P1JW0090E5-9-A00100-1---XA ********* Composite CMY K P1JW0090E5-9-A00100-1---XA P1JW0090E5-9-A00100-1---XA AZ,CX,EE,FL,MW,NE,NY,SA,SC,SW, BG,BM,CH,CK,DA,DE,DM,FW,HL,LG 01/09/2004 s 2004 Dow Jones & Company. All Rights Reserved F R I DAY, JA N UA RY 9, 2 0 0 4 ~ VO L . C C X L I I I N O. 6 ~ H H H H $ 1 .0 0 Sales Call He Shakes Up Bureaucracy With Push to Privatize Dozens of Big Companies A Blow to the ‘License Raj’ By JAY SOLOMON And JOANNA SLATER What’s News– i 7 i i Business and Finance H EWLETT-PACKARD PLANS to resell Apple’s iPod music player and promote Apple’s online music store in a surprise partnership. The pact marks the first time Apple has sold hardware for use under another brand. H-P also said it would develop its first “digital hub” for PCs and entertainment devices. (Article on Page A3) i NEW DELHI—In March 2001, strikers opposed to the Indian government’s sale of an aluminum company threatened to fast until they died, an act of civil disobedience made famous by the nation’s founding father, Mahatma Gandhi. India’s privatization czar, Arun Shourie, was unmoved. “I said you can do what you want,” recalls Mr. Shourie, photos of Mr. Gandhi hanging on the office wall in front of him. “But we’re still not going to talk to you.” The strike folded weeks later. The sale of Bharat Aluminum Co. was a big test of Mr. Shourie’s three-year campaign to sell off the almost 250 companies owned by India’s central government. The 62-year-old former journalist is waging an economic revolution that is helping unleash India’s entrepreneurial strength. Since becoming minister of disinvestment in 2000, Mr. Shourie has taken state-owned companies once thought sacrosanct, such as InArun Shourie dia’s long-distance telephone company and its biggest auto maker, and placed them in private hands. Despite considerable opposition, he has sold off stakes in 34 state-owned companies—more than the government had divested in the previous three decades. About 200 companies remain owned, at least in part, by the central government. The government is preparing to sell oil companies, shipping concerns, and hotels. Last year Mr. Shourie also was appointed minister for communications, from which he oversees India’s fast-growing telecommunications sector. For the first time since the end of British rule more than 50 years ago, India is redefining the government’s relationship to business. The sizzling economy of the world’s second-most-populous nation is expected to expand by at least 7% in the year ending in March. Supporters of reform give Mr. Shourie a hefty dose of credit for encouraging economic change. (See related article on page A6.) For much of its modern history, India was governed by the so-called License Raj, a socialist-inspired system that required government permits for almost every aspect of business. The raj was an impediment to growth and a reason India has lagged behind China, which began its economic reforms in the 1970s. In India, companies could produce only the amount allocated to them by the government under the terms of a “license.” In order to expand or start a new product line, businesses also needed state approval. The government regulated everything from exports to foreign-exchange transactions. While much of the licensing system was discarded as India began to open its economy in 1991, the country remains burdened by a slow bureaucracy as well as inefficient state companies. Mr. Shourie and the ruling Bharatiya Janata Party argue that putting companies in private hands will make them more productive and less subject to political interference and corruption. In an important sign of progress, some of the biggest critics of privatization in the opposition Congress and Communist parties have begun privatizing companies owned by local governments in the states they control. And on a naPlease Turn to Page A5, Column 1 Notice to Readers Marketplace appears in the first section today. n i i n GM said it will continue to offer aggressive sales incentives this year but still predicts strong results. Ford also plans to present a positive outlook. (Article on Page A3) i i i The SEC and Eliot Spitzer both opened investigations into the compensation of Dick Grasso, the former Big Board chief. n (Article on Page C1) i i i The SEC told IBM and one of its employees that they are likely to face charges for allegedly helping Dollar General misstate results. n (Article on Page A3) i i i A judge in the Enron case said he would accept a guilty plea to filing a false tax return by the wife of ex-finance chief Fastow. n (Article on Page A3) i i i Retailers reported that samestore sales rose 4% in December, making the holiday season their strongest in four years. n Wholesale inventories rose in November, likely contributing to economic growth in late 2003. n (Articles on Page A2) i i i The Nasdaq rose 1.1% to 2100.25, its fifth straight gain, helped by bullish Nokia news. The industrials also ended higher. n (Article on Page C1) i i i n Nokia’s fourth-quarter profit beat expectations, helped by network-division sales. The cellphone maker’s ADRs surged 14%. (Article on Page A9) i i i n AOL is again revamping its advertising sales operation, with the group’s head leaving after only six months at the helm. (Article on Page A7) i i i n Wall Street was divided as to whether Nasdaq will succeed in luring significant volume from the NYSE in dually listed shares. (Article on Page C1) i i i The European Central Bank signaled for the first time some concern about the euro’s climb. The ECB left rates unchanged. n (Article on Page A6) i i i n Grant Thornton cut ties with its Italian affiliate over a Parmalat audit. Prosecutors named two Deloitte officials in their probe. (Article on Page A9) i i i US Airways has hired Morgan Stanley to develop alternatives, including a possible asset sale. n (Article on Page A12) i i i The FDA rejected an effort by Inamed to return silicone breast implants to widespread use. n (Article on Page A7) i i i HealthSouth investors alleged the firm’s investment bankers and auditors knew fraud existed or ignored signs of wrongdoing. n (Article on Page A12) i i i Regulators are examining if banks that financed allegedly improper mutual-fund trading may have violated securities rules. n Heard on the Street..........C3 Index/Listed Options.......C10 International News ........... A6 Markets Lineup..................C2 Media & Marketing .......... A9 Money Rates................... C13 Mutual Funds ................. C13 Nasdaq Stocks ................. C6 New Securities Issues.......C7 NYSE Stocks......................C2 Politics & Policy ............... A4 Small-Stock Focus ............C8 Technology ........................ A8 Treasury/Agency Issues.....C9 Weather Watch ............... C16 World Stock Markets..C1,C16 Index to Businesses ................................................ A8 Global Business Briefs ........................................ A12 Classifieds......................................................... C11,W9 > (Article on Page C13) i i i –Markets– Stocks: NYSE vol. 1,820,835,840 shares, Nasdaq vol. 2,615,604,613. DJ industrials 10592.44, s +63.41; Nasdaq composite 2100.25, s +22.57; S&P 500 index 1131.92, s +5.59. Bonds (4 p.m.): 10-yr Treasury t –1/32, yld 4.256%; 30-yr Treasury unch, yld 5.084%. Dollar: 106.18 yen, –0.08; euro $1.2765, +1.27 cent against the dollar. Commodities: Oil futures $33.98 a barrel, s +$0.36; Dow Jones-AIG futures 141.193, s +1.974; DJ-AIG spot 179.832, s +2.514. BLACK YELLOW MAGENTA CYAN Abreast of the Market.......C3 Amex Stocks .................... C9 Bond Data Bank............. C10 Commodities .................. C12 Corrections ....................... A2 Credit Markets ................C13 Currency Trading ............. C10 Deals & Deal Makers....... C5 Directory of Services.......C13 Dividend News.................. C3 DJ Specialty Indexes ...... C10 Earnings Digest............... C13 Economy............................A2 Editorials ................... A10,11 Health................................A8 Composite I N D EX i 7 i i World-Wide Conflicting Interests Mad-Cow Scare Thins the Herd At Cattle Auction 7 n NINE U.S. SOLDIERS DIED as a medical helicopter crashed in Iraq. The Black Hawk, marked by a red cross, was hit by a rocket near Fallujah, a witness said. In Baghdad, a missile struck a giant C-5 transport with 63 aboard, but it made it back to the airport safely. Such incidents are worrisome as the U.S. embarks on a massive rotation of occupation troops. The U.S. said one soldier died after Wednesday’s mortar attack outside Baghdad that wounded 30 others. Powell disputed a think-tank report that says prewar Iraq posed no imminent threat to the U.S., defending his February U.N. arms presentation but acknowledging no “smoking gun” proof of Baghdad links to al Qaeda. i i i n The U.S. and Turkey have struck a deal to reopen Incirlik air base for Iraq operations, and the Pentagon has told Germany it will begin withdrawing troops next year in a major post-Cold War realignment. (Page A4) i i i n Palestinians will forgo a two-state solution and force Israel into a losing demographic race if it imposes a unilateral boundary, Qureia warned. Israel is planning to speed up the relocation of 20,000 Jews from Ethiopia. i i i n Health-care spending rose 9.3% in 2002, steepest rate of growth in the U.S. economy again. It is now 14.9% of GDP. With 43.6 million uninsured, states and localities are perforce being creative. (Column 4 and Page A2) n Disability rates are up sharply for working-age Americans over the past two decades, and obesity appears the prime suspect, Rand says. (Page A7) i i i n Farmed salmon have more dioxin and other potential carcinogens than wild ones, a Science study says. But the FDA said diets shouldn’t change. i i i n Britain broke tradition and ended secrecy on airlines it bans, responding to an outcry after the Flash Air crash off Egypt on Jan. 3. (Page A8) i i i n Libya agreed to an on-again, offagain compensation deal for a 1989 French airliner bombing over Africa, a lawyer for victims’ kin announced. i i i n Musharraf told Kashmiri leaders he won’t betray them in talks with India. The end of Indian control has been a sacred cause for Islamabad. n Pakistan attacked al Qaeda forces near Afghanistan. Separately, Saudi Arabia banned a charity’s head for suspected ties to terrorists. (Page A6) i i i n Thailand’s security chief said unrest in a mainly Muslim southern province is being abetted by foreign Islamic militants allied to al Qaeda. i i i n Bush plans to call next week for sending a man to Mars and building a permanent moon base as he seeks a grand touch for his re-election race. n Pressure continued to drop aboard the space station and replenishment of the air supply may be needed soon. A Russian air purifier is suspected. i i i n Charges of caucus-packing flew as Democrats neared their first primary contest with the race tightening and many in Iowa undecided. (Page A4) i i i n Mexico’s Fox expressed guarded praise for Bush’s immigration proposals, saying that much was to his liking but that more work is needed. i i i n Powell is to attend Georgia’s presidential inauguration Jan. 25. A Russian-backed anti-Tbilisi autonomous area declared a state of emergency. i i i n The NRC was asked to delay a reopening inspection of Ohio’s DavisBesse reactor after technicians improperly took a safety system offline. i i i n The flu appears to have peaked in most U.S. states, having killed 93 children, the CDC reported. A second wave is possible but seen as unlikely. i i i n New York officials want the Boys Choir of Harlem’s founder removed after an inquiry found he failed to report child-molestation allegations. i i i n A Wisconsin Catholic bishop barred any state or federal lawmaker who supports abortion rights from Communion in the Diocese of La Crosse. —Online Today— Campaign Journal: Democratic presidential hopefuls want to take on rival Howard Dean one on one, but find getting there isn’t easy, Al Hunt says. i i i n The Macro Investor: Fed Governor Ben Bernanke favors giving much clearer signals on future interest-rate policy, says Steve Liesman, but would that be healthy for markets? i i i n Your Top Picks: From Iraq to Arnold, see the most-read stories of 2003. i i Why a Brokerage Giant Pushes Some Mediocre Mutual Funds i In a Big South Dakota Barn, Organizers Press Ahead; ‘A Little Hesitant Here’ 7 7 Jones & Co. Gets Payments From ‘Preferred’ Vendors; Cruises and Safaris, Too Mrs. Wessels Loses on Putnam By MICHAEL J. MCCARTHY FORT PIERRE, S.D.—Sitting in his truck outside the large maroon barn here last week, Roger Theobald worried he might have to reload the 51 calves he had brought to sell and drive them back to his small ranch. Kenny Kooima had driven 268 miles from his Iowa farm to the deep freeze of South Dakota with dreams of amazing bargains: fine young calves for 50 cents a pound—half the going price just weeks ago. Dick Hansen, who with his family runs a large cattle operation in Harrold, S.D., debated whether even to show up with his 400 calves, the single biggest herd at the auction. A man in a green flannel jacket stepped in the front door, looked around and abruptly left saying, “I don’t want to be a guinea pig.” For the Fort Pierre Livestock Auction, whose origDennis Hanson inal sale barn was built just after World War II, this was the biggest crisis since it burned to the ground a quarter century ago. The auction was making a bold attempt to stage one of the first large cattle sales in the country since last month’s discovery of mad-cow disease in the U.S. Ranchers had spent the past year getting their calves ready to bring to market for the first big regional auction of the year. Most of the potential buyers were feedlots, ranch operations that fatten cattle in preparation for slaughter. Then, after the Dec. 23 announcement that madcow disease had struck a Holstein halfway across the country in Washington, the phone lines began lighting up at Fort Pierre Livestock. Rancher after rancher canceled. And with just four days left before the opening gavel, the auction house was facing a drastically reduced inventory: 4,000 cattle instead of the 6,500 originally advertised. Cancellations kept coming. By New Year’s Day, the day before the auction, it appeared that only 2,000 cattle would be on hand. Maybe not that many. At that point, Fort Pierre could have called off the auction, but Dennis Hanson and Johnny Smith, partners in the business, decided to press ahead. Please Turn to Page A12, Column 1 By LAURA JOHANNES And JOHN HECHINGER Like many who bought poorly performing Putnam mutual funds in recent years, Nancy Wessels lost big. One of her investments, Putnam Vista fund, dropped 40% from when she bought it in April 2000, near the stock-market peak, until she sold it in May 2002. That performance was worse than 80% of similar stock funds. What the 80-year-old widow’s broker, Edward D. Jones & Co., never told her was that it had a strong incentive to sell Putnam funds instead of rivals that performed better. Jones receives hefty payments—one estimate tops $100 million a year—from Putnam and six other fund companies in exchange for favoring those companies’ funds at Jones’s 8,131 U.S. sales offices, the largest brokerage network in the nation. When training its brokers in fund sales, Jones gives them information almost exclusively about the seven “preferred” fund companies, according to former Jones brokers. Bonuses for brokers depend in part on selling the preferred funds, and Jones generally discourages contact between brokers and sales representatives from rival funds. But while revenue sharing and related incentives are familiar to industry insiders, Jones typically doesn’t tell customers about any of these arrangements. The situation “gives you the feeling of being violated,” says Mrs. Wessels’s son, DuWayne, a Waterloo, Iowa, real-estate broker. He says he found out about the fund-company payments to Jones from his mother’s new broker when the son moved her $300,000 account to another firm in 2002. Jones, whose storefront offices are common across much of the country, is one of the nation’s largest distributors of mutual funds, with 5.3 million individual customers who hold more that $115 billion in fund shares. The firm has earned respect for its advocacy of conservative, buy-and-hold investing, and it hasn’t been tarnished by the scandals sweeping Switching Sides One important player’s evolution on mutual-fund fees says a lot about the industry. Article on page C1. the mutual fund and brokerage industries. But Jones, based in St. Louis, is also among the nation’s leading practitioners of a little-understood fund-sales practice now under scrutiny by federal securities regulators. In the industry it’s known by the bland name of “revenue sharing”: Fund companies give brokers a cut of their management fees to induce them to sell their products. Critics call it “pay to play.” “The deception is that the broker seems to give objective advice,” says Tamar Frankel, a law professor at Boston University who specializes in mutualfund regulation. “In fact, he is paid more for pushing only certain funds.” If properly disclosed, revenue sharing is legal. But the practice has come under increasing scrutiny as part of the current mutual-fund scandal, and it is now unclear precisely what disclosure is required. In November, Morgan Stanley agreed to pay $50 million to settle SecuriPlease Turn to Page A5, Column 1 Preferential Treatment Making gains... And playing favorites Edward D. Jones & Co. revenue, in billions Percentage of stock and bond funds favored by Jones that beat comparable funds over five years, ended 2003 $2.5 American Funds 2.0 87% Hartford 62% Lord Abbett 1.5 62% Van Kampen 1.0 36% Putnam 33% Goldman Sachs 0.5 32% Federated Investors 0 1998 1999 2000 2001 2002 30% Sources: SEC filings; Morningstar Inc. State and Local Programs Seek to Aid Uninsured Lack of a Federal Solution Prompts Steps to Fill Gap; Looming Campaign Issue More Vulnerable Number of uninsured in the U.S., in millions 40 By LAURIE MCGINLEY MUSKEGON, Mich.—States and local communities, frustrated by the federal government’s failure to stem the growing ranks of the uninsured, have begun experimenting with their own initiatives to expand health coverage, especially for lowincome employees of small businesses. Many of the initiatives are small and still nascent, started with seed money provided by state and federal governments or nonprofit foundations. They could be snuffed out if the states’ beleaguered financial picture doesn’t substantially improve. Medicaid, the big statefederal program for the poor, already has been cut in many states. But in states as diverse as Maine and California, and in communities as different as Galveston, Texas, and this one, state and local governments are taking tentative steps in a challenging healthcare environment to provide coverage for some low-income workers. The question 30 20 10 0 1987 ’90 ’95 ’00 ’02 Source: Census Bureau of how to aid the 43.6 million Americans estimated to lack health insurance is a growing subject of debate in a presidential election year. Maine, for instance, is developing a health plan called Dirigo — Latin for “I lead” — for thousands of residents whose employers don’t offer health coverage and who are ineligible for Medicaid. Pa- tients are expected to begin signing up next summer. Other communities and states, including Rhode Island, have started providing subsidies to workers who can’t afford their share of the premiums for employer-sponsored policies. In New York, Gov. George Pataki is promoting Healthy NY, a program designed to help small businesses and their employers afford insurance by requiring private carriers to offer low-cost bare-bones health plans. California has taken a different tack, passing a new law requiring hundreds of employers to provide coverage or pay a fee so the state can do it. That law exempts small businesses. Health-care coverage and affordability are emerging as big issues in the 2004 presidential campaign. Just yesterday, the federal government reported that health-care spending rose to $1.6 trillion in 2002, a jump of 9.3%. Federal, state and local governments accounted for almost half of that spending—$713 billion. (See related article on page A2.) Democratic contenders, meanwhile, have seized on the swelling numbers of uninsured as a stress point amid the broader prosperity. Every major Democratic presidential candidate has put forth a plan costing hundreds of billions Please Turn to Page A5, Column 4 I N S I D E T O D AY ’ S J O U R N A L It’s Business, After a Fashion China Syndrome As the apparel industry grows more consolidated and cutthroat, many couture houses demand that their creative geniuses show some business savvy as well. Design schools are snapping to it. PAGE A7 Chinese demand for cars is hotter than ever. Prices should go up. They go down. What’s up? A9 What Is the Speed Limit In Afghanistan? Kabul has a new constitution, and the U.S. and Europe have a new source of friction: how fast to go down the rutted road to nationhood. A6 Seeds of a Scandal Back in the days of disco, John Freeman wrote a law-review article titled “The Use of Mutual Fund Assets to Pay Marketing Costs.” Sound dull? Not anymore. FUND TRACK, C1 Prefab Homes Go Upscale, But Are They ‘Architecture’? The Pythago-Stee-rike! Theorem Pajama Parties for Grown-Ups There is a thin line between math geek and sports freak. SCIENCE JOURNAL, A7 P1JW0090E5-9-A00100-1---XA India’s Economy Gets a New Jolt From Mr. Shourie WSJ.com * * * * * * * * * Finicky Traveler Chills At Miami’s Chic Asian Hotel 3316365 !