Thursday, December 3, 2009

Companies going Vertical what does that mean?

Organic growth has stopped? Got to grow through acquisition and generate a greater margin ultimately to pay a dividend? mm wonder where we have seen that before?

Companies More Prone to Go 'Vertical'
• Article
Larry Ellison is known for forward thinking. With his new business model, though, the billionaire chief executive of software maker Oracle Corp. is taking a page from the past.
Mr. Ellison plans to buy Sun Microsystems Inc. and transform Oracle into a maker of software, computers, and computer components -- a company more like the U.S. conglomerates of the 1960s than the fragmented technology industry of recent years.

"It is back to the future," he told financial analysts in October.
Mr. Ellison is among the executives reviving "vertical integration," a 100-year-old strategy in which a company controls materials, manufacturing and distribution. Others moving recently in this direction include ArcelorMittal, PepsiCo Inc., General Motors Co. and Boeing Co.
The reasons vary. Arcelor, the world's largest steelmaker, wants more control over its raw materials. Pepsi wants more authority over distribution. GM and Boeing are moving by necessity, to assure quantity and quality of vital parts from troubled suppliers. Some are repurchasing businesses they only recently shed.
"The pendulum has shifted from disintegration to integration," says Harold Sirkin, global head of the Boston Consulting Group's operations practice. He attributes the change to volatile commodity prices, financial pressures at suppliers and quests for new revenue -- challenges exacerbated by the recession.
Just two years ago, for example, Mr. Ellison said Oracle would stick to its traditional focus on software. Computer hardware isn't "a business we have any ambitions in," he said then. In a September speech, he called that view "fundamentally wrong." Mr. Ellison declined to comment for this article.
The moves toward vertical integration are a departure from the past half-century, when companies increasingly specialized, shifting functions like manufacturing and procuring raw materials to others. Steelmakers in the 1980s sold their mining operations; in the 1990s, auto giants spun off their parts suppliers. Tech companies stopped making every piece of a computer system and specialized in chips, data storage or software.

The guiding principle was that specialization would boost efficiency and quality. Today, a typical corporate computer system might be assembled by Accenture PLC with data-storage systems from EMC Corp. and computers from Hewlett-Packard Co. that use chips from Intel Corp. to run Oracle software. Now, Oracle is trying to combine all those functions.
Others are pursuing similar strategies. Pepsi plans to repurchase bottlers it spun off in 1999. Back then, Pepsi executives wanted to focus on marketing and leave most operating decisions to the bottlers. Now, as consumers flock to noncarbonated beverages, Pepsi is keen to gain more control over the distribution of its growing menu of offerings, says spokeswoman Jenny Schiavone.
Such steps don't necessarily portend a return to the early-20th-century vertical conglomerates of Andrew Carnegie and Henry Ford. Then, Carnegie Steel Co. and Ford Motor Co. each owned iron-ore mines, while controlling everything from manufacturing to sales.
"The historical view of vertical integration was that you had complete control of the supply chain and that you could manage it the best," says Bain & Co. consultant Mark Gottfredson.
Today's approach is more nuanced. Companies are buying key parts of their supply chains, but most don't want end-to-end control.
Some moves may face resistance from regulators. The Federal Trade Commission, for example, is reviewing Pepsi's plan to buy its two largest bottlers. At the Justice Department, antitrust chief Christine Varney has signaled interest in scrutinizing vertical deals.
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Bloomberg News
Employees inspect steel rolls at an ArcelorMittal steel plant in Bremen, Germany, earlier this month. ArcelorMittal in the past two years has bought iron-ore and coal mines to insulate itself from fluctuating raw-materials prices and supply-chain disruptions.

Regulators in recent decades have blessed most vertical mergers on the grounds that they make firms more efficient, lower costs and benefit consumers, says M.J. Moltenbrey, an attorney with Howrey LLP in Washington, D.C. Instead, regulators have focused on preventing one company from dominating a specific market.
The European Union has moved to block Oracle's $7.4 billion acquisition of Sun on such grounds, fearing Oracle would have too much control of one software niche. (A spokeswoman for Oracle says the company sees no such conflict and is confident it will gain clearance for the deal.) The EU, however, hasn't expressed concern about Oracle's move into hardware.
While many companies, such as Coca-Cola Co. and Toyota Motor Corp., are content to stick to their current business models, others find they have little choice but to vertically integrate. In the past two years, Boeing bought a factory and a 50% stake in a joint venture that make parts for its troubled 787 Dreamliner jet. The moves partially reversed Boeing's aggressive outsourcing strategy to assemble the Dreamliner from parts made by hundreds of suppliers. Supply and assembly problems have knocked the Dreamliner more than two years behind schedule. Boeing CEO Jim McNerney says the company is still committed to outsourcing.
Likewise, GM in October took a minority stake in Delphi Automotive LLP, its biggest parts supplier, and purchased four factories and Delphi's steering business as the supplier emerged from bankruptcy. GM, which spun off Delphi in 1999, wanted to assure uninterrupted supply, a spokeswoman for the company says.
Johnson Controls Inc., another big auto-parts maker, last year bought a 70% stake in the interior-product business of bankrupt supplier Plastech Engineered Products Inc., to guarantee supply.
Several steelmakers are also embracing the shift, moving deeper into the raw-materials business that earlier steel companies exited. Arcelor has acquired mines in Brazil, Russia and the U.S. and expanded existing mining operations in recent years. Strategy head Bill Scotting says the Luxembourg company is trying to hedge against price fluctuations for iron ore and coal and supply-chain disruptions amid rising Chinese steel consumption and mining-industry consolidation.
"If you're buying fully from a market, you are relying on that market's supply chain," Mr. Scotting says.
Nucor Corp., which makes steel from recycled metal, last year bought a major scrap-metal processor. Nucor moved as scrap prices soared. Prices have since dipped, but Chief Executive Dan DiMicco says owning the supplier will help Nucor manage inventory more efficiently, eventually saving the company more than $100 million annually.
"Information on markets is extremely valuable in the scrap business," Mr. DiMicco says. By controlling supply, "you have more control over your own destiny."
Perhaps the most dramatic reversal is taking place in the tech industry, where specialization and outsourcing had dominated for decades.
Through the 1970s, computer makers such as International Business Machines Corp. also made the semiconductor "brains" of their machines, the data-storage devices and the software that made the computer useful. In 1969, the U.S. government, in a landmark antitrust suit, charged IBM with illegally bundling hardware, software and services to hinder rivals.
The government dropped the case in 1982. By then the evolution of technology had achieved what the lawsuit could not: IBM's mainframes were rivaled by less-expensive minicomputers and personal computers that ran on software from many vendors.
Oracle, founded by Mr. Ellison in 1977, quickly flourished in part because its database software could run on multiple types of computers, including IBM's. That allowed Oracle to also sell to companies that used computers from Digital Equipment Corp. and Honeywell International Inc.
The technological shift ushered in a period of innovation and specialization. Entrepreneurs devised software for particular tasks, such as word processing or accounting. Semiconductor companies, such as mobile-phone mainstay Qualcomm Inc., specialized in designing chips; they hired other firms to manufacture them.
A few years ago, the pendulum began swinging the other way. In 2005, Oracle started a strategy of buying other software makers. Last year, H-P acquired Electronic Data Systems Inc., which manages corporate computer systems, to strengthen its consulting arm and exert more control over a key sales channel. Rival Dell Inc. recently bought tech-services firm Perot Systems Inc. for similar reasons.
This month, H-P said it would buy 3Com Corp. for $2.7 billion to bolster its computer-networking unit. Rob Cihra, an analyst for Caris & Co., called the move an effort to "vertically re-integrate" to gain control over customers. An H-P spokeswoman declined to comment.
Apple Inc. last year moved to re-enter the semiconductor business after a two-decade hiatus, buying chip maker P.A. Semi and hiring chip engineers. By developing its own chips for new mobile devices -- a departure from the industry trajectory -- Apple hopes to tighten control over a key technology and keep it away from rivals, according to people familiar with the matter. An Apple spokesman said executives weren't available to comment.
At Oracle, Mr. Ellison's shift is among the industry's most pronounced. For 32 years, Mr. Ellison was a big proponent -- and beneficiary -- of specialization in what he called the "horizontal computer industry." Oracle's forte was business software to help companies run their operations more efficiently. The model generated big profits for Oracle, which avoided the expense of manufacturing computers.
With the Sun deal, Mr. Ellison scrapped that strategy. Now, he wants to sell "complete systems" made of chips, computers, storage devices and software from Oracle. Mr. Ellison is betting that the combination will appeal to corporate customers tired of assembling technology from multiple vendors.
Mr. Ellison himself invokes the old IBM. "We want to be T.J. Watson Jr.'s IBM," Mr. Ellison said in September, referring to IBM's president from 1952 to 1971. He said IBM in that era was "the greatest company in the history of enterprise in America" because its hardware and software ran most companies.
Sun was something of an anachronism that still made its own chips, storage devices, software and computers -- much like the old IBM. Over time, this diversification hurt Sun, which couldn't simultaneously keep pace with innovation from Intel, EMC, Microsoft Corp. and IBM. In today's changed tech landscape, Mr. Ellison sees those multiple product lines as assets.
His change of philosophy seems sudden. As recently as March, Oracle tried to buy only Sun's software products, according to a filing with the Securities and Exchange Commission. But when IBM neared a deal to buy Sun, Mr. Ellison decided he, too, wanted the whole company. Oracle won by offering $9.50 a share for Sun, or 10 cents a share more than IBM's bid.
During the meeting with analysts last month, Mr. Ellison said that he changed his mind quickly, calling the acquisition "opportunistic." Then, he set out to combine Sun's hardware with Oracle's software. Mr. Ellison recently unveiled such a computer, which he says searches data faster than rivals, and costs less. Oracle says it plans to make Sun computers with specialized software for tasks such as billing and managing retail stores.
Oracle will still sell software to customers that have H-P's computers, and Sun computers that will run software from its rivals. But Mr. Ellison has pledged to invest more in Sun's chips and other equipment than Sun did.
"We weren't in the hardware business, now we're diving in with both feet," Mr. Ellison said at the October event.
Noting Oracle was bucking a decades-long trend in the industry, Mr. Ellison said: "We're really brilliant, or we're idiots."
Write to Ben Worthen at, Cari Tuna at and Justin Scheck at

More from the Wall St Journal on Climate gate. (their words)

Climategate: Follow the Money
Climate change researchers must believe in the reality of global warming just as a priest must believe in the existence of God.

Last year, ExxonMobil donated $7 million to a grab-bag of public policy institutes, including the Aspen Institute, the Asia Society and Transparency International. It also gave a combined $125,000 to the Heritage Institute and the National Center for Policy Analysis, two conservative think tanks that have offered dissenting views on what until recently was called—without irony—the climate change "consensus."
To read some of the press accounts of these gifts—amounting to about 0.00027% of Exxon's 2008 profits of $45 billion—you might think you'd hit upon the scandal of the age. But thanks to what now goes by the name of climategate, it turns out the real scandal lies elsewhere.
Climategate, as readers of these pages know, concerns some of the world's leading climate scientists working in tandem to block freedom of information requests, blackball dissenting scientists, manipulate the peer-review process, and obscure, destroy or massage inconvenient temperature data—facts that were laid bare by last week's disclosure of thousands of emails from the University of East Anglia's Climate Research Unit, or CRU.
But the deeper question is why the scientists behaved this way to begin with, especially since the science behind man-made global warming is said to be firmly settled. To answer the question, it helps to turn the alarmists' follow-the-money methods right back at them.
Consider the case of Phil Jones, the director of the CRU and the man at the heart of climategate. According to one of the documents hacked from his center, between 2000 and 2006 Mr. Jones was the recipient (or co-recipient) of some $19 million worth of research grants, a sixfold increase over what he'd been awarded in the 1990s.
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Associated Press
Al Gore wins the 2007 Nobel Peace Prize: Doing well by doing good?

Why did the money pour in so quickly? Because the climate alarm kept ringing so loudly: The louder the alarm, the greater the sums. And who better to ring it than people like Mr. Jones, one of its likeliest beneficiaries?
Thus, the European Commission's most recent appropriation for climate research comes to nearly $3 billion, and that's not counting funds from the EU's member governments. In the U.S., the House intends to spend $1.3 billion on NASA's climate efforts, $400 million on NOAA's, and another $300 million for the National Science Foundation. The states also have a piece of the action, with California—apparently not feeling bankrupt enough—devoting $600 million to their own climate initiative. In Australia, alarmists have their own Department of Climate Change at their funding disposal.
And all this is only a fraction of the $94 billion that HSBC Bank estimates has been spent globally this year on what it calls "green stimulus"—largely ethanol and other alternative energy schemes—of the kind from which Al Gore and his partners at Kleiner Perkins hope to profit handsomely.
Supply, as we know, creates its own demand. So for every additional billion in government-funded grants (or the tens of millions supplied by foundations like the Pew Charitable Trusts), universities, research institutes, advocacy groups and their various spin-offs and dependents have emerged from the woodwork to receive them.
The Climate Emails
The Economics of Climate Change
Rigging a Climate 'Consensus'
Global Warming With the Lid Off
Climate Science and Candor
Today these groups form a kind of ecosystem of their own. They include not just old standbys like the Sierra Club or Greenpeace, but also Ozone Action, Clean Air Cool Planet, Americans for Equitable Climate Change Solutions, the Alternative Energy Resources Association, the California Climate Action Registry and so on and on. All of them have been on the receiving end of climate change-related funding, so all of them must believe in the reality (and catastrophic imminence) of global warming just as a priest must believe in the existence of God.
None of these outfits is per se corrupt, in the sense that the monies they get are spent on something other than their intended purposes. But they depend on an inherently corrupting premise, namely that the hypothesis on which their livelihood depends has in fact been proved. Absent that proof, everything they represent—including the thousands of jobs they provide—vanishes. This is what's known as a vested interest, and vested interests are an enemy of sound science.
Which brings us back to the climategate scientists, the keepers of the keys to the global warming cathedral. In one of the more telling disclosures from last week, a computer programmer writes of the CRU's temperature database: "I am very sorry to report that the rest of the databases seems to be in nearly as poor a state as Australia was. . . . Aarrggghhh! There truly is no end in sight. . . . We can have a proper result, but only by including a load of garbage!"
This is not the sound of settled science, but of a cracking empirical foundation. And however many billion-dollar edifices may be built on it, sooner or later it is bound to crumble.

Wednesday, December 2, 2009

From Wall St Journal Climate Scientist stands down. Is it a case of where there is smoke there is fire?

Boy this is almost as good as the Tiger Woods Drama!

* DECEMBER 2, 2009, 4:35 A.M. ET

Climate Scientist Steps Down
British Researcher Leaves Post Temporarily Amid Probe Sparked by Hacked Emails


The British scientist at the heart of a scandal over climate-change research temporarily stepped down Tuesday as director of a prominent research group amid an internal probe that follows the release of hacked emails involving him and other scientists.

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People in Copenhagen form the logo of a campaign to cut carbon emissions to 350 parts per million.

The University of East Anglia in the U.K. said Phil Jones, head of the university's Climatic Research Unit, had decided to step aside from the director's post.

The announcement comes less than a week before world leaders are set to meet for a climate summit in Copenhagen. The two-week conference, sponsored by the United Nations, is supposed to come up with tougher policies to curb greenhouse-gas emissions and slow global warming.

The need for such action has been buttressed in large part by research by Dr. Jones and his colleagues in East Anglia and around the world. But hackers recently stole emails and documents from the East Anglia center that suggested Dr. Jones and other like-minded scientists tried to squelch the views of dissenting researchers and advocated manipulating data.

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Bloomberg News

John Holdren, President Barack Obama's top science adviser, supports the view that global warming is man-made.

The fallout from the hacked emails is spreading beyond the U.K. Also Tuesday, Penn State University confirmed that Michael Mann -- a climate scientist on its faculty who figures prominently in the emails -- is under "inquiry" by the university.

Dr. Mann's work reconstructing historic global temperatures has, over the past decade, become a focal point of debate. Penn State said in a statement that its inquiry, which stems from disclosed emails written by Dr. Mann, is a preliminary step to determine whether a full investigation is needed. He didn't respond to requests for comment.

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European Pressphoto Agency

Sen. Barbara Boxer also supports the view that global warming is man-made.

On Wednesday, President Barack Obama's top science adviser -- John Holdren, a climate scientist who sent one email among those hacked and posted -- is due to testify on Capitol Hill. The House committee holding the hearing has billed it as a way to explore "the urgent, consensus view...that global warming is real, and the science indicates that it is getting worse." Dr. Holdren's office declined to comment. Dr. Holdren has long spoken of the "overwhelming" evidence of man-made global warming.

The emails have led to calls for probes into the state of climate science from U.S. politicians skeptical that humans are causing global warming. They have also drawn criticism from some high-profile environmentalists.

In one email, Dr. Jones suggested to Dr. Mann that they should try to keep out of scientific journals the research of scientists who challenge the idea of man-made global warming. We "will keep them out somehow -- even if we have to redefine what the peer-review literature is!" the email says.

The East Anglia institute that Dr. Jones headed has become a key player in building evidence for the U.N.'s argument that humans are behind global warming. In statements released by the institute in recent days, Dr. Jones has defended the integrity of the institute's scientific work, while saying that he and his colleagues "accept that some of the published emails do not read well."

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Sen. James Inhofe, a critic of the belief that global warming is man-made.

On Tuesday, Dr. Jones said the East Anglia institute couldn't continue to do its work with him as its director amid the controversy. "What is most important is that CRU continues its world leading research with as little interruption and diversion as possible," he said in the statement. "After a good deal of consideration," he wrote, he decided to step down from the director's job pending the investigation.

Longtime critics of the premise that humans are responsible for climate change cheered word of the move by Dr. Jones and the inquiry into Dr. Mann. "I think we're making headway," said Oklahoma's James Inhofe, the senior Republican on the Senate Environment and Public Works Committee.

On Tuesday, Mr. Inhofe sent a letter to the chairwoman of the Senate Environment and Public Works Committee, Barbara Boxer (D., Calif.), that called for hearings on whether any U.S. laws were broken by the scientists, or "any taxpayer-funded research deliberately obscured or manipulated." A spokesman for Ms. Boxer didn't immediately respond to a request for comment.
—Stephen Power contributed to this article.