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Analysts Call Whirlpool Best Option for Maytag
DES MOINES REGISTER
July 31, 2005

Whirlpool Corp.

Maytag Corp.

Job losses in Newton are likely, they say; how many is unclear.

Whirlpool Corp. has learned many valuable lessons in appliance manufacturing over the past five years, industry analysts say.

The Benton Harbor, Mich., company has become leaner. It has established global markets for its products, and it has invested heavily in product development.

The payoff has come with new highs for Whirlpool stock and growing sales and profits for the company.

Now, Whirlpool wants to take its expertise to the troubled operations of Maytag Corp., where the company's stock has dropped and profits have faltered.

The people in Newton, Maytag's hometown, want to know whether Whirlpool would use its expertise to rebuild Maytag or scale back its operations.

Ted Johnson wants a buyer for Maytag that will revitalize the 112-year-old Iowa icon and keep its 1,300 union workers in Newton busy building washers.

"We have the hardest-working work force in the appliance industry," Johnson said. "It would be terrific if we could find somebody who would use their skills."

Johnson, the president of United Auto Workers Local 997, which represents workers in the Newton factories, does not know whether Whirlpool fits the bill.

"We don't know what Whirlpool's intentions are for Newton," Johnson said.

Whirlpool is the leading bidder for ownership of Maytag. Whirlpool has made a preliminary offer of $18 a share for Maytag's stock. The only other bidder is Triton Acquisitions, an investment group led by Ripplewood Holdings of New York, which has offered $14 a share for Maytag.

With a Whirlpool buyout, most experts expect job losses in Newton, most likely in Maytag's corporate headquarters operations.

The most optimistic projections have Whirlpool investing in the Maytag brand and bringing new products to its operations. The grimmest projections have Whirlpool closing down most Maytag operations, with only the brand name surviving.

For now, Johnson said, the union is pulling for the first Maytag bidder, Triton Acquisitions.

Triton and Ripplewood have indicated they would keep Maytag's headquarters in Newton and continue operating its Iowa factories in Newton and Amana, at least for a while. Maytag owns the Amana refrigerator plant in Amana, which has about 2,300 workers.

"With Ripplewood, there's a glimmer of hope" that Newton operations will continue, said Johnson.

Industry analysts, however, say Maytag has a little chance of long-term survival if it continues on the same path, even with Triton/Ripplewood as its owner.

"If I were sitting in Iowa, without a doubt, I would be pulling for Whirlpool," said Laura Champine, an analyst at Morgan Keegan in Memphis, Tenn. "Whirlpool understands the business."

Different roads
Maytag and Whirlpool have come together in their takeover discussions having faced many of the same challenges over the years. The results of their corporate efforts differ, however.

l Global expansion: Both Whirlpool and Maytag experienced difficulties expanding into foreign markets.

Maytag built refrigerator and component manufacturing plants in Reynosa, Mexico, and forged a contract with Daewoo Electronics in South Korea to build lower-priced refrigerators.

But Maytag also dumped expensive operations in Europe and China. Ending the Chinese partnership alone cost Maytag about $40 million in 2002.

Whirlpool has mostly stuck with its global expansion and now has operations in Latin America, Europe and Asia.

"Whirlpool didn't back off, even when it blew up in its face," said David MacGregor, an analyst at Longbow Research in Cleveland, Ohio.

As a result, Whirlpool has tapped lucrative foreign markets, which now make up about 40 percent of its sales, said Champine, the Morgan Keegan analyst.

The global base also means Whirlpool can better obtain raw materials and components, which help it better compete against other appliance companies, such as Electrolux AB in Sweden, Haier in China and LG in South Korea.

l Reducing costs: Whirlpool announced in 2000 a $350 million corporate restructuring plan that cut 6,000 jobs worldwide. The initiative to reduce costs and increase the company's manufacturing efficiency was expected to save up to $250 million annually.

Since 2000, Whirlpool's sales have increased 29 percent and its earnings grew about 11 percent to $406 million in 2004.

Last year, Maytag announced a similar restructuring. The Iowa company said it would cut about 1,100 salaried employees, or 20 percent of its salaried workforce. That was on top of ongoing production layoffs.

Maytag expected the restructuring initiative to save $150 million annually after an initial cost of $100 million.

The expense pushed Maytag to report a $9 million loss last year, the first since 1995. Maytag's earnings have been back in the black so far this year.

Maytag's shares, however, have fallen about 60 percent in value since the restructuring announcement. The share price recently rebounded on the news of the potential buyout. Shares are trading at around $17 each.

Johnson, the Newton union president, said Maytag's cost-cutting has done little to improve the company's long-term financial stability. "It's got Maytag in the shape it is now," he said.

Combined company
Few analysts see a way around more job cuts with a Maytag-Whirlpool combination.

"They're obviously going to look at plants and offices with an eye toward eliminating redundancies," said Tom Swartwood, a lawyer and principal in Swartwood Hesse Inc., a Des Moines investment banking firm. "You have to do that in a merger, pleasant or not."

MacGregor, the Longbow Research analyst, said Maytag workers would probably see more jobs eliminated with a Triton/Ripplewood takeover, too, as the investment group looked for ways to get a return from its investment.

Champine, the Morgan Keegan analyst, said that unlike Triton/ Ripplewood, Whirlpool can bring savings to Maytag operations and offer the potential for new product lines.

The combined companies' purchasing power of steel and other raw materials "could alone double Maytag's operational profits," Champine said. And Whirlpool's component plants in lower-cost countries, such as Mexico, are more efficient and could make products for Maytag factories.

Nicholas Heymann, an analyst at Prudential Equity Group in New York, disagrees.

In a recent report, Heymann wrote that he doubted Whirlpool "could reduce or eliminate hundreds of millions of dollars," given that Maytag has already "very sharply cut" from places such as advertising, new product development and corporate operations.

Heymann also said the Maytag brands would require "immense investments if they were to once again become competitive" and the "brand was to be fully resurrected."

Heymann discussed the possibility of Whirlpool scrapping most of Maytag's appliance operations to produce "its own better-engineered products and sell them under the Maytag brand" - a move that could cost Whirlpool up to $700 million.

Champine, however, said it makes little sense for Whirlpool to abandon Maytag, since Maytag's sales were nearly $5 billion last year.

"Maytag is still 15 percent of the U.S. major appliance market," she said. "I think it would be an overstatement of how broken Maytag is. Maytag is not only a leading brand but has leading products in several categories," such as Jenn-Air ovens, Champine said.

Champine believes one reason for Whirlpool's interest in Maytag is the merger of Kmart and Sears, which sells Whirlpool appliances under the Kenmore brand. Whirlpool may need more manufacturing capacity to supply Kmart stores with appliances over the next three years, Champine said.

"Whirlpool is probably Maytag's best chance at keeping plants open," Champine said. "Whirlpool is running at nearly full capacity in the U.S., and they might be able to use Maytag's plants to service some of their growth.

"A vast majority of its assembly is still done in the U.S. for products that they sell in the U.S."

Whirlpool's operations in Fort Smith, Ark., might bear out the point.

Whirlpool, that area's largest employer, notified Fort Smith workers two years ago that it would move up to 1,500 jobs to Mexico. Since then, about 250 jobs have been added, and the company has begun producing a new high-end line of refrigerators there. About 4,700 workers in Fort Smith make refrigerators, ice makers and trash compactors, said Tom Mansky, president of the Fort Smith Chamber of Commerce.

Johnson, the UAW leader in Newton, will wait for news.

"Not knowing what's going to happen is like having an 800-pound gorilla on your back all the time," Johnson said. But "at the end of the day, you have to have hope, so you can get up the next morning and go to work," he added.

Maytag chief executive Ralph Hake and Whirlpool chief executive Jeff Fettig have crossed paths before.

In 1999, Fettig was chosen as Whirlpool's president and chief operating officer - a position that Hake, who then was Whirlpool's chief financial officer, reportedly also sought. Fettig had shaped up Whirlpool's European operations before moving into the top office at the Benton Harbor, Mich., company.

Hake left Whirlpool with Fettig's promotion and became the chief financial officer at Fluor Corp., a publicly traded engineering, construction and professional services firm in California. Hake moved to Newton and took over operations at a troubled Maytag Corp. in 2001.

I Like Sears so much, I own it for my charitable trust
By THE STREET.COM Staff
July 29, 2005

Personal Finance : 'Mad Money' Mailbag:
See the Light on Corning

Editor's Note: The following are questions received from viewers of "Mad Money," seen every day at 6 p.m. EDT on CNBC.


What do you see over the long term for Corning ?

-- Mike from New York

James J. Cramer: I believe Corning is a winner. The LCD television business is booming, and the telcos are racing to put out fiber optic data networks. On top of that, the company has a stealth business in making the filters for exhaust systems in diesel-powered cars, which is a potential home run.

Jim, is Wal-Mart a buy?

-- Kevin from Pennsylvania

James J. Cramer: Wal-Mart is a fine company, but I wouldn't buy it here. I would rather be in Target which is performing better sales-wise and has more room to grow. Another good option is Sears Holdings, which is going through a major restructuring but will benefit massively from the management skills and financial know-how of Eddie Lampert. I like Sears so much, I own it for my charitable trust, .

Federated Outlines May Plans
By Nat Worden - THE STREET.COM
July 28, 2005

Federated Department Stores outlined some of its post-merger plans for May on Thursday, which include real estate sales and an extension of its Macy's chain.

If its acquisition of May wins final regulatory approval, Federated said it plans to sell off 68 of the retailer's stores that overlap with its own store locations after the holiday selling season. The stores are located in 66 different malls and make up roughly $2 billion in annual sales, Federated said.

"Some of the locations where they're going to be divesting stores are pretty high-traffic areas, where either developers would want to purchase the store back or a competitor, like Nordstrom, might want to move in," said Morningstar analyst Kim Picciola. "This should benefit them, at least in the short-term."

Goldman Sachs analyst Adrianne Shapira said the number of stores earmarked for sale exceeded her expectations.

"The announcement should facilitate the planning process, resolve internal questions and fears that could prove distractions headed into [the holiday season] , and potentially facilitate FTC approval [so the deal could close in the third quarter] ," Shapira said (her firm is acting as a financial adviser to Federated in its proposed merger).

Federated's chief executive, Terry J. Lundgren, stuck with his pledge not to eliminate any jobs before next March.

In a statement, he also said the retailer plans to convert 330 May company stores to the Macy's nameplate, which would bring the total store count for the Macy's chain to 730. It plans to keep the Lord & Taylor name, currently with 58 stores, and it is delaying a decision about Marshall Field's, which has 60 stores. Longtime retail names from the May empire will disappear, like Famous-Barr, Filene's, Hecht's and Kaufmann's.

"Macy's emerged as a premier national retailer in March 2005, when we changed Federated's regional department store nameplates," Lundgren said in a statement. "We will continue that process in 2006 by converting many of May Company's regional store nameplates to Macy's."

The plan fits in with a series of consolidation plans that have been hatched recently in the retail sector, where many observers have said the shopping landscape is "over-stored." It also bears some resemblance to the Sears Holdings merger of Sears and Kmart. Investors are expecting an extension of the lucrative store sales that boosted shares of Kmart last year, along with a conversion of some Kmart locations to the Sears nameplate.

Both Federated and May shareholders have voted to approve the merger. Shares of Federated were recently up 61 cents, or 0.8%, to $76.38; while shares of May were up 30 cents, or 0.7%, to $41.20.

Federated to convert 330 May stores to Macy's
Crain’s Chicago Business Online
July 28, 2005

Department store giant has not decided yet on Marshall Field's name

(Reuters) — Federated Department Stores Inc. on Thursday said it will convert 330 stores it will acquire with its purchase of May Department Stores Co. to its Macy's nameplate.

The company, awaiting regulatory clearance for the $11 billion purchase of May, also said it planned to sell 68 stores in 66 malls where both retailers operate anchor stores. Of those, 41 are currently owned by May and 27 by Federated.

Analysts had estimated that as many as 100 overlapping stores would have to be sold in order for the deal to clear antitrust hurdles.

Federated said it would sell the stores, which accounted for $2 billion of last year's sales, starting in 2006.

Expanding the Macy's name into a nationwide chain aimed at middle-income shoppers was one of the primary reasons behind Federated's agreement to buy May.

"This will put more power behind their advertising, but I think they'll maintain regional buying," said Dan Hess, chief executive of Merchant Forecast, an independent research group specializing in retailing. "After you get to a certain size you're not going to gain much leverage on price ... You don't want to lose the local flavor."

The 330 additional Macy's stores will bring the total to about 730 representing virtually every major U.S. market, and allow Federated to run a national advertising campaign instead of its existing regional promotions.

The company said it had not yet decided whether to get rid of the well-known Marshall Field's name and turn those stores into Macy's locations, but it said existing Lord & Taylor stores will not be changed into Macy's.

"I suspect the plans with Lord & Taylor have to do with the Manhattan flagship store more than anything else," said Hess. "They see in Lord & Taylor a diamond in the rough. I don't think they will move it to a more moderate level."

A Federated spokesman said the Lord & Taylor business "continues to be studied" and that while the name will definitely stay, Federated hasn't yet decided on its strategy. The company declined to comment on whether the nameplate would be positioned as a third, lower-end tier to compete with the likes of J.C. Penney and Kohl's Corp.

Consumers in the Chicago area, where Marshall Field's has its roots, are anxiously awaiting Federated's decision on the future of the century-old chain. Federated has previously said it was polling Marshall Field's shoppers to determine how they would react to a name change.

An 'infinite' opportunity for growth
By Lorrie Grant, USA TODAY
July 28, 2005

WASHINGTON ˜ Bob Nardelli says he knew within his first year running The Home Depot (HD) that the chain was missing a major growth opportunity in sales to big construction contractors and home builders.

Home Depot's growth-minded Bob Nardelli is planning stores in China.
By Michael A. Schwarz, USA TODAY

He went after it and, about five years later, is beginning to cash in, thanks to some half-dozen acquisitions that have increased the chain's strength outside the orange boxes, as its stores are called. "The orange box was a convenience location for the commercial and industrial customer. To be a destination, we had to do some things differently," says Nardelli, 57, during a store visit here.

For example, mass home builders wouldn't buy carpet from Home Depot because it used outside contractors to handle installations. Home builders wanted a single company to handle both.

"We went out and bought three of the top five carpeting companies in the country, and basically, we now have penetrated the mass builders," Nardelli says.

Today, Atlanta-based Home Depot, the second-largest U.S. retailer behind Wal-Mart, is on pace to hit sales of $80 billion this year, helped in part by growing sales to commercial and industrial customers. Annual sales were $46 billion ˜ mainly from do-it-yourselfers and small contractors ˜ when Nardelli joined the company as CEO in December 2000.

"Aside from someone needing a hammer, Home Depot wasn't really a supplier to the builders of bricks and mortar," says Donald Trott, a retail analyst at Jefferies.

Now, newly acquired companies that have been leaders in the commercial and industrial sector ˜ including National Waterworks, White Cap Construction Supply and Economy Maintenance Supply ˜ form The Home Depot Supply division.

"We buy the marquee player," says Joe DeAngelo, president of Home Depot Supply.

Building on the strength of its brands, the Supply division touches 80% of the professional builder market at least three times a week, he adds. Sales are usually made directly to contractors via Internet or catalog, as well as through the branch offices of some of the subsidiaries. Products are delivered directly to the job site. The division is expected to bring in about 14% of Home Depot sales this year.

The company aims to grab more of the professional contractor market, estimated to be $231 billion.

Nardelli doesn't see penetrating this market as a stretch for the company. "This is not stepping outside our know-how," Nardelli says.

He says this fits into the company's overall vision: to encompass the lives of consumers.

"Home Depot will provide components to the infrastructure around your home. There will be materials provided from Home Depot in the road around your home. The water you drink will be transported through valves and pipes that Home Depot will supply. The hotel room that you stay in will be supported by Home Depot from construction to d้cor."

Serving big builders has been just one part of Nardelli's overall plan to renovate the home-improvement chain and raise sales, earnings and the share price.

The company forecasts sales will grow 9%-12% this year, while earnings will rise 10%-14%, to $2.49-$2.58. Its shares, which closed at $43.35 on Wednesday, are up about 30% in the past 12 months.

The chain also plans to add 175 stores this year to its 1,950. About half its projected cash flow of $7.5 billion this year is scheduled for capital spending.

Nardelli came to Home Depot after a 30-year career at General Electric. He was last CEO of GE Power Systems, GE's largest industrial unit, which he grew from a $5 billion business to $20 billion.

In the beginning of Nardelli's reign at Home Depot, the non-retailer's aggressive plan to revive slowing growth and battle increased competition from chief rival Lowe's drew some criticism.

"He was buckshotting. He saw so many targets and was trying to hit them all at once," Trott says.

He had missteps. A shift of the staff mix on the sales floor to 70% part time from 70% full time led to a less experienced workforce and less service, Trott says.

Nardelli learned, he says. "He reversed himself and went back to the more traditional and heavier staffing with full-time career people."

But as Lowe's gained strength, Nardelli ramped up store remodeling, buying more distinctive merchandise and technology upgrades that included self-checkout and better point-of-sale systems.

The payoff has been an increase in the average ticket from $48.64 in the first quarter of 2001 to $58.25 today. The $9.61 difference translates into nearly $10 billion of additional annual revenue based on the 1.3 billion transactions made a year.

"Some of the steps he took that looked painful at the time are fruitful now and are paying off, making Home Depot a stronger, nimble company ... in the 21st century," says Alan Rifkin, senior retail analyst at Lehman Bros.

Home Depot also has been looking outside the USA. It has stores in 10 Canadian provinces.

Last year, it bought Home Mart, then the No. 2 home-improvement retailer in Mexico, and turned it into the leading chain, with 50 stores.

Plans are underway for stores in China, where the company now has two buying offices and is acquiring other interests. Openings could come as early as 2007, but Nardelli is proceeding cautiously.

"I'm not going to commit to a date and do a dumb deal or build a bad store," he says. "So we're going to do it when we have the comfort and confidence in place to do so."

The company does not have a presence in Europe, which gives the retailer more growth potential.

"I've never run a business where the opportunity for growth is as infinite as it is here," he says.

THE PASSING OF OUR FRIEND
Edwin "Jim" Griffiths

Edwin "Jim" Griffiths, age 89, died Friday, July 22 in Aultman Hospital after a brief illness. He was a life resident of Canton, Ohio and was retired from Sears for about 22 years after 34 years of service.

Jim was the founding and only president of the Sears Retirees Club of Stark County, Regional Vice President of the National Association of Retired Sears Employees (NARSE), and a member of the Sears Retiree Advisory Council. He was an inductee into the Stark County Amateur Baseball Hall of Fame.

He was preceded in death by his wife, Margaret D. Griffiths, who died December 31, 2001. Jim is survived by a daughter and son-in-law, Judy and Gene Snyder of Louisville, Ohio; two grandchildren, Stephanie Snyder of Canton, Ohio, and Patrick (Tracy) Snyder of Louisville; and two great grandchildren, Ryley and Demmi Snyder.

As Chairman of NARSE, I talked with Jim monthly since he readily admitted that he was not computer literate -- and proud of it! He also participated in most of NARSE's monthly meetings. Although I only knew him for several years, he was a friend that I will truly miss. Take care Jim. We will carry on.

Condolences may be sent to Judy Snyder, 7020 Columbus Rd., Louisville, OH 44641.

Future of Field's name looks bleaker
By Sandra Jones - Crain's Chicago Business Online
July 28, 2005

Marshall Field’s name slipped a notch closer to extinction today when soon-to-be owner Federated Department Stores Inc. said it decided not to convert its Lord & Taylor stores to the Macy’s nameplate.

Cincinnati-based Federated says it is still studying whether or not to keep the Marshall Field’s name. But the implication is clear.

Most retail analysts expect Federated to choose to keep either the Lord & Taylor or Marshall Field’s name, but not both, once its agreement to buy the stores’ parent May Department Stores Co. for $11 billion is completed this fall.

“The bottom line is why are they doing the merger,” says Steve Platt, director of the Platt Retail Institute, a Hinsdale-based research firm. “It’s to realize economies of scale. Having to support all these names in different markets just doesn’t fit. Yah, Field’s is a great name and we’ll cry when it goes, but I think it’s a foregone conclusion.”

Both Lord & Taylor and Marshall Field’s have about 60 stores each. Both have longstanding and loyal customers. And both have lost luster under a string of neglectful owners. Federated would do well to attempt to restore one name to its former grandeur, but is unlikely to have the funds or the desire to remake both, analysts say.

Federated Chairman and CEO Terry Lundgren told investors last February when he inked the deal with May Co. that he plans to realize about $450 million in cost savings by 2007 from the economies of scale that come from consolidating central functions such as merchandising and advertising. Four separate department brand names means four separate buying staffs, advertising budgets and shopping bags.

“Long term, Federated still intends for Macy’s to be a national brand, and geographically those Marshall Field’s stores fit the bill,” says Neil Stern, a consultant at Chicago-based McMillan/Doolittle LP, noting Field’s stable of stores allows Federated to expand Macy’s beyond the coasts into the Midwest. “Field has enough brand equity to make the decision more difficult for them. But in the long term, they’re not going to keep it.”

Mr. Lundgren is on a mission to make Macy’s the first national department store. He has already changed all of Federated’s regional department store chains, except for the venerated Bloomingdale’s, into Macy’s, after hyphenating the names to ease transition: Bon-Macy’s, Burdines-Macy’s, Goldsimth’s-Macy’s, Lazarus-Macy’s and Rich’s-Macy’s became simply Macy’s in March.

Another 10 department store brands Federated is acquiring from May Co.—aside from Lord & Taylor and Field’s—will also be changed to Macy’s, including Famous-Barr in downstate Illinois.

A Federated spokesman didn't return calls seeking comment.

Maytag Opens Its Books to Whirlpool
FORBES.COM - Associated Press
July 27, 2005

Whirlpool officials began taking a closer look at Maytag books on Wednesday as the two appliance companies took the initial steps toward a deal that would combine their businesses.

Whirlpool Corp. boosted its offer for the Iowa appliance maker on Friday by $1 to $18 a share, or about $1.43 billion.

In a statement Wednesday, the Benton Harbor, Mich.-based Whirlpool said it had entered into a mutual confidentiality agreement with Maytag Corp., allowing its accountants to examine Maytag's financial records in detail.

"We've commenced due diligence. Therefore, we're unable to comment on our proposed acquisition at this time," Whirlpool spokesman Steve Duthie said.

Maytag spokesman John Daggett confirmed that Whirlpool officials were on site at the company's corporate headquarters in Newton.

Whirlpool had given Maytag until Sunday evening to respond to its sweetened offer. Minutes before the deadline, Maytag officials issued a statement asking for more information from Whirlpool. That apparently was provided earlier this week.

Maytag shares rose 9 cents, or 0.5 percent, to $16.94 in midday trading Wednesday on the New York Stock Exchange. Whirlpool shares fell 96 cents, or 1.2 percent, to $79.32.

In May, Maytag accepted a buyout offer from Triton Acquisition Holding Co., an investment group led by New York-based Ripplewood Holdings, for $14 per share, or about $1.13 billion.

Maytag shareholders are scheduled to vote on that offer on Aug. 19.

A call to Ripplewood Chief Executive Officer Timothy Collins was not immediately returned.

Maytag's agreement with Triton stipulates that Maytag must pay a $40 million fee if it walks away from the deal. Whirlpool CEO Jeff M. Fettig told Maytag officials in a letter Friday that Whirlpool would pay the fee if Maytag broke its agreement with Triton.

In the letter, Fettig also attempted to calm the Maytag board's concerns that the combination of Whirlpool, the nation's largest appliance manufacturer and Maytag, the third largest, might face antitrust problems with federal regulators.

Fettig said Whirlpool had checked with some of its top customers and they had no problem with the deal.

"If the customers aren't going to say it's anticompetitive, it's tougher for anyone to make that argument," industry analyst Laura Champine of Morgan, Keegan & Co. said Tuesday.

With those hurdles crossed, Maytag officials apparently were more comfortable providing sensitive information to an industry competitor.

In a July 17 letter to Maytag officials in which Whirlpool made its initial offer, Fettig indicated he wanted to make a firm offer by Aug. 9. That would allow Maytag to terminate its agreement with Triton and enter into one with Whirlpool in advance of the Aug. 19 shareholder meeting.

Maytag's board initially was hesitant to enter negotiations with Whirlpool because of concerns over the timing of completion of an agreement and valuation of the Whirlpool deal, which would pay Maytag shareholders half in cash and half in Whirlpool stock.

On Sunday, Maytag concluded the Whirlpool offer was likely to be better than the Triton cash deal and that Whirlpool had demonstrated that it would likely meet regulatory approval.

Industry watchers say buying Maytag may help Whirlpool solidify its place in a highly competitive market.

University of Iowa accounting professor Doug DeJong said 65 percent of all major appliances, including washers, dryers and refrigerators, are sold through retailers such as Sears, Best Buy, Home Depot and Lowes. That narrow channel of distribution creates intense competition for display space.

Maytag has seen market share in some appliances slip in recent years, and it was dropped last year as a major appliance supplier to Best Buy, which gave space instead to Korean manufacturer LG Electronics.

"Whirlpool is scared that they might be one of the next recipients of increased competition," DeJong said. "For them, trying to purchase Maytag makes a lot of sense. The brands are there, the distribution is there, they have great production facilities and they can offer more volume and more products to the 65 percent of the slice."

Wal-Mart Boss's Unlikely Role:
Corporate Defender-in-Chief
By Ann Zimmerman – Staff Reporter – The Wall Street Journal
July 26, 2005

Lee Scott, a Longtime Insider,
Now Grapples With Critics As Chain Sheds Insularity

Seeking Bill Clinton's Advice

When Wal-Mart Stores Inc. became the world's biggest public company, it also became one of the world's biggest targets. The barrage of criticism reached a crescendo last year as Democratic presidential candidates lambasted the company's employment practices.

Over its 43-year history, Wal-Mart typically ignored its critics. But after the primaries were over, Chief Executive Lee Scott went on the offensive. Through Thomas "Mack" McLarty, a former Clinton aide and a consultant to the Bentonville, Ark., retailer, Mr. Scott arranged a September dinner in Washington, D.C., at Mr. McLarty's home with several former Clinton administration officials.

"I don't hate all Democrats," Mr. Scott told his guests, by way of breaking the ice. Wal-Mart apportions more than 80% of its political spending to Republicans. He went on to argue that Wal-Mart's quest to lower prices helps low-income customers.

In running one of the U.S.'s most insular public companies, Mr. Scott hadn't imagined his mission would be to break bread with high-profile Democrats, or, for that matter, critics of any stripe. A former head of Wal-Mart's largely invisible logistics division, he is the ultimate corporate insider, someone who used to be terrified speaking in front of large groups. As recently as 2003, Mr. Scott declined an invitation to be photographed for the cover of Fortune magazine, on the grounds that he didn't want to hog the limelight.

But a couple of years ago, under fire for everything from its health-care benefits to the size of its stores, Wal-Mart decided to wade into the controversy it creates and gave Mr. Scott, 56 years old, responsibility for leading the offensive. So for the past nine months, he has crisscrossed the country as Wal-Mart's defender-in-chief, grappling with activists of every persuasion, including congressmen, environmentalists and Sister Barbara Aires, a Catholic nun and longtime critic. In many ways, his personal evolution mirrors that of the company.

"Over the years, we have thought that we could sit in Bentonville, take care of customers, take care of associates and the world would leave us alone," Mr. Scott said at a Goldman Sachs investors' conference earlier this year. "It just doesn't work that way anymore."

In February, Mr. Scott addressed 500 business and community leaders in Los Angeles, many of whom were hostile to Wal-Mart's local expansion plans. It already operates more than 3,500 U.S. stores. Afterward, during a visit to a nearby Panorama City store, the executive was asked if he was having fun in his new role. "No, not at all," he responded. "Fun is walking stores and seeing what is selling, seeing how we're taking care of customers. The rest is the lot I've drawn."

In recent years, Wal-Mart has been accused of offering substandard wages and insufficient health benefits. It has been sued for discriminating against women and for forcing employees to work beyond their shifts. It is blamed for hastening the decline of the American manufacturing sector by buying products from overseas and ruining town centers by putting local firms out of business.

The critiques have ranged from overblown to more reasonable. Wal-Mart's own missteps haven't helped its reputation. In March 2005, Wal-Mart settled with the Justice Department over allegations that it knowingly hired contractors that provided illegal immigrants to clean its floors. Several days later, former vice chairman and onetime No. 2 executive Thomas Coughlin resigned from Wal-Mart's board amid allegations he misappropriated up to $500,000 from the company. Through his attorney, Mr. Coughlin has denied the allegations.

And after a period of five years during which Wal-Mart's business looked invincible, its financial performance has started to show strains. Sales growth at stores open at least a year, an important industry metric, has slowed, due in part to high gas prices that pinch consumer spending. Another problem is robust competition from discounters such as Target Corp. and Costco Wholesale Corp. who are luring upscale customers while keeping prices low. Wal-Mart's share price has fallen 22% since Mr. Scott took the helm in 2000.

Wal-Mart's own image campaign may be partly to blame. During a recent get-together with financial analysts, Mr. Scott conceded that Wal-Mart's recent advertising has focused too much on its community contributions

Mr. Scott grew up in Baxter Springs, Kan., a tiny town in the southeast corner of the state where his father owned a local gas station. Baxter Springs was once a rowdy cow town, and later a prosperous mining community, but it had fallen on hard times.

Situated on Route 66, the gas station was threatened by a new interstate that took away its regular supply of customers. Mr. Scott's father sold the business, an event the CEO sometimes talks about in speeches. "I know that change isn't necessarily fun, but understand also that change isn't necessarily someone's fault," he said this spring, referring to the interstate, during Wal-Mart's first press tour.

To support himself while studying at Kansas' Pittsburg State University, Mr. Scott worked nights at a factory making steel molds for tires. In his junior year, he married fellow student Linda Aldridge. By his senior year, the couple were parents of a baby boy and lived in a 10-by-50-foot trailer in the Lone Star Trailer Court not far from campus.

After graduating with a degree in business, he went to work for Yellow Freight System, a trucking company, as a dispatcher in Joliet, Ill. "I had one job offer, so it made sense to me to think that trucking was in my future," he says.

In 1977, Mr. Scott had his first encounter with Wal-Mart and didn't like what he saw. Still working for Yellow Freight, one of Wal-Mart's shippers, Mr. Scott went to Bentonville to collect a disputed $7,000 bill. David Glass, who was then head of distribution and finance, refused to pay.

As Mr. Scott started to exit in a huff, Mr. Glass offered him a job. "I liked the way he handled himself," recalls Mr. Glass, who eventually became Wal-Mart chief executive and Mr. Scott's predecessor. "He was articulate and made his point very well."

The feeling, however, wasn't mutual. "Why in the world would I leave a good job for a company that couldn't even pay a $7,000 bill," both men recall Mr. Scott saying at the time.

Mr. Glass pursued him for the next two years, eventually convincing him to work for Wal-Mart as an assistant director of transportation where he was charged with building an in-house trucking fleet. Mr. Scott says he changed his mind based on Mr. Glass's description of a company that was good to its employees and rewarded talent.

Fear of Public Speaking

At the time, Wal-Mart had 276 stores in 11 Southern and Midwestern states and had just hit $1 billion in annual sales. But the young executive hated speaking to large groups of people.

As he drove to weekly Saturday meetings at Wal-Mart's headquarters, Mr. Scott tried recalling which side of the room had been questioned the previous week. That's where he would sit, hoping that Sam Walton, the company's founder, would start elsewhere. If his turn came before the time ran out, "I would shake and my voice would crack," he recalls.

In small groups, by contrast, Mr. Scott could be abrasive. During one meeting, he tried to convince warehouse managers to unload trucks faster. Don Soderquist, then a Wal-Mart vice chairman, cornered him after the meeting. "He told me that if my intention was to irritate and annoy everyone in the room, I had succeeded," Mr. Scott says.

As boss of the crew, Mr. Scott frequently delivered dictums, for example, demanding truckers drive slower to reduce accident rates. If a driver drank on the job or was caught visiting a girlfriend, Mr. Scott would write scolding letters to all Wal-Mart drivers, who were infuriated by these broadsides. Some complained directly to Mr. Walton and asked the boss to fire Mr. Scott.

Instead, Mr. Walton made Mr. Scott listen to the drivers' complaints and thank each one individually for using the company's "open-door policy." Mr. Scott said it was a humbling experience but one that gave him a good introduction to the company's culture.

By 1993, Mr. Scott was heading Wal-Mart's vast logistics division. Wal-Mart was the first discount retailer to have its own distribution centers, a move that cut costs by removing a layer of middlemen. It was a key to the company's success. Mr. Scott designed a hub-and-spoke distribution network with warehouses serving a series of stores not more than a day's drive away. That allowed shelves to be replenished quickly and inexpensively by keeping less inventory on hand.

Though he had spent his entire career in logistics, Mr. Scott was tapped in 1995 to run Wal-Mart's merchandising division, the unit responsible for selecting and buying goods. Wal-Mart had hit a rough patch. It was struggling with several acquisitions and distracted by rolling out new supercenters, gargantuan stores selling goods from diamond rings to bicycles. That year, the company reported its first quarterly profit decline in a quarter of a century.

Mr. Scott cut $2 billion of excess inventory by reducing the number of products Wal-Mart sold in each category, zapping slow-moving merchandise and convincing suppliers to ship smaller amounts. Yet he remained in the background. Whenever Mr. Scott addressed company meetings, it was often in tandem with the more-garrulous Mr. Coughlin, who was then running Wal-Mart's stores.

His success in merchandising showed Mr. Scott to be a capable generalist. It helped secure his ascension to the top spot. After a planned succession, in which he served as chief operating officer, Mr. Scott took over as CEO in January 2000. He brought with him a corporate professionalism that had been missing from a company still imbued with the spirit of its folksy founder Mr. Walton.

Worsening Reputation

But Wal-Mart's biggest problem wasn't financial. Without much notice, the retailer had become a mammoth force in the U.S. economy. Only two years later, one out of three diapers, one out of four tubes of toothpaste and one out of five CDs bought in the U.S. would be sold by Wal-Mart, according to research groups A.C. Nielsen and Retail Forward. That made the company a highly visible target for mainstream criticism.

One of Wal-Mart's antagonists was the United Food and Commercial Workers Union, which had struggled in vain to set up shop at the company. Starting in 1999, when Wal-Mart became serious about selling groceries, the union stepped up its campaign. It accused Wal-Mart of paying poverty-level wages and pushing workers to rely on government health benefits. The union also set up a Web site listing complaints from former workers it dubbed "WalMartyrs."

Wal-Mart rarely responded directly to the union, dismissing its complaints as propaganda.

In 2001, author Barbara Ehrenreich wrote "Nickel and Dimed: On (Not) Getting By in America." For the book, one of several published since then taking the company to task, she spent a month folding clothes at a Wal-Mart for $7 an hour. Ms. Ehrenreich described a workplace where employees performed endless, mind-numbing tasks. Employees, she wrote, often didn't make enough to afford even marked-down merchandise.

That same year, Wal-Mart was hit with a sex-discrimination suit alleging that women were paid less and promoted at a lower rate than men with equal qualifications. In 2004, a federal judge granted the suit class-action status. Wal-Mart has appealed the judge's ruling.

In 2002, the media began paying more attention to the growing number of suits filed by hourly workers, alleging they had been forced to work off the clock. It would be another two years before Wal-Mart implemented store-level controls, such as cash registers that lock up, which prevented employees working through their scheduled breaks.

Wal-Mart's reaction to criticism was to dismiss it as the work of opportunists or propagandists. "Going from everyone loving us to being a target and having to defend ourselves, justly or unjustly, took us by surprise," says former CEO Mr. Glass, who now sits on the company's board. In retrospect, he says, the company's attitude was "naive."

Scott's Fresh Approach

From the outset, Mr. Scott was a little more willing than his predecessor to address the growing chorus of disapproval. Wal-Mart rarely, if ever, settled lawsuits and was frequently fined for withholding, hiding or destroying evidence relating to legal disputes. Just months before Mr. Scott became CEO, a Texas judge threatened to fine the company $18 million for failing to produce evidence in a suit from a woman who had been abducted from a store parking lot in Beaumont, Texas, and raped. The judge didn't make good on his threat after Wal-Mart apologized to the plaintiff and the court.

Mr. Scott asked his legal team why the company had been fined so often. "They kept telling me, it was all the liberal judges that had been appointed," he says. Six months later, an executive appointed by Mr. Scott to investigate told the CEO that Wal-Mart deserved many of the sanctions. In the abduction case, for example, Wal-Mart's outside lawyers didn't turn over a document because the plaintiff's lawyers had asked for a "study" that was classified a "survey."

At Mr. Scott's direction, the company recruited a seasoned corporate counsel from Raytheon Corp., Thomas Hyde, and hired a prominent outside firm to review the way Wal-Mart handles evidence in court cases. Last year, Wal-Mart wasn't hit with any sanctions or fines for its conduct in litigating cases.

Mr. Scott also began reaching out to critics. Starting in 2000, he met occasionally with Sister Barbara Aires, who sits on the board of the Interfaith Center on Corporate Responsibility, a New York-based pressure group that often sponsors resolutions at Wal-Mart's annual meetings. Several groups in the ICCR coalition each own more than a million Wal-Mart shares, out of a total of 4.2 billion.

The ICCR raised a slew of topics from gender discrimination to low pay and benefits. Wal-Mart agreed to improve its monitoring of labor conditions in overseas factories and insist on standards for its suppliers.

In April 2002, Wal-Mart became the world's largest public company, ranked by sales. Magazine and newspaper headlines asked, "Is Wal-Mart Too Powerful?" and, "Is Wal-Mart Good for America?" By the company's reckoning, it was the subject of 2,165 articles a week in the print media in 2004, compared with 950 in 2001.

In 2002, Wal-Mart's board began to worry that the backlash was changing public sentiment about the company and could hurt its business. "The board saw it before we did," says Mr. Scott. "They run in circles we don't run in, on one coast or the other. They were hearing things from their friends." These board members included Roland Hernandez, the former head of Spanish-language TV network Telemundo Group Inc., and James Breyer, a venture capitalist from Accel Partners based in Palo Alto, Calif.

At the board's suggestion, Wal-Mart conducted its first comprehensive reputation survey. It found that workers "were more positive about the company than critics would have you believe," says Jay Allen, Wal-Mart's senior vice president for corporate affairs. Workers also wanted the company to stand up to its critics. Mr. Scott said he was getting similar feedback through an internal Wal-Mart Web page called "Lee's Garage," named for his father's service station.

Consumers were a different matter. The study found that 10% of all consumers -- including both Wal-Mart and non-Wal-Mart customers -- hated the company. An additional 30% said they had "sincere questions about Wal-Mart," based on what they heard about its treatment of workers, Mr. Allen says.

As a result, the board determined that the company had to do more to combat its critics. "I don't believe Lee ever thought so much of his job would include communicating with the outside world," said Jose Villarreal, a Wal-Mart director and a partner in the San Antonio office of Washington, D.C., law firm Akin, Gump, Strauss, Hauer & Feld, LLP. "After all, he comes out of logistics, a field so far removed from public view."

Mr. Scott concedes that Wal-Mart's management was too slow in responding to the company's worsening reputation. "We were so busy minding the store that we didn't realize we had become a political symbol," he says.

Counterpoint

In 2003, Wal-Mart began running television ads highlighting workers' opportunity for advancement as well as the retailer's community contributions. In addition, Wal-Mart concluded that Mr. Scott needed to be the single, high-profile spokesman defending the company to the public. In an election year, the need was even more acute. In 2004, a Congressional committee released a report titled, "Everyday Low Wages: The Hidden Price We All Pay for Wal-Mart."

A couple of months before the elections, Mr. Scott met with former President Bill Clinton. (Hillary Clinton sat on Wal-Mart's board between 1986 and 1992.) At a Dallas meeting with store managers in August, Mr. Scott paraphrased Mr. Clinton's advice, telling his troops to be careful that their performance wasn't defined by events unrelated to their core business. "We can't let our critics define who we are and what we stand for," Mr. Scott said.

Mr. Clinton could not be reached for comment. A spokesman says the former president has met Mr. Scott on several occasions although he couldn't confirm what they discussed.

Earlier this year, Wal-Mart for the first time bought a series of ads in national newspapers to defend its practices, titled "Setting the Record Straight." It also printed a 3,000-word essay in an ad that appeared in the New York Review of Books in response to an article that appeared in the left-leaning magazine.

In recent months, Mr. Scott has met with members of the Congressional Black Caucus and hosted a reception for members of Congress. He convened a series of meetings with the Center for Environmental Leadership in Business, part of Conservation International, a business-friendly environmental group. Wal-Mart Chairman Rob Walton sits on the group's board. Wal-Mart is now exploring requiring suppliers to use more cotton grown without pesticides.

Seeking the spotlight is anathema to Wal-Mart culture, and the transition hasn't been easy. Mr. McLarty, the former Clinton aide, recalls making the rounds of the morning talk shows in January with Mr. Scott. After one show, Mr. Scott turned to his companion and said: "How did you do this for so long and stay sane?" both men recall.

Clear Limits

There are also clear limits to Wal-Mart's willingness to compromise. "We have an obligation to be socially responsible," Mr. Scott says in an interview, "but that is not the same as being a social enterprise." He refuses, for example, to publicly engage in debate with the United Food and Commercial Workers, which Mr. Scott accuses of lying about working conditions at the company. UFCW spokesman Greg Denier emphatically denies the charge.

And despite a concerted effort to soften his rougher edges, Mr. Scott can still be impatient with criticism. During the meeting in Los Angeles with business and civic leaders, he was asked about Wal-Mart's reputation for squeezing suppliers.

"I don't feel sorry for our suppliers," he shot back. "I flew here today on a Lear 31 [jet] that had to make fuel stops. Our suppliers fly directly into Bentonville on their G5 [jets]. They're not stopping on the way. And they have got a bathroom."

He caught himself mid-screed and acknowledged that some buyers have treated suppliers unfairly. He said those who do so are fired.

The region's torrential rains, which caused severe flooding, let up the day of the speech. Mr. Scott told the crowd that several Angelenos had thanked him for bringing the sunshine. "But I don't want to take any credit," he added quickly. "At this point I don't think anyone has blamed Wal-Mart for your rain."

Will Kmart face fight to keep Joe Boxer brand?
By Sandra Guy – Business Reporter – Chicago Sun-Times
July 25, 2005

Joe Boxer, the exclusive Kmart underwear made famous by dancing man Vaughn Lowery's "Joe Boxer Boogie," is being sold to a company that licenses the Candie's and Badgley Mischka brands.

Joe Boxer Co.'s deal to sell the Joe Boxer license to Iconix Brand Group Inc., announced Thursday, raises questions for Kmart and Sears:

*Will Kmart lose another exclusive product?

*What will the sale mean for Sears' new standalone store, Sears Essentials?

Kmart Corp., which bought Hoffman Estates-based Sears Roebuck and Co. for $12.3 billion on March 24, holds the exclusive license to sell Joe Boxer socks, underwear, sleepwear and loungewear.

Kmart spokesman Stephen Pagnani said Friday that the Joe Boxer sale would cause no change in the retailer's relationship with Joe Boxer.

However, retail experts say Kmart's and Sears' rivals are known for aggressively pursuing exclusive brands, and might have their eye on Joe Boxer.

Indeed, Kohl's will launch an exclusive line of Candie's sportswear for girls and juniors this fall.

The Joe Boxer sale could give Kohl's an inside track, since Candie's and Joe Boxer will be owned by the same company, said Britt Beemer, chairman of America's Research Group, based in Charleston, S.C.

"Sears' and Kmart's competitors aren't going to sit there and do nothing," he said.

Retail experts also are mystified by the absence of Joe Boxer and Martha Stewart products at Sears Essentials stores, which are aimed at attracting affluent suburbanites.

Sears instead is touting its own brands, such as bedding, home decor and dorm-room decor by Ty Pennington, the megaphone-toting star of ABC-TV's "Extreme Makeover: Home Edition."

"I can't imagine having a Sears Essentials without having Martha Stewart. I think Kmart and Sears have been too internally focused and not focused enough on these kinds of merchandising opportunities," Beemer said.

Sears spokeswoman Corinne Gudovic said Sears may yet sell Martha Stewart, Joe Boxer and other Kmart brands in its Sears Essentials stores, but it hasn't had time to work out the details of such merchandising decisions.

"It comes down to timing," Gudovic said. "Now that Sears and Kmart have merged, we can make joint decisions."

Margaret "Peg" Duncan, a partner who heads the intellectual property group at the Chicago office of law firm McDermott Will & Emery, said both a licensor and a licensee must agree to change the terms of their contracts.

Sears' and Kmart's merger does not necessarily allow the two retailers to intermingle brands without a licensor's approval, she said.

License holders also can take their business elsewhere.

Kmart lost its exclusive license to sell Sesame Street children's clothing in December 2004, and Nike will pull its products from Sears department stores in November.

Kmart settles employee lawsuit
By David Shepardson - The Detroit News
July 25, 2005

Kmart workers who lost millions in retirement savings when the retailer collapsed in 2002 may recoup 10 cents on the dollar or less, according to people familiar with the terms of a legal settlement.

More than 50,000 Kmart employees suffered combined losses of at least $100 million in their 401(k) plans when Kmart Corp. stock became worthless following the company's 2002 bankruptcy.

At one point, 32 percent of the retirement plan's assets were in Kmart shares, court records show.

Under the settlement expected to be announced this week, the former directors and officers named in the suit will reimburse workers about $11.5 million, three lawyers familiar with terms said. The losses will be covered by a $25 million insurance policy the now-defunct Kmart Corp. held to protect executives.

The figure includes the cost of administering the settlement and employees' lawyers' fees, so the 401(k) holders might actually receive as little as 5 or 10 percent of their losses. The payouts won't be known until the number of qualified claimants is defined and the terms are approved by a federal judge.

Rita Morris started working at a Kmart in Saginaw at age 20, and in August she will mark 35 years with the company.

When Kmart Corp. stock was canceled following the company's bankruptcy, Morris' 401(k) balance shrank by $18,000.

"A lot of people lost even more than I did. It's hard. You work for a long time, and nobody ever told us that the company was going to go bankrupt," said Morris, who used to be an assistant manager in receiving but now stocks shelves on the third shift.

Lawyers for employees and the defendants told U.S. District Court Judge Avern Cohn last week that they had reached a settlement in the three-year-old class action lawsuit.

The plaintiffs alleged that Kmart executives hid the dire nature of the retailer's finances, prompting workers to unwittingly invest in the doomed company. The claimants also charged that, despite executive knowledge of the company's poor prospects, Kmart forced workers to maintain the company-match portion of their 401(k) in Kmart stock until they reached age 55.

Kmart's former Chairman and CEO Charles Conaway was named as a defendant, along with former CEO James Adamson, former vice president Jim Defebaugh and six former members of the board of directors.

The settlement does not end the legal jeopardy for the executives who presided over Kmart during its final downward spiral. The Justice Department's criminal investigation and a probe by the U.S. Securities and Exchange Commission are continuing.

Kmart emerged from bankruptcy in May 2003. During its 15-month reorganization, it closed 600 stores and eliminated more than 57,000 jobs. In November, Kmart announced a merger with Sears. The renamed company, Sears Holdings, is based in Hoffman Estates, Ill. Shareholders of the former Kmart Corp. have no claim on the stock issued by the new company.

It has skyrocketed from $15 a share when it reissued stock in May 2003 to $124.83 in March, before it was renamed Sears Holdings.

It closed Friday at $159.62 -- up 960 percent since its initial offering.

Glen Connor, a lawyer for the workers, said he didn't want to comment until the settlement was made public, but he confirmed that it would cover more than 50,000 401(k) participants. They'll receive notification letters telling them how to collect any money they are owed. The lawyers were unable to predict when the mailings would be sent, but it is likely to be months away.

Curtis Borders, 56, of Warren said he lost about one-third of the value of his 401(k) plan after the bankruptcy. He's happy for a settlement -- even if it's a small one:

"I could use it. It's better than nothing," said Borders, who worked at Kmart for 12 years in Warren and Detroit until 2004.

Kmart matched 50 percent of each worker's contribution by adding Kmart stock to their accounts. Employees couldn't convert the matching Kmart stock into other investments until they reached 55. That restriction was lifted in February 2002, but by then the discounter's stock was essentially worthless.

Overall, Kmart investors lost more $4.5 billion in equity when the stock was canceled.

Determining who's involved

In April 2004, Cohn denied a request to throw out the lawsuit and certified the suit as a class action.

"To accept defendants' position that they are not fiduciaries would mean that there was no one responsible for discretionary decision making. Their position is reminiscent of the 'old shell game,'" Cohn wrote.

Since then, the suit has been on hold as both sides agreed to sessions with two different mediators..

Lawyers for the workers said in 2004 they wanted the class to cover all employees who were enrolled in retirement savings plans after March 1999, because that's when Kmart began investing employer contributions in Kmart stock.

Lawyers for the former executives and directors said they think the class should be narrowed to include only Kmart participants who received stock from May 2001 until Jan. 22, 2002 -- the date of the company's bankruptcy filing. Cohn will have to decide who is covered by settlement if he approves it.

Also pending is arbitration of claims made by the Kmart Creditor Trust, which filed a civil suit in Oakland Circuit Court seeking around $400 million against six former executives and Kmart's accounting firm.

The government dismissed criminal charges against two former executives Nov. 7. In December, federal regulators charged three former Kmart executives and five current and former managers of major vendors with accounting fraud, claiming they misrepresented the retailer's earnings by $24 million in 2001.

A lawyer for the former outside directors, Walter B. Connolly Jr., said the employee lawsuits are abusive.

For attending a handful of meetings, the outside directors are subjected to years of litigation.

"Once you see the settlement, it is apparent that our clients did not have any vulnerability, and for that we're very thankful," Connolly said Friday. "The directors aren't sitting there looking at every financial nook and cranny."

Firms held accountable

Hundreds of lawsuits are filed annually under the Employment Retirement Income Security Act of 1974, which allows employees to sue their companies for a breach of financial duty. In the last year, employees and retirees at Michigan-based Visteon Corp. and General Motors Corp. have filed similar suits after each company's stock plummeted following bad financial news.

Earlier this month, two global companies settled similar employee suits. Royal Dutch/Shell Group, the second-largest European oil company, agreed to pay $90 million to employees covered by retirement plans following a dramatic stock price plunge.

Enron Corp. settled a U.S. Department of Labor lawsuit earlier this month and agreed to pay $356 million to defray some of the losses that employees and retirees experienced when the company declared bankruptcy in 2001.

Maytag to Consider New Whirlpool Bid
By Michael J. McCarthy and Joseph T. Hallinan – Staff Reporters –
The Wall Street Journal
July 25, 2005

Maytag Corp., which previously agreed to be acquired for $1.13 billion by a group led by Ripplewood Holdings, indicated last night that it is interested in discussing a sweetened, $1.4 billion acquisition proposal from rival Whirlpool Corp.

Such a combination would create a washer-and-dryer powerhouse that could command, by some estimates, roughly half the U.S. market share for household appliances. It is also noteworthy that Whirlpool, a latecomer in what had been an extraordinary three-way bidding contest for the struggling Iowa business icon, now appears to have emerged the front-runner.

In a statement, Maytag's board said that the Whirlpool proposal "may reasonably be expected to lead to a transaction that is financially superior" to Maytag's pending buyout offer from the group led by New York private-equity firm Ripplewood and that Whirlpool's offer is "reasonably capable of being completed."

Under Maytag's merger agreement with the Ripplewood-led group, those findings were needed for Maytag to furnish information to Whirlpool and negotiate with it. A spokesman for Whirlpool said the company would review Maytag's response. A Ripplewood spokesman didn't have a comment. Maytag's agreement with Ripplewood includes a $40 million breakup fee.

Seeking to force its rival to the bargaining table, Whirlpool on Friday raised its takeover offer for Maytag by $1 a share to $18 a share in some mix of cash and stock. And in the normally sedate world of household-appliance manufacturing, Whirlpool gave Maytag only the weekend to respond. Fed up with five days of lukewarm responses from Maytag to its initial offer, Whirlpool decided to play hardball, insisting Friday night that Maytag either negotiate an acquisition by yesterday's deadline or face Whirlpool's walking away from any deal.

Whirlpool, Benton Harbor, Mich., made its first proposal to acquire Maytag, an appliance maker in Newton, Iowa, on July 17. That initial bid was for $17 a share in cash and stock, or about $1.33 billion. While apparently richer than the Ripplewood offer of $14 a share, or $1.13 billion, Ripplewood's offer was for all cash.

Still, failing to close on the sweetened $18-a-share bid could put Maytag at odds with investors and shareholders, some of whom were vocal in their disappointment with a $14-a-share offer. A Maytag shareholder vote on the Ripplewood offer is set for Aug. 19.

In the past week, Maytag has expressed concerns that a merger with Whirlpool wouldn't win regulatory approval. Combining such large players in the North American appliance business is certain to draw close scrutiny from antitrust regulators. Along with its sweetened offer, though, Whirlpool provided Maytag with a poll showing supportive reactions to the proposed combination from large appliance retailers.

Just days after Whirlpool made its initial overture, a third party, a group led by Chinese appliance maker Qingdao Haier Co., withdrew from the bidding.

Maytag's results improved in the second quarter, as the company Friday said it moved to a profit of $3.5 million, or four cents a share, from a loss of $41.1 million, or 52 cents a share, a year earlier. Maytag shares rose 55 cents, or 3.5%, to $16.20 Friday in New York Stock Exchange composite trading, while Whirpool shares fell 72 cents to $77.18.

Pensions freezing out younger workers
Associated Press
Posted on July 24, 2005

NEW YORK - Companies looking to cool their pension problems are freezing benefits for the workers least likely to complain.

This means cutting off new employees, or a combination of new employees and workers of a certain age - often those under 40. Only people ages 40 and over are covered by federal age-discrimination labor laws, an area of growing concern to employers who are still reeling from age-discrimination lawsuits over so-called cash-balance plans.

Hewlett-Packard Co. is the latest in what appears to be a growing number of companies freezing their pensions for select workers. Earlier this week, the technology giant said it will freeze pension benefits based on age and tenure starting next year. Workers whose combined age and tenure equal a minimum of 62 keep their pension benefits intact. The pension freezes for everyone else, who retain the benefits they have already accumulated but lose the potential for further accruals. Federal law protects workers from losing a benefit they have already earned, but not from losing the promise of future benefits.

Companies that have taken similar actions in recent years include NCR Corp., Sears Holding Corp., International Business Machines Corp. and Motorola Inc. NCR froze pension benefits for workers under age 40 starting last September, and stopped offering its pension to new hires. Sears also stopped benefits for new workers and current employers under age 40 in 2004, but then changed course after its merger with Kmart. It announced this year that it will freeze plan benefits for all employees starting in 2006. IBM and Motorola, meanwhile, both shut their pension plans to new workers at the start of 2005.

In the past, employers that sought to freeze pensions would generally do it to all employees, pension experts said. Employers that wanted to protect a segment of workers from losing future pension benefits would typically focus on people ages 50 and up.

In more recent years, companies looking to freeze their pensions would generally have considered freezing them and then converting them to cash-balance plans, said Craig Copeland, a senior research associate with Employee Benefits Research Institute in Washington. The legality of cash-balance conversions is currently unclear, however, and employers are fearful of taking that route.

Cash-balance plans are a type of defined-benefit plan, but they operate differently from traditional pensions. When a pension is converted to a cash-balance plan, the final benefit under the new plan can be calculated in such a way that older workers are hurt more than younger workers.

"There was a period of conversion; that was the fad. Then there were bankruptcies, and now more people are freezing," said Copeland.

Now, employers that seek to freeze their pension plans are simply moving workers to the 401(k), said Sylvester Schieber, U.S. director of benefits consulting with Watson Wyatt in Arlington, Va. At the same time, they are being more cautious about who gets cut. Recent lawsuits over cash-balance plans have employers feeling "exposed to potential court cases and age discrimination laws," he said.

Employers dismiss the notion that they are concerned about claims of age discrimination. "We recognize that those over 40 have a shorter retirement planning horizon," NCR said.

It's unclear how many companies have frozen their pensions and moved workers to 401(k) plans in recent years. Unlike other forms of termination, pension freezing isn't a reported event, said a spokesman for the Pension Benefit Guaranty Corp. What is known is that the percentage of companies with a frozen or terminated plan rose sharply in 2004, to 11 percent from 7 percent in 2003, 6 percent in 2002, and 5 percent in 2001, according to data from consulting firm Watson Wyatt.

In addition to freezing, companies can also terminate their plans. In order to do that, however, they would need to either be in dire straits financially - as UAL Corp. was when it dumped its pension earlier this year - or able to fully fund the plan at the point of termination.

Few companies are in a position to terminate, said William Arnone, a retirement expert with Ernst & Young in New York. As a result, freezing is expected to gain momentum in coming years, he said. Employers who freeze can still take their time to make up their existing pension shortfalls. At the same time, they eliminate a big chunk of the costs associated with paying future benefits.

 

Whirlpool revs engines in Maytag takeover attempt
By David Pitt – Chicago Sun-Times
July 23, 2005

DES MOINES, Iowa -- Whirlpool appeared ready to take an aggressive approach in its attempt to purchase rival appliance maker Maytag after receiving a cool reception from Maytag officials.

"We are evaluating all of our various options, and are prepared to pursue them in an expeditious manner," Whirlpool said. It followed remarks by Maytag officials a day earlier that they were uncertain whether Whirlpool's proposal was better than a previous bid submitted by Triton Acquisition Holding Co., an investment group led by New York-based Ripplewood Holdings.

Whirlpool, the nation's leading appliance manufacturer, has proposed paying $17 a share in a deal -- half cash, half stock -- valued at $1.37 billion, while Triton has signed an agreement to buy Maytag for $14 a share in cash, or about $1.13 billion.

Whirlpool has asked Maytag to open its books and enter negotiations.

Maytag Chief Executive Officer Ralph Hake said in a Friday conference call with analysts that the company is evaluating the Whirlpool proposal but has been unable to determine whether it is better than Triton's offer and whether it will pass regulatory approval.

Hake said the deal signed with Triton requires those questions to be answered before Maytag could give Whirlpool financial information and start negotiations.

Industry analyst Laura Champine with Morgan, Keegan & Co. said Whirlpool could offer to pay Maytag a breakup fee if the deal is not approved by regulators. Other options include increasing its bid or waiting to see if shareholders defeat the Triton offer in August and come back with another offer.

Whirlpool spokesman Tom Kline said the company would not comment beyond released statements.

Champine said Maytag might be opting to take the Triton deal to shareholders because if it is turned down, Maytag would not owe Triton a $40 million breakup fee, which is part of the agreement if Maytag backs out.

Champine believes Maytag shareholders will vote down the Triton offer when they meet Aug. 19.

"I think Maytag is worth more than $14, and we found that out over the last few weeks as other sophisticated buyers have put higher bids out there," she said. "If I were them, I would vote against it and I would guess that it fails."

Documents filed by Maytag with the Securities and Exchange Commission on Friday revealed numerous shareholders' lawsuits seeking to stop Triton.

A pension fund for Illinois-based Sheet Metal Workers Local 218 filed a lawsuit in May alleging Maytag and its board of directors violated their fiduciary duties by agreeing to sell the company at an "artificially depressed" price.

Seven similar complaints were filed in Delaware in May. The cases were consolidated into a class-action complaint on July 15.

A case filed in U.S. District Court in Iowa on July 5 by Barry Yellen alleges Hake and Chief Financial Officer George Moore made false statements about the company's expected earnings range in 2005 to inflate its stock price as they were negotiating a price with Triton.

Maytag shares added 41 cents to $16.06.

Shareholder Activism: Policy Battlefield of the Future
By Bart Mongoven - Public Policy Intelligence Report
July 22, 2005

Shareholder activism does not depend on gaining the support of the majority of a company's shareholders in order to be effective -- proxy votes are nonbinding. Instead, it changes corporate policy when management sees that a strong minority of shareholders (usually 20 percent will do) find the company's policies troublesome. Senior executives begin to fear that significant amounts of management's time, energy and attention will be diverted to addressing the issue. To reach that threshold of effectiveness, activists try to recruit the support of as many large shareholders as possible -- beginning with small social-oriented firms such as Calvert, then progressing to socially-oriented pension funds such as CalPERS (and potentially TIAA-CREF, if the demonstrators get their way). Still, most successful campaigns need significant rank-and-file shareholder support and that of at least one major mainstream investor.

The two events point to the increased role that corporate shareholders will have in making public policy in the United States, and suggest that corporate decision-making could change dramatically in the coming years.

The coming shift will prompt most corporations to exercise more caution in several aspects of their businesses, as shareholders increasingly can be expected to demand that companies avoid social and environmental pitfalls that could affect the long-term value of their holdings. The caution will be apparent in corporate operations -- including the products companies make, their advertising, the places they do business and the relationships they have with certain governments. Though issue-oriented activists will have an indirect impact on corporate policies, the new social, labor and environmental policies that corporations follow will reflect primarily the work of shareholder groups. These groups are using increasingly sophisticated market analyses to show corporate managers (and fellow shareholders) the wisdom of following a voluntary course of action in areas of potential social criticism.

Since the 1970s, social and environmental activists have used proxy voting and public companies' annual shareholder meetings as a platform to push for new public policies. The early shareholder activist and "socially responsible" investment movements achieved their most significant victory in the 1980s, when heavy pressure forced major U.S. and European multinationals to withdraw from South Africa and contributed significantly to the end of the apartheid regime. By the end of the apartheid era, few major multinationals dared do business in South Africa lest they be seen as endorsing its racist political, social and economic structure.

Shareholder activism does not depend on gaining the support of the majority of a company's shareholders in order to be effective -- proxy votes are nonbinding. Instead, it changes corporate policy when management sees that a strong minority of shareholders (usually 20 percent will do) find the company's policies troublesome. Senior executives begin to fear that significant amounts of management's time, energy and attention will be diverted to addressing the issue. To reach that threshold of effectiveness, activists try to recruit the support of as many large shareholders as possible -- beginning with small social-oriented firms such as Calvert, then progressing to socially-oriented pension funds such as CalPERS (and potentially TIAA-CREF, if the demonstrators get their way). Still, most successful campaigns need significant rank-and-file shareholder support and that of at least one major mainstream investor.

That said, shareholder activism is poised to emerge as a central policy-making vehicle for three reasons. First, there is the deregulatory political culture that dominates federal policy-making. A second element is growing economic globalization -- coupled with the removal of trade barriers -- which has led to a recognition of the important role (positive and negative) that corporations can play in developing countries. The third major reason is the increasing accountability and transparency demanded by shareholders and required by securities regulators in the wake of the corporate scandals of the 1990s.

The most significant catalyst of the emerging movement in shareholder power is the deregulatory mood that holds sway at the federal level. This trend toward deregulation (or at least a reluctance to impose new regulations) began in 1995 and gained momentum when President George W. Bush took office. With Bush's election, traditional liberal lobbies concluded that new and more stringent federal regulation of corporate activities was unlikely, so they began to focus on alternative areas in which they could exert power over corporate activities. Most of these lobbies determined that they would do better with calls for action at the state level, through international treaties and through shareholder activism. All three of these trends continue to dominate new regulatory policy-making in the United States. Of the three, shareholder activism is emerging as the most powerful avenue for changing corporate policy over the long term.

This strategy is most visible in the climate change debate, where a number of corporations -- including many energy companies -- have adopted climate change policies as a result of shareholder pressure. No action is likely at the federal level on climate change for at least a couple of years. Many influential shareholder activists argue that regulation is inevitable and that, consequently, companies should begin to change their internal mechanisms now in order to prepare for dramatic regulatory changes and potential liability.

Under this kind of pressure, some major oil and electricity generating companies have adopted policies that commit, at the very least, to measure their financial vulnerabilities in a "carbon-constrained" economy. Many have gone further and adopted policies that give consideration to climate change in their internal decision-making processes. The law has not changed, but under shareholder pressure the vast majority of the energy industry is preparing for the day when it will.

New arguments following this "climate risk" logic -- that is, environmental and social concerns are not just public relations problems, but carry serious financial liability risk for companies and must be addressed in that light -- have been raised recently in various industries, including against mining, chemicals and consumer products companies. The central premise of these new shareholder campaigns is the notion that society's ethics and mores are constantly changing, and the best corporations will adjust their policies before they feel the brunt of changing values. The use of child labor in developing countries, for instance, recently was accepted practice in certain industries, but now allegations of child labor represent significant risk to corporate brands -- just ask Nike or Kathy Lee Gifford.

Similarly, it was once de rigueur for multinational construction companies and extractive industries to build large infrastructure projects that required relocation of significant numbers of indigenous peoples in developing countries. These projects usually had World Bank funding. Now the Bank won't fund such projects, and corporate managers are increasingly wary about these kinds of proposals.

Merrill Lynch recently released a report titled "Energy Security & Climate Change: Investing in the Clean Car Revolution," which concludes that there are solid investment opportunities in those automakers that have developed (or are developing) advanced clean technologies. Although Merrill Lynch understands perfectly well that "clean tech" investments tend to perform poorly in strict efficiency terms, it likely is betting that the shifting line of acceptable industry behavior will render these investments profitable nonetheless.

Examples such as these reverberate throughout industry and shareholder groups. They suggest that sound management requires acting quickly (and often on limited information) to quell potential problems, and that there is considerable risk in ignoring potential social problems. Nike's image has never completely recovered from the allegations that it used child labor, even though it is now one of the most transparent companies in the world when it comes to its supply chain. Shell continues to spend millions of dollars to rebuild its reputation after controversies in the late 1990s. (Interestingly, the cost to Shell is best measured in recruiting difficulties: New graduates, particularly in Europe, prefer not to work for a company embroiled in human rights or environmental controversies.) And as Merrill Lynch's report suggests, socially responsible shareholder groups are increasingly successful in bringing this same argument to mainstream investors.

The degree to which shareholder activism is emerging as an important element in policy-making is epitomized by ISS's acquisition of the IRRC proxy advisory business. ISS specializes in advising major pension funds and investment houses on the business implications of important votes raised at corporate annual meetings. It prepares analyses of mergers, of significant changes in pension fund management and of other similar issues relating to corporate governance for its clients.

Only rarely has ISS taken positions on social or environmental resolutions. IRRC, on the other hand, specializes in the analysis of environmental and social shareholder resolutions. This merger signifies the degree to which demands for restricting corporate behavior -- once seen as the demands of an activist fringe and thus as issues that could be safely ignored -- are now being incorporated into standard corporate-governance conversations. With this merger, ISS is acknowledging that advice on social-related shareholder activism is in sufficient demand that its portfolio needed IRRC.

As the lines of communication and credibility are strengthened between the socially responsible investment community and the mainstream investment community, activists will be able to expand their demands even further and leave their mark on how business is conducted. Further, because of recent rule changes by the Security and Exchange Commission, all financial services firms, including pensions and mutual fund companies, must make their proxy votes public. This will ease the politicization of proxy voting, as companies with strong brand names -- such as Fidelity and Merrill Lynch -- will have to tell clients how they voted on the social demands placed before shareholders.

Ultimately, these changes likely will result in corporations adopting policies that are more cautious, better thought out and significantly more responsive to public concerns. They also will usher in a fundamental shift in policy-making in government, particularly as business threatens to get far ahead of the federal government in the United States. The two traditional types of public policies -- those demanded by the marketplace regardless of law, and the demands of government -- will at least for a time diverge. Whether this new era of responsiveness satisfies society's need for regulation of business practices, however, remains to be seen, as do the larger implications of all of this for notions of democracy.

Maytag Says Whirlpool's $1.36 Billion Offer May Not Succeed
BLOOMBERG.COM
July 22, 2005

Maytag Corp., the No. 3 U.S. appliance maker, said Whirlpool Corp.'s $1.36 billion offer for the company may not succeed, signaling concern that the bid may be derailed on antitrust grounds.

Maytag's board is unable to determine whether Whirlpool's $17-a-share offer is ``financially superior'' and has a ``reasonable chance of being completed,'' Newton, Iowa-based Maytag said in a statement last night. The company said it won't open its books to Whirlpool and reiterated its backing of a $14-a- share bid by a group led by buyout firm Ripplewood Holdings LLC.

The combination of Maytag and Whirlpool would give the new company almost 50 percent of the U.S. market. Maytag may be trying to thwart the Whirlpool transaction out of concern that it wouldn't pass muster with federal regulators. The board may also be worried that Whirlpool may decline to make a bid after examining Maytag's finances, leaving the company without a buyer and owing Ripplewood a $40 million breakup fee.

“There's two unknowns: the Federal Trade Commission and that Whirlpool may get in there, look at the numbers and say `never mind,''' FTN Midwest Securities Corp. analyst Eric Bosshard said in an interview. Should Maytag “open the door to Whirlpool, they would be violating their deal with Ripplewood,'' he said.

Bosshard rates Whirlpool shares ``buy'' and has a ``neutral'' rating on Maytag. He doesn't own shares of either company.

Three Suitors

Maytag has been the focus of a bidding contest as three suitors lined up to buy the company, which is losing market share to Whirlpool, the No. 1 U.S. appliance maker, because of higher production costs and less-appealing products.

Ripplewood has been trying to acquire Maytag since at least December. After Maytag posted its first annual loss since 1995 and twice cut its 2005 profit target, it accepted a $14-a-share bid.

Once Maytag, whose brands include Amana, Jenn-Air and Hoover, announced it was for sale, it received offers from a consortium led by China's largest refrigerator maker, Haier Group, which bid $16 a share, or $1.28 billion.

Haier, which had hoped to use Maytag's brands to expand in the U.S., dropped out Tuesday, two days after Whirlpool topped its bid by $1 a share. Bain Capital LLC and Blackstone Group LP joined Haier in the bid.

Market Share

Whirlpool's bid topped Haier's. Whirlpool, based in Benton Harbor, Michigan, has 30 percent to 35 percent of the U.S. market, Morgan Keegan Inc. analyst Laura Champine said. That could make its bid for Maytag a target for intense antitrust scrutiny, legal experts said.

“Whenever you have two major players in a significant industry that want to merge, the Department of Justice and the Federal Trade Commission are going to be very interested in looking at the matter,'' said Aaron Edlin, a specialist in antitrust law at the Boalt Hall School of Law at the University of California, Berkeley.

Maytag spokesman John Daggett declined to comment beyond the information in the release. Whirlpool spokesman Steve Duthie said last night that the company hadn't received Maytag's response.

“We remain intent on the Maytag acquisition,'' Duthie said.

Ripplewood, which is joined in the bid by Goldman Sachs Group Inc.'s Capital Partners and J. Rothschild Group, has said it would lower Maytag's production costs and expand product development. The group has said it would keep Maytag's management in place.

Formal Offer

Whirlpool, which makes KitchenAid and Kenmore products, has said it wants to complete due diligence before making a formal offer by Aug. 9. Maytag shareholders are scheduled to vote on the Ripplewood bid Aug. 19. Whirlpool has said it can lower Maytag's costs in almost every category, including product development, manufacturing, information technology and purchasing.

Maytag, which has reported two consecutive quarters of earnings below analysts' estimates, reports second-quarter results this morning. The company made more than 99 percent of its ovens, washers, dryers, refrigerators and dishwashers in the U.S. as of last year, according to its Web site. About 34 percent of its production is in lower-cost countries such as Mexico, Poland and China.

Maytag shares rose 4 cents to $15.65 in New York Stock Exchange composite trading yesterday. The stock has declined 26 percent this year. Whirlpool shares, which have climbed 13 percent this year, gained 88 cents to $77.90 in New York.

Sears Canada 2Q Rev C$1.52B
Wall Street Journal Online
July 20, 2005

TORONTO (Dow Jones)--Sears Canada Inc. (SCC.T) saw a rise in its second-quarter profit and revenue, despite a 2.5% drop in same-store sales.

In a news release, the multi-channel retailer reported earnings of C$10.9 million or 10 Canadian cents a share in the latest quarter, up from C$4.6 million or 4 Canadian cents a share last year.

Net earnings for the quarter, excluding non-comparable items, were C$10.8 million or 10 Canadian cents a share compared to C$9.7 million or 9 Canadian cents a share in the same quarter last year.

The Thomson First Call mean earnings estimate called for 10 Canadian cents a share in the second quarter of 2005.
Sears Canada said total revenues for the 13-week period ended July 2, 2005 were C$1.52 billion compared to C$1.49 billion for the 13 weeks ended July 3, 2004, an increase of 2.3%. Revenues for 2005 include those of Cantrex Group Inc., since its acquisition by the company in late April, it noted.

Compared to the second quarter of 2004, gross margin increased by 95 basis points and total expenses, as a percentage to revenue, increased by 73 basis points, Sears Canada said. Inventory levels increased by 6.8%, which now include the inventory of Cantrex. The company's aged inventory dropped by 13%, it added.

Sears Canada said it's progressing with its evaluation of strategic alternatives for its Credit and Financial Services business, as announced on June 13. The company expects to select its course of action and announce its decision during the third quarter.

Company Web Site: http://www.sears.ca
Sears Canada Inc. - Toronto
2nd Quar July 2:
All figures in Canadian dollars

Wal-Mart plan has bankers on edge
Applications filed to run bank in Utah
By Becky Yerak and Josh Noel - staff reporters - Chicago Tribune
July 20, 2005

Bankers are worried that shoppers already attracted to Wal-Mart Stores Inc.'s "everyday low prices" on general merchandise may soon have another reason to go to the world's largest retailer: always low banking rates.

Wal-Mart is seeking permission from Utah's financial institutions department and the Federal Deposit Insurance Corp. to operate a bank that will enable it to recapture fees that it pays third-party institutions to process the 140 million debit, credit and electronic check transactions at its stores each month.

Cost-conscious Wal-Mart said it intends to pass on the savings to shoppers but said it has no plans to open bank branches or lend money. Wal-Mart noted that it currently leases space to more than 1,000 bank branches in its 3,197 U.S. stores and is "actively seeking new financial institutions as tenants."

But Wal-Mart is one to never say never.

Asked whether shoppers could someday shop for mortgages at Wal-Mart, financial-services director Tom McLean replied, "We continue to look for what makes sense to the customer."

Indeed, bankers are wary.

They worry that the discount chain will ultimately end up accepting deposits and doling out loans.

"We're concerned that over time Wal-Mart will change its business plan and engage in retail banking operations," said Karen Thomas, executive vice president for government relations for the 5,000-member Independent Community Bankers of America.

The Bentonville, Ark., retailer already offers basic money services in many of its stores, where 20 percent of its shoppers don't even have checking accounts. It began testing payroll check-cashing services, money orders and wire transfers in its stores in 2002.

Three years later, money orders and wire transfers are available virtually chain-wide, and payroll check cashing can be found in Wal-Mart Supercenters in all but a handful of states.

"We went in, and we just cut the prices," Wal-Mart Chief Executive Officer Lee Scott said in a recent interview in Chicago. "If someone is charging you a percentage, charging $10 to cash a check, we'll cash it for $3. That's a big difference. We still make a fair profit."

Wal-Mart, for example, typically charges $3 to cash a payroll check up to $1,000; many rival check-cashing services, currency exchanges or payday lenders will charge $6 or more, the retailer said. Meanwhile, a money order at Wal-Mart will cost 46 cents, compared with anywhere from 75 cents to $1.10 at other service providers. A wire transfer on up to $500 will set back Wal-Mart shoppers $9.46, compared to at least $15 elsewhere.

"We're doing a lot of business," Scott said.

When it opens its first store in the city of Chicago next year on the West Side, Wal-Mart expects its basic money services to get a warm reception.

Currency exchanges dotting the area, however, don't seem overly concerned about the new competition.

For one thing, Illinois' strict regulations--which cap check cashing fees at 1.85 percent--lessen Wal-Mart's threat because the giant has less room to undercut its competition, currency exchanges say.

Still, Jon Klein, vice president of Barr Management, which owns 45 currency exchanges in the Chicago area, said Wal-Mart's appeal as a "one-stop shop" could attract people turning checks into cash.

"If they're going shopping at Wal-Mart anyway, maybe they'll want to cash their check there," Klein said. "If I was next to them I might be nervous."

Because his closest store is more than a mile away, at Chicago and Cicero avenues, Klein said he isn't nervous.

Neither is Bob Wolfberg, president of PLS check cashers, which operates 29 stores in Chicago, including four in the Austin neighborhood. One of those stores is across the street from a soon-to-be-opened Wal-Mart at North and Cicero avenues.

"We welcome them to the community because they'll add economic vitality," Wolfberg said. "They will lift all boats."

Paul Gordon, a partner in the four Austin PLS stores, said he would rather not compete with Wal-Mart but isn't worried.

"Because they're not good at the financial-services industry, I'm not concerned about it," Gordon said. "That's not their specialty. I'm 24 hours. They're not. Our niche is cash services and wire services. Theirs isn't."

Wal-Mart saves its shoppers who use the services $2 million a week, the company said.

A person with take-home pay of $300 a week who cashes the check, wires money and buys a money order will save $450 a year if they use Wal-Mart instead of their competitors, said McLean, the Wal-Mart financial-services director.

"The growth has been extremely good," he said. "We're very pleased with the results."

The bank that Wal-Mart is seeking to start in Salt Lake City provides federal deposit insurance and can issue credit cards, take deposits and make loans. About the only thing it cannot do is offer standard checking accounts if its assets exceed $100 million, according to the Associated Press.

Haier Drops Maytag Bid After Whirlpool Bids $1.35 Bln
BLOOMBERG.COM
July 20, 2005

China's Haier Group, along with its partners Bain Capital LLC and Blackstone Group LP, dropped out of the three-way contest for No. 3 U.S. appliance maker Maytag Corp. after being outbid by rival Whirlpool Corp.

Whirlpool's $1.35 billion cash-and-stock offer this week topped the $1.28 billion proposed on June 21 by Haier, China's largest refrigerator maker, and Maytag's agreement to sell to New York-based buyout firm Ripplewood Holdings LLC for $1.13 billion.

Buying Maytag, the maker of Maytag, Jenn-Air and Amana appliances, would be too expensive for Qingdao-based Haier because the Chinese company would have to expend too much of its resources to compete in the U.S. market, said analyst Bruce Richardson at Evolution Securities China Co. in Shanghai. Maytag is losing market share to Whirlpool, the No. 1 U.S. appliance maker, due to higher production costs and less appealing products, he said.

``There's a limit to what they want to pay for and there's a limit to how much they can absorb,'' Richardson said.

Chinese companies, such as Haier and computer maker Lenovo Group Inc. are trying to acquire U.S. assets from the world's largest economy to feed demand from the world's fastest-growing major economy. They seek Western competitors for their expertise, brand names and access to markets, said Lu Yizhen of Citic- Prudential Fund Management Co. in Shanghai.

The Haier group indicated in a letter that pulled its offer to buy the Newton, Iowa-based company, according to a statement issued by Maytag. Haier didn't disclose why it withdrew.

Per-Share Offers

Haier offered $16 a share for Maytag, Whirlpool proposed $17 a share, and Ripplewood's agreement stands at $14 a share.

Ji Guangquang, spokesman for Haier, declined to comment as did John Ford, Blackstone Group spokesman, and Bain Capital spokesman Sam Hollander. Maytag spokesman John Daggett and Whirlpool spokesman Steve Duthie also declined to comment.

Whirlpool shares rose $2.12, or 2.9 percent, to $75.43 in New York Stock Exchange composite trading yesterday. They have gained 21 percent in the past 12 months. Shares of Maytag rose 5 cents to $17.53 yesterday and have fallen 17 percent in the past year.

Some Chinese buyers face political hurdles. A bid by Cnooc Ltd., China's third-largest oil company, to acquire Unocal Corp. is facing opposition as some U.S. lawmakers see the offer as a bid by the Chinese government to compete for energy resources. In 2003, Hong Kong billionaire Li Ka-shing's Hutchison Whampoa Ltd. scrapped a plan to buy Global Crossing Ltd. because of a U.S. national security review.

Shareholder Vote

Ripplewood, Goldman Sachs Group Inc.'s GS Capital Partners and J. Rothschild Group have been trying to buy Maytag since December 2004, according to a filing with the U.S. Securities and Exchange Commission. The Maytag board will vote on the group's $1.13 billion offer on August 19.

Whirlpool, which makes KitchenAid, Kenmore and Roper brands, offered $1.35 billion and wants to complete due diligence on Maytag before making a formal offer by August 9. The company said it can lower Maytag's costs in almost every category, including product development, manufacturing, information technology and purchasing.

Maytag has reported two consecutive quarters of earnings below analysts' estimates and twice cut its 2005 profit target. It made more than 99 percent of its washers, dryers, refrigerators, ovens and dishwashers in the U.S. as of last year, according to its Web site. About 34 percent of Whirlpool's production is in low- cost countries such as Mexico, Poland and China.

Half of U.S. Market

Whirlpool's sales growth has averaged 9.6 percent annually the past two years amid growing competition from Asian manufacturers such as LG Electronics Inc. and Samsung Corp. Sales at Maytag have increased less than 1 percent a year.

A Whirlpool purchase of Maytag would give the combined company almost 50 percent of the U.S. market and help it fend off overseas rivals. It would also face antitrust scrutiny. Whirlpool, based in Benton Harbor, Michigan, has 30 percent to 35 percent of the U.S. market, Morgan Keegan Inc. analyst Laura Champine said.

Cabela's in talks to build near Sears HQ
By David Roeder – Business Reporter – Chicago Sun-Times
July 19, 2005

The outdoor retailer and catalog operation Cabela's Inc. is negotiating to build one of its trademark mega stores on the Sears campus in Hoffman Estates, provided state and local officials bait the hook with millions of dollars in subsidies.

Hoffman Estates officials said Monday that Cabela's wants about $40 million in tax incentives to build a roughly 250,000-square-foot store in the Prairie Stone Business Park. The officials declined to say how much they're willing to offer the retailer.

A source said Cabela's has an option to acquire about 30 acres from Sears Holdings Corp. for close to $8 million.

The option expires late next month, the source said, indicating the time frame Cabela's has for a subsidy agreement.

"There's been no deal,'' said Hoffman Estates Mayor Bill McLeod. He said his community traditionally negotiates sales-tax rebates for businesses that are expected to generate substantial sales-tax revenue.

McLeod said the average Cabela's store generates about $100 million in annual revenue. That works out to a potential $2 million a year for Hoffman Estates and $6 million for the state in sales-tax revenue.

The company also is negotiating for a store site in Hammond. It has offered to buy the 93-acre Woodmar Country Club in Hammond, but club members have been reluctant to sell.

It's not known if Sidney, Neb.-based Cabela's would pursue both the Hoffman Estates and Hammond sites, or is using one for negotiating leverage on the other. A Cabela's spokesman could not be reached.

Prairie Stone is a 790-acre site north of Interstate 90 and Beverly Road. The Cabela's would be near Sears Centre, an 11,000-seat arena that's being used to draw other retail and entertainment uses to what was once envisioned as strictly a corporate office park. The arena is under construction.

Hoffman Estates Village Manager James Norris said other developers are interested in building an indoor-outdoor water park on another portion of the property. "What is happening is that the area is evolving into a destination corridor for entertainment and shopping,'' he said.

Cabela's has 12 stores, and reports sending out 120 million catalogs yearly. The stores are in markets far smaller than the Chicago region, but are positioned to draw customers from even a couple hundred miles away.

"Museum-quality wildlife displays'' and walk-through aquariums are among the attractions Cabela's touts as making its stores a tourism draw.

Norris said the state's Department of Commerce and Economic Opportunity is heavily involved in the negotiations. Representatives for the department and for Sears would not comment.

Charlie Portis, vice president of J.F. McKinney & Associates, the real estate company that markets Prairie Stone, said about 130 acres are available for development. He said interest in the site has picked up, with the cosmetics company Mary Kay Inc. recently agreeing to place a distribution center there.

In addition, the site will get a new office building to serve a single corporate user, he said. "The park seems to be getting momentum from lots of different directions,'' he said.

Golden hellos' still glitter
By Susan Chandler - Tribune staff reporter – Chicago Tribune
July 19, 2005

Recent hiring and exit packages for top executives show that
boards seem to have little fear of shareholder revolt

If there is a backlash against towering executive pay packages, you can't tell it by what's happening at Morgan Stanley or Boeing Co.

In recent weeks, the boards have handed out princely contracts to their incoming chief executives, complete with guaranteed pay and bonuses and outsized grants of restricted stock.

John Mack, the incoming CEO at Morgan Stanley, was given a "golden hello" worth an estimated $76.7 million. James McNerney, Jr. is receiving more than $53 million for taking on the top job at Chicago-based aerospace manufacturer Boeing Co.

Getting pushed out can still mean a big payday, as Philip Purcell's $110 million exit package from Morgan Stanley demonstrates. (See accompanying box.)

Maybe nothing should shock shareholders after Michael Eisner took home nearly $600 million in stock option profits from Walt Disney Co. in a single year as the last century was drawing to a close.

But investors, analysts and compensation experts still are capable of being outraged. They howled at the largess and guarantee features of the Morgan Stanley packages, in particular.

"A guaranteed bonus is an oxymoron," said Paul Hodgson, a compensation expert with The Corporate Library. "We're either basing pay on performance or we're not. If we're not, don't call it a bonus."

So why are board members still being so generous with shareholders' money, and why aren't they worried about a shareholder backlash?

Directors see themselves as friends of the CEOs, not adversaries, compensation critics say, and they often accede to outrageous pay demands because they want to avoid conflict. Reinforcing the alignment of their interest is the fact that most directors of large corporations are CEOs themselves.

Feeling his pain

In the case of Morgan Stanley, the directors felt Purcell's pain at being pushed overboard, suggests Richard Bove, a brokerage analyst with Punk Ziegel & Co. in New York.

Morgan Stanley's board was replete with Purcell supporters, many of whom knew him from his days heading brokerage Dean Witter when it was part of Sears, Roebuck and Co. and after it was spun off.

The board resisted calls for Purcell's ouster for months, and only gave in when the departure of key executives and negative press coverage continued unabated.

Morgan Stanley's board "hasn't really embraced that change was necessary," Bove said.

"They are as culpable as he is, so from their perspective they are as blameless as Purcell is. If Purcell was treated badly, they were treated badly. The fact is that personal loyalties are still No. 1 in this business."

Once you've been generous with the guy being pushed out, it's easy to be generous with the one you're trying to woo, Bove adds.

Morgan Stanley drew particularly harsh criticism for its willingness to guarantee pay for Mack and several other top executives. Under his contract, Mack would have received $25 million in both 2005 and 2006 no matter how his firm performed. After a furor erupted, Mack gave up his pay guarantee.

In a statement, Morgan Stanley said it was trying to be fair with the agreements as well as "appropriate to the circumstances and consistent with past practice." The firm also said it was trying to "ensure management stability through the CEO search process," although it hardly got that.

Stephen Crawford, one of Morgan's two co-presidents, resigned within days of receiving his guaranteed contract, allowing him to walk away with $32 million.

At Boeing, it was easy for directors to sympathize with McNerney because he was, in fact, one of them--a Boeing board member--and he already was a CEO.

To make up for what McNerney was leaving behind at 3M, Boeing gave him restricted shares worth an estimated $25.3 million. The company also guaranteed McNerney the maximum bonus allowed in 2005--230 percent of his base pay--which will top $4 million. Any bonus amounts he received from 3M will be subtracted from that, Boeing said.

Boeing says it is paying McNerney a reasonable amount given his experience and that the company didn't offer him a signing bonus or any special inducements. His pay package is "in keeping with similar recent placements at other large U.S. companies and appropriately recognizes the value an executive like Jim McNerney brings to Boeing," said Boeing spokesman John Dern.

When it comes to explaining the non-stop escalation in CEO pay, compensation experts point to several phenomena: the rise of the compensation consultant, the power of the comparison group and the role of the single candidate.

Compensation consultants work at the pleasure of the CEO, points out Graef Crystal, a former compensation consultant who is now a columnist for Bloomberg News.

Their jobs are to figure out how to shovel more money into executives' pockets through incentive programs that consistently pay out, he says. And they've done an excellent job.

"I hate to call myself a whore, but I've turned a trick or two," said Crystal. "Even back in the 1980s, I was making $800,000 to $900,000 a year. They didn't care what you charged them. If you were going to get them an extra $10 million, they didn't care because they didn't pay the bill. The shareholders pay the bill."

When a compensation consultant wants to bolster a CEO's argument that he should be receiving more, he carefully selects a group of other CEOs that will be used for comparison.

Put a top-earner in the comparison group such as Terry Semel at Yahoo ($230.6 million in 2004 compensation) or George David at United Technologies ($88.7 million), and it is easy to argue that the current boss is seriously underpaid.

"They're all looking at each other, and the pay just goes up and up," said Crystal.

Also pumping up pay is the selection process where headhunters sift through a long list of potential candidates but present only one to the board, compensation experts say.

As board members become attached to the headhunter's choice, they become less willing to dicker over the candidate's pay demands.

What should happen, Crystal says, is for a headhunter to bring two or three candidates to the table and let the board evaluate their pay requirements.

`Leadership has value'

Not everyone agrees the system is broken and needs to be fixed.

James Drury, who runs his own executive search firm in Chicago, says that boards have to consider "market dynamics" when they are considering how much to pay a new chief. They can't ignore what other companies are offering, particularly if they are trying to recruit a hot prospect.

"Leadership has value, and the market sets the value every day when a leader moves from one place to another," Drury said.

If boards were parsimonious or bargained too hard, they might not be able to persuade top talent to come on board, he adds. "I can tell you from experience that if boards took a very aggressive approach ... leaders would probably stay where they are."

Of course, executive recruiters such as Drury have a vested interest in CEO pay levels continuing to rise, compensation critics point out. The fees charged by headhunters usually total one-third of the candidate's first-year base pay and estimated bonus.

So is there any way to rein in executive compensation? Most experts don't see one.

Small shareholders can complain, of course. But because they can't vote directors out of office, there's no way real way for them to punish boards they consider overly generous.

Institutional shareholders have more clout, but few of them have taken up the cudgel, Crystal said. The heads of large pension funds and mutual fund companies earn hefty salaries and bonuses themselves, which puts them in an awkward position when complaining about others' take-home pay.

Some compensation critics simply are resigned to seeing more of the same.

"It hasn't changed, and it never will change," said Punk Ziegel's Bove.

The Corporate Library's Hodgson is slightly less cynical, but not much. He would be willing to celebrate if CEO pay would just "slow down a little."

- - -

How warm is his handshake?

What John Mack, new CEO of Morgan Stanley, gets:

- Pay package: Guaranteed minimum of $25 million a year for 2005 and 2006*

- Stock: One-time grant of 500,000 restricted shares paid over five years. Estimated value: $26.7 million.

- Other: Vacation, pension, retirement plans and retiree health benefits will be treated as if Mack didn't leave the company in 2001.

Total: At least $76.7 million for the first 18 months

What Morgan Stanley gets:

- A popular executive who may be able to quell the dissent that led to the defection of key rainmakers and a revolt by a group of eight former executives who called for the ouster of Philip Purcell.

*After signing his contract, Mack renounced his pay guarantee but is expected to make roughly the same amount based on the company's past performance.

Source: Morgan Stanley 8-K filing with the SEC

- - -

What color is his parachute?

What Philip Purcell, former CEO of Morgan Stanley, got:

- Bonus: $44 million. Will be adjusted according to the percentage increase or decrease in the company's 2005 pre-tax earnings.

- Restricted stock: $34.7 million

- Stock options: $20.1 million

- Retirement: $11 million

- Other: $250,000 annual payment on the anniversary date of his termination; $250,000 charitable contribution in Purcell's name; office and secretary. All continue for the rest of his life.

Total: $110 million

What Morgan Stanley got:

- Purcell agrees not to say bad things about his former employer. Purcell agrees to forfeit his bonus, annual payment, charitable contribution and secretarial services if he goes to work for a competitor.

Source: SEC filings and news reports

Allstate CEO: Firms should be politically active
USA Today
July 18, 2005

President Bush signed a bill in February that will send most class-action lawsuits into federal courts. It was regarded as a major victory for business, as was the bankruptcy bill that starting in October will make it more difficult for consumers to avoid paying debt. Business has long accused plaintiff lawyers of "shopping" class-action suits into counties where juries had a track record of penalizing companies. A key man behind the law is Edward Liddy, CEO of Allstate, who chairs the Business Roundtable's Civil Justice Reform Task Force. Liddy isn't finished. Asbestos and medical liability are next on his wish list. Liddy, 59, met with USA TODAY reporter Del Jones in Washington, D.C., to discuss what companies need to know about legal reform and being politically active.

Liddy says companies should be careful when picking political positions.
By H. Darr Beiser, USA TODAY

Q: Are companies looking forward to fewer class-action trials?

A: You might see a spike for a while because where companies used to settle, they may take a chance of going to court because they think they will get a fair hearing. It has leveled the playing field and, over time, will reduce the number of suits.

About Liddy

Became Allstate chairman and CEO in 1999.
President and chief operating officer, 1994-98.
Executive at Sears, 1988-94.
Native of New Brunswick, N.J. Was 12 when his father died.
Graduate of Catholic University of America in 1968 with degrees in political science and economics.
MBA, George Washington University, 1972.
Worked for Donald Rumsfeld, now secretary of Defense, when Rumsfeld was CEO of aspartame maker G.D. Searle. They remain friends.
Basketball fan of the Chicago Bulls and Dartmouth College, where his 6-foot-2 son played guard through the 2004-05 season.
Avid reader, mostly of history and biographies.
Recent reads: Prize: The Epic Quest for Oil, Money & Power by Daniel Yergin and Alexander Hamilton by Ron Chernow.
The historic figure he would like to meet if he could go back in time: Harry Truman.

Q: Business is piling up legislative victories. Do you risk a consumer backlash if they fear their legal alternatives are being eroded?

A: I'm not sure that we're piling up victories. The class-action victory was kind of nice, but consumers can still sue for a variety of things. The class-action remedy is still available, except that in the past it has been mostly state-based. It goes to federal court. Cases may be heard more quickly because they won't be filed in 50 jurisdictions.

Q: The conservative position usually favors states' rights. This moves litigation out of state courts and into federal courts. A double standard?

A: No, and I'll tell you why. In the past, you had a class-action suit in Illinois and it would make law for people in California and New York. Now, a class action can still be filed in state court where it has state-based participants. Federal courts will hear cases that involve multiple states. It's the opposite of the way you worded it. It preserves states' rights.

Q: Trial lawyers contribute heavily to Democrats. Companies contribute heavily to Republicans. The perception is that both parties have sold out. True?

A: Neither party really sells out. We formulate a point of view that's good for our company, our customers, and advance that point of view. We'll be just as aggressive supporting the Democratic Party on a lot of state issues.

Q: When you take a public stand on a controversial issue, you offend half of your customers. Is that wise?

A: You can't be neutral. You don't need to be out in left field on a position, but if you're neutral, then you're on the sidelines and the path goes in directions that you may not like. Choose positions carefully. But you need to be politically active to advance things.

Q: Don't you risk boycotts or other forms of backlash?

A: I suppose. But the risk of doing nothing sometimes outweighs the risk of doing something. If you don't act, then things will never change. Sometimes, you have to put your hand up, take a position and move forward. You don't need to have the banner in your hands and lead the charge, although we've been pretty public in our support of the class-action bill.

Q: The classs-action bill demonstrates that business has more success persuading voters to elect business-friendly candidates than it does at persuading juries in the courtroom. Why is that?

A: I'm not sure I would agree with the way you're characterizing that. In the past five to 10 years, the class-action lawsuit process has been tilted toward favorable judges and juries. As that abuse is removed, you will see more companies taking a chance in the court system. Companies couldn't afford the risk of going to a jury. Now, with class actions going into federal courts, you'll get better judges and juries. Companies will rely more on the jury box and not so much on the ballot box.

Q: You would like to see punitive and pain-and-suffering damages restricted. But if a jury doesn't have the ability to hit a company over the head with a 2-by-4, won't safety be compromised? Won't companies consider lawsuits as a cost of doing business?

A: Do you believe that people try to do the right thing and serve the greater good? That's what I think most people generally try to do. Secondly, you suffer great reputational damage from lawsuits. A company like Allstate sells insurance policies, which is a promise to pay in the future. We can't be getting sued every day, because that chips away at our brand image, at the confidence people have in the company. If you eliminate pain and suffering, you don't eliminate the real pain the company suffers if it has done something wrong.

Q: You honestly don't think an auto company has ever made a safety decision for economic reasons?

A: There's a difference between a safety improvement and fixing a defect. Let's assume that an SUV is prone to roll over.

Fixing that's a lot different than saying we should require side air bags. Side air bags is a matter of education. Is the consumer prepared to pay for it? You make some models with side air bags, some without. You see which decision the consumer makes.

But not fixing something that is injurious, that's different. I don't know what it was like 20 or 30 years go, but in this day and age companies are pretty enlightened about taking the high road because it is vital to long-term consumer relationships.

Q: What's wrong with letting juries penalize companies with punitive damages, but giving the money to charity? Punish companies without making lottery winners of plaintiffs.

A: I would not do that. Certainly for negligent things done willfully, there ought to be a penalty applied. Maybe someone goes to jail, maybe they are banned for life from working in an industry. If you gave punitive damages to charity or the government, that would spawn abuse and regulation that would drive us all nuts. Are you better off having a bad doctor removed from practice or assigning punitive damages? I would vote for the former.

Q: Companies often settle lawsuits because it is more expensive to litigate. Is the lack of corporate backbone partly to blame for frivolous lawsuits?

Liddy's advice

There is risk when companies take controversial stands. But there may be more risk when they stay neutral. Companies should reconsider trusting their position to the jury box, not just the ballot box. The public should rethink punitive damages. It's better to remove a bad doctor than to drive up insurance bills that are passed on to consumers. The public's opinion of companies is low and has few signs of improvement. Companies have a lot of work left to repair the damage.

A: It's situational. There are times when it is less expensive to settle. The meter is pretty expensive when it's running on lawsuits. Other times, when you settle one suit it will give rise to a thousand, and you have to litigate. Most CEOs look at it that way. They're not anxious to set a trend that they're a soft company.

Q: Why do companies insist that the evidence be sealed when they settle? Don't consumers need to know if a product is harmful?

A: Suits are settled before all the evidence is out. The company is accused of X and Y, but the suit does not include the rebuttal when it is settled, so there is a benefit in keeping things sealed if it has not gone to fruition.

Q: Can you see that from the outside it looks as if you're hiding something?

A: Yeah. When we seal things, we don't do it because we're trying to hide something. It's like a divorce proceeding. Anyone can say anything they want to whether it's grounded in fact or not.

Q: A na๏ve question: Is there any way of encouraging an ethical culture where people don't file frivolous lawsuits and companies do the right thing when they legitimately injure someone?

A: I don't see it. We go to the court system at the drop of a hat in this country and it's really a shame. It's cultural.

Q: Michael Moore enjoys a measure of popularity by painting corporations as evil. Is that because there is at least some truth to his allegations?

A: In some parts of America there is a distrust of big organizations, be it corporations or the military. Certain members of the business community have given America a lot to worry about. WorldCom and Enron cost people billions of dollars and wiped out pension plans. People spent 20 years at MCI building a competitor for AT&T and now at 55 years old they don't have a pension. You'd be pretty irritated at that. You'd like to see a return to a more wholesome view of business. The American capitalist system is the envy of and the engine of growth around the world.

Q: Do you detect a swing in sentiment more favorable to corporations?

A: Not yet. I have a son in college. If he tells certain people that his dad is the CEO of Allstate, they look at him like he's some sort of crook.

Whirlpool Enters Fight for Maytag With Informal Bid
By Dennis K. Berman and Michael J. McCarthy – Staff Reporters
The Wall Street Journal
July 18, 2005

Whirlpool Corp. has entered the bidding fray for Maytag Corp., making a preliminary $1.33 billion offer for its competitor and setting off a three-way scrum for the icon of American industry.

In a letter to Maytag Chief Executive Ralph Hake, Whirlpool, the big appliance maker, said it was prepared to offer $17 a share -- at least half in cash, and the rest in stock -- for the Newton, Iowa, maker of Maytag, Jenn-Air and Hoover brands. The letter falls short of a formal offer and includes a request to perform due diligence on Maytag's books.

A bid would compare with a $14-a-share deal on the table from a private-equity consortium led by Ripplewood Holdings. And it rivals a $16-a-share all-cash proposal from a triumvirate of China's Qingdao Haier Ltd. and private-equity funds Blackstone Group and Bain Capital, which hasn't yet been finalized. All bidders would assume Maytag's $969 million in debt.

A request for comment from Ripplewood wasn't returned. Maytag officials weren't available for comment. A Bain spokesman declined to comment.

Over the past year, investors have viewed Maytag as a broken company, weighed down by high labor costs, slack innovation and new competition from mainly Asia-based competitors. But Whirlpool's interest shows the commercial potency of Maytag's brand names, which got their start nearly 100 years ago with the introduction of the Pastime washing machine.

Today Maytag employs about 18,000 people world-wide and makes a variety of products from small refrigerators dubbed "personal beverage chillers" to furnaces to air conditioners.

A person familiar with Whirlpool's thinking said Whirlpool intended to keep those brand names in circulation, while also hinting at some broad changes should the Benton Harbor, Mich., firm prevail in the takeover battle.

Without providing specifics, this person said Whirlpool's global manufacturing operations, which perform a lot of work in China, could drive "significant efficiencies" to help repair Maytag's overburdened cost structure. This person also said that Whirlpool could better extend Maytag's "pipeline of innovation" by lending its expertise in creating products.

Having sat on the sidelines for two months as two suitors chased Maytag, Whirlpool wasn't expected to emerge as a bidder. Inside Whirlpool many thought its size would simply disqualify it, from an antitrust standpoint, from bidding for its Iowa rival. Whirlpool has annual sales of more than $13 billion and about 50 manufacturing and technology-research centers around the globe. Its brands, marketed in roughly 170 countries, include Whirlpool, KitchenAid, Brastemp, Bauknecht and Consul.

A Maytag-Whirlpool combination would undoubtedly draw scrutiny from the government. However, the bid by Haier, the Chinese company, threw a wild card into the mix that may have benefited Whirlpool. The Chinese-backed offer for a Midwestern business icon contributed to the consternation in Washington in recent weeks over investment ambitions by the Asian nation for U.S. businesses.

Now Whirlpool and Maytag could argue that the market for appliances isn't merely a domestic one, but a global one. And the two firms, even combined, wouldn't hold nearly the sway over an international marketplace, their argument could follow.

The rhetoric is certain to heat up as Maytag prepares for a shareholder meeting slated for Aug. 19. With Haier's final bid expected within a week, Maytag's board continues to recommend Ripplewood's $14-a-share offer, which is well short of the $15.45 where the company's shares traded on the New York Stock Exchange on Friday. With three players in the mix, the shareholder meeting date is likely to change as the board wades through the three different proposals.

Whirlpool shares, meanwhile, last month reached a 52-week high, and closed Friday at $69.99, down 1.2% on the day. The company has a market capitalization of $4.7 billion. Law firm Weil Gotshal & Manges, investment bank Greenhill & Co., and consultants the Boston Consulting Group are advising Whirlpool.

Retailer Kohl's makes turnaround with new brands
By Angela Moore - REUTERS
July 17, 2005

NEW YORK (Reuters) - Mid-priced retailer Kohl's Corp.'s risky move to bulk up its offering of exclusive brands has paid off for investors, as the department store's shares have experienced a year-long climb, analysts said.

Kohl's, which struggled for several quarters with stagnant fashion sales and bloated inventories, introduced a bevy of new clothing lines in the last year that helped drive store traffic and boost sales.

The new brands, featuring dressier merchandise, include Urban Pipeline, apt. 9, Chaps and Daisy Fuentes' namesake clothing line.

Citing its new labels, Kohl's this month posted a 14.4-percent jump in June sales at stores open at least one year, and shares hit a year high of $58.90, up 43 percent from last July's 52-week low of $41.11.

Analysts are positive, if a tiny bit cautious.

"Kohl's has a tendency not to test new brands, but to roll them out in a big way," said Dan Hess, chief executive of Merchant Forecast, an independent research group specializing in retailing. "I think there's a good chance they'll continue to see success, but the way they invest in new brands holds risk. You need to have a strong stomach."

Fast-growing Kohl's had been a Wall Street favorite. The Menomonee Falls, Wisconsin-based company was cheered years ago for pioneering the off-the-mall department store format, which combined the convenience of discount shopping with the selection and service of a department store.

But other chains, like J.C. Penney Co., and Sears moved to copy that model, improving their clothing offerings for teens and tweens, and adding shopping carts and central check-out aisles that are popular with shoppers.

In 2003, Kohl's was left with hefty stockpiles of clothing, which it eventually had to mark down as much as 80 percent, cutting into its profitability and raising doubts about whether it was still in tune with customers' tastes.

It also struggled with entering urban areas where its bland Midwestern style sense didn't resonate with fashion-savvy city hipsters.

And with Kohl's reputation for sweeping discounts, markdown-conditioned shoppers were reluctant to pay full price.

ROLL THE DICE

But last fall, the company made a big investment in brands, rolling out an exclusive string of new apparel names.

In light of Kohl's previous fashion blunders, this initiative was a gamble, but the new lines -- many of which will mark their first anniversary this fall -- were more fashion-forward and more popular with shoppers.

The company's turnaround was helped by its decision to enter the beauty business, with a partnership with Estee Lauder and new brands American Beauty, Flirt, Good Skin and Grassroots.

Those are all steps in the right direction, analysts say.

"We expect top-line trends to continue stabilizing during the next three quarters as management maintains tight inventory control, introduces and expands proprietary brands, and the moderate income consumer begins to see a modest acceleration in wage growth, and thus disposable income growth," Piper Jaffray analyst Jeff Klinefelter wrote in a research note.

Kohl's shares now trade at about 23 times the average estimate of analysts surveyed by Reuters Estimate of earnings in 2005. Competitors J.C. Penney, which trades at almost 17 times earnings; Sears Holdings Corp., which trades at almost 25 times earnings; and Federated Department Stores Inc., trade at about 15 times earnings.

Going forward, Kohl's plans to expand its jewelry and home offerings, and it signed a deal to sell Quiksilver Inc. clothing under the legendary skateboarder Tony Hawk's brand, and clothing under the Candie's brand, which will include an advertising campaign with actress and singer Hilary Duff.

Sears-Kmart hybrid scores with shoppers
By Greta Guest – Business Writer - Detroit Free Press
July 16, 2005

For Sylvia Blair, the old Kmart in Rochester Hills was a so-so shopping experience.

The new Sears Essentials store that has been in the works there for three months is a huge improvement, according to the 29-year-old Oak Park resident. Blair bought a pink peasant skirt and beaded halter top for a weekend party as she shopped the store Friday.

"This is much better. It's a better quality of clothes," Blair said. "This is my second time here this week ... don't tell my husband."

The store on Rochester Road is the first one in Michigan that has converted to the new concept that blends the best of Sears and Kmart, said Sears Holdings Corp. spokeswoman Corinne Gudovic.

The concept combines convenience items typically found at Kmart, such as milk or paper towels, with the high-end appliances, hardware and electronics that Sears sells.

Gudovic said the Rochester Hills store has its grand opening today, which is scheduled to begin at 7:30 a.m. with a ribbon-cutting and $10 gift cards to the first 200 customers. She said the Kmart in Warren opens Aug. 20 as a Sears Essentials and the Brighton store will be converted by Oct. 29. The conversions cost about $3 million each. All told, about 400 Kmarts are expected to be converted to Sears Essentials by 2007.

Shoppers still will find seasonal items, the pharmacy and the health and beauty and stationery departments toward the front of the store.

"We did that because it was important for us to keep the Kmart customer," Gudovic said. "We like to have young families. Everything we have is for your home, your family."

The store sells everything from Sears branded clothing to Kmart's Essential Home line of ready-to-assemble furniture. Kmart's toy department, pharmacy, pantry, caf้, garden center and health and beauty department remain.

But the bulk of merchandise comes from Sears, including the apparel, shoes and home goods such as towels. A portrait studio and optical center are up front next to the caf้. Sears Essentials stores will not sell Kmart's Martha Stewart Everyday merchandise because of contractual issues.

"In this store, customers still look for Martha, but they are embracing the Ty Pennington products," said store manager Patrick Craig.

The Sears Essentials stores have increased staffing by 25% over the employment levels of the Kmart stores to handle sales of the appliances, hardware and electronics, he said. The hardware area went from about four aisles to 20.

Robbin Ouimet, 43, of Rochester Hills visited the new store for the first time Friday.

"It was nice. It is nice to have a place nearby where there are larger appliances and tools and TVs," said Ouimet, who lives 3 miles from the store. "My husband is happy he can get Craftsman tools nearby."

The couple usually bought those items at Sears anyway, she said, but the new store will save them the drive to Sears stores in Pontiac or Sterling Heights.

Sears Holdings was created in March when Kmart and Sears Roebuck and Co. completed their $12.3-billion merger.

Health Care at the Swipe of a Card
By Jennifer A. Kingson – New York Times
July 16, 2005

The paper-pushing method of paying medical bills, which has long been fairly resistant to the electronic age, is about to be challenged as new payment options like health savings accounts and prepaid medical cards gain wider acceptance in the workplace.

Beyond their practical aspects, these products - and health savings accounts in particular - represent a philosophical shift toward consumer-directed health care, with people taking a more active role in supervising their medical treatments and benefits.

Health savings accounts, created in late 2003 as part of Medicare legislation, allow users to funnel pretax earnings to a bank account that can be used exclusively for medical expenses, including doctors' visits, medications and insurance premiums on long-term care. Only people who sign up for health insurance plans with high deductibles - $1,000 or more for an individual in 2005, or $2,000 or more for family coverage - are eligible.

Both employers and workers can deposit funds in the accounts, and the amount that each contributes depends on the individual plan and the worker's preferences. The accounts can be linked to a debit card and can be managed online or by telephone; account holders receive a regular statement by mail.

For now, most employers are likely to offer health savings accounts alongside traditional health insurance plans, and workers will have to decide which option makes the most sense by looking at their tax rate, their medical risks and other factors. (One helpful Web site is www.hsainsider.com, which is maintained by the H.S.A. Coalition, a nonprofit group.)

One advantage to health savings accounts is that they can accumulate from year to year - in contrast to the more common flexible spending accounts, which must be used up in a single calendar year or the funds are revoked. Both types of accounts are a way for people to reserve pretax dollars from their paychecks.

Some employers have begun offering medical prepaid payment cards linked to flexible spending accounts. Instead of having to fill out a reimbursement form to cover eligible expenses, account holders can use a MasterCard or Visa card to pay a drugstore, doctor or other provider directly.

Since the card will work only for expenses that are authorized under the cardholder's flexible spending account plan - which typically include things like eyeglasses, child care and prescription drug co-payments - there is never a question of whether the outlay is covered.

Health savings accounts have been cited as a way to get people to shoulder more medical expenses and for insurers and employers to pay less. Critics say that these accounts benefit the healthy over the sick, because people with chronic medical conditions would be forced to tap them more often and thus would end up saving less for retirement.

"It's fair to say that this is a way for employers to save money," said Joe Martingale, national leader for health care strategy at Watson Wyatt, a consulting firm. But "the real policy objective is to make the costs of health care more affordable and sustainable for everybody."

As consumers spend more of their own money on medical expenses, the thinking goes, doctors, hospitals and pharmaceutical companies will have more incentives to compete on price and market forces will thus bring down the overall cost of health care, Mr. Martingale said.

If these accounts are successful, they could become the dominant or exclusive option at some companies, Mr. Martingale said. That does not necessarily mean that people will have to spend more of their own money on health care, as long as employers continue to contribute meaningful amounts to the accounts, he said.

Among large employers, 8 percent already offer health savings accounts, 18 percent plan to offer them in 2006 and 47 percent are considering offering them, according to a survey that Watson Wyatt released in March. The company polled 555 employers with at least 1,000 workers each.

Scott Hauge, who owns Cal Insurance & Associates, a small property and casualty insurer in San Francisco, introduced health savings accounts for his employees this year. He said he was able to lower his company's health insurance bill to $139,000, from $175,000. Of his 30 workers, 17 chose a health savings account and 13 picked a traditional health insurance plan.

"Initially there was confusion" among the employees about the new program, Mr. Hauge said. "It is somewhat complex and people have to take a look at it and look at their own situation and make sure that it works for them."

Polls by Watson Wyatt and Visa suggest that awareness of health savings accounts is quite low. And confusion runs high, in part because the accounts can be offered through several types of providers - banks, insurers, third-party administrators - and the necessary infrastructure to support the accounts is in some cases a work in progress.

Some banks, including J. P. Morgan Chase, were ready at the beginning of 2004 with health savings accounts that mimicked existing online banking programs. About 40,000 people have signed up for health savings accounts at Chase and the bank expects that number to increase tenfold over the next year, executives there said.

One major insurer, the UnitedHealth Group, has gone so far as to set up its own bank, called Exante, to offer health savings accounts, and says that 44,000 accounts have been opened there, with an average monthly deposit of $862, including money contributed by both employers and employees.

UnitedHealth also offers health reimbursement arrangements, which are medical-related accounts financed solely by employers that can also be carried over from year to year.

With a health savings account, "those dollars go in pretax, stay pretax, and can go out pretax" if they are used for qualified expenses, said Tracy Bahl, chief executive of Uniprise, a division of UnitedHealth Group. "The account is portable, the account goes with the employee after termination, whereas with the H.R.A., the dollars do not go with the employee" but are returned to the employer after a worker leaves.

Though UnitedHealth customers have health savings accounts through various banks and providers, the accounts offered through the company's Exante Bank pay 4 percent interest and come with a MasterCard debit card, Mr. Bahl said. Exante plans to add a credit feature to the cards and to introduce mutual funds tied to the accounts, he added.

Keith A. Bennett, a 34-year-old information technology consultant in Kansas City, Mo., opened a health savings account through UnitedHealth a year ago when he left a corporate job to set up his own consulting business. The insurance plan he selected for his family pays 100 percent of medical expenses after a $3,550 deductible.

Mr. Bennett said he was given a checkbook rather than a debit card to use in conjunction with the account, and that if he leaves the checkbook behind, he can pay medical bills with a regular credit card and reimburse himself by check, as long as he keeps the receipt to prove that it was a qualified expense.

"One of the nice features that I was sold on is that it's tax deductible, and as a small-business owner, that's important to me," Mr. Bennett said. "I might not be so quick to go to the doctor with just a slight sore throat now that I'm more aware of costs and of the bottom line."

How Costco Became the Anti-Wal-Mart
By Steven Greenhouse – New York Times
July 17, 2005

JIM SINEGAL, the chief executive of Costco Wholesale, the nation's fifth-largest retailer, had all the enthusiasm of an 8-year-old in a candy store as he tore open the container of one of his favorite new products: granola snack mix. "You got to try this; it's delicious," he said. "And just $9.99 for 38 ounces."

Some 60 feet away, inside Costco's cavernous warehouse store here in the company's hometown, Mr. Sinegal became positively exuberant about the 87-inch-long Natuzzi brown leather sofas. "This is just $799.99," he said. "It's terrific quality. Most other places you'd have to pay $1,500, even $2,000."

But the pi่ce de r้sistance, the item he most wanted to crow about, was Costco's private-label pinpoint cotton dress shirts. "Look, these are just $12.99," he said, while lifting a crisp blue button-down. "At Nordstrom or Macy's, this is a $45, $50 shirt."

Combining high quality with stunningly low prices, the shirts appeal to upscale customers - and epitomize why some retail analysts say Mr. Sinegal just might be America's shrewdest merchant since Sam Walton.

But not everyone is happy with Costco's business strategy. Some Wall Street analysts assert that Mr. Sinegal is overly generous not only to Costco's customers but to its workers as well.

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

Mr. Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business."

He also dismisses calls to increase Costco's product markups. Mr. Sinegal, who has been in the retailing business for more than a half-century, said that heeding Wall Street's advice to raise some prices would bring Costco's downfall.

"When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them," he said. "We don't want to be one of the casualties. We don't want to turn around and say, 'We got so fancy we've raised our prices,' and all of a sudden a new competitor comes in and beats our prices."

At Costco, one of Mr. Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

"They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.

But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.

Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. "On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now."

IF shareholders mind Mr. Sinegal's philosophy, it is not obvious: Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.Mr. Dreher said Costco's share price was so high because so many people love the company. "It's a cult stock," he said.

Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

"He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."

Mr. Sinegal says he pays attention to analysts' advice because it enforces a healthy discipline, but he has largely shunned Wall Street pressure to be less generous to his workers.

"When Jim talks to us about setting wages and benefits, he doesn't want us to be better than everyone else, he wants us to be demonstrably better," said John Matthews, Costco's senior vice president for human resources.

With his ferocious attention to detail and price, Mr. Sinegal has made Costco the nation's leading warehouse retailer, with about half of the market, compared with 40 percent for the No. 2, Sam's Club. But Sam's is not a typical runner-up: it is part of the Wal-Mart empire, which, with $288 billion in sales last year, dwarfs Costco.

But it is the customer, more than the competition, that keeps Mr. Sinegal's attention. "We're very good merchants, and we offer value," he said. "The traditional retailer will say: 'I'm selling this for $10. I wonder whether I can get $10.50 or $11.' We say: 'We're selling it for $9. How do we get it down to $8?' We understand that our members don't come and shop with us because of the fancy window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values."

Costco was founded with a single store in Seattle in 1983; it now has 457 stores, mostly in the United States, but also in Canada, Britain, South Korea, Taiwan and Japan. Wal-Mart, by contrast, had 642 Sam's Clubs in the United States and abroad as of Jan. 31.Costco's profit rose 22 percent last year, to $882 million, on sales of $47.1 billion. In the United States, its stores average $121 million in sales annually, far more than the $70 million for Sam's Clubs. And the average household income of Costco customers is $74,000 - with 31 percent earning over $100,000.

One reason the company has risen to the top and stayed there is that Mr. Sinegal relentlessly refines his model of the warehouse store - the bare-bones, cement-floor retailing space where shoppers pay a membership fee to choose from a limited number of products in large quantities at deep discounts. Costco has 44.6 million members, with households paying $45 a year and small businesses paying $100.

A typical Costco store stocks 4,000 types of items, including perhaps just four toothpaste brands, while a Wal-Mart typically stocks more than 100,000 types of items and may carry 60 sizes and brands of toothpastes. Narrowing the number of options increases the sales volume of each, allowing Costco to squeeze deeper and deeper bulk discounts from suppliers.

"He's a zealot on low prices," Ms. Kozloff said. "He's very reticent about finagling with his model."

Despite Costco's impressive record, Mr. Sinegal's salary is just $350,000, although he also received a $200,000 bonus last year. That puts him at less than 10 percent of many other chief executives, though Costco ranks 29th in revenue among all American companies.

"I've been very well rewarded," said Mr. Sinegal, who is worth more than $150 million thanks to his Costco stock holdings. "I just think that if you're going to try to run an organization that's very cost-conscious, then you can't have those disparities. Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong."

There is little love lost between Wal-Mart and Costco. Wal-Mart, for example, boasts that its Sam's Club division has the lowest prices of any retailer. Mr. Sinegal emphatically dismissed that assertion with a one-word barnyard epithet. Sam's might make the case that its ketchup is cheaper than Costco's, he said, "but you can't compare Hunt's ketchup with Hein ketchup."

Still, Costco is feeling the heat from Sam's Club. When Sam's began to pare prices aggressively several years ago, Costco had to shave its prices - and its already thin profit margins - ever further.

"Sam's Club has dramatically improved its operation and improved the quality of their merchandise," said Mr. Dreher, the Deutsche Bank analyst. "Using their buying power together with Wal-Mart's, it forces Costco to be very sharp on their prices."

Mr. Sinegal's elbows can be sharp as well. As most suppliers well know, his gruff charm is not what lets him sell goods at rock-bottom prices - it's his fearsome toughness, which he rarely shows in public. He often warns suppliers not to offer other retailers lower prices than Costco gets.

When a frozen-food supplier mistakenly sent Costco an invoice meant for Wal-Mart, he discovered that Wal-Mart was getting a better price. "We have not brought that supplier back," Mr. Sinegal said.

He has to be flinty, he said, because the competition is so fierce. "This is not the Little Sisters of the Poor," he said. "We have to be competitive in the toughest marketplace in the world against the biggest competitor in the world. We cannot afford to be timid."

Nor can he afford to let personal relationships get in his way. Tim Rose, Costco's senior vice president for food merchandising, recalled a time when Starbucks did not pass along savings from a drop in coffee bean prices. Though he is a friend of the Starbucks chairman, Howard Schultz, Mr. Sinegal warned he would remove Starbucks coffee from his stores unless it cut its prices.

Starbucks relented.

"Howard said, 'Who do you think you are? The price police?' " Mr. Rose recalled, adding that Mr. Sinegal replied emphatically that he was.

If Mr. Sinegal feels proprietary about warehouse stores, it is for good reason. He was present at the birth of the concept, in 1954. He was 18, a student at San Diego Community College, when a friend asked him to help unload mattresses for a month-old discount store called Fed-Mart.

What he thought would be a one-day job became a career. He rose to executive vice president for merchandising and became a prot้g้ of Fed-Mart's chairman, Sol Price, who is credited with inventing the idea of high-volume warehouse stores that sell a limited number of products.

Mr. Price sold Fed-Mart to a German retailer in 1975 and was fired soon after. Mr. Sinegal then left and helped Mr. Price start a new warehouse company, Price Club. Its huge success led others to enter the business: Wal-Mart started Sam's Club, Zayre's started BJ's Wholesale Club and a Seattle entrepreneur tapped Mr. Sinegal to help him found Costco.

Costco has used Mr. Price's formula: sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships and aim for upscale shoppers, especially small-business owners. In addition, don't advertise - that saves 2 percent a year in costs. Costco and Price Club merged in 1993.

"Jim has done a very good job in balancing the interests of the shareholders, the employees, the customers and the managers," said Mr. Price, now 89 and retired. "Most companies tilt too much one way or the other."

Mr. Sinegal, who is 69 but looks a decade younger, also delights in not tilting Costco too far into cheap merchandise, even at his warehouse stores. He loves the idea of the "treasure hunt" - occasional, temporary specials on exotic cheeses, Coach bags, plasma screen televisions, Waterford crystal, French wine and $5,000 necklaces - scattered among staples like toilet paper by the case and institutional-size jars of mayonnaise.

The treasure hunts, Mr. Sinegal says, create a sense of excitement and customer loyalty.

This knack for seeing things in a new way also explains Costco's approach to retaining employees as well as shoppers. Besides paying considerably more than competitors, for example, Costco contributes generously to its workers' 401(k) plans, starting with 3 percent of salary the second year and rising to 9 percent after 25 years.

ITS insurance plans absorb most dental expenses, and part-time workers are eligible for health insurance after just six months on the job, compared with two years at Wal-Mart. Eighty-five percent of Costco's workers have health insurance, compared with less than half at Wal-Mart and Target.

Costco also has not shut out unions, as some of its rivals have. The Teamsters union, for example, represents 14,000 of Costco's 113,000 employees. "They gave us the best agreement of any retailer in the country," said Rome Aloise, the union's chief negotiator with Costco. The contract guarantees employees at least 25 hours of work a week, he said, and requires that at least half of a store's workers be full time.

Workers seem enthusiastic. Beth Wagner, 36, used to manage a Rite Aid drugstore, where she made $24,000 a year and paid nearly $4,000 a year for health coverage. She quit five years ago to work at Costco, taking a cut in pay. She started at $10.50 an hour - $22,000 a year - but now makes $18 an hour as a receiving clerk. With annual bonuses, her income is about $40,000.

"I want to retire here," she said. "I love it here."

How Gift Cards Helped Trip Up Wal-Mart Aide
By Ann Zimmerman and James Bandler – Staff Reporters - The Wall Street Journal
July 15, 2005

Contact lenses, a $100 gift card and an alert Wal-Mart Stores Inc. employee helped trigger the forced resignation this year of Thomas M. Coughlin, the discounter's former No. 2 executive, according to a new chronology of events Wal-Mart filed yesterday with the Labor Department.

Wal-Mart has accused Mr. Coughlin, a former vice chairman, of stealing as much as $500,000 from the giant retailer in the form of bogus expenses and reimbursements along with the unauthorized use of gift cards. The high-profile case is being probed by the U.S. Attorney in Fort Smith, Ark. Mr. Coughlin, through his lawyers, has denied wrongdoing.

Yesterday's filing by Wal-Mart was an attempt to refute a claim by Jared Bowen, a former company vice president, that he was unjustly fired after blowing the whistle on Mr. Coughlin's alleged wrongdoing. In a letter to Labor Department officials from one of its outside lawyers -- Eugene Scalia, son of Supreme Court Justice Antonin Scalia -- Wal-Mart said Mr. Bowen wasn't a whistleblower and, in fact, helped Mr. Coughlin misappropriate funds.

Instead, Wal-Mart said yesterday, Mr. Coughlin was caught after a different employee blew the whistle.

According to Wal-Mart's account, Mr. Coughlin in May 2004 asked Mr. Bowen for 51 Wal-Mart gift cards, each with a value of $100. He said they would be given to that year's "All-Stars," who were generally lower-level employees recognized for superior performance.

Wal-Mart said Mr. Coughlin used the gift cards himself at Wal-Mart stores and Sam's Club outlets, at one point spending $1,000 toward three 12-gauge shotguns. A company spokeswoman said Wal-Mart was able to track all the purchases, saying Mr. Coughlin also used the cards to buy puppy chow, a Celine Dion compact disc, Stolichnaya vodka, wine, a $319 fishing license, a rifle case and a $3.54 Polish sausage.

Mr. Coughlin's downfall came, the company said, in January 2005, when he presented one of the $100 gift cards at a Wal-Mart store to buy contact lenses. After a sales clerk called the home office to inquire about the gift-card program, an alert employee noticed the card was supposed to be an All-Star award and "could not understand why Coughlin would be attempting to redeem" it. The home office employee alerted corporate fraud personnel, Wal-Mart said, triggering an internal probe.

Mr. Coughlin retired as vice chairman of Wal-Mart in January, and then was forced to resign from the board in March amid accusations that he misappropriated company funds for his personal use. Wal-Mart's filing contains fresh details of the unraveling of his alleged false-reimbursement efforts, which Wal-Mart says lasted for more than a decade. Among the personal items Mr. Coughlin supposedly got Wal-Mart to pay for, the company said, were an $8,500 all-terrain vehicle, a $10,000 customized hunting vehicle and more than $30,000 for hunting leases.

The release of numerous documents accompanying the letter to the Labor Department took Mr. Coughlin's legal team by surprise. In a statement, his lawyers, William Taylor and Blair Brown, said the company had refused for months to release the documents, citing the ongoing federal investigation and the need for confidentiality.

"Now, suddenly and without any notice to us, Wal-Mart decided that it no longer needed to protect the confidentiality of the documents and made them available for the world," the attorneys said in the statement. They said they hadn't seen the documents and couldn't comment on them. "We deplore the unfairness with which Wal-Mart is treating one of its most loyal and valuable leaders."

As for Mr. Bowen, Wal-Mart claims that during its internal probe he withheld information about company funds used for Mr. Coughlin personally, including ranch vacations. The company also claims Mr. Bowen wasn't candid about his own involvement in the so-called union project -- a mysterious effort that is expected to form the heart of Mr. Coughlin's defense if he is indicted.

Mr. Coughlin will argue that he wasn't stealing by using the gift cards and other maneuvers, but rather reimbursing himself for secret payments he was making to gather intelligence on union-organizing activities in Wal-Mart stores, according to people familiar with the matter.

In yesterday's filing, the company said it found "no evidence that any of the funds Coughlin took were used to pay union informants or otherwise deter unionization." In addition, the letter claims on several occasions Mr. Bowen submitted false travel expenses of his own.

"We need time to look over this huge amount of new information that no one's ever raised before, such as Jared submitting false expenses of his own," said Steve Kardell, Mr. Bowen's attorney.

Last week, Wal-Mart said it recently discovered that Mr. Bowen had forged his college transcript when he applied to work at company headquarters, inflating his grade point average to a 3.5 from a 2.1 and exaggerating the number of credit hours he had completed. Mr. Bowen said he eventually admitted to two supervisors that he had forged his transcript. "This just shows you what a company with the resources of Wal-Mart can do and the degree to which they can come with after-the-fact issues to smear someone," Mr. Kardell says.

Clock is ticking for Field's name
By Sandra Guy – Business Reporter - Chicago Sun-Times
July 14, 2005

CINCINNATI -- Survival of the Marshall Field & Co. name hung in the balance here Wednesday as Federated Department Stores shareholders approved the $17 billion takeover of Field parent May Co.

And the balance was tipping toward erasing the 124-year-old company's name from Chicago's retail landscape.

Survival of the Lord & Taylor name looks even less likely.

Terry J. Lundgren, Federated's chairman, president and chief executive, told reporters following the shareholders' meeting, "Certainly Marshall Field's is a very well-known, strong name. But the real answer is not with us in this room. It's really with what customers actually will do with that name and how important it is."

WHAT'S IN A NAME?
We asked some passersby near Marshall Fields what they thought about the store possibly changing its name.
Roger Prather, 65, of Hyde Park
"Changing the name would be degrading to this established business. It would be a travesty."
Velma Evans, 47, of Auburn-Gresham
"Marshall Field's is tradition. It's a very unique store to Chicago."
Darlene Griffin, 60, of Bloomingdale
"I'd still shop here [if it were Macy's], but it wouldn't be the same."
Robert Jarvis, 35, of South Chicago
"Chicago without Marshall Field's would be like a Twinkie without the cream."
Bobbi Leggett, 79, of River East
"I like Macy's, but Marshall Field's has been here since I was a little girl."
Beverly Frazier, 43, of Gresham
"There's nothing like Marshall Field's. It's been a cornerstone of this city for 150 years."

Perhaps most telling was Lundgren's declaration to the shareholders: "First and most important, we have a clear vision for being this premier retailing company built primarily around two outstanding national retail brands: Macy's and Bloomingdale's."

Shoppers will know whether Field's will become Macy's by fall or perhaps earlier, but no name changes will occur before 2006.

Federated is already surveying customers in Chicago, Minneapolis and Detroit about the importance of the Field's and Lord & Taylor names. An independent party was hired to conduct interviews at malls, online, on the telephone and by mail, Lundgren said. Similar surveys of shoppers at once-venerated stores such as Rich's in Atlanta, Burdine's in Florida and Bon Marche in Seattle failed to stay Federated's hand from renaming them Macy's.

"The biggest resistance to changing the names came from our own employees," Lundgren said. "To get to the truth, you've got to go deeper, be more challenging and point out what's different inside the store. So far in our markets, our customers said it doesn't make that big a difference."

On the bright side, no Field's stores are expected to be sold because of overlap between Federated and other May nameplates, including Lord & Taylor, Filene's and L.S. Ayres.

But even if the Field's name survives, the chain faces extensive changes.

Federated will introduce its merchandise in Field's stores by fall 2006, including private labels such as INC, Charter Club and Tasso Elba.

Unique merchandise is crucial to Lundgren's mandate to increase sales. However he declined to endorse the continued presence of Field's State Street boutiques, operated by outside companies including Thomas Pink, Alexandre Savile Row and Baccarat crystal.

On the other hand, Lundgren signaled that State Street could remain as is but that its new parent would use more real estate inside the store for merchandise.

"There's a lot of room in the State Street store for upscale assortments," he said.

Retail behemoth rises as May enters Federated Stores' camp

BY DAN SEWELL - ASSOCIATED PRESS

CINCINNATI -- Shareholders of both companies overwhelmingly approved Federated Department Stores Inc.'s takeover of rival May Department Stores Inc. on Wednesday, advancing an $11 billion deal that will bring together such nameplates as Macy's, Bloomingdale's, Lord & Taylor and Filene's under one corporate umbrella.

The deal will create a formidable retail force with nearly 1,000 department stores and $30 billion in annual sales. St. Louis-based May will become a Federated division.

Federated said 99.88 percent of its shares voted favored the merger, and 97 percent of May shares.

Terry J. Lundgren, Federated's chairman, president and chief executive, said the merger, announced in late February, now awaits approval from the Federal Trade Commission. The company expects the deal to be final before the holiday shopping season.

The merger will create "one superb national department store," John L. Dunham, May's chairman, told about 50 shareholders at May's meeting in New York. "We will be much stronger in every aspect of the business than either company could be independently."

"What people expect with the Federated strength in fashion buying is that they will be able to get the May stores more back on track with consumers," said Jeffrey Peng, who helps manage $13 billion at Dreman Value Management in Jersey City, New Jersey, including Federated shares. "May has made fashion mistakes and buying mistakes. Federated has done a much better job on that."

Many of May's department stores will be converted to the Macy's name as Federated accelerates its strategy of creating a nationwide brand that will allow it to expand its national marketing initiatives. That means May store nameplates like Hecht's, Foley's and Kaufmann's could soon disappear.

The national scope of the company will provide better economies of scale and help Federated better compete with low-price operators like Wal-Mart Stores Inc. at the bottom and upscale retail merchants at the top.

May stores, including Marshall Field's and Lord & Taylor, will get upgrades that Federated calls its reinvent strategy with wider aisles for baby stroller access, grouped together fitting rooms and space outside fitting rooms where the TV plays a cartoon channel, as a way to draw younger female shoppers.

Speaking on Chicago stores, Lundgren said that while there is overlap between stores, "we're looking at it on a store by store, mall by mall basis. We have no plan to divest in a wholesale way."

On the number of stores the company will own on the Mag Mile alone, he said: "We're glad to have as much real estate as we do on the Magnificent Mile." But he did not say whether any of those stores would change names or close.

Lundgren credited Eddie Lampert, who engineered the takeover of Sears, Roebuck by Kmart, with pushing Federated to have a more open mind toward real estate strategies. "Lampert has thrown a new wrinkle into the real estate holding equation for retailers that has yet to be fully understood," he said. However, Federated expects to maintain a combination of leased and owned properties.

Federated is merging May's St. Louis corporate headquarters functions into Federated's Cincinnati and New York corporate offices this year. But Federated plans to make St. Louis the headquarters of one of the combined company's major operating divisions to capitalize on the talent pool there.

Dunham told shareholders Wednesday there will be no merger-related layoffs before March 1, and he declined to comment on store closings and management changes at May that will result from the merger, noting that it will be up to Federated's team to decide.

Under the terms of the deal, each share of May will be converted into the right to receive $17.75 per share in cash and 0.3115 shares of Federated stock.

Federated's shares have risen 35 percent since the merger was announced Feb. 28, to about $75, bringing the current value of the offering to about $41 per May share. May's share have increased 19 percent.

Burt Flickinger III, managing director for New York-based consultants Strategic Resource Group, said the two companies offer "a very responsible retail plan. . . . They should get complete regulatory approval."

Federated has about 112,000 employees and more than 450 Macy's and Bloomingdale's stores in 34 states, Guam and Puerto Rico. May -- operator of Lord & Taylor, Famous-Barr, The Jones Store, Filene's and other regional department stores -- has 132,000 employees in 46 states, the District of Columbia and Puerto Rico.

Federated-May deal OKd
By Becky Yerak - Tribune staff reporter - Chicago Tribune
July 14, 2005

Shareholders vote for merger; Field's name up in the air

CINCINNATI -- In a deal that will transform the nation's retailing landscape, Federated Department Stores Inc.--the owner of Macy's and Bloomingdale's--came a step closer Wednesday to doubling its size as shareholders overwhelmingly approved the acquisition of May Department Stores Co. in a deal valued at $11 billion.

Terry Lundgren, chairman and chief executive officer of Cincinnati-based Federated, said he has not decided whether to change the name of Marshall Field's, a May chain with strong Chicago ties.

That decision will come sometime next year after Federated completes surveys with Midwestern shoppers.

In recent years, Federated has been converting its regional chains to the Macy's or Bloomingdale's names as it seeks to build national brands.

In February, when it announced plans to buy St. Louis-based May, Federated said most of May's regional department stores would become Macy's. Two possible exceptions were Marshall Field's and Lord & Taylor.

"We're in the market now researching Chicago, Minneapolis and Detroit, talking to customers about the importance of the Marshall Field's name," Lundgren said Wednesday.

It is shoppers in Chicago, however, who are most likely to be sentimental about the name.

Although Field's is headquartered in Minneapolis, it was founded in Chicago and its flagship store remains on State Street. In contrast, the Field's name was rolled out in Detroit only four years ago.

"Certainly Marshall Field's is a well-known, strong name," Lundgren said. "But the real answer is not with us; it's what customers actually will do and how important it is" for them.

Federated is overseeing "thousands of interviews," conducted by outside firms, to gather "unbiased research," Lundgren said.

"And we're not just learning about names. We're learning about customers and what they want, what level of satisfaction they have."

When Federated researched past potential name changes, it found that workers were more wedded to the monikers than shoppers. "Our customers said it doesn't really make that big of a difference," he said.

Federated will know the results of the Field's research by late fall or "maybe earlier," Lundgren said.

Federated's merchandising strategy won't become visible in May stores, including Field's, until fall 2006, he said.

Lundgren called Field's State Street property, which in recent years has allowed suppliers to open boutiques within the store, a "great" store. And it has the potential to be a leading producer for Federated as well.

"We can have a very high-end business and do all the things that store does now, but we'll want to get in and get a closer look before we decide what is working and what isn't," he said.

May bought Field's last year from Target--beating out a rival bid from Federated. Lundgren said earlier this year he would have pursued May even without Field's. Indeed, Federated and May had talked about a merger before Field's was in the mix.

But one shareholder at Wednesday's Federated meeting believes that Field's was a linchpin of the latest deal.

"You're like a man infatuated with a woman. You're so infatuated with Marshall Field's that you're buying May," the shareholder told Lundgren. "Is that why you overpaid for May?"

Lundgren responded that Federated paid a fair price. His evidence: Federated's stock has climbed since the May deal was announced, suggesting that Wall Street is happy with the purchase price.

The merger still needs to be approved by the Federal Trade Commission. The regulator is conducting an antitrust review of the deal, which will create a $30 billion retailer with a widespread presence as an anchor at the nation's shopping malls.

If the merger passes regulatory muster, it is expected to close in Federated's fiscal third quarter. About 81 percent of Federated's outstanding shares, or 99 percent of votes cast, were in favor of the merger.

Wal-Mart, Humana to Offer Drug Plan
Associated Press - FORBES.COM
July 13, 2005

Wal-Mart Stores Inc., the world's largest retailer, and Humana Inc., one of the nation's largest health-care providers, on Wednesday said they will offer a prescription drug plan to Medicare recipients.

Financial terms were not disclosed.

The Medicare Part D plan will provide prescription drug coverage to Medicare beneficiaries, with enrollment beginning in November and becoming effective in January. Humana will offer a cobranded prescription drug card with Wal-Mart and Sam's Club, the companies said. Part D prescription drug plans were created as part of the Medicare Modernization Act in 2003.

In addition, the companies said they will launch a campaign this month to inform senior citizens about the program at all 3,600 Wal-Mart stores, Sam's Clubs and Neighborhood Markets in the United States.

Humana said it plans to offer the Medicare prescription drug plan in 46 states and Washington, D.C.

Shares of Wal-Mart fell 12 cents to $49.97, while Humana shares dropped 45 cents to $40.94 in afternoon trading on the New York Stock Exchange.

John Mack on His Plans for Morgan
By Patricia Sellers - FORTUNE - KINGMAKERS
July 25, 2005 issue

Hardly anyone expected John Mack to return to Morgan Stanley. Least of all John Mack. Rising from bond salesman to president, he helped build the firm into a Wall Street powerhouse. In 2001 he quit

and became CEO of CSFB. He returned that investment bank to profitability but clashed with the board of parent Credit Suisse Group, which ousted him last summer. Recently Mack has watched the turmoil at Morgan Stanley from the chairman's office of Pequot Capital. Now that he has replaced his old nemesis Phil Purcell, he is dealing with profit shortfalls and executive departures. He sat down with FORTUNE's Patricia Sellers on his first full day at Morgan's Midtown Manhattan headquarters.

Is this your first time here since 2001?
No, I've come to this building to get a haircut every three or four weeks. Sal's shop is in the lobby. Once the search started, I didn't want to be spotted, so I met Sal at my son's apartment.

How did you decide to come back?
I had to get comfortable that the board was 100% behind me. Then I had to decide if I was ready to go back to a public company. Sometimes when I went to bed, I thought, "I don't want to do this."And when I woke up, I thought, "I do want to do this." [My wife] Christy said, "If you're going to do this, you need to be smarter about the way you work."

How so?
At CSFB I took on all of it. This time, I need to delegate more. I must not get sucked into the little things.

How different will this job be?
Very different. CSFB needed a cultural change. I don't think we need cultural change. CSFB had major regulatory and profitability issues. The issues here are more strategic.

Like whether Morgan Stanley and Dean Witter belong together?
In 1997 we did the merger, and that strategy still makes sense. I believe there's tremendous value in the combined network. It's all about execution. Look at Merrill Lynch, where Stan O'Neal has done a wonderful job. Their retail business is No. 1 or No. 2 in productivity. Why aren't we? Dean Witter wasn't at the top when we did the merger and has slipped since.

Purcell decided to spin off Discover Card. Might that strategy change?
Everything can change. I need to understand it. I need to hear what the managers think.

Five top-level executives recently left. Do you want them back?
Ideally, I'd like all five to come back. [Banker] Joe Perella epitomizes the client focus, the client care that any great investment bank needs.

Perella and Vikram Pandit [Morgan's departed securities chief] have indicated they won't work under co-president Zoe Cruz. Can you see these three people living together?
They used to. Somehow it worked. I need to understand the dynamics.

What's your biggest weakness?
I trust people very quickly, and that gets me into trouble.

You manage down well, but you have trouble managing up. Without question. But I think this time the board is on my side.

Shareholders OK Federated, May Merger
FORBES.COM -  Associated Press
July 13, 2005

Shareholders of both companies overwhelmingly approved Federated Department Stores Inc.'s takeover of rival May Department Stores Inc. on Wednesday, advancing an $11 billion deal that will bring Macy's, Bloomingdale's, Lord & Taylor and Filene's under one corporate umbrella.

The deal will create a formidable retail force with nearly 1,000 department stores and $30 billion in annual sales. St. Louis-based May will become a Federated division.

Federated announced that 99.88 percent of its shares that voted favored the merger, which needed a simple majority for approval. A total of 81.3 percent of the company's outstanding shares were voted. About 97.09 percent of May shares that voted favored the purchase, according to Sharon Bateman, a May spokeswoman. About 77 percent, 280.8 million, of outstanding shares were cast, she said.

"Today's votes by shareholders of both May and Federated are important milestones in our process to create a premier national retailing company that will help us compete against a highly competitive marketplace," said Terry J. Lundgren, Federated's chairman, president and chief executive.

Lundgren said the merger now awaits approval from the Federal Trade Commission. The company expects the deal to be final before the holiday shopping season.

The merger will create "one superb national department store," John L. Dunham, May's chairman, president and chief executive officer, told about 50 shareholders at May's meeting in New York. "This is a good, bold, exciting move."

Still, with painful downsizing in the months ahead as May gets digested by Federated, Dunham acknowledged to journalists after the meeting that "it's a bittersweet day." He noted it's "a day of mixed emotions."

Federated is merging May's St. Louis corporate headquarters functions into Federated's Cincinnati and New York corporate offices this year. But Federated plans to make St. Louis the headquarters of one of the combined company's major operating division to capitalize on the talent pool there.

Dunham told shareholders Wednesday that there will be no merger-related layoffs before March 1, and he declined to comment on store closings and management changes at May that may result from the merger, noting that it will be up to Federated's team to decide. Company officials are also remaining mum about details of the merger until it is approved by regulators. The deal, announced in late February, is expected to close this fall.

Under the terms of the deal, each share of May will be converted into the right to receive $17.75 per share in cash and 0.3115 shares of Federated stock.

Burt Flickinger III, managing director for New York-based consultants Strategic Resource Group, said the two companies offer "a very responsible retail plan. ... They should get complete regulatory approval."

Federated has about 112,000 employees and more than 450 Macy's and Bloomingdale's stores in 34 states, Guam and Puerto Rico. May - operator of Lord & Taylor, Famous-Barr, The Jones Store, Filene's and other regional department stores - has 132,000 employees in 46 states, the District of Columbia and Puerto Rico.

Many of May's department stores will be converted to the Macy's name as Federated accelerates its strategy of creating a nationwide brand. That means such May store name plates like Hecht's, Foley's and Kaufmann's could soon disappear.

The extended national scope is expected to help Federated better compete with Wal-Mart Stores Inc. and upscale retail merchants.

Flickinger said prospects for the combination of the companies' top stores "will be phenomenal."

Shares of Federated fell $1.50, or 2 percent, to $74.80, in midday trading on the New York Stock Exchange, where May's shares fell 56 cents, or 1.4 percent, to $40.60.

New investors overhaul Sears Portrait Studios
By Sandra Guy – Sun-Times Columnist
July 13, 2005

A hostile takeover of Sears Portrait Studio has started a digital and marketing revolution in a business under siege.

It may sound like hedge-fund wizard Edward S. Lampert's takeover of Sears Roebuck and Co., but this is a different story.

David Meyer, co-founder of investment group Knightspoint Partners, led a group of investors in gaining control of Sears Portrait Studio's operator, CPI Corp., in March 2004. The investors replaced CPI's board and top executives, and started slashing costs. CPI holds the license to run the portrait studios, and Sears collects a percentage of the studios' sales.

The new executives have revamped Sears Portrait Studios, including 25 in Chicago-area Sears stores, with digital cameras, software that creates more varied and expensive photos, and simpler pricing that eliminates most coupons. Sears operates 864 portrait studios in its department stores, plus 40 free-standing ones in strip malls.

Shoppers who pay an extra $3 per sheet can pick up their photos on the same day, rather than waiting 16 days for prints as they did under the old film system. (A sheet can be either one 8-by-10, two 5-x-7s, three 3-by-5s or 8 wallet-size.)

Those who pay the regular price still must wait several days for prints.

Other new features of the digital studios include:

*A customer can elect to see his or her proofs online by receiving an e-mail with a link to the Sears Portrait Studio Web site.

*Photos can be manipulated to simulate oil paintings.

*Copies of photos may be transferred to such items as mugs and mouse pads.

*And customers may order a montage of close-up photos, called a portrait study, of a baby's face, toes, hands and favorite stuffed animal.

The transition of the film studios to digital technology is the biggest investment Sears Portrait Studio has made in its 44-year partnership with Sears.

It's a two-pronged campaign: Fight the growing number of people taking their own digital photos, and attract younger moms with babies into Sears stores, particularly those who might shun malls, said Jim Litwin, vice president of marketing for Sears Portrait Studio.

"For the first time in many years, we're adding a significant number of new portrait studios, including about 40 by year's end in Sears Essentials stores," said Litwin, who commutes to CPI's headquarters in St. Louis from his home in northwest suburban Buffalo Grove.

Sears Essentials is the name of Sears' new off-mall stores that blend Sears and Kmart products, a strategy resulting from Kmart's $12.3 billion takeover of Sears on March 24.

The portrait studios' growth is expected to surge as Sears converts 400 Kmart stores to Sears Essentials in the next three years.

Sales have already leapt by double-digit percentages in portrait studios with digital cameras and high-speed computers. The company intends to convert all of its studios to digital technology by year's end.

"It opens a huge opportunity for us to photograph new poses, to put text or other effects on an image, and to let the photographer instantly crop the photos to customers' specifications," said Litwin.

Sears' rivals Wal-Mart, Target, J.C. Penney, Picture People, Babies R Us, Kiddie Kandids and others are struggling with the same problem: Busy parents can snap and print their own digital photos.

Litwin said of the counter-strategy: "We constantly point out that we offer high-quality prints and professional photography, lighting and props. . . . The prints made on-site are long-lasting images -- longer-lasting than the typical inkjet prints people make at home -- that can be put into scrapbooks."

Stock spotlight: Sears
Chicago Sun-Times
July 13, 2005

Nothing like a groundless rumor to hype a stock, and gullible investors were sucked in by a classic one Tuesday.

Theflyonthewall.com reported that rumors were swirling that Sears Holdings Corp. directors were poised to pay a dividend. That sent SHLD soaring as high as $161.75, a new 52-week peak.

Sears' exasperated spokesman Chris Braithwaite reiterated company policy: no dividend in the forseeable future. The company is run by a hedge fund manager, and those guys have little affection for dividends.

The stock closed at $157.38, up $2.17, creating nearly $360 million in new wealth on nothing more than an online rumor.

Sears chooses marketing boss from within ranks
By Becky Yerak - Tribune staff reporter – Chicago Tribune
July 12, 2005

Sears, Roebuck and Co. has promoted Joan Chow, vice president of marketing services, to senior vice president and chief marketing officer, effective immediately.

Chow, 44, replaces Janine Bousquette, who left in April as chief customer and marketing officer for Sears Roebuck, which in March merged with Kmart Holding Corp. to form Sears Holdings Corp.

Following in the footsteps of its new retail sibling, Sears Roebuck has been slashing its advertising spending by double-digit percentages since merging with the more cost-conscious Kmart. Advertising historically has been key for Sears, long one of the nation's biggest spenders on messages to lure shoppers.

In her new position, Chow is responsible for Sears Roebuck's marketing and customer relationship management efforts. She reports to Luis Padilla, president of merchandising and marketing for Sears' stores.

Since joining Sears in 1998, Chow has held various marketing roles in Sears' home services, which include product repair, home delivery and the customer relations arm Customer Care Network.

In April 2004, she was named a vice president in Sears' corporate marketing department and assumed additional duties for multicultural marketing. Three months ago, she added responsibility for marketing services.

Before joining Sears, Chow was vice president of software product management at Information Resources Inc. Previously she was product director with Johnson & Johnson.

She earned her bachelor's degree from Cornell University and an MBA from the University of Pennsylvania.

Bousquette, a former marketing executive with eToys and PepsiCo, joined Sears in 2002.

Mack Takes Step to Clean House
By Ann Davis - Staff Reporter - The Wall Street Journal
July 12, 2005

Morgan Stanley CEO Bids Adieu To Crawford,
but Move Will Cost Firm's Shareholders $32 Million

Morgan Stanley's newly appointed chairman and chief executive, John Mack, bid an expensive goodbye yesterday to a top deputy closely aligned with his predecessor.

Stephen Crawford, Morgan Stanley's co-president for a turbulent 3∏-month period, stepped down after Mr. Mack told Mr. Crawford on Friday and over the weekend that he thought the executive should relinquish the co-presidency, people familiar with the matter said.

In a pay deal that has riled both investors and employees of the blue-chip Wall Street firm, the departure of Mr. Crawford, 41 years old, will cost Morgan Stanley shareholders $32 million. Morgan's board last week disclosed that it had guaranteed Mr. Crawford $16 million a year for 2005 and 2006, but that he also could collect the full amount upfront if he resigned before Aug. 3. Someone familiar with the matter said Mr. Crawford made about $11.5 million last year, when he was chief administrative officer. Mr. Crawford was the executive most closely aligned with former Chief Executive Philip Purcell, who resigned last month after a shareholder revolt challenged his leadership.

Mr. Crawford called working for Morgan Stanley a "great privilege." He made no comment in the statement about his compensation. He declined an interview request.

The board defended the pay guarantee as an effort to retain Mr. Crawford, since he was at risk of losing his position under a new CEO. Mr. Crawford was promoted to co-president in late March along with former bond chief Zoe Cruz in a management shake-up that led several other top executives to resign. Mr. Crawford's pay agreement, dated June 30, states, "We look forward to a very promising future with you at the Company."

But investors yesterday were criticizing the deal as wasteful. Patrick S. McGurn, special counsel for Institutional Shareholder Services, which advises investors on governance issues, said such rich severance deals are "arguably, pay for failure."

He added: "While I think most shareholders understand the desire of this board -- and I think shareholders share it -- to put behind it the troubles of the last few months, shareholders don't like to get the tab for doing so."

Mr. McGurn said Morgan Stanley's board may face legal risk over the pay guarantees to Mr. Crawford and others; shareholders are watching for a ruling in Delaware Chancery Court on whether the board of Walt Disney Co. breached their duty by allowing an excessive severance package to onetime president Michael Ovitz.

Zoe Cruz, the other co-president, remains at the firm as "acting president," the company said. Unlike Mr. Crawford, she recently turned down the chance to receive a guaranteed paycheck. That earned her goodwill as an uproar ensued last week over pay deals for Mr. Crawford and other Purcell allies, as well as an estimated $44 million payout to Mr. Purcell.

In an interview, Mr. Mack said, "I think the right thing to do is what Zoe did. She turned it down."

Indeed, Mr. Mack rejected a pay guarantee for himself last week, albeit after the fact. The board had agreed to pay him as much as $25 million a year if rival CEOs' pay averaged at least that amount. But after employees questioned both his pay deal as well as the other pacts, he announced Friday that he would ask the board to evaluate him on the firm's performance. Monday, Mr. Mack told employees that if the firm performed well, everyone would get the rewards.

Mr. Mack added that Ms. Cruz has told him to do what was best for the firm, even if it meant asking her to step aside. Calling her "a team player," he said the fact that he had made her acting president was "an indication that we may want to bring other people into the firm. We need flexibility." His actions also allowed for the possibility that Ms. Cruz would stay but have another co-president.

Mr. Mack said his decision about Mr. Crawford wasn't related to the pay deal, but rather to the executive's experience level. Mr. Crawford has served as chief financial officer and chief administrative officer but has never run a Morgan Stanley business division. "I think operating experience is important. That's critical in my view," Mr. Mack said.

 

The Great Wal-Mart of China
By Clay Chandler FORTUNE.COM THE 2005 GLOBAL 500
July 11, 2005

For the world's biggest company, the key to growth lies in the world's biggest country.

"This way, ladies! Follow me!"

It's two weeks before the opening of Wal-Mart's first supercenter in Chongqing, and Baker Jiang, Wal-Mart's manager for western China, has invited a delegation of women on a tour. A small army of red-shirted associates greets the ladies at the door with a rousing Wal-Mart cheer.

Inside, Jiang whisks the group around shelves piled with toys, sporting goods, and household appliances, past the new film-processing machines, and down the escalator to the produce department, butcher shop, and bakery where, donning mask and hairnet, he beckons visitors to inspect for cleanliness.

Wal-Mart, he says, "will never use tap water to make your bread." By tour's end, it is the women who are cheering. "This blouse is so cheap," says one. "Can I buy it now?" Another gives Jiang a coquettish nudge. "We've waited so many years for this. What took you so long?"

Wal-Mart doesn't get that kind of reception in many parts of the U.S. these days. In its home market the giant retailer is under siege, blamed for evils from squeezing suppliers and crushing the corner grocer to busting unions and driving down wages.

But good luck convincing Chinese consumers that the arrival of a supercenter should be cause for public outcry. In Chongqing, a metropolis of 31 million where shopping options have long been limited to dank, state-run stores with surly clerks or open-air markets where the tomatoes may or may not be as fresh as the garbage, the locals say, "Bring it on!"

"So what if they take business from other shopkeepers?" says 51-year-old Sheng Xuehua. "They should, if they can do a better job." Out on the street, construction worker Li Daping agrees. "We can't wait for Wal-Mart to open. We're practically counting the days."

Opening day, when it arrives June 30, brings pandemonium. There's a giddy rush when doors swing wide at 7:30 a.m. Thousands of shoppers scamper from aisle to aisle, heaping carts with spinach, cooking oil, whatever they can grasp.

A truckload of roasted ducks sells out in minutes. By 8 a.m. the queue for rotisserie chicken at 85 cents a bird is 50 people long. Shoppers snatch five-kilogram sacks of rice as fast as employees can unload them. At tanks near the entrance, housewives lunge at live grass fish as long as their arms. At 9:30, a cadre of local officials joins Wal-Mart's Asia CEO, Joe Hatfield, for a ceremony on the public square outside.

There's a brass band, fire-breathing Sichuan opera dancers, and a traditional lion dance. Hatfield paints the eye of a lion's head to bring good luck. But the gesture seems superfluous: Inside, each of the store's 75 checkout lanes is backed up 15 customers deep.

By closing time at 10 p.m., 120,000 customers have trooped through the doors. But there is little time to savor success. Wal-Mart opens its next supercenter in Shanghai in less than a month. In the world's most populous market, the world's biggest retailer is playing catch-up.

Wal-Mart plans to roll out 15 new stores in China this year, including its first supercenters in Beijing and Shanghai, and it has enticed analysts with talk of increasing floor space by as much as 50% a year. Company executives won't elaborate on expansion plans, but Hatfield, a chain-smoking 30-year Wal-Mart veteran who has run the China operation since 1995, says his orders from Bentonville, Ark., are clear. At last year's annual meeting, held in Shenzhen, members of Wal-Mart's board admonished him to "get a lot more aggressive."

And no wonder. Wal-Mart can't sustain the astronomical U.S. growth rates of the past decade forever. Sooner rather than later, the company will need help from overseas. But the Beast of Bentonville has yet to emerge as a dominant player in any of the foreign markets that account for about 20% of its global sales. In Germany it is still struggling to stanch losses at the two retailers it acquired in the 1990s. In Japan it has yet to articulate a clear strategy for its 38% stake in the troubled Seiyu chain. The company has had better luck in emerging economies, such as Mexico, where there are fewer entrenched incumbents. But executives have long viewed China, with its vast population and booming economy, as their best bet for long-term global growth. In an interview with FORTUNE last year, former Wal-Mart CEO David Glass proclaimed China "the one place in the world where you could replicate Wal-Mart's success in the U.S."

It was slow going at first. The company sent an advance team of executives to China in 1994 and, two years later, opened the first Wal-Mart supercenter in Shenzhen, the gritty boomtown across the border from Hong Kong. Before the first store opened, an alliance with a Thai supermarket chain collapsed, forcing Wal-Mart to surrender planned developments in Shanghai and Shenyang. Beijing checked Wal-Mart's expansion with regulations, limiting foreign retailers to a handful of large cities and obliging them to offer at least 35% of each store to local partners. The Sam's Club format, with its emphasis on membership fees and high-volume sales, left Chinese customers cold. By the end of last year, Wal-Mart could boast just 43 stores in China˜a far cry from the 3,719 it operates in the U.S. The company doesn't disclose financial results for China. But China's chamber of commerce reported in its annual retail ranking that Wal-Mart grossed $916 million last year˜less than 2% of the company's international sales, and a tiny sliver of its $288 billion total revenue.

Those numbers have nowhere to go but up. The demographics are dazzling: 100 cities with populations of more than a million; 150 million urban families with annual incomes of more than $10,000 within the next ten years; more than $6 trillion in total retail spending this year, and growing at a 15% annual clip. And unlike India, which forbids foreign direct investment in the retail sector, China is opening its doors to outside players. The crucial turning point came last December, when Beijing, in keeping with terms of its admission to the World Trade Organization, granted foreign retailers permission to invest independently in any city they choose.

But many hurdles remain. Hatfield says his biggest challenge is finding qualified managers. Each supercenter, which mixes produce and general merchandise, requires hiring and training 500 employees. Locating sites is just as tricky. In most Chinese cities, municipal governments control prime real estate, giving an edge to state-owned retailers. And then there's the competition. In America, Wal-Mart may be the 800-pound gorilla, but in China, it's still a chimp, jostling with Chinese conglomerates such as the state-run Shanghai Brilliance group, as well as with foreign rivals such as France's Carrefour. Wang Zongnan, president of Brilliance, China's largest retailer with 3,300 stores and sales of $8.1 billion, says he doesn't lose much sleep worrying about Wal-Mart. "Local retailers have the advantage in all large economies," he says. "I see no reason to doubt that will be the case in China too."

Wal-Mart hopes to prove that thinking wrong. By opening in Chongqing, on the upper reaches of the Yangtze River, it is establishing a beachhead for expansion well beyond China's densely populated eastern seaboard. And to get it right, Hatfield and his lieutenants pulled out all the stops, working with development partners from Shenzhen and Singapore to secure a prime location at Nine Dragon Plaza, a public square across from the municipal zoo. The store is surrounded by residential developments and lies at the terminus of a new light-rail line. Store manager Sunny Han estimates that more than a million people live within a four-mile radius. But that same circle includes three stores operated by New Century, a retail group owned by the local government, as well as a lively street market and a gleaming new Carrefour as big as Wal-Mart. To lure customers, Wal-Mart will open an hour and a half earlier and close later, and it will deploy a fleet of free shuttle buses to ferry residents to the store.

At the open-air market on nearby Go Forward Street, peddlers hawking long beans and acorn squash were bracing for the worst a few weeks before the opening. "I'll definitely switch to Wal-Mart," said Liu Bijuan, a stocky housewife picking through baskets of eggplants and cucumbers. In a stall nearby, a butcher scratched himself lazily as flies swarmed over slabs of beef. But at the Carrefour up the road, it was a different story. The space is vast and well stocked. Shoppers thronged the food counter, and prices for many items were comparable to those in Wal-Mart stores.

Carrefour came to China a year after Wal-Mart but has expanded more rapidly. The French retailer's China CEO, Jean Luc Chereau, credits his success to the 12 years he spent building Carrefour's business in Taiwan. "It was in Taiwan that we discovered Chinese culture," he says. "By the time I moved to Shanghai in 1999, I was well prepared." But Carrefour has also demonstrated superior operating savvy and a greater tolerance for risk. By forging alliances with local governments, it circumvented many of Beijing's restrictions, fashioning a network of 60 hypermarkets in 25 cities, with sales last year of nearly $2 billion. This year China's largest foreign retailer vows to match Wal-Mart's China expansion store for store.

Still, it's early days, and Wal-Mart has deep pockets. More important, perhaps, is that Hatfield and his team have become adept at replicating Wal-Mart's corporate culture and figuring out what Chinese consumers want. Headquarters for Wal-Mart's retail operation˜a dingy warren tucked behind the first supercenter in Shenzhen˜reflect the company's reputation for pinching pennies. But Hatfield spends little time there. Most days you'll find him roaming Wal-Mart stores, scouting the competition, or foraging for products in urban street markets. "I'm a big believer in Sam's philosophy that when it comes to good ideas, you should steal shamelessly," he says. "You have to get out there and ask, 'What are our competitors doing that we're not?' You have to be hungry for new knowledge every day."

Hatfield's pursuit of local knowledge has produced surprising differences in the look and feel of Wal-Mart's stores in China. Chinese customers tend to do their shopping on foot, not by car. They have smaller apartments and smaller refrigerators, so they buy in smaller quantities and are accustomed to going to market every one or two days. So Wal-Mart supercenters in China devote lots of floor space to food. Perishable products get pride of place and come in a mind-boggling assortment of shapes, colors, and flavors. Except for the prices and the smiley faces, a U.S. customer venturing into the produce department at a Chinese Wal-Mart might think he had stumbled into a Whole Foods store in San Francisco.

Wal-Mart's managers have learned a lot about Chinese customers. One early discovery: They want to put their hands on the merchandise, shucking each corncob before putting it in their basket, or demanding that associates not only take a fitted sheet out of the plastic but demonstrate it on an actual bed. Chinese shoppers also have a thing for clamor. Often managers can goose sales simply by dispatching associates to restack an item noisily in the middle of the floor. And at the Chongqing opening, bottles of red wine moved briskly when bundled with free cans of Sprite. (In China they like their cabernet carbonated.)

The fare can get a lot more exotic than that. Since the SARS epidemic two years ago, Wal-Mart's China stores have stopped slaughtering poultry on the premises and no longer offer rabbits or snakes. But spicy chicken feet and stinky tofu are perennial favorites. In Chongqing, those who come too late to catch a grass fish can choose from a selection of lobsters, turtles, and live bullfrogs the size of soccer balls. At most supercenters, the bestselling items are prepared lunches served in Styrofoam containers: two meats, two vegetables, rice, and a cup of hot soup, freshly prepared onsite˜all for less than $1. A typical supercenter sells more than 1,000 a day. Hatfield says the sight of truck and taxi drivers retching on the side of the road helped convince him that there was an opportunity for Wal-Mart to boost midday store traffic by luring customers from local street vendors.

Another innovation is what Wal-Mart calls "retail-tainment." Stores provide space for local school groups to perform, and they organize daily activities for the elderly. Residents are welcome to wander in and freeload on air conditioning. It's savvy marketing, of course. But it may have long-term benefit: If Wal-Mart can succeed in weaving itself into the fabric of urban communities, it may head off the image problems that have arisen in other markets.

Unlike the merchandise, Wal-Mart's management practices have required little tinkering for China. If anything, the red shirts, mass cheering, incessant pep rallies, and veneration of a deceased founder seem characteristics far better suited to the People's Republic than the American South. Two hours of buttonholing Chongqing associates as they left work failed to identify anyone who would confess to feeling oppressed. What's striking about all this regimentation, though, is that it's so focused on answering the wants of individuals. At times, Baker and Sunny, with their folksy PR tours and community-outreach projects, seem like old-time Boston ward heelers.

Another constant is the obsession with tian tian ping jia˜everyday low prices. Hatfield, darting around a supercenter in Shenzhen, ticks off item after item: "Men's dress slacks? Eight bucks˜and that's including alterations. Those dress shoes? $4.80. They were three times that two years ago." Wal-Mart lured customers to the Chongqing opening by advertising DVD players for $23.97 and in-line skates for $11.93. Often products are displayed with signs declaring the value of the discount wrested from suppliers by Wal-Mart buyers.

Although Wal-Mart's shelves bristle with U.S. consumer brands˜from Crest toothpaste and Clairol shampoos to Oreos and Gatorade˜almost everything is made in China. And, as in the U.S., suppliers have trouble sorting out whether Wal-Mart's embrace is a bear hug or a death grip. Consider Dong Yongjian, the 33-year-old proprietor of a spicy-chicken-feet factory an hour's drive from the Chongqing store. Wal-Mart buyers stumbled on Dong's product four years ago at a rival retailer in Shenzhen. They sent a team of auditors to inspect his factory and began stocking his chicken feet in stores. Dong's chicken-feet recipe˜which he guards as zealously as Colonel Sanders did his "secret blend of 11 herbs and spices"˜was an immediate hit. Wal-Mart has become Dong's top customer. But while sales are booming, profits aren't. "They want the lowest prices I can possibly give them," says Dong. "I see this is a long-run relationship, so I'm doing my best to hold down costs." At the headquarters of Yunan Red Wine, a salesman says that to win Wal-Mart's business his company had to knock prices down 15%, undermining its pricing power with other customers.

If the associates on the sales battlefront in Chongqing represent one face of Wal-Mart's operation in China, suppliers waiting in the reception area of Wal-Mart's global procurement headquarters in Shenzhen are another. The room, with a poster of Sam Walton on one wall and Wal-Mart's latest share price on another, is an exporters' purgatory. Supplicants take a number and wait for an audience with Wal-Mart buyers or quality inspectors. Those whose products are deemed worthy of Wal-Mart's U.S. customers can see sales rocket almost overnight. Many come bearing items of whimsy˜dancing Christmas trees, Jar Jar Binks action figures, Nerf dart sets. But this is a tense place. On a recent afternoon, there was no mirth in the eyes of Li Xiaolong as he stepped into a tiny conference room, strapped on the target-shaped vest manufactured by his Dongguan employer, and waited for a Wal-Mart buyer to fire Nerf darts into his chest. Last year Wal-Mart spent $18 billion on merchandise from China-based suppliers, most of it toys, footwear, Christmas decorations, and sporting equipment, accounting for 3% of China's total exports. If Wal-Mart were a country, it would be China's sixth-largest export market.

Wal-Mart buys only about 10% of what it sells in U.S. stores from suppliers in China. But at a March meeting for investment analysts in Shenzhen, company executives spoke of raising China purchases significantly˜to perhaps double the current amount˜over the next five years. Critics say that pits American workers against Chinese, who earn $5 a day. Andrew Tsuei, head of Wal-Mart's overseas procurement office, offers no apologies. "My job is to find the best value for our customers while sourcing in an ethical way," he says. "China gives us competitive products and meets our quality and ethical standards. There's no reason for us not to buy here."

Wal-Mart executives say they hold suppliers to U.S. standards for business ethics as well as product quality, dispatching hundreds of auditors to monitor working conditions, compensation, and safety records˜though Tsuei acknowledges that gauging compliance is a challenge. In China, as in the U.S., Wal-Mart has resisted calls for labor unions. Chinese associates, however, aren't up in arms. That's because Chinese unions are creatures of the state, run to collect dues for the party and keep tabs on workers, not represent them. In November, after months of public sniping by the government-controlled All China Trade Federation, Beijing and Bentonville reached a compromise. Wal-Mart pledged to accept a union should workers formally request one. Thus far they have not.

Given the scope of Wal-Mart's ambitions in China and the enthusiasm of Chinese shoppers at recent store openings, Bentonville's stated expansion plan looks way too timid. Merrill Lynch analyst Daniel Barry calculates that even if Wal-Mart adds stores at a rate faster than this year's pace, its China retail network will include no more than 230 stores by 2009. That's fewer than the number of stores Wal-Mart will add in the U.S. this year.

Maybe Wal-Mart is just playing its China cards close to the vest. In the U.S., the company's pattern has always been to keep its head down and its mouth shut˜until it has piled up all the chips. Wal-Mart International spokesman Elizabeth Keck says that, although Wal-Mart doesn't make projections more than a year out, "it is not correct to assume that we only plan to open 15 new stores a year in China." She also hints at the possibility of growth through acquisition. But her boss, Wal-Mart's International CEO, John Menzer, isn't tipping his hand. "We'll take one store at a time," he told reporters in Beijing this spring.

Back in Chongqing, Joe Hatfield has few doubts about the company's success. Walking into the store after the opening ceremony, he is almost run over by a couple wheeling two large shopping carts piled high with sacks of rice. Does it worry him that on opening day customers have loaded up so heavily they won't need to return to the store for months? "Nah," he laughs, waving to the pair. "Those two'll be back tomorrow. They gotta buy vegetables."

Reporter Associates Susan M. Kaufman, Joan Levinstein, and Wang Ting

Sears Promotes Joan Chow to
Senior Vice President and Chief Marketing Officer
PRNewswire
(July 11, 2005)

HOFFMAN ESTATES, Ill., July 11 /PRNewswire/ -- Sears Roebuck and Co., a wholly-owned subsidiary of Sears Holdings Corporation - News today announced the promotion of Joan Chow, 44, to senior vice president and chief marketing officer for Sears Retail, effective immediately.

In her new position, Chow is responsible for the strategic integration of Sears Roebuck's marketing and customer relationship management efforts. She reports to Luis Padilla, president of merchandising and marketing for Sears Retail. Most recently, Chow served as vice president, marketing services.

"Joan is a seasoned marketing executive who will continue to drive the growth and increased customer relevance of Sears and its core brands," Padilla said. "She's a proven leader who will provide heightened focus on Sears' differentiating strengths and businesses."

Since joining Sears in 1998, Chow has held various marketing roles in Sears' Home Services, including director of customer relationship marketing, director of business marketing, and vice president of marketing. In April 2004, she was named a vice president in the company's corporate marketing organization and assumed additional responsibilities for multicultural marketing. In April 2005, she added responsibility for Marketing Services.

Prior to joining Sears, Chow was vice president, software product management at Information Resources, Inc., a marketing information and analytics company. Previously she served as product director with Johnson & Johnson.

Chow earned her Bachelor's degree from Cornell University and an MBA from the Wharton School of the University of Pennsylvania.

Reduced insurance wins fans, opponents
By Daniel Costello – Los Angeles Times
July 10, 2005

Connie Terwilliger, a 53-year-old voice-over artist, has found a way to cut her insurance premiums by more than half.

By switching health plans, her monthly cost will drop from $300 to $123. For that, she will get five doctor visits a year, some lab tests – and strict limits on hospital care.

“I’m pretty healthy, and in many ways this plan is better for me at half the price,” the San Diego woman said.

Like Terwilliger, more Americans are turning to low-cost health plans, some as cheap as $50 a month, that pay for routine doctor visits and perhaps some prescription drugs but that don’t cover catastrophic illnesses or most hospital care.

For some healthy consumers, they might be a good idea. But as the plans become more popular, consumer advocates warn that they may provide a false sense of security. Without that ultimate protection, they say, the plans might not always be worth the cost.

The bare-bones policies, known as “limited-benefit” or “mini-medical” plans, have been popular for several years with some small employers. Now more companies are embracing the leaner policies as a way to cajole uninsured workers to get coverage or to help struggling employees keep it.

California-based Jack in the Box Inc. and Marie Callender’s recently started offering limited-benefit health plans to their employees, joining companies such as Exxon Mobil Corp., Home Depot Inc. and Denny’s Corp. This year, more than 20 national companies, including Intel Corp., IBM and Sears, Roebuck & Co., are expected to include limited health insurance in their coverage options as well.

Critics of mini-medical insurance point out that most employers don’t contribute to the plans, as opposed to traditional plans in which employers often pay 80 percent to 100 percent of employee premiums. And, they say, these policies won’t much help workers who most need it – those who end up in the hospital facing huge unpaid medical bills. Research shows that up to half of all bankruptcies today are related to medical costs.

Another concern, say benefit experts, is that if employees try to reapply for comprehensive coverage down the road, limited plans may not be considered “credible coverage,” and applicants could be denied for pre-existing conditions just as if they had no insurance at all.

“Let’s say exactly what this is about,” said Lisa McGiffert, senior policy analyst for Consumers Union, a Washington, D.C.-based consumer advocacy group. “Medical coverage is getting more limited every day, and people are paying higher health premiums for little in return.”

Others worry that broader adoption of limited plans could skew the notion of just what it means to have health insurance or encourage more employers already offering better benefits to move to the skimpier plans.

“People could say these folks are technically insured, but that doesn’t mean much (with these plans). People would still be crippled if they get sick,” said Jonathan Parker, national campaign director for Americans for Health Care, a national grass-roots organization that advocates for universal healthcare.

The limited plans keep costs down by not offering the same benefits that typical comprehensive plans do. Still, the growing popularity of the plans shows that they are filling a need.

“No one is going to say these are better than full coverage, but it’s a step up for people who otherwise wouldn’t have insurance,” said Jonathan S. Edelheit, president of United Group Programs, a national insurance broker based in Florida.

Sears Canada looking to sell credit-card division
Rita Trichur - Canadian Press – Ottawa Citizen
July 10, 2005

TORONTO -- Sears Canada Inc. is entertaining inquiries from an undisclosed number of potential buyers looking to scoop up its lucrative credit-card division and will narrow that list to one by its fourth quarter.

But some retail analysts warn that the divestiture of its "profit centre" could hurt the department store operator's bottom line.

"We have some interested parties to whom we've sent some information on the company," said Sears Canada spokesman Vincent Power, staying mum on specifics.

"Certainly by the end of the year, all this will be settled."

Some analysts have speculated the sale could generate $1 billion or more. While not confirming that price tag, Power said the proceeds would be reinvested in the retailer's merchandising operations.

"It is a good business, but we don't necessarily have to own the business to be able to reap the benefits," Power said, adding a satisfactory transaction would allow the company to continually earn income while ridding itself of the segment's capital costs.

"There are other alternatives that could happen, like a joint venture or something."

John Chamberlain, an analyst with Dominion Bond Rating Service, said Sears initially identified over a dozen potential acquirers, almost exclusively financial-services institutions."

"I think any of the Canadian banks would at least take a look at it," he added.

Chamberlain pointed to CIBC, which has proven expertise with its own money-making credit-card operation. Other likely candidates include Citigroup, GE Capital, MBNA, American Express and HSBC.

"I would think that Citibank would be the one to beat," Chamberlain added.

In 2003, New York-based Citigroup, the largest financial institution in the United States, bought the credit-card business of Sears, Roebuck & Co. for $3 billion US.

Sears Canada announced in June that it would follow in its parent's footsteps by selling its own credit-card division -- Canada's third-largest card operation.

The retailer says its Sears Card is the largest in-house proprietary retail credit card in Canada with $2.3 billion in receivables, while the Sears MasterCard has $200 million in receivables.

The cards have about four million active accounts and generated $101.3 million in operating income in 2004.

Immediately following the disclosure, DBRS placed Sears Canada's debt under review with negative implications.

The debt-rating agency worried "the potential divestiture of the business unit will result in reduced, and more variable, profit as the credit and financial services unit has provided a consistent and reliable source of earnings despite fluctuations in the merchandising business."

This concern is echoed by retail analyst John Winter, who said it is probably more profitable for Sears to lend money than sell merchandise.

"It is the profit centre, isn't it?" Winter said. "Frankly, I think it is surprising they are going to sell it because generates good profits and it is always a significant part of their overall performance picture."

Sears Canada (TSX:SCC) runs 121 department stores, 219 off-mall stores and 64 home improvement showrooms, plus catalogue merchandise pickup locations, Sears Travel offices and a national home maintenance network.

It is 54 per cent owned by Illinois-based Sears Holding Corp., known as Sears, Roebuck before it merged with Kmart Holding Corp. in March.

Footstar, Sears end contract dispute
Footstar to pay Sears Holdings $45 million
Chicago Tribune - Bloomberg News
July 9, 2005

Footstar Inc. will pay Sears Holdings Corp. $45 million to continue staffing and selling shoes in Kmart stores through 2008, allowing Footstar to proceed with its plan to exit bankruptcy.

The settlement resolves a dispute over whether Sears could end a contract under which Footstar sold shoes at Kmart stores. Sales at Kmart account for 95 percent of Footstar's revenue and are the centerpiece of the Mahwah, N.J.-based company's plan to repay creditors.

The accord allows Sears to evict Footstar from an undisclosed number of Kmart stores it's converting to a more upscale format called Sears Essentials. Earlier this year, Sears won court permission to remove Footstar from 44 such stores.

"There's a feeling that at least the downside is removed, and there's no liquidation scenario anymore," said Kevin Starke, an analyst with Weeden & Co. "But there's still a question about what this company's worth. ... We don't know yet."

After 2008, Sears will purchase substantially all of Footstar's remaining store inventory at book value, according to the settlement. Footstar will retain its brand names, including Thom McAn and Cobbie Cuddlers. The agreement requires court approval.

"We think this is a very positive settlement for the company," said Jay Indyke, a lawyer representing Footstar's unsecured creditors. "This settlement allows the company to go forward with a plan to repay unsecured creditors 100 percent plus interest."

Hoffman Estates-based Sears Holdings was created in March when Kmart Holding Corp. acquired Sears, Roebuck and Co. Sears plans to convert more than 400 of its 1,504 Kmart stores by the end of 2007 as part of the acquisition.

Sears spokesman Chris Brathwaite declined to comment.

Footstar signed a contract in 1995 to staff and sell footwear in Kmart stores. Earlier this year, a U.S. bankruptcy court in White Plains, N.Y., denied a request by Sears to void the contract because of alleged breaches by Footstar. But Sears won court approval to evict Footstar from Kmart stores it's converting to Sears Essentials stores.

"With this agreement, we are able to put the uncertainty of the litigation behind us as we focus our full attention on concluding the Chapter 11 process," said Dale Hilpert, Footstar's chief executive.

Along with the Sears contract, Footstar has contracts with Wal-Mart Stores Inc. and Rite Aid Corp., a company spokeswoman said.

Footstar owed unsecured creditors roughly $144 million when it filed for bankruptcy protection in March 2004.

Separately, Sears has selected Lockton Cos. as its insurance broker after a review.

"We continue to have other relationships with our previous brokers," Aon Corp. and Marsh & McLennan Cos., a spokesman for the Hoffman Estates-based retailer said Friday.

The Reward for Leaving: $113 Million
By Eric Dash – New York Times
July 8, 2005

Philip J. Purcell's golden parachute has a platinum lining.

The board of Morgan Stanley has awarded Mr. Purcell, who retired as chairman and chief executive after a bitter struggle for control of the firm, an exit package worth an estimated $113.7 million.

The disclosure by the firm late yesterday came two days after it reported that John J. Mack signed a contract worth as much as $25 million a year - or as much as the average of four of his high-paid Wall Street peers - to return to Morgan Stanley as Mr. Purcell's successor.

Mr. Purcell leaves with a long list of parting gifts, including a departure bonus worth $42.7 million based on the company's performance through the second quarter of this year. The one-time cash payment, which was not in his original employment contract, is based on a formula that adjusts the bonus up or down depending on the difference between Morgan Stanley's fiscal 2005 and 2004 pretax profit. So far, Morgan Stanley's pretax profit is down about 6 percent this year and the value of the bonus reflects that amount.

He will also receive $34.7 million of restricted stock and an estimated $20.1 million in stock options, based on yesterday's closing share price of $53.34, which he collected during his years at the firm. And he is to receive retirement benefits with a lump-sum value around $11 million.

He is getting medical benefits, $250,000 in lieu of other benefits and an office and administrative and secretarial expenses every year for the rest of his life. In addition, Morgan Stanley will make $250,000 in charitable donations a year in his name.

The board negotiated the agreement before Mr. Purcell stepped down at the end of last month, according to a person briefed on the negotiations. The agreement also has a noncompetition provision that seeks to dissuade Mr. Purcell from joining one of 12 large financial services companies. The contract does not discourage him from taking a job at a hedge fund, consulting firm or private equity firm.

A Morgan Stanley spokesman said the company sought the agreement "to be fair, appropriate to the circumstances and consistent with past practice."

The board also agreed to new employment contracts with two top executives, including Stephen S. Crawford, who along with Zoe Cruz rallied behind Mr. Purcell after a group of former Morgan Stanley bankers called for his ouster this spring.

A company spokesman said the agreements "resulted from discussions the board undertook following the announcement of Mr. Purcell's decision to retire, in order to ensure management stability through the C.E.O. search process and transition."

Mr. Crawford, who was named co-president of Morgan Stanley after a management shake-up in March, agreed to a contract guaranteeing him at least $16 million a year for each of the next two fiscal years. If he is terminated for good reason at any time - or if he simply decides to resign from now to Aug. 3 - he will be entitled to $32 million.

Ms. Cruz, Mr. Crawford's counterpart, discussed a similar employment contract with Morgan Stanley's board but made a decision not to enter an agreement, according to a person briefed on the negotiations. She is now working without a contract.

David H. Sidwell, Morgan Stanley's chief financial officer, agreed to a contract that will guarantee him at least $10.5 million, provided he stays through the middle of October. Mr. Sidwell will receive $21 million if he is fired without cause or resigns for good reason.

The disclosure of the contracts comes as some compensation experts have questioned how Morgan Stanley handled its negotiations with Mr. Mack.

Paul Hodgson, a senior compensation analyst at the Corporate Library, described Morgan Stanley's contract negotiations with Mr. Mack as an "ice cream war" between children, where one wants as much as the other. "Except that, in this case," he said, "somebody seems to have got the whole ice cream factory.

"This is surely not the way mature executives and mature boards should behave," he added.

Mr. Hodgson did not return calls about what he thought of the most recent board negotiations.

Morgan Stanley Gives Rich Exit Pay
By Ann Davis and Randall Smith – Staff Reporters – The Wall Street Journal
July 8, 2005

Ex-CEO Purcell Gets Pact Valued Around $44 Million;
His Top Aides Also Do Well

Morgan Stanley awarded exit pay of about $44 million to former Chief Executive Philip Purcell, who was forced out last month, and gave lucrative packages to some of his top lieutenants who remain for now.

The shape of one package could encourage a possible quick exit by one Purcell deputy, Co-President Stephen Crawford, by allowing him to resign for any reason before Aug. 3 and still receive a $32 million payout.

The pay pacts were disclosed late yesterday by the blue-chip securities company, whose board last week replaced Mr. Purcell with his longtime adversary John Mack after a 10-week feud waged by dissident alumni shareholders.

Although terms of the packages vary, they generally entitle top members of Mr. Purcell's team to two years' pay if they are terminated. Critics called them overly generous, considering the New York company's subpar performance, which fueled calls for Mr. Purcell's ouster.

Richard Bove, an analyst at Punk, Ziegel & Co., said shareholders are "frustrated that this much money is being handed out without [the executives] having to perform to get it."

Mr. Purcell's $44 million bonus payment may be adjusted up or down based on the percentage change in Morgan Stanley's earnings this year. In its fiscal first half ending in May, the company's pretax profit fell 6% to $3.48 billion.

Other top Purcell deputies who received special pay packages included David Sidwell, chief financial officer, John Schaefer, head of the company's retail brokerage operation serving individual investors, and Mitchell Merin, who oversees asset management, according to people familiar with the pacts.

The board struck the agreements after Mr. Purcell announced plans to retire in early June to preserve management stability during the transition, when it wasn't clear how long it would take to find a successor, according to someone familiar with the decision.

However, the company's other co-president, Zoe Cruz, elected not to receive a guaranteed pay package, someone familiar with the company said. One potential reason: As the company's former chief of fixed-income, Ms. Cruz received 2003 pay higher than Mr. Purcell himself.

Mr. Purcell's package includes $250,000 annually for life as well as retiree medical benefits and the ability to direct $250,000 in annual charitable contributions by the company. Mr. Purcell also will collect $62.3 million in previously granted stock and option awards, plus other pension benefits, retirement savings and deferred compensation.

In a statement yesterday, the company said it made the awards, "consistent with past practice ... in order to ensure management stability through the CEO search process and transition." The late Richard Fisher, who served as Morgan Stanley's chief executive before its 1997 merger with Dean Witter, Discover & Co., received pay that totaled about twice his final pay in the years after he stepped down, one person familiar with the company said.

Mr. Purcell's package, payable half in January 2006 and half in January 2007, roughly equals twice the $22 million he was paid in 2004. A person knowledgeable about the board's actions said Mr. Mack didn't learn about the agreements until after the board approved them along with his own job terms.

Mr. Crawford will receive $16 million annually for 2005 and 2006 whether or not Mr. Mack terminates or reassigns him, and he would receive the entire $32 million if he resigns for any reason in the 30 days beginning July 5. Mr. Sidwell will receive $10.5 million for 2005, provided he stays through Oct. 15, and if he is terminated before being paid for 2006, he is guaranteed that amount for that year as well.

Analyst Sees Eventual Sears Canada/Hudson's Bay Merger
By Andy Georgiades – of Dow Jones Newswires – Wall Street Journal Online
July 5, 2005

TORONTO -- How much longer will it take for Canada's two largest department store operators, Sears Canada Inc. (SCC.T) and Hudson's Bay Co. (HBC.T), to figure out they should merge? Perhaps a little more than a year, according to one analyst.

After peering through the proverbial crystal ball, Desjardins Securities analyst Keith Howlett said that, between the fall of 2006 and the spring of 2007, he sees a number of factors leading to a merger proposal between Sears Canada and Hudson's Bay.

The pair have been struggling for some time, dealing with consumers' thirst for discount-priced merchandise, and with major shareholders Jerry Zucker and Ed Lampert getting more actively into the picture, there's been no shortage of speculation about the companies' future place in Canada's evolving retail landscape.

In a research report issued Tuesday, Howlett pointed to four key factors. First, Sears Canada has announced it's looking at alternatives for its credit card, and Howlett believes that business will be sold, with the proceeds returned to shareholders via dividend or share buyback. Second, the board of directors at Hudson's Bay will have had ample time to decide if its strategic plan is financially sound.

Third, Hudson's Bay's largest shareholder, Jerry Zucker, may have a "larger voice" in the company's affairs, potentially through a proxy battle for board representation at its 2006 annual meeting if necessary. Lastly, Ed Lampert, chairman of Sears Holdings Corp. (SHLD) - majority-owner of Sears Canada - will have "meaningful evidence as to the financial performance" of the new Sears Essentials format in the U.S., which will combine the "best" products from the old Sears Roebuck and Kmart stores.

"The cost savings of combining Sears Canada and Hudson's Bay should be substantial relative to their current modest operating profits from retailing," Howlett wrote, adding that certain assets (the Bay and Home Outfitters divisions, Zellers store leases, Hudson's Bay's credit card business) could be sold as well.

In addition, he said Lowe's Cos. (LOW) - which recently announced it's coming to Canada - Home Depot Inc. (HD), and Rona Inc. (RON.T) could be interested in certain Zellers locations. However, the highest return to shareholders in combining Sears Canada and Hudson's Bay may be in "facilitating" Target Corp.'s (TGT) long-rumored entry to Canada.

Howlett downgraded Sears Canada to sell from hold, but kept his C$22 share price target. His view is that Lampert won't initiate a buyout of the minority interest in Sears Canada, as his past conduct has been to either obtain a substantial shareholding interest combined with an "activist agenda" or to take strategic control through a controlling share position to create value for himself and shareholders.

"There is little evidence that Lampert wishes to engage in time-consuming and arduous buyouts of minority shareholders," Howlett wrote.

Selling Sears Canada once the credit division is gone wouldn't fit with Lampert's track record either. "Sale of the core Canadian retailing business would not accord with Lampert's record as an activist money manager who focuses on improving the performance of retailing companies," Howlett wrote. "We believe it highly unlikely that Lampert will sell the residual Sears Canada retailing business unless he has exhausted all major avenues by which to add value to the benefit of all shareholders."

It wasn't immediately clear if Howlett owns shares of any of the companies mentioned, nor if his firm has had an investment-banking relationship with them.

How Purcell Lost His Way
By Emily Thornton in New York – Business Week
July 11, 2005
 
An inside look at the strategic errors that led to the mess at Morgan Stanley

Philip J. Purcell had missed out on one blockbuster deal after another -- Chase Manhattan, JPMorgan, Bank One. And with Morgan Stanley's share price down to barely half its 2000 peak, tensions inside the firm mounted as some of the firm's white-shoe bankers worried that CEO Purcell would grasp at any deal -- even a merger with a second-tier bank where they would never want to work.

At a meeting of Morgan Stanley's 14-person management committee in June, 2004, in Purchase, N.Y., some felt their fears were confirmed. The topic was Morgan Stanley's direction. The discussion, such as it was, soon erupted into blazing arguments. The fuse: an analysis of possible mergers presented by then-strategic officer Stephen S. Crawford that included a deal with Charlotte (N.C.)-based retail bank Wachovia Corp. By the end of the meeting, many of the six investment bankers on the committee had beaten down the suggestions. But it was an uneasy peace. Before long, the long-simmering conflict over Morgan Stanley's direction would escalate into open warfare, pitting directors, ex-execs, bankers, and Purcell loyalists against one another -- ultimately leading to Purcell's resignation in June. Through spokesmen, none of the key players would speak on the record for this story.

A reconstruction of Purcell's last years in office, pieced together by BusinessWeek from dozens of interviews with former and current executives and others, shows that the most widely cited reason for his downfall -- his personality -- doesn't completely explain all the rifts inside the firm or its penchant for blowing big opportunities. By many accounts, Purcell favored one side of the firm over the other, brutally dismissed top execs who fell out of favor, and undermined Morgan Stanley's culture of meritocracy with some of his promotions. But it was his inability to develop a coherent strategy and sell it to the troops that led to his undoing. This former McKinsey & Co. consultant, who had won a reputation as a master strategist, found himself bereft of ideas when they were most needed.

MORALE BOOSTER?
That means simply replacing Purcell won't immediately fix Morgan Stanley. If ex-President John J. Mack makes a triumphant return, as is widely expected, he should be able to raise morale and defuse many of the personal antagonisms that plague the firm. But he will inherit all the strategic dilemmas that Purcell struggled with for most of his eight years at the helm.

One of the first signs of Purcell's strategic quagmire emerged in the late 1990s, when then-President Mack recommended that Morgan merge with Chase Manhattan. Purcell preferred JPMorgan. Nothing happened, largely because the bank's top execs couldn't agree on which deal to pursue, according to people familiar with the discussions. Chase ended the debate by buying JPMorgan in 2000. The next year, Mack quit after losing a fight with Purcell over who would lead the firm.

Purcell still didn't have a plan for Morgan Stanley when the board of directors met at the end of 2003, say several people briefed on the discussions. The financial-services industry was consolidating, but Purcell couldn't come up with a clear answer to directors' questions about how Morgan Stanley should respond. The board asked him to develop a blueprint in time for a two-day meeting in July, 2004, in London. Purcell charged a small team to work out strategic options, ranging from going it alone to a blockbuster merger.

The group had barely begun work in January, 2004, when Morgan Stanley was left out in the cold yet again as another banking megadeal got done. This time, it was JPMorgan Chase & Co.'s purchase of Bank One Corp.. The news came as a shock in the executive suite at Morgan Stanley. Once more, the firm had been sizing up the two players as potential merger partners for months before they were snatched away. Adding insult to injury, Gary Parr, a former top Morgan Stanley banker who had recently defected to Lazard Fr่res & Co., had advised Bank One.

Purcell knew he had to do something and began openly talking with his managing directors about other potential mergers. One name that became an open secret early last year among some of Morgan Stanley's top brass was a real shocker: Wachovia Corp. The regional bank had broken out of its Southern base only a few years earlier; New Yorkers were still learning how to pronounce its name. Wachovia CEO Ken Thompson had repeatedly said he didn't want to merge with an investment bank.

Still, Purcell thought the deal made a lot of sense, bankers who were close to the strategic team say. Wachovia only had a small investment bank, and Morgan Stanley would give the North Carolina bank's retail brokerage and credit-card operations far more heft. Moreover, because Wachovia's market cap was then roughly the same as Morgan Stanley's, there was a chance that Purcell could continue to play a role in the combined company, which some insiders say seemed important to him.

The debate over doing a deal -- especially with a bank such as Wachovia -- widened old fault lines in the firm. Executives began to blame each other for the firm's beaten-down stock price and lagging financial performance. Investment bankers said the poor results reflected the weakness of the old Dean Witter retail businesses, which Purcell continued to manage after Dean Witter bought Morgan Stanley in 1997. What's more, they complained that they didn't have enough capital to build up trading operations or to undertake highly lucrative transactions -- such as trading big blocks of shares with corporate clients, as Goldman, Sachs & Co. did. Purcell and his loyalists often countered that the investment bank was sucking up most of the firm's capital. Some veteran Dean Witter executives griped that the bankers were taking too many risks.

By the time of the Purchase meeting in June, 2004, even Wachovia was becoming too expensive to buy. So some executives argued that if Purcell did want to do a deal, he should sell Morgan Stanley to a company able to pay a stiff premium, one with enough prestige to keep people on board, say some people familiar with what happened. Names tossed out by people in the meeting included Citigroup and Bank of America Corp. -- though mergers with them might have left no role for Purcell.

UNEASY TRUCE
Unable to agree on a possible deal, the management committee resolved simply to try to improve the firm's operations by better integrating the Morgan Stanley and DeanWitter businesses. Purcell went along with the committee's decision. He told the July board meeting in London that he planned simply to manage Morgan Stanley's existing businesses better, according to several people briefed on the meeting. But the group failed to resolve how that would be achieved or what the firm's ultimate goal should be.

The truce lasted little more than four months. On Dec. 9, Scott Sipprelle, a former managing director who is now a hedge-fund manager, sent Purcell and the board a letter that called for breaking up the firm. Within four days, Purcell recruited his old boss at Sears Roebuck & Co., Edward A. Brennan, to rejoin the board, which was already packed with loyalists. Later the board removed the firm's takeover defenses and adopted a provision that entitled Purcell to a $62 million parachute if he quit or the firm was taken over. On Mar. 3, a separate Group of 8 former executives sent a letter calling on Purcell to resign, though this news didn't break until the end of the month.

Purcell was done arguing. He called some of his management committee to tell them about the letter. He said the board might think that the head of the investment bank, Vikram Pandit, was behind it. (Later, the Group of 8 repeatedly denied that he was involved.) Purcell also asked some committee members if they wanted to be considered as candidates for president and CEO. Until then, Pandit had been widely perceived as Purcell's most likely successor. Head of equities John P. Havens, a Pandit loyalist, declined the offer, according to several people familiar with the matter.

MISSING NAMES
Word of Purcell's suspicions quickly made its way back to Pandit. He confronted the CEO, insisting that he had nothing to do with the letter, according to people familiar with the matter. Purcell said that he would clear up any impression that Pandit was involved -- provided that Pandit agreed to support Purcell. But Pandit replied he was loyal to the firm, not to any individual, the sources say.

Tensions between Purcell and Pandit continued to build. Then, on Mar. 28, Purcell dropped a bombshell: He showed Pandit a new leadership plan for melding Morgan Stanley's investment bank more closely with its retail brokerage, asset management, and credit-card operations. The cornerstone: Zoe Cruz, head of the bank's fixed income division, and chief administrator Crawford would be promoted to co-presidents. Two names were missing from the organizational chart: Pandit and Havens. After working at Morgan Stanley for two decades, Pandit was through. He left the building shortly after meeting with Purcell, say people who know him. He didn't say goodbye to his troops. He didn't clean out his office. He just walked out in a raincoat into New York's Times Square.

All hell broke loose as the full extent of the disarray inside Morgan Stanley's executive ranks became public that night. Purcell announced the promotions of Cruz and Crawford. The next morning, Havens followed Pandit out the door -- to a standing ovation on the trading floor. But that was just the beginning. Within two months, three other members of the management committee quit, along with more than 50 bankers, traders, and brokers. "For a lot of us, Pandit was the last hope for Morgan Stanley," says a former Morgan Stanley banker who asked not to be named.

As the Group of 8 was hammering him in newspaper ads and Morgan Stanley's stock kept sinking, Purcell was losing his grip on the firm. All the while, company spokesmen dismissed any talk of a lack of direction. "It is management's responsibility to continually evaluate all of the strategic alternatives," says a Morgan Stanley spokesman. "It has been the unanimous view of the management committee that organic growth is the best option."

Yet it was still not clear how Purcell's new management team would do business any differently. The only obvious change was that Cruz and Crawford were jointly put in charge of all of the firm's businesses. Previously, Pandit ran the investment bank, reporting directly to Purcell, who ran the retail brokerage, credit-card, and asset-management operations. "It's been less clear than with other brokerages where Morgan Stanley wanted to go," says Glenn Schorr, a financial-services analyst at UBS.

Finally, on June 13, Purcell announced he would retire. At first, the market didn't take the news very seriously -- perhaps because Purcell had said he would stay until a successor was found or until the next annual meeting in March. But once word trickled out that the board was considering Mack for the job, the stock jumped 5%. Morgan Stanley may have found a leader who investors and employees can believe in. Now it just needs a plan to put it back at the head of the pack.

Whether it's Mack or someone else, whoever replaces Purcell will need to reverse the sharp slide in the firm's stock price, persuade star bankers and top execs who walked out this year to return, and get the storied bank firing on all cylinders again. Above all, the successor must put a strategic stamp on the place.

There are several ways to do that. Morgan Stanley could refocus on its distinctive businesses that cater to blue-chip corporations and super-rich individuals. That might mean selling its mediocre credit-card, asset-management, and brokerage units. It could still buy a small retail bank. Or Morgan could sell itself to a big bank such as Citigroup. But one of the many lessons of Purcell's downfall is that doing nothing is a recipe for failure.

Extreme makeover/
Sears launches hybrid store at Kmart site
By Christie Smythe – Louisville Courier-Journal
July 6, 2005

Stepping into the new Sears Essentials store, a former Kmart on Dixie Highway, Josephine Washburn stopped and let her eyes wander.

Gone are the K Caf้ and its aroma of popcorn butter. Kmart's loud-beeping registers have been replaced. The almost constant blare of the public-address system has been silenced.

Banished from the entry area are shelves cluttered with snacks, makeup and other items.

In their place is a vast display of trendy women's clothing and a clear line of sight to freshly painted walls at the back of the store.

"It's clean. It's bright. Everything's in order," she said. "Much improved over Kmart."

In hopes of reinvigorating Sears by moving it out of the malls and closer to people's neighborhoods, the new Sears Holdings Corp. has launched a hybrid of Sears and Kmart called Sears Essentials. Sears Holdings, parent of merged Sears and Kmart, plans to convert about 400 Kmarts across the country into the new stores by 2007.

Among the earliest is the Sears Essentials at 4915 Dixie Highway.

Similar to Wal-Mart and Target, Sears Essentials seeks to offer one-stop shopping, spokeswoman Corinne Gudovic said.

The stores pair many of Sears' most successful products -- such as Kenmore appliances, Craftsman tools, and Apostrophe-brand women's clothing -- with Kmart convenience items like shampoo, milk and pet food.

The Louisville store officially opens July 16, but the new signs are up and customers are shopping there.

The concept is a smaller version of another store Sears started before its merger with Kmart -- Sears Grand, which also merges Sears' brand goods with convenience-store items.

Sears Grands are about 200,000 square feet, roughly double the size of the average Sears. Sears Essentials are about 75,000 square feet.

Since 2003, four Sears Grands have been built.

Another four are scheduled to open by year's end, Gudovic said, but none have been scheduled for Louisville.

Sears began exploring off-mall locations as a way to get into neighborhoods, Gudovic said, adding that all Sears Essentials are about eight miles away from the nearest regular Sears store.

The addition of convenience-store items was necessary because "customers expect it these days," she said.

Customers "want to be able to zip in, get a gallon of milk if they need it, but then also walk around and get a new pair of shoes for the kids, or something for their husband's garage," she said.

Sears has big hopes for Sears Essentials. But some industry experts have criticized the company's multiple formats -- Sears, Sears Grand and Sears Essentials -- saying they confuse customers.

"Why do you need three brands?" said George Whalin, a retail consultant in San Marcos, Calif. "Customers are certainly not going to know what the differences are."

Howard Davidowitz, a New York retail consultant, said Sears Essentials stores can't compete with Wal-Mart's low prices or Target's fashion items.

"I don't really see any differentiation on what they're going to do," Davidowitz said. "I think this attempt is doomed to the dustbin of history."

Whalin and Davidowitz said the pricier Sears brands might drive away Kmart's discount price shoppers. And some Kmart favorites are missing, notably the Martha Stewart line. At Louisville's Sears Essentials, Kmart regulars might need to brace themselves for sticker shock.

One of the most expensive televisions in a nearby Kmart is about $1,500, but plasma TVs in the Sears Essentials reach the upper $5,000 range.

Sears Essentials also has $60 women's blazers, $100 bed-sheet sets and $2,000 Craftsman tool chests -- all well above the price levels of their Kmart counterparts.

Gudovic said Sears Essentials eventually will have items at varying price levels and is looking into adding some Kmart brands.

Longtime Sears fans at the store said they didn't mind the store's prices and liked having a Sears close to their homes. The nearest regular Sears is about 10 miles away. Few other major retailers have stores in the area -- which has plenty of strip malls, used car lots, transmission shops and check-cashing businesses.

"It's about time we got a good store around here," said Jodie Pierce, who works as a home health aide. Noting the number of homeowners and families who live in the area, she added: "There's plenty of money down here. We want to spend it down here."

Customers also said they liked the variety offered at the store.

Checking out Kenmore gas grills, 63-year-old Howard Hammers admitted: "I actually came in looking for a toy for my grandson."

Were the Good Old Days That Good?
By Louis Uchitelle - New York Times
July 3, 2005

TOM RATH, the protagonist in Sloan Wilson's 1955 novel, "The Man in the Gray Flannel Suit," certainly had his share of troubles: the stressful conformity, the constant striving for success, the superficial suburban friendships, the war experiences he kept hidden from his wife. It all ate away at him.

But Tom, like most Americans in the first three decades after World War II, took a rising standard of living for granted. When he needed more income to make ends meet, he simply landed a better-paying job. Indeed, at parties throughout suburbia, Mr. Wilson wrote, "the public celebration of increases in salary was common." And Tom didn't fret about medical bills, job security or the quality of public schools for his three children.

Fast forward to Tom and Marie DeSisto in 2005. They are real people in their early 50's, living in a three-bedroom condominium in Newton, Mass. Ask them if their standard of living is rising and they say yes, indeed, it is - but not in the Rath family's sense of the word. The DeSistos' income made a U-turn last year, but they manage to live within its limits, even eking out money for extras. And that success lifts their spirits. "We are not really into boats and cars," Mrs. DeSisto said, "but we are traveling more."

Pushed into early retirement last year by his employer, Verizon, Mr. DeSisto's salary plummeted from more than $100,000 as a manager to $36,000 as a first-year math teacher at Newton High School. His wife, on the other hand, has just been promoted to director of nursing in the Framingham public schools. Her salary rose by nearly $4,000, to $67,000 a year, but she is also adding eight working days a year to handle the additional responsibilities.

While the Raths moved up in income, home size and leisure time, the DeSistos sold their four-bedroom colonial home in Newton, pocketing a profit while cutting their property taxes and maintenance costs. "We planned carefully," Mrs. DeSisto said, "and we downsized successfully."

So, did the Raths, that quintessential 1950's family, enjoy a higher standard of living than middle-class families like the DeSistos do today? In other words, can it be that living standards are actually slipping in America?

No economist, demographer or historian would make that case. Living standards, after all, almost never go backward, at least not in a material sense. Indeed, the economy today is growing, consumer spending is plentiful and new technologies - from the Internet to laparoscopic surgery - make life better than ever, as they do in every generation.

BUT for the DeSistos and their contemporaries, the trajectory is no longer the steadily upward line that the Rath family enjoyed. Instead, the line appears to be climbing erratically. That is certainly true of the traditional measures of standard of living. After 20 years of very small gains, the rate of improvement surged from 1995 to 2000 - only to fall back toward zero over the last four years, a reversal that puzzles analysts.

"When you talk about living standards, you have to focus on people in the middle," said Robert Gordon, an economist at Northwestern University. "A lot of the goodies that we think of as raising living standards have gone to the people at the top at the expense of the broad mass of Americans in the middle."

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, argues that federal subsidies in the form of tax credits, mainly the earned income tax credit, are raising living standards for low-income families by more than many people realize. Those subsidies have risen by about $2,000 since President Bush took office in 2001, to just over $3,000 a year for a married couple with two children and a family income of $27,300, Mr. Hassett estimates.

"The standard income numbers don't capture what is happening to people at the bottom," he said. "So you have to look at their consumption, not their income, to gauge standard of living. And consumption has significantly outperformed income."

While income and consumption are the chief measures of a nation's standard of living, other, more subtle indicators also play an important role - and several of them are not doing so well. Life expectancy in the United States, while still rising, has fallen behind that in France, Germany and Japan. Home ownership is at a record high for the population as a whole, but it has dropped since the 1970's for some groups - working families with children, for example, according to the Center for Housing Policy. In overwhelming numbers, Americans say they are satisfied with their standard of living, a Gallup poll reports. But 25 percent of the nation's families also worry all or most of time that they won't be able to pay their bills. That is up from 21 percent in the late 1990's.

And in many cases, public services are not holding their own. "Thirty years ago a lot of public goods were free, and now they are fee-based," said Michael Hout, a sociologist at the University of California, Berkeley. "Even the Grand Canyon charges, and many public schools are engaged in fund-raising. So public goods that contribute to living standards are more dependent today on family income."

The good news for the nation is that productivity - a measure of output per worker that is the bedrock on which income and living standards are built - is rising. When it goes up, so does the revenue from the sale of the additional goods and services that each worker produces. In theory, some of that revenue feeds back into the income of the workers, financing improvements in their standard of living.

That symbiotic relationship worked very well for Tom Rath. From the late 1940's through 1973, productivity grew at an annual rate of nearly 3 percent, and incomes rose almost as briskly. Then came a horrific slowdown: productivity fell back to an annual growth rate of less than 1.5 percent from the mid-1970's to the mid-90's, and median income hardly rose at all.

The revival that started in 1995 brought productivity growth back to its old rate of increase, and for five years incomes also rose smartly. What happened next is tough for economists to explain. The productivity growth rate has stayed strong - rising at an average annual rate of just under 3 percent since 1995, according to the Bureau of Labor Statistics. But starting in 2000, median income, adjusted for inflation, has grown more slowly every year - and this year the increase is almost imperceptible.

"There is no question that a huge gap has opened up between productivity and living standards," said Jared Bernstein, a senior labor economist at the Economic Policy Institute.

Not since World War II have productivity and income diverged so sharply, yet that phenomenon barely registers in public opinion surveys. Nearly 9 in 10 people surveyed by Gallup say they are satisfied with their standard of living, a higher proportion than in the 1960's. In answering that question, however, those surveyed make no comparisons with the past, said Lydia Saad, a senior editor at Gallup, "so they don't know whether they are falling behind on some treadmill of life."

Richard A. Easterlin, an economic historian at the University of Southern California, has a different take. Satisfaction is always relative, he says. If a family's debt rises, that is not a negative as long as other people's debt is increasing at roughly the same pace.

The parity helps to explain why consumption has risen 40 percent faster than income since 2001, and why people are able to focus on the amenities they acquire - the cellphones, the bigger homes, the cars and the digital cameras - without feeling weighed down by rising debt or by income that is rising more slowly.

TOM RATH'S generation, having experienced the Depression, expected more hard times after World War II. When the economy boomed instead, the aspirations of his generation rose and so, eventually, did their sense of well-being. All of that changed in the 1980's, when globalization infected public attitudes and people told pollsters that they expected their children's living standards to decline.

That shift in expectations soon gave way to a new norm. In the age of layoffs, tens of thousands of families have done what the DeSistos have done: adjusted to a decline in income after a job loss. The DeSisto family's income is still more than twice the national median of nearly $53,000, and Mrs. DeSisto's eight additional days of work are not really eight additional days, as she sees it.

"I always worked those extra days," she said. "I just didn't get paid for them in my old job as supervisor of nurses."

While the glass may be half full in the eyes of many beholders, living standards certainly are not improving for everyone. Productivity, as it rises, throws off more and more income, which is then distributed to capital in the form of profits, and to labor in higher wages, more paid hours and benefits.

Labor's share, which has historically represented 60 to 65 percent of the total, has fallen in the last five years to the low end of that range. But for Mr. Gordon at Northwestern, that is only part of the story. Capital's share, he says, has increasingly found its way to upper-income families as stock options, dividends, special bonuses and the like.

"We had much less income inequality in the first couple of decades after World War II because of strong unions, restricted trade and a decline in immigration," Mr. Gordon said. "Then all three reversed, which means that the income from productivity falls to the bottom line and for the time being stays there."

To him and others, living standards cannot be truly rising if the improvement is so unevenly distributed; in addition, they say, earning a living has become increasingly stressful.

Job security, which Tom Rath took for granted, has deteriorated. "People talk of the new economy and of reinventing themselves in the workplace, and in that sense most of us are less secure," said Daniel Kahneman, a Princeton University economist who shared a Nobel in economics for his contributions to behavioral economics.

People approaching the age of 65 face a different uncertainty: smaller retirement incomes than their parents enjoyed. That is happening as the nation shifts from a system of fixed monthly pensions to 401(k)-type accounts, in which people save what they can for their own retirement. In the process, retirement income is falling from 93 percent of preretirement pay for today's retirees to 80 percent, on average, for the next generation, according to an Urban Institute projection.

Some retirees cannot afford the pension hit, and they continue to work. The portion of the 65-and-over population that is employed has risen to 14 percent from less than 12 percent in 1995, the Bureau of Labor Statistics reports. The option to retire is slipping away, and that damages living standards.

"People who have a choice experience a greater standard of living," said Richard T. Curtin, director of the University of Michigan's Surveys of Consumers. "They are not constrained from choosing what they prefer."

Choosing not to work is no longer an option for many families who need two incomes to pay what they consider basic expenses. Two of those expenses - health care and education - have risen faster than incomes, says Elizabeth Warren, a bankruptcy specialist at Harvard Law School and co-author of "The Two-Income Trap."

"Half of all people who file for personal bankruptcy do so in the aftermath of a serious medical problem," she said, noting that the number of Americans without health insurance has increased in recent years. As for education, the rising cost is mostly in the purchase of expensive homes in upscale areas known to have good public schools. "A generation ago," Ms. Warren said, "the majority of American parents believed they could buy whatever home they could afford and send their kids to a good school down the street."

There is a problem with this argument. The quality of public school education, measured by test scores, is in fact holding up quite well, on average. The National Assessment of Education Progress, a federally sponsored testing program that started in the 1960's, periodically measures the skills and achievements of students at the ages of 9, 13 and 17. Scores have risen slightly since the early 1980's, on average, but so, too, has the disparity in school performance.

"The variation is extraordinary across school districts and even across schools in the same district," said Richard Murnane, an economist at Harvard's Graduate School of Education, "so when you ask about how good the schools are, the measure of central tendency is less interesting than the variation around the average."

HEALTH problems also undermine living standards. Life expectancy at birth is one symptom. At 69.7 years in the late 1950's, life expectancy in the United States was slightly ahead of that of Germany and France, and well ahead of Japan's. Now Japan is far ahead at 80.5 years, compared with 78.5 in France, 77.5 in Germany and 76.5 in the United States.

Infant mortality, at more than six deaths per thousand live births, similarly trails the rates in France, Germany and Japan, according to the Organization for Economic Cooperation and Development. Height, too, is no longer an American hallmark. Average height has been stuck at less than 6 feet for a decade or more while Europeans have grown passed that mark, suggesting that they are somehow healthier.

Obesity is now a distinguishing feature. The percentage of obese American adults has doubled in the last 15 years, to 30 percent, said Kenneth E. Thorpe, chairman of the department of health policy management at Emory University's School of Public Health.

The way we live makes that happen, he argues: the lack of exercise, the marketing of foods high in sugar and fat, the over-large portions. As a result, weight-related illnesses - diabetes, heart disease, hypertension, asthma - have risen sharply.

"Once you are sick, we are doing a better job in treatment," Dr. Thorpe said. "The pace of technological development has probably accelerated since 1980 more than in previous generations. That's the good news. The bad news is that we have larger shares of the population who are sick."

For Dr. Thorpe, the much better treatment is clearly a big improvement in standard of living - offset, however, by the big increase in the incidence of illness. He estimated that the additional health care cost resulting from the decline in healthiness would total $70 billion this year.

"You can't have a rising standard of living," he said, "if you have people getting less healthy."

The Rath family had no such misfortune. In Sloan Wilson's hands, the man in the gray flannel suit enjoyed an ever more prosperous life - a happy ending that many middle-class families can't seem to match today.

Sears stock rated `buy'
Tribune staff, wire reports - Chicago Tribune
July 2, 2005

Deutsche Bank issued a "buy" recommendation on the stock of Sears Holdings Corp., setting a price target of $185 for the shares of the Hoffman Estates-based retailer. Sears stock closed Friday at $151.75, up 1.2 percent. Among other things, Deutsche cited Sears' plans to sell real estate and other assets.

"We believe this could include the sale of at least 200 to 300 non-core full-line stores, the proprietary Lands' End brand, the company's 54 percent interest in Sears Canada, and the recently announced proposal to divest the Orchard Supply and Hardware business," Deutsche noted in its 26-page report.

Can a Rainmaker Be Morgan Stanley's Peacemaker?
By Jenny Anderson – New York Times
July 1, 2005

WALL STREET loves he roes. Morgan Stanley, the famous investment bank that has bled talent and endured a long and embarrassing public feud among its factions, is hoping that John J. Mack is that hero.

But is Mr. Mack really the right man for the job? At Morgan Stanley in 1997, he pushed for a deal with the retail brokerage firm Dean Witter, was assured the top job, but failed to secure it when the board, backed by his opponent's supporters, apparently changed its mind. Mr. Mack, who is known as one of Wall Street's best deal makers, botched the basics of one of his most important deals. What's more, his vision for Morgan Stanley as a financial supermarket flopped.

Mr. Mack later took over Credit Suisse First Boston, a bank at the time riddled with regulatory issues and capital management problems and struggling with how to pay for rich, guaranteed compensation packages. He fixed the balance sheet - no small feat - but failed to fix the culture.

That may sound silly. If banks are making billions and paying their bankers well, feeling good about the place seems overrated. Not quite. Banks need a strong culture to prevent their mercenaries from going elsewhere and because bankers - like people in general - like to work for a winning team. The chief executive who creates the kind of place where people think they can win and want to win ultimately ends up attracting the best talent and the best clients. Not a bad cycle.

Mr. Mack's record at First Boston was mixed. His deep cuts - he long ago was given the nickname Mack the Knife - probably saved the company financially but ultimately went too far. Credit Suisse First Boston is struggling to get back into the top five of most major league table categories, it is ramping up its proprietary trading operations long after its peers have been minting money in that business and it is late to the game in commodities.

Mr. Mack's best solution for the investment bank was to sell it, a strategy the Swiss dismissed. Then, they dismissed him.

Mr. Mack's supporters would offer excuses, some legitimate: that he was hoodwinked by a handshake with Philip J. Purcell, the Dean Witter chief executive who defeated him in the power struggle and ran the bank until Mr. Mack's return this week.

As for First Boston, the argument is that the problems were intractable and he was there only for three years - hardly long enough to fix a culture. First Boston's precarious financial position forced him to cut back on risky businesses like proprietary trading and to fire necessary talent.

But the bottom line is that Credit Suisse First Boston is struggling today and Morgan Stanley is, in part, a problem created by a merger that was poorly executed by him and his predecessor. So why is he is universally accepted as the executive who can fix all the problems?

It's the same story: Wall Street loves heroes. Mr. Mack, whose origins are in selling bonds, is universally revered as a deal maker extraordinaire. He knows chief executives, likes calling on them and is a major asset to any investment bank seeking deals.

But Morgan Stanley needs a peacemaker, not another rainmaker. While some employees at Morgan Stanley see Mr. Mack's return as salvation, others see him as the man who created the problem in the first place. Some, of course, just want a chief executive so they can get on with their jobs.

Mr. Mack's peacemaking does not measure up to his deal making. First Boston employees, current and past, tell endless tales of his arrival at the troubled institution. He told the bankers to get over their issues: Credit Suisse First Boston and Donaldson, Lufkin & Jenrette had just merged in what has been called one of the worst bank deals in history, and the bankers were fighting over pay and titles. He shook the place to its core, requiring business heads to tear up contracts - issuing them stock instead, an effective trick - but by most accounts, failing to get in the trenches, break down the silos and make the firm work more effectively.

Morgan Stanley is the kind of job that calls for getting in the trenches, forging peace among the enemies and making businesses work. Institutional securities, the unit Mr. Mack knows best, probably needs the least amount of work. Retail brokerage, asset management and the credit card businesses need help. If he applies the tough love of First Boston, expect a new outbreak of civil war within a few years.

Mr. Mack's saving grace may be his love of Morgan Stanley. In the early 1990's, he did such a good job building a culture, reaching across from the trading floor to make friends with investment bankers, that Harvard Business School wrote a case study on him, "Becoming a One-Firm Firm." The study cites an Institutional Investors' article with one colleague referring to him as the Alfred P. Sloan of Morgan Stanley.

So maybe Morgan Stanley will make Mr. Mack's superhuman powers emerge. But if history is any guide, he's as much human as he is hero.

Mack's Next Challenge:
To Make Peace and a Profit
By Jenny Anderson – New York Times
July 1, 2005

On John J. Mack's to-do list: rewind to 1992.

Morgan Stanley  was mired in management turmoil. Robert Greenhill, a veteran investment banker and the president of the firm, left amid a power struggle with Richard Fisher, the chairman. Mr. Mack, a prot้g้ of Mr. Fisher's, became the chief operating officer of the firm and set out to mend fences.

In a presentation to managing directors, Mr. Mack said: "It's up to you to reach across to the other divisions and say to the person in Equity or the person in I.B.D. [investment banking division] or whoever you think was the last difficult person you had to deal with, 'I don't understand your business, but I want to understand it, and if I understand it then maybe I won't feel this way about you,' " according to a 1999 Harvard Business School case study about Morgan Stanley.

Mr. Mack faces an eerily familiar landscape today. The company has been through the equivalent of a horrible family fight, and it is up to him, and the management team he chooses, to heal bruised egos.

While few think Morgan Stanley's blue chip brand has been anything more than dinged - the firm still ranks among the top three in announced mergers and acquisitions, debt offerings and stock and stock-related offerings through the first quarter of 2005, according to Thomson Financial - the challenges he faces are significant.

"He's got to re-energize and remotivate and re-excite an organization that's clearly been kicked in the stomach in the past six months," said Michael C. Feiner, a professor of management at the Columbia Business School. "It's been a rough ride for them."

Mr. Mack, a 29-year veteran of Morgan Stanley who was forced out in a power struggle in 2001 and has now returned, faces major institutional challenges. He has to assemble a team of managers who work well together and, with them, decide how to fix the firm's underperforming units, mainly its retail brokerage and money management businesses.

He has to improve Morgan Stanley's bond trading profits, which lately have come in far below those of its peers. He will have to mend fences with Dean Witter brokers, who have been publicly blamed as the source of all the firm's problems.

There are other fences to mend, too. He must reassure clients that the bank will be competing with other banks and not internally. He will also need to strike a new tone with regulators, who increasingly view Morgan Stanley as an institution that would rather fight them in court than settle disputes.

Finally, Mr. Mack will have to determine what to do with the Discover credit card business. Morgan Stanley's former chief executive, Philip J. Purcell, built that business, but amid tensions stemming from the bank's lagging stock price, he agreed in April to explore a spinoff.

After yesterday's announcement that Bank of America  would buy MBNA , a large credit card issuer, for a 31 percent premium over the MBNA share price, Mr. Mack might decide to keep the business or sell it, rather than spin it off and incur potential tax penalties.

Still, at the top of the list will be fixing the retail brokerage business, which has significantly lagged behind its peers. In 2003 and 2004, the retail unit was about half as profitable as its main competitors, Citigroup's  Smith Barney Private Client Services and Merrill Lynch's Private Client Group.

According to data compiled by Guy Moszkowski, a securities industry analyst at Merrill Lynch, pretax margins at Morgan Stanley were 8 percent in 2004, compared with 22.5 percent at Smith Barney and 19.1 percent at Merrill Lynch. Revenue per financial analyst, another common measure of profitability, was $421,000 at Morgan Stanley in 2004, compared with $532,790 at Smith Barney and $697,234 at Merrill Lynch.

In an interview yesterday, Mr. Mack would not say what he intends to do with the underperforming business, but conceded: "I have always been a fan of retail. Look what happened at Merrill Lynch under Stan O'Neal. That is their foundation. Here the foundation is investment banking, but there is opportunity on the retail side."

Morgan Stanley's bond trading and issuance business has also underperformed its peers. Part of that has been its choice of specialty: first-quarter results for firms such as Lehman Brothers  and Bear Stearns were stellar because of their strength in trading mortgage-related securities. Morgan Stanley is not as strong in that area.

According to Mr. Moszkowski, in the first half of 2005, bond trading contributed 63 percent of Lehman Brothers total revenue, 46 percent of Bear Stearns revenue, and 41 percent of Goldman Sachs revenue. At Morgan Stanley, however, bond trading contributed only 35 percent of total revenue.

Aside from the company's internal businesses, Mr. Mack will have to rehabilitate the firm in the eyes of regulators. While every Wall Street firm has been under intense regulatory scrutiny, Morgan Stanley has stood out as one of a few firms consistently in the crosshairs of regulators for taking an adversarial position during investigations. In one case the firm failed to retain documents as securities rules require.

"You have to get along with the cops," said Edward H. Fleischman, a former S.E.C. commissioner and senior counsel at the Linklaters law firm. "You want to get the slate clean and you want to tell the regulators that we will go back to being the Morgan Stanley we were and you knew for decades."

Wading through regulatory minefields will not be new for Mr. Mack. When he arrived at Credit Suisse First Boston in 2001, where he was chief executive for three years, prosecutors were threatening to indict the firm for violating rules on initial stock offerings. He brought in Gary Lynch, a former Securities and Exchange Commission enforcement director, to help settle the many investigations.

Of course, Mr. Mack's greatest asset could be the huge reserve of good will he would be able to tap. His deep roots within the firm and his reputation as a leader will help him to navigate and to build a support base. But his history also poses unique liabilities. "One challenge is to get a sense of the lay of the land without presuming it's like it was when he left," Professor Feiner said.

In a speech to Harvard Business School students in October 2003, Mr. Mack insisted his management style was "softer." His advice to the students? "Demand to be managed." There may be no shortage of that, now that Mr. Mack is back.

Homecoming at Morgan Stanley
By Landon Thomas, jr. - New York Times
July 1, 2005

For John J. Mack, the new chief executive of Morgan Stanley, it was a moment to savor. On his triumphant return yesterday to the investment bank that unceremoniously dropped him four years ago, Mr. Mack was greeted by a standing ovation from a crowd of 200 employees gathered in a conference room at Morgan Stanley's towering Manhattan headquarters on Times Square. But for all the cheering, Mr. Mack immediately faced the task of bandaging the wounds that deeply scarred the fractured firm under Philip J. Purcell, the former chief executive of Morgan Stanley who forced out Mr. Mack in a power struggle in 2001.

The tensions facing Mr. Mack were immediately evident in the announcement after the market closed that Zoe Cruz and Stephen S. Crawford, co-presidents of the investment bank under Mr. Purcell, had resigned from the board, the first of what are likely to be a series of high-level moves.

Mr. Crawford and Ms. Cruz, who were appointed during a management shakeup in March, were closely linked to Mr. Purcell and their board seats had become an emotional point of contention inside the firm. Mr. Mack, in an interview, said that he had not asked them to step down; they will remain in their executive posts, at least for now.

In his brief speech to Morgan Stanley's employees, Mr. Mack said that he felt as if he was home again and proclaimed his belief in the "one-firm firm," a mantra he has echoed from his days as president at Morgan Stanley to his time as chief executive at Credit Suisse First Boston.

While Mr. Mack's voice cracked a bit in the end as he took in the crowd - the majority of them executives who had worked with him during his 29 years at the company - he showed his well-known steely side too.

"We are going to bring some people back," he said. "But on our terms, not theirs."

Miles L. Marsh, the lead director of Morgan Stanley's board, also described Ms. Cruz's and Mr. Crawford's resignations from the board as voluntary. But the moves also demonstrated just how much maneuvering room Mr. Mack will have as he begins to reshape a board that had largely been put together by Mr. Purcell.

"I would not come back if I didn't trust this board and have the assurance that they wanted me back," Mr. Mack said in an interview after the board formally elected him chairman and chief executive. "Even in light of what happened four years ago."

It is widely expected that several directors with ties to Mr. Purcell will not stand for election at next year's annual meeting.

"We are here to announce the worst kept secret on Wall Street," Mr. Marsh told the Morgan Stanley gathering as Mr. Mack, Mr. Crawford and Ms. Cruz all looked on. After some comments thanking Mr. Purcell for his contributions, Mr. Miles told the executives that from the moment that Mr. Purcell had resigned as chief executive, Mr. Mack had been on their minds. He then introduced Mr. Mack as "the man from Rye."

Deciding on a fresh management structure that can bring together Morgan Stanley's fractious bankers and traders will fully test Mr. Mack's management skills. In recent weeks, the strife between bankers favoring Ms. Cruz and others in the camp of Vikram S. Pandit, the former president of the firm's institutional securities division, has made Morgan Stanley's executive suite seem more like an overcrowded sand box in a schoolyard. And it is clearly paining Mr. Mack.

"These are talented individuals and we want people to come back," he said. "But they will have to put aside their conflicts."

By adopting what some saw as a severe tone in referring to the former executives - asking them to come back on the firm's terms, not theirs - Mr. Mack runs the risk of alienating the departed executives. Many of them have been courted by rival firms; Joseph R. Perella, the mergers and acquisitions banker who left Morgan Stanley in May, proved his worth by personally advising MBNA on its deal with Bank of America.

The group of dissident executives who fought to oust Mr. Purcell have always been ambivalent about Mr. Mack. Indeed, if they do not return, they could well resume their public campaign seeking further changes at Morgan Stanley.

In a statement the dissident executives said, "We hope that John will be able to attract back many of the talented employees who left the firm during this stressful period, in particular the five former members of the management committee who are so important to the firm's franchise."

One of those is Mr. Pandit, a cerebral derivative expert with an academic bent. He is poles apart in personality and management style from Ms. Cruz, a fiery foreign exchange trader - yet they both claim Mr. Mack as a corporate sponsor.

Mr. Pandit and Ms. Cruz clashed on numerous matters in the past, including how much capital should be used for trading purposes. When Mr. Pandit left Morgan Stanley, declaring his loyalty to the firm and not Mr. Purcell, and Ms. Cruz declared her loyalty to Mr. Purcell, and what had been a run-of-the-mill executive suite spat became more like a blood feud.

Now Mr. Mack must decide whether his famed ability to grab petulant investment bankers by the ear and get them to work together can result in Mr. Pandit returning and Ms. Cruz staying on.

Over the weekend, Mr. Mack called Mr. Pandit and asked him to return, although he did not discuss any specifics of what his position would be. Mr. Purcell eliminated Mr. Pandit's position when he appointed Mr. Crawford and Ms. Cruz co-presidents. Mr. Mack also urged Mr. Perella to return. Mr. Pandit and Ms. Cruz declined to comment.

Mr. Mack said he intended to spend the next weeks talking with people inside Morgan Stanley about who should stay and who should go. While he said yesterday that he would not make a decision about management structure in the near term, he will be under pressure to act quickly given the extent of uncertainty about who the firm's president should be.

Some bankers have sought to persuade Mr. Mack that he should reconsider Ms. Cruz's position, but he is also aware that she has supporters within the fixed income division, which produces a large share of Morgan Stanley's profits.

Mr. Mack received a telephone call in recent days from Mr. Purcell, and they had a cordial conversation, Mr. Mack said in a television interview.

Mr. Mack has already taken a page from Mr. Purcell, who had urged his bankers to ignore the public outcry and return to work during his retirement speech in mid-June.

"The first thing," Mr. Mack said, "is to get everyone to stop looking at the headlines."

New CEO of Morgan Stanley Faces Tough Choices on Strategy
By Randall Smith – Staff Reporter – The Wall Street Journal
July 1, 2005

John Mack, newly named chief executive at Morgan Stanley, strongly signaled he won't dismantle the financial supermarket he helped build in the 1990s, as some analysts have urged.

Far from it. "The concept of a large-footprint financial services firm makes a lot of sense," he told Wall Street analysts yesterday. While a more narrowly focused firm may make sense over short periods, he added, "I think over a number of cycles you need to have the breadth and strength of a big financial institution."

The 60-year-old Mr. Mack, as expected, was tapped yesterday to run the New York securities company, returning four years after he lost a power struggle with his predecessor, Philip Purcell.

His immediate task will be to stabilize a company whose culture was disrupted in the wake of the 1997 merger of investment bank Morgan Stanley with brokerage firm Dean Witter, Discover & Co. Mr. Mack, president of the old Morgan Stanley, helped orchestrate the merger with Dean Witter, which was run by Mr. Purcell.

A longer-term challenge, charting the company's strategic course, will be more formidable. Some rivals are thinning the shelves of their financial "supermarkets" -- offering a mix of products to small investors and big institutions -- as regulators increasingly examine conflicts of interest and as conglomerates fail to reap synergies.

Some investors have urged a Morgan Stanley breakup. Mr. Mack should "come in and quickly rid the franchise of underperforming units," such as retail brokerage, "that had no remaining synergies with the institutional and asset management units," says David Trone, an analyst with Fox-Pitt, Kelton.

Mr. Mack -- known as "Mack the Knife" for his cost-cutting -- said he favors greater scale. Not only did he pursue the Dean Witter merger at Morgan Stanley, he unsuccessfully pushed for a merger involving Credit Suisse First Boston, in his stint as chief executive there.

Although he did acknowledge questions about whether the company should keep its Discover credit-card and asset-management units, he said clients value the "safety" of dealing with companies that are "well capitalized," and indicated that such firms can afford to take greater risks to make more money.

"It may be the cards we're holding now. It may be a combination of cards, and it may be a new deck," Mr. Mack said.

Here is a breakdown of Morgan Stanley's main business units, the issues he will confront, and what he said about them yesterday.

Retail Brokerage

The problems in Morgan Stanley's retail-brokerage business that caters to individual investors -- the nation's third-largest with a sales force of 10,438 -- are especially acute because broker productivity trails that of major rivals. Although the unit generates the second-highest revenue of Morgan Stanley's four businesses -- institutional securities are No. 1 -- it has the skimpiest pretax profit margin, at 8%.

The lower quality of the former Dean Witter brokerage system dates to its low-end roots within the Sears, Roebuck & Co. empire, where Dean Witter brokers once sat in Sears stores. It also derives from Mr. Purcell's history of favoring Dean Witter's, and then Morgan Stanley's, home-grown mutual funds and other investment products, rather than freely offering rival funds with better records. Yesterday, Mr. Mack he said he would do the merger all over again and keep the brokers. Not to gain extra distribution for securities, he said, but to enhance the company's "ability to gather assets" and gain "a much more diversified revenue stream."

Discover

Mr. Purcell threw a bone to critics by announcing a possible spinoff of the Discover credit-card business, which came from Dean Witter. Although Morgan Stanley denies it, critics warn that injecting the capital required to support the business on a stand-alone basis could weaken the remaining company's credit worthiness.

While Discover ranks a distant No. 7 to much larger rivals, such as American Express Co., and its market share has eroded, its earnings add stability to the more volatile securities business. Even as Morgan Stanley's overall earnings tumbled 45% from 2000 to 2002, credit-card profit rose 5.6%. Consideration of a Discover spinoff comes as larger banking rivals are moving in the other direction. Yesterday, Bank of America Corp. unveiled plans to acquire credit-card titan MBNA Corp. for $35 billion, jumping ahead of Citigroup Inc. and J.P. Morgan Chase & Co. to lead in the card business. Mr. Trone believes Discover's "ultimate destiny is to be sold." Mr. Mack said he needed to study the issue.

Asset Management

Morgan Stanley's asset-management business -- managing $416 billion, nearly half for individual investors -- needs work. Managing investor money is an annuity business; companies receive management fees even if investors don't make trades. Although it contributed just 13% of pretax profit in 2004, its profits, like those of credit-cards, have stabilized the company's results.

Last month, Citigroup unveiled a plan to hand over its asset-management business to Legg Mason Inc., partly because of regulators' concern about the conflict inherent in brokers' favoring Citigroup funds. Regulators have cracked down on Morgan Stanley and other brokerage houses for improperly favoring their own products. "Given what we've been through in a regulatory environment," Mr. Mack said, "you have to question now about your ability to gather assets with your own in-house funds."

Institutional Securities

By some measures, institutional securities, the heart of the former Morgan Stanley franchise, is thriving. Despite defections during the civil war, the business, which arranges financing for corporate clients and trades securities, is stable. This year, Morgan Stanley remains No. 1 in world-wide announced mergers and No. 2 in high-profit global initial public offerings. The institutional business accounted for 62% of the company's pretax profit in 2004.

Critics said Mr. Purcell discouraged the kind of risk-taking needed for such trading profits by pressing for the firing of some top traders after losses. Here, Mr. Mack preached the virtue of size. "I've done business all over the world," he said, "and I've been amazed how [less capable firms] do business because they have a financial platform that dwarfs many firms. So I believe a strong, broader platform ... will bring even more business into a firm like ours."

Mack, Back by Popular Demand
By Ann Davis – Staff Reporter - The Wall Street Journal
July 1, 2005|

Board Provides Breathing Room After Days of Twists and Turns;
Returnee Gets Standing Ovation

New York -- On his first day back at Wall Street firm Morgan Stanley as its new chairman and chief executive, John Mack was given some breathing room on the board, as two co-presidents appointed by his predecessor and longtime rival relinquished their directorships but not their jobs.

Mr. Mack, elected to his new posts unanimously by the board yesterday, said he didn't insist that Co-Presidents Stephen Crawford and Zoe Cruz give up their directorships. A person familiar with the matter said Mr. Mack wasn't informed of their decision until after they had voted to give him the job.

The two had been placed on the board in April as former Chief Executive Philip Purcell was trying to shore up support in the face of an increasingly vocal shareholder revolt. They left to give Mr. Mack "greater flexibility in shaping the board's composition," said Miles Marsh, the board's lead independent director. In addition to these two seats, Mr. Mack can name two more directors to still-vacant seats created this spring by the board.

Mr. Crawford and Ms. Cruz's future roles as co-presidents aren't guaranteed, but Mr. Mack struck a supportive note about the current team. Though he said he hoped to bring back recently departed executives, he signaled that he won't tolerate factions. "If they don't have common ground and the same vision that the management team here has, then most likely it won't work," he told analysts.

The moves capped 17 days of twists and turns. It began on June 13 with Mr. Purcell's succumbing to pressure and resigning, and the lead director on the successor search initially ruling out Mr. Mack, who had resigned as Morgan president in 2001 after a power clash with Mr. Purcell. The board's reversal in the past week demonstrates its increasing desire to end the shareholder revolt that began with a management shake-up by Mr. Purcell.

Mr. Mack became chairman and chief executive officer effective immediately after the board's midday vote yesterday. Mr. Marsh cited Mr. Mack's nearly three decades at Morgan Stanley and highlighted Mr. Mack's track record of forging "cohesive teams" and his "close relationships with clients world-wide."

In choosing Mr. Mack, the board went with a leader who is in many ways Mr. Purcell's opposite. Mr. Mack is charismatic and a quintessential Wall Street deal maker, with a stern side but a Southern manner and knack for connecting with people. Mr. Purcell was considered aloof, a former management consultant who kept an inner circle of loyalists and delegated most client contact to others, sticking by business strategies even when managers urged change.

"This is an historic and inspirational about-face for a board which many thought was paralyzed by dysfunctional group-think," said Jeffrey Sonnenfeld, associate dean at Yale School of Management. "They belatedly but admirably recognized that their No. 1 job was not to protect the CEO from dissent, but to protect shareholder assets from obvious deterioration."

Mr. Mack got a standing ovation at Morgan Stanley's New York City headquarters, after which Mr. Marsh quipped, "I think we made the right decision."

"Always a good feeling to come home," Mr. Mack said in an interview. "I am comfortable that I have 100% support of this board."

"This is a great day for Morgan Stanley," said Byron Wien, longtime Morgan Stanley investment strategist. "Mack has the combination of leadership ability and passion that will restore our culture and re-establish the greatness that people once associated with this fine firm."

In 4 p.m. composite trading yesterday on the New York Stock Exchange, Morgan Stanley's stock was off 85 cents to $52.47 on a down day for the markets.

Many investors cheered the Mack news. "You have to give credit to the board for overcoming their initial position and making a decision that was in the best interest of the company and the shareholders," says Tim Cook, president of Kailas Capital, a Stamford, Conn., asset-management firm.

Even without Ms. Cruz and Mr. Crawford on the board, Mr. Mack is taking a job that carries risks. He is casting his lot with a board still dominated by one-time Purcell loyalists.

The board supported the former CEO's decision to appoint the two new co-presidents over other respected management-committee members, and the directors continued to stand by Mr. Purcell as those angered by his shake-up quit the company.

Mr. Mack will have to turn the other cheek with some who allowed him to quit in 2001 when he became convinced Mr. Purcell wouldn't live up to what Mr. Mack deemed a private promise to make him CEO a few years after the 1997 merger of Morgan Stanley's investment bank with Mr. Purcell's more Main Street-oriented Dean Witter, Discover & Co.

Right after Mr. Purcell stepped down on June 13, the director in charge of the search, Charles Knight, told employees the board had ruled out a roster of some of Morgan Stanley's best-known former executives and culture carriers, including Mr. Mack.

One candidate's name surfaced almost immediately: Laurence Fink, CEO of asset manager BlackRock Inc. But the directors were unprepared for the curve ball Mr. Fink sent them when he sat down with Mr. Knight and Mr. Marsh, the lead director, on Monday, June 20, at the office of recruiter Thomas Neff.

"Why aren't you talking to John? This is crazy, you're talking to me," Mr. Fink said, according to someone with knowledge of the conversation.

Mr. Fink added that he wasn't sure he was interested, and said Mr. Mack was the clear choice as someone with a longtime Morgan Stanley pedigree and proven ability to make people work together both at Morgan Stanley and at his most recent job as CEO of Credit Suisse First Boston, and co-CEO of its parent, Credit Suisse Group. Last year the Credit Suisse board forced Mr. Mack out after it rejected his attempts to do a merger.

Other Morgan Stanley investors steered the board toward Mr. Mack, too, and a stern letter from Allianz AG's Allianz Global Investors chided the board for not looking at current and former executives.

Soon, Mr. Mack got a call from Mr. Neff, who had approached him in the past about "fix it" jobs in the financial industry. This time, Mr. Neff wanted him to fix his old company. "It wasn't on my list of things that were going to happen," Mr. Mack recalled in the interview. He called his wife, Christy, with the stunning news.

Mr. Mack began assessing how much support he could realistically expect from a board of Purcell loyalists. Mr. Marsh and other board members worked to put his mind at ease.

In an interview, Mr. Marsh said the board moved to assure him he had "100% support of the board. We didn't go through a lot of games in trying to express that point of view."

But it seemed that way when, around the same time, Mr. Knight gave an interview to The Wall Street Journal reiterating that the board had ruled out Mr. Mack. Mr. Marsh partially explained his colleague's perplexing public statement by saying, "We were quite fearful that if in fact it leaked out that John was a candidate that it would kill the search" for anyone else.

Word that Mr. Mack was under consideration pushed up Morgan's stock 5% by the end of last week. Mr. Marsh brushed aside questions about the board's longtime support of Mr. Purcell under fire, saying, "The board has to support the team on the field."

With a new coach in charge, the dissident alumni shareholders who led the anti-Purcell revolt, known as the Group of Eight, seemed placated. Though they hadn't lobbied for Mr. Mack, they called his return important to restore the firm's pre-eminence and said they hoped he would attract back "many of the talented employees who left the firm during this stressful period."

Thomas DeLong, a professor of management at Harvard Law School who has both worked at and consulted for Morgan Stanley, said Mr. Mack "is simply not threatened" by people who have different strengths than him. "He's secure enough in who he is to bring in the best. He's remarkable that way. He lets them run."

--Joann S. Lublin contributed to this article.

Morgan Stanley Brings Back Its Ex-President to Be Its Chief
By Landon Thomas, Jr. - New York Times Online
June 30, 2005

The board of Morgan Stanley announced this afternoon that it had elected John J. Mack, a former president of the firm, as its chairman and chief executive, succeeding Philip J. Purcell, the man who forced him out in a bitter power struggle in 2001.

Mr. Mack's triumphant return concludes an eight-year Wall Street drama that, with its themes of intrigue, banishment, mutiny and redemption, gave what could have been just another boardroom putsch the feel of a Shakespeare play.

For Mr. Mack, 60, who drove the 1997 merger with Mr. Purcell and Dean Witter, his return is also a resounding victory for the Morgan Stanley bankers and traders whose revolt against Mr. Purcell's leadership this spring forced a recalcitrant Morgan Stanley board to abandon its longstanding support of Mr. Purcell.

In many ways the upheaval at Morgan Stanley was highly unorthodox. While power struggles are not uncommon in corporate America, on Wall Street, where discretion is a time-honored virtue, public campaigns by retired executives urging the removal of a sitting chief executive are virtually unknown. But Mr. Purcell's status as an outsider and Mr. Mack's renown as perhaps the ultimate Morgan Stanley insider turned tradition on its head and paved the way for his return.

"The board has agreed unanimously that John Mack is uniquely qualified to become Morgan Stanley's new chairman and chief executive officer," Miles Marsh, the board's lead director, said in a statement issued by the firm. "He has the singular combination of experience, strategic insight and leadership ability needed to bring together the people of Morgan Stanley and improve profitability across the firm."

Mr. Mack will immediately take over from Mr. Purcell.

"I am proud to return home to the world's premier financial services company and to the most talented team on Wall Street," Mr. Mack said in the statement, adding, "I look forward to working shoulder-to-shoulder with my colleagues old and new, across all of the firm's businesses."

Mr. Mack's return had been eagerly anticipated by many people at Morgan Stanley. Byron R. Wien, a senior investment strategist at the firm, said on Wednesday that he was looking forward to it. "Morale has already improved in anticipation of his return," he said. "He has proven that he can bring harmony to disparate factions."

Still, several crucial matters appear to remain unresolved. For one, Mr. Mack has told the board that he wants the return of former Morgan Stanley executives who left the firm after a management shake-up in March. But their return, especially that of Vikram S. Pandit, who was president of the firm's institutional securities business, would be sure to antagonize Zoe Cruz, whom Mr. Purcell appointed as a co-president this March.

For Mr. Mack, a brash and forceful executive known for his ability to connect with all varieties of bankers and brokers, managing the rift between Mr. Pandit and Ms. Cruz will be a severe test of his skill as an executive.

Mr. Mack was an early supporter of Ms. Cruz but in recent days, some rival executives within the firm have lobbied him to reconsider her position. Mr. Mack, however, has told friends that he will not succumb to anyone else's agenda.

He faces other challenges, too. After years of infighting and a punishing public campaign by a group of eight retired executives calling for Mr. Purcell's ouster, Morgan Stanley, once regarded as perhaps the pre-eminent name on Wall Street, has been demoralized by a wave of executive departures, a lagging share price and an uncertain profit outlook.

Mr. Mack must also tackle some pressing strategic issues, namely whether he should sell or spin off the slower-growing credit card and retail brokerage units that were originally part of Dean Witter. The performance gap between the firm's institutional securities division, the core of the original Morgan Stanley, and the lagging Dean Witter businesses lay at the root of a culture clash that evolved into a civil war between Morgan Stanley and Dean Witter executives.

The appointment of Mr. Mack is a rapid reversal by the board. Two weeks ago, when Mr. Purcell announced he would retire, the director leading the search for Mr. Purcell's successor, Charles F. Knight, said that Mr. Mack would not be a candidate. Directors initially reached out to a selection of outside executives, including Laurence D. Fink, the chief executive of BlackRock, and Robert E. Diamond Jr., the president of Barclays.

But when several candidates, as well as a chorus of Morgan Stanley executives, said that Mr. Mack was the man best able to unify the firm, the board contacted Mr. Mack early last week.

Mr. Mack, who had not expected a call from the board, went on a family vacation to Europe, at which point the negotiations began. After his return on Sunday, the talks picked up speed. As word leaked out, Morgan Stanley employees cheered the news, and shares of Morgan Stanley rose sharply, strengthening Mr. Mack's hand.

Leading up to the 1997 merger, Mr. Mack and Mr. Purcell had a close professional relationship. Mr. Mack was attracted to Dean Witter's retail brokers; Mr. Purcell was seduced by the lure of the Morgan Stanley brand.

At the time of the merger, the two men's closeness in age became a complicating factor (Mr. Purcell is 61). As head of the larger, acquiring firm, Mr. Purcell pushed for the chief executive title. But Mr. Mack, as president of Morgan Stanley and with Wall Street influence, also had a claim on the title.

In his eagerness to get the deal done, Mr. Mack deferred to Mr. Purcell's wishes and accepted the title of president. Associates of Mr. Mack have always said that there was an agreement between the men that Mr. Purcell would let Mr. Mack succeed him in about five years. But nothing was ever put in writing, and by 2001 a rift was developing.

Angered by the lack of integration efforts and the loss of some of his own loyalists, Mr. Mack made a bid for the top job in early 2001. Rebuffed by Mr. Purcell and a board that by then was dominated by directors with close ties to him, Mr. Mack left the firm within months and watched in frustration when no senior Morgan Stanley executives followed him.

To this day, Mr. Mack has harbored resentment toward Mr. Purcell, people close to Mr. Mack say.

"I made a good deal with the wrong guy," Mr. Mack is reported to have told friends, frustrated at his inability to outmaneuver Mr. Purcell.

Mr. Mack has the bruising physical presence of the high school football star he once was. The son of a grocer in Mooresville, N.C., Mr. Mack graduated from Duke in 1968 and joined Morgan Stanley's bond division in 1972.

As an aggressive bond salesman, Mr. Mack was part of an early wave of hungry self-starters who would become the new face of the firm, displacing the Ivy League-educated investment bankers. By 1984 he was running fixed-income sales.

For a man who is being hired to unify a divided firm, it bears noting that Mr. Mack was a notorious guardian of his fixed-income turf and a relentless political infighter to boot. Throughout the 1980's, he waged punishing battles with members of the old guard in equities and investment banking like Anson M. Beard Jr., Joseph G. Fogg 3rd and Robert F. Greenhill.

Scars from those battles still remain and the dissident executives, known as the group of eight, who include Mr. Fogg and Mr. Beard and who are being advised by Mr. Greenhill, still blame Mr. Mack for the merger that they have tried to undo.

A passionate man with an active sense of humor, Mr. Mack also has his quirkier ways of securing loyalties and has been known to send a Brooks Brothers suit to a sartorially challenged colleague.

Less clear is his track record as a manager of a deeply divided firm.

After 29 years at Morgan Stanley, Mr. Mack's second act came at Credit Suisse First Boston. He took the job as chief executive in July 2001 as Wall Street was reeling after the collapse in the stock market and still recovering from a merger with Donaldson Lufkin Jenrette.

Upon his arrival, bankers were at war with each other. He cut 10,000 jobs, forced bankers to tear up their contracts and worked to achieve a one-firm goal. The results were mixed. He settled all regulatory inquiries, but he failed in creating the one culture he strove for and when he pushed for a big merger, he was ousted by the board.

Morgan Stanley Taps Mack as CEO
By Ann Davis – Staff Reporter – The Wall Street Journal Online
June 30, 2005

Decision Marks an End To an Arduous Battle;
'Great Day for Morgan'

In a dramatic turnaround and concession of past mistakes, Morgan Stanley's board Thursday morning, as widely expected, brought back storied Wall Street leader John Mack as its new chairman and chief executive Thursday to replace his longtime rival, Philip Purcell.

The board, battered by criticism that it stood too long behind an ineffective and divisive CEO, this time went with a leader who is in most every way Mr. Purcell's opposite. Mr. Mack is a charismatic leader and quintessential Wall Street dealmaker, with a stern but Southern manner and knack for connecting people. Mr. Purcell was an aloof manager who kept a small inner circle of loyalists and delegated most client contact to others, sticking stubbornly by business strategies even when managers urged change.

Ripples were still spreading later Thursday following the announcement. Mr. Mack said Zoe Cruz and Stephen Crawford, whose appointments as co-presidents touched off a shareholder revolt that eventually led to Mr. Purcell's ouster, will remain in their positions. In a press release after the close of trading on Wall Street, Morgan Stanley announced that Ms. Cruz and Mr. Crawford resigned their positions from the board. Mr. Mack, in an interview on CNBC, said he didn't ask for their resignations and acknowledged their leadership.

Mr. Mack also said the door is open to executives who left the firm amid the uproar of the Mr. Purcell's top-level shake-up, and that Morgan Stanley is starting a new review of the spinoff of the Discover credit-card operations.

He also extended an olive branch to current and former employees. "I look forward to working shoulder-to-shoulder with my colleagues old and new, across all of the firm's businesses," he said in a prepared statement. "I am eager to hear and execute their ideas on how we can bring out the best in Morgan Stanley and continue delivering innovation for our clients, growth for our shareholders, and opportunity for our employees."

Charles Knight, who headed the CEO search, said earlier Thursday that Mr. Mack's history at Morgan Stanley made him the ideal candidate. "Ultimately, we determined that John's substantial record of achievement in the financial services industry, his ability to attract and retain world-class people, and his strong ties to Morgan Stanley made him the very best candidate to lead the firm forward," Mr. Knight said in a prepared statement.

Within the company, the mood was jubilant. "This is a great day for Morgan Stanley. Mack has the combination of leadership ability and passion that will restore our culture and reestablish the greatness that people once associated with this fine firm," said Byron Wien, the longtime Morgan Stanley investment strategist.

Even other contenders for the job expressed excitement. "I really do believe the board came through and chose the right person who could effectively navigate Morgan Stanley back to its glory," said Laurence Fink, CEO of asset-manager BlackRock.

Mr. Mack entered talks with the board last week, after it quietly reversed a public stance by the director leading the chief-executive search that it had ruled out him and other former Morgan executives as candidates. The board considered candidates including Mr. Fink and John Costas, chief-executive of UBS AG's investment bank.

Mr. Mack, 60 years old, will have to heal wounds the company has endured during a culture clash that began when the investment-banking giant merged with retail brokerage Dean Witter, Discover & Co. in 1997. That clash reached a crescendo three months ago after Mr. Purcell, who came to Morgan from Dean Witter, shook up his management team and sparked a shareholder revolt.

Mr. Mack will confront major issues to put the New York firm back on solid footing. He needs to command the full support of Morgan Stanley's board, which hadn't initially backed his return to the company. He must calm restive employees who have been unhappy with the decisions of his predecessor. He is expected to seek to hire several executives who left the company in the aftermath of the Purcell-led shake-up.

Mr. Mack noted four key priorities in the firm's written statement: working as a team, enhancing profitability in the face of intense global competition, renew Morgan's focus on clients, and assure productive working relationships with regulatory and public officials and other key constituencies of the company.

Mr. Mack also will have to make strategic decisions about which lines of business he wants Morgan Stanley to focus on, and whether he wants it to continue trying to be a big financial supermarket or return to its roots as an elite investment bank catering to corporations and the wealthy. And he needs to assuage investors who have been nervous about the Morgan Stanley franchise amid defections and the internal turmoil of recent months.

Mr. Mack had a bitter parting with Morgan Stanley in 2001 after he determined that Mr. Purcell wouldn't step aside and let him take the reins. Working with a board dominated by handpicked loyalists, Mr. Purcell for months had enjoyed the board's support amid increasingly loud calls for his ouster and high-level defections from the company. Around the time word got out that Mr. Mack was under consideration, Mr. Purcell's belongings at the company's Manhattan headquarters were boxed up.

Last year Mr. Mack departed as co-CEO of Credit Suisse Group and CEO of its Credit Suisse First Boston unit after the Swiss parent's board rejected his entreaties for a merger. Earlier this month, he had made other plans, to be chairman of hedge fund Pequot Capital Management.

How Purcell Lost His Way
By Emily Thornton - Business Week Online
JUNE 30, 2005

NEWS ANALYSIS

An inside look at the strategic errors that led to the mess at Morgan Stanley Philip Purcell had missed out on one blockbuster deal after another -- Chase Manhattan, JPMorgan, Bank One, And with Morgan Stanley's share price down to barely half its 2000 peak, tensions inside the firm mounted as some of the white-shoe bankers worried that CEO Purcell would grasp at any deal -- even a merger with a second-tier bank where they would never want to work.

At a meeting of Morgan Stanley's 14-person management committee in June, 2004, in Purchase, N.Y., some felt their fears were confirmed.

OPEN WARFARE. The topic was Morgan Stanley's direction. The discussion, such as it was, soon erupted into blazing arguments. The fuse: an analysis of possible mergers presented by then-strategic officer Stephen Crawford that included a deal with Charlotte (N.C.)-based retail bank Wachovia.

By the end of the meeting, many of the six investment bankers on the committee had beaten down the suggestions. But it was an uneasy peace. Before long, the long-simmering conflict over Morgan Stanley's direction would escalate into open warfare, pitting directors, ex-execs, bankers, and Purcell loyalists against one another -- ultimately leading to Purcell's resignation in June. Through spokesmen, none of the key players would speak on the record for this story.

A reconstruction of Purcell's last years in office, pieced together by BusinessWeek from dozens of interviews with former and current executives and others, shows that the most widely cited reason for his downfall -- his personality -- doesn't completely explain all the rifts inside the firm or its penchant for blowing big opportunities. By many accounts, Purcell favored one side of the firm over the other, brutally dismissed top execs who fell out of favor, and undermined Morgan Stanley's culture of meritocracy with some of his promotions.

MORALE BOOSTER? But it was his inability to develop a coherent strategy and sell it to the troops that led to his undoing. This former McKinsey & Co. consultant, who had won a reputation as a master strategist, found himself bereft of ideas when they were most needed.

That means simply replacing Purcell won't immediately fix Morgan Stanley. If ex-President John Mack makes a triumphant return, as is widely expected, he should be able to raise morale and defuse many of the personal antagonisms that plague the firm. But he will inherit all the strategic dilemmas that Purcell struggled with for most of his eight years at the helm.

One of the first signs of Purcell's strategic quagmire emerged in the late 1990s, when then-President Mack recommended that Morgan merge with Chase Manhattan. Purcell preferred JPMorgan. Nothing happened, largely because the bank's top execs couldn't agree on which deal to pursue, according to people familiar with the discussions. Chase ended the debate by buying JPMorgan in 2000. The next year, Mack quit after losing a fight with Purcell over who would lead the firm.

FOILED AGAIN. Purcell still didn't have a plan for Morgan Stanley when the board of directors met at the end of 2003, say several people briefed on the discussions. The financial-services industry was consolidating, but Purcell couldn't come up with a clear answer to directors' questions about how Morgan Stanley should respond. The board asked him to develop a blueprint in time for a two-day meeting in July, 2004, in London. Purcell charged a small team to work out strategic options, ranging from going it alone to a blockbuster merger.

The group had barely begun work in January, 2004, when Morgan Stanley was left out in the cold yet again as another banking megadeal got done. This time, it was JPMorgan Chase & Co.'s purchase of Bank One.

The news came as a shock in the executive suite at Morgan Stanley. Once more, the firm had been sizing up the two players as potential merger partners for months before they were snatched away. Adding insult to injury, Gary Parr, a former top Morgan Stanley banker who had recently defected to Lazard Fr่res, had advised Bank One.

VIEW FROM THE TOP. Purcell knew he had to do something and began openly talking with his managing directors about other potential mergers. One name that became an open secret early last year among some of Morgan Stanley's top brass was a real shocker: Wachovia Corp.

The regional bank had broken out of its Southern base only a few years earlier, and New Yorkers were still learning how to pronounce its name. Wachovia CEO Ken Thompson had repeatedly said he didn't want to merge with an investment bank.

Still, Purcell thought the deal made a lot of sense, bankers who were close to the strategic team say. Wachovia had only a small investment bank, and Morgan Stanley would give the North Carolina bank's retail brokerage and credit-card operations far more heft. Moreover, because Wachovia's market cap was then roughly the same as Morgan Stanley's, there was a chance that Purcell could continue to play a role in the combined company, which some insiders say seemed important to him.

RISKY BUSINESS. The debate over doing a deal -- especially with a bank such as Wachovia -- widened old fault lines in the firm. Executives began to blame each other for the firm's beaten-down stock price and lagging financial performance. Investment bankers said the poor results reflected the weakness of the old Dean Witter retail businesses, which Purcell continued to manage after Dean Witter bought Morgan Stanley in 1997.

What's more, they complained that they didn't have enough capital to build up trading operations or undertake highly lucrative transactions -- such as trading big blocks of shares with corporate clients, as Goldman, Sachs (GS <javascript: void showTicker('GS')> ) did. Purcell and his loyalists often countered that the investment bank was sucking up most of the firm's capital. Some veteran Dean Witter executives griped that the bankers were taking too many risks.

By the time of the Purchase meeting in June, 2004, even Wachovia was becoming too expensive to buy. So some executives argued that if Purcell did want to do a deal, he should sell Morgan Stanley to a company able to pay a stiff premium, one with enough prestige to keep people on board, say some people familiar with what happened. Names tossed out by people in the meeting included Citigroup (C <javascript: void showTicker('C')> ) and Bank of America (BAC <javascript: void showTicker('BAC')> ) -- though mergers with them might have left no role for Purcell.

UNEASY TRUCE. Unable to agree on a possible deal, the management committee resolved simply to try to improve the firm's operations by better integrating the Morgan Stanley and DeanWitter businesses. Purcell went along with the committee's decision. He told the July board meeting in London that he planned simply to manage Morgan Stanley's existing businesses better, according to several people briefed on the meeting. But the group failed to resolve how that would be achieved or what the firm's ultimate goal should be.

The truce lasted little more than four months. On Dec. 9, Scott Sipprelle, a former managing director who is now a hedge-fund manager, sent Purcell and the board a letter that called for breaking up the firm. Within four days, Purcell recruited his old boss at Sears Roebuck & Co., Edward Brennan, to rejoin the board, which was already packed with loyalists.

Later the board removed the firm's takeover defenses and adopted a provision that entitled Purcell to a $62 million parachute if he quit or the firm was taken over. On Mar. 3, a separate Group of 8 former executives sent a letter calling on Purcell to resign, though this news didn't break until the end of the month.

MISSING NAMES. Purcell was done arguing. He called some of his management committee to tell them about the letter. He said the board might think that the head of the investment bank, Vikram Pandit, was behind it. (Later, the Group of 8 repeatedly denied that he was involved.) Purcell also asked some committee members if they wanted to be considered as candidates for president and CEO. Until then, Pandit had been widely perceived as Purcell's most likely successor. Head of equities John Havens, a Pandit loyalist, declined the offer, according to several people familiar with the matter.

Word of Purcell's suspicions quickly made its way back to Pandit. He confronted the CEO, insisting that he had nothing to do with the letter, according to people familiar with the matter. Purcell said that he would clear up any impression that Pandit was involved -- provided that Pandit agreed to support Purcell. But Pandit replied he was loyal to the firm, not to any individual, the sources say.

Tensions between Purcell and Pandit continued to build. Then, on Mar. 28, Purcell dropped a bombshell: He showed Pandit a new leadership plan for melding Morgan Stanley's investment bank more closely with its retail brokerage, asset management, and credit-card operations. The cornerstone: Zoe Cruz, head of the bank's fixed income division, and chief administrator Crawford would be promoted to co-presidents.

MASS EXODUS. Two names were missing from the organizational chart: Pandit and Havens. After working at Morgan Stanley for two decades, Pandit was through. He left the building shortly after meeting with Purcell, say people who know him. He didn't say goodbye to his troops. He didn't clean out his office. He just walked out in a raincoat into New York's Times Square.

All hell broke loose as the full extent of the disarray inside Morgan Stanley's executive ranks became public that night. Purcell announced the promotions of Cruz and Crawford. The next morning, Havens followed Pandit out the door -- to a standing ovation on the trading floor. But that was just the beginning. Within two months, three other members of the management committee quit, along with more than 50 bankers, traders, and brokers.

"For a lot of us, Pandit was the last hope for Morgan Stanley," says a former Morgan Stanley banker who asked not to be named.

NO ROADMAP. As the Group of 8 was hammering him in newspaper ads and Morgan Stanley's stock kept sinking, Purcell was losing his grip on the firm. All the while, company spokesmen dismissed any talk of a lack of direction. "It is management's responsibility to continually evaluate all of the strategic alternatives," says a Morgan Stanley spokesman. "It has been the unanimous view of the management committee that organic growth is the best option."

Yet it was still not clear how Purcell's new management team would do business differently. The only obvious change was that Cruz and Crawford were jointly put in charge of all of the firm's businesses. Previously, Pandit ran the investment bank, reporting directly to Purcell, who ran the retail brokerage, credit-card, and asset-management operations. "It's been less clear than with other brokerages where Morgan Stanley wanted to go," says Glenn Schorr, a financial-services analyst at UBS.

Finally, on June 13, Purcell announced he would retire. At first, the market didn't take the news very seriously -- perhaps because Purcell had said he would stay until a successor was found or until the next annual meeting in March. But once word trickled out that the board was considering Mack for the job, the stock jumped 5%. Morgan Stanley may have found a leader who investors and employees can believe in. Now it just needs a plan to put it back at the head of the pack.

FORMULA FOR FAILURE. Whether it's Mack or someone else, whoever replaces Purcell will need to reverse the sharp slide in the firm's stock price, persuade star bankers and top execs who walked out this year to return, and get the storied bank firing on all cylinders again. Above all, the successor must put a strategic stamp on the place.

There are several ways to do that. Morgan Stanley could refocus on its distinctive businesses that cater to blue-chip corporations and super-rich individuals. That might mean selling its mediocre credit-card, asset-management, and brokerage units. It could still buy a small retail bank. Or Morgan could sell itself to a big bank such as Citigroup. But one of the many lessons of Purcell's downfall is that doing nothing is a recipe for failure.

Thornton is BusinessWeek's banking editor in New York

Bank of America to Acquire MBNA
WALL STREET JOURNAL ONLINE
June 30, 2005

NEW YORK - Bank of America Corp. said it agreed to acquire MBNA Corp., a major independent credit-card issuer, for $35 billion in cash and stock.

The acquisition combines a giant domestic bank with a leading provider of credit-card and payment products, significantly enhancing Bank of America's product mix and customer reach, Bank of America said. After the deal, Bank of America will become one of the largest card issuers in the U.S., with $143 billion in managed outstanding balances and 40 million active accounts, the bank said.

"Today's announcement is not only about the creation of one of the world's largest card providers. That is compelling in and of itself," Bank of America Chairman and Chief Executive Officer Kenneth D. Lewis said in a statement. "But it's really a much larger story about two companies with complementary strengths."

In the wake of the deal, Bank of America said it expects to take a restructuring charge of $1.25 billion related to the transaction. It said it will cut costs by eliminating 6,000 jobs and by cutting overlapping technology, vendor leverage, and marketing expense. The deal is expected to close in the fourth quarter.

Under terms of the agreement, MBNA stockholders will receive 0.5009 common share of Bank of America plus $4.125 for each of their shares. Based on Bank of America's Wednesday closing stock price, the deal is valued at $27.50 a share, or $35 billion in total.

After the announcement early Thursday, NYSE-listed shares of MBNA surged $4.95, or 23%, to $26.02 in premarket activity. Shares of Bank of America closed Wednesday at $46.91 apiece. There is no premarket activity in Bank of America's stock.

Consolidation Seen
The deal comes as a slowdown in the growth rate of the credit-card business is putting new pressure on independent card issuers. MBNA has been a focus of takeover speculation since it warned in April that its 2005 profits would be significantly below expectations.

In an era of explosive credit-card growth, independent card issuers, many of which were spun off from banks in the 1980s, grew rapidly and developed strategies to set themselves apart from one another. MBNA, for instance, wooed consumers by forming relationships with their favorite colleges, sports teams and professional organizations, slapping well-known logos on consumers' cards. Since then, however, the nation's biggest banks have paid increasing amounts of attention to the credit-card business. Along the way, some of the independent issuers got snapped up by big banks.

Known in the industry as "mono-line" companies, these independents include MBNA, Capital One Financial Corp., Providian Financial Corp., and Metris Cos. Unlike other credit-card operations that are tucked into banking behemoths such as J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America, the mono-line issuers don't have significant banking operations. Earlier this month, Washington Mutual Inc. announced plans to buy Providian in a cash-and-stock deal valued at $6.45 billion.

Cost Savings
In the MBNA deal, Bank of America said it expects the job cuts to help it achieve overall cost savings of $850 million, which would be fully realized in 2007. Bank of America said it will add more than 20 million new customer accounts as well as affinity relationships with more than 5,000 partner organizations and financial institutions.

Bruce L. Hammonds, the chief executive and president of MBNA, will become CEO and president of Bank of America Card Services and report to Liam E. McGee, president of Bank of America Global Consumer and Small Business Banking. Mr. Hammonds will remain in Wilmington, Del., and be part of Bank of America's Risk & Capital Committee, which guides the company's strategic direction.

Frank P. Bramble Sr., a vice chairman of MBNA, will be appointed to Bank of America's board of directors.

The company said it will maintain significant capital strength and earnings diversity. About 55% of earnings will come from global consumer and small business banking; 17% from global business and financial services; 11% from global capital markets and investment banking and 10% from global wealth and investment management, it said.

"For our shareholders, the Bank of America and MBNA combination yields a diverse business mix less dependent on market-sensitive businesses," Mr. Lewis said. "The financial strength and cash flow generation of the combined entity should provide significant resources to support future growth."

Last week, Bank of America increased its quarterly dividend 11% to 50 cents a share. The current dividend yield is approximately 4%. The company said it will continue to focus on a strong dividend for shareholders. Additionally, Bank of America's strong cash flow and capital position, strengthened by this transaction, should enable the company to continue repurchasing shares for the foreseeable future.

The agreement has been approved by both boards of directors and is subject to approval by regulators and MBNA shareholders. Bank of America was advised in the transaction by Keefe, Bruyette & Woods. Legal counsel was provided to Bank of America by Cleary Gottlieb Steen & Hamilton. MBNA was advised by UBS Securities and Joseph Perella. Legal counsel was provided to MBNA by Wachtell, Lipton, Rosen & Katz.

Morgan Stanley Plans to Rehire Its Former President
By Landon Thomas, Jr. - New York Times
June 30, 2005

The board of Morgan Stanley is expected to meet today and elect John J. Mack, a former president of the firm, as its chairman and chief executive, succeeding Philip J. Purcell, the man who forced him out in a bitter power struggle in 2001.

Mr. Mack's triumphant return would conclude an eight-year Wall Street drama that, with its themes of intrigue, banishment, mutiny and redemption, gave what could have been just another boardroom putsch the feel of a Shakespeare play.

For Mr. Mack, 60, who drove the 1997 merger with Mr. Purcell and Dean Witter, his return is also a resounding victory for the Morgan Stanley bankers and traders whose revolt against Mr. Purcell's leadership this spring forced a recalcitrant Morgan Stanley board to abandon its longstanding support of Mr. Purcell.

In many ways the upheaval at Morgan Stanley was highly unorthodox. While power struggles are not uncommon in corporate America, on Wall Street, where discretion is a time-honored virtue, public campaigns by retired executives urging the removal of a sitting chief executive are virtually unknown. But Mr. Purcell's status as an outsider and Mr. Mack's renown as perhaps the ultimate Morgan Stanley insider turned tradition on its head and paved the way for his return.

The board is scheduled to meet today at Morgan Stanley headquarters in Midtown Manhattan to consider formally and then vote on Mr. Mack's candidacy, people briefed on the search process said yesterday.

While a last-minute reversal is always possible, it is widely expected that the board will support him. And today, Mr. Mack, four years after his unceremonious departure, is likely to make his first official visit to a firm where he worked for close to 30 years.

"John's coming back would be terrific," said Byron R. Wien, a senior investment strategist at the firm. "Morale has already improved in anticipation of his return. He has proven that he can bring harmony to disparate factions."

Still, several crucial matters remain unresolved. For one, Mr. Mack has told the board that he wants the return of former Morgan Stanley executives who left the firm after a management shake-up in March. But their return, especially that of Vikram S. Pandit, who was president of the firm's institutional securities business, would be sure to antagonize Zoe Cruz, whom Mr. Purcell appointed as a co-president this March.

For Mr. Mack, a brash and forceful executive known for his ability to connect with all varieties of bankers and brokers, managing the rift between Mr. Pandit and Ms. Cruz will be a severe test of his skill as an executive.

Mr. Mack was an early supporter of Ms. Cruz but in recent days, some rival executives within the firm have lobbied him to reconsider her position. Mr. Mack, however, has told friends that he will not succumb to anyone else's agenda.

He faces other challenges, too. After years of infighting and a punishing public campaign by a group of eight retired executives calling for Mr. Purcell's ouster, Morgan Stanley, once regarded as perhaps the pre-eminent name on Wall Street, has been demoralized by a wave of executive departures, a lagging share price and an uncertain profit outlook.

Mr. Mack must also tackle some pressing strategic issues, namely whether he should sell or spin off the slower-growing credit card and retail brokerage units that were originally part of Dean Witter. The performance gap between the firm's institutional securities division, the core of the original Morgan Stanley, and the lagging Dean Witter businesses lay at the root of a culture clash that evolved into a civil war between Morgan Stanley and Dean Witter executives.

The appointment of Mr. Mack is a rapid reversal by the board. Two weeks ago, when Mr. Purcell announced he would retire, the director leading the search for Mr. Purcell's successor, Charles F. Knight, said that Mr. Mack would not be a candidate. Directors initially reached out to a selection of outside executives, including Laurence D. Fink, the chief executive of BlackRock, and Robert E. Diamond Jr., the president of Barclays.

But when several candidates, as well as a chorus of Morgan Stanley executives, said that Mr. Mack was the man best able to unify the firm, the board contacted Mr. Mack early last week.

Mr. Mack, who had not expected a call from the board, went on a family vacation to Europe, at which point the negotiations began. After his return on Sunday, the talks picked up speed. As word leaked out, Morgan Stanley employees cheered the news, and shares of Morgan Stanley rose sharply, strengthening Mr. Mack's hand.

Leading up to the 1997 merger, Mr. Mack and Mr. Purcell had a close professional relationship. Mr. Mack was attracted to Dean Witter's retail brokers; Mr. Purcell was seduced by the lure of the Morgan Stanley brand.

At the time of the merger, the two men's closeness in age became a complicating factor (Mr. Purcell is 61). As head of the larger, acquiring firm, Mr. Purcell pushed for the chief executive title. But Mr. Mack, as president of Morgan Stanley and with Wall Street influence, also had a claim on the title.

In his eagerness to get the deal done, Mr. Mack deferred to Mr. Purcell's wishes and accepted the title of president. Associates of Mr. Mack have always said that there was an agreement between the men that Mr. Purcell would let Mr. Mack succeed him in about five years. But nothing was ever put in writing, and by 2001 a rift was developing.

Angered by the lack of integration efforts and the loss of some of his own loyalists, Mr. Mack made a bid for the top job in early 2001. Rebuffed by Mr. Purcell and a board that by then was dominated by directors with close ties to him, Mr. Mack left the firm within months and watched in frustration when no senior Morgan Stanley executives followed him.

To this day, Mr. Mack has harbored resentment toward Mr. Purcell, people close to Mr. Mack say.

"I made a good deal with the wrong guy," Mr. Mack is reported to have told friends, frustrated at his inability to outmaneuver Mr. Purcell.

Mr. Mack has the bruising physical presence of the high school football star he once was. The son of a grocer in Mooresville, N.C., Mr. Mack graduated from Duke in 1968 and joined Morgan Stanley's bond division in 1972.

As an aggressive bond salesman, Mr. Mack was part of an early wave of hungry self-starters who would become the new face of the firm, displacing the Ivy League-educated investment bankers. By 1984 he was running fixed-income sales.

For a man who is being hired to unify a divided firm, it bears noting that Mr. Mack was a notorious guardian of his fixed-income turf and a relentless political infighter to boot. Throughout the 1980's, he waged punishing battles with members of the old guard in equities and investment banking like Anson M. Beard Jr., Joseph G. Fogg 3rd and Robert F. Greenhill.

Scars from those battles still remain and the dissident executives, known as the group of eight, who include Mr. Fogg and Mr. Beard and who are being advised by Mr. Greenhill, still blame Mr. Mack for the merger that they have tried to undo.

A passionate man with an active sense of humor, Mr. Mack also has his quirkier ways of securing loyalties and has been known to send a Brooks Brothers suit to a sartorially challenged colleague.

Less clear is his track record as a manager of a deeply divided firm.

After 29 years at Morgan Stanley, Mr. Mack's second act came at Credit Suisse First Boston. He took the job as chief executive in July 2001 as Wall Street was reeling after the collapse in the stock market and still recovering from a merger with Donaldson Lufkin Jenrette.

Upon his arrival, bankers were at war with each other. He cut 10,000 jobs, forced bankers to tear up their contracts and worked to achieve a one-firm goal. The results were mixed. He settled all regulatory inquiries, but he failed in creating the one culture he strove for and when he pushed for a big merger, he was ousted by the board.

Morgan Stanley Board Expected To Meet Today to Make Mack CEO
By Ann Davis – Staff Reporter – The Wall Street Journal
June 30, 2005

Ending an arduous months-long fight over who will lead one of Wall Street's most storied institutions, Morgan Stanley's board is expected to meet today to elect John Mack as chief executive, in what would be an extraordinary comeback for the securities-industry veteran.

The board is turning to the former Morgan Stanley president to heal the wounds the company has endured amid a culture clash that began when the investment-banking giant merged with Main Street brokerage firm Dean Witter, Discover & Co. in 1997, in a bid to become a financial-services supermarket. That culture clash reached a crescendo three months ago, after Chief Executive Philip Purcell, who came to Morgan Stanley from Dean Witter, shook up his management team, igniting a shareholder revolt.

To put the troubled company back on solid footing, Mr. Mack will have to confront some major issues. He needs to command the full support of Morgan Stanley's board, which initially ruled out his return to the company. He must calm the restive elements unhappy with the decisions of his predecessor. He also is expected to seek to rehire several executives who left the company in the aftermath of the Purcell-led shake-up.

Also facing Mr. Mack are major strategic decisions such as whether Morgan Stanley, with its 54,142 employees, should continue trying to offer one-stop shopping for a wide array of financial services or return to its roots as an elite investment bank catering to corporations and the wealthy. What's more, he will have to assuage investors who are nervous that the high-level defections and internal turmoil of recent months have hurt the Morgan Stanley franchise.

The largest of the company's four primary businesses is its institutional-securities division, which accounts for about 60% of pretax earnings and represents the old Morgan Stanley investment bank. The merger with Dean Witter brought it the Dean Witter brokerage arm and the Discover credit-card business. Dean Witter now operates under the Morgan Stanley banner and has more than 10,000 brokers, but it has had significantly lower profit margins than its peers. Morgan's fourth business is an asset-management operation that includes mutual-fund families from both sides of the company.

The return of Mr. Mack, who had a bitter parting with Morgan Stanley in 2001 after he determined that Mr. Purcell wouldn't step aside and let him take the reins, would be a sharp rebuke to Mr. Purcell. Working with a board dominated by his handpicked loyalists, Mr. Purcell for months had enjoyed the board's support amid increasingly loud calls for his ouster and a string of well-publicized departures from the firm. Around the time word got out that Mr. Mack was under consideration to succeed him as CEO, Mr. Purcell's belongings at the company's Manhattan headquarters were boxed up, say people familiar with the matter.

There remained a chance complications could arise with Mr. Mack's appointment, delaying or derailing it. However, the board's support for him has built quickly over the past several days, as has Mr. Mack's confidence that he can accomplish the agenda he sets, people close to the matter say.

Mr. Mack entered talks with the board just last week, after it quietly reversed a public stance by the director leading the chief executive search that it had ruled out him and other former Morgan executives as candidates. The board has considered other candidates, including Laurence Fink, chief executive of asset-manager BlackRock, and John Costas, chief executive of UBS AG's investment bank.

As president of Morgan Stanley, Mr. Mack was the leader most closely associated with the firm's institutional-securities business, the driver of its earnings growth. He began there in 1972 as a bond salesman. As an executive, he earned the name "Mack the Knife" for his cost-cutting and ability to make quick decisions. Months after leaving Morgan in 2001, he took the helm of another securities company, Credit Suisse First Boston, and later became co-chief executive of its parent, Credit Suisse Group. While there, he won praise for returning the firm to profitability and corralling bankers into more of a team culture.

But as the Credit Suisse board grew impatient with the company's turnaround, Mr. Mack found himself out of another top Wall Street job. On June 24 of last year, he lost his place as chief executive of both Credit Suisse and CSFB. The Credit Suisse board acted after rejecting Mr. Mack's entreaties to do a merger with another European bank. Then, after a year in which he informally advised some former clients on deals and networked and traveled extensively, he had appeared to settle down early this month as chairman of New York hedge fund Pequot Capital Management.

Company officials were taking steps yesterday to prepare for the widely expected announcement, people familiar with the matter said, as the two sides ironed out final logistical details. It is unclear what Mr. Mack's pay would be, or whether his contract would call for a multiyear commitment. Mr. Purcell's 2004 pay, including salary, bonus and stock-related compensation, was $22 million.

It also is unclear whether the announcement will mention any plans by board members to retire; as previously reported, Mr. Mack hasn't made board resignations a condition of his accepting the job.

The appointment of Mr. Mack could come as a relief to the board, even though it represents a surrender both to investor opinion and employee demand. Mr. Mack's name has circulated as a chief executive candidate for months, even before Mr. Purcell announced June 13 that he would step down. When it surfaced that the board was actually considering him last week, investors bid up Morgan Stanley's stock by about 5%.

Employees pushed back forcefully after Mr. Purcell's announcement when it appeared the board might look outside the company's rich stable of current and former employees and bring in an outsider unschooled in the original investment bank's high-finance culture.

If he passes this final test today, the immediate challenge for Mr. Mack will be determining what executives he brings to his executive team and how or whether he moves other players around on Morgan's chess board. He has shown a reluctance before the board chooses a new leader to say how or whether he would change a controversial management structure put in place in by Mr. Purcell in March that included the promotion of two executives, Zoe Cruz and Stephen Crawford, as co-presidents. Mr. Mack knows both executives from his previous decades at the company.

Mr. Mack also has deep ties to former members of Morgan Stanley's management committee who left in the wake of the March shake-up, and is said to want to bring many of them back, including former securities chief Vikram Pandit and star banker Joseph Perella. Those executives have indicated they won't work under Ms. Cruz, people familiar with the matter say. It is Ms. Cruz who is considered more likely than the company's other co-president to have a senior role under Mr. Mack.

Another task is addressing questions investors will soon want answered about the company's strategy and structure. Morgan Stanley hasn't decided whether to spin off its Discover credit-card operations to become a purer securities-firm model. Mr. Mack would be immersed immediately in a roiling debate about whether financial supermarkets work on Wall Street, and whether Morgan Stanley's underperforming brokerage unit for individual investors is a good fit with its investment bank.

Morgan Stanley, which had 2004 net income of $4.5 billion, holds the coveted No. 1 position globally in lucrative mergers-and-acquisitions advisory work. According to data provider Dealogic, Morgan Stanley is No. 2 in initial public offerings, another profitable area, and ranks fifth in global equity underwriting and sixth in global debt underwriting.

Trust in firms goes both ways
By Kortney Stringer – Business Writer – Detroit Free Press
June 29, 2005

They're the best of companies and worst of companies -- at least in the minds of some consumers.

CONSUMERS AND TRUST
What is the most trustworthy company in America?
1. Ford
2. (tie) General Electric (tie) Wal-Mart
4. General Motors
17. Kmart
What is the least trustworthy company in America?
1. Enron
2. Wal-Mart
3. Ford
4. General Motors
10. Kmart
What company's advertising is most believable?
1. Wal-Mart
2. Ford
3. Coca-Cola
4. Pepsi
What company's advertising is most at odds with its image, reputation or product?
1. Wal-Mart
2. McDonald's
3. Ford
4. Carl's Jr.
12. Kmart
Source: Aegis Group's Synovate for Advertising Age
Note: survey of 1,133 adults. Michigan firms bolded. Partial list.
Turns out, some of the most popular companies in America are also among the nation's least trusted firms.

A recent study by Aegis Group's Synovate for Advertising Age magazine found U.S. consumers are polarized in their views of some of the country's largest corporations, including Michigan giants Ford Motor Co., General Motors Corp. and the recently moved Kmart Holding Corp. The online survey of 1,133 adults was intended to measure consumers' perceptions of U.S. firms and their advertising.

"It's clear they feel positively about some big corporations, but there's also a lot of work to be done -- or a big opportunity -- for companies to turn around some negative perceptions," said Bradley Johnson, an Ad Age editor-at-large.

It's common for big firms to have supporters and naysayers. Consumers consider various factors to form opinions about a firm, from its treatment of workers to its products, services and ads. Thus, if a firm's corporate behavior is out of sync with a consumer's