The Wall Street Journal Education Program Weekly Review & Quiz Covering front-page articles from March 18-24, 2006 Professor Guide with Summaries Spring 2006 Issue #11 Developed by: Scott R. Homan Ph.D., Purdue University Questions 1 – 12 from The First Section, Section A Vodafone's Global Ambitions Got Hung Up in Japan By CASSELL BRYAN-LOW and ANDREW MORSE and MIHO INADA March 18, 2006; Page A1 http://online.wsj.com/article/SB114264873803102084.html A few years ago, when Vodafone Group PLC spent around $14 billion to expand into Japan, the world's biggest cellphone carrier at the time hoped to make a splash in the world's most-advanced cellphone market. Yesterday, Vodafone conceded defeat. It agreed to sell its 97.7% stake in Vodafone Japan for an amount that doesn't even recoup its investment, when taking into account additional capital spending. The sale to Internet conglomerate Softbank Corp. of Tokyo is for $11.9 billion in cash, plus about $3.7 billion in preferred stock, loans and debt assumption. Vodafone said it will record a charge of $8.6 billion related to the unit. Vodafone's Japan foray has become yet another warning on the limits of global branding in the telecommunications business, where local tastes and market dynamics can trip up the hardiest adventurers. It carries important lessons for Vodafone and its chief executive as the company seeks new growth opportunities. Over the past decade, Vodafone has preached the benefits of using its massive scale to spread the same phones and brand image globally. Now, the company may concentrate on growing in contiguous markets rather than in isolated countries. "It is...becoming increasingly clear that the greatest benefits come from strong local and regional scale," said Vodafone Chief Executive Arun Sarin, in a conference call yesterday. U.S. telecoms have already retreated en masse from foreign markets. For example, in the past three years, BellSouth Corp. sold both its Latin American and Israeli operations. Instead of expanding abroad, large U.S. telecom players have been focused on their home market, where competition with cable rivals and Internet players is heating up. The exit from foreign markets in part has enabled telecom consolidation in the U.S., freeing up funds for acquisitions and taking away conflicting strategic directions. Vodafone's latest move leaves investors in the sector wondering what it will do with its U.S. asset, Verizon Wireless, in which it has a 45% stake. Vodafone has been unable to establish a brand in the U.S. market and an attempt two years ago to sell out of Verizon Wireless and acquire U.S.-based AT&T Wireless, which has a compatible wireless technology with Vodafone's European operations, went wrong. SBC and BellSouth's wireless joint venture, Cingular, outbid Vodafone and won a heated bidding war. Today, there aren't many assets left on the U.S. market for Vodafone to acquire and Verizon Communications Inc. has publicly said it is pressuring Vodafone to sell its stake in Verizon Wireless. Mr. Sarin yesterday said: "We are happy with our position and © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 1 of 30 frankly we have no current plans to sell the business." The Japan sale may draw further investor scrutiny of Mr. Sarin, who has seen Vodafone's stock price fall sharply in recent months. Yesterday, the company's American depositary receipts were at $22.51 in 4 p.m. composite trading the New York Stock Exchange, off 1% and well below its 52-week high of $28.14 in September. In looking to secure a deal quickly, Mr. Sarin may have passed over a potentially higher bid. On Thursday, U.S. private-equity firms Cerberus Partners LP and Providence Equity Partners Inc. offered Vodafone a tentative and conditional bid for its Japanese business valued at as much as about $17.2 billion, including debt, or about $1.7 billion more than Softbank's offer, according to people familiar with the matter. A Cerberus spokesman couldn't be reached. Providence declined to comment. Mr. Sarin said yesterday that Softbank's offer was "clearly superior based on the total economic value and the high level of certainty that we attach to a successful closure." The deal, which will leave Vodafone with a seat on the Japan unit's board, is expected to be completed in just a month or two, the companies said. As for his job, Mr. Sarin, an India-born U.S. citizen, said, "I can confidently say that my position is secure." Vodafone's experiment in Japan began under Mr. Sarin's predecessor, Sir Christopher Gent. During his six years as CEO from 1997, the swashbuckling Briton shepherded the Newbury, England, company through a series of major deals that established it as a global player. It currently operates in Europe, Africa, Asia and the U.S. Japan has long been an enticingly lucrative cellphone market. Japanese consumers spend on the latest phone fashions and use their phones for a dizzying array of tasks from sending photos to buying train tickets. With no equivalent to the BlackBerry handheld email device in Japan, people use their cellphones to send email. Cellphone companies see the market as particularly up for grabs because, in November, Japan is expected to start letting people switch carriers while keeping their phone numbers. This will make it more attractive for customers to change carriers. But Japan is also a notoriously difficult market for foreigners to crack, particularly in telecommunications. Consumers are known for being finicky and chasing the latest trend. Also, some Japanese phone networks traditionally used technology that was unique to Japan. After investing in Japan through a series of deals in 2001 and 2002, Vodafone soon erred. In late 2002, when Vodafone introduced a sleek clam-shell phone equipped with a highresolution camera, an advanced bar-code reader and a state-of-the-art liquid-crystaldisplay screen, stores couldn't keep enough in stock as the phone became a hit with Japanese consumers. But the model, called SH-52 made by Sharp Corp., was sold only in Japan, which ran counter to Vodafone's global strategy. It was also expensive. Its wholesale price was roughly $435, but the retail price was just $175 because Vodafone subsidized the difference to attract subscribers. So, Vodafone decided to cut the number of SH-52 model phones it bought from Sharp. It later stopped reordering the phone altogether. "They just discontinued popular phones and popular services," says Hayato Yoshida, who runs the mobile phone counter at a major Tokyo branch of retailer Bic Camera Co. "They were looking at the global market instead of looking at what Japanese users wanted." But the key problems for Vodafone arose when Japan switched from traditional to highspeed cellphone services intended to make it easier for users to download music and play © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 2 of 30 videogames, among other things. Vodafone, which had originally used a phone network unique to Japan, decided to wait to build a high-speed network that worked on the global 3G standard so that its Japanese customers could travel overseas with their phones. Rivals pushed ahead with alternative technologies. Technical complications delayed Vodafone's launch, originally planned for December 2001, for an entire year. In the meantime, Japanese rivals aggressively marketed their own versions. Rival NTT DoCoMo Inc. started its high-speed service in October 2001, and No. 2 player KDDI Inc. in April 2002. By around the time Vodafone launched, with limited network coverage and just a few phone models in December 2002, KDDI, had some five million customers for its high-speed service. 1. A few years ago, when Vodafone Group PLC spent around $_____ to expand into Japan. a. 1.4 billion b. 14 billion Correct c. 140 billion d. 14 million 2. This week Vodafone agreed to sell its 97.7% stake in Vodafone Japan for $________ in cash, plus about $3.7 billion in preferred stock, loans and debt assumption. a. 1.19 billion b. 11.9 billion Correct c. 119 billion d. 119 million Consumers in Japan and Europe May Help to Drive Global Growth By MARK WHITEHOUSE and JATHON SAPSFORD March 20, 2006; Page A1 http://online.wsj.com/article/SB114282180881102701.html An important shift is taking place in the global economy: Japan and Europe, until recently among the biggest drags on world growth, may soon be playing crucial supporting roles. In a trend that has caught many economists by surprise, companies and consumers in the euro zone and Japan, the world's second- and third-largest economies after the U.S., have started spending again -- or appear poised to do so -- for the first time in years. The new climate has prompted moves by central bankers in both places to push up interest rates to curb inflation, a policy that could weigh on stock and bond prices everywhere by slowing the flow of cash around the globe. But the re-emergence of spending in those nations has implications far beyond financial markets. For one thing, it means that the world might be less dependent on the American consumer, whose willingness to borrow and spend has been a primary driver of world growth for the past five years. If U.S. economic growth starts to taper off later this year, as some economists predict, Japanese and Europeans might help pick up the slack, a © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 3 of 30 global rebalancing act that many had hoped for but few had thought probable. Growing local demand in emerging economies such as China and India could make a difference, too. "I feel nervous as hell thinking it, because it's such a ridiculously optimistic thing to think," says Jim O'Neill, chief economist at Goldman Sachs in London. But, "if the U.S. was ever going to slow down, in many ways there couldn't be a better time for it." Even if U.S. growth doesn't slow anytime soon, stronger growth abroad would be welcome news. It could help rein in the widening U.S. trade deficit by giving American companies more opportunity to sell their goods and services overseas. "The businesspeople in both Japan and Europe are beginning to feel their oats," U.S. Treasury Secretary John Snow said last week in an interview with The Wall Street Journal. The trend, he said, is "good for us." For the time being, the U.S. is on a roll, fueling growth in the rest of the world by buying much more stuff from abroad than it exports. The current-account deficit, a measure of how much the U.S. borrows from overseas to pay for foreign goods and services, widened to a record $805 billion in 2005 from $668 billion in 2004. That's a sign that the world's dependence on U.S. demand has been growing. Some economists, though, expect the U.S. economy to slow in the second half of 2006, as stagnant or falling home prices make Americans feel less wealthy, and thus less willing to spend. Economists polled by the Journal expect annualized growth in U.S. gross domestic product to slow to 2.9% by the fourth quarter of this year from 4.6% in the current quarter. That could be a significant blow to the global economy: U.S. consumers buy about a fifth of everything the world produces. Until recently, there were few candidates to step up and buy if the U.S. consumer stepped down. Japan has been growing for three years, but slowly and without much help from its consumers. Europe, too, offered little hope of buoyancy. Household consumption in Germany, for example, fell in each of the past four quarters. But change has come quickly. In Japan, for example, fourth-quarter GDP grew at an annualized 5.4%, the highest rate among the Group of Seven industrialized nations. More significantly, Japanese consumers have regained some of their urge to buy. After barely budging for much of the past decade, Japan's household spending grew by an annualized 3.5% in the final quarter of 2005. Anecdotal evidence suggests a society that is learning how to spend money again. New restaurants are opening in Tokyo's posh neighborhoods, as are high-end boutiques. Apple Computer Inc. sold 14 million iPod portable music devices in the last quarter of 2005 -its best sales since introducing the iPod to Japan in 2001. Coach Inc., a maker of upscale handbags, expects its Japanese sales to jump 20% to about $410 million for the fiscal year ending in June. The picture is less clear in Europe. In France and Spain, robust household spending is fueling an economic upturn. But in Germany, Europe's largest economy, official data still show consumers in the doldrums. Many economists hope Germans will feel better about opening their pocketbooks if -- as some surveys suggest -- employers start taking on more workers. The widely followed Ifo survey, for example, shows German business confidence at levels not seen since the reunification boom of 1991. And in the most recent Manpower survey of hiring expectations, German businesses said they expect to increase their work © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 4 of 30 forces by 5% in the second quarter, reversing an expected decline of 4% in the current quarter. 3. The current-account deficit, a measure of how much the U.S. borrows from overseas to pay for foreign goods and services, widened to a record $_____ in 2005. a. 5 billion b. 80 billion c. 85 billion d. 805 billion Correct 4. Japan fourth-quarter GDP grew at an annualized ______ the highest rate among the Group of Seven industrialized nations. a. 4.5% b. 5.4% Correct c. 54% d. 45 % Soft Landing For the Danish, A Job Loss Can Be Learning Experience By MARCUS WALKER March 21, 2006; Page A1 http://online.wsj.com/article/SB114290848917403735.html HJORRING, Denmark – After graduating from high school, Susanne Olsen spent 10 years at the local slaughterhouse hacking ham off dead pigs. It was arduous, unskilled work that left her ill-equipped for most other jobs. Then the slaughterhouse closed down last year, leaving 500 people without jobs in a small town that had recently lost its biscuit factory and its mobile-phone factory. All three employers were striving to cut their labor costs amid rising competition from lowwage Eastern Europe and Asia. But unlike millions of laid-off workers in similar circumstances elsewhere in Europe, Ms. Olsen was sure she was going to find a new job. Now she's an apprentice golf landscaper, with her salary subsidized by the state while she takes four years of training paid for by the government and her new employer. "I miss my old colleagues, but I don't miss the pigs at all," Ms. Olsen says. Most of Western Europe is fighting to hold on to its traditionally strong job protections while in some cases cutting jobless benefits, as the region struggles to compete in a globalized economy. Denmark has gone the other way. The government allows liberal hiring and firing as in the U.S. And it has imposed limits on the duration of its high unemployment benefits. But it also invests more than any other country, as a percentage of its gross domestic product, in retraining the jobless -- a combination it calls "flexicurity." Its unusual mix of the free market and big government has helped Denmark cut its unemployment rate in half, from about 10% in the early 1990s to U.S.-style levels of under 5% now. The economy has been relatively robust, growing 3.4% last year. Meanwhile, France and Germany are at or above the Danish jobless rate of a decade ago. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 5 of 30 Even though Danes are among the most easily laid-off workers in Europe, polls show the country's workers are the most secure about their future. The European Commission now holds up Denmark as a model for other countries to try to follow. Politicians from other EU countries have made numerous study trips to Copenhagen. France has cited Denmark as a model for its own more modest labor-law reforms, which in recent days have touched off mass public protests. Meanwhile, Danes change jobs more frequently than any workers in the developed world except Americans and Australians, says the Organization for Economic Cooperation and Development. But fewer than 10% say they're concerned about job security, compared with nearly 40% in Germany and more than 60% in Spain. Most Danes believe they can always find work in their fluid labor market. In the interim, they get security from a dole that replaces up to nine-tenths of their last wage, the highest level in Europe. Critics say the experiment might not be easy to replicate. For one thing, Denmark is small, with just 5.4 million people. And close-knit Scandinavian countries historically have had a higher tolerance for taxes. The system isn't cheap: Denmark spends about 4.4% of its GDP every year on supporting and retraining the jobless, the most expensive labor-market policy in the world. That and Denmark's other welfare generosity keep income taxes sky-high. Tax revenues take up half of gross domestic product, second only to Sweden. Not everyone benefits equally. Annabeth Garvold, a university graduate who was jobless for much of 2003, says the state computer-training course she took was too basic to be useful, though the program did place her in three months of subsidized work at a tech company, through which she found a job. Workers retrained for new industries also aren't guaranteed to find salaries as good as their old ones. Ms. Olsen's golf-course wage, which started at $20 an hour, won't rise as high as the nearly $30 an hour she made butchering pigs, she says. Meanwhile, immigrants, including many Muslims, have significantly higher unemployment rates and are unemployed for longer than the native-born, just as in other European countries. Such tensions boiled over when a Danish newspaper published provocative cartoons of the prophet Muhammad, a controversy that has become global. Denmark has long been accustomed to flexible hiring and firing, agreed between unions and employers back in 1898 in exchange for unions' rights to organize and strike. Rising prosperity in the post-World War II era allowed the state to pay generous benefits to the jobless, the sick, early retirees, parents, and anyone who wanted to take a break from work. But by the early 1990s, Denmark, like many European welfare states, found itself supporting a rising number of working-age people who lived comfortably on welfare and had little incentive to find jobs. Social problems grew: The children of the unemployed grew up to be unemployed. "Welfare dependency developed into a social state of mind," says Helle Seerup, a labor-market expert at the Danish trade union confederation. In 1994, the center-left government of Prime Minister Poul Nyrup Rasmussen scrapped indefinite benefits for the unemployed, who suddenly faced state pressure to actively seek work. The prime minister's close ties to trade unions helped him to win acceptance for the change. The present center-right government, under Prime Minister Anders Fogh Rasmussen, has tightened the system further. If a person hasn't found work after a year, their consultant © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 6 of 30 "activates" them, proposing specific training or work experience -- and reducing benefits if they don't comply. Denmark's different regions run the policy with variations, constantly experimenting and tweaking the system as officials learn what works. The nationwide success rate: About two-thirds of Danes who are laid off have a new job within a year, say labor-market specialists. The state is so determined to get Danes off the dole that it sometimes designs and funds entire new college courses just to fill a small number of jobs. In the cramped corridors of the Public Employment Service for the Copenhagen area, labor consultant Kim Jorgensen has arranged for a business school to run three courses in the past three years in how to program the business software system Microsoft Axapta, at a cost of $160,000 to the taxpayer. In total, 16 unemployed people were trained this way to fill specific vacancies. 5. Danes change jobs more frequently than any workers in the developed world except Americans and __________, says the Organization for Economic Cooperation and Development. a. Chinese b. Australians Correct c. Germans d. Swedes 6. Denmark spends about _____ of its GDP every year on supporting and retraining the jobless, the most expensive labor-market policy in the world. a. 2.2% b. 3.3% c. 4.4% Correct d. 5.5% Developing Story As Market Shifts, Newspapers Try to Lure New, Young Readers By JULIA ANGWIN and JOE HAGAN March 22, 2006; Page A1 http://online.wsj.com/article/SB114299723393804903.html Looking for ways to shore up their readership and broaden appeal to advertisers, many U.S. newspapers are adopting a new tactic: targeting narrower and younger audiences. Newspapers are launching youth-oriented publications designed to attract smaller advertisers that can't afford mainstream papers. They're building search engines to compete with Google Inc. and Yahoo Inc. on a local level. And they are offering "selfserve" classified-ad Web sites, where consumers can create their own ads. In many cases, profits are small, but papers are willing to take the hit in order to break into new markets. "In the past what newspapers did well was reach broad audiences, but that is not where the growth is occurring," says Scott Flanders, chief executive of Freedom Communications Inc., the closely held parent of the Orange County Register in California and other publications. "If we're going to get growth, it will come from capturing new readers, being able to segment them and being able to let advertisers target audiences." © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 7 of 30 Newspapers remain a profitable business, despite the high fixed costs of printing plants, news-gathering staffs and home-delivery operations. As the primary advertising option in their local markets, most newspapers have enjoyed significant leverage with advertisers. They use that power to raise prices. In 2005, publicly traded U.S. newspaper publishers reported that newspaper operations produced operating-profit margins of 19.2%, down from 21% in 2004, according to figures compiled by independent newspaper-industry analyst John Morton. He says that figure is still more than double the average operating-profit margin of the Fortune 500 companies. A convergence of forces is presenting new challenges to the newspaper business. While advertising price increases have allowed newspaper revenues to continue to rise, in recent years competition from the Internet and other media has slowed the rate of revenue growth. Newspaper profit margins peaked in the late-1980s at about 23%, Mr. Morton says, and have fallen as low as 11% during recessions. "Newspapers, although they still remain the dominant local advertising vehicles, have lost some of their market power." Some traditional, big-ticket advertisers are changing their habits. Department-store chains, which have long been major advertisers, are consolidating and cutting their newspaper ad spending, according to Borrell Associates Inc., which provides advertising advice to media companies. Local car dealers, another big source of revenue, are switching more of their ad spending to the Web to reach car buyers online. Newspapers' classified-ad business -- a major source of revenue for many papers for decades -- also faces competitors on the Web. One is Craigslist, an online classified service operating in 190 markets, which allows users to post free ads for jobs, housing, goods and services. Craigslist makes money by charging for employment listings in three of its markets -- New York, San Francisco and Los Angeles. Sites such as Monster.com, where people look for jobs and workers, and eBay.com, where consumers buy and sell items, also compete with newspaper classified ads. Meanwhile, the proliferation of free news on the Internet, increased television viewing and changing habits of Americans have diminished newspaper circulation. Daily U.S. newspaper circulation fell 2% to 54.6 million in 2004, the most recent year available, from 55.8 million in 2000, according to the Newspaper Association of America. Daily circulation is down 13% from its peak of 62.8 million in 1985, the trade group says. Last week, Knight Ridder Inc., the nation's second-largest newspaper chain, said it agreed to be sold to McClatchy Co., a newspaper chain one-third its size, in a transaction valued at $6.5 billion. McClatchy Chief Executive Gary Pruitt wrote in a Wall Street Journal opinion-page piece last week that investors' concerns about the industry allowed his company to buy Knight Ridder for "a price that would have seemed an unimaginable bargain only a few years ago." In this environment, newspapers are trying innovative ways to protect their business. Consider the Bakersfield Californian, an independent, family-owned paper in central California. When executives heard Craigslist was coming to town last year, they decided to launch their own classified Web site -- and make it free. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 8 of 30 7. In 2005, publicly traded U.S. newspaper publishers reported that newspaper operations produced operating-profit margins of __________ in 2004, according to figures compiled by independent newspaper-industry analyst John Morton. a. 19.2% down from 21% Correct b. 21% down from 22% c. 22.2% down from 24% d. 23.5% down from 25% 8. Looking for ways to shore up their readership and broaden appeal to advertisers, many ______ are adopting a new tactic: targeting narrower and younger audiences. a. newspapers Correct b. local news broadcasts c. magazines d. weekly readers GM Makes Sweeping Buyout Offer Deal With Delphi, UAW, Lets Auto Maker Slash Unionized Work Force Clearing Out a Generation By JEFFREY MCCRACKEN and LEE HAWKINS JR. March 23, 2006; Page A1 http://online.wsj.com/article/SB114303616562705130.html General Motors Corp. reached a landmark buyout and early-retirement program yesterday with the United Auto Workers and parts supplier Delphi Corp., marking a major step toward shrinking the unionized North American auto industry. But for GM, it is not the end of the painful overhaul facing the company after nearly two decades of losing ground to Asian and European rivals. Under a complex deal worked out in weeks of talks, GM agreed to finance earlyretirement packages and buyouts to be offered to as many as 131,000 GM and Delphi workers -- including all 105,000 of GM's current UAW-represented employees in the U.S. The buyouts would range from $35,000 for those with the most service to $140,000 to certain others further from retirement age. The buyout plan is one of the largest in U.S. corporate history. In effect, GM is offering to take off the assembly line a whole generation of workers hired in the 1960s and '70s when the company still dominated the U.S. auto industry. But how many will sign up to leave is a big question mark. And even if many do, GM Chairman and Chief Executive Officer Rick Wagoner still faces a series of challenges that the big labor deal won't solve. In 4 p.m. composite trading on the New York Stock Exchange, GM's stock finished up one cent, at $22.01. On Wall Street, the ultimate worry is whether GM can succeed where some big unionized steelmakers and airlines failed and restructure outside of bankruptcy court. GM © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 9 of 30 has denied any plan to use Chapter 11 bankruptcy to shed its obligations under its current U.S. union agreements. But major credit-rating agencies have dropped GM's debt ratings deep into "junk" levels and warned that without a quickly executed turnaround plan in North America, bankruptcy is a possibility. One agency, Fitch Ratings, has warned that some debtholders could get 40 cents on the dollar in a GM bankruptcy scenario. Among the challenges still facing GM is an investigation by the Securities and Exchange Commission into GM's accounting. Just last week, the company said it still is unable to file its annual report and added $2 billion to its net loss for 2005, widening it to $10.6 billion. GM is also struggling to find a buyer to reinvigorate its big finance unit, General Motors Acceptance Corp. A wide acceptance of the buyout, by easing concerns about GM's viability, could speed a sale of a controlling stake in the finance unit. Groups led by two private-equity firms have made bids for GMAC in the $11 billion range. 9. Under a complex deal worked out in weeks of talks, GM agreed to finance early-retirement packages and buyouts to be offered to as many as __________ GM and Delphi workers. a. 11,000 b. 13,000 c. 101,000 d. 131,000 Correct 10. The GM buyouts would range from __________. a. $3,000 to $14,000 b. $5,000 to $14,000 c. $35,000 to $140,000 Correct d. $350,000 to $840,000 In Big Takeover Fights, France Retains a Home-Field Advantage By ALESSANDRA GALLONI March 24, 2006; Page A1 http://online.wsj.com/article/SB114316814483507116.html PARIS -- Late on Feb. 22, Henri Proglio got cold feet. The chief executive of French waste and water company Veolia Environnement SA had been talking with Italian energy giant Enel SpA for months about a joint takeover bid for French utility Suez SA. But that evening, Mr. Proglio phoned Enel to back out. "Suddenly, the whole thing took on a new political shape and I said: 'I don't want to be part of this,' " Mr. Proglio recalls telling the Enel chief executive. Three days after the call, the politics behind Mr. Proglio's abrupt retreat were clear. French Prime Minister Dominique de Villepin announced that Suez was merging instead with state-owned Gaz de France to create an all-French global energy giant. The hastened marriage lifts a lid on France's recipe to ensure French industry stays under French control. A hand-in-glove relationship between government and business has given © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 10 of 30 France more top-tier companies in important industries, from aviation to retail, than any other country in Europe. But this France-first approach also points to a big obstacle blocking Europe's emergence as an economic and political power, a cause France has claimed to champion for decades. How can the European Union speak with a single voice in world affairs when its members are feuding over their blue-chip companies? "The French model of building up national champions and having them expand into more open markets is probably good for France," says Charles Grant, the director of the London-based Centre for European Reform. "It is not so good for the European project or the European economy as a whole." The Suez affair has triggered a storm of protest against French economic nationalism, even as other European countries grudgingly accept a rise in hostile takeovers across the Continent. (See articles in column 5 and on page A3.) France's moves have been a source of heated debate this week at a meeting of European Union leaders in Brussels. Officials from Italy and other EU countries warn the French could undermine efforts to create a deregulated energy market across the 25-nation bloc and the very idea of a single EU market. "We can only have an internal market when electricity flows freely and when we accept European champions and not just think nationally," German Chancellor Angela Merkel told reporters as she headed into a meeting in Brussels last night. "Otherwise the internal market would not make sense." Economic patriotism in Europe is neither new nor exclusively French. Madrid is currently trying to thwart a German bid for a Spanish energy company and Poland is striving to block an Italian bank takeover. Italy itself for years tried to block foreign takeovers in its banking sector. Just yesterday, France's Parliament approved a law to help French companies fend off hostile bids. France says it is not interventionist. "There is a sentiment that France is protectionist, but that is not the image I have of my country," French Finance Minister Thierry Breton said at a lunch meeting with reporters yesterday. But Mr. Breton added that states can't stay on the sideline either. "States have a right, as stakeholders, to express themselves." One tactic France has used is to pounce pre-emptively. Over the past two years, Paris has thwarted foreign bids for French companies, including pharmaceutical company Aventis. France warned off PepsiCo Inc. last year amid rumors it was interested in a bid for yogurt and drinks giant Danone Inc. Soon after, the country unveiled a list of 10 industries offlimits to takeovers. In the Suez case, President Jacques Chirac called Italy's premier to say France would consider a bid by Enel as "hostile," according to an internal Enel memo and confirmed by the French government. Italians say this was part of a wider bullying campaign to make Mr. Proglio back off. The French say they did nothing against Italy. Enel has said repeatedly that it is interested in Suez and has lined up more than $60 billion in financing for an eventual bid, but it hasn't yet decided yet whether to pull the trigger and try to break up the all-French union. But no one denies that the Suez-Gaz de France marriage was meant to bolster France, and that what the French call economic patriotism plays well with French workers and the French public. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 11 of 30 Despite international complaints about French protectionism, the strategy hasn't hurt foreign investment in France. Foreigners own around a 40% share of France's leading stocks and one out of every seven French workers is employed by a foreign company, according to the government. Yet some economists wonder whether national-champion mergers -- and the protection of their workers -- are good for French economic efficiency in the long run. "Who does economic patriotism benefit?" asks Mario Monti, former EU competition and internal markets commissioner. "Is it in the interest of consumers? Of the economy in general? I don't know." The bonds between French business and politics are often forged in the classrooms of the Ecole Nationale d'Administration, an elite civil-servants training school whose graduates, known as enarques, control much of French state and business. Both Messrs. Chirac and Villepin are enarques. The two other enarques in the Suez saga sat down for lunch last April at Chez Laurent, an upscale restaurant with a peach-colored exterior behind Paris's presidential palace, according to people familiar with the matter. Suez Chairman Gérard Mestrallet and Gaz de France Chief Executive Jean-François Cirelli were both keen to merge their companies. Suez has long said it wanted to expand its energy business. Gaz de France, which is much smaller than its state-owned direct competitor Electricité de France, or EDF, has always said it wanted to become less domestic and less natural gas-oriented. It was immediately clear to the two men, who have both held jobs as government advisers, that no deal involving the state-owned Gaz de France could happen without the French government. At the time Mr. Breton, France's finance minister and sometime science-fiction writer, was working on the sensitive privatization of 22% of Gaz de France, scheduled for mid2005. In preparation for a sale, the government in 2004 had passed a decree ensuring that state ownership of Gaz de France would never fall below 70%. 11. Officials from Italy and other EU countries warn that _____ could undermine efforts to create a deregulated energy market across the 25-nation bloc and the very idea of a single EU market. a. Spain b. Russia c. Norway d. France Correct 12. One out of every _______ French workers is employed by a foreign company. a. 5 b. 7 Correct c. 9 d. 16 Questions 13 – 17 from Marketplace After a 14-Year Run, A Technology CEO Shares Some Advice By CAROL HYMOWITZ © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 12 of 30 March 20, 2006; Page B1 http://online.wsj.com/article/SB114281788616302611.html Carol Bartz has outlasted most CEOs of big companies. She has been chief executive of Autodesk for the past 14 years, when the median tenure is just five years. She led the Silicon Valley software company through economic ups and downs. In May, Ms. Bartz will relinquish her CEO post and become executive chairman. But her longevity as CEO gives her a rare perspective on what it takes to weather mistakes and business cycles and to be an agent of change. Don't rest on your honeymoon-period laurels. When she first became CEO, Ms. Bartz joked that her task was "playing Wendy to the Lost Boys of Autodesk." The company had one product, profits were sagging and employees, who brought their dogs and cats to the office, weren't used to answering to anyone. Even by Silicon Valley standards, the atmosphere was chaotic, choking creativity. She quickly imposed a more traditional management structure, with schedules for product launches and for regular performance reviews. Many employees welcomed a CEO who could make decisions. But as business improved, some began backsliding to old habits. "If you arrive when a heart attack is occurring, people agree to change their diet," says Ms. Bartz. "But when things get stabilized, it's human nature to want to start eating hamburgers again." Executives must doggedly push improvements and keep reminding employees what they must do to achieve them. Don't typecast your employees, or hold a grudge. When Ms. Bartz fired Carl Bass, co-founder of a software company she'd acquired, Autodesk's chief engineer told her, "You can't fire Carl!" Mr. Bass was known as a technical wizard but often complained that the company wasn't moving fast enough. But Ms. Bartz insisted his attitude was hurting progress. A few months later, however, she invited Mr. Bass back, after reaching an understanding, and he began to rewrite a problematic version of the company's signature software. He eventually rose to chief operating officer. He'll succeed Ms. Bartz as CEO. "If you never change your mind about people, you won't have the talent you need," says Ms. Bartz. Motivate others by believing in the company. During the dot-com boom in the late 1990s, Ms. Bartz would wake up in the middle of the night stunned by how quickly Autodesk had slid into obscurity. "We were making software for Old Economy companies and no one cared about that anymore," she recalls. To keep most employees from jumping to dot-com start-ups, where they thought they'd become millionaires, she first had to convince herself that she believed in Autodesk's products and business model. "Sure we lost some people," she says, "but once I dug into myself and knew I believed in Autodesk, I could convince others to stay." Change with the business landscape. Refusing to be cowed by the dot-com bubble, Ms. Bartz also realized the Internet was radically altering business. "I knew we had to use the network to change how we design, manufacture and market products," she says. Under her watch, Autodesk began customizing products for specific industries, such as entertainment, autos and construction. It also began selling software by subscription so © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 13 of 30 customers could use it for only a certain time period and get free updates. The result: more-stable revenues than when customers could use the software indefinitely but paid for upgrades. Invest in your business during downturns. Even when Autodesk's profits were sagging in the last downturn, Ms. Bartz made a major investment in three-dimensional software, considered the future of the industry. Her company is now capitalizing on this investment. As a CEO you always have to ask, "How do we stay relevant and make something work?" says Ms. Bartz. The software permits customers to see a three-dimensional model of what they want to design, which enables them to get more things right the first time. Unless you invest during downturns, you won't be ready for upturns, she adds. Gain knowledge outside your company. While some CEOs are rejecting board seat offers because of the increased work required in this environment of heightened regulation, Ms. Bartz thinks being a director at Cisco and BEA Systems has sharpened her leadership skills. "I get the chance to see how other CEOs operate and what other companies are up against," says Ms. Bartz. She also often attends the World Economic Forum "not to schmooze but to open my brain," she says. "You have to find ways to break the isolation of being a CEO." Know when to step aside. At 57, Ms. Bartz isn't ready to retire and wasn't shown the door by directors. "I cried my eyes out," she says about her first thoughts of stepping down. But she knew Mr. Bass was getting job offers, and she didn't want to spend years grooming another successor. She also likes the fact that she's stepping aside when Autodesk is at the top of its game, thanks to many of her initiatives, and when she still isn't bored. "It's very good to leave a job when you still love it," she says. 13. Advice from CEO Carol Bartz includes a. Don't rest on your honeymoon-period laurels. b. Invest in your business during downturns c. Know when to step aside d. All of the Above Correct A Study in Diplomacy By SEBASTIAN MOFFETT and JAMES T. AREDDY March 21, 2006; Page B1 http://online.wsj.com/article/SB114289523153503394.html Growing up in Japan, Asayo Iizuka was fascinated by China. So the 22-year-old jumped at the opportunity to study at Shanghai's Fudan University, hoping to expand her knowledge and make Chinese friends. There she met Chen Li, a 20-year-old economics student at Fudan, who hated Japan. When she was growing up, Ms. Chen's family had told her the Imperial Japanese Army had killed her great-grandfather. So, at first, a friendship didn't seem possible. "I don't really like the Japanese," she informed Ms. Iizuka early on. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 14 of 30 Yet the two women have stayed in touch and each continues to try to change the other's point of view. In the process, they confronted, on a personal level, some of the major issues threatening relations between Asia's two economic giants at a time when slowgrowth Japan is finding opportunities in fast-expanding China. "For 4,000 years China was the top country in Asia, but in the past 150 years, Japan has been more powerful," Ms. Iizuka says. "Now they are equal, but they don't know each other well enough to acknowledge each other." Even as old wounds linger, China, including Hong Kong, has become Japan's biggest trading partner. About 99,000 Japanese live in China, more than any other country besides the U.S. Both governments are working to nurture better relations among the younger generation. Japan plans this year to set up a fund of 10 billion yen ($86 million) to pay for 1,100 Chinese high-school students to study in Japan annually for about 10 days and an additional 150 for several months to a year. A current government-affiliated study program enrolls 100 Chinese students in Japanese high schools each year. "The economic relationship is robust and growing," said Jeff Kingston, director of Asian studies at Temple University Japan. "But I don't think that can continue indefinitely while government relations are in the deep freeze." In China, memories are still strong of the Sino-Japanese war from 1937 to 1945, when the Imperial Army killed at least 10 million Chinese, according to standard estimates. The Chinese complain that Japanese school textbooks skim over the war and object to visits by Prime Minister Junichiro Koizumi to the controversial Yasukuni war shrine in central Tokyo that is dedicated to the 2.5 million people who died fighting for Japan, most of them during Japan's war with China and World War II. In protest, Beijing has refused to schedule formal summit meetings with Mr. Koizumi and is opposing Japan's bid for a permanent seat on the United Nations Security Council. Thousands of Chinese participated in anti-Japanese demonstrations last spring. Ms. Iizuka's fascination with China began when she studied the Chinese language in high school. She loved China's ethnic variety and thousands of years of history, and knew the language would help her career. While studying law and politics at a Tokyo university, she went in 2003 to spend a year at Fudan -- the top university in Shanghai. That winter, a South Korean friend introduced the two women. The students exchanged phone numbers. But Ms. Chen talked little with Ms. Iizuka. Ms. Chen had disliked Japan since she was a child growing up mostly near Shanghai. From age 7, schoolteachers took her class to see patriotic films; some were about heroic Chinese children risking their lives to resist evil Japanese soldiers during Japan's World War II occupation of China. 14. Even as old wounds linger,_______ has become Japan's biggest trading partner. a. the United States b. South Korea c. Germany d. China, including Hong Kong Correct Building Homes On Old Bases Isn't So Easy © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 15 of 30 By CHRISTINE HAUGHNEY March 22, 2006; Page B1 http://online.wsj.com/article/SB114299844483004914.html SAN FRANCISCO -- Lennar Corp. seemed to have snatched two dream properties when it paid $2 for the right to rebuild two former military bases in one of the nation's most expensive housing markets. But Lennar executives have learned there's nothing easy about turning vacant military land into profitable housing developments. At Hunter's Point, a former Navy shipyard in southern San Francisco, Lennar faces demands to build more affordable houses for an economically depressed population as it tries to market homes in an area many San Franciscans consider environmentally unsafe. Even at the closed Mare Island Navy shipyard in suburban Vallejo, the builder's success in selling homes with sweeping bay views has been overshadowed by criticism that it should have first developed job-creating commercial sites. "It's not for the weak of heart," says Tim Ford, executive director for the Association of Defense Communities, a group based in Washington, D.C., that advises communities on base redevelopment. "It's something that you have to be able to look past all of the problems and realize the potential of a piece of land." Lennar's experience is being closely watched because it has made the biggest plunge among home builders as the U.S. government shutters more bases. The incentive for home builders: The government assumes responsibility for much of the costly environmental cleanup and sifting through competing community demands for the abandoned bases, limiting the builders' exposure to delays. Builders pay to construct roads and other infrastructure improvements. They profit by selling the redeveloped plots of land or newly-built homes. At stake is the economic viability of areas around the 22 more major bases that have been ordered closed by President Bush. Among them: Walter Reed Army Medical Center in Washington and Concord Naval Weapons Station near Oakland, Calif., both due to shut down by 2011. While other national home builders -- including Toll Brothers Inc., based in Horsham, Pa., and Actus Lend Lease, Nashville, Tenn. -- have looked at the bases slated for closure, Miami-based Lennar is the national developer furthest along in the redevelopment process. As the nation's third-largest home builder based on number of homes built, Lennar has plucked five military-base redevelopment projects in California, which company officials say offered bases with the best large parcels near major cities. Lennar took ownership of Mare Island land in 2003 and Hunter's Point in 2005 for $1 apiece. An affiliated company, LNR Property Corp., is helping with nonresidential redevelopment of the bases' combined 1,100 acres. The price reflects the risk of the two projects, which require more infrastructure investment than bases more immediately available for home building. In contrast, Lennar paid $649 million in 2005 for the former El Toro Marine Air Corps station, covering 3,700-acres in real-estate hotbed Orange County, Calif. To be sure, Lennar expects both Mare Island and Hunter's Point to pay off. After investing $80 million in Mare Island, it has sold 178 homes for an average of $700,000 apiece, or nearly $125 million. It splits the profits with the city of Vallejo. The company © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 16 of 30 expects to invest a similar amount at Hunter's Point. It projects a profit there by mid- to late 2007 after starting home sales. And while military-base redevelopment represents a tiny part of Lennar's business -- in 2005, it had sales of $13.8 billion and profit of $2.4 billion -- some analysts say the move gives the company an edge over competitors. "This is not going to make or break the company," says Stephen Kim, a managing director at Citigroup Investment Research. Still, he adds, Lennar is gaining valuable experience learning to negotiate, particularly in San Francisco, a fertile area for social activism but a lucrative market for home builders. "The more resistance there is," says Mr. Kim, "the greater potential for a competitive advantage to emerge." Lennar executives acknowledge they've encountered unexpected problems and delays in negotiating with the military, local governments and community groups. "Everybody -including the Navy, the cities and us -- all have gone through a learning curve," says Emile Haddad, president of Lennar's Western region, which oversees these projects. 15. Lennar took ownership of Mare Island land in 2003 and Hunter's Point in 2005 for ______ a piece. a. $1.00 Correct b. $500 c. $10,000 d. $80 Million As Microsoft Fumbles, Marketers Supplant Tech Managers By ROBERT A. GUTH March 23, 2006; Page B1 http://online.wsj.com/article/SB114304385369805253.html Last summer, inside the corridors of Microsoft Corp., there were hints at what the world learned only this week: that one of the most anticipated technology products in years would miss its planned arrival date. Some programmers, in an internal company poll, predicted that Microsoft might have to delay the Windows Vista operating system, highlighting perhaps the biggest challenge facing Chief Executive Steve Ballmer: how you manage a sprawling technology company in an era of fleet-footed competitors, ranging from Apple Computer Inc. to Google Inc. Management issues came under scrutiny Tuesday when the software giant said it would release Vista in January 2007, missing this year's important holiday season and coming at least two months after industry watchers expected the badly needed update to the software used on more than 90% of all personal computers. The announcement not only brought into question Microsoft's credibility as a high-tech leader, it appeared to have a ripple effect throughout the industry. Yesterday, share prices at Nvidia Corp., a maker of graphics chips that has been betting heavily on a boost in sales because of Vista, declined 2.9% in 4 p.m. composite trading on the Nasdaq Stock © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 17 of 30 Market to $49.33. In New York Stock Exchange composite trading, shares of Micron Technology Inc., which makes memory chips, declined 3% to $14.55. Also on the Big Board, shares of disk-drive maker Seagate Technology dropped nearly 4%, or 93 cents, to $24.01. Microsoft shares slid about 2% to $27.15 on the Nasdaq. In the wake of the news, Microsoft is expected later this week to name a new head of its Windows group, part of a broader reorganization that is the latest step to put tighter management controls on an organization that is Microsoft's largest source of revenue and profit. 16. Microsoft's management issues came under scrutiny Tuesday when the software giant said it would release Vista in_______. a. June 2006 b. November 2006 c. January 2007 Correct d. April 2007 Racing to Improve United Airlines Employees Go to School for Pit Crews To Boost Teamwork, Speed By SUSAN CAREY March 24, 2006; Page B1 http://online.wsj.com/article/SB114316589044307078.html MOORESVILLE, N.C. -- Denise Rivera spends her workdays waving in jets, unloading baggage and pushing planes around with a tractor. But on this day, the lead ramp servicewoman for United Airlines at Miami International Airport was struggling to remove five lug nuts from a Chevrolet Monte Carlo stock car. "It needed lubrication or something," she said later. "I kept winging it and finally got it down." Ms. Rivera was one of 33 United ramp workers who donned coveralls, knee pads, ear plugs and safety goggles at Pit Instruction & Training LLC one recent afternoon to learn how to handle a jack, change 65-pound tires and fill fuel tanks on race cars. They aren't about to turn airport runways into race tracks. But UAL Corp.'s United hopes some training in the split-second practices of Nascar pit crews will help Ms. Rivera and her colleagues slash the time that United's 455 jetliners spend on the ground. Less time on the ground equals more time aloft. That means more daily flights without having to buy new planes and -- the airline hopes -- more revenue. The pit-crew experience is intended to reinforce the importance of such things as teamwork, preparedness and safety. It's one small but important way United is trying to become more efficient after emerging from three years of bankruptcy-court protection last month. "We're back to basics," says Joni Teragawachi, United's manager of world-wide airport operations training. The Federal Aviation Administration "has had issues with us" because inspectors could find United workers doing things differently at different airports, she says. "In our history, training has been optional." By immersing its supervisory "lead" ramp workers in the adrenalin-pumping realm of Nascar, the airline hopes to cut the average aircraft ground time by eight minutes to 53 minutes, competitive with United's peers. For the airline's leisure-oriented "Ted" flights, © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 18 of 30 the goal is to cut ground time by five minutes to 36. United plans to put nearly 1,200 of these employees through "Pit Crew U" this year and hopes to bring customer-service agents to similar classes in 2007. About 18 months ago at its Denver hub, the airline started a campaign to standardize ramp functions to determine the most efficient and consistent way to safely "turn" a plane -- bring it in, unload and load it, and push it out again. Building on that, it set schedules for shorter ground times at the San Francisco hub and on most Ted flights this year. Soon, the new regime will make its way to Chicago and Washington. 17. United hopes to reduce the average aircraft ground time of its planes to _____. a. 35 minutes b. 53 minutes Correct c. 530 minutes d. 530 seconds Questions 18 – 23 from Money & Investing The Return of Growth Funds By ELEANOR LAISE March 18, 2006; Page B1 http://online.wsj.com/article/SB114263967152501886.html Remember "growth" funds? They were top performers among mutual funds back in the 1990s -- until they tumbled when the technology-stock bubble burst, taking parts of investors' nest eggs with them. Well, they're back. Increasingly, investment advisers are telling clients to shift money into growth-stock mutual funds, which look for fast-growing companies with the best prospects for increasing their earnings -- thus the name. Merrill Lynch & Co. in recent months told clients to put more money into growth stocks, and a recent survey of money managers showed that 80% were bullish on large growth stocks, up from 65% in last year's third quarter, according to Russell Investment Group. For investors, it marks a change. For the past six years, "value" stocks -- think utilities, auto makers, banks and other established firms -- were clear winners. But "the pendulum has swung too far" toward value investing, says Alan Skrainka, chief market strategist of Edward Jones, who in recent weeks urged clients to diversify into growth stocks. Growth funds are already showing signs of strength. For the past three quarters in a row, growth funds trumped value funds in terms of performance, according to investmentresearch firm Morningstar Inc. And in the fourth quarter, growth funds attracted more money than value funds for the first time in five years, according to Financial Research Corp. Growth funds took in $9.7 billion, compared with $3.1 billion for value funds. In January, investors added an additional $4 billion to growth funds while pulling $3.3 billion out of value funds. However, growth funds have changed a lot in the past few years, making it tougher for investors to spot the best ones. The last time they were in favor, in the late 1990s, many growth funds had very similar portfolios -- basically, they were stuffed with tech and © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 19 of 30 health-care stocks. That's no longer the case. Increasingly, they're dabbling in everything from energy to industrial manufacturers. It's also tough to tell which funds might be good by looking at their recent track records. The reason is simple: Across the board, they've been doing pretty badly. The average growth fund has lost 1.4% annually over the past five years ending Dec. 31, compared with a 7% gain for the average value fund, according to Morningstar. In addition, some growth funds that have posted better performance may have pulled that off because they strayed away from investing solely in traditional growth stocks. For instance, the MainStay Mid Cap Growth fund is one of the top-performing growth funds over the past three years investing in midsize companies, according to Morningstar. One reason: It has a lot of money in energy stocks -- traditionally a value investment. Manager Rudy Carryl devotes about 15% of assets to energy, nearly double the allocation of a typical rival fund. "A stock doesn't know whether it's growth or value, and we're somewhat agnostic ourselves," Mr. Carryl says. 18. Increasingly, investment advisers are telling clients to shift money into ______, which look for fast-growing companies with the best prospects for increasing their earnings. a. index funds b. growth-bonds funds c. growth-stock mutual funds Correct d. index-bond funds Silicon Valley Start-Ups See Cash Everywhere By REBECCA BUCKMAN March 20, 2006; Page C1 http://online.wsj.com/article/SB114282030825002662.html The market for high-technology start-up businesses is so intense in Silicon Valley that some companies are being showered with millions of dollars from investors -- without even asking for it. It is a phenomenon called "pre-emptive financing," and it has become more common in the past several months. The question is whether venture capitalists are moving too quickly, funding risky, untested start-up businesses -- just as they did during the heady, and ultimately unsustainable, technology-stock boom of 1999 and 2000. Pre-emptive financing happens when a venture capitalist seeks out a promising start-up business and offers it money out of the blue, before the company tries to raise a second or third round of cash. If the offer is good enough, in theory, the venture investor will snag a piece of the company quickly, thus avoiding a costly bidding war that could erupt later once the company says publicly it is looking for cash and attracts several suitors. Such bidding wars are increasingly common these days and have pushed up prices investors pay for stakes in some start-up companies. The median valuation of venturefunded start-up businesses -- the amount investors think these companies are worth -soared to $15.2 million in 2005, from $10 million two years earlier, according to research firm VentureOne, a unit of Dow Jones & Co., which publishes The Wall Street Journal. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 20 of 30 Venture capitalists typically take stakes in small, private-sector companies, hoping for a payout later through a company sale or an initial public offering of stock. The trend puts many start-up companies in the driver's seat. "I've had several [venturecapital] firms come to me long before we were looking for money," says Jason Goldberg, chief executive officer of Seattle online job-search concern Jobster Inc. His company, after getting unsolicited calls from two venture firms last year, raised $19.5 million in additional financing much earlier than it had planned. Young companies in wireless communications, computer games and consumer Internet services are big targets for preemptive funding calls these days. It all highlights how desperate some venture capitalists have become to find homes for the huge amounts of cash they have raised, and how few companies there are that really deserve their money. Last year, venture-capital firms raised $25.2 billion from investors, the most since 2001, and they are struggling to put all that money to work. "There's such a dearth of very high-quality opportunities," says Michael Greeley, a general partner with IDG Ventures in Boston. "Investors will move very aggressively right now." IDG has hired a recruiting firm to set up meetings between IDG partners and promising start-up executives, he says, to help his firm develop relationships and, in some cases, possibly pre-empt the process of formal fund raising. Some investors are so eager to one up each other that they don't even bother to find out who to call at promising start-ups. A Pasadena, Calif., home-improvement Web site, Done Right, operated by a company called Perform Local Inc., received an email in January from a well-known investment firm inquiring about putting cash into the company. Paul Ryan, Done Right's chief executive officer, says the missive wasn't sent to him or to his executives -- it landed in a general corporate email inbox. Mr. Ryan wasn't put off by the impersonal plea: "We're having very good discussions with [the firm] right now," he says, declining to name the potential investor. The risk of pre-emptive financing is that investors are so eager to seal deals early that they will overlook flawed business models and management and invest imprudently. The trend "absolutely harkens back to the bubble days" of 1999 and 2000, says Tom Blaisdell, a general partner with DCM-Doll Capital Management, Menlo Park, Calif. Mr. Blaisdell and others note pre-emptive funding has its upsides: If venture capitalists can offer financing before anyone else, they sometimes have more time to investigate a company's business and work with it to come up with mutually favorable investment terms. Many investors say the start-up market isn't as frothy as it was in the bubble, with sentiment tempered by the lethargic market for start-up initial public offerings of stock. Indeed, not all venture firms are embracing the practice. Still, many start-up companies are leveraging pre-emptive funding calls into even more money. Jobster, which does business with Microsoft Corp. and Cisco Systems Inc., raised $8 million from two well-known venture-capital firms in 2004. Just a few months later, Mr. Goldberg, the CEO, received unsolicited calls from two other firms offering him more money, and at terms that valued the company much more richly than had its first two investors, Ignition Partners and Trinity Ventures. Mr. Goldberg declined to name the two new firms that contacted him. Those calls got him thinking that perhaps he did need more funding. So Mr. Goldberg called another venture firm, Mayfield Fund, which had expressed interest in Jobster © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 21 of 30 months before but hadn't invested. Mayfield wound up leading the $19.5 million round of funding in August; the two pre-emptive cold-callers didn't get a piece of the deal. "Nothing gets a VC moving like the idea that someone else might get their deal," Mr. Goldberg says. Mayfield Managing Director Allen Morgan says he isn't surprised topdrawer start-up businesses like Jobster are getting pre-emptive offers. "We're all hungry for returns," he says. Other start-up companies also are benefiting. Gibu Thomas, a co-founder and CEO of Sharpcast Inc., which makes software that helps people access, share and back up digital content between various electronic devices, says he struggled to raise money for his startup company in late 2004 and early 2005. But last August, Sharpcast snagged $3 million from two firms, Draper Fisher Jurvetson and Selby Venture Partners, and two months later, other venture capitalists clamored to put more money into the company. 19.___________ happens when a venture capitalist seeks out a promising start-up business and offers it money out of the blue, before the company tries to raise a second or third round of cash. a. Blue Sky financing b. Euro financing c. Pre-venture financing d. Pre-emptive financing Correct Sink or Swoosh By JUSTIN LAHART March 21, 2006; Page C1 http://online.wsj.com/article/SB114290564281603651.html The gods of fashion may have it in for the goddess of victory. To judge from how its U.S. business is faring, Nike is doing very well. Its new high-tech (and high-priced) running shoes are selling well, as are its signature Air Jordan line of basketball shoes. Moreover, sales at Reebok, the shoe company recently acquired by Germany's Adidas-Salomon, have stumbled, allowing Nike to grab market share. Nike's domestic sales were up 15% from a year earlier in the quarter ended Nov. 30, to $1.3 billion, and analysts believe U.S. sales rose at least 10% in the quarter ended Feb. 28. But when Nike reports results after the stock-market close today, Wall Streeters will be focusing on its business in Europe and Asia, where it garners nearly half of its sales and profits. The problem: Consumers in Western Europe and Japan (by far Nike's biggest Asian market) have been favoring what's known variously as the low-profile, Puma-style, fusion, lifestyle or European-style look. Gaining popularity in the U.S. as well, these are shoes that, while athletically styled, are better-suited for hanging out than running sprints. Last year, the company did introduce some low-profile shoes, and it's looking to expand its offerings heading into this summer. But while these shoes have been well-received, the low-profile business promises a high level of competition. "The market is pretty inundated and flooded," says Sharon Lee, co-founder of Los Angeles youth-marketing firm Look-Look. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 22 of 30 Nike tends to do best when fashion trends favor more technical, athletic footwear. It's possible that consumer tastes in Europe and Japan might change as economies in those parts of the world improve. One reason that low-profile shoes have been doing well is necessity -- they're cheaper than true athletic shoes. If shoppers outside of the U.S. start feeling more confident, they may start paying up for the more athletic styles that are Nike's strong suit. But Nike also has to worry about defending its home turf. Even though Reebok has stumbled in the U.S., John Shanley, an analyst at Susquehanna Financial Group, worries about a renewed assault by Reebok in the U.S. backed by its new Adidas owners. That would force Nike to spend more money defending itself. And that could curtail its efforts to expand its business overseas. 20. Nike's domestic sales were up _____ from a year earlier in the quarter ended Nov. 30. a. 10% b. 15% Correct c. 18% d. 22% Cox Puts More Tech Into SEC By KARA SCANNELL March 22, 2006; Page C1 http://online.wsj.com/article/SB114299337227504837.html WASHINGTON – The Securities and Exchange Commission, at the urging of new Chairman Christopher Cox, is pursuing a series of technology initiatives that could transform how public companies and mutual funds disclose financial data. The proposals build on the SEC's longstanding mandate to foster better disclosure. But they are tweaked to reflect Mr. Cox's free-market view that financial markets armed with information can discipline companies, an alternative to government regulation. Among the measures, he is: • Offering incentives to companies to disclose financial information in a way that tags various pieces of data -- such as revenue, profit margins and reserves -- so that investors can compare companies against each other and across industry groups. • Weighing the creation of a new benchmark that would allow investors to evaluate mutual funds' performances after taxes and fees, akin to the auto miles-per-gallon results calculated by the Environmental Protection Agency. • Proposing to allow companies to bypass paper forms entirely for shareholder votes -unless specifically requested by an investor -- and to post proxy statements and the like on a Web site. While Mr. Cox strongly supports the initiatives, any rules that would change how companies report information to shareholders would require majority votes by the full five-member commission. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 23 of 30 The approach reflects the emerging leadership style of Mr. Cox, who took the SEC helm last August: He seeks to build a consensus and generate enthusiasm for change without mandating it. It is a delicate act of not upsetting corporate groups but, instead, allowing them and investor advocates to ease into changes while leaving the door open for tweaks and refinements. Some of those groups believe the new moves could reduce costs by allowing for electronic communication with shareholders. Others -- especially on the business side -are more skeptical. They are worried about the expense of adding new technology, and some don't like the idea of giving investors an easy way to compare financial results of companies. 21. The new chairman of the Securities and Exchange Commission is ____. a. Christopher Cox Correct b. Merrill Lynch c. Arthur Andersen d. Mary Reed Red Sky in Morning By JUSTIN LAHART March 23, 2006 http://online.wsj.com/article/SB114307775483905858.html When Carnival Corp. reports results Thursday, the news should be good. But there may be a sea change coming. Count the cruise line among the companies that have benefited from catering to higherend customers. Carnival's passengers tend to be both older and better off than most Americans, which also means that they've benefited more than most from the booming housing market. But with real estate showing signs of slowing, the big spenders may start spending less. Analysts polled by Reuters Estimates think Carnival's revenue increased to $2.517 billion in the first quarter, which ended last month, up from $2.396 billion a year earlier. Earnings per share, at 36 cents, are expected to be down from a year earlier, due to higher fuel costs, but they're widely expected to rise in the spring and summer -- its busiest and most profitable time of the year. Many passengers book those peak-season cruises during the first few months of the year in what is known in cruise-industry lingo as "wave season." Reports from travel agents on wave-season bookings this year have been mixed, but that may have as much to do with shifting trends -- like passengers booking online directly with the cruise companies - as anything else. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 24 of 30 The real challenge for Carnival and other cruise lines could come much later. Even if the housing-market slowdown gets worse, it will take time before it is reflected in people's spending. That means this year's cruise may not get canceled, but next year's could be. Another challenge: New regulations set to go into effect at the end of the year (though they could get delayed) will require U.S. cruise passengers to carry a passport to travel to Canada, Mexico, the Caribbean, and Bermuda. Only about a fifth of U.S. citizens carry a passport, in part at least because of the hassles of processing, which can take up to six weeks. That means a lot of people will simply opt to stay stateside. Since the new regulations will affect air travel, too, there could be lots of competition among airlines, resorts and cruise lines for passport-holders with itchy feet. That means next year could be great for travelers looking for deals on cruises, but lousy for the cruise business. 22. New regulations set to go into effect at the end of the year (though they could get delayed) will require U.S. cruise passengers to carry a ______ to travel to Canada, Mexico, the Caribbean, and Bermuda. a. travel guide b. drivers license c. credit card d. passport Correct Tech Time By JUSTIN LAHART March 24, 2006; Page C1 http://online.wsj.com/article/SB114316350686507013.html Companies have been cautious about spending money on new equipment in recent years, and they've been especially cautious about spending money on technology. But chief financial officers suggest that might be changing. When the Commerce Department releases its February durable-goods report today, economists polled by Dow Jones Newswires and CNBC expect it will show that overall orders for durable goods (nonperishable items like backhoes and sheet metal) will bounce up by 1.5% from January's level. But coming up with a decent estimate for this report is a real crapshoot. In January, the economists thought it would slip by 2.5% and it fell by 9.9% instead. That's one reason why traders and economists perusing the report tend to quickly gloss over trends in overall orders and focus on smaller details. Of particular interest are figures for capital-equipment orders, excluding defense equipment and aircraft, both of which can be incredibly lumpy. These orders are a good guide to how much money companies are spending on new equipment. To date, this spending has been less-than-stellar. Even though companies have been flush with cash, they've concentrated spending on replacing old equipment. Spending on technology has been especially sluggish. Its share of overall business spending has fallen. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 25 of 30 Last year, orders for tech equipment represented 46% of the overall dollar value of nondefense capital orders excluding aircraft, versus 53.4% in 2000. Companies may be about to loosen the purse strings, however. In a survey collected earlier this month, John Graham, a professor at Duke's Fuqua School of Business, found that U.S. chief financial officers expect their capital spending to be 6.5% higher over the next 12 months than it was over the past 12 months. Three months earlier, the CFOs pegged that rate at 5.7%. Tech-spending plans saw an even bigger bump. The CFOs expect to spend 8.4% more on tech in the next 12 months, compared with an expectation in the earlier poll that yearahead spending would rise by 4.6%. Another reason for the more optimistic spending plans, thinks Mr. Graham, is that warm weather this winter meant that fears of a severe energy crunch were allayed. He also thinks that companies are running out of opportunities to defer spending on technology by eking out more productivity from the tech equipment they already have. 23. Last year, orders for tech equipment represented ___ of the overall dollar value of nondefense capital orders excluding aircraft, versus 53.4% in 2000. a. 26% b. 46% Correct c. 64% d. 76% Questions 24 – 26 from Personal Journal, Section D Curing Teen Night Owls: Doctors Probe Why It's Hard For Many Kids to Get Up By TARA PARKER-POPE March 21, 2006; Page D1 http://online.wsj.com/article/SB114289729715903449.html Staying up late and sleeping until noon usually seems like normal teenage behavior. But there's increasing concern among doctors that many teens may actually be suffering from a little-known sleep disorder. The problem, called delayed sleep phase syndrome, isn't well known and is often underdiagnosed, but it may afflict anywhere from 360,000 to several million teens and young adults, according to a 2004 review article in the medical journal Sleep. One of the gravest concerns, researchers say, is that it is often misdiagnosed as attention deficit disorder, depression or a behavioral problem that is treated with prescription drugs. The sleep disorder, however, can usually be treated without drugs. DSPS is believed to be the result of the body's internal clock -- called the circadian system -- getting stuck in the wrong place, causing kids to stay up late. As kids enter puberty, circadian rhythms that affect sleep begin to change, which is why most kids' bedtimes shift about an hour later as they get older. But for reasons no one understands, some kids experience more dramatic changes as their internal clocks shift forward too far. Those kids can't fall asleep until the early hours of the morning, but still have to get up early for school, so they have to get by on just a few hours of sleep each night. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 26 of 30 It isn't clear why this happens. It may be hereditary. External factors may also play a role. As kids get older, schools start earlier, and homework loads and extracurricular activities increase, often forcing kids to stay up later than normal. Every adolescent has to deal with these pressures, but in some kids, the changes may upset the circadian system, causing it to essentially get stuck in a place where sleep is consistently delayed. "The parents get stigmatized as not having control over their kids when they can't get them to school in time," says James Wyatt, co-director of the sleep-disorders center at Rush University Medical Center in Chicago who is conducting research looking for ways to better diagnose the disorder. "Children themselves get stigmatized as avoiding school or lazy. There's a lot of baggage associated with it." One of the biggest challenges of delayed sleep phase syndrome is getting the right diagnosis. Sleep problems aren't usually on the radar screen of pediatricians, school counselors or parents. "If teachers were more aware and if parents more aware that they should go to a sleep specialist, then it's usually pretty easy to fix," says Lawrence MacDonald, medical director for the Sinai-Grace Hospital Sleep Disorders Center in Detroit. One of Dr. MacDonald's patients is a 17-year-old Grosse Pointe, Mich., boy whose grades started falling two years ago. After making straight A's in junior high, the teen started bringing home low C's from high school. He was often unable to pay attention in class, and complained of constant fatigue and feeling overwhelmed. After visits with the school counselors, the pediatrician and a psychiatrist, he was diagnosed with depression and started therapy. But the psychiatrist eventually said he didn't seem depressed and suggested his problems at school might be due to ADD. He was given the drug Strattera. His mother, a nurse, heard about Dr. MacDonald after talking with a colleague who had recently attended a medical seminar with the doctor. After hearing about the teen's sleep troubles, Dr. MacDonald suspected the boy might be suffering from DSPS. When the teen tried to go to bed at a normal time, he would lie awake for hours, or get up and play on the computer or watch TV. He would finally fall asleep around 4 a.m., only to be awakened at 7 a.m. for school. The cycle lasted about two years before he was correctly diagnosed. Short-term use of melatonin, a hormone that influences sleep patterns, may help, but the problem can return when the treatment is stopped. Prescription sleeping aids also can offer short-term relief, but they typically aren't recommended for adolescents. A nondrug treatment called chronotherapy can be used to "re-set" the body clock. Chronotherapy essentially "winds" the body clock forward three hours at a time, moving the child's bedtime around the clock until he or she ends up with a "normal" bedtime. For instance, for a child who can't fall asleep until 4 a.m., the bedtime is first delayed until 7 a.m., and the child is allowed to sleep until about 3 p.m. The next day bedtime is delayed another three hours, this time until 10 a.m., and the child is awakened at 6 p.m. The process continues, with bedtime moving around the clock to 1 p.m., 4 p.m., 7 p.m. and 10 p.m. until the desired bedtime is reached. Windows are taped up and phones turned off so midday sleep stretches won't be interrupted. Parents typically have to sacrifice sleep themselves and take turns staying up late and helping kids pass the time in the middle of the night. The treatment typically takes about a week, so a parent can choose to do it during a school vacation. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 27 of 30 24.______ is believed to be the result of the body's internal clock -- called the circadian system -- getting stuck in the wrong place, causing kids to stay up late. a. DSPS Correct b. DESP c. ADHD d. ESPN Size Doesn't Matter Anymore In Online Purchases By MYLENE MANGALINDAN March 22, 2006; Page D1 http://online.wsj.com/article/SB114298684939704637.html Internet-only deals are increasingly turning the Web into a virtual bargain basement for big-ticket items from snowblowers to HDTVs. The offers are stoking a marked change in consumer behavior. For years people have embraced the practice of buying small and easily-packaged items, such as books, online. But purchasing big, costly products after merely viewing them on a computer screen has been much slower to catch on. In recent months, however, a number of retailers have noticed a significant jump in online sales of big-ticket items, like refrigerators and treadmills. Overall, total revenue from online sales of large items, including furniture, appliances and other equipment rose 34% during the most recent pre-Christmas holiday period (Nov. 1-Dec. 25, 2005) from a year earlier, according to research firm comScore Networks. Electronics retailer Best Buy Co. says sales on its Web site in December grew more than 40% from December 2004, with appliances such as big-screen television sets selling particularly briskly. In fact, Best Buy tallied that TV sales on its Web site grew three times as fast as TV sales in its stores in 2005 from a year earlier. Companies such as Sears Holdings Corp., sporting equipment retailer Cabela's Inc., and Wal-Mart Stores Inc. now report selling hefty items like treadmills, log cabins and mattresses on their Web sites. Some retailers believe that the increased complexity of products such as TVs and washing machines has sent more consumers to the Internet to conduct research -- and many end up placing an order while they're online. Many manufacturers and online retailers have also put better systems into place so that online orders can be shipped to the customer directly from the manufacturer. To entice consumers further, some online retailers are offering to pay the shipping costs. Jeff Elliott, a 46-year-old building-materials project manager in New Palestine, Ind., purchased a $2,700 42-inch plasma-screen television set late last year from Best Buy's Web site, and about a year ago he bought a $1,100 Bose audio system with speakers and subwoofers online. Mr. Elliot says he bought the large items over the Web to spare himself from "breaking my back, or taking a chance of breaking something" by having the retailer deliver his big purchases to his home. He adds that if Internet sites are willing to do the "heavy lifting" with big items, he's all for it. All of this is a boon to consumers as some retailers, eager to promote online sales of large items, offer more Internet-only specials related to big stuff. Target Corp.'s Web site is offering free shipping on select furniture and patio furniture through Saturday. J.C. © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 28 of 30 Penney Co. offers discounted beds, bedroom furniture sets, patio furniture, mattresses, tables and chairs on its Web site. Home Depot offers no shipping charges on its patio furniture bought online. Best Buy currently has two offers centered on sizable items that can be found exclusively on its Web site. In one offer, Best Buy says it will give away a free DVD recorder with any $999-or-higher TV purchase. In its other offer, Best Buy promises a free 20-inch television set with the purchase of any large appliance priced at $999 or more. When Charley Geoly, an executive recruiter, was building a home in Menlo Park, Calif., recently, he bought 3,600 pounds of copper gutter, a 37-inch and 50-inch TV, 1,000 cabinet handles and pulls, and other items on the Internet. "What the Web gives you is much broader access" to suppliers and manufacturers, he says. "I had better selection and more easy selection." The trend differs from buying used cars and homes through the Internet, since cars and houses can't be mailed to a consumer's home. Many of the car and home sales that take place through Web sites also aren't sales at all -- real-estate and auto sites typically refer a consumer to a car dealer or real-estate agent and take a cut for making the referral. Some sites such as eBay Inc.'s eBay Motors site are exceptions, because the entire transaction, mostly used cars, takes place on the site and delivery of the used car varies widely from in-person pickup to shipment and special delivery. For the most part, actual physical sales of homes and used cars over the Web are limited. For retailers, the payoff from selling big stuff online can be huge. The average order on Costco Wholesale Corp.'s Web site, which sells many large items such as caskets and children's playhouses, is $450, according to Ginnie Roeglin, senior vice president of ecommerce and publishing. Some retailers and analysts say that big, brand-name items carry a higher price and are more generally more profitable than small products such as socks, though that varies by product. 25. Internet-only deals are increasingly turning the Web into a virtual bargain basement for _______. a. big-ticket items Correct b. small-ticket items c. cast iron items d. low tech items Finding Five-Star Child Care: States Rate Facilities in Effort to Boost Quality By SUE SHELLENBARGER March 23, 2006; Page D1 http://online.wsj.com/article/SB114307948876705908.html For decades, five-star hotels and restaurants have had consumers lining up to get in. Now comes a new consumer rating: five-star child care. Three months before her daughter Cassidy was born, Sharon Loomis put her on a waiting list for a child-care center rated "five stars" under a North Carolina quality-rating plan. A year later, Ms. Loomis is still waiting for an opening, hoping Cassidy will get in before © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 29 of 30 she herself returns to school next January. It's all worth it, says Ms. Loomis, to know she's "making intelligent decisions" about child care. North Carolina is among a fast-growing group of states offering a kind of Zagat guide to child care. Just as if they were restaurants or hotels, child-care concerns are being assigned star ratings by state regulators. Both child-care centers and family child-care homes, where a sitter takes several children into her home, post the ratings on front doors or walls and sometimes in advertising. The ratings are fast becoming the linchpin for states' drive to raise child-care quality. "It's the most significant step in improving quality that we've seen in years, and it has absolutely caught fire across the country," says Steffanie Clothier, child-care program director for the National Conference of State Legislatures, Denver. "Over the last several years, it has gone from a few states designing new systems, to half the country looking at" doing so. States implementing the plans have increased from a handful in 2001 to 14 currently. New Hampshire and Iowa are rolling out child-care quality-rating systems this month. On Tuesday, Wyoming Gov. Dave Freudenthal signed a measure into law that established a rating system. In the Albany, N.Y., area, a four-county pilot program was successfully completed recently and a statewide child-care task force is exploring next steps. The state of Washington is also developing a rating plan. In all, about two dozen states are exploring or designing ratings systems, says Anne Mitchell, a Climax, N.Y., consultant and author of a 2005 United Way study on the topic. The ratings systems evaluate facilities on such criteria as low child-adult ratios, teacher credentials, curriculum, group size, and the safety and richness of the environment. Some of the criteria have been linked in research with better outcomes in children. Most states rate both child-care centers and preschools. The state ratings help fill an information gap. In the past, the primary gauge of quality has been accreditation by the National Association for the Education of Young Children, a nonprofit professional group in Washington, D.C., whose seal of approval is regarded as the gold standard by parents, educators and facilities. But NAEYC accreditation can take years to attain; only an estimated 8% of U.S. child-care centers and preschools have earned it. While many states use NAEYC standards in setting top criteria, the tiered state rating systems provide information about facilities working their way up to accreditation. 26. State ratings systems evaluate good child care facilities on such criteria as: a. teacher credentials & curriculum Correct b. high child-adult ratios c. gourmet meals and snacks d. All of the above © Copyright 2005 Dow Jones & Company, Inc. All rights reserved. WSJ Professor Guide: Page 30 of 30