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JUNE 12, 2006
Edited by Deborah Stead Talk Show "You never, ever put the CEO on the witness stand." -- Donald Watkins, one of the lawyers who ran the successful defense of former HealthSouth CEO Richard Scrushy, critiquing former Enron CEO Kenneth Lay's legal strategy, to USA Today TARGET-SPOTTING High Tech -- And Ripe For The Picking Suddenly, buyouts are back. But while management's $22 billion bid for energy company Kinder Morgan is grabbing headlines, much of the recent Wall Street buzz has been about the prospect for mega technology deals. Tech companies have long been considered off-limits to leveraged-buyout artists, mainly because of the big swings in their share prices and cash flows. In the past five years, though, that volatility has eased. And when a consortium of private-equity firms bought SunGard Data Systems for $11.3 billion last year, the world was put on notice that tech was fair game. The deals are likely to get even bigger. At least eight private-equity firms, including Blackstone Group and Texas Pacific Group, are forming funds with unusually large target values: $10 billion or more. "Sometime in the next 12 to 18 months, you'll see a $25-to-$35 billion buyout in technology," predicted Gene Frantz, a partner at Texas Pacific, at a recent industry conference. Jim Davidson, co-founder of tech buyout shop Silver Lake Partners, joked that even Intel's $103.4 billion valuation is looking attractive. Here, then, is BusinessWeek's back-of-the-envelope list of potential tech targets, created with help from Standard & Poor's CapitalIQ division. We looked for companies with market values higher than $11.3 billion (SunGard's price), low price-earnings ratios, steady cash flows, and lackluster stock performance. The results range from the highly probable to the downright dubious, but these days, anything is possible. By Justin Hibbard TARGET-SPOTTING 
  REAL ESTATE RIPPLES Retail: Who's In Harm's Way Some big retailers may feel quite a chill as America's hottest housing markets cool, says Gregory Melich. The Morgan Stanley (MWD ) analyst believes housing strength (which makes consumers feel flush) has supported retail sales for the past three years, spurring yearly sales growth to 8% from the more typical 4%. As housing weakens, Melich says, the stocks of marquee names such as Neiman Marcus (WMG.A ), Home Depot (HD ), and Target (TGT ) may be hit, because these retailers have a chunk of their outlets "where you've had a much frothier housing market that supported consumption." Which housing markets are frothier than most? Melich identifies areas where prices have shot up about 20% since 2000 and where mortgage debt is highest relative to income -- 31%, vs. a national average of 16%. The markets fitting these criteria: Honolulu, Southern California, Las Vegas, Washington, D.C., and some Florida locales. Melich ranks the exposure of 15 retailers in these areas. Neiman Marcus is No. 1, with 33% of its stores in these overheated markets. Nordstrom (JWN ) ranks second (29%), with discount retailers Mervyns and Ross Stores (ROST ) close behind. Next are Bed Bath & Beyond (BBBY ), Circuit City (CC ), Target, and Home Depot (14% each). Of course, some home markets are hot because of job growth. In those cases, steady paychecks will keep sales ringing. By Mara Der Hovanesian ENRON WATCH France Says "Vive le Verdict" Whatever their differences with the Bush Administration these days, the French seem to have only admiration for the American justice system's handling of the Enron corruption case. "The Enron Affair: The Lessons of an Exemplary Verdict," read the headline in the center-right daily Le Figaro on May 29, atop an article about the guilty verdicts that could culminate in decades-long prison sentences for Kenneth Lay and Jeffrey Skilling. French courts rarely hand out stiff sentences for white-collar crimes. Convicted in 2003 of stealing more than $360 million from Elf Aquitaine to use for bribery and other illegal activities, Loïk le Floch-Prigent, the ex-CEO of the former state-owned oil company, was sentenced to only a five-year prison term. And after serving less than a year, he was released for health reasons. The relatively light sentences in the Elf Aquitaine scandal and other French corporate crime cases may help explain why even the leftist daily Libération interpreted the outcome of the Enron trial in an admiring tone: "It demonstrates the willingness of American justice to grant no leniency to these corrupt executives." By Carol Matlack Year Of The Beagle Beijing is issuing a Snoopy postage stamp on June 1, Children's Day in China. The "Dynamic-Happy Snoopy" stamp series (at 80 fen, or 10 cents, a stamp) shows the Peanuts beagle traveling to Beijing, Hong Kong, Macau, and Taiwan. The stamps cap a decade of relationship-building with the Chinese, says Elizabeth Brinkley of United Media, which licenses the Snoopy character. Brinkley, who declined to disclose the licensing fee for the stamps, says that Snoopy items, carried in more than 2,000 outlets in China, are considered "high-end lifestyle" products -- and not for children only. "Our key demographic is women 18 to 35," she says. By Bremen Leak BLOGSPOTTING Database Danger cfo.com/blogs WHY READ IT For informed rants on corporate issues by editors at CFO magazine. NOTABLE POST "The system [for checking immigrants' status] envisioned in the Senate bill...would expand a voluntary pilot program... launched in 1996. About 6,200 employers use that system today...many of them say the database is riddled with errors. Legal workers sometimes get flagged as illegal. Invalid Social Security numbers don't always get rejected. Long delays are common. The new system...1,500 times the size...would have to be up and running just 18 months after Congress appropriates money for it." PUBLIC IMAGES Pharma's Rep May Be On The Mend Drug prices are high, drug safety an ongoing concern, and drug company shares weak. But the pharmaceutical industry is gaining a bit more popularity with the public: A Harris Interactive (HPOL ) poll conducted in April shows that pharmaceutical companies' reputations have improved markedly from 2005. The industry is still far from beloved. Its "net positive rating" -- the percentage of consumers who say it's doing a good job minus the share of those who say it isn't -- is only 25%. That puts pharma near the bottom of the rankings on 21 industries tracked by the poll. Only health insurers, oil companies, and Big Tobacco did worse. Still, 25% is better than last year's score (13%) and the -4% recorded in 2004, when Merck's (MRK ) Vioxx was pulled off the market. Why the improved image? Harris analysts point to less negative news about safety and price issues in the past two years. And others cite Medicare's new prescription drug coverage, which eases the pain of high prices for seniors. By Catherine Arnst WEB WORLD Geek Swag For Sale Cashing in on the cachet of all things Web 2.0, a new site, Valleyschwag.com, has started hawking promotional items -- "schwag," in Valleyspeak -- it gets free from hot Internet companies. For $14.95 a month, subscribers to the site, an offshoot of San Francisco Web developer Rubyred Labs, get a delivery of gewgaws usually handed out only at tech conferences and other events. Among the most popular: laptop stickers from Flickr (a photo-sharing site) and T-shirts from Odeo (a podcast-sharing site) and Songbird (which proffers a downloadable Web player). Buzz about Valleyschwag on popular tech blogs like Boing Boing and TechCrunch have helped boost subscribers to 1,500, from just 60 after the site launched in late March. One-third are from overseas (mostly Europe, but also Russia, India, and even Iraq). Rubyred co-founder Thor Muller acknowledges that the demand for the giveaways might be seen as a Web 2.0 bubble indicator. "There's no way we could've started this business a year and a half ago," he says. Even so, Rubyred has launched a companion site, Valleybeta, where enthusiasts filling out user profiles can beta-test new Web apps. Meanwhile, Muller is considering charging Valleyschwag suppliers that want to place the swag with certain demographic groups among his subscribers. "We're starting to have companies come to us saying, 'We want to reach these people,"' he says. By Mark Walsh FAST FOOD Buyer's Remorse At Mickey D's Under its back-to-the-Mac strategy, McDonald's (MCD ) has been selling off its subsidiary chains, including Chipotle Mexican Grill, on the theory that they are distractions. But despite its successful Chipotle IPO and a hearty investor appetite for new restaurant stocks generally, McDonald's isn't even trying to sell its last ancillary operation, Boston Market. Speaking at McDonald's annual meeting on May 24, CFO Matthew Paull gave this blunt explanation: It's just not that valuable. In the mid-1990s, the chain, which offers full-course meals at its 630 locations in 28 states, was as hot as Chipotle, whose spin-off will generate at least $1 billion for McDonald's. Now, however, Boston Market nets only $15 million a year for the $20.5 billion fast-food giant. And because McDonald's hasn't been investing in it, and won't be in the future, the home-style eatery has no chance of doing better, Paull says. "It's an unimportant brand," he told shareholders. Independent restaurant analyst Allan Hickok says Boston Market might bring about $100 million if it went on the block, a sum that will only decline in the near future, he adds, as potential buyers face higher rates on borrowed funds. McDonald's paid $173.5 million for a bankrupt Boston Market in 2000, mostly for the chain's real estate but also because the company thought it might learn from Boston Market's "fast casual" approach. What management learned, Paull now says, is that McDonald's shouldn't have bought it in the first place. By Michael Arndt
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