Live Long? Die Young? Answer Isn’t Just in Genes (NYTimes, 08/31/06)

August 31, 2006
The New Age
Live Long? Die Young? Answer Isn’t Just in Genes
By GINA KOLATA
Josephine Tesauro never thought she would live so long. At 92, she is straight backed, firm jawed and vibrantly healthy, living alone in an immaculate brick ranch house high on a hill near McKeesport, a Pittsburgh suburb. She works part time in a hospital gift shop and drives her 1995 white Oldsmobile Cutlass Ciera to meetings of her four bridge groups, to church and to the grocery store. She has outlived her husband, who died nine years ago, when he was 84. She has outlived her friends, and she has outlived three of her six brothers.
Mrs. Tesauro does, however, have a living sister, an identical twin. But she and her twin are not so identical anymore. Her sister is incontinent, she has had a hip replacement, and she has a degenerative disorder that destroyed most of her vision. She also has dementia. “She just does not comprehend,” Mrs. Tesauro says.
Even researchers who study aging are fascinated by such stories. How could it be that two people with the same genes, growing up in the same family, living all their lives in the same place, could age so differently?
The scientific view of what determines a life span or how a person ages has swung back and forth. First, a couple of decades ago, the emphasis was on environment, eating right, exercising, getting good medical care. Then the view switched to genes, the idea that you either inherit the right combination of genes that will let you eat fatty steaks and smoke cigars and live to be 100 or you do not. And the notion has stuck, so that these days, many people point to an ancestor or two who lived a long life and assume they have a genetic gift for longevity.
But recent studies find that genes may not be so important in determining how long someone will live and whether a person will get some diseases — except, perhaps, in some exceptionally long-lived families. That means it is generally impossible to predict how long a person will live based on how long the person’s relatives lived.
Life spans, says James W. Vaupel, who directs the Laboratory of Survival and Longevity at the Max Planck Institute for Demographic Research in Rostock, Germany, are nothing like a trait like height, which is strongly inherited.
“How tall your parents are compared to the average height explains 80 to 90 percent of how tall you are compared to the average person,” Dr. Vaupel said. But “only 3 percent of how long you live compared to the average person can be explained by how long your parents lived.”
“You really learn very little about your own life span from your parents’ life spans,” Dr. Vaupel said. “That’s what the evidence shows. Even twins, identical twins, die at different times.” On average, he said, more than 10 years apart.
The likely reason is that life span is determined by such a complex mix of events that there is no accurate predicting for individuals. The factors include genetic predispositions, disease, nutrition, a woman’s health during pregnancy, subtle injuries and accidents and simply chance events, like a randomly occurring mutation in a gene of a cell that ultimately leads to cancer.
The result is that old people can appear to be struck down for many reasons, or for what looks like almost no reason at all, just chance. Some may be more vulnerable than others, and over all, it is clear that the most fragile are likely to die first. But there are still those among the fragile who somehow live on and on. And there are seemingly healthy people who die suddenly.
Some diseases, like early onset Alzheimer’s and early onset heart disease, are more linked to family histories than others, like most cancers and Parkinson’s disease. But predisposition is not a guarantee that an individual will develop the disease. Most, in fact, do not get the disease they are predisposed to. And even getting the disease does not mean a person will die of it.
There are, of course, some valid generalizations. On average, for example, obese men who smoke will die sooner than women who are thin and active and never get near a cigarette. But for individuals, there is no telling who will get what when or who will succumb quickly and who will linger.
“We are pretty good at predicting on a group level,” said Dr. Kaare Christensen, a professor of epidemiology at the University of Southern Denmark. “But we are really bad on the individual level.”
Looking to Twins
James Lyons used to think his life would be short. Mr. Lyons, a retired executive with the Boy Scouts of America, thought of his father, who died at 55. “He had one heart attack. It was six hours from onset to death, and that was it.”
Then there were his first cousins on his father’s side. One died at 57 and another at 50. “He was in a barber chair and had a heart attack,” Mr. Lyons said of the 50-year-old. “He died on the spot.”
“He was a big strapping guy, 6-4, healthy and energetic. Then, boom. One day he was there, and the next day he was gone.”
“I approached my 50’s with trepidation,” said Mr. Lyons, who lives in Lansing, Mich.
But his 50’s came and went, and now he is 75. He is still healthy, and he has lived longer than most of his ancestors. He is baffled as to why.
It seems like common sense. Family members tend to look alike. And many characteristics are strongly inherited — height, weight, a tendency to develop early onset heart disease or to get diabetes. Even personalities run in families. Life span would seem to fit with the rest.
But scientists have been trying for decades to find out if there really is a strong genetic link to life spans and, if so, to what extent.
They turned to studies of families and of parents and children, but data analysis has been difficult and any definitive answer elusive. If a family’s members tend to live to ripe old ages, is that because they share some genes or because they share an environment?
“Is it good socioeconomic status, good health or good genes?” Dr. Christensen asked. “How can you disentangle it?”
His solution, a classic one in science, was to study twins. The idea was to compare identical twins, who share all their genes, with fraternal twins, who share some of them. To do this, Dr. Christensen and his colleagues took advantage of detailed registries that included all the twins in Denmark, Finland and Switzerland born from 1870 to 1910. That study followed the twins until 2004 to 2005, when nearly all had died.
Now, Dr. Christensen and his colleagues have analyzed the data. They restricted themselves to twins of the same sex, which obviated the problem that women tend to live longer than men. That left them with 10,251 pairs of same-sex twins, identical or fraternal. And that was enough for meaningful analyses even at the highest ages. “We were able to disentangle the genetic component,” Dr. Christensen said.
But the genetic influence was much smaller than most people, even most scientists, had assumed. The researchers reported their findings in a recent paper published in Human Genetics. Identical twins were slightly closer in age when they died than were fraternal twins.
But, Dr. Christensen said, even with identical twins, “the vast majority die years apart.”
The investigators also asked when the genetic factor kicked in. One hypothesis, favored by Dr. Christensen, was that the strongest genetic effect was on deaths early in life. He thought that deaths at young ages would reflect things like inherited predispositions to premature heart disease or to fatal cancers.
But there was almost no genetic influence on age of death before 60, suggesting that early death has a large random component — an auto accident, a fall. In fact, the studies of twins found almost no genetic influence on age of death even at older ages, except among people who live to be very old, the late 80’s, the 90’s or even 100. The average age at which people are dying today in the United States is 68.5 for men, and 76.1 for women, according to Arialdi M. Minio of the National Center for Health Statistics. This statistic differs from life expectancy, which estimates how long people born today are expected to live.
Finding Randomness
Even though there may be a tendency in some rare families to live extraordinarily long, the genetic influence that emerged from the studies of twins was significantly less than much of the public and many scientists think it is.
A woman whose sister lived to be 100 has a 4 percent chance of living that long, Dr. Christensen says. That is better than the 1 percent chance for women in general, but still not very great because the absolute numbers, 1 out of 100 or 4 out of 100, are still so small. For men, the odds are much lower. A man whose sister lived to be 100 has just a 0.4 percent chance of living that long. In comparison, men in general have a 0.1 percent chance of reaching 100.
Those data fit well with animal studies, says Caleb Finch, a researcher on aging at the University of Southern California. Genetically identical animals — from worms to flies to mice — living in the same environments die at different times.
The reason is not known, Dr. Finch said.
“It’s random,” he said. “Since we can’t find any regular pattern, that’s the hand wave explanation — randomness.”
And random can mean more than one thing.
“There are two phases of randomness,” Dr. Finch said. “There’s the randomness of life experiences. The unlucky ones, who get an infection, get hit on the head or get mutations that turn a cell into cancer. And there are random events in development.”
Random cell growth and division and random differences in which genes get turned on and how active they are during development can cause identical twins to have different numbers of cells in their kidneys and even different patterns of folds in their brains, Dr. Finch pointed out. And random differences in development early in life can set the stage for deterioration decades later.
But seemingly random events can still come as a shock. That’s how Annmarie Bald felt when her identical twin, Catherine Polk, died in her sleep of a heart attack. It happened seven years ago, when Ms. Polk was 43. To this day, Ms. Bald, of Forked River, N.J., lives in fear that the same thing will happen to her. She nervously sees her doctor every year for a checkup, and every year her doctor tells her the same thing: her heart is fine.
“The question in my mind every day is, ‘How did I end up still here and she’s gone?’ ” Ms. Bald said. “It’s not something you ever get over.”
Yet even diseases commonly thought to be strongly inherited, like many cancers, are not, researchers found. In a paper in The New England Journal of Medicine in 2000, Dr. Paul Lichtenstein of the Karolinska Institute in Stockholm and his colleagues analyzed cancer rates in 44,788 pairs of Nordic twins. They found that only a few cancers — breast, prostate and colorectal — had a noticeable genetic component. And it was not much. If one identical twin got one of those cancers, the chance that the other twin would get it was generally less than 15 percent, about five times the risk for the average person but not a very big risk over all.
Looked at one way, the data say that genes can determine cancer risk. But viewed another way, the data say that the risk for an identical twin of a cancer patient is not even close to 100 percent, as it would be if genes completely determined who would get the disease.
Dr. Robert Hoover of the National Cancer Institute wrote in an accompanying editorial: “There is a low absolute probability that a cancer will develop in a person whose identical twin — a person with an identical genome and many similar exposures — has the same type of cancer. This should also be instructive to some scientists and others interested in individual risk assessment who believe that with enough information, it will be possible to predict accurately who will contract a disease and who will not.”
Alzheimer’s disease also has a genetic component, but genes are far from the only factor in determining who gets the disease, said Margaret Gatz of the University of Southern California and Nancy Pedersen of the Karolinska Institute.
Dr. Gatz and Dr. Pedersen analyzed data from a study of identical and fraternal Swedish twins 65 and older. If one of a pair of identical twins developed Alzheimer’s disease, the other had a 60 percent chance of getting it. If one of a pair of fraternal twins, who are related like other brothers and sisters, got Alzheimer’s, the other had a 30 percent chance of getting it.
But, Dr. Pedersen noted, Alzheimer’s is so common in the elderly that it occurs in 35 percent of people age 80 and older. If genes determine who gets Alzheimer’s at older ages, Dr. Pedersen says, “those genes must be very common, have small effects and probably interact with the environment.”
As for other chronic diseases of the elderly, Parkinson’s has no detectable heritable component, studies repeatedly find. Heart disease appears to be indiscriminate, striking almost everyone eventually, says Dr. Anne Newman of the University of Pittsburgh, who has studied it systematically in a large group of elderly people.
But the general picture is consistent in study after study. A strong family history of even a genetically linked disease does not guarantee a person will get it, and having no family history does not mean a person is protected. Instead, chronic diseases strike almost at random among the elderly, making it perhaps not so surprising that life spans themselves have such a weak genetic link.
Matt McGue, a psychology professor at the University of Minnesota who studies twins, contrasts life spans with personality, which, he says, is about 50 percent heritable, or attention-deficit hyperactivity disorder, which is 70 to 80 percent heritable, or body weight, which is 70 percent heritable.
“I’ve been in this business for a long while, and life span is probably one of the most weakly heritable traits I’ve ever studied,” Dr. McGue said.
Seeking Rare Families
At the National Institute on Aging, the question still hovers: Is it possible to find genetic determinants of exceptional health and longevity?
“If you could identify factors for exceptionally good health, that might allow people to avoid disease,” said Evan Hadley, director of the institute’s geriatrics and clinical gerontology program.
There are two methods to do this, Dr. Hadley said. One is to look at how the genes of centenarians differ from those of the rest of the population. But, he said, that requires that if longevity genes exist, they are common among centenarians. And, so far, such studies have not yielded much that has held up — with one well accepted exception: a gene for a cholesterol-carrying protein that affects risk for heart disease as well as Alzheimer’s disease. Those who have that gene have double the chances of living to 100. But that chance is not much anyway. Only about 2 percent of people born in 1910 could expect to reach 100. The second approach is to look for rare genes in unusually long-lived families. “If there is something in a family, it may be in only one or a few families,” Dr. Hadley said. But it may have a big effect.
So the National Institute on Aging is starting a research project with investigators at three United States medical centers and at Dr. Christensen’s center in Denmark. The plan is to find exceptional families, those in which there is a cluster of very old, closely related members — two sisters in their 90’s, for example — whose children, who would typically be in their 70’s, and grandchildren, can be studied too.
Today, many families have a few members living to advanced ages, but very few families have many of them. And in large families, just by chance, someone may live past 90, but it is unlikely that most of the brothers and sisters will get there. For these families, there does not appear to be a genetic component to life spans.
For now, the study is in a pilot phase, testing a scoring system to define the families who seem to fit the criteria.
“If you are really, really old in a family, that gets you more points,” Dr. Hadley said. “You get more points for being 97 than for being 92. But we also are looking at the whole family structure. If there are just two siblings in a family and both live to 98, that’s very exceptional. But suppose there are eight kids and they all made it to 87. That’s pretty unusual, too.’’
If the researchers find genes in the oldest family members that seem to be associated with protection from a disease like heart disease and with a long life, they will follow the younger members of the family, children in their 60’s and 70’s, asking if the same genes seem to protect them as they age.
Some wonder if the project can succeed, said Dr. Newman, who is directing one study center, at the University of Pittsburgh. “The big debate is, is it possible for there to be a few genes that are protective or is it going to be so complicated that we won’t be able to figure out the genetic factors? Is it going to be that some people are just lucky?”
She is optimistic, reasoning that since some families tend to have early onset of certain diseases, others probably have a genetic predisposition to get diseases like heart disease, cancer and Alzheimer’s so late that most members do not get them at all and live very long and healthy lives.
“This would be the flip side of early onset,” she says.
Mrs. Tesauro is in the pilot study. She had always been healthy and active, a self-described tomboy growing up who played tennis until she was 85. “I just can’t sit still,” she said.
She was a woman who knew her mind, so eager to go to college that she defied her father, who thought it was a waste of money, and worked her way through. She ended up with a master’s degree in education and a career as a high school teacher.
Her twin was different. She was the frilly type, Mrs. Tesauro said, and was not much of a student. She failed a grade in high school and barely graduated. Both Mrs. Tesauro and her sister married and had children.
Mrs. Tesauro was born first, and it is a common belief even among scientists that the twin born first is stronger and lives longer. But when he looked at the Scandinavian data, Dr. Christensen said, he found that birth order made no difference in health or longevity.
The day before visiting Mrs. Tesauro for the first time, the Pittsburgh investigators tried to call her, just to be sure she was still alive and still healthy enough to be interviewed. When they could not reach her, they began to worry.
But all was well. Mrs. Tesauro answered the phone the next morning and explained why they had had such trouble. She was out running errands.

Researchers Yearn to Use AOL Logs, but They Hesitate (NYTimes, 8/23/06)

August 23, 2006
Researchers Yearn to Use AOL Logs, but They Hesitate
By KATIE HAFNER
When AOL researchers released three months’ worth of users’ query logs to a publicly accessible Web site late last month, Jon Kleinberg, a professor of computer science at Cornell, downloaded the data right away. But when a firestorm over privacy breaches erupted, he decided against using it.
“Now it’s sitting there, in cold storage,” said Professor Kleinberg, who works on algorithms for understanding the structure of the Web and searching it. “The number of things it reveals about individual people seems much too much. In general, you don’t want to do research on tainted data.”
After the data was released for academic researchers like Professor Kleinberg to work with, many were torn, loath to conduct research with it as they balanced a chronic thirst for useful data against concerns over individual privacy.
It is one of the frustrations of being an academic researcher in a world that has grown highly commercial. Data is everywhere, but there is precious little of it for university researchers to work with. Raw data about people’s online behavior — the grist for many an academic researcher’s mill — remains locked up inside large companies, accessible only to a subset of corporate researchers.
The AOL incident has set off a flurry of divergent opinions in the academic community over the appropriateness of using the data for academic research.
Some see the data as too valuable to withhold altogether. “One of the biggest problems is trying to get real data,” said Christopher Manning, an assistant professor of computer science and linguistics at Stanford University.
Although the 650,000 AOL users were not personally identified in the data, the logs contained enough information to discern an individual’s identity in some cases.
AOL quickly withdrew the data from its research Web site, but not before it had been downloaded, reposted and made searchable at a number of Web sites. And on Monday, the company dismissed Abdur Chowdhury, the researcher who posted the data, along with another employee. Maureen Govern, AOL’s chief technology officer, resigned.
Academia has a longstanding disadvantage when it comes to raw data. While fresh data sets are routinely made available to researchers at large companies like Google, academia has largely made do with the same two sets of search data — one from Excite and one from Alta Vista — for nearly 10 years.
Meanwhile, a virtual eternity has elapsed and those two data sets have long outlived their usefulness. “The way people use search engines now is totally different,” Professor Kleinberg said. “Partly because what you expected to get out of a search engine back then was much less, so people didn’t try anything too fancy.”
While acknowledging “genuine privacy concerns,” Professor Manning said, “I think it’s fair to say that given researchers’ craving for data, having the AOL data available is a great boon for research.”
Professor Manning, who has downloaded a copy of the AOL data set but has no immediate plans to work with it, added that the trove of raw research material represented by the AOL data “obviates the need for anyone to worry about getting data for a while.”
William W. Cohen, an associate research professor in the machine learning department at Carnegie Mellon University, said the AOL query logs could be invaluable for researchers working in the field of personalization.
“Someone’s past search history can tell you a lot about what they’re interested in,” he said. Professor Cohen, who takes annual vacations near Charleston, S.C., used himself as an example.
“By knowing what someone searched for in the past, you can do a lot better at answering a query,” he said. “If you look at my recent searches, they might have something to do with vacation homes, Folly Beach and car rentals. So if I search for seafood restaurants, it’s more likely I’ll be looking for one in the Charleston area, and if I say ‘Charleston,’ it’s much more likely to be South Carolina than West Virginia.”
At the same time, Professor Cohen shares Professor Kleinberg’s view about the AOL query logs.
“I would feel personally uncomfortable looking too closely at searches showing things like marriages breaking up,” he said. “I don’t want to do research in order to see if my algorithms are working correctly, while delving into the details of people’s lives.”
Professor Cohen said that although he might eventually do research on the data set, “the privacy issues are something I’d have to think through very carefully.”
Companies occasionally mete data out to academic researchers. Microsoft has done this, but in a controlled fashion. Yahoo shares some statistical data with researchers who are approved case by case through an internal vetting program, according to Joanna Stevens, a company spokeswoman, but query data, she said, has never been distributed.
Asked about its policy, Google issued a statement that said, “Our current policy is not to release queries or personal data to researchers outside of the company.”
Oren Etzioni, a professor of computer science at the University of Washington, said that shortly after the news of the privacy violations surfaced, he had lunch with Dr. Chowdhury and two of Dr. Chowdhury’s colleagues.
Professor Etzioni said Dr. Chowdhury was horrified by what had happened. “He didn’t anticipate that this kind of data could be used to track down individuals.” Dr. Chowdhury declined to comment, at the advice of his lawyer.
The release of the AOL query logs coincided with a global conference in Seattle of information retrieval researchers, and it prompted heated discussions among those in attendance.
Among them was Jamie Callan, an associate professor in the school of computer science at Carnegie Mellon and chairman of the Association for Computing Machinery’s special-interest group on information retrieval, which organized the conference.
Professor Callan said that although no one disagreed on the importance of protecting privacy, “there’s also a strong belief that it is very important for the scientific community to have access to data of this kind in some anonymized form.”
The last similar case involved a set of hundreds of thousands of internal e-mail messages from Enron, posted in 2003 on the Federal Energy Regulatory Commission’s Web site, in connection with the agency’s investigation into the company.
Although some of the e-mail was relevant to the investigation, most of it was not. So hungry were researchers for a coherent body of e-mail messages to work with that they were able to set aside their concerns that the privacy of many people who had nothing to do with the Enron scandal was severely compromised.
“Researchers glommed onto it,” Professor Manning said. “It was enormously good for academic research for all kinds of things you might want to do, like social network analysis.”
Several research papers have emerged in the years since the Enron e-mail corpus was released, and it remains the only large body of actual e-mail in the public domain.
“It seems this AOL data is creating more of a stir,” Professor Manning said. Where the release of the Enron e-mail was justified as shedding light on corporate wrongdoers, “the AOL data is more like a real violation.”
Professor Etzioni and others say one partial solution to heightened privacy concerns could lie in more stringent “scrubbing” of data in a way that did not diminish its quality as a research tool. This could entail, for instance, replacing numbers that carry identifying information — like Social Security numbers and ZIP codes — with zeros, or replacing the word “New York” with “X17.” To a researcher, Professor Etzioni said, “it doesn’t matter so much that it’s New York as X17.”
Professor Kleinberg said he hoped that over time, the AOL incident would lead to “a richer, more informed discussion about what it means to create data sets that are clean and anonymized.”
Still, a freeze on all data distribution is likely to be in effect for the foreseeable future.
Professor Etzioni said that over lunch with the AOL researchers, he had mentioned that for his own research, he was interested in a data set containing queries starting with “Wh,” to signify that a question was being asked. Such data need not be tied to an individual to be useful as a research tool.
“We build technology that answers questions,” he said. “So we want to test it on actual questions people are asking.”
The AOL researchers told Professor Etzioni they would get approval from the company and send him a compact disc containing the question set.
But Professor Etzioni is not holding out much hope of receiving the data. “I don’t think that CD is in the mail,” he said, “and that’s too bad.”
Tom Zeller Jr. contributed reporting for this article.

Whispers of Mergers Set Off Suspicious Trading (NYTimes, 08/27/06)

August 27, 2006
Whispers of Mergers Set Off Suspicious Trading
By GRETCHEN MORGENSON
The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem.

It is against the law to trade on inside information about an imminent merger, of course.

But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.

The study, conducted for The New York Times by Measuredmarkets Inc., an analytical research firm in Toronto, scrutinized mergers with a value of $1 billion or more that were announced in the 12-month period that ended in early July. The firm analyzed the price, the total number of shares traded and the number of individual trades in each stock during the weeks leading up to the announcement and looked for large deviations from trading patterns going back as far as four years.

Although any number of factors can lead to spikes in trading, deviations of the kind observed by Measuredmarkets are among the data used by regulators to spot insider trading. Of the 90 big mergers in the period, shares of 37 target companies exhibited abnormal trading in the days and weeks before the deals were disclosed.

Christopher K. Thomas, a former analyst and stockbroker who founded Measuredmarkets in 1997, said that his company’s analysis led to the conclusion that the aberrant activities most likely involved insider trading. Measuredmarkets provides examples of unusual trading to institutions, individuals and a regulatory organization in Canada.

It is always possible that a company’s stock moves because of developments in a particular industry or business sector, or because a prominent newsletter, columnist or blogger has written something that could prompt investors to take action. But in the companies that were analyzed, no such influences seemed to be at work. The companies were not the subject of widely dispersed merger commentary during the periods of abnormal trading, nor did they make any announcements that would seem to explain the moves.

The analysis by The New York Times found that, in a handful of the mergers, significant progress toward a deal was being made on the days unusual trading occurred. For example, the day that four bidders were putting together buyout offers for Amegy Bancorp, a Houston bank company, trading in its stock quadrupled.

Attempts to quantify the amount of potential insider activity in deals have come up short in the past, in part because the regulators with access to detailed information do not release it. The Securities and Exchange Commission does not disclose, for example, the percentage of referrals it receives from exchanges that wind up as cases.

The S.E.C. would not comment on the study but said that it had looked at Measuredmarkets’ system and concluded that surveillance techniques of self-regulatory organizations like the New York Stock Exchange were more sophisticated.

Securities regulators, traders and academics agree that merger waves lead to more illicit trading on nonpublic information. In Britain, regulators have made insider trading a primary focus and have shifted their scrutiny to brokerage firms and institutional investors, rather than individuals, involved in mergers.

Like Measuredmarkets, the Financial Services Authority in British has found a pattern of stock trading ahead of mergers. In 2004, 29 percent of companies involved in mergers experienced abnormal trading before public announcements, according to a March 2006 study of large British companies subject to takeovers. In 2001, the comparable figure was 21 percent.

The British study compared the stocks’ price movements with previous returns, adjusted for overall market moves. The comparison period was 240 trading days, ending 10 days before the merger announcement.

In this country, the S.E.C. has focused more on individuals than on institutions in its investigations. And even though merger activity has rocketed in recent years, the number of its cases involving insider trading has held in a range of 40 to 59 annually since 2000, the S.E.C. said.

Some economists and academics assert that insider trading is essentially a victimless crime and therefore not worth deploying regulatory armies to battle. But there are losers, including small investors who miss out on gains, when such trading moves markets.

Moreover, many investors are troubled by what they now see as rampant insider trading, saying it fosters the perception that insiders can profit in the markets at the expense of outsiders.

“Martha Stewart got hurt very badly for something that happens every single day on Wall Street,” said Herbert A. Denton, president of Providence Capital, a money manager and an adviser to minority shareholders. “It’s a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the S.E.C. should get very, very serious and prosecute a lot of people or forget about it.”

Although Ms. Stewart was investigated for insider trading, she was found guilty of other related charges.

The S.E.C.’s handling of one insider-trading investigation is the subject of scrutiny by Congress after the firing last September of Gary J. Aguirre, a former staff attorney at the agency. Mr. Aguirre contends that his investigation into possible insider trading by Pequot Capital Management, a prominent hedge fund, was thwarted for political reasons by his superiors. He was fired after complaining, even though he had just received a merit pay increase.

Mergers and acquisitions present particularly rich opportunities for profiting on insider information, a violation of the securities laws written to keep all investors on a level playing field. That is why all those involved in corporate unions, from law firms to investment banks to those in between like printers, are supposed to keep quiet during the process.

Officials from the nation’s top securities regulators met on Aug. 18 to discuss emerging trends in insider trading, said Joseph J. Cella, chief of the office of market surveillance at the S.E.C. “We are certainly cognizant of the uptick in merger-and-acquisition activity,” he said.

The companies identified by Measuredmarkets represented many industries and received bids not only from corporate rivals, but also from private investor groups and management-led buyout teams. They included Amegy Bancorp, the subject of a $1.7 billion takeover announced last September by Zions Bancorp, the large Utah bank; CarrAmerica Realty, a real estate investment trust acquired for $5.6 billion by the private investment company Blackstone Group after a March announcement; Dex Media, a directory publisher whose $9.5 billion purchase by the R. H. Donnelley Corporation was disclosed in October; the IDX Systems Corporation, a health care systems company whose $1.2 billion acquisition by General Electric was announced in September; and Texas Regional Bancshares, which the Argentinian bank BBVA said it would acquire in June for nearly $2.2 billion.

In each of the five cases, the abnormal trading occurred during periods of significant behind-the-scenes progress in the mergers, as outlined by the companies themselves in regulatory filings long after the deals were struck.

In the Amegy bank deal, the volume of shares traded more than quadrupled on a day when four of the bank’s bidders were analyzing its financial records and preparing offers. Volume jumped in CarrAmerica’s shares on Feb. 17, the day the real estate investment trust struck a confidentiality agreement with a potential bidder and Goldman Sachs began providing the bidder with an analysis of CarrAmerica’s books.

Trading in Dex Media increased sharply last Sept. 14, the day that management, legal teams and financial advisers representing the company and Donnelley met. And the price and the number of shares traded in IDX jumped on Sept. 7, when its chief executive and a G.E. executive talked and G.E. agreed to increase its bid by 5 percent.

Officials at the companies said that they were unaware of unusual trading in advance of the deals and declined to speculate on reasons for the action.

Measuredmarkets has no way to identify who might have been behind the anomalous trading. But a few of the deals that it flagged are already under scrutiny by regulators.

In June, for example, the S.E.C. froze $1 million in trading gains of South American investors who profited on the June 12 buyout announcement of the Maverick Tube Corporation, an oil equipment maker, by Tenaris SA, a steel company with headquarters in Luxembourg. Anadarko Petroleum’s June bid for the Kerr-McGee Corporation, a smaller rival, is also being investigated, according to a July 13 report in The Houston Chronicle; the transaction closed in August. The S.E.C., following its usual practice, declined to comment on the report.

The takeover crowd includes corporations, management-led buyout teams as well as private equity firms, which represent wealthy private investors. Companies’ directors are reaching out to many potential bidders these days to ensure shareholders get the best price. In the process, they are expanding the number of people with knowledge of the deals.

Still, it is undeniable that brokerage firms, with their varied businesses all under one roof, remain particularly well-positioned to capitalize on inside information. Not only do these firms advise buyers and sellers in mergers, giving them immense access, they also have proprietary trading desks that invest the firm’s money in stocks and other securities, money management units that invest for clients and trading desks that profit mightily by executing trades for hedge funds.

Brokerage firms contend that barriers within their operations keep deal information from seeping out. But regulators at the Financial Services Authority in Britain are challenging these assertions.

In a July 7 speech, Hector Sants, managing director of wholesale and institutional markets at the F.S.A., described why his focus was shifting to institutions. “Our spotlight will shine in particular on relationships between investment banks and their clients,” he said, “because we believe the risk of market abuse is highest where a client can be made an insider on a forthcoming deal.”

The fast and furious pace of deals this year is increasing the opportunities for mischief. In each of the last three months, according to Thomson Financial, the value of announced mergers has exceeded $100 billion — the longest stretch of such volume since 2000.

Although the number of deals in the first seven months of this year slipped to 685 from 763 in the same period in 2005, the dollar amount of transactions rose 31 percent in that time, Thomson Financial said.

Regulators on the front lines also seem to be spotting more irregularities. Officials in the market surveillance unit of New York Stock Exchange Regulation Inc. have made more referrals to the S.E.C. this year than they did in the comparable period last year. As of last month, those regulators had referred 76 cases for possible investigation, up from 60 a year earlier. In 2005, the surveillance unit referred 111 cases, 63 percent more than the previous year.

The number of insider-trading cases filed by the S.E.C., though, has been relatively static. Walter G. Ricciardi, deputy director of enforcement at the S.E.C., said that 9 percent of the cases filed by the commission since Feb. 1 have been based on insider trading, which can encompass merger or any other news that would affect a company’s market price. On a percentage basis, the cases have ranged from 7 percent to 12 percent of the agency’s total since 2000.

“The yield is less probably than in comparable areas,” Mr. Ricciardi explained of insider-trading inquiries. “A lot of times the trading may look like something crazy, but you’ve got to have evidence.”

Recent cases have centered on some relatively small players. In late December, for example, the S.E.C. sued Gary D. Herwitz, an accountant, and Tracey A. Stanyer, an executive vice president at Sirius Satellite Radio, for trading ahead of news in late 2004 that Sirius was going to award a $500 million contract to Howard Stern, a radio show host.

Each settled with the S.E.C., without admitting or denying wrongdoing. Mr. Herwitz paid $52,000. Mr. Stanyer paid $35,000 and was barred from serving as officer or director of a public company. Mr. Herwitz pleaded guilty to insider trading in federal court in Brooklyn and was sentenced to two years’ probation and a $20,000 fine earlier this year.

In May, the S.E.C. sued Jason Smith, a letter carrier in New Jersey, contending he leaked grand jury information to a 14-person ring that included low-level employees of Merrill Lynch and Goldman Sachs, a worker for a printing company and a retired seamstress in Croatia. Regulators say that scheme generated $6.7 million in profits.

What about cases involving larger or more sophisticated investors? “We certainly see institutional-type accounts that have come into the market with extraordinarily good timing on a repeat basis; we have investigated those,” said Mr. Cella of the S.E.C. “But to get the evidence to prove a violation of the statute under which we allege insider trading is difficult.”

And that is true whether the case involves individuals or institutions.

The British securities regulator, for its part, has cited the possibility of hedge funds profiting on insider information as a foremost concern. David Cliffe, a press officer at the F.S.A., said that hedge funds must be keenly watched because they have extensive and close relationships with investment banks that are in a position to provide nonpublic information in exchange for lucrative trading commissions.

Spotting abnormal trading is far simpler than bringing a successful insider-trading prosecution, as Mr. Cella of the S.E.C. noted. Still, the trading anomalies identified by Measuredmarkets are intriguing.

Consider Koch Industries’ bid for Georgia-Pacific on Nov. 13. Senior officials of the companies first met to discuss a merger on Oct. 5. Koch Industries proposed to limit its purchase to certain Georgia-Pacific assets after the company, which makes forest products, had spun off other businesses to the public. Subsequent company filings noted that Danny W. Huff, Georgia-Pacific’s chief financial officer, told Koch officials on Oct. 7 that such a deal would “probably not” be acceptable to his company’s board.

Merger talks continued through October and into November. Both sides conducted corporate analyses — known as due diligence — from Nov. 8-11. Koch Industries’ board voted to approve a bid on Nov. 10.

That day, volume in Georgia-Pacific shares jumped 37 percent above its 2005 average and the number of trades in the stock rose significantly as well, Measuredmarkets found. On Friday, Nov. 11, volume increased yet 66 percent more from the previous day’s high level. Georgia-Pacific shares rose 5.5 percent over the period. The company made no announcements either day, and the overall market rose 1.3 percent over the two days.

On Sunday, Nov. 13, Koch Industries announced that it would pay $21 billion for Georgia-Pacific, or $48 a share, a 39 percent premium to the closing price the previous Friday. Anyone who bought Georgia-Pacific shares on either Nov. 10 or Nov. 11 stood to gain 40 percent in just a few days.

A spokeswoman for Koch Industries did not return phone calls seeking comment.

Another case in point is the surprise merger, announced May 7, between the Wachovia Corporation, a bank holding company based in North Carolina, and Golden West Financial, a West Coast savings and loan. This time the unusual trading showed up both in the stock of Golden West Financial and in its call options.

Traders buy call options, giving them the right to purchase shares of the underlying company at a set price within a specified period, when they expect the stock to rise. Options provide the potential for a sharp profit because each option represents 100 shares.

On May 3, the number of Golden West’s call options that changed hands was triple the daily average. Subsequent filings show that was the day Wachovia’s board met to review a possible acquisition of Golden West and the day after Golden West’s board met to weigh the bid.

Officials at Wachovia and Golden West said they did not know why the volume rose.

The probability of detection appears small, based on the number of cases brought in the United States, and the penalty for insider trading is often a negotiated settlement that may not involve much more than giving up the gains.

An example is the S.E.C.’s conclusion of a case in 2004 with an employee of Fleet Boston. The employee, the S.E.C. said, made $473,000 by trading on knowledge of the bank’s buyout by Bank of America. The commission exacted $525,000 in a settlement, which included his profits, prejudgment interest of $1,576.67 and a civil penalty of $51,842.36.

The penalty portion of such settlements, Mr. Ricciardi said, typically equals the illegal profits. The Insider Trading Sanctions Act of 1984 allows for a penalty of up to three times those profits.

The S.E.C. dispenses a reward, up to 10 percent of the penalties, Mr. Ricciardi said, to tipsters whose information leads to a successful case.

When stocks gyrate because nonpublic information about deals has leaked out, many people are harmed. The most affected are those who sell shares in the company before it is taken over at a significant premium. An investor who sold Georgia-Pacific shares on Nov. 9, just before the unusual trading, missed a 46 percent gain. Those who sold the Andrx Corporation, just before unusual trading began last February missed, a 36 percent gain.

Others also lose. The company that makes the acquisition, for example, may wind up paying more. Investment advisers typically include a company’s target share price and total market capitalization in the analysis of what an acquirer should be willing to pay. If a stock rises in the days or weeks during negotiations, the purchase price could be driven higher. A rising price could even scuttle a merger if the deal becomes too costly to the prospective buyer.

Jenny Anderson contributed reporting for this article, and Donna Anderson contributed research.

Profit Falls by Half at Dell (NYTimes, 8/18/06)

August 18, 2006
Profit Falls by Half at Dell
By DAMON DARLIN
Three days after its announcement of a vast safety recall, Dell reported little but bad news yesterday: profits down by half, and an informal Securities and Exchange Commission investigation into its accounting.
Speaking from China to Wall Street analysts in a conference call after the earnings announcement, Michael S. Dell, the company’s founder and chairman, said, “We are not satisfied with our performance, and we will do better.”
While the company has told analysts for more than a year that it will do better, it has not been able to follow through. In a changing market, Dell has been unable to gain traction against competitors as it has in the past, when it has cut prices to gain market share.
The chief executive, Kevin B. Rollins, said yesterday that the company had cut prices “too aggressively” in a number of markets to win market share, which hurt its profitability. “We didn’t do a good job of it,” he said.
Analysts remained frustrated. Harry Blount of Lehman Brothers asked Mr. Rollins, “Why should we believe that your actions will be any better than they have been?”
Investors were also frustrated, with Dell shares dropping more than 5 percent in extended trading after the earnings report.
Dell said net income dropped 51 percent, to $502 million, or 22 cents a share, from $1.02 billion, or 41 cents a share, a year earlier. Revenue increased 5 percent, to $14.09 billion, from $13.43 billion. The company warned four weeks ago that its earnings would be weaker than expected.
Dell also revealed that it had received a notice from the Securities and Exchange Commission in August of last year that the S.E.C. was conducting an informal investigation. The company said it involved “revenue recognition and other accounting and financial reporting matters.” The company refused to give any further details, but a spokesman said it did not involve the backdating of options, a problem affecting many technology companies.
James M. Schneider, the chief financial officer, said the audit committee of the company’s board was conducting an inquiry. He said that after an exchange of letters with the S.E.C., Dell found “something that warranted further investigation” in its accounting of about 18 months ago. He refused to give details.
The company also announced Thursday that it would use processors from Advanced Micro Devices in some of its desktop PC’s. Dell had exclusively used Intel processors for its PC’s; it announced in May that it would begin using A.M.D. chips in some servers. It said the use of the A.M.D. processors would help lower the cost of the computer components.
Dell has been pressed to reduce its component costs to improve its profit margins. Operating margins have dropped to 5.1 percent from 8.7 percent a year ago. “It’s a staggering sequential decline in margins,” said A. M. Sacconaghi, an analyst with Sanford C. Bernstein & Company.
Dell has cut prices but has not gained market share from its competitors. “The pricing riddle was not clarified,” Mr. Sacconaghi said. “What it does say is that the price cuts were ineffectual.”
From a 52-week high of $37.05, Dell’s shares closed Thursday at $22.80, up 7 cents on the day, but fell to $21.64 in extended trading after the earnings announcement.
Mr. Rollins said it was “a little early to tell” if the recall of 4.1 million notebook computer batteries would have any impact on sales. “We are not anticipating anything,” he said. He said the sweeping safety recall, the largest in the history of the consumer electronics industry, was done “so customers have trust that we always do the right thing.”
The cost of the recall, which could exceed $300 million, is being shared with Sony, whose manufacturing was cited in the battery flaw. The company’s Web site with details about the recall had 1.26 million visitors on Tuesday, the first day of operation, according to ComScore Networks, a market research firm. By Wednesday, 150,000 orders for replacement batteries had been received, said Bob Pearson, a Dell spokesman.
Mr. Rollins said the company saw signs that its customer service, another area of concern, was improving. But he said Dell would spend another $50 million in this area beyond the $100 million already committed. The cost of hiring more operators for call centers and other personnel is having an effect on earnings. The company has 22 percent more employees and its operating expenses rose 19 percent from a year ago.
Dell’s basic problem is that it is set up to sell the bulk of its computers in the market showing the slowest growth: United States corporations. Sales in Asia were up 27 percent year over year and in the Americas, outside of the United States, up 29 percent. But in the United States, sales grew only 3 percent.
Worldwide sales of desktop PC’s fell 4 percent in the second quarter compared with a year earlier. But Dell said revenue from notebook computer sales rose 8 percent, as unit shipments rose 22 percent.
But analysts said that really underscored another weakness for Dell. While the overall PC market is slowing, to annual unit growth of about 6 percent, the market for notebook PC’s in the United States has hardly slowed at all. It is expected to grow about 41 percent this year, compared with 47 percent last year, said Samir Bhavnani, an analyst with Current Analysis.
Consumers prefer to buy notebooks in stores rather than online, said Ted Schadler, principal analyst for consumer technology at Forrester Research. Dell sells online direct to consumers, though it displays its models in mall kiosks and is experimenting with displays in larger spaces in malls. He said consumers seemed to want to feel the notebook before they bought it.
But Mr. Rollins, the chief executive, said, “We disagree with that.”
According to data from I.D.C., Dell’s market share in the United States for notebook computers rose to 31.9 percent in the second quarter from 29 percent in the first quarter.
“The Dell model is a vibrant model,’’ Mr. Rollins said. “We are really going to stick with the Dell model.”

Maker Calls New Bird Flu Vaccine More Effective(NYTimes,7/27/06)

July 27, 2006
Maker Calls New Bird Flu Vaccine More Effective
By DENISE GRADY
A new vaccine against bird flu developed by GlaxoSmithKline is more effective than any previous version and works at a far smaller dose, the company reported yesterday on its Web site.
The ability to immunize people with small doses greatly increases the possibility of making enough vaccine to protect much of the population in the event of a pandemic.
Until now, high dosage requirements have been a major obstacle to making a vaccine for avian flu. An earlier vaccine, made a year ago by Sanofi Pasteur and stockpiled by the government, required such large doses that it would be difficult or impossible to keep up with a pandemic.
GlaxoSmithKline said it had tested its vaccine in Belgium in 400 healthy people, ages 18 to 60, who were then given blood tests to measure their immune systems’ response. The tests showed that more than 80 percent of the subjects were protected by two shots, each containing only 3.8 micrograms of an antigen, an immunity-stimulating substance made from the bird flu virus.
By contrast, the first Sanofi vaccine protected only about 50 percent of the test subjects, who received two shots with much higher doses, 90 micrograms each.
But health officials said it was too early to make any recommendations about how and when the vaccine should be used if it reached the market. And it is not clear that the vaccine would still be effective if the virus mutated.
The GlaxoSmithKline vaccine is not yet available, but the company expects to seek approval for it this year from the Food and Drug Administration and from drug agencies in other countries. A spokesman for the F.D.A., Paul Richards, said, “We are encouraged by GSK’s promising report,” and added that the vaccine would probably qualify for an accelerated approval process that could be completed in six months. The vaccine will sell for the same price as a standard flu shot, said Patty Seif, a GlaxoSmithKline spokeswoman. Worldwide, that cost for consumers averages $8 to $12 a shot, she said.
What sets the new product apart is that it includes an adjuvant, a substance added to stir up the immune system and make the vaccine work better and at lower doses. Alum is a common adjuvant, but it did not provide enough enhancement with bird flu vaccine when tested by Sanofi.
The nature of GlaxoSmithKline’s adjuvant is a trade secret, but David Stout, president for worldwide pharmaceuticals at the company, said the ingredients had already been given to people in other products, though not in this particular combination.
“How we mix and match is what’s proprietary,” he said.
Dr. Anthony S. Fauci, director of the National Institute of Allergy and Infectious Diseases, said GlaxoSmithKline’s findings were “very, very impressive.” But he cautioned that the results were based only on blood tests, not real-life exposure.
“The proof of the pudding is, how does it work in the field,” he said, adding that it would be especially important to find out if the vaccine still worked if the bird flu virus began to change genetically. It is too early, he said, to tell what the government’s plans might be for buying and stockpiling this vaccine.
Dr. David Nabarro, chief pandemic flu coordinator for the United Nations, said: “Certainly this is welcome, but we’ve only had a press release. It’s very difficult for any of us to comment in more than general terms.”
Dr. Irwin Redlener, head of the National Center for Disaster Preparedness at Columbia University, said, “This is very promising technology, but what is still not known is how well this vaccine will work on whatever the actual strain is that produces a pandemic.”
Even so, he said, it would make sense for the government to stockpile about 40 million doses of the GlaxoSmithKline product and start using it if a pandemic began. If the vaccine worked, more could be made; if it did not, crash production of another vaccine would be needed.
Flu pandemics occur when people encounter new viral strains to which they have no immunity. The bird flu virus now spreading around the world, known as A(H5N1), is such a strain, but so far it has not managed to spread easily to people or between them. If it were to mutate in a way that made it more contagious among people, a deadly pandemic could erupt.
But, Dr. Nabarro warned, yet another new virus, totally unrelated to A(H5N1), could pop up, and in that case the current vaccines will be useless. The A(H5N1) virus could also mutate enough to make the vaccines obsolete, he said.
“We’re a long way away from seeing this vaccine being part of the pandemic preparedness strategy for governments, but it’s welcome news and likely to be a step in the right direction,” he said.
Mr. Stout said the company had not yet met with government officials in any country to make plans for the use of the vaccine.
He said that GlaxoSmithKline’s current production capacity for seasonal flu vaccine was 60 million to 70 million doses a year, and that it could make an equal amount of the bird flu vaccine. By 2008, it expects to be able to make 150 million doses a year. But those amounts can vary considerably.
The A(H5N1) virus has spread rapidly through birds in Asia, Europe and Africa in the last few years. The virus attacks mainly birds, but some humans have been infected, mostly through contact with birds. So far, the disease has been highly lethal in people, killing more than half its victims. It seems rarely to spread from person to person, but that could change.
Since 2003, 232 people in 10 countries have contracted bird flu, and 134 have died. The worst current outbreak is in Indonesia.

A Defense of Short-Termism (NYTimes,7/29/06)

July 29, 2006
Joe Nocera
A Defense of Short-Termism
ONCE upon a time, in a bygone era, a new creature began stalking Wall Street. He was called a “corporate raider,” and he made strange utterances that executives had not heard before.
He growled that executives cared more about building empires than building shareholder value. He bought big stakes in bloated, inefficient companies and began demanding — demanding! — that chief executives cut loose money-losing units to become more competitive. He insisted that management be paid with stock and options so that they would start caring about the stock price, and would be rewarded as their shareholders were rewarded.
And how did executives respond to this alien threat? They resisted mightily, of course.
Among the major arguments they raised was that these new creatures didn’t really care about the companies they were stalking. All they cared about was a short-term fix that would lift the stock price, even if that so-called fix ultimately hurt the company. The raiders, executives said, didn’t just want to pare back unprofitable divisions; they wanted to slice into valuable research and development. They wanted to throw out the baby with the bath water. Why, executives asked, should they sacrifice the long-term health of the corporations they were running just because some rich financier wanted to get a little richer?
Yes, well, that was then.
AND this is now. The former Securities and Exchange commissioner William H. Donaldson is standing at a podium in a Manhattan hotel. It is this past Tuesday — smack dab in the middle of “quarterly earnings season”— and about 40 people, including a handful of reporters, have gathered to listen to Mr. Donaldson decry the rise of “short-termism” in American business.
Two groups — the Business Roundtable’s Institute for Corporate Ethics, and the CFA Institute’s Centre for Financial Market Integrity — have produced a report about the corrosive effect of short-term thinking in American business. Mr. Donaldson is helping them unveil the report at the luncheon.
In addition to laying out the problem of short-termism — which the report describes as “the excessive focus of some corporate leaders, investors, and analysts on short-term quarterly earnings and a lack of attention to the strategy, fundamentals and conventional approaches to long-term value creation” — it also proposes a handful of solutions. These include eliminating “earnings guidance,” pegging executive compensation to “long-term strategic and value-creation goals” instead of short-term stock market goals, and communicating to Wall Street more frequently about long-term strategy and fundamentals.
“It’s a beginning,” says Mr. Donaldson, who then cedes the floor to people from the two organizations that produced the report.
“Seventy-six percent of our members say they don’t want earnings guidance,” says Jeffrey J. Diermeier, the president of the CFA Institute, which represents thousands of Wall Street analysts and professional investors. Kurt N. Schacht, the institute’s managing director, adds that it is critically important that Wall Street and corporations “get off the quarterly earnings treadmill.” In this room, at least, there are no dissenters.
And why would there be? Who, after all, can possibly be in favor of short-term thinking? In the space of 25 years, quarterly earnings have gone from being a requirement to an obsession that has seemingly warped the way American executives think and act. The Enron scandal, for one, was directly related to this obsession. But even putting scandal aside, it is pretty clear that too often, companies worry more about creating short-term financial results than long-term strategic results. Remember how Coca-Cola, under the late Roberto C. Goizueta, used to make its quarterly number, usually by a penny a share, like clockwork? Then, in 1997, Mr. Goizueta died, and eventually the truth came out: the company had played some financial games to smooth its earnings and achieve those results. I don’t think it’s a stretch to say that the company is still paying the price for some of the things it did back then.
“There’s a tyrant terrorizing nearly every public company in the United States,” wrote the Harvard Business Review in 2001. “It’s called the quarterly earnings report. It dominates and distorts the decisions of executives, analysts, investors, and auditors. Yet it says almost nothing about a business’s health.”
It wasn’t hard for me to find people to echo that line this week. “Stop worrying about the quarter,” said Robert Olstein, who runs the Olstein Financial Alert Fund. “It’s irrelevant.”
Peter L. Bernstein, the well-known economic historian, said, “There is evidence that companies will pass up profitable opportunities” if such an investment will have a short-term effect on coming earnings.
Peter M. Gilbert, chief investment officer for the Pennsylvania State Employees’ Retirement System, said, “Short-term focus takes the eye off creating long-term value for corporations and ultimately for the investor.”
And Candace Browning, Merrill Lynch’s global head of research, said, “It became a game.”
Ms. Browning was speaking in particular about earnings guidance, which companies began doling out in the 1990’s. That’s the now-common practice of a company estimating, within a small range, what its earnings-per-share are likely to be both quarterly and annually. Practically speaking, it means that companies get to set the bar — and then jump over it.
To Mr. Olstein, this is a classic example of “the tail wagging the dog instead of the dog wagging the tail.” It’s also a prime example of short-termism — companies that were really focused on long-term strategy wouldn’t bother trying to do the analysts’ job for them, nor would they be particularly worried about the short-term hit the stock might take if it “missed” the consensus earnings number ginned up by the analyst community.
In any case, companies that are managed well for the long-term will likely see their stock price rise accordingly — even if it is more volatile over the short term. Google doesn’t give guidance, and it hasn’t exactly hurt the company.
The most shocking thing I heard this week about the bad effects of short-term thinking came from a 2005 study conducted by three economists for the National Bureau of Economic Research. They asked a series of questions about the importance of quarterly earnings to more than 400 executives and discovered that almost 80 percent of them said they “would decrease discretionary spending” in such critical areas as research and development, advertising and maintenance if they needed to do so to make the quarterly numbers.
Campbell R. Harvey, a Duke University economist and one of the authors of the study, still sounded a little stunned by the results when I spoke to him. “You would think they wouldn’t want to admit this,” he said. As he saw it, in the wake of the accounting scandals, companies were less willing to use “accounting shenanigans,” as he called it, to meet earnings projections. So instead, “they are doing things that effect the real operations of the company, like postponing R.& D. This is the stuff that creates real value in the long term.”
So why, even after hearing the horror stories, is there still a part of me that says, “Not so fast?” Partly it’s because for all the anecdotal evidence of short-termism and its effects, there is not a lot of empirical data to back it up. Corporations, for instance, still do a great deal of research and development — $250 billion worth each year, according to Baruch Lev, the well-known accounting professor at New York University.
Mr. Lev scoffs at the notion that short-termism is even a problem. “It would be ludicrous to tell managers, ‘we’re going to leave you alone for five years and then come back and monitor your performance,’ ” he said. “Even if you are long-term oriented, you are going to look at how they are doing every quarter.”
The second reason, though, is that as I listened to Mr. Donaldson and the others, I couldn’t help thinking back to the early 1980’s, when the executives themselves made the exact same arguments Mr. Donaldson was making from the podium.
Let’s be honest here: for many of the executives back then, the argument that they were managing for the long-term was bogus. There was too much lethargy in too many companies, and a desire by too many executives to avoid making tough decisions — cutting loose unprofitable divisions, for example. Having sailed through the post-war era without much in the way of global competition, there were plenty of American industries that desperately needed to be shaken up in a tougher, more competitive era. Whatever their flaws, the raiders helped spur that process — in no small part by forcing executives to pay more attention to the stock price.
Ms. Browning of Merrill Lynch told me that she thought “the pendulum has swung too far in terms of focusing on the quarter.” I agree with her. That’s what often happens on Wall Street — and, indeed, in business. We swing from one extreme to the other.
So yes, by all means: let’s get rid of earnings guidance, and start paying executives for achieving important long-term strategic goals that will help the company grow and prosper into infinity. Those are worthy suggestions. But let’s not swing the pendulum back too far.
Surely we’ve learned by now that long-termism can be just as much a problem as short-termism.

The Wi-Fi in Your Handset (NYTimes, 7/29/06)

July 29, 2006
The Wi-Fi in Your Handset
By MATT RICHTEL
What if, instead of burning up minutes on your cellphone plan, you could make free or cheap calls over the wireless networks that allow Internet access in many coffee shops, airports and homes?
New phones coming on the market will allow just that.
Instead of relying on standard cellphone networks, the phones will make use of the anarchic global patchwork of so-called Wi-Fi hotspots. Other models will be able to switch easily between the two modes.
The phones, while a potential money-saver for consumers, could cause big problems for cellphone companies. They have invested billions in their nationwide networks of cell towers, and they could find that customers are bypassing them in favor of Wi-Fi connections. The struggling Bell operating companies could also suffer if the new phones accelerate the trend toward cheap Internet-based calling, reducing the need for a standard phone line in homes with wireless networks.
The spottiness of wireless Internet coverage means that for now, the phones will be more of a supplement to, rather than a replacement for, standard cellphone service. But dozens of American cities and towns are either building or considering wide-area wireless networks that would allow Wi-Fi phones to connect and make free or cheap calls.
“It’s a phone that looks, feels and acts like a cell phone, but it actually operates over the Wi-Fi network,” said Steve Howe, vice president of voice for EarthLink, which is building networks in Philadelphia and Anaheim, Calif.
Later this year it plans to introduce Wi-Fi phone service that Mr. Howe said could cost a fifth as much as traditional cell service.
The technology is in its early stages, and it faces some hurdles to widespread use. But it is being promoted by big technology companies like Cisco Systems and giving rise to new competition in the mobile phone business.
A handful of companies are already using Wi-Fi phones to cut costs within offices or on corporate campuses, and the phones will soon be reaching the consumer market.
Skype, the Internet calling service owned by eBay, said last week that four manufacturers plan to begin shipping Wi-Fi phones that are compatible with the service by the end of September. Among them is Netgear, a maker of networking equipment, which plans to charge $300 for its phone; the other makers include Belkin, Edge-Core and SMC.
Skype allows free calls to other Skype users and usually charges pennies a minute for calls to regular phones, although it has made all domestic calls free through the end of the year.
EarthLink plans to sell phones for $50 to $100, then charge roughly $25 a month for unlimited calling. Initially, the service will work only with hotspots where Internet access is provided by EarthLink, either in homes or on its citywide networks.
The major cellphone companies have taken notice of Wi-Fi phones, and some have chosen to deal with the potential threat by embracing it, building it into their business plans.
Cingular Wireless plans to introduce phones next year that will allow people to connect at home through their own wireless networks but switch to cell towers when out and about.
Later this year, T-Mobile plans to test a service that will allow its subscribers to switch seamlessly between connections to cellular towers and Wi-Fi hotspots, including those in homes and the more than 7,000 it controls in Starbucks outlets, airports and other locations, according to analysts with knowledge of the plans. The company hopes that moving mobile phone traffic off its network will allow it to offer cheaper service and steal customers from cell competitors and landline phone companies like AT&T.
“T-Mobile is interested in the replacement or displacement of landline minutes,” said Mark Bolger, director of marketing for T-Mobile. Wi-Fi calling “is one of the technologies that will help us deliver on that promise.”
Major phone manufacturers including Nokia, Samsung and Motorola are offering or plan to introduce phones designed for use on both traditional cell and Wi-Fi networks. Samsung said last week that it had begun to sell its dual-mode phone in Italy.
Wi-Fi not only has the potential to offer better voice quality than traditional cellular service, but it also opens the door to videoconferencing and other data services on mobile devices. Cellphone users are now often limited to the services offered by their carriers, but Wi-Fi phones could have access to a wider range of offerings on the Internet, in some cases at faster transmission speeds than on the carriers’ networks.
But there are enough limits to the technology that it may be some time before people start tossing out their old cellphones to take advantage of Wi-Fi.
The radio signals sent from standard mobile phones connect to tens of thousands of cell sites on towers or attached to buildings, billboards and other structures. These cells have an average range of two miles, allowing them to blanket much of the country.
Wi-Fi hotspots have a much more limited range, usually no more than 800 feet. Unlike the cellphone towers, which are operated by the carriers, the hotspots tend to be controlled by individuals or smaller companies, and are not coordinated or organized into a larger network.
“It’s going to be a long time before you’ll have a reliable Wi-Fi connection anywhere you go,” said Michael Jackson, director of operations for Skype.
A company called Fon, which is based in Spain and is backed by Skype and Google, is trying to accelerate the spread of Wi-Fi by selling cheap wireless routers to anyone who will agree to let other people in the vicinity use them by paying an access fee. The buyers can choose to split the fee with the company.
In October, Fon plans to begin charging about $150 for a wireless router that also serves as a docking station for a Skype-compatible Wi-Fi phone. The phone will connect easily to hotspots operated by Fon members.
“Wireless Internet infrastructure can be incredibly inexpensive,” said Martin Varsavsky, the founder and chief executive of Fon.
Without special software, like that from Fon, however, hotspots may not automatically set up a connection with the new phones. Instead, until the technology is smoothed out, users might have to configure their phones to connect whenever they are in range of a new hotspot.
“If it takes you five minutes to set up at the airport and you save 50 cents, why would you bother?” said Benoit Schillings, chief technology officer of Trolltech, an Oslo company developing software to make these connections easier.
Another wrinkle is that Wi-Fi networks operate over unlicensed radio spectrum. This spectrum is essentially public space, which means that anyone can make use of it, but it also means that the frequencies can be congested, potentially causing interference and dropped calls.
By contrast, the major cellphone carriers paid billions of dollars to the federal government for the right to use their slices of the radio spectrum. They can control who is on their networks, maintain quality standards and limit overcrowding. But the spectrum fees introduce a layer of costs that Wi-Fi calls are not burdened with.
Companies including Clearwire, founded by the cellphone pioneer Craig O. McCaw, are building subscribers-only wireless data networks using a technology called WiMax that has a much greater reach than Wi-Fi, and mobile phone service is part of their plans.
The hotspot technology has inspired a vigorous and complex discussion in the telecommunications world about how the traditional companies should react.
On its face, the technology would seem to present the carriers with a major problem. The more time subscribers spend connected to Wi-Fi hotspots, the less time and money they spend on the cell network.
Yet carriers also recognize that per-minute charges are falling across the industry, and that the loss of revenue they suffer if they allow people to switch onto a Wi-Fi network could be offset by attracting loyal subscribers who sometimes want to connect that way.
Further, some carriers argue that if people connect to Wi-Fi in their homes and offices, where there are close and reliable hotspots, they will enjoy connections that are better than those via cell towers and will not need standard phone lines. In a home, for example, the mobile phone could connect as effectively through Wi-Fi as traditional cordless phones do now to their base stations.
Larry Lang, general manager of the mobile wireless group at Cisco, said Wi-Fi would allow good service in people’s homes “without having to put up big cellphone towers in the neighborhood.” Cisco makes equipment that phone companies use to handle digitized calls.
Roger Entner, a telecommunications industry analyst with Ovum Research, said some carriers were still wary of Wi-Fi service. He said they were concerned that when hotspot reception was not good — whether at home or elsewhere — they would be blamed.
“The guys who don’t want it are predominately Verizon Wireless,” Mr. Entner said. They do not want a customer who is getting poor service at a hotspot “complaining that Verizon service is responsible,” he said.
A spokesman for Verizon Wireless, Jeff Nelson, said the company was looking at Wi-Fi service but had no plans to offer a product in this area. “At this point, we don’t see a great application for customers,” he said.
Further complicating the business discussion for the carriers are the incestuous ownership arrangements in the telecommunications world. For instance, Cingular Wireless is owned jointly by AT&T and BellSouth, while Verizon Wireless is part owned by Verizon Communications, the regional phone giant.
BellSouth, AT&T and Verizon Communications each have an interest in selling high-speed Internet access for homes and offices. If consumers have an incentive to set up wireless networks in their homes — networks that could be used for superior phone service — it could give them another reason to buy high-speed Internet access.
Of course, as many laptop users have discovered, Wi-Fi Internet access is not always something you pay for. Sometimes it is something you just find, as can be the case when people deliberately or unintentionally leave access points open and unsecured. The phones that work with Skype, and most likely others, will turn the free access point in a neighborhood café — or a neighbor’s house — into a miniature provider of phone service.
“It can be very open, decentralized,” said Mr. Entner of Ovum Research. But, he said, such a grass-roots infrastructure presents many challenges. For example, callers could get frustrated when the hotspot they are relying on for a connection stops working and there is no one to complain to.
Mr. Entner said, “You could knock on your neighbor’s door and say, ‘By the way, buddy, I’ve been bumming your Wi-Fi signal to make calls; please turn it back on.’ ”
John Markoff contributed reporting for this article.

Wal-Mart Finds That Its Formula Doesn’t Fit Every Culture (NYTimes,8/2/06)

August 2, 2006
Wal-Mart Finds That Its Formula Doesn’t Fit Every Culture
By MARK LANDLER and MICHAEL BARBARO
WIESBADEN, Germany, July 31 — Three days after Wal-Mart Stores announced that it would pull out of Germany, Roland Kögel was wandering through the aisles of a somewhat threadbare Wal-Mart in a strip mall in this western German city.
“Why are they giving up now?” he asked. “They have good prices and a good variety of products.”
Yet Mr. Kögel, 54, confessed that he never bought groceries at Wal-Mart. Food is cheaper at German discount chains. He also does not visit this store often, because it is on the edge of town and he does not own a car. His one purchase for the day was tucked under his arm: a neck pillow.
Shoppers like Roland Kögel help explain why Wal-Mart raised the white flag in Germany, the site of the company’s first foray into Europe.
After nearly a decade of trying, Wal-Mart never cracked the country — failing to become the all-in-one shopping destination for Germans that it is for so many millions of Americans. Wal-Mart’s problems are not limited to Germany. The retail giant has struggled in countries like South Korea and Japan as it discovered that its formula for success — low prices, zealous inventory control and a large array of merchandise — did not translate to markets with their own discount chains and shoppers with different habits.
Over all, Wal-Mart is still expanding outside the United States, particularly in markets where it entered by acquiring a strong retailer. Still, given Wal-Mart’s formidable record at home, the company’s recent setbacks have exposed a rare vulnerability overseas.
Some of Wal-Mart’s problems stem from hubris, a uniquely powerful American enterprise trying to impose its values around the world. At Wal-Mart’s headquarters in Bentonville, Ark., however, the message from these missteps is now registering loud and clear.
In particular, Wal-Mart’s experience in Germany, where it lost hundreds of millions of dollars since 1998, has become a sort of template for how not to expand into a country.
“It is a good, important lesson, a turning point,” an international spokeswoman for Wal-Mart, Beth Keck, said. “Germany was a good example of that naïvete.” She added, “We literally bought the two chains and said, ‘Hey, we are in Germany, isn’t this great?’ ”
Among other things, she said, Wal-Mart now cares less whether its foreign stores carry the name derived from its founder, Sam Walton, as the German Wal-Marts do. Seventy percent of Wal-Mart’s international sales come from outlets with names like Asda in Britain, Seiyu in Japan or Bompreço in Brazil.
Wal-Mart is also trying to integrate acquisitions with more sensitivity — a process that involves issues like deciding whether to consolidate multiple foreign headquarters and how aggressively to impose Wal-Mart’s corporate culture on non-American employees.
In Germany, Wal-Mart stopped requiring sales clerks to smile at customers — a practice that some male shoppers interpreted as flirting — and scrapped the morning Wal-Mart chant by staff members.
“People found these things strange; Germans just don’t behave that way,” said Hans-Martin Poschmann, the secretary of the Verdi union, which represents 5,000 Wal-Mart employees here.
Wal-Mart’s changes came too late for Germany, but they could help it crack other markets, like China, where it already has 60 stores and 30,000 employees. Far from being chastened by its setbacks, Wal-Mart is forging ahead with an aggressive program of foreign acquisitions.
In a single week last fall, Wal-Mart completed the purchase of the Sonae chain in Brazil, bought a controlling stake in Seiyu of Japan, and became a partner in the Carcho chain in Central America. The deals added 545 stores and 50,000 employees to Wal-Mart’s overseas empire.
“I’m hard pressed to name a U.S.-based general merchandise retailer that is doing better than Wal-Mart International,” said Bill Dreher, who follows Wal-Mart for Deutsche Bank in New York.
Starting from scratch 14 years ago, Wal-Mart International has grown into a $63 billion business. It is the fastest-growing part of Wal-Mart, with nearly 30 percent sales growth in June, compared with the same month last year. Even subtracting one-time gains from acquisitions, it grew at nearly 12 percent, about double the rate of Wal-Mart’s American stores.
Sustaining that pace is critical for Wal-Mart, because high fuel prices have helped sap the buying power of Americans. In June, store traffic in its home market declined. Wal-Mart estimated that its sales in the United States in stores open at least one year would increase only 1 percent to 3 percent in July.
Wal-Mart Germany, with 85 stores and $2.5 billion in sales, is almost a footnote for a company focused on Asia and Latin America. But the problems it encountered here have echoes elsewhere. For example, it never established comfortable relations with its German labor unions.
“They didn’t understand that in Germany, companies and unions are closely connected,” Mr. Poschmann said. “Bentonville didn’t want to have anything to do with unions. They thought we were communists.”
Ms. Keck said Wal-Mart did cultivate good relations with the leaders of the works’ council, which represents the unionized work force, and changed policies in response to employee concerns.
Wal-Mart will soon get another chance to deal with organized labor, albeit of a less independent sort. In China, the state-controlled All-China Federation of Trade Unions is organizing workers in Wal-Mart’s stores.
Germany also provides a lesson in the perils of buying existing chains. Wal-Mart’s purchase of Wertkauf and Interspar saddled it with stores in undesirable locations. The Wiesbaden outlet is worlds away from a squeaky-clean American Wal-Mart: nearby are a couple of sex shops.
“These were some of the least attractive of the big-box retailers out there,” said James Bacos, director of the retail and consumer goods practice at Mercer Management Consulting in Munich.
Compounding the problem, Wal-Mart shut down the headquarters of one of the chains, infuriating employees who opted to quit rather than move. Such a decision would have been routine in the United States, where Ms. Keck said, “moving is a big part of the Wal-Mart culture.” In Germany, she said, it prompted an exodus of talented executives.
In South Korea, Wal-Mart had only 16 stores — a small presence that contributed to its decision in May to sell out to a Korean discount chain. Many Koreans have never heard of Wal-Mart. In Seoul, a sprawling area of 10 million, there is only a single store.
This lack of scale causes another problem that has afflicted Wal-Mart in several countries: its inability to compete with established discounters, like the Aldi chain in Germany and E-Mart in Korea.
The obvious lesson is to try to bulk up. In Brazil, Wal-Mart opened only 25 stores in its first decade there and struggled to compete against bigger local rivals. Then, in 2004, it bought Bompreço, giving it a presence in the country’s poor, but fast-growing, northeast.
Wal-Mart did not change the names of the stores, which range from neighborhood grocers to large American-style hypermarkets. But with 295 stores in Brazil, Wal-Mart now ranks third in the market, after Carrefour of France and the market leader, Companhia Brasileira de Distribução.
Size has given Wal-Mart increased leverage with suppliers there, though analysts say the company needs even more stores to be in a position to undercut local discounters on the prices it offers customers.
At a Wal-Mart store in suburban Rio de Janeiro the other day, Ana Paula Cunha de Almeida, a 26-year-old housewife, had loaded her shopping cart with rice, beans and flour. But she was also carrying a bag from a smaller grocery store, where she had bought meat, cheese and cold cuts.
“These are always cheaper somewhere else,” she said.
The grocery business has proven the most difficult for Wal-Mart to crack. Aldi, with 4,100 stores in Germany, undercuts Wal-Mart on price, while still offering high-quality food.
Even in Canada, where Wal-Mart steamrolled local department store chains when it entered the country as a nonfood retailer in 1994, the grocery trade looms as a challenge. Wal-Mart recently announced plans to build supercenters that will also sell groceries. But analysts predicted Wal-Mart would face stiff competition from Canada’s largest chain, Loblaw.
Bernie Skelding, a vacationer shopping at a Wal-Mart in Huntsville, Ontario, north of Toronto, said he liked going to the store when he had a varied shopping list. But he added, “If I’m looking for food, I go to Loblaw’s.”
Wal-Mart’s most successful markets, like Mexico, are those in which it started big. There, the company bought the country’s largest and best-run retail chain, Cifra, and has never looked back. This year, Wal-Mart is spending more than $1 billion in Mexico to open 120 new stores.
Taking over Cifra “gave them a critical mass to build from,” said Tufic Salem, an analyst at Credit Suisse First Boston in Mexico City. “The management stayed, and they knew the market very well.”
Perhaps the most striking example of a Wal-Mart success is Asda, which was Britain’s No. 1 discount chain when Wal-Mart acquired it in 1999. With sales of $26.8 billion, Asda now accounts for 43 percent of Wal-Mart’s international revenue.
Wal-Mart’s German experience also taught it to use local management. The company initially installed American executives, who had little feel for what German consumers wanted.
“They tried to sell packaged meat when Germans like to buy meat from the butcher,” Mr. Poschmann said.
Some of Wal-Mart’s missteps — selling golf clubs in Brazil, where the game is unfamiliar, or ice skates in Mexico — are so frequently mentioned, they have become the stuff of urban legend. But even more subtle differences in shopping habits have tripped up the company.
In Korea, Wal-Mart’s stores originally had taller racks than those of local rivals, forcing shoppers to use ladders or stretch for items on high shelves. Wal-Mart’s utilitarian design — ceilings with exposed pipes — put off shoppers used to the decorated ceilings in E-Mart stores.
Beyond the ambience, Wal-Mart’s shoes-to-sausage product line does not suit the shopping habits of many non-American shoppers. They prefer daily outings to a variety of local stores that specialize in groceries, drugs or household goods, rather than shopping once a week at Wal-Mart.
“They have stacks of goods in boxes,” said Lee Jin Sook, 46, a housewife sitting on a subway in Seoul. “That may be good for some American housewives who drive out in their own cars.” But Koreans, she said, prefer smaller packages: “Why would you buy a box of shampoo bottles?”
“I heard Wal-Mart later tried to change their style,” Ms. Lee added, “but I guess it was too late.”
Mark Landler reported from Wiesbaden, Germany, for this article, and Michael Barbaro from Portland, Ore. Reporting was contributed by Choe Sang-Hun from Seoul, South Korea;Heather Timmons from London; Elisabeth Malkin from Mexico City; Ian Austen from Huntsville, Ontario; and Paulo Prada from Rio de Janeiro.