The news that Nortel Networks NT (TSX) has moved into bankruptcy is not all that surprising.  The telecommunications firm has been suffering ever since the 2001 recession.  The company which changed CEOs back in November 2005 had high hopes with the arrival of Mike Zafirovsky.  Zafirovsky had a terrific pedigree.  He was extremely well regarded when he headed the cellphone division for Motorola.  Prior to his selection at Nortel he had been passed over for the CEO job at Motorola and appeared anxious to make his mark.  He also had tremendous training while at General Electric (before his time at Motorola) which at the time was headed by Jack Welch.  When he took the job at Nortel the company was mirred in scandal and was already suffering financially.  Zafirovsky an excellent operations manager may have lacked the strategic acumen to ultimately turn Nortel around but it is hard to see what he or anyone else might have been able to do.  According to an acute analysis by Gordon Pitts of the Globe and Mail,

… Nortel’s fate was probably determined by the time the new CEO arrived in October, 2005. The global asset meltdown and recession simply hastened the inevitable end of the Nortel saga –- as it will with many crippled companies that have entered the downturn with severe competitive liabilities.  

Mr. Zafirovski was realistic in understanding it would be a tough haul. “These things do not happen overnight” he said in an interview in summer of 2007. “We are not looking for a 50-year turnaround but we did say on Day One it would be three to five years to recreate something special. We are now 19-20 months into it so obviously the time frame is narrowing.”   

 Pitts went on to state,

Mike Zafirovski was the right leader to turn around Nortel, but he came too late to the game. He expected he might have up to five years to fix Nortel, but it was less than three years until the market collapse, which has simply thrown more gasoline on Nortel’s bonfire of cash flow.  

CEOs are essential to a company’s overall success but they are just a component.  Nortel’s management and products came up against a wall back in 2001 and never really found the right exit door to help it get back on track.  Let’s hope other struggling companies can look at Nortel and come away with some ideas on how they might manage to avoid Nortel’s fate. It is likely that Alcatel-Lucent’s situation may actually improve as a result of Nortel’s new status. Stay tuned.  For more:  Bloomberg  

The continuing financial saga at Citigroup continues to remain front page news.  The latest moves at the bank ( Smith Barney – Morgan Stanley JV, moves to further break up the bank) all seem to be counter to the strategy Pandit has been professing for some time.  As these changes move closer to reality and Pandit continues to lose supportive allies, e.g., former U.S. Treasury Secretary Robert Rubin (resigning as Citi board member), the pressure on Pandit will only get greater.    

Let it be said, Pandit inherited a nearly impossible situation when he came in as the new CEO but its getting far more difficult to see how he can remain in his position.  More and more the U.S. government seems to be a powerful force behind the bank’s latest moves.  We will just have keep watching as changes dribble out and pressure builds on Pandit.   Pandit’s greatest hope and possible salvation as CEO is to become a “true believer” in the current changes and push hard for more dramatic and quick changes.  He must acknowledge that the global financial supermarket that was Citi must now come to an end.  Sandy Weil’s vision for Citi can no longer be valid.  To get a sense of what he might do, check out the Breakingviews.com section in today’s International Herald Tribune.  

I hope he can find the way to make things happen for the bank.  

For more:  Fierce Finance  Reuters  NY Times Dealbook  Huffington Post  

Our special focus this week is on telecommunications equipment. The most recent boom in this space has of course been for Smartphone technology. The question that arises is whether or not his boom will continue and act as a cushion for the telecom space in this bleak market. Here’s what analysts Pablo Perez-Fernandez of Global Crown Capital and Mark McKechnie of American Technology Research had to say:

Mr. Perez-Fernandez: To some extent it’s going to be less affected than other sectors mainly because the growth rate of smart phones has been so much bigger than almost everything else in telecom. Nonetheless, some of the data that came out in the last quarter said that the growth rate has collapsed below 20%. So that’s been affected.

Mr. McKechnie: Our overall industry forecast for handsets, we’re looking at units down 12% year over year in 2009. That’s going to be down 10% or 15%, it’s hard to say, but the overall industry is facing a headwind and clearly handsets are an economically sensitive item, like tennis shoes. ..Smartphones as a percentage of overall handsets are going to grow and so you could see some absolute growth, but there’s no question that that headwind is going to slow down the hyper growth that we’ve seen up until now.

For the complete Telecommunication Equipment issue, including a complete overview of this space and stock picks, click here. 

All the speculation about who Yahoo will appoint as the next CEO appears over.  Jessica E. Vascellaro and Joann S. Lublin report in today’s Wall Street Journal that Carol Bartz the former CEO of software maker Autodesk will be Yahoo’s next CEO.  According to the article,

Yahoo Inc. is expected to announce that Carol Bartz, former chief executive of software company Autodesk Inc., has accepted an offer to become the Internet company’s next CEO, according to people familiar with the situation.        

The real question remains where she will try and take the firm – acquisition, re-build, new direction?  We will just have to wait and see.    For more:  Techcrunch Reuters  The Register   Los Angeles Times  Silicon Alley Insider  Venture Beat  Reuters (update 1/14)  IT World (update 1/14)  

The weekend and early today saw a spate of articles speculating that Citigroup is under pressure from regulators to replace its chairman, Winfred Bischoff.  Speculation has arisen that Richard Parsons former CEO and chairman of Time Warner and a current Citigroup board member might replace Bischoff should he leave.  According to a story by Eric Dash in today’s International Herald Tribune,

U.S. government banking regulators are pressing Citigroup to shake up its board and replace its chairman, Winfried Bischoff, in an effort to restore confidence in the beleaguered financial giant.    

Richard Parsons, chairman of Time Warner and a Citigroup director, has emerged as the leading candidate to succeed Bischoff as Citigroup’s chairman, people briefed on the situation said Sunday night. While the timing was uncertain, the change could come as early as this week. 

A shift in the Chairman would only mean greater pressure on Citi’s current and struggling CEO, Vikram Pandit.  With the possible spinoff of Citi’s Smith Barney division into a joint venture with Morgan Stanley, which came to the fore this past week, and the continuing pressure on Citi for a breakup of other divisions — can Pandit survive? Questions will continue to be asked as to whether Pandit is the right person to handle these types of changes and if not, who might the bank turn to handle the job?   This all comes after former U.S. Treasury Secretary Robert Rubin resigned his board seat at the bank.  Rubin has always been considered an ally of Pandit’s.  In the midst of the continuing crisis at Citi according to Time Magazine which relies on a Wall Street Journal piece,

Citi’s board has given Pandit a vote of confidence.    

Is it deja vu or does the board really support Pandit or is it just continuing to fail in its responsibilities?  I anticipate more key management changes at the bank over the next few weeks.  Stay tuned.  For more:   UPI    Bloggingstocks  Fox Business News  Ft.com Gapplerblog  Portfolio.com   Fool.com

With so many potential investors tentative to wade back into the turbulent waters of investing, risk control becomes more important than ever. We asked several porftolio managers this week how they seek to control and eliminate risk in the portfolios they manage:

• Degas Wright, Decatur Capital Management (Large and Small Cap Growth)
  • “We’ve divided our return into risk factors and have identified those factors that have typically added value. For instance, our stocks exhibit positive returns on our momentum factor, so we typically overweight on that factor. This approach allows us to focus on those risk factors that add Alpha while not taking unintended risk in those factors that do not add active return.”
• Fred Hayek, Hayek Kalen Investment Management (Fundamental Value)
  • “On the equity side we use the appraisal method. We appraise the value of a business and compare our appraisal to its current price. The price to value ratio is a key metric. We don’t look at stocks as lottery tickets to be cashed in by the lucky. We look at a stock as a small piece of a business that’s for sale. We try to buy businesses that are priced at a significant discount to our appraisal. It’s not a perfect process, it’s not science. The analysis process is a combination of science, art and common sense. When you do it that way and focus on what can go wrong, focus on the risks, you are going to make more good decisions than you do bad ones.”
• Jim Bitzer, Falcon Point Capital (Small Cap)
  • “Our risk management includes stop-loss discipline- no more than 5% of the portfolio in any one stock, reasonable sector weighting constraints and the daily monitoring of positions. We have portfolio committee meetings weekly where the investment team gets together and talks about problem stocks, recent trends or concerns, which companies we met with the previous week and general thoughts on the portfolios. With quick communication among all the investment team here, we’re generally pretty fast to identify problem areas to get out of or attractive areas to make new investments in.”

For the complete Investing Strategies report, including complete interviews with each of these portfolio managers, and stock picks, click here.

The January 8th edition of the The Economist has an article on the fate of returning CEOs.  Typically returning CEOs have not fared out that well on their second time around.  Steve Jobs serves as a major exception but Michael Dell, Dell Computer, Howard Schultze, Starbucks, and many others have not fared quite as well.  The article refers to recent research.

That there are so many disappointing second acts is perhaps not surprising, given the difficult circumstances in which they tend to begin. According to Rudi Fahlenbach of Ohio State University, former chief executives typically “come back when the firm is doing awfully”. In a recent study of 60 returning chief executives, he and two other economists found that they typically replaced bosses under whom the firm’s share price had dramatically underperformed its industry benchmark—by 20% a year on average.

The returning chief executives in the study had been particularly strong first time around, and most had not been retired for long, so they could plausibly claim to have remained familiar with the inner workings of the firm, making them better placed to revive it than any outside candidate. Indeed, most of them (including all but two of those studied by Mr Fahlenbach et al) were members of the board that reappointed them, and in many cases the chairman. Strikingly, Apple’s Mr Jobs was an exception, having distanced himself from Apple after being ousted in a boardroom battle in 1985—a separation that may have contributed to his second-act success. 

Determine for yourself whether second time around returning CEOs are worth doing.  Read the piece. 

Dismal earnings in the retail sector are beginning to have an impact on executive management.  Today Chico’s FAS CHS (NYSE) announced the retirement of its chairman and CEO Scott Edmonds.  The company also announced that board member David Dyer, who formerly served as the CEO of Tommy Hilfiger and Land’s End, would be the company’s new CEO.  Edmonds announced retirement came after the company said its December same-store sales fell 12.4 percent.  Chico’s has been suffering for sometime now.   Back in June of this year Spotlight Capital Management an institutional investor in Chico’s had urged for the Edmonds ouster.  According to a story by Laura Layden in the Naples News Spotlight Capital stated,

“Basically, our view is that the performance over the past three years has been very disappointing. We lay blame for that at the feet of the chief executive. We do not believe he has the skills necessary to turn the business around and we are disappointed that the board hasn’t replaced him already,” said Greg Taxin, the fund’s managing director and a Chico’s investor himself.  

… “During his tenure, shareholders have lost $1.6 billion dollars. He’s got one of the worst track records of any CEO of a public company in the United States,” Taxin said.

… Under Edmonds’ watch, the public company’s stock has fallen more than 80 percent from its high and earnings per share have declined for the past three years, he said.

It’s time for the board to bring in a new leader who can turn the business around, Taxin said. 

The continuing slide in the company’s sales and its stock appears to have forced the board’s hand.  Edmonds replacement Dyer certainly has the requisite background and experience.  In both of his previous CEO stints at Lands End and Tommy Hilfiger he played a big role in the sale of those firm’s to larger companies.  It is possible may ultimately have to do the same for Chico’ s.  Keep a close eye on the moves Dyer takes over the next few months to help stabilize the speciality retailer.   For more:  NBC News  Market Report – In play CHS  New Press   Reuters   Footnoted.org (update 1/9)  

Despite the continually gloomy economic climate, we here at TWST keep finding pockets of good news, and this week’s Insurance issue is no exception.

One of the company’s we interviewed, American Financial Group (AFG) declared its quarterly dividend payments last week of $.13 a share- a 4% increase over the quarterly dividend paid in 2008.

In the interview we did with their CFO, Keith Jensen, we asked them about their long terms goals, in terms of maximizing shareholder value. He had this to say about that:

Mr. Jensen: Our objective would be to continue to grow shareholders’ equity in the 8% to 10% a year range, to continue to develop products that work well, taking advantage of some of the competencies we have and to start up new businesses that meet some of the objectives we have around being specialty-type companies. For example, during this last year, we hired a group of individuals who are experts in environmental liabilities.

For the complete Insurance report, including the full interview with Mr. Jensen and other senior management executives from top insurance firms, click here.  

This week here at TWST we did a special interview with Andre Peschong- a partner at Bridgewater Capital Corporation and the writer of Dealflow Diaries. Mr. Peschong gave us here at TWST his opinions on the nature of the current market climate, and whether we have reached the light at tend of the tunnel, or if there is simply more tunnel to be had:

Mr. Peschong: One of my last blog posts was, “Is this a bottom or a bear rally?” If you look at it again historically, but even setting aside historically and look at it pragmatically, there is no catalyst in the market in the next six to nine months that’s going to cause a fundamental turnaround in the market. It is merely a bear rally. Fourth quarter earnings reports are not going to be good. Those start to come out in late February. We’re going to see a lot of these companies reporting earnings that are going to be bad. The fourth quarter was fundamentally bad but we may get a little bump in the January effect, maybe a little bit of a rally but if you really look at it, any rally is merely the ability to sell into it from an institutional perspective. I don’t think you’re going to see the market over 10500; that is probably the top and any rally that you see will be short-term and short-lived. I still think we are going to find one new low, one new intermediate-term low and I think that is probably right around 7,000 again.

For the complete interview with Mr. Peschong, including a complete overview of the current market climate, and his opinions on where the market is headed, click here.