NO DEAL

Microsoft walks away from Yahoo!, and both companies lose

RATHER as John McCain cannot be displeased to have seen Hillary Clinton and Barack Obama fighting it out, Google has for the past three months enjoyed watching its only two serious rivals, Yahoo! and Microsoft, tear each other to pieces. Yahoo!, once an internet pioneer, has fallen far behind Google in web search and related advertising. Microsoft still dominates desktop computing but lags behind Google as software moves online. So Steve Ballmer, Microsoft's boss, dared ask Yahoo!: what would be wrong with making, if not exactly a dream team, at least a joint effort out of it?

But on May 3rd, after a frustrating marathon of meetings, Mr Ballmer walked away. He had raised his offer for Yahoo! from an initial $44.6 billion on January 31st to about $47.5 billion, some 70% more than Yahoo!'s value at the time of the opening bid. Jerry Yang, Yahoo!'s co-founder and boss, wanted at least $5 billion more. Mr Ballmer wrote him a bitter letter saying that “you and your stockholders have left significant value on the table.” Wall Street's verdict, on May 5th, was to cut Yahoo!'s value to $34 billion.

That the sell-off was not even worse primarily reflects the possibility that a deal may yet happen. Another software company, Oracle, recently dropped a bid for a smaller rival, BEA Systems, after its board rejected the offer, but eventually had its way after BEA's angry shareholders forced their board back into negotiations and a sale. Mr Ballmer's farewell letter to Yahoo!, by recapitulating the negotiations in all their embarrassing detail, provides just the sort of fodder for Yahoo!'s investors to order Mr Yang to resume talks.

Mr Ballmer took particular pains to criticise Yahoo!'s readiness to “make Yahoo! undesirable as an acquisition for Microsoft.” By this he means Mr Yang's apparent plan to outsource Yahoo!'s search-advertising technology to, of all people, Google. In a purely mathematical sense, this could indeed make Yahoo! somewhat more valuable. Google is better than Yahoo! or Microsoft at placing relevant ads next to search results and collects more in revenue for each resulting mouse click.

Yet it is a bizarre tactic. The history of Yahoo! during this decade is of trying, failing, and trying again to catch up with Google in search advertising. Its first big failure was not to bid high enough to buy Google outright. Its next attempt, in 2003, was to buy Overture, the company that pioneered search advertising, but by then Google was pulling ahead. An outsourcing deal with Google was considered and rejected. For the past two years Yahoo! has invested oodles in a project called Panama that was meant, again, to catch Google.

Presumably Yahoo! has been exerting itself so because it believes that the advertising technology is, along with search, the source of competitive advantage in the internet era. That is certainly what Microsoft believes, which is why it bought aQuantive, an online-advertising specialist, and built its own search-ads platform, called adCenter. What Yahoo! and Microsoft lack is volume—in the number of both searches and advertisers bidding to place ads. Teaming up would help to address that problem; but a capitulation by Yahoo! to Google would merely invite antitrust regulators to look at Google's dominance.

Mr Yang could merge Yahoo! with AOL, the web portal of Time Warner, but AOL already outsources its search ads to Google and would be no help at all in catching the leader. Asserting, as Mr Yang does, that Yahoo! all by itself could become “the starting point” on the internet, and its advertising powerhouse, rings hollow.

Things look just as bleak for Mr Ballmer. He has invested billions trying to make Microsoft an internet and advertising superpower. But it seems not to matter. According to Danny Sullivan, a web-search analyst, Microsoft “literally has no brand” when it comes to its online services—nobody has ever been advised “to Live” or “to MSN” a recipe or a cute classmate. The only one having any fun continues to be Google.

Magic restored

Under its new boss Disney has staged an impressive creative turnaround—and is making synergy work

IN “RATATOUILLE”, the most recent animated film from Pixar, a film studio owned by Disney, a talented cook named Remy, who happens to be a rat, finds his way into the kitchen of a once-great restaurant. Its head chef has given up on creativity and instead plans to churn out ready meals branded with the name of the restaurant's revered founder, Auguste Gusteau. Eventually the chef loses control of the restaurant, the frozen meals are tossed out and Remy's cooking helps it regain its reputation and inventive flair.

Something similar appears to have happened at Disney. Four years ago it was in turmoil, with its then chief executive, Michael Eisner, under siege from shareholders who accused him of stifling the firm's creative culture. Today under Bob Iger, who took over as chief executive in 2005, Disney is enjoying a remarkable and profitable run of hit TV programmes and films. “Disney's creative momentum is so strong now that there's no comparison between it and other big media companies,” says Lawrence Haverty, a fund manager at Gabelli Asset Management.

In the past Disney concentrated mainly on the very young, but in recent years it has found a new audience among “tweens”, or nine- to 14-year-olds. In 2006 the Disney Channel in America started showing “Hannah Montana”, a TV series about an ordinary girl with a double life as a rock star, and broadcast “High School Musical”, a television film about a romance between two pupils from different cliques at school. Both turned into huge hits with staying power: in fiscal 2006 and 2007 combined, Disney made over $100m of operating profit from “High School Musical” and various spin-off products. Coming soon is “Camp Rock” a Disney Channel film starring the Jonas Brothers, a wholesome boy-band which has already sold over a million CDs for Hollywood Records, Disney's recorded-music label.

At the same time Disney's broadcast-TV network, ABC, is benefiting from a number of hits, such as “Desperate Housewives”, “Lost” and “Ugly Betty”. Disney has also improved the fortunes of its film business, which earned $1.2 billion in operating profit last year, up from $200m in 2005. Some of the increase came from the firm's acquisition of Pixar for $7.4 billion in 2006, but the performance of Disney's live-action films, such as “Enchanted”, drove most of the improvement. On April 8th Disney laid out ambitious plans for ten new animated films in the next four years.

What accounts for this renaissance? Mr Iger's management style is said by many to have unlocked Disney's creativity. “There was already creativity inside Disney, but Bob removed the barriers to it,” says Peter Chernin, chief operating officer of News Corporation, a rival media group. “Michael Eisner was all about his own creativity,” says Stanley Gold, a former Disney board director who led a campaign to oust Mr Eisner in 2004, referring to the way in which the former boss meddled in the detail of Disney's parks and movies. In contrast, he says, “Bob pushes creative decisions to the people below him.”

In addition, Mr Iger's acquisition of Pixar, a studio that insists on creative originality, has sent a signal to people inside and outside Disney. “A few years ago we weren't necessarily seen by the creative community as the place to be,” says Tom Staggs, Disney's chief financial officer, “but now that has changed and people want to work here.” Mr Iger immediately put Pixar's top people in charge of Disney's animation business, and last year he put an end to the practice of making cheap direct-to-video sequels of old favourites, such as “Cinderella II: Dreams Come True”—Disney's equivalent of frozen food.

Before Mr Iger took over, says Mr Staggs, Disney had a factory-like process for animation in which a business-development team came up with ideas and allocated directors to them. “With the arrival of the Pixar leadership, Disney has adopted the director-driven development and production approach that Pixar has used so successfully,” he says. The full proof of Pixar's impact on Disney's animation will be seen in November when the firm releases “Bolt”, the first film developed entirely under the new bosses. To be sure, Mr Iger paid a high price for Pixar, and box-office revenue in America for the studio's films has declined with each release since “Finding Nemo” in 2003, points out Ben Swinburne of Morgan Stanley. Pixar's next film is “WALL-E”, about the adventures of a robot in the year 2700, which will open in American cinemas in July.

One former Mouseketeer argues that Mr Iger cannot take much credit for Disney's recent string of hits. “All the great new shows from Disney were developed, and many of them launched, when Michael Eisner was leading the company,” says David Hulbert, a former president of Walt Disney Television International. “The TV and studio creative cycle lasts several years, so we will have to wait some time yet to see what Bob Iger's cautious, centralised and consensual management style produces,” he adds. Disney executives counter that Mr Eisner had made Mr Iger responsible for ABC, the Disney Channel and ESPN, its sports network.

What is certain is that under Mr Iger, Disney has perfected the art of media synergy. The firm has turned “High School Musical”, for instance, into a live concert tour, a stage musical, a show on ice, and a series of books and video games. Pixar's “Cars” may have slightly disappointed at the box office, but Disney sold 100m model vehicles on the back of it, plans to build a “Cars Land” attraction in its California Adventure theme park and is developing an online virtual world tie-in.

Disney now has ten “franchises” that it treats in this way, from Mickey Mouse to Disney Fairies. Every media conglomerate pursued synergy some years ago, but Disney is the only one to have made it work consistently across the whole company. It helps, of course, that so many of its customers are children, who tend to be more receptive to spin-off products than adults.

Mr Eisner certainly pushed synergy hard, but Mr Iger's collaborative management style is better suited to it, insiders say. In Britain, says a Disney executive based in London, the firm's programme-sales group worked hard to sell “High School Musical” to the BBC, even though it contributed relatively little to their own division's bottom line, because exposure on free-to-air TV then bolstered sales of “High School Musical” DVDs, pencil cases and other products. “A few years ago they wouldn't have bothered,” says the executive, “but now the key properties are so drummed into us that everyone is behind them.”

Not everything is perfect in the Magic Kingdom. Investors worry about the impact of a recession on Disney's theme parks, which accounted for just over a quarter of the firm's revenues in the first fiscal quarter of this year. Mainly for that reason, the firm's share price has fallen by 14% in the past year. Disney says that its American parks are more resilient during slowdowns than those of its rivals. Like its peers, Disney still earns most money from traditional media, and needs to expand its businesses online. But its creative momentum and proven ability to extract value from its hits means it can afford to feel more optimistic about the future than most big media firms.

The great American slowdown

The recession may not be as severe as many fear, but the recovery could take longer—and that is dangerous

AMERICANS are unaccustomed to recessions, particularly ones that involve shopping less. During the past quarter-century, the world's most powerful economy has suffered only two official downturns, in 1990-91 and 2001. Both were short and shallow. In 2001 consumer spending barely skipped a beat; a decade earlier it fell, but only briefly. Buoyed by rising asset prices and financial innovations that allowed ever more people to tap ever more debt, the collective American wallet has not snapped shut in almost two decades.

That may be about to change. Evidence is mounting that the economy has slipped into recession—and this time consumer weakness is to the fore. The doughty American shopper is being pummelled by four things: the housing bust, the credit crunch, higher fuel and food costs and, most recently, a weakening labour market. The unemployment rate rose to 5.1% in March, while the private sector lost jobs for the fourth month in a row. Feeling poorer and with fewer people prepared to lend them money, consumers are cutting back: witness the slump in car sales. And seeing that consumer spending accounts for 70% of American demand, that hurts, especially when it is coupled with a collapse in the once mighty construction industry. The IMF now officially predicts an American recession in 2008; many at the Federal Reserve think output is contracting.

Shallow but lengthy: you could do a lot worse
There are two big questions about this downturn for America and the world: how long? And how deep? On the second count, there is room for guarded optimism: although American recessions have usually sent the world economy into a funk, this time the slowdown need not be so severe—especially for the emerging world. The economic tests instead may come from the length of this downturn: an America that stays sluggish for several years could cause all sorts of problems.

That is not to imply that a severe global slowdown is out of the question. The IMF reckons that there is a 25% chance of the world economy growing by less than 3% in 2008 and 2009, the equivalent of recession, in its view. The origins of this crisis lie in the biggest asset bubble in history; financial markets have already suffered arguably their biggest shock for 80 years; and America is not the only developed economy suffering (Britain's housing market, for instance, is showing the same symptoms as America's). But so far at least there is little evidence that the world economy is falling off a cliff.

The pace of job losses in America has been mild compared with previous downturns, and there are a couple of reasons to suppose it will stay that way. The first is the activism of American policymakers. Congress started throwing money at the problem early, and a second fiscal stimulus is already being discussed (alongside a bail-out for the housing market). The Fed has slashed interest rates, promised more cuts if the economy stays weak and—perhaps most important—sharply reduced the odds of financial-market catastrophe by extending its safety net to investment banks.

The second is the changing structure of the world economy. The dynamism and resilience of emerging markets mean that America does not matter as much as it once did. The IMF expects global growth to fall from 4.9% in 2007 to 3.7% this year—hardly catastrophic. Moreover, these foreigners can now do a bit to cushion the blow for Americans: already global demand, coupled with a weak dollar, is boosting American exports. Meanwhile, some losses from America's housing bust have been borne abroad, although not without pain.

With these props, America can avoid a deep slump, but don't expect a vigorous recovery. Spending will be supported by tax rebates in the second half of the year, but the hangover from the housing bust will linger much longer. Judging by the experience of other rich countries that have suffered financial crises spawned by housing busts, such as Sweden and Norway in the early 1990s, weak balance sheets will weigh on consumers' spending for years rather than months. The 2008 recession may be mild, but the 2009 recovery will be feeble.

Beware the slithering snail
If the world economy's biggest problem turns out to be America remaining snail-like for longer than most people expect, many will breathe a sigh of relief. Given the scale of the financial mess, it could be a lot worse. You can even argue that after five years of breakneck growth, a more sedate global expansion would be no bad thing: it would dampen inflationary pressures in the emerging world, and weaker domestic demand should shrink America's gaping external deficit—already down from above 6% of GDP to below 5%.

But that is about as far as optimism can take you. The main fear is that the rest of the world proves less resilient than now seems likely: commodity exporters, say, may rely on American demand less than they did, but are hardly cut off from it. The weak dollar also causes problems. Importing America's loose monetary policy will become harder to sustain for countries, such as the Gulf states, that peg their currencies to the greenback. They will need to let their exchange rates rise.

Politics too can do plenty of damage. A sluggish America next year will be a hard inheritance for the next president. With the budget deficit rising, big domestic reforms, such as expanding health-care coverage, will become more difficult; with a fragile economy, the Democrats, if they get in, may have to rethink their plan to roll back George Bush's tax cuts.

And do not forget populism and protectionism. Already eight out of ten Americans say their country is on the wrong track. A protracted malaise will spawn an angry search for scapegoats. Even though free trade is helping save Americans from a worse downturn, Mr Bush is struggling to get a trade deal with Colombia through Congress: heaven help the Doha round. Meanwhile, the momentum to re-regulate financial markets and punish the oil industry, credit-card firms or indeed any other malefactors of great wealth will grow. The great American slowdown may be less calamitous than many people fear; but it is fraught with dangers.

How to conquer the world

What makes a “global leader”? INSEAD's dean has a few ideas


EVEN in these troubled times, the cult of the CEO remains strong. However Frank Brown—appointed dean of INSEAD in 2005, after 25 years as a businessman himself—isn't impressed by many of today's company chiefs. Many of them, he reckons, are just not “global business leaders”.

In his new book*, Mr Brown argues that culturally insular business leaders can no longer survive in an environment where single companies now trade across many economies, and where bosses need to take decisions, manage people, pick their teams and take counsel in a manner that differs from anything that has gone before. The Economist spoke to him about what he thinks it takes to make the new grade.

In your book, you focus on how to be a successful business leader in a “transcultural” marketplace. What characterises that marketplace?

Most organisations are no longer local. They operate across many countries and sell into many different economies. So, if you're aspiring to leadership, the concept of building a career in one place is pretty much by the board. In the business environment of today and tomorrow, you can't bury yourself in your office in New York or London or Tokyo. You've really got to not just be aware of the other great places in the world, but be very familiar with them and have a perspective on what it means to operate there.

When did this change start to kick in?

It's been developing since the 1980s. But it's been doing so reluctantly. There are many cultures in the developed world where it's perfectly acceptable for you to ensconce yourself in your office and expect that everyone will come to you.

Not only that, it's still acceptable to expect that you can look at things from the perspective of “Well, here's how I do it in my country, why is it different there?” as opposed to “I really want to learn how they do it because maybe I can learn from it and better understand what drives their market and what will drive them in negotiations if we're trying to do a business deal.”

Which cultures in the developed world are still that insular?

America and Britain probably still lead the pack in terms of being more narrowly focused on their own environment as opposed to the world beyond.

The transcultural marketplace, you contend, needs “global” business leaders. What differentiates such a leader from their more traditional counterparts?

Global business leaders understand markets outside of their own territory; they consider their own market to be the world as opposed to a single country; they understand the need to get input from a lot of different places before making a decision; and they understand the need to communicate with cultural sensitivity because the words that work in New York won't necessarily work in Tokyo or Beijing.

I think global business leaders are also much more open about who they surround themselves with, in terms of their leadership team and who they take counsel from. It is critical, if an organisation is global, that the world—including the developed world—is represented in the leadership of that organisation. And that means diversity from every perspective, be it age, gender, culture, you name it.

Your book has a very practical focus. What are the most fundamental pieces of advice you hope readers will take away with them?

The key one in my mind is networking and relationship-building. Often I have met someone who is 30 or 35 years old and they ask me, “How do I build a network?” My immediate answer is “You should have been doing it for the last 15 years.” Someone who is a junior accountant or lawyer or banker—chances are they've already worked on deals alongside people who are now senior in their organisation. They may have worked alongside the next Richard Branson or the next Bill Gates. The fact of the matter is that they didn't take a business card and they didn't make any attempt to build a relationship with that person.

So, I hope that people who are 18 or 20 years old, and who read the book, think: “Wow, I really do need to focus on developing my network and building relationships with people early on.” It's not something you do once you're 40 and join the country club.

The other area is communication. We all go to conferences and we all listen to speeches. Nine out of ten are absolutely boring—given by people who don't make eye contact; who don't modulate their voice; who don't talk passionately enough; who read you slides. That is so easy to overcome with things like basic preparedness, knowing your audience and sticking to a timeline. Communication is overlooked and not focused on as being important. But how you communicate is a huge factor in how successful you are.

You yourself have 25 years of global leadership experience. What are the most valuable lessons you've picked up along the way?

In my experience, you learn from everyone you come into contact with, whether you learn best practice or you learn worst practice and say, “I'm never going to emulate that.” The most important lessons for me have been an ability to develop perspective on a situation and understand what are the important issues and what are the less important issues. I think I've developed a good style in terms of communication and in terms of managing and building relationships with people.

In the future, will every business leader have to be a global business leader?

To be effective, people will have to have this broader perspective. Will there be exceptions? Absolutely. But it will become much more prevalent that the successful business leader will have worked in multiple markets, will have a very diverse team under them, and will be much more open to input and ideas coming from different directions. They will still be a strong leader and fast decision-maker, but the process by which they come to that decision will be different.

Stars in their eyes

WITH the launch of Sputnik in 1957, the Soviet Union kick-started the space race with America in earnest, but when the cold war ended America's lead was cemented. A new report by Futron, a technology consultancy, underlines America's dominance. Futron's space-competitiveness index ranks the nine leading countries, plus Europe, in space technology according to 40 measures in government spending, human expertise and the private sector. Europe benefits from its joint policy and the expertise of multinational companies, while China and India are using their economic clout to become bigger players.

Santé and Skal!

ICONIC is a much-overused adjective in branding, but it is a fitting description of Absolut, the Swedish vodka. The Absolut bottle, inspired by the medicine bottles sold in Stockholm pharmacies in the 18th and 19th centuries, is a design classic. Clever marketing campaigns have propelled the spirit from its southern Swedish home to leadership of the world’s premium vodka market. This is one of the fastest-growing segments of the industry, especially in America, the world’s biggest market for spirits, so its ownership is a prize well worth winning.

When the centre-right Swedish government decided to put the owner of Absolut, Vin & Sprit (V&S), up for sale almost two dozen bidders showed interest in one of the drinks industry’s most marketable brands. After a hotly contested auction running for almost four months, Pernod Ricard, a French drinks giant, emerged victorious. On Monday March 31st the Paris-based company announced its takeover of V&S for €5.6 billion ($8.9 billion) including debt. “The acquisition is a fantastic opportunity and represents our third transformational acquisition,” said a triumphant Patrick Ricard, Pernod’s chief executive and chairman.

Under Mr Ricard’s stewardship Pernod has been transformed from a company operating mainly in France—making pastis, an aniseed-flavoured aperitif—into a multinational heavyweight competing with Diageo for world leadership of the drink industry. With the blessing of his father, Paul Ricard, who founded the Ricard company, the younger Mr Ricard embarked on an international spending spree: he bought America's Austin Nichols, producer of Wild Turkey whiskey, Irish Distillers, another whiskey maker, and Jacob's Creek, an Australian wine company. In 2001 he acquired 38% of Seagram, a Canadian conglomerate with a large spirits portfolio. Four years later came his biggest coup so far with the €11.4 billion takeover in 2005 of Allied Domecq, a British drinks group.

Although integrating Allied Domecq took longer than expected, Pernod was keen from the start to add V&S to its mix of brands. But it had to fight off strong competitors. Bacardi, a family-controlled company, was keen to land V&S to bolster its position against unwanted takeover offers. Fortune, another suitor, is close to V&S as both are part of Maxxium, a distribution network that is a joint-venture between the two companies alongside Rémy Cointreau, a French drinks firm and Edrington Group, another spirits company. EQT, another bidder, is controlled by Sweden’s Wallenberg family, and had it been successful this tie-up would have pleased those in favour of keeping the corporate jewel in Swedish hands.

Analysts reckon the price paid by Pernod is high, but Mr Ricard was determined to buy a vodka brand at almost any cost. Diageo, his company’s big rival, controls 20% of the American market through its ownership of Smirnoff vodka. Frustration at losing a long-running fight to take over Russia's Stolichnaya vodka may have tempted Pernod to land a knockout blow. Stolichnaya would have been less expensive, and the brand is less developed, which gives it greater growth potential, but the deal became enmeshed with political machinations around Russia’s recent elections. And Absolut gives Pernod good exposure to the American market, which Stolichnaya doesn’t have.

After its takeover of Allied Domecq, Pernod Ricard said that it thought it could become the world’s biggest drinks company over the next decade-without any further big acquisitions. If all goes according to plan, the pastis-maker from Marseilles might accomplish that feat rather earlier than expected.

Secrets of Male Entrepreneurs Exposed!

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