The Feud at the Top of Morgan Stanley

Kelleher, a gregarious former bond salesman, and Taubman, a reserved merger specialist, don't play well together. The friction between them has led to lost business opportunities for Morgan Stanley, according to former executives. Both are contenders to b Morgan Stanley via Bloomberg

By Michael J. Moore and Max Abelson

Colm Kelleher and Paul J. Taubman, co-presidents of the Institutional Securities Group at Morgan Stanley, work on opposite sides of an ocean, disagree about strategy, and share an enmity that has become the subject of company jokes.

At a meeting of more than 100 managing directors at the Ritz-Carlton Battery Park hotel in New York last year, Robert A. Kindler, the bank’s head of mergers and acquisitions and brother of stand-up comedian Andy Kindler, drew laughs and whistles when he ribbed the men about their relationship, according to two people who attended the session. “So how’s that co-head thing going?” Kindler asked, gesturing at the two men.

Neither Kelleher, 54, a gregarious former fixed-income salesman based in London, nor Taubman, 50, a reserved New York-based banker who has advised media clients on mergers, responded to the taunt, say the people, who asked not to be identified because they weren’t authorized by the bank to speak. Kelleher has been more vocal offstage, insulting Taubman in front of colleagues, according to two former Morgan Stanley executives.

The feud between the men has led to lost business opportunities, in addition to wasting colleagues’ time, according to six former executives. The Institutional Securities unit, which combines investment banking, sales, and trading, is critical: It generated $8.8 billion of revenue and $1.7 billion of profit in the first half, accounting for 79 percent of Morgan Stanley’s total earnings.

President and Chief Executive Officer James P. Gorman, who appointed the men to their posts in December 2009, will tolerate the tension between Kelleher and Taubman so long as their group performs, a current colleague says. This year, Morgan Stanley has maintained a leading position in investment banking and recovered some trading market share lost after the financial crisis. “The fact is, Institutional Securities just produced one of its strongest quarters ever in a very challenging environment, with the firm taking market share across many areas,” says Mark Lake, a company spokesman. Kelleher, Taubman, and Gorman declined to comment.

Kelleher and Taubman share a common ambition: Each sees himself as a potential future head of the company, according to three people who know them. Both are candidates to become president after Gorman, 53, gives up that title when he succeeds John J. Mack, who is retiring as chairman in January. The feud between Kelleher and Taubman may hurt their chances for advancement, four former executives say.

One of nine children who grew up in Ireland’s County Cork, Kelleher, an Oxford graduate, is fond of a daily Cuban cigar and off-color jokes, plays golf, collects modern British art, and drinks with colleagues. A former fixed-income salesman, he was chief financial officer during the 2008 financial crisis, when Morgan Stanley secretly borrowed $107 billion from the Federal Reserve, the most of any bank. He conducted business lying down on his office floor after suffering a back injury in a car accident.

Taubman, the son of an accountant, was born in New York and graduated from the University of Pennsylvania’s Wharton School in 1982, joining Morgan Stanley that year. He helped negotiate a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial in September 2008 that helped the company survive the financial crisis. A former colleague describes him as a good person for a quiet, problem-solving conversation, not a chat over a beer.

Taubman and Kelleher’s relationship was rocky at least as far back as their being named co-heads, say two former executives who worked under them. The statement announcing the appointments described a shared leadership, with Kelleher “overseeing” sales and trading and Taubman “focusing” on banking. The arrangement didn’t last. A year later, Gorman moved Kelleher to London and put him directly in charge of sales and trading while giving Taubman sole responsibility for investment banking.

The men speak to each other infrequently and usually don’t coordinate their remarks at internal presentations, the colleagues say. They disagree about how aggressively to push clients for additional business after stock or bond offerings. Investment banks often pitch clients to win derivatives business, such as an interest-rate or currency swap, related to a sale of stocks or bonds. Kelleher favors seeking the additional transactions, which can bring in significant trading revenue. Taubman is more cautious about such deals, because they can place the bank in the awkward position of being on the opposite side of a trade with a client it just advised.

Along with creating obstacles to doing business, such discord is bad for morale as well. “What happens is people spend time politicking, which has some costs,” says Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies corporate governance. “It’s the CEO’s or the board’s job either to try to get them to stop feuding, or you remove one.”

The bottom line: The inability of Taubman and Kelleher to get along may mean that neither man wins the president’s post at Morgan Stanley.

Moore is a reporter for Bloomberg News. Abelson is a reporter for Bloomberg News.

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Myths About China and India's Africa Race

By Anil K. Gupta and Haiyan Wang

More countries in Africa are joining the global economy. Over the last decade, the continent’s GDP expanded at an average annual rate of 5.1 percent, low compared with emerging giants like China and India but still well above the global growth rate of 2.9 percent. During this period, Africa also became far more globally integrated and saw its merchandise trade grow at an annual rate of 12.9 percent, vs. a global growth rate of 8.9 percent.

Africa’s economic ties with China and India have grown at a particularly rapid pace. This development—when put in the context of Asia’s ongoing march toward becoming the world’s economic center—has led many to believe that China and India have taken over from the West as the new economic powers in Africa. That conclusion, however, hinges on some common misconceptions about China and India’s engagement with Africa.

Myth No. 1: China and India dominate the race for Africa.

During 2000-2010, Africa’s merchandise trade with China grew at an annual rate of 29 percent (from $9 billion to $119 billion) and with India at an annual rate of 18 percent (from $7 billion to $35 billion). While these growth rates are very robust, they are building on a very low base. So far, Africa’s economic partnership with Europe dominates that with China or India. In 2010, Europe received 36 percent of Africa’s exports, compared with 13 percent for China and 4 percent for India. Over 37 percent of Africa’s total imports came from Europe, vs. 12 percent from China and 3 percent from India. In 2010, even the U.S. was ahead of China in terms of total merchandise trade with Africa.

To date, China and India also have played only a small, albeit growing, role in terms of capital investment in Africa. Each accounts for less than 5 percent of the total inbound foreign direct investment (FDI) stock in Africa, a tiny fraction of that from Europe and the U.S.

In short, as newly active players, China and India are making rapid headway in Africa. However, appearances notwithstanding, they are still far behind the developed economies—especially Europe—in terms of economic engagement with Africa.

Myth No. 2: China and India’s engagement with Africa is all about natural resources.

Many Indian companies are looking at opportunities to sell in African markets. In 2010, Indian mobile operator Bharti Airtel paid $9 billion for the African telecom operations of Kuwait-headquartered Zain. Tata Motors, India’s largest automaker, has opened an assembly operation in South Africa. Mumbai-based Essar Group is investing in the African steel sector and Godrej, another Indian conglomerate from Mumbai, is very active in Africa’s consumer goods market. Karuturi Global, the Bangalore company that is the world’s largest rose producer, has become one of Africa’s largest players in commercial agriculture and leases 1,200 square miles of land in Ethiopia. Indian companies are also very active in Africa’s emerging IT services market.

Chinese companies are also not just focused on Africa’s natural resources. China has taken a growing interest in helping build Africa’s infrastructure such as roads, railways, bridges, ports, and power stations. At the 2009 China-Africa Summit, China pledged to build 100 clean energy projects in Africa covering solar, biogas, and hydropower. It also announced the phasing in of zero import tariffs for 95 percent of products from the least developed African countries.

Both China and India are beginning to see Africa not just as a resource supplier but also as a market and as a target for capital investment in many sectors of the economy.

Myth No. 3: China and India are the new neocolonialists in Africa.

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New Delhi’s Housing Boom Hits a Snag

Taking to the streets to drum up business for suburban developments Vishwanathan/Bloomberg

By Pooja Thakur and Abhay Singh

B.N. Mishra aspired to become a suburbanite. In 2009 the New Delhi resident plunked down 2.2 million rupees ($45,800) for a three-bedroom unit in a new residential complex going up in Greater Noida, a bedroom community east of the Indian capital. Three years later, Mishra, 36, who runs a software business, is close to giving up hope that his family will ever move in. The development he bought into is caught in a legal dispute that pits builders against the villagers who once owned the land. “It has been a huge roller coaster ride,” says the first-time home buyer. “If there is no solution, I’ll have to continue with renting or buy a house that is ready.”

Elsewhere in India, protests by villagers who have been forced to sell their land to the government—usually at below-market rates—have stalled billions of dollars worth of projects, including steel mills, auto assembly plants, and highways. “The issue is a critical component of the overall investment climate,” says Dharmakirti Joshi, an economist at Crisil, the local unit of Standard & Poor’s. “I believe it will get sorted out, but if it doesn’t it will have repercussions.”

A four-story height restriction in most parts of New Delhi has made land for new residential projects scarce and expensive, driving members of India’s burgeoning middle class to more affordable areas to the south and east of the capital. In the suburbs of Greater Noida, Noida, and Gurgaon, developers are expected to deliver 439 million square feet of new housing stock over the next three years, enough for 340,000 families, according to real estate research firm P.E. Analytics. Prices for these new homes range from about $20,000 to $4 million, according to Jones Lang LaSalle India. In contrast, colonial-style bungalows along central Delhi’s tree-lined avenues can cost more than $10 million.

In Greater Noida, farmers claim they were swindled by officials in Uttar Pradesh state, who expropriated their land for industrial purposes and promised them jobs. Instead, the government sold the acreage to residential developers. In July, India’s highest court ruled that the land should be returned to the villagers. Local authorities hope to reach a compromise with the farmers that safeguards some $10 billion worth of investments.

The controversy has “shaken the developer community, because if you don’t get good title land from the government, who do you go to?” says Getamber Anand, vice-president of the Confederation of Real Estate Developers’ Associations of India and managing director of Noida-based developer ATS Infrastructure.

To tamp down resentment in the countryside, the government of Prime Minister Manmohan Singh has drafted legislation to revamp a century-old land acquisition law. Parliament is expected to vote on the bill, which defines protections for those facing government expropriation, before year-end.

Real estate broker Rohit Saxena used to spend weekends on a hot dusty road, darting between cars to distribute brochures for residential developments in Noida. Saxena says that in his best month last year he earned 1.05 million rupees, or 29 times India’s per-capita annual national income. These days, Saxena is having to make do largely on his monthly salary of 30,000 rupees, as the deals have petered out. Says Samir Jasuja, chief executive officer of P.E. Analytics: “Sales have come to a standstill because the customer doesn’t know what he is buying, whether the land belongs to the developer or not.”

The bottom line: The development of housing for 340,000 families has been slowed by disputes over land in the suburbs of New Delhi.

Thakur is a reporter for Bloomberg News. Singh is an editor for Bloomberg News.

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Oracle Eyes Industry-Specific Software Buys

By Aaron Ricadela

(Bloomberg) — Oracle Corp., facing mounting competition from smaller, “boutique” rivals, may make more deals to purchase industry-specific software companies, co-President Mark Hurd said.

Oracle is focused on so-called vertical markets, such as financial-services customers, and acquisitions could be a part of that strategy, Hurd said today in his first interview with a business publication since joining the company. Still, Redwood City, California-based Oracle doesn’t feel pressure to tap its $31.7 billion in cash to make a deal, he said.

“There’s a lot of value in these industry verticals we’ve invested in over the years,” said Hurd, referring to software for the banking, telecommunications and retailing industries. “It’s hard to beat the returns the company gets.”

Oracle, the world’s largest maker of database software, also is seeking to spur sales by appealing to budget-minded businesses. The company’s hardware and software can boost efficiency, letting customers reduce the number of servers and databases they ran, Hurd said. Oracle plans to unveil new computer systems packaged with database software and other programs at its OpenWorld conference next week in San Francisco.

The company also will release new software applications in its Fusion line at OpenWorld, stepping up competition with boutique companies that focus on specialized software applications, Hurd said. The company aims to repeat the success it’s had with last year’s crop of new products, he said.

“If you went back a year ago and looked at the amount of technology released at Oracle OpenWorld, you’d have to say it’s a tremendous yield,” Hurd said. “Next week we’ll announce even more.”

Oracle rose 81¢, or 2.8 percent, to $29.71 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have climbed 10 percent during the past 12 months.

Chief Executive Officer Larry Ellison has spent more than $40 billion on acquisitions since 2005, including last year’s $7.4 billion acquisition of computer maker Sun Microsystems Inc. The takeover spree has also added programs that let companies manage human resources, operations and other complicated computing tasks.

Ellison also introduced a new computer system, the Sparc Supercluster, at an event at the company’s headquarters today. The product includes a Sparc T4 processor that can run Oracle’s database and a user’s applications faster than older Sun machines, Ellison said at the event.

“We think lots and lots of people are going to upgrade from their current Sparc systems,” Ellison said. “This is a really fast computer.”

Hurd joined Oracle last September, a month after he was ousted as Hewlett-Packard Co.’s CEO. Hurd was replaced at Hewlett-Packard by Léo Apotheker, who was forced out himself last week and replaced by former EBay Inc. CEO Meg Whitman. Hurd declined to discuss Hewlett-Packard in today’s interview.

Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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Practical Pointers in an Anxious Age

The problems facing the world are substantial. Europe is cracking up. American manufacturing is on its heels. And it can be very hard to find a stylish navy blue suit, especially if you’re looking for details like a Savile Row-style waistband buckle. It would be easy to panic, but remain calm, not because we know the answers, but because we called people who do. We found folks with pretty good ideas about how to fix Europe (Christine Lagarde, managing director of the International Monetary Fund), save manufacturing (Dan Akerson, who runs General Motors), and find a suit (Thomas Mahon, who learned his trade on Savile Row, cutting cloth for gents such as Bryan Ferry and the Prince of Wales). We didn’t stop there. Life is far more complicated than a few crumbling continents. We also wanted to know how to network, how to run a meeting, how to spot talent, how to decant wine, and how to hack any website. And we’re particularly happy that we learned how to play basketball with the President. Hint: Do not knock him unconscious.

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Ten Things Only Bad Managers Say

By Liz Ryan

We know the kinds of things good managers say: They say “Attaboy” or “Attagirl,” “Let me know if you run into any roadblocks, and I’ll try to get rid of them for you,” and “You’ve been killing yourself—why don’t you take off at noon on Friday?”

Bad managers don’t say these things. Helpful, encouraging, and trust-based words and phrases don’t occur to them.

Crappy bosses say completely different things. For your enjoyment, we’ve gathered together 10 of the most heinous, bad-manager warhorse sayings. Do any of them sound like something a manager in your company might say (or might have said this week)?

If you don’t want this job, I’ll find someone who does.
Great leaders understand that the transaction defining the employer-employee relationship—the fact that an employer pays you in cash while you cough up your value in sweat and brainwork—is the least important part of your professional relationship. Good managers realize that to get and keep great people, they have to move past the dollars-and-cents transaction and let people own their jobs. Good leaders give people latitude and let them know that their contributions have value. Lousy managers, on the other hand, love to remind employees that it’s all about the transaction: “You work for me.” They never fail to remind team members that someone else would take the job if you ever got sick of it or let the lousy manager down in some way.

I don’t pay you to think.
This is what a bad manager says when an employee offers an idea he doesn’t like. Maybe the idea threatens the inept manager’s power. Maybe it would require the lousy manager to expend a few brain cells or some political capital within the organization. Either way, “I don’t pay you to think” is the mantra of people who have no business managing teams. It screams, “Do what I tell you to do, and nothing else.” Life is way too short to spend another minute working for someone who could speak these words.

I won’t have you on eBay/ESPN/Facebook/etc. while you’re on the clock.
Decent managers have figured out that there is no clock, not for white-collar knowledge workers, anyway. Knowledge workers live, sleep, and eat their jobs. Their e-mail inboxes fill up just as fast after 5:00 p.m. as they do before. Their work is never done, and it’s never going to be done. That’s O.K. Employees get together in the office during the daytime hours to do a lot of the work together, and then they go home and try to live their lives in the small spaces of time remaining. If they need a mental break during the day, they can go on PeopleofWalmart.com or Failblog.org without fear of managerial reprisal. We are not robots. We need to stop and shake off the corporate cobwebs every now and then. If a person is sitting in the corner staring up at the ceiling, you could be watching him daydream—or watching him come up with your next million-dollar product idea. (Or doing both things at once.)

I’ll take it under advisement.
There are certain words that we never use in real life—only in business and only in ways that let us know that the speaker is shining us on, bigtime. “I’ll take it under advisement” means “Go away and die, and don’t speak to me again unless I ask you to.” It means “I am not going to do whatever you just suggested that I do, and I want you to know that I value your opinions less than I can tell you.”

Who gave you permission to do that?
My brother worked at a huge tech company, and one day he and his team of Software Quality Assurance folks were meeting at the office before heading to the airport. They gathered at 6 a.m. in a conference room to talk about their plan once they hit the ground in the destination city. The door opened and a manager walked into the conference room. “Who called this meeting?” he asked. “Only a grade level E5 can call a meeting.” My brother left that job a few months later. People who obsess about hierarchy and permission and grade levels and the like are people you’d be better off avoiding, especially in relationships that give them power over your life and career.

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Where the Pentagon May Cut—or Spend

Illustration by Kelsey Dake

By Roxana Tiron

CUT
Light Tactical Vehicles
U.S. Army and Marine Corps plans to buy a fleet of new armored trucks could be at risk. The Joint Light Tactical Vehicle program is estimated to cost between $10 billion and $30 billion, according to the Congressional Research Service. Without it, the Army and Marines would depend on armor-fortified versions of Cold War-era Humvees made by AM General.
Body Armor, Rifles, Backpacks
Spending on contracts for body armor, night-vision equipment, backpacks, and small arms may decline $2.44 billion over the next couple of years as U.S. troops withdraw from Iraq and Afghanistan, according to a Bloomberg Government study by Sopen Shah. Savings should increase with the conclusion of those wars and cuts in the number of service members stationed elsewhere overseas.
Personnel
Former Defense Secretary Robert Gates said in January that Army uniformed personnel will be reduced by 27,000 starting in 2015, and the Marines may cut 20,000. For every reduction of 10,000 nondeployed military personnel, the U.S. could save as much as $1 billion annually, according to Gordon Adams, associate director at the Office of Management and Budget under President Bill Clinton.
Advanced Fighter Jets
Lockheed Martin’s $382 billion F-35 Joint Strike Fighter is the only advanced jet in development. Congressional scrutiny may trigger cuts in the proposed purchase of 2,443 F-35 planes for the U.S. Air Force, Navy, and Marine Corps. If the already delayed vertical-take-off-and-landing version of the F-35 were dropped, Lockheed could lose as much as $33.2 billion in revenue, according to a Bloomberg Government study.
Carrier Strike Group
The U.S. Navy is reviewing its plans to maintain 11 aircraft carriers and may mothball at least one of the giant warships built by Huntington Ingalls Industries. That would mean related cuts to the vast support structure in the carrier’s strike group, which includes cruisers, destroyers, and other escort vessels, warplanes, and about 7,500 sailors. The potential savings: about $2.6 billion a year.
BOOST
Helicopters
The U.S. military is expected to keep buying variants of the Black Hawk helicopter made by Sikorsky, a unit of United Technologies, along with Boeing’s Chinooks. The Army’s helicopter procurement budget should still rise to about $4.7 billion in 2016 from $4.4 billion in 2012, according to data compiled by Bloomberg Government.
Radars and Sensors
The electronics market will grow cumulatively to a total of about $45 billion by 2020, from $37 billion this year, according to Teal Group analyst David Rockwell. The Pentagon is buying electronic jamming devices and cloud-penetrating radar systems as well as sensors, networks, and computers, the central nervous system for military platforms.
Unmanned Aircraft
The global market for drones is set almost to double over the next decade, to $11.3 billion, according to Teal Group’s Philip Finnegan. The analyst expects U.S. spending on research and development and procurement for unmanned aircraft to increase from $4.3 billion to $7.8 billion. The Pentagon plans to more than triple its inventory of strike and surveillance drones provided by such manufacturers as General Atomics Aeronautical Systems and Northrop Grumman.
Smartphones and Tablets
The U.S. military plans to expand its use of smartphones and tablets. Each branch has tested products such as Apple’s iPad and iPhone and HTC’s Touch Pro2. So far, General Dynamics’ Sectéra Edge and L-3 Communications’ Guardian are the only smartphones accredited for use on the Defense Dept.’s classified networks. Next-generation devices may erode the Pentagon’s dependence on Research In Motion’s BlackBerry.
Cybersecurity
Defense Secretary Leon Panetta told Congress that America’s next “Pearl Harbor” could be an attack on its computer networks. The Pentagon’s spending on cybersecurity is forecast to grow by 9.5 percent annually from the current level of $4.5 billion, according to John Slye, an analyst at Input, a market research firm in Reston, Va.

With Kevin Brancato

Tiron is a reporter for Bloomberg News.

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'Job-Killing' Tax Hikes May Not Be So Lethal

The rich may spend part of a tax windfall, but put some into savings and investments. The middle class spend more of any extra cash they get Bloomberg

By Mike Dorning

Barack Obama had barely finished announcing his deficit-reduction plan this week before John Boehner, the Republican House Speaker, dismissed the President’s proposed tax increases on wealthy Americans as a blow to “job creators.” That phrase has been coming up a lot lately in Washington. The notion that the rich drive job creation and that taxing upper incomes is a “job killer” is a powerful line and difficult to refute between commercial breaks. But like a lot of political memes, it suffers from one shortcoming: It’s not at all clear that it’s true.

“There’s very limited evidence to support the claim that increased personal income tax rates on higher-income people would reduce hiring,” says Joel Slemrod, who served as senior tax economist for President Ronald Reagan’s Council of Economic Advisers. Cutting taxes on upper incomes may have economic benefits, but it’s not an especially powerful way to create a lot of jobs quickly.

The big difference between the rich and everyone else is that they are more likely to save money from a tax cut since they already have enough to live on, says Alan Viard, an economist at the conservative American Enterprise Institute. They may buy a yacht, but plenty is left over for their portfolio. In the long run, all the money the rich save as a result of lower tax rates means there is more available to be invested in business through banks or the stock market. That should eventually lead to higher standards of living—and, yes, more jobs. But it takes time for that to be felt.

If politicians are looking to create jobs right away, they’d be better off concentrating their efforts lower down on the income ladder. The poor and middle class are more apt to spend extra money, maybe on groceries or a new refrigerator, helping to spur the economy immediately. The No. 1 reason small business owners say they’re not hiring is poor sales. A Congressional Budget Office report looking at economic multipliers found tax cuts for low- and middle-income families are more than twice as powerful in stimulating immediate demand as tax cuts for the wealthy. “The short-run/long-run is the critical thing,” Viard says. “If the goal is to have more jobs 6 months, 12 months from now, you want to increase aggregate demand. If the goal is to have a high standard of living 10, 20 years from now, you want to increase national savings.”

Even that long run picture is not so clear. Under Bill Clinton, taxes on higher-income families were high compared to now, at 39.6 percent. Yet almost 23 million jobs were added vs. net job growth of 1.1 million during George W. Bush’s lower-tax years. In the 1950s, a Golden Age of growth, the top marginal tax rate was as high as 91 percent. There were many other economic forces at work in each of these periods, making direct comparisons difficult. Still, says Slemrod, now a professor at the University of Michigan, “it disproves the idea tax increases are the kiss of death.”

The benefits of the tax cuts are muddied further if there’s a budget deficit. “Despite all the rhetoric that tax cuts promote economic growth, that is not the case when the tax cuts are not paid for,” says Martin Sullivan, a former tax economist for the U.S. Treasury Dept. and now an analyst for the nonpartisan publication Tax Notes. As Viard puts it, “Anyone who tells you they have conclusive results, you should be wary of.”

The bottom line: In the 1950s, a time of rapid economic growth in the U.S., the top marginal income tax rate was as high as 91 percent.

Dorning is a reporter for Bloomberg News.

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