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DealBook: Russia Musters Its Credibility to Sell Fund

June 8, 2011 by Leave a Comment

As part of its drive to show foreign investors that Russia is a safe and profitable place to put their money, a government-owned bank has established a private equity fund with a former Goldman Sachs banker in charge and Prime Minister Vladimir V. Putin as rainmaker.

Last month, Mr. Putin met in Moscow with prominent international investors including Stephen A. Schwarzman, chief executive of the Blackstone Group, and Lou Jiwei, chief executive of the China Investment Corporation, to try to generate interest in Russia’s direct investment fund. Mr. Putin plans to announce the fund formally later this month at the St. Petersburg International Economic Forum.

Over dinner on Wednesday in Vienna with a small group of business people and investors, Kirill Dmitriev, an alumnus of Goldman Sachs and McKinsey Company who is chief executive of the fund, gave details about how it would be structured.

The point of the fund, Mr. Dmitriev emphasized, will be to make money. That is not always obvious in Russia, where foreign investors have been concerned about corruption, lack of an impartial court system and the authoritarian tendencies of the government.

“We want to make some returns,” said Mr. Dmitriev, who speaks lightly accented, colloquial English and graduated from Stanford University and Harvard Business School. Before Mr. Putin named him to run the fund, Mr. Dmitriev was president of Icon Private Equity, a fund focused on Russia and the former Soviet Union.

Profitability, rather than government policy goals, will drive the investments, Mr. Dmitriev promised. While the overall aim is to promote growth and create jobs, investments will be judged according to the potential return over the typical private equity cycle of five to seven years, he said.

Russia plans to commit $10 billion to the fund, in installments of $2 billion a year for five years, via the government development bank Vnesheconombank. But the bank’s stake in investments will never exceed 50 percent, meaning that foreign investors will retain control, said Petr Fradkov, deputy chairman of the bank.

At the same time, Mr. Putin’s personal involvement in the fund is designed to reassure investors that they will not be abused by arbitrary or corrupt lower-ranking officials. “The investor has implicit comfort,” Mr. Fradkov said.

Mr. Putin met for an hour and a half on May 18 with the foreign investors, a group of about 20 people that also included representatives of the Kuwait Investment Authority, the Abu Dhabi Investment Authority and private equity fund Permira, Mr. Fradkov and Mr. Dmitriev said.

Investors are not being asked to write blank checks to the fund, but rather to invest in individual deals, another feature designed to reassure them that they will have control over how their money is spent. Mr. Fradkov said that there were projects in the works and the first deals should be announced within nine months.

Mr. Fradkov would not give specifics about potential deals, but Mr. Dmitriev said one goal of the fund would be to invest in companies that could profit from Russia’s rapidly growing middle class.

Investors may still need to be persuaded. The questions put to Mr. Dmitriev and Mr. Fradkov at the dinner made it clear that many still regarded Russia as risky and unpredictable. When politicians are involved — and not just in Russia — there is always a risk that money will be steered to pet projects.

As Mr. Dmitriev points out, the best way to deal with such concerns will be to generate some big returns in the years to come.

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Supreme Court Rules for Drug Firm in a Patent Dispute

June 7, 2011 by Leave a Comment

WASHINGTON — The Supreme Court on Monday sided with a drug company over Stanford University in a patent dispute concerning a test to measure the amount of H.I.V. in a patient’s blood.

In a second decision, the court ruled that plaintiffs in a securities fraud class action against Halliburton did not have to prove that false statements from the company caused them to lose money in order to band together in a class action.

In the patent case, Stanford v. Roche Molecular Systems, No. 09-1159, the court considered how a 1980 federal law, the Bayh-Dole Act, affected rights to the H.I.V. test. It was invented by Dr. Mark Holodniy, a fellow at Stanford’s department of infectious diseases who had been assigned by the university to conduct research at the Cetus Corporation, a private firm.

Dr. Holodniy had signed a contract saying that “I agree to assign” inventions arising from his employment at Stanford to the university. He later signed a contract saying that “I will assign and do hereby assign” to Cetus inventions arising from his time there.

Roche Molecular Systems bought Cetus’s rights in the H.I.V. test and created a kit that became widely used in hospitals and clinics. Stanford sued for patent infringement; Roche said it was entitled to sell the kits in light of the agreement between Dr. Holodniy and Cetus; and Stanford responded that the doctor had no rights to assign given the Bayh-Dole Act, which specifies how rights in patents are allocated when federal money is involved.

The “general rule,” Chief Justice John G. Roberts Jr. wrote for the majority in a 7-to-2 decision, is that “rights in an invention belong to the inventor,” even if created on an employer’s watch. (Outside the patent context, Chief Justice Roberts said, the basic rule often goes the other way. “No one would claim,” he wrote, “that an autoworker who builds a car while working in a factory owns that car.”)

A lower court ruled that Dr. Holodniy’s agreement with Stanford had been only a promise to assign his rights in the future while the one with Cetus had been an authentic assignment. That interpretation of the two agreements, which was not at issue in the Supreme Court, meant, the chief justice said, that Roche would win unless the Bayh-Dole Act had altered the basic rule that inventors controlled their patent rights.

The act allocates rights between the federal government and federal contractors like Stanford, Chief Justice Roberts wrote. But, he continued, “nowhere in the act are inventors deprived of their interest in federally funded inventions.”

The act, the chief justice wrote, “simply assures contractors that they may keep title to whatever it is they already have.” But, he wrote, “you cannot retain something unless you already have it.”

The decision may not be particularly consequential. With more carefully drafted assignment agreements, Chief Justice Roberts wrote, “the statute as a practical matter works pretty much the way Stanford says it should.”

In a dissent, Justice Stephen G. Breyer said he would have returned the case to the lower courts for further consideration of two questions: the proper interpretation of the interaction of the two assignment agreements and whether the Bayh-Dole Act should be assumed to require assignment of patent rights by employees of government contractors to their employers.

Justice Ruth Bader Ginsburg joined the dissent.

In the securities fraud case, Erica P. John Fund v. Halliburton, No. 09-1403, the court considered what plaintiffs must prove in order to join together in a class action.

The plaintiffs, who bought Halliburton stock from 1999 to 2001, said the company had made false statements designed to inflate its stock price on three topics: its financial exposure to asbestos claims, how much it stood to make from its engineering and construction business, and the expected benefits of a merger with Dresser Industries.

The lower courts ruled that the plaintiffs had met most but not all of the requirements to proceed as a class. The missing element, the federal appeals court in New Orleans said, was that they had failed to prove “loss causation,” that is, “that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses.”

In a unanimous decision written by Chief Justice Roberts, the court ruled that such proof was not required at the class certification stage.

It was true, Chief Justice Roberts wrote, that finding proof that the investors had relied on the misstatements was part of the class certification basis. But loss causation is a logically different issue, he wrote. It requires proof, he said, that “a misrepresentation that affected the integrity of the market price also caused a subsequent economic loss.”

In presenting its case to the Supreme Court, Halliburton essentially conceded that proof of loss causation was not required at the class certification stage. What the appeals court actually meant in using the phrase, Halliburton contended, was “price impact,” that is, that the false statements affected the stock price in the first place.

“We do not accept Halliburton’s wishful interpretation of the court of appeals’ opinion,” Chief Justice Roberts wrote. “Whatever Halliburton thinks the court of appeals meant to say, what it said was loss causation.”

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Japan Appears Dispensable as a Supplier

May 30, 2011 by Leave a Comment

Consider the case of STMicroelectronics, Europe’s giant in the semiconductor business, which buys silicon wafers, chemicals and chip-packaging components from Japan.

STMicroelectronics has more than $10 billion a year in sales. Its major customers span a variety of industries — consumer electronics, autos, mobile phones and computers — and include Apple, Bosch, Hewlett-Packard, Nokia and Sony Ericsson.

After the earthquake and tsunami struck Japan in March, STMicroelectronics, like many global companies that buy parts and materials from Japan, quickly set up a crisis task force to assess the health of its supply network there. But the sense of crisis gradually passed. When necessary, suppliers outside Japan have been lined up, and the company’s production has not been disrupted.

And even though STMicroelectronics’ sales to Japan — about 4 percent of total revenue — will decline this year because of lower demand, “it is going smoother on the supply-chain side than we had thought,” said Carlo Bozotti, chief executive of STMicroelectronics.

The big European company’s experience is widely shared. More than two months after the disaster, any lingering impact on industries outside Japan from shortages of crucial supplies is limited. Beyond their concerns about a very short list of components, like certain automotive microcontrollers, companies around the world are cautiously breathing easier.

“The global supply chain has been able to weather the storm,” said Hau Lee, a professor at Stanford University’s graduate school of business. Barring further unexpected shocks, Mr. Lee said, “This has not been as bad as most people initially worried it might be.”

The resiliency of global supply networks and quick action by companies are part of the reason. But another explanation was provided by a study published last week, led by Mr. Lee and Kevin O’Marah, a supply chain specialist at Gartner, an information technology research and advisory company.

Their report used data from a survey of 750 supply chain managers across a spectrum of industries worldwide, sponsored by SCM World, a professional organization and Web site. As it happens, the survey was done in February, shortly before the quake and tsunami. It found that Japan, despite being the world’s third-largest economy (behind the United States and China), plays a relatively small role in the global supply chain.

The supply managers gave a telltale sign when asked to name the most important source of supply of manufactured parts and materials outside of the corporation’s home country. They were then asked to name their second and third most important nonhome source.

China was the leader, with 37 percent of the managers saying it was their leading source beyond the home nation. Next came the United States with 20 percent, followed by Germany with 7 percent. The same order was evident in the combined totals.

Japan fell well down the list, tied for eighth with Canada.

“What’s remarkable is how relatively isolated Japan is,” said Mr. O’Marah, an author of the report. “It’s far less integrated into the world’s manufacturing supply chains than you would expect, given the size of Japan’s economy.”

Another supply-chain specialist cautioned that the country survey data may understate Japan’s role. China’s rise as a manufacturer has tilted toward low-cost assembly operations, which often rely on Japan for important components, said Hal Sirkin, a senior partner at the Boston Consulting Group. “There is a Japan-inside-China element that might be missed here,” Mr. Sirkin said.

Japan specialists are likely to find the survey data — and Japan’s modest place in the global supply network — more revealing than surprising. Japan’s manufacturing prowess and global competitiveness are focused in a few industries, like automobiles and consumer electronics, they note. In those industries, the traditional Japanese model has been that a supplier would sell almost exclusively to one large manufacturer, like Toyota or Nissan.

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Warren Buffett, Delegator in Chief

April 24, 2011 by Leave a Comment

That is Warren Buffett’s management style, as described in a biography by Roger Lowenstein. Mr. Buffett delegates; he empowers his executives. Mr. Buffett, the 80-year-old chief executive of Berkshire Hathaway known as Uncle Warren, has been praised as one of the world’s greatest business managers. He has racked up average annualized returns of more than 20 percent for four decades. Yet in a potential case study for business schools, the question is now being asked: Does Mr. Buffett delegate too much?

Just in time for his company’s annual meeting with 35,000 investors next weekend, Mr. Buffett’s management style is coming under scrutiny.

His heir apparent, David L. Sokol, resigned last month after it emerged that he had bought $10 million worth of stock in Lubrizol, a chemical manufacturer, a day after he began orchestrating a merger with Berkshire, which later acquired Lubrizol for $9 billion — increasing the value of Mr. Sokol’s holding by $3 million.

Although Mr. Sokol mentioned that he was a shareholder in Lubrizol to Mr. Buffett when he suggested that Berkshire buy the company, Mr. Buffett said he did not ask about “the date of his purchase or the extent of his holdings.” The controversy exposed a paradox: Mr. Buffett may be considered one of the world’s best managers, but he doesn’t actively manage the hundreds of businesses that Berkshire owns.

“Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?” asked Stanford University’s Graduate School of Business in a paper titled “The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway?”

Unlike Jeffrey R. Immelt, the chief executive of General Electric, who spends much of his time on airplanes traveling the world to visit the company’s 287,000 employees and oversees a giant campus and management team in Fairfield, Conn., Mr. Buffett “manages” Berkshire’s 257,000 employees with just 21 people at his headquarters in a small office in Omaha.

Mr. Buffett’s business partner, Charles Munger, once described Mr. Buffett’s day. He spends half of his time just sitting around and reading, Mr. Munger said. “And a big chunk of the rest of the time is spent talking one on one, either on the telephone or personally, with highly gifted people whom he trusts and who trust him.”

And that trust has advantages. “Part of his genius is that he’s created a hands-off culture that encourages entrepreneurs to sell their private companies to Berkshire,” said Larry Pitkowsky, managing partner of GoodHaven Capital Management and a longtime Berkshire shareholder, “and, critically, that they keeping showing up for work every day without worrying that they are going to get a call from headquarters telling them how to run things.” How hands-off is Mr. Buffett? When questioned once about why Berkshire didn’t take a more active role in fixing Moody’s, the troubled credit rating agency, in which he was the largest shareholder, he declared: “I’ve never been to Moody’s. I don’t even know where they’re located.”

“If I thought they needed me I wouldn’t have bought the stock,” he added.

He sees himself less of an activist than as a passive investor, a stock picker with a nose for a good deal. “We don’t tell Burlington Northern what safety procedures to put in or AmEx who they should lend to,” he said at his annual meeting two years ago. “When we own stock, we are not there to try and change people.”

His management approach may be as much a function of his own philosophy as it is a practical preference. He likes to make his investments dispassionately, based on the numbers, rather than let emotions get involved.

Mr. Buffett’s investing antennas may be genius, but some of his critics have suggested that his trust-based management style may have left him too farsighted to quickly spot operational problems. As reported by Carol Loomis of Fortune magazine, when Mr. Buffett was first told in 1991 about indications of a possible scandal at Salomon Brothers that later nearly took down the company (Berkshire was its largest shareholder), he initially did not detect any reason to be particularly alarmed, “so he went back to dinner.” Only after speaking several days later about the matter with his partner, Mr. Munger, “did Buffett get a sense of real trouble.”

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