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On The Cover/Top Stories

Wall Street's Honest Man
Nathan Vardi
4165 words
28 February 2011
Forbes
FB
70
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

Two years after Wall Street nearly caused the end of the world, the
convulsive melodrama continues. A handful of protagonists are gone,
some barely escaping prosecution, to say nothing of a prison cell. But the
usual cast of characters is still stealing headlines--popping up at the
White House or Davos or on the society pages.

Then there's Jay S. Fishman, chief executive of the Travelers Companies.

If you've never heard of him--maybe you remember the insurance
company's trademark red umbrella--there's a reason for that. Fishman is
a little limelight-phobic. Until now there has never been a profile of him,
just a handful of stories written a decade ago by two Minnesota
newspapers after he took over an all-but-forgotten insurer called the St.
Paul Cos.

The man has nothing to hide. In fact, his is a remarkable tale of straight-
talking his way to success. This is a guy who was once a protégé of Sandy
Weill's and walked away from a big job at Citigroup; who preemptively
said no thanks to any bailout from then Treasury Secretary Hank Paulson,
even as his peers were taking handouts; who warns his investors that his
company's returns might be lower from one year to the next; who frets
that, left unchecked, the government debt crisis will turn into a death
spiral; who expresses misgivings about his own abilities; who takes a very
long view of his custodianship. "I don't want to be [just] a caretaker," he
says during a rare couple of interviews. "I want to leave something
behind that was better than what I got."

You'd expect that from the head of the Nature Conservancy. But from a
Wall Street mogul?

Jay Fishman is a throwback to the days before credit derivatives,

collateralized debt obligations and subprime mortgage securities. He runs
Travelers as a pretty simple business: It writes policies on commercial
properties, autos and homes, and invests the insurance premiums largely
in fixed-income securities, mostly bonds. "We focus on the long term
here," he says. "That is how we do things." Over that horizon the
company has done quite well. While the hellfires tore through most of
Wall Street in 2008, Travelers emerged unsinged, netting $2.9 billion on
$24.5 billion in revenue. Last year it earned $3.2 billion on $25.1 billion.
Steady, if unexciting progress. Taking few, but calculated, risks, says
Fishman, "you underperform when things are good and, as a result, do
better when things are bad."

Still, in the last five years Travelers' stock has returned an annual
average of 7%, more than the shares of Goldman Sachs, JPMorgan Chase
& Co. and Berkshire Hathaway (see graph, p. 77). "I think he has done a
great job there," says JPMorgan Chief Jamie Dimon, a friend who has
known Fishman since 1988, when they both worked for Sandy Weill as he
was building the multiheaded monster Citigroup. "He does the nuts and
bolts right, he hasn't strayed from his strategy, he bought back a lot of
stock and is willing to use the capital wisely for the shareholders." He
adds: "It's not his personality to take bows."

That's for sure. I chased him for a year before Fishman and his staff
finally agreed to sit down for an extensive series of interviews. A standing
nail always gets whacked, he told me, paraphrasing the Japanese proverb.
Now he feels comfortable enough about himself and his business--and its
place among its humbled peers--to risk the hammer. That said, you will
never catch Fishman talking about doing God's work (Lloyd Blankfein) or
throwing a $3 million-plus birthday party for himself (Steven Schwarzman)
or exploding in a colorful cloud of curses (Jamie Dimon). His favorite four-
letter word is "risk"--and it's usually preceded by "thoughtful" and
followed by "management."

At 58, fighting off a bit of a paunch, with a thick mane of gray hair,
Fishman resembles the family doctor who gives it to you straight--and
who doesn't overdo expensive tests and medications. "We are an
insurance company first and an asset manager second," he says, sitting
on a couch in his modest office, with no view to speak of, in midtown
Manhattan. That's no diss to investors; Fishman is simply describing his
priorities. "We take only that amount of investment risk that we need to
be a top-notch insurance company."

But--and it's a big but--the very conservatism that helped Travelers tack
through the worst of the financial typhoon is now something of a liability.
On the revenue side the demand for insurance has been weak, and
competitors, rescued by taxpayers, are coming back strong. On the
investment front the company has a huge exposure to municipal bonds
(54% of its sizable $73 billion portfolio), which has the scent of peril to
some investors and is reflected in the fact that Travelers shares, a recent
$57, have been trading at close to book value.
Ironically, perhaps, the property and casualty business used to be seen as
one of the more volatile financial enterprises because it can get rocked
each time the earth shakes (as it did in 1989 with the Loma Prieta
earthquake) or the wind blows (Hurricane Andrew, 1992). Fishman's
company is a big insurer of businesses, writing policies on everything
from commercial trucks to farm equipment and workers' compensation. It
also has a large consumer business, insuring home and car owners. Most
of those products are sold through independent agents.

Fishman has always been up front about his MO. In the years preceding
the credit mess he told investors time and again he would not run
Travelers the way many other insurance firms operate--essentially as a
publicly traded investment company that happened to be funded by
writing insurance. In an era when some investment banks and insurance
companies often looked more like debt-fueled hedge funds, increasing the
assets on their balance sheets to as high as 30 times equity, Fishman
stuck to his core business and leveraged Travelers' assets only up to 4
times equity. "We never think about investing in something just to earn
another 10 cents a share," he says. "We tell investors, 'If you are going to
buy a stock just because you think the earnings next year are going to be
higher, we are not your company.'" He has repeatedly said that the
company should produce return on equity in the midteens over time,
stressing that the company might not meet that target every year (in
2010 its ROE hit 12.1%). While he doesn't expect it will happen, Fishman
is telling shareholders that he may lower his long-standing profitability
target if some current conditions become more permanent. What
conditions? High unemployment, low GDP growth and low returns on
capital.

"Once you tell your people that you don't care if they grow or make more
money this year over last, but that they manage the capital they are
given in ways that produce superior results over time--you remove from
the organization the impetus to do dumb things," says Fishman. "People
ask me what went wrong with these other companies, and, while I don't
know what goes on anywhere else, my experience is that if you tell
employees what you want them to do, they will try their hardest to do
what you ask them."

"Trying hardest" is a family hallmark. Born in the Bronx, Fishman watched

his father work long hours at his small printing company so that he could
send Jay to private school (he attended Barnard School for Boys); every
cent went to pay tuition and the rent on a two-bedroom apartment. His
grandmother, Fishman heard over and over again, had been sent by her
family in Latvia at age 13 to work as a seamstress on Manhattan's Lower
East Side, sending money back to her family so they could join her. Hard
work paid off: Fishman graduated from the Wharton School at the
University of Pennsylvania with a bachelor's degree in economics and a
master's in accounting.

He was 15 when he met his future wife, Randy, then 13. Fishman was
working at the golf course at a summer resort in the Catskills, in upstate
New York; Randy was a guest. They ran into each other one night in the
hotel lobby after a dinner. "He was wearing a mock blue turtleneck, and
he was very good looking," she recalls, sitting in the living room of their
stately but relatively modest redbrick colonial in Englewood, N.J., where
the Fishmans have lived since 1998. "I told my friends that I knew it
sounded crazy, [but] this was a guy I could marry." Fishman's parents
drove the couple on their first date to a restaurant in Paramus. (The
couple has two grown sons but prefers not to discuss them in order to
shield them from publicity.)

Fishman worked as an accountant at American Can Co., then jumped to

the company's acquisitions unit--and fortuitously to an impressive career
path. Later, while working at merchant bank Shearson Lehman, he wound
up negotiating with Dimon in an effort to acquire Fingerhut, the catalog
marketing company owned by Primerica. The deal fell through, but Dimon
convinced Fishman to join Sandy Weill's gang. After Primerica bought a
chunk of Travelers in 1992, Weill dispatched Fishman and Robert Lipp,
plucked from Chemical Bank, to Hartford, Conn. to troubleshoot.
(Primerica later acquired all of Travelers; in 1998 Fishman was tapped to
run it.)

Then came a critical juncture. In December 2000 Weill named Fishman

and Chuck Prince co-chief operating officers at Citi--a bone thrown to the
board, which was concerned that Weill wasn't adequately preparing for his
succession. One of these two guys, it seemed, would likely end up
running the financial colossus. Fishman's new job was huge: continuing to
run Travelers' property-and-casualty and life insurance businesses, as
well as overseeing consumer banking units in Europe and Japan.

But Fishman was starting to agonize about his future at Citi. "I didn't
think Sandy was going anywhere," he muses. Worse, he was cankered by
self-doubts. "What became apparent to me was that my experience base
was such that there were better candidates to run [Citi] . . . I had next to
no experience in sales and trading, limited experience in investment
banking and no experience in commercial banking." He concludes
modestly, but firmly, "I wouldn't have been an effective CEO."

On the other hand, he desperately wanted to run his own show. When a
recruiter called in 2001 about heading the troubled St. Paul Cos., Fishman
decided to take a look. Over two consecutive Saturday nights he walked
the empty St. Paul headquarters, wrestling with the decision. He returned
to New York City and finally cornered Weill to tell him he was leaving.
Fishman tried to remind Weill that he himself had quit the number two
post at American Express to go off on his own. Weill's disappointment,
Fishman recalls, turned into irritation. "I told Sandy, 'I am not the guy.'"

Weill confirms the unpleasant encounter. Sitting in his massive and eerily
quiet office on the 46th floor of the General Motors Building--adorned with
memorabilia from his careers in business and philanthropy and offering
magnificent views of Central Park--Weill says at first he took Fishman's
exit personally. "Jay, I thought, was a very important person in the future
of the company and maybe the person who would end up running it,"
says Weill, adding that his disappointment subsided within days and he
wished Fishman well. Still, he says, "I was really annoyed that he was
leaving."

In retrospect Fishman's exit looked shrewd--and lucky: He quit long

before he could be tagged with the bank's fiasco. Chuck Prince, a lawyer
who had little operational experience, ended up presiding over one of the
biggest disasters in the history of Wall Street, after Weill backed him for
the top job at Citi in 2003. For his part, Fishman doesn't think Citi's
structure was inherently unwieldy--or that he did anything that
contributed to the bank's collapse seven years after his departure. "I left
Citi, the stock was at $50 a share," says Fishman. "It was a great
success." Today it trades at $4.75.

St. Paul Cos. was a mess. Several top executives had left, and its medical
malpractice unit and reinsurance business were gushing losses; Fishman
got rid of them. He quickly found a lieutenant--a lucky coincidence. He
was being driven up Park Avenue in Manhattan (he never completely
adapted to Minneapolis) when he saw William Heyman, who had led
Citigroup Investments. Asking the car to stop, Fishman jumped out,
wanting to know what his former colleague was up to. Heyman said he
had just quit Citi. He had an offer letter from Jamie Dimon at Bank One,
but Fishman talked him into heading up investments for St. Paul. "I
thought Jay and Jamie were the best two businessmen at Citi," says
Heyman. At St. Paul he dumped large stock and venture capital holdings
that he felt were too risky. (Later he managed Travelers' portfolio
unscathed through the credit crisis.)

Another chance encounter in New York proved crucial to St. Paul's--and

Fishman's--future. In 2003 he bumped into his mentor at Citi, Robert Lipp,
in the foyer of the New York City Ballet. (Fishman likes dance, but his
passion is music.) Lipp had gone on to become chief of Travelers, Citi's
p&c business that Weill had spun off in 2002. Both men had recently
grappled with big charges stemming from asbestos claims. Now that they
were through the worst, Fishman suggested a merger of the two
companies to create the second-largest commercial insurer, right behind
AIG. In April 2004 St. Paul's acquired Travelers in an $18 billion (all stock)
deal. Fishman remained CEO; Lipp became executive chairman. For
Fishman, who had spent almost nine years at Travelers--and three years
after that in a kind of diaspora--returning to the company felt like
"coming home again."

There were more jeers than cheers from investors, who battered the
stock in the first six months as the combined companies grappled with
their different approaches. St. Paul Travelers increased reserves by $1.6
billion months after the merger closed. New business declined, as
independent insurance agents adapted to the underwriting standards of
the new company.

"I could have done a better job managing expectations, including my

own," Fishman reflects today. The company sliced 10% of its workforce--
3,000 positions--to save $350 million. Within a year the company was
humming as Fishman sat down with agents, resolving their issues one by
one.

That sort of outreach is pure Fishman, who routinely travels the country
to get a ground-eye view of his businesses, customers and employees.
After Hurricane Katrina he was the only insurance chief to visit then
Senate Majority Leader Trent Lott, who had lost his beachfront home and
was furious with the industry. Recently Fishman traveled to Texas, where
he put on headphones at Travelers' consumer call center, and to funerals
in North Carolina, for a claims adjustor who was in a fatal car accident,
and in upstate New York, for the son of an employee killed in Afghanistan.
"We do hugs, not handshakes," laughs Lipp, who left Travelers in 2005 to
become an adviser to Dimon at JPMorgan before going off to Stone Point
Capital, a private equity firm.

When Lipp departed, Fishman lost his closest adviser. But by 2005, as the
housing market started to reach a high boil, he and Heyman, whose
fixed-income team managed investments from St. Paul, knew exactly
what course to take: Ignore the siren calls of higher returns. "Nobody
goes to Minnesota to work at an insurance company because he is a
frustrated hedge fund manager," says Heyman. When bankers came
around selling big structured products like collateralized debt obligations,
he refused to bite because CDOs were so thinly traded that they couldn't
be unloaded easily. Travelers didn't get into any auction-rate securities or
structured investment vehicles, either. Yes, the company had bought
$200 million of subprime mortgage-backed securities--a sliver of its then
$68 billion investment portfolio. But Fishman and Heyman instinctively
shrank from securities that had no track record and yielded only 25 basis
points more than the mortgage paper backed by government-sponsored
Fannie Mae and Freddie Mac. Fishman correctly figured that Uncle Sam
would always stand behind those and held on to billions of dollars' worth.
But he and Heyman eschewed preferred securities issued directly by
Fannie and Freddie, which the feds ultimately declined to support,
because they found them too much of a gamble.
Fishman says he is in the business of taking calculated risks against the
1-in-1,000 chance of a catastrophe. "We're not in the luck business," he
insists. Perhaps that experience offers some protection from the hubris
that seems to bring down Wall Street Olympians time after time.

In 2007 one thing he did buy--and perhaps overpaid for--was the

Travelers' red umbrella logo. Weill loved it and had Citi hang on to it after
he ditched the insurer. Chuck Prince was willing to part with it, for a price.
"It was not inexpensive" is as far as Fishman will go. "But worth every
penny," including what it cost to cut the 6-ton sculpture into three
sections and move it from Citi's downtown building to Travelers' rotunda
plaza in Hartford. (At that time "St. Paul" was dropped from the company
name.)

Fishman doesn't pretend to have seen the financial crisis coming. "We
were not that prescient about the collapse of the mortgage market," he
says. Just prepared by an insurer's conservative habits and suspicion of
investments that always seemed to be too good to be true. Travelers
rebuffed offers to create a securities lending program that would have
used the proceeds to buy mortgage-backed assets. This very scheme
created such prodigious losses at AIG that the government had to
backstop it with $38 billion in taxpayer funds, part of several infusions.

As AIG caved in on itself in September 2008, Fishman put together a

videoconference for all employees to reassure them. Travelers, he said,
was "in terrific shape" and had committed none of the sins of its
competitors. He invoked Aesop's Fables and quipped that a new company
logo might involve "the red umbrella with a tortoise underneath it--in the
context of the tortoise and the hare. . . . When times are hot and fast,
we're not going to be in the lead in that race" because "financial
performance is really a marathon." He also called then Treasury Secretary
Hank Paulson to tell him that Travelers didn't need a bailout.

As 2009 drew on Fishman had cause to feel more confident of his strategy.
He gave lower-paid staffers a one-time $500 contribution to their 401(k)
accounts. He declined several overtures to run struggling financial giants,
which he refuses to name. In June Robert Thomson, managing editor of
the Wall Street Journal, called to tell Fishman that Travelers would be
replacing Citi in the Dow Jones industrial average. Thomson explained he
wanted a company that would not have to be removed in the near future.

Travelers isn't going away anytime soon--but neither are some of its
onerous challenges. It remains heavily invested in municipal bonds, which
once seemed a sure if boring bet, but now, by dint of underfunded
pensions and unmanageable state deficits, look somewhat radioactive.
Travelers holds $39.7 billion of munis, though $7.2 billion of them are
prerefunded--that is, refinanced, with the proceeds put into U.S.
Treasurys. Fishman concedes he could be wrong, but he is sticking with
muni bonds that carry specific contractual provisions or pledges. General
obligation bonds issued by a particular county that Heyman will not
disclose may have recently weakened, but Travelers doesn't own those
bonds; it holds bonds secured by the county's sales tax receipts and still
believes in that investment.

Fishman and Heyman also like the $800 million in higher education tax-
exempt bonds the company owns from institutions like Harvard and Yale.
Travelers has sold some state bonds in the last year and now owns only
$1 billion of general obligations issued by the ten most fiscally challenged
states--the ones on everyone's hit list. Still, Fishman is concerned that
hysteria over shaky city budgets might damage Travelers' stock. "We
could significantly reduce our muni exposure at a gain, given the mark-to-
market position, but we don't want to, so we are trying to be clear to our
investors about what we own," says Fishman. "I think transparency will
overcome it." In a similar effort of full disclosure, Travelers has estimated
that net investment income will be $92 million lower in 2013 if it is forced
to reinvest maturing bonds at today's low rates. "It was unusual for a
company to provide that level of clarity," Fishman says in a rare moment
of self-congratulation. Last year Travelers helped nudge its stock price
higher by repurchasing $5 billion of its shares.

What about the top line? Slow demand for insurance (buffeted by a weak
economy) and strong competition are forcing Travelers to look outside its
orbit. Growth by acquisition is tough because it must consider a target
large enough to add appreciably to its $22 billion base of premiums
earned. So Fishman is trying lots of things. He is launching his first direct-
to-consumer effort, circumventing agents to take on the likes of Geico
and Progressive. Travelers recently announced it would spend $370
million to form a joint venture in Brazil that sells surety insurance
(contract guarantees issued to third parties) and will likely expand into
writing property and casualty policies. Fishman is looking to do something
similar in India.

Meantime, he is taking care of himself. Rising at 5:20 a.m., Fishman hops

on his stationary bike; a torn meniscus keeps him off the elliptical
machine. He is watching his diet, haunted by the memory of his mother,
who died at 59 from heart disease. But it's a challenge, especially
because of how much time he spends on the road.

He is compensated very well. In 2009 he took home $22 million--$1

million in salary, $7.5 million in bonus, $13.5 million mostly in vested
shares and stock gains. Last October, after commuting to various offices
for 35 years, he bought a $4.2 million apartment on Park Avenue.

He is trying to give back, serving on the board at Penn (where he funds

two full scholarships a year) and the advisory committee of the Jazz
Foundation of America. Fishman has also made the gaping federal deficit
his own cause. He sometimes spends evenings watching C-Span; at other
moments he dives, with an actuarial eye, into Congressional Budget Office
data. He shares his growing alarm about the failure to tackle the debt
crisis with anyone who will listen--policymakers, insurance agents,
investment advisers, even with friends in social settings. Fishman seems
to be speaking to Wall Street, as well as to Washington, when he says, "I
don't think that a thoughtful person can say, 'I got mine, and I don't care
about you.'"

Citi's Kiddies

Brilliant empire builder or creator of a financial doomsday machine, Sandy

Weill left a complicated legacy. "A lot of very good managers worked at
our company at one point or another," he says. Fishman is one. Among
the others:

Jamie Dimon CEO, JPMorgan Chase "What he has done in the universal
banking model--the best of anybody," says Weill, who forced Dimon out
of Citigroup in 1998, ending a long working relationship.

Joe Plumeri CEO, Willis Group Holdings He spent 32 years working for
Weill, first as a gofer and later as a sales and marketing exec at various
companies, then headed Smith Barney.

Ajay Banga CEO, MasterCard Banga started out at Nestlé and PepsiCo,
then joined Weill when Travelers Group merged with Citicorp in 1998; he
racked up considerable global experience over 13 years at Citigroup.

Sallie Krawcheck President, global wealth management, Bank of America

Hired by Weill in 2002, the star analyst rose to become head of Citi's
Smith Barney but clashed with Vikram Pandit, leaving in 2008.

Chuck Prince Senior counselor, Albright Stonebridge Group A lawyer, he

was once Weill's closest confidant; he ran Citigroup from 2003-07 as the
financial services giant collapsed under its own weight.

Document FB00000020110214e72s00005

© 2011 Factiva, Inc. All rights reserved.

On The Cover/Top Stories

Novo Nordisk's Medical Miracle
Robert Langreth
1922 words
28 February 2011
Forbes
FB
78
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

Novo Nordisk Chief Executive Lars Rebien Sørensen made a bold decision
four years ago. His company had made its name selling one 90-year-old
miracle drug--insulin for diabetes. Rival drug companies were testing new
diabetes pills that threatened to cut into insulin's market share. One such
pill from Merck had just been approved in the U.S. Others seemed
imminent. Worse, Novo Nordisk had spent $1 billion to come up with its
own diabetes pills with limited success.

The Danish company could have licensed a product from another

company to keep pace. Instead, Sørensen shut down Novo's pill research.
He poured the savings into the company's core competency--insulin and
other injected diabetes meds--betting that their sales would continue to
grow in the wake of a global diabetes epidemic. "It was a calculated risk,"
says Sørensen. "We could see that there was a declining return on
investment in [diabetes pills] and pulled our resources earlier than most."

It turned out to be a brilliant move. In an era when markets for many pills
are shrinking thanks to patent expirations and safety worries, insulin has
emerged as an unlikely growth story. It remains the most potent drug for
a disease that is on the rise around the world. No pill has come close to
displacing it. Because diabetes is a progressive disease, many, if not most,
patients end up on it eventually. Unlike newfangled drugs that turn out to
have unexpected side effects--like the heart risk problems that hobbled
GlaxoSmithKline's Avandia--insulin has a safety profile that is well
understood. Doctors are used to managing its main side effect,
dangerously low blood sugar.

Worldwide insulin sales have quadrupled in the last decade to $15.4

billion, according to IMS Health. Novo, the world's largest insulin maker,
sold $7.1 billion of insulin last year in a hard-to-penetrate oligopoly that
also includes Sanofi-aventis and Eli Lilly. The company's overall sales
($11.25 billion; it also sells hemophilia drugs) were up 13% in 2010. They
are projected to grow at an 8% to 10% clip for years to come. Its stock
has quintupled in the last decade. Novo's $64 billion market cap is bigger
than biotech stalwart Amgen ($52 billion) and its rival Lilly ($39 billion).
A big part of Novo's success is that the patient pool is growing every year.
Some 26 million Americans have diabetes and another 79 million--a third
of the adult population--have prediabetes, the CDC says. At the current
rate, one in three American adults will have diabetes by 2050. As India,
China and other emerging economies become wealthier and adopt
Western diets, the diabetes rate is surging in those places as well. The
most common form of the disease, type 2 diabetes, starts in adulthood
and is closely linked to obesity and inactivity; it is a progressive disease in
which the body loses the ability to make enough insulin or use it properly.
Patients with type 1 (juvenile) diabetes can't make insulin at all and need
to inject it their whole lives.

"The market for insulin is almost endless. It is going up and up and up. It
is not even close to the peak," says diabetes specialist David Nathan of
Massachusetts General Hospital. "There is no cure in sight, and insulin is
extraordinarily effective," says David Kliff, a diabetes sufferer who runs
the e-newsletter Diabetic Investor. "Talk about being in the right place at
the right time with the right thing."

Some of Novo Nordisk's success has come at the expense of its

competitors. Eli Lilly started producing insulin in 1923 and long dominated
the U.S. market. Under Sørensen Novo expanded its U.S. sales force and
overtook Lilly. Novo's $2.9 billion in U.S. insulin sales easily outpace Lilly's
$2.1 billion, according to IMS Health. "They brought in a full portfolio of
modern insulins and caught Eli Lilly on the back foot," says Morgan
Stanley analyst Peter Verdult. Says Sørensen: "Lilly was off focus for a
period of time. That led to an opening for us."

Sørensen, a 56-year-old with a master's degree in forestry, promises the

growth will continue for at least a decade. "We are in a far better position
than we were five years ago," he says. "We have the strongest portfolio
of products." One fast-growing new entrant is Victoza, an injected version
of a natural hormone, GLP-1, that stimulates the body to produce insulin.
It could hit $1 billion in sales in 2012. Besides controlling blood sugar, the
drug also appears to help people lose weight. If this use pans out--big
trials in obese patients are slated to begin this year--sales could be far
greater.

Nordisk was founded by Danish Nobel laureate researcher August Krogh

in 1923 after he heard about the discovery of insulin two years before by
Toronto researchers. Keenly interested because his wife had diabetes, he
obtained a license to purify it from animals and started production in
Copenhagen. Rival insulin maker Novo was founded two years later a few
miles away. The two merged in 1989.

For decades insulin came from cow and pig pancreases. Companies
"would go to the [slaughterhouse] and collect pancreases and use a
commercial-grade meat grinder to extract insulin," says Novo chief
medical officer Alan Moses. A breakthrough came in 1978, when
Genentech announced it had produced human insulin in bacterial cells
using genetic engineering. Lilly's Humulin, based on the Genentech work,
hit the market in 1982 and was the first approved drug produced using
genetic engineering. Novo followed with its own genetically engineered
insulin.

Today's designer insulin products are even better than the natural
versions. By making slight chemical tweaks to the insulin molecule itself
or the chemicals surrounding it, Novo and its competitors have produced
quick-acting and long-lasting versions that make managing diabetes
easier. Novo's fast-acting Novolog changes one amino acid in the natural
insulin molecule. This prevents it from clumping together, so the insulin is
more rapidly released into the bloodstream. Patients can inject it right
before a meal instead of having to wait 30 minutes before eating as they
did with earlier products. Novo's long-acting Levemir contains different
chemical changes that allow the insulin to be released slowly over 24
hours. Good for Novo: Such designer insulins cost two to three times as
much as older forms of the drug, says Morgan Stanley's Verdult.

One unusual feature of the company is that it is controlled by a

foundation that owns 26% of its shares but has a 73% voting stake. Its
mission is to use the dividends from the drugmaker to help support
biomedical research. This helps keep the focus squarely on the long term,
says Sørensen. "The owners are not in a position where they can divest."
Novo prides itself on exhaustively studying every safety issue before a
drug hits the market. When one insulin formulation caused tumors in lab
animals in the early 1990s, Novo halted trials of related products for three
years until it was sure the problem was specific to one formulation. "We
are cautious; we never put business issues ahead of safety," says Novo
R&D head Mads Krogsgaard Thomsen.

Sørensen bikes 10 kilometers to work in the Copenhagen suburbs every

day. He started his career in 1982 as a salesman in Novo's industrial
enzymes business (now a separate company called Novozymes) and
gained a reputation for boosting profits by slashing redundant layers of
middle management and revamping sales forces. "He is razor sharp and
has the ability to make decisions and implement change," says
Novozymes Chief Executive Steen Riisgaard.

He later moved into the diabetes side of the business and took over as
chief executive when Novozymes was spun out in 2000. He immediately
faced a big decision. Novo had just gotten its rapid-acting Novolog
approved in the U.S. but had only 80 sales reps there--nowhere near
enough to pitch the product to primary care doctors used to Eli Lilly's
competing products. Sørensen gambled on a colossal, decade-long
expansion of the sales force--a $500 million investment. Today Novo has
2,000 U.S. sales reps. "It was a gut call," he says. "We realized if we
wanted to be a global company there was no other way around it but to
invest."

One key to its success has been prefilled insulin "pens" that appeal to
many patients who don't want the hassle of using a vial and syringe.
"From my point of view it is a huge difference," says Novo U.S. head
Jerzy Gruhn, a diabetes sufferer who uses the pens. "If you are at the
airport, a vial and syringe is pretty embarrassing. You need to go to the
restroom." With pens people can dial up a dose so fast that nobody
notices. These days 45% of Novo's U.S. insulin sales come from pens.

More recently Novo chemists have been applying chemical technology to

make longer-acting injected diabetes drugs. Victoza is an early success
story. The natural insulin-stimulating hormone GLP-1 on which it is based
is a poor drug because it is degraded by the body soon after it is injected.
Victoza contains chemical modifications that slow its absorption so it can
be taken once a day. It competes with Lilly's Byetta.

Novo's next move is to take on Sanofi-aventis, the other heavyweight in

the diabetes business. Its Lantus dominates the market for long-acting
insulin. To fight back Novo has come up with an even longer-acting insulin
called degludec. It claims that degludec avoids the insulin "spikes" seen
with Lantus. In one big trial patients on degludec had 35% fewer
occurrences of nighttime low blood sugar, a known insulin side effect,
than those on Lantus. "It is absolutely hands down a better profile than
Lantus," says Sørensen. Degludec could hit the market by 2012. Sanofi
says it is "too early to draw any conclusions" about degludec.

Now that injected diabetes drugs are hot, the competition is intensifying.
In February Sanofi announced promising results for its own GLP drug that
could compete with Victoza. Lilly is beefing up its sales force and pipeline
to better compete with Novo and Sanofi. "Our intent is clear: reclaiming
our leadership in diabetes," says Enrique Conterno, president of Lilly's
diabetes arm. The company has six diabetes drugs in late-stage tests,
including two long-acting insulins and two once-weekly GLP drugs. "No
other company has that type of pipeline," says Conterno.

Novo faces numerous other risks as well. Insurers could decide the small
advantages of the latest designer insulin products aren't worth the added
expense and stop paying for them. ObamaCare could cut back on
reimbursement even more. The rapid growth of the insulin market makes
it an obvious target for companies seeking to make "biosimilar" drugs that
could undercut Novo on price.

Sørensen isn't worried. As usual, he is planning for the long term. One pill
project the company still has going aims to make the first oral version of
insulin, a goal that has eluded researchers for decades. It faces daunting
technical obstacles. If it works it could "completely revolutionize therapy,"
Sørensen says. And keep Novo on top even longer.

On The Cover/Top Stories

Inside The Vegas Party Machine
Steven Bertoni
1527 words
28 February 2011
Forbes
FB
100
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

For a few seconds the club goes dark and the techno swells. Foam flakes
spill from the ceiling and the strobes explode, lightning in a blizzard,
illuminating 500 gyrating bodies on the dance floor, balconies and tops of
banquettes. Amid the bedlam a busboy ferries a dozen Champagne flutes
and a 10-pound crystal ice bowl through the scrum, threading the gap like
Barry Sanders in his heyday. Seconds later he plants the stemware on a
table in straight rows and slides a candle a smidgen to the left, in line
with the flower vase and juice carafes, as it must be at all 47 tables.
Satisfied, he whips back to the bar--but not before swabbing a few stray
drops of Grey Goose from another tabletop while lighting a brunette's
cigarette with a flick of the wrist.

Micromanaged chaos: That's the secret behind The Bank, the sizzling
8,000-square-foot nightclub in Las Vegas' Bellagio resort and a star
attraction within Andrew Sasson's Light Group nightlife empire. Busboys
are the lowest organism in the hospitality ecosystem. To Sasson they're a
crucial element of an overall service and marketing strategy--one that
relies on fanatical attention to detail and consistency. When FORBES
interviewed him in 2004 Sasson was 34 and The Light Group had 3 clubs
and $14 million in revenue. Seven years and a nasty recession later he
operates 16 venues--including restaurants, lounges and clubs where $20
bottles of Skyy sell for $475--that rake in $160 million. In the works: a
second club in the Mirage, a lounge in the Bellagio and, with the help of
Cirque du Soleil billionaire Guy Laliberté, a Cirque-themed nightclub in the
Mandalay Bay Casino. "The show's going to happen in the ceiling, in the
walls and on the floor," crows Sasson.

Sequined waitresses spice up the show, but bussers keep it cruising along.
To make the squad, each candidate must survive a grueling eight-day
boot camp, including role-playing, sales seminars and written tests. The
job is so vital to his business that Sasson makes all club managers bus,
among other tasks, before assuming their roles.

Gallery: Undercover At A Hot Vegas Nightclub

Over drinks in New York last fall Sasson offered to put me through part of
his training program. (Only the floor managers and one of the 20 on-duty
bussers knew I was a reporter.) Thus began a grueling four-night voyage
into the bowels of the Vegas club machine.

I started my busboy training at 10 p.m. on a Thursday in January,

shadowing a tall, blonde waitress in a sprayed-on silver dress. My uniform:
gray striped shirt, tie in a double Windsor knot, pressed black slacks and
shined black shoes. An hour later I was scrambling through the crowd
with a stack of dirty cocktail glasses brushing my jugular and club
manager Jason Ellis at my back barking: "Go! Keep it moving! This is
pathetic!" I spent the remainder of my shift, which ended at 6 a.m.,
clearing thousands of glasses and unloading 100-pound trash cans into
dumpsters--hard work but not exactly out of the ordinary for bussers at
other large clubs.

Ordinary ended the next day as busser David Cagna stepped me through
Sasson's 50-page service manual. There were 34 tasks I had to complete
before guests took their first sips--from polishing the glasses and loading
the drawers beneath the tables with five bottles each of five different
sodas, to fluffing the banquette pillows and trimming the yellow rose to
exactly 6.5 inches in length. All the required tools had to be stashed in
my pockets: flashlight, wine key, cigar cutter, lighter, spare ash tray,
earplugs and two rags (one for the tables, one for the floor). After
inspecting my tables, management assessed my appearance and sent me
home to shave.

The Bank's best bussers move with ninja stealth: Champagne pedestals
suddenly appear, cigarettes spontaneously ignite and slushy ice magically
firms into fresh cubes. At a clumsy 6 foot 4 I stood out. During my second
night on duty I knocked over Champagne flutes like dominos and spilled
$20 cocktails down $1,000 cocktail dresses.

Trainees get slack--full-timers don't. Floor managers stalk the club like
casino pit bosses, looking for the slightest slip-ups. A napkin on the floor
or a rag hastily tucked into your pocket earns one writeup. Four writeups
a year and you're gone.

Perform well, though, and you can do pretty well. Bussers snag 20% of
waitress tips and whatever customers add to their tabs; high rollers have
been known to slip a $100 bill here and there. (Sasson and company were
tight-lipped about compensation.) I didn't accept tips, but a few tables did
write me in for an extra $70 to $80, which went into the overall pool.
Those who keep up the good work over time can rise through the ranks.
One of The Light Group's directors of operations, John Pettei, started as a
busser; President Jodi Myers was a cocktail waitress.

Gallery: Undercover At A Hot Vegas Nightclub

On the third afternoon, as the dents under my eyes deepened, I joined 40

Light Group employees to learn the other half of my job. Sasson demands
that all employees do their part to bring in new business. Bussers have to
lure at least ten (attractive) women a week. Sasson even created new
union job categories for waitresses, bussers and bartenders that make
marketing part of their gigs.

Sasson calls his approach "The Sell." It has four stages: get the marks
talking about themselves, discover their needs, pitch a Light Group venue
that might fill them, and close the deal. After a stale PowerPoint
presentation each of us role-played with the person to our left. "In town
for a bachelorette party? I can get you a table at our new club, Haze.
Hate clubs? We have the Caramel Lounge at the Bellagio. Don't drink?
Chef Akira Back's Yellowtail has the best sushi in town." And on it goes
until a pitch clicks--or someone tells you to get lost.

Before my final night of boot camp (and working on four hours' sleep), I
walked the floor of Caesars Palace to try to fill my sales quota. After
plenty of false starts the pressure was on and I was running out of time. I
sidled up to three pretty women walking ahead of me, skipped the intro
and jumped right to the close. "What club are you ladies going to
tonight?" I asked. The eldest of the three shot me a cold stare and said
dryly: "We aren't going to a club tonight because these two are underage
and I'm their mother."

Gallery: Undercover At A Hot Vegas Nightclub

The embarrassment continued back at The Bank, where I had to pass a

mock service test. Three managers sat at my table and sent me to the
dish room to load up: ice bowl, strawberry tray, eight Champagne flutes
and a wine stand all in one trip. I set the stand down, noisily placed the
glasses in wavy rows and spilled some strawberries. The trio glared. Then
they asked where they could get drugs; I told them, as trained, that
drugs weren't tolerated at The Bank. They asked where they could get
good sushi; I said Yellowfin, instead of Yellowtail. They asked about steak;
I confidently told them to go to Prime, not Brand, The Light Group's steak
house. Other infractions included ignoring the unlit cigarettes hanging
from their lips and smudging their glass rims with my thumbs. "I just paid
$1,500 for a bottle of Dom, and you expect me to drink from a glass with
fingerprints on it?" grumbled operations director Johnny McMahon. I reset
the table and started again.
By the time I bombed my second mock service test (for failing to place
folded napkins in unused glasses), it was time to open the club. Within
the first five minutes I sent one of those $475 bottles of Skyy crashing to
the ground. I raced up and down two flights of stairs every two minutes
foraging for fresh supplies. I glided napkins under naked drinks, lit
cigarettes, tweaked table settings and mopped spills. At one point the
dancing mob swelled into my section, knocking a line of drinks to the floor.
My hands full of empty carafes, I tossed a rag over the mess and yelled to
the throng of barefooted girls to mind broken glass as I fetched a broom.
Later I sliced my thumb on the chipped rim of an ice bowl (too bad I
signed a liability waiver). After bandaging it up I jetted back to my section
where a security guard told me someone had vomited and environmental
services were on the way to sanitize the area.

Just then McMahon tapped me on the shoulder and said: "I'm pulling you
off duty." It was 3 a.m.

Business Travel
Stress Tests
Jon Bruner Michael Noer
1727 words
28 February 2011
Forbes
FB
88
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

There are some people--network news anchors, diplomats--who have to

be ready to fly anywhere in the world on just a couple of hours' notice.
They have "go bags," executive assistants and practically unlimited
expense accounts. They are business travel's global elite, road warriors
armed with black American Express cards and "key man" insurance
policies.

Then there is Jon Bruner. Jon is none of these things. He is just a FORBES
reporter who bravely volunteered to fly anywhere in the world on five
hours' notice to road-test a bunch of electronic devices under genuinely
grim travel conditions. He has a bag loaded down with laptops and power
adapters, a semi-sadistic editor and a three-figure budget. He is business
travel's Willy Loman, armed with little more than goodwill and a per diem
meal allowance.
@JonBrunerDATANAUT Five minutes after I was told I'd be going to
Bucharest, I vomited. Not from the thought of going to Bucharest. In fact,
I'm actually a fan of the architectural style known as Socialist Realism.
This expulsion was instead the result of an abrupt-onset stomach ailment
of unknown origin that left me doubled over in my office for most of the
afternoon.

Two hours later, with my nausea in brief remission, I wheeled my suitcase

full of laptops down to the curb and hailed a cab to Kennedy Airport. I
made it to the gate just in time and boarded the half-full plane. My editor,
Michael Noer, had been kind enough to book me a middle seat in a row
that doesn't recline. I felt my health take a turn for the worse and moved
to an empty row, where I clamped on my Bose QuietComfort 15 noise-
canceling headphones, stayed awake just long enough for an ill-advised
vegetable curry dinner, took a Tylenol PM and did my best to pass out.

@MichaelNoerBACKSLASH To set the record straight, I'm not trying to

torture Jon Bruner. I chose Bucharest simply because it was the farthest I
could send Jon for the least amount of money. The fact that Romania has
average January temperatures in the mid-20s, has the lowest per capita
income in the European Union and is home to both Dracula and Copsa
Mica, one of the most polluted cities in the world, never entered into my
thinking.

It gets even better (or worse, if you are Jon Bruner). It turns out that
Bucharest is also infested with tens of thousands of semi-starving feral
dogs. These aren't the "nice puppy" sort of homeless hounds that can be
bought off with a spare Milk-Bone or two. A few years back they fatally
mauled a visitor from Japan. They are a serious enough problem that the
U.S. State Department lists stray dogs as a "Special Circumstance" on its
official Romanian travel page.

@fusion10k commented Sounds to me like you are not stress-testing the

laptops. Yes, dogs are a problem in Bucharest and probably throughout
the country. On the other hand, it may be a cheap national defense
strategy. Who knows?

@JonBruner During the layover in Brussels, I sipped a slimy latte and got
to know the Droid 2 Global smartphone that I've borrowed from Verizon.
The Droid lives up to its promise: Once I get used to the interface, I find
it reasonably easy to post a status update on Facebook and e-mail groggy
self-portraits to my girlfriend. The data plan is a ridiculously expensive 20
euros per megabyte of data. At 1.2 megabytes each of those photos costs
over $30 apiece to send by e-mail.

My next flight is on TAROM, the Romanian national airline. The airline's

name is spelled just like that, in all capitals, but I think it could stand to
be italicized and followed by an exclamation point: TAROM! As I take my
seat, I'm relieved to see that my long search for an airline with dirtier
planes than United's is finally over.

@MichaelNoer Seventeen hours into his trip, Jon finally called me. He had
just gotten to his hotel, a modern Marriott just across the street from the
Palace of the Parliament, which is apparently the second-largest office
building in the world, after the Pentagon. He seemed in good spirits,
having gotten over that nasty vomiting attack, and was heading
downtown to get a bite. I didn't bring up the dogs.

@JonBruner For dinner recommendations, I turned to the Dell Streak

tablet. The Streak is an interesting entry in the tablet contest. It's more
like a large smartphone than a tablet; its screen measures 5 inches
diagonally, and it can make phone calls. My overall impression is that if
you can stand carrying a phone roughly the dimensions of a king-size
chocolate bar, you'll find it easier to do many things on the Streak than
on a standard smartphone.

The Streak connected to the hotel's Wi-Fi quickly, and I found a couple of
restaurant recommendations and city pointers with the device's browser.
After 30 minutes or so of walking, guided at some points by the Droid's
map app, I made it to Bucharest's pleasant prewar city center, where
grand Parisian-style buildings lined snow-covered pedestrian streets. I
ended up at an atmospheric beer hall, where I ate a delicious bean-and-
sausage stew, drank a glass of house beer and marveled that only 24
hours earlier I had no idea that I was headed to Bucharest.

@MichaelNoer I haven't heard from Bruner since yesterday afternoon,

Bucharest-time. This has raised concerns that he has been devoured by a
pack of feral dogs, although Romanian partisans have assured me that
Bucharest's stray-dog problem is either vastly overstated or some wacky
Eastern-European defense scheme.

@JonBruner My time in Bucharest was enormously pleasant. Everyone I

encountered was warm and helpful; the Romanian language has a lovely
musical sound to it; and I encountered no vicious canines. But 15 minutes
into the taxi trip back to the airport I noticed that the driver wasn't
running the meter--a gambit I'd been had warned about (the idea is that
the traveler, on arriving at the airport, is handed a bill for many times the
expected amount; if the traveler protests, the driver's associates at the
taxi stand take the driver's side).

I downloaded the Google Translate app to my Droid, asked for the

Romanian version of "Please turn on the taxi meter," and did my best to
pronounce "Va rugam sa randul sau, pe metru taxi." The driver glared at
me. "Da, metrutaxi," I persisted. He muttered and switched on the meter.
What followed were many more turns up and down residential streets
than I remembered on the way in.
@kozmakate commented I live in Bucharest and I agree the taxi drivers
can really take advantage. My technique is to argue that they are not
helping the image of the country, but this generally produces a shrug,
even from those who speak English.

@MichaelNoer In what might have been a subconscious act of revenge

Bruner missed his flight back to the States. This development is seriously
bad news. It's supposed to snow here in New York. Up to a foot is
expected, with high winds and sleet.

@JonBruner TAROM's most modestly priced ticket was totally immodest,

and I couldn't save anything by leaving the next day. Lufthansa quoted a
price about half of TAROM's, but Expedia's terrific mobile site bested them
all. At the final step, however, Expedia failed; the site wasn't able to
reserve flights less than eight hours in advance. The Lufthansa ticket lady
had taken a break, so I turned again to my Droid and, in a quick burst of
Teutonic efficiency, confirmed a seat to New York in about two minutes on
the airline's website.

More than any other device on my trip, the Droid has been critical to my
safety and comfort. It's not just that it has instant Internet anywhere I
go--many tablets have that option--it's a combination of that, portability,
an easy app store and an unobtrusive profile that have helped me at
every step on my trip, from finding my way through the winding streets of
Bucharest to taking a few hundred dollars off the price of an airline ticket.

@MichaelNoer Jon's new, full-fare (those seats better be comfy!)

Lufthansa flight is scheduled for a 7:40 p.m. arrival. JFK will almost
certainly be closed by then. Welcome to Detroit, buddy.

@JonBruner When I packed, I made sure to include the Apple 15''

MacBook Pro that I know and love. I rely on it completely when I crack
my knuckles and churn out info-graphics and articles. It wasn't until I was
sitting down for the final leg of my trip that I pulled out the trusty
machine and observed a prime failure: The MacBook Pro doesn't fit on
any airline tray table that I can afford.

To illustrate this problem, I made some calculations. Lufthansa's Boeing

747-400 economy seats have 31 inches of pitch. Subtract about 4 inches
for seatback depth, and you've got 27 inches between the seatback in
front of you and the cushion behind you. Lufthansa's economy seats also
recline to 113 degrees. Assuming you want to tilt your laptop's screen
back 10 degrees beyond vertical, you're left with a little over 11 inches
between the front edge of the MacBook and the back of your seat. Not a
comfortable way to type, and I'm skinny after my recent stomach virus.

@MatthewHerper commented I use a 10-inch netbook on planes. Even

works on commuter jets.
@MichaelNoer Bruner either bribed the pilots or got lucky with the winds.
His flight landed nearly an hour early, 49 hours after he left the office and
about 20 minutes before the blizzard struck.

Entrepreneurs
Taming the Spread
Christopher Steiner
954 words
28 February 2011
Forbes
FB
56
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

Few industries remain as stubbornly inefficient as the gift-card business.

Consumers spent $100 billion on cards last year; roughly 10% of that pile
will expire or go unused. Retailers enjoy the cash float while recipients
rue their absentmindedness. Want to sell the cards for cash? An
intermediary will capture a 10% spread.

David Leeds aims to change all that with Tango Card. His two-year-old
Seattle startup makes software that tracks gift-card balances in real time
and blasts e-mails about looming expirations. Leeds also sells tangible
Tango Cards, which buyers can redeem for gift cards usable at 11
national retailers, including Starbucks, Home Depot, Gap, REI and
Amazon.com. Tango takes an average 10% cut of each card redeemed.
(If you buy a $100 Tango Card and put it all with Starbucks, Tango keeps
$10 and Starbucks takes the rest.)

One big wrinkle: Tango balances not turned into retailer credit can be
redeemed for cash or donated to charity. Retailers don't like giving money
back, and they hate losing "lift"--the extra purchases that consumers tend
to make on top of their gift-card haul. The average lift is 40%, meaning
that a $100 gift card will result in $140 in sales.

Partnering with retailers while ruffling their feathers has been a tough
balancing act. Tango has only 5,000 users thus far and minimal revenue.
"Everybody is fighting against the cash-redemption option," says Leeds,
41. "But that's where the business is going."

Leeds struck out on his own in 1995, ditching a steady paycheck as a

planning manager for printermaker Lexmark and opening a consulting
shop in Guangzhou, China to help American companies set up
manufacturing plants there. The business sputtered, but Leeds' attempt
was enough to impress the admissions committee at Stanford Business
School, from which he graduated in 2000.

As the tech market melted, Leeds, with three of his classmates, saw
opportunity in what telecom types called "backhaul." A decade ago most
cellphone towers fed data into the copper wires of local phone companies,
which, for a big fee, moved the data to the big telcos' main fiber-optic
networks. Leeds' crew was able to cut out the local phone companies by
moving the data using microwave radios. For half the price the radios fed
tower data to a central point with a direct connection to a telco's fiber.
After a successful pilot with AT&T in Dallas, the group managed to raise
$625 million in capital. FiberTower went public in 2006, giving Leeds 1.3
million shares worth $8 million at the time.

Burned out by the long weeks, Leeds left the company a year later. As he
cleaned out his office, he came across ten gift cards scattered beneath
the files. Total outstanding balance: $450. "Back then the most
sophisticated way to manage gift cards was in a manila folder," he says.

To find a better solution Leeds spent $6,000 on gift-card focus groups in

Seattle, Detroit, Atlanta and San Francisco. The 300 consumers he
interviewed held an average of five cards; many craved a way to track
balances and expiration dates. Encouraged, Leeds raised $500,000 of
angel funding and spent $30,000 to roll out a Tango iPhone app, which
automatically tracks gift-card balances and expirations.

Leeds spent most of 2010 begging big fish like Home Depot and
Amazon.com to let him market their cards. He also retooled his website:
In usability tests last August, people looked at the site and had to ask
what the company did. Two months later Leeds launched a new site, with
three navigation tabs instead of six. "We gave people fewer choices, but
made it more obvious where they could find important functions," he says.

Not that retailers were impressed. The second-party gift-card market that
Tango was trying to crack is primarily controlled by two companies:
InComm and Blackhawk Network, the latter owned by supermarket chain
Safeway. Together they account for $25 billion in gift-card revenue
annually. (Primary sellers--say, Starbucks selling its own cards, of which
they moved $1.5 billion worth last year--make up the other $75 billion in
gift-card sales.) "If you can't generate $100 million in sales right off the
bat, a lot of the big players don't want to bother with you," says Leeds.

One thing Leeds had that big brands didn't was hard research on gift-card
buyers. Once he had their attention, Leeds buried the hook by planning to
sell Tango Cards as seamless add-ons offered by popular online retailers.
(The next time you buy a bouquet of roses online there may be an option
to tack on a Tango Card.) In January 2010 Williams-Sonoma bought the
pitch; others soon followed.

Such bundling opportunities are legion, and Leeds will need as many as
he can find. In November Tiny Prints, which ships 1 million customized
greeting cards a day during the holidays, began offering customers the
option to print a Tango Card directly inside Tiny's cards. Recipients can
log on to Tango's website, pick the retailer card they want, redeem the
Tango Card for cash or donate their balance to charity. Tiny Prints keeps
half of Tango's 10% cut.

The big bet: mobile. Leeds is bringing on five full-time developers to build
an app that will plant a bar code on smartphone screens that can be
scanned in lieu of a physical gift card--finally separating the card's value
from its plastic delivery vehicle. Says Leeds: "We want to ensure people
use every penny of their gift cards every time."

Money & Investing

Target Practice
Daniel Fisher
1184 words
28 February 2011
Forbes
FB
44
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

What do a faded Japanese restaurant chain, a private prison operator and

a natural gas producer have in common? Value that the market has
overlooked.

So says Russell Glass, the former second-in-command to billionaire

buyout artist Carl Icahn. These days Glass runs the eponymous RDG
Capital LLC, where he's using the tactics of a corporate raider to find
promising investments in publicly traded companies.

To Glass a big part of the job involves ferreting out targets whose assets
aren't throwing off cash now--but will in the future. It's a strategy on
which hundreds of billions of dollars are riding. Buyout-focused private
equity funds have $450 billion in "dry powder," meaning capital that's
been committed but remains unspent, according to Prequin, a London
private equity research firm. Corporations are sitting on another $800
billion in cash. Much of it will end up flowing into deals that are based on
Glass' type of modeling.

"You're going to see a tsunami of buyouts in the next 12 to 36 months,"

he says.

Glass has ridden the private equity roller coaster since graduating from
Stanford Business School in 1988. His first job involved advising Arkansas
gas and insurance magnate Jerry Jones on his wildly successful 1989
purchase of the Dallas Cowboys. Glass later went to work for Icahn and
served from 1998 through 2002 as president of Icahn Associates, with
which he retains close ties. Now 48 and overseeing investments as large
as $250 million out of New York City for institutions and himself, Glass
assesses companies through a private equity lens and occasionally
prepares a takeover offer himself.

Most value investors analyze companies based on their current financial

performances, as measured by the stock price as a multiple of earnings or
book value. PE guys, by contrast, often try to divine the value that
companies will derive tomorrow from today's investments in capital
improvements or R&D.

For private equity investors, the final test is whether a venture will
generate sufficient cash flow to service the debt they plan to pile on it in
order to pay themselves big dividends and recoup their initial investment-
-to "get their bait back," in Wall Street parlance. Since Glass is hoping
many of the outfits he's investing in will ultimately be bought out by
others, he looks for similar characteristics.

Chesapeake Energy fits the bill. It has spent more than $2 billion on
natural-gas-producing shale properties. Investors have cooled to gas
stocks as rising supplies have driven prices down, but Glass takes the
long view. So does his former boss. Last year Icahn doubled his
Chesapeake stake to 5%.

"Here's a company that has spent billions of dollars to acquire

undeveloped acreage that is only now starting to produce cash flow," says
Glass, who assembled his own position at $20 a share before
Chesapeake's recent surge to $30. "Where we like to invest is generally
the 6-, 12-, 18-month period before the new plant opens or the well
begins to produce."

An investment in A.T. Cross likewise worked out well for Glass. When he
started looking at the Lincoln, R.I. penmaker in mid-2010 it had an
enterprise value (market value plus debt) of around $75 million and as a
private company could earn $17 million before interest, depreciation and
taxes. Glass figured that a buyout shop would gladly pay more than eight
times Ebitda, or $150 million, for Cross.

What really interested him was Cross' growing but little-noticed Native
Eyewear sunglasses division, which Glass thought was itself worth $100
million. The Boss family's controlling stake eliminates the prospect of a
hostile takeover, but the stock has risen from $4 to $10--for a 65%
increase in enterprise value to $132 million--and the company recently
announced plans to buy back $10 million worth of its stock.

Benihana, the restaurant chain that peaked around the time Jimmy Carter
was President, is another Glass favorite. It spent $150 million prettying
up its Japanese-themed restaurants but failed to impress investors.
Perhaps they were turned off by founder Rocky Aoki's reputation for
paying greater attention to powerboats and pretty women than to his
company's performance.

"I agree that would be a negative," Glass deadpans, "except for the fact
that Mr. Aoki has been dead for more than two years."

Glass bought into Benihana in 2009 at $4 per share and began pushing
management to sell the company. Benihana, which has 97 restaurants
and more than $300 million in annual revenue, has since hired Jefferies &
Co. to "explore options," including a sale; the shares have doubled to $8.

Another measure Glass looks at is "sustainable" free cash flow. He defines

it as Ebitda minus historical depreciation. If a company is in expansion
mode, he subtracts the typical yearly costs of expansion. If after that the
company's free cash flow multiple is attractive for its industry, he pokes
around for hidden assets, as he did at Icahn Associates. Those might
include real estate, unappreciated R&D, a secret formula or two or
anything else hiding on the balance sheet that might attract a PE buyer or
competitor.

Corrections Corp. of America meets that standard. The nation's largest

operator of private prisons spent $500 million on facilities for which it had
no contracts. It now boasts 12,000 empty beds.

Glass sees that as an asset now that federal prisons are running at more
than 100% of capacity, while states and cities are looking to save money
by outsourcing prisoners.

"Eventually those beds are going to get filled," Glass says.

Once filled they'll generate $100 million a year in additional cash flow,
Glass figures; maintenance capital expenditures for the entire company
run only $50 million. In its current form CCA has an enterprise value of
$3 billion. Glass advocates splitting it into a real estate investment trust
and an operating company--something several hospital chains have done.

Given that the REIT could charge the parent $400 million a year in rent, a
conservative multiple would value it at $5 billion; the management arm
would be worth another $1 billion, Glass says.

He's hardly alone in seeing unrealized value in CCA. Activist investor

William Ackman's Pershing Square Capital Management is its largest
shareholder with 9.4%. He's made similar runs at J.C. Penney, Target and
Fortune Brands, all to the benefit of shareholders who tagged along for
the ride.

rabble-rousers even if you don't have the money to buy out companies
wholesaLE, russell glass suggests buying into companies where activists
are shaking things up.

Technology
Blackberry Battles Back
Elizabeth Woyke
1835 words
28 February 2011
Forbes
FB
34
Volume 187 Issue 3
English
(c) 2011 Forbes Inc.

The blows keep coming for Research In Motion, maker of BlackBerry

phones. One of its largest carrier partners, Verizon Wireless, has been
touting competitive new iPhone 4 and Google Android devices. In the past
year BlackBerry slipped from 75% of Verizon's smartphone sales to only
24%. Bank of America, Citigroup, Dell, JPMorgan and UBS have all said
they're considering letting employees tote around phones other than
BlackBerrys. In November AT&T halved the price of RIM's flagship Torch
phone, less than three months after its launch. RIM's average phone price
fell 9% in the most recently reported nine months, a time when the
industry as a whole increased prices. In the last 12 months its shares
have dropped 5% while the Nasdaq has been up 31%.

Absorbing these blows in Waterloo, Ont. is RIM's billionaire chief

executive duo, Mike Lazaridis and Jim Balsillie. At first they resisted calls
to overhaul the stolid, messaging-centric BlackBerrys, clinging to virtues
such as a physical keyboard and long battery life. Their devices didn't
have the engaging software apps and satisfying browsing experience that
the iPhone and Android phones offered. "RIM did not initially participate in
the revolution that Apple and Android introduced," says Royal Bank of
Canada analyst Mike Abramsky.

RIM is no longer ignoring said revolution. It has new hardware, software

and a plan in place to regain its leadership in smartphones by expanding
beyond its CrackBerry handsets into other covetable gadgets such as
tablet computers, cars and household appliances.

Balsillie, in one of his trademark rants, fired back at prattling skeptics on

the last quarterly earnings call in December: "These business models are
highly shifting, and if people think there's a straight-ahead shot for
everybody and it's all just predictably extended the way it's going now, I
think that's a highly questionable assumption." (To be sure, RIM is still
growing smartly. Revenue and BlackBerry smartphone shipments in its
most recent quarter were up 40%, profit 45%.)

RIM has bought ten mobile media firms since 2009 to refresh its Web
browser and app store. Its latest purchase, in December, was the
Astonishing Tribe, a hip Swedish technology-and-design firm that created
the slick look for the initial version of Android in 2008.

The crown jewel among those deals was the purchase in April of a little-
known Ottawa company called QNX Software Systems. The 270-person
company created an operating system decades ago that is largely invisible
to the world but a marvel of tightly written code. It is used to run factory
assembly lines, nuclear power station monitoring systems, in-car
entertainment consoles and giant Cisco routers.

RIM bought QNX to make its code the brains for all future BlackBerry
devices. Lazaridis says the two companies are "the biggest part of each
other's futures." RIM's first tablet, the PlayBook, will launch in March with
a QNX operating system. More tablets are pegged for later this year, and
computerlike BlackBerry "superphones" will come soon after. QNX will tie
the devices together.

Analysts like the strategy. "I can see a BlackBerry or PlayBook bridging to
your car, thermostat, security system and media server," says Jefferies
analyst Peter Misek. "RIM could be much more of a connectivity company
than it is now."

Other tech firms such as Motorola and Samsung are pursuing similar
schemes. RIM says its devices will be more useful because they will
support Adobe's popular Flash multimedia platform and let users toggle
among multiple applications at once (something the iPhone still cannot
do).
In 1973 Dodge enrolled at the University of Waterloo, near Toronto.
Gordon Bell, a fellow physics major who shared Dodge's hobby of
assembling computers, soon became a friend. Together they decided to
write an operating system.

The project consumed the rest of Dodge and Bell's university lives and
early postgraduate years. In 1980, while holding down full-time jobs at a
Bell-Northern Research lab, the two incorporated their company. In
homage to Unix, the Bell Labs operating system, they dubbed theirs
QUNIX. AT&T's lawyers objected to the name, so they dropped the vowels.

Lazaridis, who at 49 is 7 years younger than Dodge, took a similar route.

A devotee of his high school's electronics lab, Lazaridis studied electrical
engineering at the University of Waterloo before founding RIM in 1984
with childhood friend Doug Fregin.

Dodge and Lazaridis' paths first crossed in the mid-1980s, but the two
didn't socialize much or work together until 2009. That year a desire to
link BlackBerrys to cars led RIM to QNX, which is the world's largest
supplier of software for in-vehicle infotainment systems. RIM bought QNX
from Harman International for $200 million, 5.7 times QNX's sales.

Dodge says the decision to merge was quick. He and Lazaridis joke that
their engineers "talk the same bit rate." More crucially, they share a
vision of mobile computing's future, in which devices, offices, cars and
homes connect seamlessly. Consumers, say Dodge and Lazaridis, should
be able to beam a high-definition movie from a PlayBook to a big-screen
TV while also using the gadget to browse the Internet. If people need to
work, they should be able to juggle multiple documents while news
widgets and e-mail continually update in the background.

Prior to RIM's acquisition the only portable consumer gadgets powered by

QNX were universal remote controls. RIM, however, says QNX software is
uniquely suited for the job. Two features distinguish QNX's operating
system, Neutrino, from traditional operating systems: its "microkernel"
architecture and multicore processing.

A microkernel is the smallest chunk of software necessary to handle most

of the tasks of an operating system. Because it is compact and isolated
from related software, microkernels allow developers to omit or remove
functions they don't need. QNX says Neutrino's microkernel is about 1%
the size of those in conventional operating systems, such as Microsoft's
Windows 7. Neutrino can control multiple processing cores, deftly juggling
multiple applications while maintaining longer battery life. Dodge coaches
his engineers to follow Albert Einstein's philosophy of making things "as
simple as possible but no simpler."
The result is a fresh break from the BlackBerry workhorse aesthetic. The
new operating system, BlackBerry Tablet OS, is touch-based, snappy and
fluid. Commands have been pared down to gestures. A diagonal swipe
across the PlayBook's screen calls up a digital keyboard. Swiping up from
the bottom of the screen lets users exit an app. Dodge calls the
experience "poetic." Many reviewers say the interface is on par with Apple
and Android and that the browsing feels faster.

Lazaridis credits QNX for bringing in software sophistication and velocity

at a crucial time. Dodge, in turn, is delighted to see gadgets running on
QNX. After decades of providing only software, creating a physical product
the company has control over is a "complete joy," says Dodge. "We had
the vision for mobile computing before but not the resources."

Now that QNX is better equipped, Dodge and Lazaridis are targeting new
areas such as hospitals and utilities. They say any industry that employs
QNX could be a BlackBerry partner. Cars, which Lazaridis jokingly calls
the "biggest possible BlackBerry accessory," will likely come first because
of QNX's familiarity with the market. One idea is to build PlayBook docks
into car dashboards. Drivers would be able to access music files,
messages and navigation software by voice after docking their tablets.
PlayBooks could also be embedded in car seat backs as passenger
entertainment systems.

Analysts say RIM is assembling the right elements, but much depends on
execution. "This is a pivotal point for RIM," says Abramsky. "We'll see
over the next two to three quarters whether it can sustain its leadership
or whether Apple and Google will dominate."

Developer support will be crucial. RIM already lags in apps, stocking about
20,000 in its online store compared to Apple's 350,000 and Google's
100,000. RIM is even further behind in PlayBook apps because existing
BlackBerry apps can't yet run on QNX without some tweaks.

Developers tend to be wary of RIM because the older BlackBerry platform,

which is based on the Java programming language, is considered difficult
to work with. To entice them, in October RIM started releasing application
tools based on simpler mainstream technologies like Adobe Air, Flash and
HTML5. "We want to meet developers where they are," says Tyler Lessard,
RIM's vice president of developer relations. Apps from other operating
systems, says Lessard, can be converted to work with QNX within a day.

As an added incentive, RIM is offering free PlayBooks to developers who

submit usable apps before Mar. 15. RIM says more than 2,000 developers
have registered since the release of the new tools and the PlayBook will
launch with more than 4,000 apps. Misek thinks RIM will have 100,000
apps by late 2012. Abramsky expects RIM to ship 4 million PlayBooks this
year. By comparison, Apple shipped 15 million iPads in the first nine
months the device was on sale.

Early results look encouraging. Mobile-game vendor Glu Mobile calls RIM's
embrace of open standards extremely positive. "RIM moving everything
to QNX makes sense," says Glu Chief Executive Niccolo de Masi. Mobile
local search application Poynt has built a PlayBook app at RIM's request.
Chief Executive Andrew Osis says creating the app with Adobe Air was
easier than writing for the iPhone, Android or Nokia's Symbian platform.

Lazaridis contends that the smartphone and tablet industry is young.

Researcher Gartner says smartphone sales will rise from 498 million units
this year to 851 million in 2014 and tablet sales from 65 million units this
year to 208 million in 2014. "We're running as fast as we can while being
very deliberate," says Lazaridis. "With QNX, we are confident enough to
make long-term plans."Forbes Flashback: 2007

Little-known but wonderful fact: E-mail spam volume is down 75% from a
year ago. Most of that is due to an 80% drop in the Viagra variety. This is
sweet vindication for Cisco researcher Patrick Peterson, whose antispam
obsession we wrote about in September 2007. He traced the flow back to
a "bot" network of compromised PCs and now has insight into what
follows. Pharma spammers take the pill orders and give a 40% cut to
crooks running the botnets.

Peterson detailed his findings to U.S. authorities, who have wised up, too.
In November "Spam King" Oleg Y. Nikolaenko, who allegedly ran a
massive botnet, was arrested in Las Vegas. Fake pharma marketer
SpamIt shut down his operation in October, likely after pressure from
Russian authorities. Says Peterson: "Sure, someone will fill the void but
likely a spam prince instead of a spam king. They won't be able to scale
like that anymore."