BUSINESSWEEK ONLINE: APRIL 19, 1999 ISSUE

Readers Report

LBOs Didn't Make Formica Lose Its Gloss

''How Formica got burned out by buyouts'' (Finance, Mar. 22) incorrectly characterizes sequential leveraged buyouts as damaging to Formica Corp. and, by implication, any other company subjected to the same process. The damage done to the Formica business was done during the two periods when the business was owned by conglomerates. The business improved during its two periods of LBO ownership.

The fundamentals of well-executed LBO management and ownership are:

-- The use of substantial debt in the capital structure because it is the least costly form of capital.

-- The discipline that debt obligations impose on management decisions.

-- The motivational impact of stock ownership on management.

-- A tax-efficient way of rewarding investors through sale of the business.

It is this last point that can lead to sequential LBOs. Every business needs to be revitalized periodically, and selling a company to another LBO organization can be a good way of doing this, while simultaneously rewarding investors.

The major caveat in LBOs is not to overdo the leverage. Some research that was done by Professor Michael Jensen of Harvard business school makes it pretty clear that the majority of LBOs have been well-executed. I was an investor in Formica's first LBO, and I am a modest investor in its third LBO experience. I am betting that the company will prosper under the leadership of Vince Langone.


T.J. Dermot Dunphy, CEO
Sealed Air Corp.
Saddle Brook, N.J.



Let's End the E-Commerce Tax Holiday

As exciting as commerce over the Internet may be, check out this scary scenario--and, if it comes to pass, the unwelcome burden it could place on the wrong citizens (''What every CEO should know about electronic business,'' Cover Story, Mar. 22). Merchandise ordered over the Net (and through mail order, too) does not pay its fair share of state taxes to the recipient's state.

Let's pretend that thousands of people in small towns and cities in Kansas order over the Internet. Those folks do not shop at local book stores, hardware stores, mass merchandisers, etc.--all of which pay taxes in Kansas. If those retailers go out of business when their sales drop, who will replace these funds in local government coffers? Who pays for schools, roads, jails, court systems? Surprise, the people who bought via the Internet--and those who didn't--would see their taxes increase.

There are no free lunches: Someone has to pay. Sooner or later--and it had best be sooner--Internet, mail order, and catalog firms must pay their share of taxes just like conventional retailers.

Lyle Cazel
Glenview, Ill.



The Gears Are Still Grinding at DaimlerChrysler

I recently visited a friend at the expansive headquarters of DaimlerChrysler near Stuttgart. At lunchtime, however, it became obvious that some Americans, a contingent from Detroit, were confused as they attempted to pay at the cash register of Daimler's cashless cafeteria.

The scene presented another example of the many ''transition troubles'' pointed out in ''DaimlerChrysler: The grace period is over'' (International Business, Mar. 29). In a very American voice, one of the Chrysler men at the cash register shrugged and asked rhetorically: ''Why are things so complicated?''

Integration is complicated and does seem to be going slowly. One grand reason is that Daimler thinks it bought Chrysler and Chrysler thinks it bought Daimler.

Investors are right to be worried, as so many in top management are absorbed by the complications of integration and the resulting confusion. I would not be at all surprised if those Americans are still in the cafeteria trying to figure out how to pay for lunch.

B. Roman
Stuttgart



Policymakers Must Be Accountable to the Voters

I was struck by the incongruity of two articles. The focal point of ''Is the fight over bank reform really about fund-raising?'' (Washington Outlook, Mar. 22) is the theory that the Treasury Dept. wants a major role in financial-services policymaking to enhance its ability to raise campaign dollars. The article makes much of the fact that the Comptroller of the Currency is accountable to the Treasury Secretary, a Presidential appointee, while the Federal Reserve, the other player in this turf fight, is disengaged from campaign finance.

In that same issue, ''It's a wonderful loophole'' (Finance, Mar. 22) comments on the federal thrift charter and the opportunities it offers for the efficient delivery of a broad range of financial services. It notes that Goldman, Sachs & Co., Treasury Secretary Robert E. Rubin's former firm, withdrew its thrift-charter application because the rules imposed by the Office of Thrift Supervision, a division of the Treasury, were too tough. This hardly is evidence that bank regulation and supervision has become politicized.

It's good to have a politically independent Federal Reserve for the critical role it plays in monetary policy and the payments system. It's also good to have policymakers, whether members of an administration or members of Congress, who are accountable to the voters. If we didn't, the infamous ''Know Your Customer'' rule might have gone into effect, instead of into the graveyard of good intentions gone amok.

Paul A. Schosberg
President & CEO
America's Community Bankers
Washington



An Upset in Mexico Will Put PRI Stalwarts on the Street

I agree that the political arena in Mexico has opened up, to the point that someone other than the Institutional Revolutionary Party (PRI) standard-bearer might win (''Mexico's next election could be a real horse race,'' International Outlook, Mar. 15). On the face of it, this will be a favorable development. But has anyone thought about what might happen then? The PRI has been in power since around 1929. Thousands of Mexican families, many of them going back for generations, loyal PRIstas every one of them, will suddenly be shut out from the hundreds of thousands of patronage positions the PRI has traditionally doled out to the party faithful. In other words, they will lose their jobs. Unless they can erase their PRI pasts (highly unlikely), they will become practically unemployable.

Just think of the unrest that might follow, with thousands of PRI stalwarts pounding the pavement in search of jobs that, despite an expanding economy, will not be there. I, for one, anticipate a period of serious political instability in the wake of a PRI loss. Anyone with financial interests in Mexico would be well advised to watch the situation closely.

Kevin J. Broderick
Alexandria, Va.



Stephanopoulos Is What's Wrong with Washington

Aren't we all getting tired of another book about ''driven'' people and their angst? ABC has done nothing to enhance its credibility by hiring George Stephanopoulos as a commentator (''Stephanopoulos: All too ambitious?'' Books, Mar. 29). I've watched him act like a junkyard dog protecting the President, then equivocate in his pronouncements on the Clintons, and finally come out against them with his own sob story when that opportunity opened. He's got nothing to say. When George commented on TV, it was so apparent that it was always about him (George)--only about him.

This country needs men and women of substance in government, people who have a vision, who believe in ideas and ideals and are able to ally themselves with those who will fight for those dreams. We shouldn't care about those who are primarily interested in managing their careers in Washington while claiming to stand for something.

This is another example of why Washington is seen as the main trap in our nation's political plumbing system. It catches all the posers and opportunists clumped into one place--just a big smelly, soapy hairball: insipid, disgusting, and obstructive to real progress.

Sophia Patterson
Cleveland



Some Alternatives to Slow Death by Medicare

Surely Laura D'Andrea Tyson is a better economist than her arguments in support of expanded Medicare coverage for drugs suggest (''Why Medicare must do more at the drugstore,'' Economic Viewpoint, Mar. 22). The problem with Medicare, as with all third-party-payment programs for medical care, is finding a way to control overconsumption and to share costs fairly across a population with extraordinarily diverse appetites for medicine and prescription drugs--appetites that are a bewildering blend of physiological need and psychological desire.

Tyson's approach assumes that the public as a whole must pay the cost of inducing medical providers to make available the benefits of approved forms of medical care. Before we decide to allocate a greater portion of our wealth to making care providers richer, we need to decide why that's a sensible policy. By expending huge amounts of money, we can extend the lives of most people by some period of time. But it's not clear that all recipients of this care prefer that to just getting the cash. Maybe spending the last three months of life on government-paid riotous living would be better than a year of drug-benumbed slow death paid for by Medicare.

Arthur O. Armstrong
Manhattan Beach, Calif.



Long-Term-Care Policies: ''A Prepaid Ticket to Hell''

Regarding ''A golden (years) opportunity,'' (Social Issues, Mar. 29): The reason people are not buying long-term care policies is the national fear of nursing home horror stories. Nursing homes are the stepchildren of American medicine, from their motel architecture to their low-wage management and operations personnel. Until this industry adopts professional standards for education and training, long-term care policies will be seen as prepaid, one-way tickets to hell.

Royal Alcott
Eureka Springs, Ark.


To read a letter to the editor about this letter, click here.



Unilateral Free Trade Will Bring Disaster

In ''The 21st century economy'' (Cover Story, Aug. 24-31), you called for an open, vibrant global economy as one of the critical elements of a pro-innovation growth strategy for the U.S. in the 21st century. Your editorial called for passage of fast-track legislation but added: ''Strongly insist that overseas countries open their markets if they want to sell in the U.S.''

Unfortunately, the Administration has not required overseas counties to open up their markets. Our trade deficit continues to set new records, with China and Japan accounting for the largest portion of the imbalance. We have been huffing and puffing--and lecturing Japan for more than 25 years, with meager results. By now, they don't take our threats of retaliation very seriously, while resenting our condescending attitude. China is practicing a skillful game of mercantilism, dictating what we can sell them, while demanding an open U.S. market for their products. Meanwhile, the Administration and the Congress have paid virtually no attention to the potential future trade deficit. This debt will have to be repaid, and it will not be painless.

Instead of taking concrete steps to convince Japan and China that free trade is not a one-way street (the recent steel dumping by Japan is a graphic example of what's wrong), we have been waging a bare-knuckle battle with the European Union over bananas and hormone-treated livestock. Sharp words are being accompanied by severe penalties against countries with whom we have no significant trade problems.

The recent threat of penalties on steel imports should serve as warning that protectionism may become a more widely used weapon if American jobs and businesses are sacrificed in the name of preserving free trade. Unilateral free trade, like unilateral disarmament, will eventually result in disaster. The Administration has been reluctant to disclose the number of U.S. jobs lost since enactment of NAFTA, or to mention the last time we had a trade surplus with Japan. This lack of candor will eventually damage the positive elements of genuine free trade.

Melvyn S. Rifkind
Encino, Calif.



''Color Boeing red-faced'' (Up Front, Apr. 5)

''Color Boeing red-faced'' (Up Front, Apr. 5) should have stated that Boeing Co. was assessed a civilian penalty for sharing technical information--not classified information--with its Sea Launch partners.





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LETTERS:
LBOs Didn't Make Formica Lose Its Gloss

Let's End the E-Commerce Tax Holiday

The Gears Are Still Grinding at DaimlerChrysler

Policymakers Must Be Accountable to the Voters

An Upset in Mexico Will Put PRI Stalwarts on the Street

Stephanopoulos Is What's Wrong with Washington

Some Alternatives to Slow Death by Medicare

Long-Term-Care Policies: ''A Prepaid Ticket to Hell''

Unilateral Free Trade Will Bring Disaster

CORRECTIONS & CLARIFICATIONS:
''Color Boeing red-faced'' (Up Front, Apr. 5)

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