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Tuesday, February 26, 2013

For companies cutting IT costs, the cloud is the place to be

Story first appeared on USA Today -

Data storage shift helps companies' bottom line

Cloud computing is exploding and growing faster than a swirling funnel crossing the Oklahoma plains. The next generation of computing lowers information technology costs while increasing corporate profits at the same time. And what's not to like about that?

That one-two punch was revealed in a study obtained by USA TODAY conducted by England's Manchester Business School. The study, which was commissioned by San Antonio-based hosting company Rackspace, is expected to be released Wednesday.

The Manchester study indicates that cloud computing allows U.S. businesses to slash information technology costs by about 26%. What's more, 62% of those same American companies say that deploying in the cloud improved their bottom lines.

"The results are finally showing what we've known all along," says Rackspace Chief Technology Officer John Engates. "It's not just about moving workloads from your data center to our data center."

The rise of cloud computing has much bigger ramifications. It's a tectonic shift in how we work, live and play. iTunes is in the cloud. Ford's cars are connected to the cloud. Google's Gmail is based in the cloud. But those are largely consumer examples; now corporate computing is also shifting to the cloud.

"The move to the cloud can't happen fast enough for some companies," says Engates, who has been on the ground floor of the cloud-computing movement.

Cloud computing has myriad definitions, but in the most general sense it means devices linked to data centers located just about anywhere over a combination of wireless and wired networks. There are "private clouds," where companies own and control the data centers, which are usually centrally located in lower-cost geographies. And then there are "public clouds," in which companies use computing power delivered from servers they don't own, which are usually shared with other corporate customers.

Big companies tend to use a combination of private and public clouds, reserving their high-security functions and digital record keeping for the data centers they control. But the growing acceptance of public clouds foreshadows a trend in which computing power will be delivered similarly to the way electricity is distributed by utility companies. In fact, tech geeks refer to the long-term public cloud concept as "utility computing."

We are a long way from when most companies no longer own servers, or operate so-called on-premise data centers, and rely solely on public clouds. There are a number of reasons, including security concerns, control and reliability. But the Manchester survey suggests that enterprise computer customers are embracing the shift enthusiastically.

In addition to the cost-efficiency of cloud computing, the study found that 68% of U.S. firms are plowing the cash they saved back into their businesses. They are using the cost savings to improve and expand product lines, services and other offerings. More than 60% of the companies surveyed say they are using the money to hire new employees, give raises and offer bonuses. Employment at the American companies surveyed increased 28%.

While existing companies are transitioning to cloud computing at their own pace, start-ups unsurprisingly are totally embracing the change -- especially software and social-media concerns and online retail outfits.

More than half of the start-ups surveyed said they wouldn't have been able to afford on-premise data centers at the time of their launch.

Of course, it is self-serving for a cloud-service provider to hire a study that supports its case, but the numbers are the numbers, and Manchester interviewed some 1,300 companies in both the U.S. and the United Kingdom.

Intel's general manager of cloud computing, Jason Waxman, isn't surprised by the findings. Server, storage and networking sales have been booming at the chip giant in recent years. Intel pegs the compounded growth rate for servers at about 25% to 30% a year based largely on expansion of private and public clouds.

"The more companies can save on computer infrastructure, the more they can spend on infrastructure," Waxman says. "All of these new opportunities represent a huge build-out."

Waxman thinks that public cloud providers, including Rackspace, Seattle-based Amazon.com (yes, that Amazon) and San Francisco-based GoGrid, could grow as much as 70% a year.

Gartner, the industry research consultant, predicts that the total public cloud market could swell to more than $206 billion in 2016, roughly double what it is now.

Says Intel's Waxman, "It's an astronomical opportunity."

Major Banks Ignore States Banning Payday Loans

Story first appeared on The New York Times -

Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.

With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.

While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.

The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,” said Virginia O’Neill, senior counsel with the American Bankers Association.

But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.

The Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter. Benjamin M. Lawsky, who heads New York State’s Department of Financial Services, is investigating how banks enable the online lenders to skirt New York law and make loans to residents of the state, where interest rates are capped at 25 percent.

For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.

Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.

Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives, rather than where the lender is. The legislation, pending in Congress, would also allow borrowers to cancel automatic withdrawals more easily. “Technology has taken a lot of these scams online, and it’s time to crack down,” Mr. Merkley said in a statement when the bill was introduced.

While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed. Under federal law, customers are allowed to stop authorized withdrawals from their account. Still, some borrowers say their banks do not heed requests to stop the loans.

Ivy Brodsky, 37, thought she had figured out a way to stop six payday lenders from taking money from her account when she visited her Chase branch in Brighton Beach in Brooklyn in March to close it. But Chase kept the account open and between April and May, the six Internet lenders tried to withdraw money from Ms. Brodsky’s account 55 times, according to bank records reviewed by The New York Times. Chase charged her $1,523 in fees — a combination of 44 insufficient fund fees, extended overdraft fees and service fees.

For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase cannibalized her child support income. She said she applied for a $400 loan from Loanshoponline.com and a $700 loan from Advancemetoday.com in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law.

Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011, but was told that she had to ask the lenders instead. In one month, her bank records show, the lenders tried to take money from her account at least six times. Chase charged her $812 in fees and deducted over $600 from her child-support payments to cover them.

“I don’t understand why my own bank just wouldn’t listen to me,” Ms. Baptiste said, adding that Chase ultimately closed her account last January, three months after she asked.

A spokeswoman for Bank of America said the bank always honored requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokeswoman for Chase, said: “We are working with the customers to resolve these cases.” Online lenders say they work to abide by state laws.

Payday lenders have been dogged by controversy almost from their inception two decades ago from storefront check-cashing stores. In 2007, federal lawmakers restricted the lenders from focusing on military members. Across the country, states have steadily imposed caps on interest rates and fees that effectively ban the high-rate loans.

While there are no exact measures of how many lenders have migrated online, roughly three million Americans obtained an Internet payday loan in 2010, according to a July report by the Pew Charitable Trusts. By 2016, Internet loans will make up roughly 60 percent of the total payday loans, up from about 35 percent in 2011, according to John Hecht, an analyst with the investment bank Stephens Inc. As of 2011, he said, the volume of online payday loans was $13 billion, up more than 120 percent from $5.8 billion in 2006.

Facing increasingly inhospitable states, the lenders have also set up shop offshore. A former used-car dealership owner, who runs a series of online lenders through a shell corporation in Grenada, outlined the benefits of operating remotely in a 2005 deposition. Put simply, it was “lawsuit protection and tax reduction,” he said. Other lenders are based in Belize, Malta, the Isle of Man and the West Indies, according to federal court records.

At an industry conference last year, payday lenders discussed the benefits of heading offshore. Jer Ayler, president of the payday loan consultant Trihouse Inc., pinpointed Cancún, the Bahamas and Costa Rica as particularly fertile locales.

State prosecutors have been battling to keep online lenders from illegally making loans to residents where the loans are restricted. In December, Lori Swanson, Minnesota’s attorney general, settled with Sure Advance L.L.C. over claims that the online lender was operating without a license to make loans with interest rates of up to 1,564 percent. In Illinois, Attorney General Lisa Madigan is investigating a number of online lenders.

Arkansas’s attorney general, Dustin McDaniel, has been targeting lenders illegally making loans in his state, and says the Internet firms are tough to fight. “The Internet knows no borders,” he said. “There are layer upon layer of cyber-entities and some are difficult to trace.”

Last January, he sued the operator of a number of online lenders, claiming that the firms were breaking state law in Arkansas, which caps annual interest rates on loans at 17 percent.

Now the Online Lenders Alliance, a trade group, is backing legislation that would grant a federal charter for payday lenders. In supporting the bill, Lisa McGreevy, the group’s chief executive, said: “A federal charter, as opposed to the current conflicting state regulatory schemes, will establish one clear set of rules for lenders to follow.”

Friday, February 22, 2013

European Unemployment Rises, Euro Area to Shrink in 2013

Story first appeared on Bloomberg News -

The euro-area economy will shrink in back-to-back years for the first time, driving unemployment higher as governments, consumers and companies curb spending, the European Commission said.

Gross domestic product in the 17-nation region will fall 0.3 percent this year, compared with a November prediction of 0.1 percent growth, the Brussels-based commission forecast today. Unemployment will climb to 12.2 percent, up from the previous estimate of 11.8 percent and 11.4 percent last year.

Economic and Monetary Affairs Commissioner Olli Rehn said authorities must press on with reforms to end the region’s debt crisis and help the recovery. While “hard data” has been disappointing, there also has been more encouraging “soft data” that points to better times, he told reporters today.

A strengthening of the euro economy later this year may be led by Germany, where investor confidence rose in February to a 10-month high. The commission’s weak outlook reflects government austerity measures and efforts by companies and consumers to reduce debt. The European Central Bank said today banks will next week return 61.1 billion euros ($80.5 billion) of its second three-year loan, a measure introduced to aid lending at the depths of the financial crisis.

“We clearly have a decoupling with different recovery trends, with Germany certainly recovering at a much faster pace,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “We still have a lot of noise and volatility in the monthly data, but the bottom line is that the euro zone as a whole has already turned.”

German Confidence

The commission cut its forecast for the German economy, Europe’s largest, to 0.5 percent growth this year, from 0.8 forecast in November, due to a drop in euro-area demand that damps export and investment.

In a sign that Europe’s largest economy is anticipating better times, the Ifo institute in Munich said its business climate index climbed to 107.4 from 104.3 in January. That’s the biggest increase since July 2010 and the fourth straight monthly gain. Earlier this week, the ZEW gauge of investor sentiment rose to the highest in almost three years.

Separately today, the ECB said 356 financial institutions will repay money on Feb. 27 from its second long-term loan. The 61.1 billion-euro figure is about half the 122.5 billion euros forecast by economists. The ECB flooded markets with more than 1 trillion euros in three-year loans a year ago and banks have the option of repaying after 12 months. They started returning the initial loan last month.

“The second LTRO was used by a wider range of institutions with poorer collateral and given the positive carry still on offer, it makes sense for many of these institutions to hold on to these funds,” said Elsa Lignos, a currency strategist at Royal Bank of Canada in London. “We wouldn’t take this as a sign that financial tensions are returning.”

Budget Deadlines

The Stoxx 600 Index (SXXP) rose 1.1 percent as of 12:33 p.m. London time, bringing its advance for the year to 3 percent after a 14 percent gain last year. The euro slipped 0.1 percent versus the dollar to $1.3172. It has strengthened 6 percent over the past six months.
On the euro area, Marco Buti, head of the commission’s economics department, said the labor market “is a serious concern.”

“This has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward,” he said.

Domestic Demand

The commission said domestic demand won’t improve until 2014, when it should take over as the main driver of growth. Investment is expected to be a drag on the economy this year, subtracting 0.3 percent from GDP, before offering a 0.4 percent contribution in 2014.

Seven euro-area economies are expected to contract in 2013, with the Netherlands joining Italy, Spain, Portugal, Greece, Cyprus and Slovenia in the new forecast.

The EU’s outlook for next year was more upbeat, with 2014 forecasts of 1.4 percent growth and 12.1 percent unemployment in the euro area. Across the 27-nation European Union, the commission projected 0.1 percent growth for 2013 and 1.6 percent growth in 2014, after the bloc shrank 0.3 percent last year.

“Some signs of a turnaround are now discernible,” Buti said. “The present forecast projects a return to moderate growth in the course of this year, as confidence gradually recovers and the global economy becomes more supportive.”

Budget Shortfalls
Rehn urged nations to keep cutting budgets and overhauling their economies in the face of slowing growth. In a statement, he said any shift away from fiscal consolidation would prolong the downturn.

“The decisive policy action undertaken recently is paving the way for a return to recovery,” Rehn said. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is under way, delaying the needed upswing in growth and job creation.”

Still, he said deadlines may be extended because of the poor short-term economic outlook, giving deficit violators such as Spain and France room to avoid penalties or draconian cuts.

The EU is close to agreement on how to install the ECB as a common bank supervisor for the euro area, as well as how it will apply new global standards on how much protective capital banks should hold, Rehn said. These steps also will help set the stage for improvement in future years, he said.

The euro area as a whole is expected to post a budget deficit of 2.8 percent in 2013, according to the EU report. Spain is projected to show a 10.2 percent deficit for 2012, falling to 6.7 percent in 2013. The Spanish economy is projected to shrink 1.4 percent in 2013, the same as in 2012, with unemployment rising to 26.9 percent in 2013.

France, where President Francois Hollande has tussled with EU calls for more austerity, is projected to post a 4.6 percent deficit in 2012 and a 3.7 percent gap in 2013, the commission said. Without any changes, France’s deficit would rise to 3.9 percent in 2014 and Spain’s would rise to 7.2 percent, the commission said.

Rehn said it’s too soon to determine whether the commission will call for France to take additional steps.

Wednesday, February 20, 2013

Reader's Digest Parent Co. Files Second Bankruptcy

Story first appeared on The Deal Pipeline -

The publisher of Reader's Digest magazine and other titles has turned the page to its second bankruptcy filing as too much leverage, leftover overhead costs and a more profound fall in revenue and profitability than forecast has led the company to seek out a $105 million debtor-in-possession loan and a prenegotiated reorganization plan centered on swapping debt for equity.

Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York in White Plains will consider the interim use of $11 million of the DIP financing, along with its cash collateral, at an afternoon hearing on Tuesday.

Reader's Digest Association Inc. filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York in White Plains, under the main case of its parent company, RDA Holding Co., on Sunday. Its international affiliates, including Canada, weren't included in the bankruptcy filing.

The company filed with 30 affiliates and has sought to jointly administer the cases. Drain will also consider the joint administration of the cases during Tuesday's hearing.

RDA Holding has secured a $105 million DIP loan from prepetition lenders Wells Fargo Principal Lending LLC, GoldenTree Asset Management LP, Empyrean Capital Partners LP and Apollo Management LP's Apollo Senior Floating Rate Fund to fund its reorganization.

The DIP has $45 million in new money and refinances its roughly $60 million prepetition secured credit facility. The DIP matures the earliest of Oct. 31 and the effective date of its reorganization plan.

Through the DIP, the refinanced loan is priced at either Libor plus 500 basis points, with a 3% floor on Libor or a base rate plus 400 basis points. The base rate has a 3% floor. The new-money portion of the DIP is priced at either Libor plus 950 basis points, with a 1.5% floor on Libor or a base rate plus 850 basis points, with a 1.5% floor on the base rate. If the company defaults on the DIP, the pricing increases by 200 basis points.

The DIP carries a 4.75% ticking fee, which would be paid on the undrawn amount of the new money portion of the loan starting 30 days from the petition date until the loan is fully funded. The DIP also has a 2% early termination fee, a 2% commitment fee on the new money portion of the loan and $30,000 per year administrative agency fee.

According to a declaration filed by RDA Holding president and chief executive Robert E. Guth, the company plans to cut its debt by 80% during its second trip through Chapter 11.

As Reader's Digest Association, then-owned by private equity firm Ripplewood Holdings LLC, the company first filed for Chapter 11 on Aug. 24, 2009, in White Plains, N.Y. During its case, it pruned its debt by 75%, left its operations intact and wiped out its prepetition equity holders. The company emerged from bankruptcy protection on Feb. 22, 2010, with RDA Holding as the parent.

The New York-based media and direct marketing company blamed its second bankruptcy filing on a business plan and financial forecasts that failed to "adequately account for the steep declines that the media industry has suffered over the last few years," the declaration said.

The company has also struggled due to its highly leveraged capital structure and its legacy overhead expenses. In addition, its international businesses have experienced a decline in profitability and subscription revenue.

RDA Holding began negotiations with its secured lenders, Wells Fargo Bank NA and Wells Fargo Principal Lending, as well as an ad hoc committee of its senior secured noteholders last year as it faced a potential covenant default on its secured credit facility.

The ad hoc group consists of GoldenTree Asset Management, Empyrean Capital and Apollo Management. The group holds roughly 70% of the senior secured notes, court documents said.

Under the terms of the prenegotiated plan, which has not yet been filed with the court, the holders of $464 million in senior secured notes will swap their debt for 100% of RDA's reorganized common stock.

RDA has $534 million in outstanding prepetition debt, including the senior secured notes, a more than $59.26 million secured credit facility with Wells Fargo and a $10 million unsecured term loan from Luxor Capital Group and Point Lobos Capital. Wells Fargo is the trustee and Wilmington Trust FSB is the collateral agent on the senior secured notes.

Under the reorganization plan, the DIP loan will convert into exit financing or be repaid in full in cash, through its reorganization plan.

The refinanced portion of the loan will convert to a "first out" exit term loan, while the new money portion of the DIP will convert to a "second out, first priority" exit term loan. The exit loans will mature on Sept. 30, 2015.

The first out exit term loan with Wells Fargo will be priced at Libor plus 600 basis points or a base rate plus 500 basis points. Libor has a 3% floor, while the base rate has a 4% floor. The second out exit loan will be priced at Libor plus 11% per annum or a base rate plus 10% per annum. There is a 1.5% floor on Libor and a 2.5% floor on the base rate. It also carries a 2% up-front fee and an up to 2% early termination fee. If the company defaults on the exit loans, the interest rate would increase by 200 basis points.

RDA must file its plan and disclosure statement within 25 days of its petition date. It plans to win confirmation of the plan by July 15 and exit from Chapter 11 by July 31, under the terms of its restructuring support agreement.

Through the reorganization plan, unsecured creditors will get a pro rata share of an undetermined amount. Its prepetition equity holders will be wiped out.

"After considering a wide range of alternatives, we believe this course of action will most effectively enable us to maintain our momentum in transforming the business and allow us to capitalize on the growing strength and presence of our outstanding brands and products," Guth said Sunday in a company statement.

"The complex transformation that we began 18 months ago under the leadership of a new senior management team has resulted in a more streamlined, more focused, and more profitable business, but we have unfortunately been unable to align our debt levels correspondingly. The Chapter 11 process, which will facilitate a significant debt reduction, will enable us to continue to redefine our business by focusing our resources on our strong North America publishing brands, which have shown a new vitality as a result of our transformation efforts, particularly in the digital arena," Guth said in the statement.

Reader's Digest Association, which publishes the second-largest paid subscription magazine in the U.S. in Reader's Digest, has been selling its underperforming and noncore businesses since 2011 in an effort to pay down its debt.

Last year, the debtor sold its Weekly Reader and Allrecipes.com businesses for $3.6 million and $175 million, respectively, and hired FTI Capital Advisors LLC as its financial adviser for the sale of its international entities, the declaration said.

The company, which has been in business for more than 90 years, produces and sells print and digital magazines, books, music and videos to consumers around the world.

According to court documents, Alden Global Capital holds a 17.77% stake in the company, while Point Lobos Capital holds a 13.55% stake. Its other large equity holders include Jefferies High Yield Holdings LLC (9.43%), GoldenTree Asset Management (9.22%), GE Capital Corp. (8.96%), JPMorgan Chase Bank NA (6.79%), and Goldman Sachs Asset Management LP (5.69%).

The debtor listed its assets at $1.12 billion and its liabilities at $1.18 billion in its petition.

RDA Holding's largest unsecured creditors include the Federal Trade Commission of Washington ($8.75 million), Williams Lea of New York ($5.97 million), HCL Technologies Ltd. of Vienna, Va. ($4.36 million), Quad/Graphics Inc. of Sussex, Wis. ($3.58 million) and RR Donnelley Receivables Inc. of Trumbull, Conn. ($1.61 million).

Debtor counsel is Michael Aiello, Marcia Goldstein and Joseph Smolinsky at Weil, Gotshal & Manges LLP. Evercore Group LLC is the company's investment banker.

Abhilash M. Raval, Blair M. Tyson and Michael E. Comerford at Milbank, Tweed, Hadley & McCloy LLP are counsel to Wells Fargo.

Nicole L. Greenblatt at Kirkland & Ellis LLP and Moelis & Co. are advisers to the ad hoc committee of noteholders.

Amid Merger Reports Shares Soar for OfficeMax & Office Depot

Story first appeared on the Chicago Tribune -

Shares in Naperville-based OfficeMax Inc. soared 20 percent Tuesday on a report it is in advanced merger talks with Office Depot Inc.

And Office Depot shares were up 9 percent after the Wall Street Journal reported the two companies were in advanced discussions, citing person familiar with the negotiations, with a deal possible as early as this week.

Currently, the deal is expected to be structured as a stock-for-stock transaction, the person said.

Neither company responded to requests seeking comment.

One of OfficeMax's top shareholders, Neuberger Berman, said it would support a merger with Office Depot depending on terms of the deal, according to a portfolio manager at the firm.

Responding to media reports, Benjamin Nahum of Neuberger Berman, told Reuters in an interview that his preference would be for OfficeMax to declare a special dividend before merging with Office Depot. "In our view this would facilitate a fair deal."

Neuberger Berman said OfficeMax shareholders should be compensated for "the balance sheet strength that we bring to this combined entity."

The news came months after the investment firm called on the third-largest U.S. office supply chain to return money to shareholders in the form of a dividend or share repurchases and raised the specter of a proxy fight next year if the retailer fails to comply.

According to Thomson Reuters' data, Neuberger Berman owns 4.76 percent of OfficeMax, making it the third-largest shareholder of the Naperville company.

OfficeMax is expected to report its quarterly earnings on Thursday.

While the pair up had been rumored for years, one analyst said Monday that he believed a deal was less likely after a report last week that Office Depot is in talks to sell its remaining 50 percent stake in its Mexican operations.

Scott Tilghman, an analyst with investment firm B. Riley & Co. said that similarities in the pair’s U.S. and Mexican operations were thought to be a cornerstone of the consideration to combine.

But even if Office Depot does sell its Mexican stake, Tilghman said a deal would still make sense as both companies struggle to gain traction against competitor Staples Inc. and sites like Amazon.com.

By combining, the pair could cut costs by shedding stores and streamlining operations without having to raise prices. Tilghman estimates the companies could get rid of 20 percent of their combined stores and still hold onto customers.

Both companies have struggled in recent years from declining revenue in their retail stores. In OfficeMax’s most recent quarter, it was able to grow net income by cutting costs despite lower revenue. Slumping retail sales were somewhat offset by OfficeMax’s U.S. contract business, where it works directly with businesses to help operate more efficiently and reduce office expenses.

If combined, OfficeMax and Office Depot, the world’s second and third largest office products companies by revenue, would still not eclipse the segment’s largest business, Staples Inc.

Office Depot, based in Boca Raton, Florida, has 1,675 stores world-wide, annual sales of about $11.5 billion and some 39,000 employees, the Journal said. OfficeMax, operates roughly 900 stores in the United States and Mexico, generates about $7 billion in annual sales and has 29,000 employees, the Journal said.

Shares of OfficeMax closed at $13, up $2.25 Tuesday on the New York Stock Exchange. Shares of Office Depot rose 42 cents to close at $5.02.

Monday, February 11, 2013

Eight Companies Ruined By Their Founders

Story first appeared on USA Today -

For every Sergey Brin, there is a Michael Dell. While the Google co-founder and CEO made his company one of the most valuable in the world with its shares trading near an all-time high, Dell has laid waste to his namesake. Dell and financial supporters offered to buy the company for $13.65 a share, 40% lower than what it was worth when Dell returned to the company as CEO in early 2007.

Investors who bought Dell shares a year ago have taken a haircut of more than 20%. Dell's failure is not unique. He belongs to a group of founders of large public companies that showed great promise but were ultimately wrecked by poor decisions, legal problems, and a lack of innovation.

Perhaps the greatest hallmark of founders who ruin their companies is that they appear to look out mostly for No. 1 rather than the interests of the company and its shareholders. For starters, they accept excessive compensation.

Steve Jobs of Apple, earned $1 in salary and bonus in 2010. By contrast, Aubrey McClendon, who was recently ousted as CEO of Chesapeake Energy, made over $100 million in 2008, and remarkably large sums in the years since then. Some of his other actions, such as allegedly borrowing against assets that he co-owned with Chesapeake, raised concerns of conflict of interest.

Martha Stewart recently received a new contract from her company, Martha Stewart Living Omnimedia, which has lost money four years in a row. Under the arrangement, she will continue as founder and chief creative officer at the firm until 2017. That is in addition to the more than $20 million she made over the three years that ended in 2011.

Dov Charney, who drove the company he founded, American Apparel, to the brink of bankruptcy in 2011, made $11.6 million that year. Michael Dell, who in 2010 settled Securities and Exchange Commission charges that he helped misrepresent Dell's financials, made more than $21 million during the company's last three combined fiscal years.

A more complex measurement of these founders' performance is their lack of vision to transform their companies as the markets in which they operate change. None have shown the foresight Brin did when he moved Google beyond search and into mobile operating systems. And his company is also the dominant force in online video.

Dell did not drive any comparable revolution at his company, which never stepped aggressively into the new age of personal computing— tablets and smartphones. The same holds true for Mike Lazaridis, the co-founder of BlackBerry, which did not transform its market share in the corporate smartphone industry into a lead in the consumer sector.

Richard M. Schulze, who was the founder, largest shareholder, and de facto head of Best Buy oversaw a period in which the retailer failed to move into e-commerce quickly. In the meantime, Amazon has nearly bulldozed Best Buy under.

The most often damaging problem with founders is that they cannot be pushed out. Martha Stewart owns the controlling interest in her company. Groupon founder Andrew Mason and two other shareholders control that company. Schulze and Dell own commanding portions of the shares in the companies they founded.

24/7 Wall St.'s review of large, U.S. publicly traded companies included an analysis of company financials, as well as share price changes over time. We reviewed company documents filed with the SEC to identify voting share of the founders. If that could not be determined, we used the founder's total share ownership. In Dell's case, the voting share reflects his ownership before the completion of the company's pending leveraged buyout.

Eight Companies Ruined by Their Founders:

1. Dell, founded 1984
Founder: Michael Dell, 13.97% voting share
Dell started his company when he was 19 years old. By 2001, the company he founded as a college student was the largest computer systems provider in the world. In 2004, Dell resigned as CEO but returned to the position in February 2007. By then, the company had already begun to lose its appeal with consumers in the competitive PC business. Despite Dell's return, the company continued to struggle in its core business. Dell's worldwide PC market share fell from 15.9% in 2006 to 10.7% in 2012. Consumers' growing preferences for tablets and smartphones over PCs and regulatory scrutiny have hurt the company. In 2010, the SEC fined Dell $100 million, and Michael Dell $4 million, alleging the company engaged in accounting fraud intended to mislead investors about financial performance. On Feb. 5, Dell reached a deal with a group of investors that included Michael Dell to go private for $24.4 billion, the largest leveraged buyout since the 2008 financial crisis.

2. Chesapeake Energy, founded 1989
Founder: Aubrey McClendon, under 1% voting share
McClendon, Chesapeake's CEO since he helped co-found it has become known for his lavish compensation packages and extreme bets on his company's performance. In 2008, McClendon lost much of his personal fortune after borrowing money to buy massive stakes in Chesapeake. McClendon was paid $100 million that year. Between 2009 and 2011, McClendon's earned more than $57 million in total compensation. In April 2012, Reuters reported that McClendon had again borrowed a large amount of money, in this case, $1.1 billion, using his stake in the company's natural gas and oil wells as collateral. Reuters also discovered McClendon was running a $200 million hedge fund from within company headquarters that speculatively traded in "the same commodities Chesapeake produces." Within weeks, McClendon gave up his position as chairman due to concerns over potential conflicts of interest. He is scheduled to resign as CEO April 1.

3. Martha Stewart Living Omnimedia, founded 1997
Founder: Martha Stewart, 86.7% voting share
Stewart's company continues to struggle while she remains chairman. Stewart's audience is aging and the company relies too much on it's print magazine revenue. Stewart's image took a serious hit in 2004, when she was found guilty of conspiracy, obstruction of justice, and making false statements to a federal investigator after she was indicted for insider trading. Although Stewart launched a high-profile "comeback" campaign after her release from prison, her efforts have not paid off for the company. It has not turned an annual profit since 2007. The company's stock price is down more than 58% the past five years. Part of the problem is executive turnover. There have been at least five CEOs and five CFOs since the company's start. Many executives argue that Stewart's excessive involvement has hampered their ability to make change. The sixth CEO, Lisa Gersh, announced in December that she was leaving the company after serving in the position for just five months. Despite the company's struggles, Stewart was paid more than $21 million between 2009 and 2011.

4.BlackBerry, founded 1984
Founder: Mike Lazaridis, 5.7% voting share (outstanding shares)
Lazaridis co-founded BlackBerry, formerly known as Research In Motion, in 1984 and served as co-CEO of the company, alongside Jim Balsillie, through January 2012. The two pioneered the smartphone revolution. Lazaridis, however, failed to prepare BlackBerry for the upcoming competition from consumer-facing rivals. Among the largest mistakes marking the end of Lazaridis' tenure were the failed BlackBerry PlayBook tablet, a four-day global service outage — which left phones unable to browse the Internet or access emails and texts — and a focus on business professionals even as iPhones and Androids absorbed market share. In the third quarter of 2012, BlackBerry's worldwide market share of mobile device sales, by operating system, was just 5.3%, down from 11% in the third quarter of 2011, according to Gartner research firm.

5. Countrywide Financial, founder 1968
Founder: Angelo Mozilo, less than1.5% voting share
Mozilo, former Countrywide CEO, became the face of the subprime mortgage mess after that market collapsed. Under his watch, his company began financing mortgages to high-risk borrowers, which during the housing boom drove the company's spectacular growth. In 2006, Countrywide financed about 20% of all mortgages in the U.S., more than any other mortgage lender in the country. But the company fell apart when the housing market tanked and borrowers defaulted on their high-interest loans. Countrywide was eventually sold to Bank of America in 2008 for $4 billion, with Mozilo forced out a few months later. The company faced a barrage of lawsuits, arguing that Countrywide had used deceptive practices to get people to apply for mortgages they could not afford. Mozilo's integrity was also called into question when it was reported that several government officials and politicians, such as then-U.S. Sen. Chris Dodd, received favorable mortgage deals simply by being "friends of Angelo." In 2010, Mozilo settled an insider trading charge with the SEC for about $67 million. He is permanently banned from serving as an officer and director of a public company, under the terms of the settlement.

6. Groupon, founder 2008
Founder: Andrew Mason, 19.5% voting share
Mason, Groupon's quirky founder and CEO, has stumbled repeatedly the past couple years. His company, which provides discounts and daily deals online, had to revise its financial reports in August 2011 after regulators and analysts took issue with its accounting methods. Groupon issued another revision to its financials in early 2012 as the company overstated its 2011 profit by more than $20 million. Because of these problems, along with general concern that the daily deal fad — the company's core business — may be slowing, the stock price has been declining. It is now roughly a quarter of its initial public offering price of $20 a share, with the company's market capitalization at $3.3 billion. It didn't have to be this way. In 2010, Groupon rebuffed Google's offer to buy the company for up to $6 billion. There has been talk that Mason isn't mature enough to run a company of this size. For instance, he was criticized for drinking beer at the company's annual meeting and for his public gaffes commenting on why it turned down buyouts.

7. American Apparel, founded 1989
Founder: Dov Charney, 43.3% voting share
Charney started and ran American Apparel from his dorm room at Tufts University in the late 1980s. Twenty years later, in 2008, the apparel company had more than 6,700 employees and 197 stores worldwide. But provocative ads and rapid expansion did little to address problems plaguing the company. In 2009, the Immigration and Customs Enforcement agency said that a quarter of workers at the company's downtown Los Angeles manufacturing facility were illegal immigrants. In 2011, two sexual harassment lawsuits were filed against Charney. In December, a former store manager accused Charney of choking him and rubbing dirt in his face. Charney has denied all allegations of misconduct. The company has also struggled to stay afloat financially, running an operating loss in the last 12 months for which financial statements have been released.

8. Best Buy, founded in 1966
Founder: Richard Schulze, 20.24% voting share
Schulze has presided over a company that has struggled to stay relevant in a sector that is increasingly moving online. Best Buy's business has taken a sizable hit from online retailers such as Amazon.com. Some industry experts and analysts point out that Best Buy is increasingly becoming a showroom for electronics consumers — meaning that people go to the store to check out the product and then buy it cheaper online. In the most recent quarter, Best Buy lost $10 million as revenue fell 4% compared to the previous year. The company's share price is approximately one third of what it was five years ago. Schulze also found himself embroiled in a company sex scandal. A Schulze lieutenant, former CEO Brian Dunn, was forced to resign from the company after it was discovered he had an affair with another staffer. The founder received criticism after an internal investigation found that he had knowledge of the affair and did not report it to the board. Schulze announced his retirement from the board shortly after the investigation.

Stabilizing Profits for Recession Surviving Auto Dealers

Story first appeared on The Detroit News -

Innovations in retail and outlet upgrades are hot topics for discussion at annual convention

As auto sales have come roaring back from the recession, dealers across the country are seeing profits stabilize and in some cases improve, as many continue to upgrade their buildings and customer waiting areas and amenities.

Many of the nation's 17,540 new car dealers are gathering here this weekend for the annual National Automobile Dealers Association Convention and Expo.

Dealer renovation programs and future innovation will be hot topics among the more than 20,000 dealers, manufacturers and other auto industry officials expected to attend.

"Dealers that are in business today are strong and stable," Terry Burns, executive vice president of the Michigan Automobile Dealers Association, said in an email.

"Many have upgraded their facilities, retooled their service departments, focused on their customer experience and look forward to a great 2013."

In 2012, automakers and their dealers sold about 14.5 million vehicles in the U.S. NADA Chief Economist Paul Taylor expects consumers to buy or lease more than 15.4 million new vehicles this year across the country.

Last year, new-car dealers in Michigan sold 486,372 cars and trucks; that's up 5.6 percent from 460,628 sold in 2011, and up 18.2 percent from 411,342 vehicles sold in 2010. The figures still pale in comparison to what Michigan's dealer body sold in 2007, before the industry collapse and the large reduction of dealerships among the Big Three.

Michigan has about 650 new-car dealers. Burns said he expects a "little contraction" among them this year, due to consolidation of brands.

Nationally, some automakers plan to add new-car dealerships in 2013, including Kia Motors America, which expects to add 10, and Volkswagen Group of America Inc., which plans to add more than 15. In the past year, Chrysler Group LLC's Fiat brand has added about 60 dealerships across the country to grow to 201 locations. Fiat executives have said they would like to add more dealerships in select cities.

Other car companies aren't increasing dealership numbers, but they are helping dealers improve facilities to retain loyal customers and gain new ones.

In a recent interview, Hyundai Motor America President and CEO John Krafcik told NADAFrontPage.com, a website run by the dealer group, that the company does not plan to add to its 820 dealerships. Instead, Krafcik said Hyundai has focused on boosting customer satisfaction; more than 340 dealers have completed renovations.

Automakers from Chrysler to American Honda Motor Co. Inc. and Toyota Motor Sales U.S.A. Inc. have facility upgrade programs. Many of those programs have been in progress for several years.

Volkswagen, which has more than 600 VW dealers and more than 250 Audi dealers, said it plans to complete 45 modernist "White Frame" facilities this year. Some are new construction, others are renovated dealerships. More are in the pipeline for next year. More than 100 Volkswagen dealers are spending $450 million on renovations from 2011 to 2013, while Audi dealers are spending $206 million on renovations from 2009 to 2013.

Doug Fox, owner and president of Ann Arbor Automotive, which includes five Asian brands, renovated his Acura store about seven years ago and his Nissan store five years ago.

"We are in the process of doing an image store for Kia, and we're certainly going to be considering doing one for Hyundai in the next couple of years," he said this week in a phone interview, adding sales at both his Kia and Hyundai franchises each were up about 10 percent in 2012. Fox said he hopes to complete the Kia redesign by the end of the year; Kia will contribute a portion of the cost.

"Certainly, a consumer likes to come into a nice, clean, fresh, contemporary building," Fox said. "And I think in our case, the buildings we're talking about are definitely in need of refurbishment."

More than 70 percent of Ford Motor Co.'s Lincoln Motor Co. dealers in the top 130 U.S. markets have agreed to renovation programs that include creating a "new sales and service experience for future Lincoln owners," Ford spokeswoman Elizabeth Weigandt said in an email.

About 25 percent of dealers in those top markets will have renovated facilities this year, Weigandt said.

General Motors Co. expects almost all Chevrolet, Buick, GMC and Cadillac dealers will have a new look by 2016. The Detroit automaker, which reduced its dealerships over the past year by about 50, said about 92 percent of its 4,355 dealers have agreed to participate in its renovation program.

Russ Shelton's dealership in Rochester Hills is one that has the new look after he spent more than $2 million gutting the facility. He added more square footage to his showroom, new furniture and energy-efficient lighting.

GM is defraying some of the cost, he said.

Shelton, in a phone interview, said he expects sales at Shelton Buick GMC will rise from about 650 to 700 annually to about 1,000 vehicles a year.

"I think 2013 is going to be a good year. All manufacturers are predicting big numbers."

Friday, February 8, 2013

109 Arrests - IRS Cracking Down on Identity Theft

Story first appeared on USA Today -

The IRS says a coast-to-coast campaign against tax-related identity theft led to more than 700 enforcement actions last month, including arrests and indictments.

Federal authorities took action against 389 people suspected of involvement in identity theft to commit tax fraud, the IRS said Thursday.

Announced as the annual federal tax-filing season begins, the nationwide actions include 109 arrests and 189 indictments, plus court complaints and information, said acting IRS Commissioner Steven Miller.

The bulk of the enforcement actions took place on the East Coast and in the Midwest, a map released Thursday by the IRS shows.

Additionally, IRS auditors and criminal investigators in late January started visiting 197 money service businesses, including check-cashing stores, to ensure the locations don't aid identity theft or refund fraud. The visits focus on 17 high-risk areas identified by the IRS in or near New York; Philadelphia; Atlanta; Tampa; Miami; Chicago; Houston; Phoenix; Los Angeles; San Diego; El Paso; Tucson; Birmingham; Detroit; San Francisco; Oakland and San Jose.

Part of a year-long IRS crackdown, the effort targets thieves who gain access to other people's Social Security numbers and other identifying information, and then use that information to concoct and file fraudulent federal tax returns — and collect unwarranted refunds.

"As tax season begins this year, we want to be clear that there is a heavy price to pay for perpetrators of refund fraud and identity theft," said Miller. "We have aggressively stepped up our efforts to pursue and prevent refund fraud and identity theft, and we will continue to intensely focus on this area.

The tax agency has added additional computer screening filters in an effort to stop the crime, said Miller. Although he acknowledged the filters could slow IRS processing of some legitimate tax returns and refunds, Miller said the tax agency would work to keep any delays to a minimum.

Additionally, the IRS as of late 2012 had assigned more than 3,000 employees to work on identity theft-related work, said Miller. That's more than double the number devoted to the area in 2011, he said.

In all, the IRS says its efforts in 2012 "protected" against $20 billion in fraudulent refunds, most of which are directly related to identity theft. That compares with $14 billion in 2011.

Miller said the IRS is making progress in fighting identity theft refund fraud, but still has room to improve. The agency is working to speed the time it takes to get refunds to honest taxpayers victimized by the crimes, he said.

Thursday, February 7, 2013

Fed Website Hacked - Banker's Info Accessed

Story first appeared on USA Today -

More than 4,000 bank executives had their personal information published on the Internet by hackers who accessed the data on an internal Federal Reserve website, according to a Reuters report.

The Federal Reserve says no critical functions were affected by the breach, which the activist group Anonymous is taking credit for. `

"Exposure was fixed shortly after discovery and is no longer an issue. This incident did not affect critical operations of the Federal Reserve system," a spokeswoman for the U.S. central bank told Reuters. All of the bankers affected by the breach had been contacted, Reuters said.

The information posted by Anonymous included mailing addresses, business and personal phone numbers and e-mail addresses.

Anonymous is a ragtag group of activist hackers who've launched scores of attacks on government and business sites.

The Fed did not identify the hacked website. But Reuters said bankers were told that the site was a contact database for use during natural disasters.

Wednesday afternoon, Fed spokeswoman Lisa Oliva said the hackers had exploited a "temporary vulnerability." She says the exposure has been fixed, the executives have been informed of the breach and it is no longer an issue.

Anonymous has been involved in an increasing number of hack attacks on business and government websites in retaliation for the seizure of Megaupload, a popular Internet service that allowed users to transfer large files of movies and music. The FBI has charged several people connected with Megaupload with copyright infringement and running an international criminal enterprise.