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September 08, 2004

Mark Cuban, trying his hand at politics, makes a serious error regarding drug company profitability:

One of the great lies of all time is that we have to protect drug company profits. . . . That if [the government] doesnít [protect drug companies from price controls], then the drug companies wonít invest money in new drugs, and as a result we wonít have the miracle cures, particularly those miracle cures that donít ever offer a complete payback on the cost of developing them.


Letís get real here. The day I believe that argument is the day that CEOs of public drug companies donít pay themselves, donít have bonuses and donít own stock in their companies.

They donít run their companies to make a profit. They run their companies to make Wall Street happy, to push their stock prices up, and if they are lucky, to hit the jackpot personally.

They know that in order for their stock prices to go up, they have to sell the future. If all they have to sell is the cash flow from their existing base of drug patents, they have a problem. Could you imagine the CEO of a major drug company saying, ďWell, we canít come up with any new products, and our R&D isnít really working, so we will just play out the patents on our drugs and pay out the cash to shareholders.Ē Yeah Right.

They will do just what they are doing now ó keep on investing in their own R&D hoping they can hit a home run with new drugs, and when that doesnít work, they will use their stock and cash to buy other companies that have better prospects. In all cases, they hope the results will propel their stock and their own net worth.

They arenít going to change how they do business at all. Wonít happen. CEOs are a competitive bunch. You donít get to run a major corporation by not being motivated to succeed. A measure of that success is personal wealth.

As long as CEOs and those around them want to be rich, we can change the laws regarding drug pricing and nothing at all will changeÖNothing.

This is a perfect example of how a smart businessman can believe a stupid idea when it comes to politics. Cuban is right, of course, about the kind of motivations that make executives tick - like any other worker, they work to make their companies profitable because they are given incentives to do so, not out of some abstract love for their shareholders. And he's right that, if drug companies realized tomorrow that they could no longer expect future profits from large R&D layouts, executives would be loath to become doomsaying pessimists about their own companies.

But what would really happen is right under Cuban's nose, and he misses it: what does a company do when it realizes that its current business is throwing off profits that can't sustain in the future? Well, the most common response is what Cuban himself suggests: "use their stock and cash to buy other companies that have better prospects." In other words, diversify.

Which is precisely the point: if R&D in new drugs starts looking like a bad gamble, sooner or later drug company CEOs will devote more of their available resources to acquiring companies who do other things than invest in drug R&D, and less to that R&D. And, in the long run, we'll have fewer drugs produced. Not none; that goose won't stop laying golden eggs entirely. But the natural response of CEOs who want to stay successful will be to migrate their companies' capital investments away from a low-margin business. And we'll all suffer.

Posted by Baseball Crank at 07:07 AM | Business • | Politics 2004 | Comments (2) | TrackBack (0)
June 21, 2004

A DC-based lobbying outfit called the American Shareholders Association has produced a study showing a sharp increase in payment of dividends following the dividend tax cut:

According to the latest ASA analysis of S&P 500 dividend data, favorable dividend activity among S&P 500 companies increased 55.2 percent since the tax cut was enacted. A total of 298 favorable dividend actions (increases and initiations) were taken on the S&P 500 compared to just 192 in the previous 12 month period. 19 more companies are paying a dividend than before the tax cut and companies increased their dividend 277 times. As a result, $185 billion of cash will be returned to S&P 500 shareholders in 2004.

The group's head argues that this is good corporate governance, given that unlike reported earnings, cash dividends can't be faked:

"More cash in shareholders pockets is disciplining managers to undertake only the most productive investments. This has re-elevated shareholders to be true owners of the corporations they invest in and has improved corporate governance more than any regulation passed by Congress or the Securities and Exchange Commission."

Posted by Baseball Crank at 06:17 AM | Business • | Politics 2004 | Comments (3) | TrackBack (0)
June 05, 2004
BUSINESS/POLITICS: It Can't Be The Economy, Stupid!

It seems almost beside the point at this stage to talk about domestic politics - the political terrain is 100% Iraq at the moment - but if the economy winds up becoming an issue in the election, the recent job growth reports may send the Democrats looking to take this helpful advice from the Politburo.

Posted by Baseball Crank at 11:55 AM | Business • | Politics 2004 | Comments (0) | TrackBack (0)
April 20, 2004
BUSINESS: Stock Answer

Mark Cuban has some revealing if unduly cynical thoughts about the stock market, from someone who was on the inside in the 1990s. (Yet again, Cuban writes with the touching naivete of a guy who thinks you can speak freely about the stock market in this country without getting sued at the drop of a hat). While I can't agree with Cuban's wholesale cynicism about the market, it's amazing how often investors, like sports fans and sports teams, forget that something that is a good buy at one price can be a terrible investment at a different price. His story about a company called Gandalf is a great example of the phenomenon.

Posted by Baseball Crank at 06:26 AM | Business | Comments (0) | TrackBack (0)
April 02, 2004

Via Dustbury, we see that the Dow Jones Industrial Average has dropped AT&T, International Paper and Eastman Kodak and added AIG, Pfizer and Verizon. The passing of AT&T, in particular, from the Dow seems like a real sign of changing times.

Posted by Baseball Crank at 06:30 AM | Business | Comments (0) | TrackBack (0)
April 01, 2004
BUSINESS: Accounting For Options

Kevin Drum links to this Gregg Easterbrook item arguing for treating stock options as an expense . . . granted, I'm a lawyer not an accountant, but as I explained in one of my earliest entries on this blog (one that drew a response from the author of a WSJ op-ed) I still don't understand why options should be an expense rather than a contingent liability that's expensed when exercised. Easterbrook's example of a company giving away land is entirely bogus, since granting an option gives away (duh!) an option to buy stock, not the stock itself. You can estimate the potential cost, but the real cost to the company isn't realized until when-and-if the option is exercised (and not all options are exercised, especially given that stock prices sometimes go down, not up).

PS - In the same item, Drum also argues that the Easterbrook item I cited yesterday on Richard Clarke and Iraq missed a few public statements Clarke did make at the time, although Easterbrook's larger point still stands about the gap between Clarke's present level of outrage and his willingness to speak out at the time.

Posted by Baseball Crank at 06:21 AM | Business | Comments (0) | TrackBack (0)
February 28, 2004
BUSINESS: The Lou Dobbs Rogue Fund

Jim Glassman has some fun figuring out that if you invested your money in firms Lou Dobbs has blasted for 'offshoring' jobs, you would have made a 72% return on your investment last year.

Posted by Baseball Crank at 11:23 AM | Business | Comments (1) | TrackBack (0)
November 19, 2003
BUSINESS: Delaware Indicator

I found this column a few weeks ago by economist Daniel Gross interesting: he argues that the rate of new business incorporations in Delaware (a state with nearly as many corporations as people, owing to its use as a legal home to many national companies) is a good indicator of the potential for near-term growth in the economy.

Posted by Baseball Crank at 06:37 AM | Business | Comments (0) | TrackBack (0)
July 17, 2003
BUSINESS/SCIENCE: The Death of Moore's Law?

Former Intel CEO Gordon Moore thinks that we are only a few years from seeing the finite limits on how small things can be cause the death of "Moore's law," the maxim that "the number of transistors on a computer chip will double every two years."

Posted by Baseball Crank at 07:15 AM | Business • | Science | Comments (0) | TrackBack (0)
July 13, 2003
BUSINESS: What Point?

>PowerPoint actually impedes your ability to process information

>Key quote: ''PowerPoint allows speakers to pretend that they are
giving a real talk, and audiences to pretend that they are listening."

>Source: via The American Scene

Posted by Baseball Crank at 09:56 PM | Business | Comments (0) | TrackBack (0)
July 11, 2003
BUSINESS/POLITICS: Social Conscience

Ricky West has some thoughts comparing Warren Buffett's anti-tax-cut social justice rhetoric to the reality of Berkshire Hathaway's treatment of its employees. Of course, Buffett has a duties to the other Berkshire Hathaway shareholders to maximize their profits rather than pay unnecessarily high salaries; he has to let the other shareholders decide for themselves how much money they want to devote to giving their fellow man a better deal than the market demands.

But then, shouldn't that also be true of George W. Bush?

Posted by Baseball Crank at 07:30 AM | Business • | Politics 2002-03 | Comments (0) | TrackBack (0)
June 17, 2003

Not good news, but probably not that harmful, either.

Posted by Baseball Crank at 09:27 PM | Business | Comments (0) | TrackBack (0)
May 13, 2003
BUSINESS: Not For Thee

Mindles H. Dreck thinks it's funny that the New York Times, even after getting burned by Jayson Blair, is willing to call for onerous regulations of Wall Street while it couldn't live with even modest internal controls for its own business. Of course, Wall Street handles other people's money - but then, as I often see in my law practice, a single Times article can launch a huge and costly lawsuit that can take years to get rid of.

Posted by Baseball Crank at 07:41 AM | Business | Comments (0) | TrackBack (0)
April 21, 2003
LAW/BUSINESS: AOLTimeWarner On The Hot Seat

The Washington Post reports on a probe of AOLTimeWarner by the SEC.

Posted by Baseball Crank at 11:41 PM | Business • | Law | Comments (0) | TrackBack (0)
February 20, 2003
BUSINESS: Ireland's Bane

Ireland's roaring economy has sputtered, and this New York Times profile blames the euro.

Posted by Baseball Crank at 06:31 AM | Business | Comments (0) | TrackBack (0)
February 03, 2003
POLITICS/BUSINESS: Charles Schwab Steps Down

Charles Schwab stepped down as CEO of his firm Friday, while remaining on as chairman. This looks like just a sensible combination of corporate governance reform (Schwab's explanation) and the 65-year-old Schwab beginning the transition to the next generation of leadership for his company. But you do have to wonder, his denials to the contrary, if Schwab would be a candidate for public office. I assume from some of his public positions that he's a Republican, although whether a moderate or a conservative, I've no idea. But he's got huge name recognition and deep pockets.

In the end, probably the biggest hurdle is that he'll be 69 when Gray Davis' term ends. Guys like Schwab are generally better suited to be governors than senators. Still, in a California GOP desperate for winners, he'd be a guy worth talking to.

Posted by Baseball Crank at 07:00 AM | Business • | Politics 2002-03 | Comments (0) | TrackBack (0)
January 27, 2003
BUSINESS: Only The Vultures Got Fat

The incomparable Lileks on Monster.com's Super Bowl ad: "it reminds you of the year when every other ad was for an internet-bubble company. One has survived, and itís the site aimed at the unemployed. Thereís the latter nineties, in a nutshell."

Posted by Baseball Crank at 09:57 PM | Business | Comments (0) | TrackBack (0)
December 19, 2002
BUSINESS: WSJ Corrupted By Clinton Crony!

The NY Post has an interesting critique of the corporate ethics of Dow Jones, parent company of The Wall Street Journal. Ironic that the Journal gets criticized for the ethical failing of having a Clinton crony (Vernon Jordan) on its board.

Posted by Baseball Crank at 06:58 AM | Business | Comments (0) | TrackBack (0)
November 14, 2002

More inside-the-Beltway stuff in Bob Novak's column on the impending doom of Treasury Secretary Paul O'Neill, which will leave the Bush Administration looking to fill the Treasury and SEC jobs as well as Larry Lindsey's economic-adviser job all at once.

While there are several candidates, all have their shortcomings:

Read More Ľ

Posted by Baseball Crank at 06:05 AM | Business • | Politics 2002-03 | Comments (0) | TrackBack (0)
November 05, 2002

Slipping his resignation letter over the transom on a busy news day: people I work with know and respect Harvey Pitt, and everyone seems to agree that he deserved better than this.

Posted by Baseball Crank at 11:08 PM | Business • | Law • | Politics 2002-03 | Comments (0) | TrackBack (0)
September 26, 2002

A study tries to estimate the cost of spam to businesses, but I think it overestimates - I can spot and delete spam (which has started to spill over my law firm's firewall in droves lately; we used to get it from legal publishers and the like but now it's the really nasty stuff too) at a rate of probably one every 5-7 seconds, not 30 seconds as estimated in this article.

Posted by Baseball Crank at 06:02 AM | Business • | Science | Comments (0) | TrackBack (0)
September 24, 2002

Google is into the news-searching business! I've already sampled this new search engine and it sure looks fun and useful. We'll see how long it stays free.

Posted by Baseball Crank at 10:53 PM | Blog • | Business | Comments (0) | TrackBack (0)
September 03, 2002
BUSINESS: Options as a Contingent Liability

Academics REUVEN BRENNER and DONALD LUSKIN argue in today's Wall Street Journal that when stock options are issued, they should be treated for accounting purposes, not as nothing (the traditional method) nor as an immediate but estimated expense (the current "reform" proposal), but as a contingent future liability that becomes an expense when exercised. (The article is available online only for subscribers). Their argument makes sense, and for another reason they don't mention: expensing options when exercised means that a company's income statement will take a hit (and be expected to take a hit) immediately after any big run-up in the stock that causes options to be exercised in large numbers. That should provide something of a check to excess enthusiasm, because big-time inside selling will trigger an instant dip. (The downsides: (1) until management absorbs this lesson, there would be more spike-and-drop patterns leading to more lawsuits, and (2) some execs could be legally trapped from selling by insider trading laws, because their decision to exercise options could, itself, be material nonpublic information about the future financial results of the company).

UPDATES: First of all, I mistakenly identified Donald Luskin as an academic, which he isn't. Second, Prof. Brenner was kind enough to email me to point out that he had considered the "hit to the income statement" point in his original draft of this article, which had to be shortened to fit the WSJ's space constraints.

Posted by Baseball Crank at 07:07 AM | Business | Comments (0) | TrackBack (0)
August 23, 2002

You can tell things are really going badly in the markets when business journalists are leaping to their deaths.

Posted by Baseball Crank at 07:16 AM | Business | Comments (0) | TrackBack (0)
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