Watching the news unfold on Wall Street at the moment is like watching a crisis zone. The bad news just keeps coming.
1. Citigroup pays record fine of $US215m for ripping off 2 million poor borrowers plus CEO Sandy Weil under the pump over Jack Grubman’s Worldcom spruiking.
2. CS First Boston fires CEO and looks like they’re in big trouble for misleading analysts. New York District Attorney called in for a criminal prosecution.
3. Morgan Stanley shares fall 10% after disappointing profit, 8th quarter fall in a row.
4. Dennis Kozlowski’s ex wife pledges $US10m to avoid jail for the former Tyco CEO as it is claimed he pilfered $US600m.
5. Ted Turner tries to oust Steve Case, the chairman of AOL-Time Warner, which is down 80% since merger and still smarting from a world record $US54 billion write-down.
. 6. Another $US2bn in irregularities at Worldcom so total figure now $US9bn.
Shares in Ross Perot’s old company EDS announced a profit warning after the market had closed on Wednesday and then duly plunged an incredible 50 per cent on Thursday, draggin the Dow Jones index down another 230 points to 7943, the first sub-8000 close since July 23. And this wasn’t confined to EDS as its main competitor, IBM, slumped 7 per cent bringing losses to 12 per cent over the past two days.
EDS warned that previous forecasts of third quarter earnings per share of US74c were a little inflated and the figure for the latest quarter was actually going to be only US12c. This is the company that just a few weeks ago went on a six-city roadshow talking up forecasts. Hmmm, let’s hope the computers work today in the South Australia public sector and the Commonwealth Bank as both rely heavily on EDS a company which appears not to have a clue what is going on.
And the meltdown continues. The Wall Street Journal has just reported that internal auditors have turned up an additional $US2 billion in improperly accounted for earnings at MCI Worldcom as it clears the decks for an incredible $US50.6 billion write down.
As we speak, the AOL-Time Warner board continues to meet after 7 hours in New York and fallen billionaire Ted Turner is reportedly gunning for the head of AOL founder Steve Case, the man who engineered the merger which has literally destroyed what was once the world’s biggest media. Shares in the merged company are off 70 per cent this year. As Rupert famously said of the 2000 merger deal, “what was the Time Warner board smoking that weekend?”
Then you’ve got more disasters in the banking sector. Following JP Morgan-Chase’s bad profit and share collapse, Morgan Stanley shares dived 10 per cent on Thursday after they missed third quarter profit forecasts and suffered their eighth straight quarterly decline in earnings.
CS First Boston fired their global CEO overnight and replaced him with a tag team duo out of New York and Zurich as more than 20 US states really crank up a huge case against the global investment banking giant for misleading and heavily conflicted share recommendations from their analysts. Merrill’s settled a similar claim with the New York district attorney for $US100 million but it looks like CSFB could be going down in a bigger way.
And Citigroup, the world’s biggest bank, has just settled a predatory lending case brought against it by federal regulators for a whopping $US215 million. If only our regulators were this tough against the Aussie banking cartel. Does this mean Crikey can start paying less than 12 per cent on the $18,000 outstanding on the Diners line of credit?
But it will get worse for Citigroup as the inquiry into dodgy Salomon Smith Barney analyst Jack Grubman, the man who spruiked MCI Worldcom shares like no other, is now tipped to be also likely to claim the scalp of global CEO Sandy Weil.
Then you’ve got the woes of Lucent, the company which dropped more than $500 million promising to build One.tel’s $1.2 billion mobile network. Their shares went through US$1 overnight, having lost more than 90 per cent of their value and bankruptcy is being openly talked about.
Sun Microsystems and Intel also hit multi-year lows today and are both off an incredible 80 per cent since the dotcom peak.
But there is some good news folks. The ex wife of disgraced and soon to be jailed Tyco CEO Dennis Kozlowski has pledged to come with the $US10 million cash required by tomorrow so he won’t be eating porridge in the tough Rykers (sic) Island prison in New York City just yet.
The irony in all these stories is that Lucent, Tyco, MCI Worldcom, CSFB, Citigroup, EDS and AOL-Time Warner all have quite substantial businesses in Australia.
And while Australian investors have collectively dropped more than $10 billion in US stocks over the past year, at least some of the offending companies have also dropped a bucketload in Australia.
Why EDS is crashing and burning
An IT expert writes:
The problem at EDS and other consulting/outsourcing firms is they were all hooked on a drug called IT outsourcing and ERP implementation. This was a drug freely available for the best part of the 90’s and there was more than enough of it to go around. Once they learned how to sell and implement it they built lean machines focused on the main line, so to speak.
Then the usual competitive pressures began. Revenues shrank as the product was commoditised and many new gangs (start-ups, dot coms ASP’s etc.) muscled in on the turf of the big guys. The good consultants and sales execs demanded and received exceptional packages.
People began to get lazy, the SAP’s and Oracles were a lot harder to install and configure, clients demanded major customisation, the botched implementation stories abounded, customers began to drag their feet about spending vast sums of cash and then the market tanked. Nobody was buying, least not plain vanilla anymore.
Customers began to say “running my IT is easy, how about helping me with all the hard stuff like payroll processing, accounts payable, claims processsing, supply chain, dealing with my employees etc.
So the EDS’s of the world said “Ah we need to diversify, we need to bundle all this Business Process stuff in”. This is where it gets a little tricky. You see all the consultants were good at selling deals and so so at installing them on the IT side but, when it came to business processes and the like they didn’t know what they didn’t know and it is killing them.
So these companies are dressing up IT and internet consultants as business process consultants and sending them out to sell business process based deals. Only problem is that their customer is no longer the friendly old CIO, it is now the mean old CFO and the COO.
These individuals are a much tougher sell, highly sceptical and will see the wolf in sheep’s clothing and call it a wolf in sheeps clothing. They will also demand to deal with someone who actually understands business process as well as the IT. The problem here is that most of the big players did not and do not have many genuine well rounded business process experts (remember the IT focus).
In addition to having to find people who know what business processes are and go and sell business process based deals, the business process sales cycle is much longer: 12 to 18 months usually and therefore more expensive. That combined with a slow economy has them questioning where the next hit is coming from and whether or not they should check into rehab.
Meanwhile, the clock is ticking, the sales pipelines are drying up and getting thinner, the leadership merry go rounds continue, the layoffs continue, everybody circles ignoring the hard decisions.
So we see EDS getting caught with its pants down, dry pipeline exposed, IBM buys PwC Consulting, CSC retreats to government, ACS blinks on the edge of the P&G abyss, CGEY tries to reinvent itself yet again, ATK . . , Accenture . . , etc. etc.
There’s gold in them hills we just need . . .