marketing VP's compensation plan have a large commission component? Of course, "commission plan" tells us that the time horizon for success is very short. Which leads me to the finale...

4. All of this is in response to the VCs reluctance to provide additional capital. Perhaps the worst recession in 70 years has something to do with this new direction for rateintegration? Maybe if they were a marketing-focused company at inception they would be able to weather this storm. But they weren't and based on what I've read and analyzed, taking a job with them would be like betting against the house in Vegas.

I guess I'll just have to finish my MBA.

Blue Ocean or Blue Sky? It's still the blues...

Recently I read "Blue Ocean Strategy," a purported solution to the age-old question of "how do I make a buck in this world?" The subtitle, "How to Create Uncontested Market Space and Make the Competition Irrelevant," promises the holy grail of psuedo-monopoly, giddy profits, and a captive customer base, so I was hooked. Tell me more...

Written by W. Chan Kim and Renee Mauborgne, the book was published by Harvard Business School press - a surefire ticket to management-consultant riches, and they do not disappoint from that perspective. Blue ocean strategy divides capitalism into two bodies of water, red oceans and blue oceans. The red oceans are where competition swims like a great white just offshore during the Fourth of July festival at Amity Island. On the other hand, blue oceans are devoid of life except your own private party; they are like a giant spa filled with dancers whose names are Bambi, Jade, and Sapphire, and ringed by bottles of Cristal. You just settle in to the warm, bubbling water and listen to the giggles while smearing some Ossetra on a piece of gold leaf. Apparently, many well-known innovations are the result of blue ocean strategy, even though the book was written decades after those goods and services came to market.

One of the strokes of genius discussed thoroughly in BOS is Cirque du Soleil, the entertainment brainchild of Guy Laliberte and Daniel Gauthier. These men came from the rough-and-tumble world of street performance art, and the "Circus of the Sun" was originally intended to run for 13 weeks in Quebec and then shut down. But according to BOS, it was Guy's plan to devise a circus that was different from Barnum and Baily or Ringling Bros.; in fact, Blue Ocean Strategy only shows the traditional American circus acts as the sole competitive landscape for Cirque du Soleil. It's almost as if Guy and Daniel were planning to deal with the prospect of setting up their tent in the same town at the same time as a conventional three-ringed event, an eventuality that never occurred.

Apparently, Lalibert and Gauthier used a "strategy canvas" in 1984 to determine the precise differentiation factors from elephants and lion tamers and to create a blue ocean experience. Never mind that they were street performers who wanted to bring street performance to a theater. Never mind that the strategy canvas wasn't invented until 2005, or that the Canadian government bailed them out when they went bankrupt, or that they hired Guy Caron in 1985 to incorporate elements from circuses around the world into their show. Those pesky facts would interfere with the premise that BOS is not a POS.

Another blue-ocean innovator is Herb Kelleher, the founder of Southwest Airlines. It seems that he and Rollin King used a strategy canvas in 1970 to define the role of Southwest in a soon-to-be deregulated air travel market. Apparently, he carefully plotted the points in the Eliminate-Reduce-Raise-Create grid and after careful implementation of the BOS, he started the most successful airline in U.S. history. Yet, if the authors had actually asked Kelleher about his reasoning, he would have told them that if you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline. He would have told them that he never used a blue ocean strategy; he just wanted to deliver a reliable, fun service to an under-served market - a traditional marketing strategy that wouldn't make a dime for a management consultant.

Blue Ocean Strategy tells us to avoid red oceans at all costs; the red ocean is hard work followed by a slow death. Yet, red oceans are the source of all incremental innovation. Red oceans are the reason we have iPhones & iPods, air conditioning, disc brakes, power steering, touch-tone telephones, ball point pens, sliced bread, frozen vegetables - this list could go on for miles and encompass millions of products and services that make the modern world more comfortable, safe, and enjoyable. This is not to discount the disruptive innovations that crawl out of blue oceans onto muddy shores, but at the same time, to recognize that blue oceans also spawn far more failures than red oceans. Remember the old adage, you can tell a pioneer because he's face down in the dirt and has arrows in his back.

Hindsight is 20/20, and I could find allegory in a phone book. What this means is that after examining successful products, anyone could devise a "strategy" that creates a common thread out of thin air, complete with charts and graphs that can be sold to desperate businesspeople seeking salvation in the global economy. But the reality of the matter is that innovation begins with someone wanting to deliver an outstanding customer experience, and each innovator is as different as a snowflake. There are no magic juju beans or secret sauces, just a desire to delight, amaze, or enthrall.

The true test of BOS is, since it was published, can the authors point to a single disruptive innovation that was created solely as the result of someone reading their book? Take your time, I've got all day...

Blue Ocean Strategy delivers a value not found on the bookstore shelves in the "Business" section or in an MBA program. Its appraisal is more akin to Moby Dick, a big fish story. As a work of fiction, it is priceless.

The Beauty of Finance

Sarah Palin, once mocked in the press and on television for her vacuum of foreign policy skills, her implosive domestic agenda, and her slippery-fingertip grasp of economics, has finally shown her true colors. She is a financial genius, on the same level as Jim Cramer, Richard Nixon, and Herbert Hoover.

Speaking in Hong Kong at an annual conference of investors, Palin has finally cracked the code that led to our current global economic malaise, an issue that has already been explored by dozens of books, magazine articles, and television documentaries, all helmed by leading pundits, regulators, economists, traders, banking experts, and financiers. Contrary to this treasure trove of insight, in her opinion the fault line lay in too much government regulation.

Alan Greenspan, the legendary head of the Federal Reserve, has said, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." He went on to admit, "“I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” Under questioning by Rep. Henry Waxman at a congressional hearing, Greenspan even went to far as to agree that his world view, his entire ideology of deregulation was wrong. According to man who headed the most powerful financial institution in the world for 19 years, it was a lack of regulation that fomented the collapse. But from Palin's perspective, Greenspan is old and not very pretty, so he is not to be believed. Did Greenspan ever kill a wolf from a helicopter or put on hip waders for a news conference? I think I've made my point.

Numerous experts have pointed to the repeal of the Glass-Steagall Act with the Gramm-Leach-Bliley Act, a bill that removed the separation between commercial and investment banks, and the Commodities Futures Modernization Act, which eliminated penalties for outright gambling by investment houses, as key components of the meltdown. Further, a multitude of insiders point to a dysfunctional SEC as a contributing factor; this was an agency that for 16 years didn't notice the largest swindle in history, the Madoff scandal. Madoff's hedge fund was a Ponzi scheme, the oldest trick in the book and one that an MBA student could have uncovered, let alone the chief securities regulator.

Several investors walked out on her speech, but that only showed how their "reality-based" worldview will limit the possibilities for the future. Palin lives in a universe where Ayn Rand is the Supreme Creator, an alternate existence where the removal of all restraint will inspire trust and confidence in the markets. The French, the Russians, and the Iranians have already experienced this happy place of social Darwinism presided over by a discompassionate oligarchy, and as a result, the world received the benefits of the guillotine, Stalin's communism, and Islamic fundamentalism.

Perhaps this is Palin's strategy - we'll all have to buy lots of guns and move to Alaska while we await the apocalypse. Oh, joy!

"That Giant Sucking Sound"

Dell Computer is purchasing Perot Systems for a whopping $3.9 billion, a 68% premium over the pre-announcement share price. I'm glad that Michael Dell finally realized that hardware has been a commodity for some time now, unless you're Apple, which has created a unique experience with the combination of their hardware and software. If Dell had been paying attention, when Google started making their own servers (over 200,000 of them) of a proprietary design in order to reduce costs, the writing was on the wall. Years ago, IBM moved away from focusing on hardware and successfully transitioned itself to a global services company. Hewlett-Packard, with the exception of Carly Fiorina's ill-fated acquisition of Compaq, had been moving toward services. But then, Fiorina only made that acquisition to justify an increase in her compensation package - thankfully, her presence is no longer a blight on Silicon Valley. So Dell waited far too long, but did they pay too much for Perot Systems?



Consulting last year's 10-K report, it is apparent that $3.9 billion is quite a bit of money, considering the revenue and cash flow. Revenues top out at $2.7 billion, but at the bottom line, net profits are a mere $117 million. This is largely due to the fact that services incur heavy expenses and don't have software-like margins, such that operating costs for Perot Systems are a hefty $2.3 billion. On top of that, revenues are down in 2009, making this acquisition look even worse. But this is only a part of the picture, because Perot has very little long-term debt and it receives 47% of its revenue from the health care sector.

The American Recovery and Reinvestment Act of 2009 has set aside $59 billion toward health care and $19 billion just to create electronic medical records systems in hospitals and clinics across the country. Currently, less than 10% of doctors have access to electronic medical records, and that is about to change. Perot Systems is well positioned to capitalize on this tax-payer funded opportunity, so I think that 3 years from now, Dell will appear to be astute in paying such an egregious sum for a company founded by someone who, during his presidential campaign, talked about "crazy Aunt Hattie in the basement" as a reference to the economy, and "that giant sucking sound will be jobs going to Mexico" as his rebuttal to NAFTA.