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Horizon skipper is a big fan of boxing

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People – June 2006

Horizon skipper is a big fan of boxing
by Chris Richter

The business Chuck Raymond is in is on the sea. But the president and chief executive of Horizon Lines Inc. has spent much of the last three years on the road and in meetings. Since 2003, the Charlotte-based container-shipping and logistics company has been through two leveraged buyouts and an initial public offering. “It’s been a pretty exciting 31 months.”

The Carlyle Group, a Washington, D.C.-based private-equity company, bought Horizon from Jacksonville, Fla.-based transportation giant CSX for $300 million. A year later, New York-based Castle Harlan, another private-equity financier, bought it for $650 million. Horizon went public last September. Castle Harlan, its largest shareholder, owns about 37%.

Founded in 1956 by Tar Heel trucking executive Malcolm McLean, Horizon is a remnant of Sea-Land Service, the company that pioneered container shipping. Horizon carries more than a third of the container cargo shipped between ports in the lower 48 states and Hawaii, Alaska, Puerto Rico and Guam. It has 16 ships, owns or leases nearly 23,000 containers, employs about 1,800 and reported about $1.1 billion revenue last year. Customers include Wal-Mart, Lowe’s, Toyota, U.S. Postal Service and Procter & Gamble.

Raymond, 62, earned a bachelor’s in marine transportation from the U.S. Merchant Marine Academy in 1965. The Providence, R.I., native started at Sea-Land as a deck officer in the North Atlantic, then moved to warmer waters as a vessel superintendent in San Juan, Puerto Rico, in 1967 before going into management. Winston-Salem-based R.J. Reynolds Industries bought the company in 1969 and spun it off in 1984. CSX bought it two years later. When the company sold Sea-Land’s international business to Denmark’s Maersk in 1999, he became president and CEO of domestic shipper CSX Lines. He kept the job after Carlyle bought the business and changed its name to Horizon.

Raymond says his biggest challenge is maintaining growth. Horizon has had 17 straight quarters of increased earnings. In April, it signed a 12-year lease on five ships twice as large as and a little faster than its current craft. They’re what he wants the rest to look like within 10 years. “Today, we’re operating about eight different kinds of ships: different sizes, different years, different capacities. We want to look a little more like the Southwest Air model, get our costs down and operate with a standardized fleet.”

Home wreckers

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Home wreckers

Before putting up a multimillion-dollar monster manse at the right address, builders often tear something down.
by Frank Maley

David Smoots steers a white Chevy Suburban along the tree-lined streets of his neighborhood on Charlotte’s south side. Many houses in Myers Park went up well over half a century ago, but a lot are vanishing, pushed down by bulldozers and replaced by giant homes that sprawl and tower. Even old brick houses that look stately and sturdy are on shaky ground in a market that values where they stand more than the traditions they stand for. In parts of Myers Park — two to three miles from the tall bank headquarters downtown — new homes outnumber originals.

It’s happening across North Carolina and the nation. From the beaches to the mountains, some of the state’s older neighborhoods convulse daily as construction workers tend the birth of behemoths sired by a strong economy and changing life-styles. Neighbors watch warily as one lot after another is cleared and rebuilt. Tyvek is everywhere. Consumers who want higher ceilings, more-spacious kitchens and other amenities are driving the demand for bigger houses. But in many cases, the catalysts are builders who buy property, tear down what’s there and put up new houses on speculation that a buyer will emerge.

When new houses dwarf old, builders hear complaints from those who are overshadowed.

Smoots has nudged the trend along as a home buyer — his 7,000-square-foot house replaced a 1,600-square-foot one — and as director of sales for Charlotte-based Simonini Builders Inc. With 109 employees and more than $100 million annual revenue, Simonini is among the largest builders in Charlotte tearing down houses and replacing them. But it has plenty of competitors, bigger and smaller. A block in Myers Park might have the signs of three or four builders in its front yards. Simonini started in 1973 as a builder of customized homes, but it wasn’t until the mid-1990s that it more than occasionally did teardowns. Smoots is its point man for them.

Putting up houses in older neighborhoods is trickier and often costlier than building on virgin land in the suburbs. The lots are frequently more expensive. The equation also is more likely to include time spent working around trees, calming fears of nearby residents, driving equipment in and out with minimal damage to landscaping and neighborhood harmony and solving problems caused by each lot’s peculiarities. “It pushes the cost up because your productivity goes down,” says David Batie, associate professor of construction management at East Carolina University.

When you’re done, there’s a good chance someone isn’t going to like what you did. Smoots stops his Suburban at a home developed by another builder — a two-story, brick-and-stone, 5,600-square-foot house with a tall, steep roof, bordered on three sides by low-slung red-brick ranch houses. “Quite frankly, I don’t think it’s in keeping at all with the neighborhood. I don’t think that will age well. I am ticked off about stuff like that. I don’t appreciate that. That’s an opportunist right there.”

Builders might disagree on what’s appropriate, but as long as people are buying new houses in old neighborhoods, they will try to satisfy the demand. For the deals to work financially, builders say they need to be able to construct houses bigger than those they tear down. It’s not unusual for a replacement to be more than double the size of the original.

Homeowners often have differing views about what’s happening, too. Some abhor the bigger houses, which they think make older homes seem puny and destroy the character of a neighborhood, and they lament losing trees to construction. Those issues can create public-relations problems for builders. But neighbors often welcome how the new homes boost property values, if they can afford the tax increases.

And when their homes go on the market, selling to a builder is often the easiest negotiation. Although builders sometimes pay less than people who want the house as a residence, homeowners don’t have to wait while potential buyers fuss over every flaw. “If it is a teardown candidate, we don’t care what it looks like,” Simonini CEO Ray Killian says. “We don’t care if the electricity works. We don’t care if the plumbing works. There’s no real-estate commission, and we can close in a relatively short period of time, so it’s a very quick, smooth, clean transaction for the seller.”

Raindrops patter against the taut cloth of a black umbrella as Smoots walks through a wooded yard in south Charlotte’s Foxcroft neighborhood. A friend tipped him that the owner might sell her house, so he has come to evaluate it for Simonini. He guesses it might be worth about $600,000. Simonini would tear down the 28-year-old, 4,500-square-foot home and replace it with a 6,000-square-foot one that would sell for maybe $2 million. In its favor, the lot sits on higher ground than its neighbors — good for draining rain and swelling buyers’ egos. He walks around back, noting that the property is trapezoidal, a challenge because it means less room in back than in front. A new, bigger house would stretch closer to the rear property line than the old one, which would eliminate some trees. Then he sees what could be a deal breaker: a narrow creek so close to where the new home’s back wall would be that it might not leave room for a swimming pool. If Simonini is going to get $2 million from a buyer, a pool isn’t an option Smoots can forego. Prospective customers will look for reasons not to buy, and so does he. “I’m trying to wear their shoes and wear their hat and say, ‘What is it that is not appealing to me versus the next one I’m seeing down the street?’”

When Smoots discovers a lot worth pursuing, he negotiates price while researching deed and zoning restrictions. If everything is acceptable, he gets it under contract and starts reviewing some of the 50 house plans in the Simonini files to see which fits the lot best. Or he might have new plans drawn. If he settles on an existing design, he often sends it to an architect for site-specific modifications, some aimed at making the house fit in with the neighborhood. Smoots says he tempers the drive to maximize profit on a job with a desire to build good will that could lead to other projects in the neighborhood. “You can have more by taking less.”

No-interest loans help builders sell homes with huger kitchens, higher ceilings and heftier prices.

If a customer comes to him while the lot is under contract but before closing, he’ll show it and maybe the plans he has picked out, but he doesn’t usually beat the bushes for buyers that early. “It’s not on my Web site. I don’t own it, so I don’t market it. When I close, I put a sign in the yard.”

Builders can lower their risk by lining up a buyer before closing on the property and building a customized house. But in a hot market — when the risk of not selling quickly is lower — that’s not always ideal, Smoots says. The profit margins are higher on speculative projects. “I can build a house so much faster as a spec than I can dealing with you and your wife and all your changes and uncertainties and having to wait. Even though you’re paying the note, you’re costing me in resource time. My builder is still having to deal with you for 12 months instead of me being done in nine.”

To turn a profit, Smoots figures his company needs to build houses that will sell for three or four times the price of the lot. Teardowns and rebuilds often include costs that can be hard to quantify, such as the hours or days spent on public relations. Smoots knows that neighbors often grumble when a builder starts work on a teardown, so he visits them to explain what’s going to happen, leaving his card and urging them to call if they have problems.

A lot of his customers work for Bank of America or Wachovia and want to live near downtown. The urban core is the magnet in Raleigh, too, where the hot neighborhoods include Country Club Hills, Coley Forest and Five Points, says Ken Kirby, director of political affairs for the Home Builders Association of Raleigh-Wake County. But in Greensboro, the golf-course communities of Irving Park and Sedgefield have seen more teardowns than other neighborhoods, says Cheryl Collins, executive officer of the Greater Greensboro Builders Association. In New Hanover County, the ocean is the draw. “It’s not unusual to find a million-dollar house, say on Wrightsville Beach, being bought and torn down,” says Donna Girardot, executive officer of the Wilmington-Cape Fear Home Builders Association.

In Charlotte, one house in Myers Park has come to symbolize the teardown trend for many residents. Three years ago, an owner demolished a 5,900-square-foot house at the corner of Princeton Avenue and Queens Road West and replaced it with a 17,000-square-foot stone giant that has been variously described as “beautiful,” a “monstrosity” and “that thing at Princeton and Queens Road.”

It’s a jarring sight, even in a neighborhood boasting a wide range of architecture, including Colonial Revival, Tudor Revival and bungalow. Myers Park was built in stages, starting in 1911, and was a home of tobacco magnate James Buchanan Duke, founder of Duke Power and Duke University.

Many buyers want the prestige of a Myers Park address. But the old houses there — and in other established neighborhoods — often don’t fit their lifestyles, so they opt for a new home that’s usually much bigger. In the past 30 years, the average size of a new single-family house in the U.S. has increased 39% to 2,349 square feet. “Houses are just bigger today than they were in the 1940s or ’50s, when a lot of these houses were built,” says Killian, who grew up in Myers Park and lives there today. “More bathrooms, three-car garages, sports courts, basketball courts, gazebos, pavilions, gardens, pools. In the ’40s, that was not really on the agenda when everybody was coming back from the war.”

Older neighborhoods offer status and location, though the houses often aren’t spacious enough for buyers.

Teardowns also have been fueled by low interest rates and the increasing popularity of interest-only loans, which allow borrowers to delay payment of principal. Typically, they are used by those anticipating a big boost in their income or hoping to refinance or sell their house quickly. In 2000, interest-only loans were just 1.8% of new mortgages in North Carolina, excluding refinancings, according to LoanPerformance, a San Francisco-based mortgage-information provider. By last year, that number had shot up to 28.7% in North Carolina and 34.8% in the Charlotte metro area. Nationally, 34.2% of new loans are interest-only.

Such loans can help people manage what is often the high cost of a new home on a teardown site. In Myers Park and elsewhere, million-dollar houses are less of a novelty than before. They were about 0.6% of the nation’s houses in 2000. But in 2003, the latest statistics available from the U.S. Census Bureau, they made up 1% of all homes. In North Carolina, their share was smaller in 2003, but the increase has been more dramatic — 0.14% to 0.34%

Just as builders have jumped at the opportunity to demolish older houses and erect new ones, homeowners in neighborhoods where that’s common have reacted, as individuals and in groups. Sometimes those responses help builders. Sometimes they don’t.

On the plus side, teardowns can spur people in changing neighborhoods to hire builders to improve their houses. Across from a house Simonini is building on Princeton Avenue, Bill Musgrave is reluctantly adding 2,000 square feet to the front of his 5,400-square-foot home. The houses on both sides of his recently were torn down. One of the replacements has been built; the other is under construction. Both extend more than 30 feet closer to the street than his. Musgrave, who owns eight Saturn car dealerships in North Carolina, hired Simonini to bring his house in line with his neighbors’ and raise its value. “I felt like if I didn’t improve my house to make it more competitive with what was being built around it, then I would basically limit my house to the value of the lot.”

While the Musgraves keep up with the Joneses, residents of Hermitage Court in Myers Park asked the City Council to designate their street a historic district, which can slow builders’ projects and make their work more difficult. The district, approved in April, is a response to nearby development — epitomized by what Hermitage Court residents call “the castle” at Queens and Princeton, about two miles away. “The only things that are missing are a drawbridge and a moat,” quips Edwin Peacock III, who led Hermitage Court’s effort.

That designation can’t prevent teardowns. But the Charlotte Historic District Commission can delay a building permit for a year, administrator John Rogers says. “It makes people think twice about doing spec demolitions and rebuilds in the district, because that’s a year delay in your turnaround time.” If a builder does proceed, he must meet nine commission criteria, some of which are subjective, such as “the overall relationship of the project to its surroundings.” Put simply, Rogers says, “you have to make it look like it belongs there.”

At the other end of the spectrum, owners of the 24 houses on Sherbrooke Drive, a Charlotte cul-de-sac about five miles from Myers Park, could become a builder’s fondest dream. They put their combined 17 acres on the market last year and hope to sell to a developer who could build 80 condominiums. They were motivated by dollar signs, as well as the fear that builders might buy their houses one by one and slowly change the nature of the neighborhood.

Two years ago, a builder bought a vacant lot adjoining the 50-year-old neighborhood and wanted to buy houses next to it. But the neighborhood association denied a request to waive a rule barring houses taller than one story. However, people began talking about selling their houses together to get more than they could individually, which they guessed would be about $250,000 each. They want to get double that.

While Sherbrooke waits for a buyer, work goes on in Myers Park. Other parts of Charlotte and the state probably also will change, though Killian isn’t sure how much longer the numbers will work for builders. “The sales prices of these teardown houses, meaning really just lots, are getting so high, can you put the proper house on there and still be in a marketplace that’s acceptable for some buyer to buy one?” Killian asks. “That’s the $64,000 question.”

Rising interest rates or a recession could slow the teardown revolution, too. If opposition to the big houses grows, local regulations also might halt it. So far, though, nothing has dampened demand for bigger houses on expensive lots in established neighborhoods. “I’m in the business every day,” Killian says. “And I’m shocked at the amount of money that people have and are willing to spend.”

Wachovia CFO’s job is a Wurtz case scenario

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People – May 2006

Wachovia CFO’s job is a Wurtz case scenario
By Chris Richter

Tom Wurtz insists he’s “not a terribly exciting person.” He’s a number cruncher and since February has been Charlotte-based Wachovia Corp.’s chief financial officer, in charge of budgeting, financial reporting, treasury management, taxation and other brain-busting duties at the nation’s fourth-largest bank.

Wachovia promoted him from treasurer to replace Bob Kelly, who resigned to become CEO of Pittsburgh-based Mellon Financial. Banking analyst Nancy Bush of Aiken, S.C.-based NAB Research LLC says Wurtz is “scary smart.”

Smart enough to know he had made a mistake on his first career choice — and the second. “Like George Costanza, I always thought it would be fun to say I was an architect.” Unlike the Seinfeld character, Wurtz, 44, actually studied to be one — for a year at Kent State University before transferring to West Virginia University to study petroleum engineering. “About halfway through the program, I realized that oil tends to accumulate in some unattractive places.” He earned a bachelor’s in engineering there in 1984 and an MBA from Arizona State University in 1986.

He worked for the California legislature as a consultant for a state agency similar to the federal Government Accountability Office. Part of his job was researching ways to coordinate federal and state medical-insurance programs. In the late ’80s, fascinated by the savings-and-loan crisis, he went to work for the U.S. Office of Thrift Supervision in Thousand Oaks, Calif. After three years, he moved to California Federal Bank as vice president of asset-liability management, helping the bank restructure.

California Federal teamed up with a small software company to develop software that forecast how changes in interest rates would affect an institution’s earnings. He became an expert on the software and in 1992 joined Berkeley, Calif.-based Risk Management Technologies as a senior consultant.

Two years later, Wurtz, who didn’t want to raise a family in California or cold weather, moved to Charlotte to focus on East Coast clients, which included Wachovia and First Union. Later, he joined First Union as director of corporate forecasting. By 2001, when First Union bought Wachovia and took its name, he was treasurer.

His aversion to cold weather comes from a childhood spent in Allegany, N.Y., about 60 miles south of Buffalo. “It was a wonderful place to grow up. And if you like recessions and cold weather, then it’s a great place to stay.”

He prefers Mooresville, living on Lake Norman. He takes daily walks with his wife, Nanci, and their four teenagers. Not terribly exciting? “I like my life, but I’m not sure other people want to live vicariously through it.”

The east, with the least, remains much the same.

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Economic Outlook – May 2006

The East, with the least, remains much the same.

Eastern North Carolina has done little to improve its economy in the past five years, according to a report from the North Carolina Center for Public Policy Research, a Raleigh think tank. Just 12.9% of the region’s work force is in manufacturing, which offers the highest-paying jobs, compared with 15.6% for the state. And both percentages are shrinking. Mike McLaughlin is editor of North Carolina Insight, the center’s journal.

BNC: Why does the East keep lagging?

McLaughlin:One big issue is the education level of the work force. As a region, these 41 counties, most of them east of Interstate 95, have higher dropout rates, lower percentages of college graduates and lower per capita income than the rest of the state.

What industries thrive in the East?

Agriculture still drives the economy. It really is the breadbasket of North Carolina. The military has survived this latest round of base closures. There is some concern, though, about a major mobilization. Will that cause an economic hiccup?

Your study says only 2% of the workers are in agriculture. How is it the driver?

That won’t include anybody in the farmer’s family who works on the farm and migrant workers. You also need to look at meat-processing plants and feed-and-seed businesses, which are tied to the agriculture economy.

The public sector employs nearly a quarter of the workers.

The private sector is just not as large in the East. The economy is not as diversified as it needs to be if the school system or a hospital is the largest employer.

How have things improved since 2001?

There’s more broadband Internet availability, and natural gas is more available in some regions. We’ve seen some strategic initiatives such as biotechnology. We see ethanol being looked at as a new driver of demand for crops. We see some things building on the region’s strength, such as a new egg-processing plant. We’re seeing some boat manufacturers.

Why are the East’s problems the state’s?

For the rest of the state, there is cost when a region struggles. Some of these counties have very high Medicaid expenses and have trouble supporting their school systems. Tom Lambeth, the former director of the Z. Smith Reynolds Foundation, said it best when he said if you’re in a boat and one end springs a leak, you all go down together.

How can the state help?

Policies that will help small business. The East is unusual in that most people work in small businesses. Education is a responsibility of the state as well. The number of low-performing schools has been higher in that part of the state, so hopefully more funds flow that way.

How did the rest of the state get ahead?

In the early 20th century, industrialization was moving into the Piedmont to take advantage of the road construction. In the East, they relied more on agriculture and lower-skilled manufacturing. Today, agriculture is a troubled sector in many ways. Farmers are getting older, and some farms are going out of farming and into other uses. While the East has some success in attracting industry, the pace of industry leaving is accelerating. It is a one-step-forward-and-two-steps-back proposition.

What can the East do to catch up?

It’s going to take multiple strategies. They need to think in terms of singles and doubles and not the home run like Research Triangle Park or the projected home run of the Global TransPark. People have high hopes for the international port at Southport, but the jury is still out. The East needs to build on its strengths, whether it’s tourism or history. It needs to develop and retain small and medium-sized businesses. It’s going to take a sustained, long-term effort to bring this region up to the level of the rest of the state.

How far can it get through tourism?

Tourism can be lucrative for some people and part of a multifaceted strategy. Look at Asheville. People want to move their firms there just because they like it. People like to retire to a place that they enjoy visiting, and retirees who migrate to an area bring more resources.

What kinds of small and midsize businesses would work well in the East?

The ones that come out of the fabric of that community. Duplin County is a good example with the winery — and the nutrition supplements made from the hulls of the grapes — and the agribusiness developing around livestock. If you start to develop some niche, it starts to feed on itself, and then you start to get wholesale suppliers in that area.

Why has the region struggled to attract manufacturers?

It’s not just education but also a critical mass of population so a manufacturer will have a large enough work force. Nucor steel was successful in Hertford County, but those jobs are so high-paying that people will drive several counties for them. When it’s a job paying just marginally living wage, you’re not sure you can get the work force that you need.

The East fell behind a long time ago. How quickly can it catch up?

With a sustained effort, progress could be made in 10 years.

The China trade

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The China trade

The state lands the headquarters of a company from a country many Tar Heel manufacturers love to hate.
By Irwin Speizer

It all began in Beijing 22 years ago with 11 computer scientists working in a two-room house no bigger than a studio apartment. Now, Lenovo Group Ltd.’s new headquarters will be a suburban campus in Morrisville, a setting as foreign as it is distant — 7,130 miles — from that bunkerlike building. Buying IBM Corp.’s personal-computing business was the first acquisition of a major U.S. operation by a Chinese company, and with it came about 1,800 jobs at IBM’s Research Triangle Park campus, which is as much a high-tech icon in North Carolina as Lenovo’s birthplace is in China.

These were jobs the state’s political establishment was determined to keep, even if it meant cozying up to a country many Tar Heel manufacturers have tried to brand as a trade renegade. Never mind that Lenovo is partially owned by the Chinese government. Or that its takeover of IBM’s PC business raises some of the national-security issues that recently scuttled a United Arab Emirates-owned company’s bid to operate U.S. ports. Or even that Lenovo began cutting jobs after winning state and local incentives worth $14 million.

It has agreed to increase its North Carolina employment by up to 400 within 11 years, and for state officials the allure of new jobs — particularly high-tech ones — trumps other concerns. “If the question is, do you make an effort to secure 300 or 400 new jobs for a promising new industry that we expect to help sustain our economy in the future, there is not much of a question there,” says Don Hobart, general counsel for the N.C. Department of Commerce. “Everyone recognizes the role that China’s emergence in the world economy plays. It is an economic reality.” As for security and trade issues, they’re best left to the feds. Morrisville Mayor Jan Faulkner notes, “It was more important for us to look at keeping jobs here locally, not to worry as much about the specific China influence.”

Globalization has been hard on the state’s traditional industries — its textile mills and apparel plants, for example, have shed 170,000 jobs since 1997 — and many manufacturers blame China. Textile and furniture groups lobby Washington for protection against the advantage afforded not just by China’s cheap labor and lax workplace rules but by its currency, which the government keeps weak to make its exports even less expensive.

By buying cheaper foreign goods, U.S. consumers have helped build a huge trade imbalance. China, which has a $200 billion surplus with this country, has spent much of it on U.S. Treasury securities. Now Chinese companies are eyeing American assets, and the state Commerce Department, which has been sending trade missions to the Asian nation, is determined to snare some of that investment. In this case — and almost coincidentally — it snagged a global headquarters.

When Lenovo started talking to Armonk, N.Y.-based IBM about buying its PC division, Commerce officials fretted about the potential loss of Tar Heel jobs but began plotting how the state might benefit from a merger. IBM is the world’s largest tech company, with $96 billion of revenue last year, more than 300,000 employees in 75 countries and clients in 174. In 1965, it had been the first corporation to make a major investment in RTP, an event considered the catalyst in creating what has become one of the world’s premier technology centers. Its RTP operation — which at the time Lenovo came along had about 13,000 employees, including the PC division — is the company’s largest site.

Five of China’s top 15 companies are IBM clients. One is Lenovo, founded in 1984 with a $25,000 grant from the Chinese Academy of Sciences. Originally Legend Computers Ltd., it imported and sold PCs, including IBM machines, before manufacturing motherboards, the backbone of personal computers, then its own brand of computers. By 1997, it was the leading computer supplier in China. As Legend expanded into the desktop and laptop market, IBM was slowly retreating, focusing on technical services and consulting. A section in its 1998 annual report titled “The PC Era is Over” sparked speculation that it would dump that line of business. Though IBM continued making desktops and laptops — most of the manufacturing was overseas, much of it in China — the rise of Dell and sales success of Hewlett-Packard machines made it a distant third in worldwide sales, with market share and profits in its PC division slipping.

Lenovo announced it was cuting 300-350 RTP jobs – and moving its headquarters to the Triangle.

By the end of 2003, IBM and Legend — soon to change its name to Lenovo — were talking. Negotiations dragged on as the Chinese company tried to devise terms by which it could absorb IBM’s PC business, which had $9 billion of sales in 2003 — three times its total revenue. In October 2004, rumors that they were close to a deal circulated. On Dec. 7, they announced they had one, valued at $1.75 billion: Lenovo would pay $1.25 billion in cash and assumed debt, plus IBM would get a stake in Lenovo. While analysts debated whether it was a good price, North Carolina officials scurried to determine what this meant for IBM’s Tar Heel work force. In the announcement, Lenovo said it would keep the PC operation in RTP and move its headquarters from Beijing to Purchase, N.Y., near Armonk.

Then things hit a snag. The Committee on Foreign Investment in the United States, a federal interagency panel, decided in late January 2005 to review the deal. The concern: The PC operation might give China a U.S. base for spying or industrial espionage. IBM has government contracts, and its North Carolina campus is a crossroads of sensitive tech information. But after two months of study, the committee allowed the acquisition with a few stipulations. What they were has never been made public, but news reports said Lenovo would have to move off IBM’s campus at RTP.

That the deal sailed through the committee is no surprise. Created in 1988, the panel is supposed to draw on the expertise of its members, including representatives of the Defense and Justice departments, to vet proposed deals. “These are not agencies known for being light on issues like homeland security,” notes Jeff Carlisle, Lenovo vice president of government relations. Transactions that raise security issues can be forwarded to the president for further review and possible action. But the Chicago Tribune reported last year that only 12 of 1,500 deals the committee has examined had been forwarded. Only one had been rejected — a Chinese company buying a Seattle manufacturer of aerospace parts.

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What has derailed several recent takeovers was not the committee but other opposition, primarily in Congress. When Chinese National Offshore Oil offered $18.5 billion last summer to buy El Segundo, Calif.-based Unocal, lawmakers squawked, citing national-security concerns. The company backed off, allowing San Ramon, Calif.-based Chevron to buy Unocal for $17 billion. That’s similar to what happened this year when a United Arab Emirates-owned entity bought the British company that held operations rights to major U.S. ports. The Lenovo-IBM deal has generated no such uproar — at least not yet.

Donald A. Manzullo, chairman of the congressionally appointed U.S.-China Economic and Security Review Commission, has suggested taking a closer look and questions whether the Committee on Foreign Investment is tough enough on foreign-owned companies. Carlisle, who says Lenovo has been working with the commission, maintains that the U.S. has nothing to fear from its ownership of the PC business. “Lenovo is clearly doing everything it can to play by the rules.”

Jeffrey Barlow, a history professor and Asian authority at Pacific University in Forest Grove, Ore., says the deal merited closer scrutiny. Lenovo, after all, still is partially owned by the Chinese government. (After the merger, the Chinese Academy of Sciences owns 27.3 %; IBM, 13.2%.) The paucity of congressional interest, he suspects, is probably due to IBM’s lobbying clout in Washington and politicians’ inability to grasp the implications of a complex tech deal. “How in the world are they going to possibly keep proprietary IBM information from feeding into Lenovo?” he adds. “To me, it’s one of the critical questions.”

Lenovo’s answer, in part, was the decision to move its new employees to another location. The company decided it needed its own campus. That meant the state could lose more than 1,800 jobs if Lenovo picked a site outside North Carolina. Commerce officials went on high alert. In March 2005, Assistant Secretary Tony Copeland and industrial developer Steve Brantley went to Beijing to assure Lenovo officials that North Carolina would do everything it could to keep the company. Lenovo already was shopping for possible sites. On the way out, the Commerce duo ran into a delegation from Westchester County, N.Y. — Purchase — wooing the company.

"It wouldn’t be realistic wringing your hands about the cost of globalization and not try to reap one of the benefits."

By last summer, Lenovo’s quest for a new site was in full song. The Commerce Department gave the project a code name — Grace — but, unlike many site searches, there was little doubt who was looking. Any pretense at secrecy was shattered in August when a Durham city official accidentally released a confidential e-mail that included details of the project. At the top of the list: Lenovo wanted $14 million in incentives to stay in North Carolina. About the same time, Commerce was making yet another trip to Asia. Copeland and Peter Cunningham, director of international trade, traveled to Hong Kong to brief Lenovo executives on incentives available in North Carolina.

There was little the state could offer to save jobs, but Lenovo could get millions of dollars for creating some. And local governments were willing to pay to play. Negotiations involving the company, state officials and those from Wake and Durham counties continued. New York was still in the mix, as was the Atlanta region. In October, Commerce Secretary Jim Fain flew to Beijing for some face time with Lenovo officials and toured the company’s computer plant. “We spent time during August and up to October doing everything we could to recruit the project to the area,” Hobart says.

In Raleigh, as the incentives package came together, questions about Lenovo’s Chinese roots came up before the N.C. Economic Investment Committee, an 11-member panel chaired by Fain that doles out industrial-investment grants. The committee quickly decided that the state would be best served by encouraging Lenovo to stay, both for the jobs and to send a message to China that North Carolina was open for business. The big question was how to use the grants to encourage the company to make a long-term commitment. Lenovo could lease space or build it. A lease would let Lenovo relocate if it got a better deal later. Investing in a new building would likely ensure a long stay.

What the committee came up with was a proposal that included a Job Development Investment Grant with two options. JDIGs are the most generous incentives the state has, refunding to a company some of the state income tax withheld on new employees. If Lenovo leased space, Lenovo could get up to 65%. It could get back 73% with a new building. Over the 11 years of the grant, the difference could be worth several million dollars. The carrot worked. Lenovo decided it would build if it stayed in North Carolina.

Morrisville officials figured they had the inside track. The town and Wake County were prepared to offer incentives, and a site in a private industrial park was ready for construction. “We heard that one of the big issues they were having was that they needed to be up and running in early 2007,” Mayor Faulkner says. “They were in a very big hurry, and we had a place for them to build.” That the big hurry was motivated by security concerns mattered little. “We discussed it a little bit, but it didn’t become a major issue. As long as Lenovo was jumping through the hoops of the federal government, I was not worried about the security end of it.”

On Oct. 27, Gov. Mike Easley declared victory, announcing that Morrisville had won the bidding. Lenovo would move 1,820 workers onto a new, $84 million campus in early 2007 and promised to create up to 400 jobs over five years. If it maintained its original number and met annual job-creation targets, it could get $8.4 million in JDIG money. It also got a $750,000 One North Carolina grant, $1 million of worker training and $2 million of tax credits for research and development. Morrisville and Wake County each kicked in $1 million of incentives, bringing the total to the $14 million Lenovo wanted.

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The company broke ground in February, with plans to move into the project’s first phase as early as next spring. Then, on March 16, Lenovo announced a global restructuring that would cut 1,000 of its nearly 20,000 jobs, including 300 to 350 in North Carolina. That seemed to undermine the promised increase in employment.

But Lenovo explained that the restructuring will bring some jobs — it is moving its headquarters to Morrisville, adding up to 70 positions, plus relocate a call center from Atlanta and a logistics team from Boulder, Colo. The net effect remained unclear. “It was not something we were anticipating,” Hobart says. “And it may be that the company was not anticipating it at the time we were negotiating. Our understanding, based on conversations with the company, is that the company expects that they would still be in a position to meet the performance criteria for the grants.”

To qualify, Lenovo must add 72 more jobs by March 2007 than it had at the time the grant was announced. By March 2008, it must add 144 more. The number increases until the total reaches 400. If Lenovo fails to meet the targets, the grant is reduced each year in proportion to the number of jobs created. If North Carolina employment drops below 1,820, it gets nothing that year. If it has a net job loss two years in a row, it loses the grant.

Lenovo wants to maximize what it gets, Carlisle says, but it won’t sacrifice what its business needs to do that. And right now it needs downsizing and restructuring. “It would be great to get the incentives. Growing our presence [in North Carolina] is still a goal of the company, and we would certainly hope to meet the benchmarks.”

At Commerce, officials are watching to see what Lenovo does. So far, there are no regrets about the courtship of a Chinese company in a state hit hard by competition from other Chinese industries. “There is no question that North Carolina’s low-wage manufacturing industries — many of them — have either closed or shifted production as a result of competition from China,” Hobart says. “But it wouldn’t be realistic wringing your hands about the cost of globalization and not try to reap one of the benefits. These are jobs that are absolutely worth fighting to keep in North Carolina.” The trick now is to see if the grants do that.

Summertime, and living is easier for tournament

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Sports

Summertime, and living is easier for tournament
By Chris Roush

Greensboro’s professional golf tournament once again has survived the cut. But organizers are a long way from striding up the 18th fairway to tap in for a major victory. When the PGA Tour announced its schedule for the 2007 season — shrunk from 48 to 38 tournaments — the Gate City was on it. It even got a better date, Aug. 13-19, rather than the one it had in October. So why aren’t more people in Greensboro smiling?

Maybe it’s because they know there is more work to be done to keep the shots coming at the Carolina Classic at Greensboro — the tournament’s 2007 name, for now. The name is changing because the sponsor, DaimlerChrysler, is paying for its final round at Forest Oaks Country Club this fall.

That might have been enough to kill the event except for a mad pitch by organizers, led by tournament director Mark Brazil. The board had 10 days to come up with a $25 million letter of credit to secure a date on the Tour through 2010. The backing came from individuals, businesses and foundations. “We had to provide that guarantee to the Tour to show we were serious about this,” Brazil says.

If they were serious then, it’s hard to characterize the mood now. Particularly with $25 million at risk if they don’t come up with a title sponsor. The tournament has hired IMG, the New York-based sports-marketing powerhouse, to get those backers off the hook. Tournament officials, Brazil says, already have had phone conversations with several potential sponsors. He talks to IMG executives weekly and expects a new sponsor in place by the fall.
He declined to discuss candidates but says the search is worldwide. Of course, there are some good reasons for that.

While North Carolina-based companies such as Bank of America and Wachovia might seem natural fits, both already have their names on golf tournaments. Wachovia signed a four-year extension last year on the Wachovia Championship in Charlotte; BofA sponsors the Colonial in Texas and the Bank of America Championship, a senior event, in Massachusetts. Jefferson-Pilot, once the city’s most prominent corporate player, has been bought by a Philadelphia insurance company. Winston-Salem-based Reynolds American is out — cigarette makers can no longer sponsor sports events.

“We would love to have someone based in North Carolina, but regional sponsors are hard,” says tournament board member George House, a Greensboro lawyer. “Only companies with national products benefit from paying the rates for national TV.”

That eliminates the state’s other banks and utilities such as Duke Energy and Progress Energy. Lowe’s seems more comfortable with NASCAR. Later this year, the Triad will gain a Fortune 500 company when Chicago-based Sara Lee spins off Hanesbrands into a separate company. But given its prominence in pantyhose and bras, it might be more at home with the LPGA.

National companies in financial services, automobiles, insurance and business consulting would be prime candidates, says David Carter, executive director of the University of Southern California Sports Business Institute. “That sponsor might be trying to reach consumers or other businesses, and golf can provide a tight demographic of affluent homeowners.”

Brazil says it is a seller’s market, noting that only a handful of PGA events are seeking title sponsors. “Four years ago, there were about 12 tournaments on the PGA Tour looking for sponsors. Now there’s a real scarcity.” A title sponsor helps pay for operations as well as TV advertisements. Corporate sponsors spent $900 million with the PGA in 2005, up 7% from the year before, according to IEG Sponsorship Report, which notes that pharmaceutical and technology companies have become major sponsors in recent years.

Regardless of who the new sponsor is, the tournament — long thought of as mostly a local event — must broaden its appeal to patrons and fans. The key, Brazil says, is the new board, which last year took over running the event from the Greensboro Jaycees. The Jaycees had been running the event since its inception, but they treated it as part fundraiser and part leadership program. A volunteer would serve as chairman of the tournament for a year, then turn it over to another volunteer. No real continuity was established until Brazil was hired in late 2001.

The board is being expanded to include executives from outside the Gate City, including J.B. Davis, president of Klaussner Furniture Industries in Asheboro, and Paul Fulton, former dean of Carolina’s Kenan-Flagler Business School. Even the city’s name, a fixture on the Tour since 1938, could disappear. A new sponsor, Brazil says, will likely want the tournament to bear its brand.

But even a name change won’t solve another problem: the tournament’s site. Forest Oaks is not one of the Tour’s famous courses, even after a makeover in 2003 from UNC grad and top Tour player Davis Love III. It’s not even a marquee course in its own state. Golf Digest doesn’t rank it among the 25 best in North Carolina, favoring others such as Pinehurst No. 2, Quail Hollow in Charlotte, Grandfather Golf and Country Club in Linville and even Bryan Park in nearby Browns Summit.

The date change helps and hurts. August in Greensboro is hot. Since 2001 — excluding an abnormally cool 2004 — the daily high temperature that week has averaged 87, with humidity in the upper 90s. The good news: less competition for fans than in October. The National Football League will be in its preseason. College football won’t be cranked up. NASCAR will be on a North/Midwest swing. Even the interminable National Basketball Association and National Hockey League playoffs will be over.

Because it’s the final “regular season” tournament before the start of the four-event Tour championship series, the new date should attract stronger fields. House says it will force some top players to come to Greensboro to better their position. “It’s clear that we will wind up with everyone from No. 15 to No. 40. Whether we get the top five or six depends on how close they are at the end of the year. If it’s a runaway, Tiger may not play. But if he’s at a close position at the top of the list, he may need to play.”

Greensboro needs him. Or it may yet eventually find itself beside Hartford, Conn., and Washington, D.C., on the outside looking in, hoping for a tee time on the next PGA Tour schedule.

State should sink money into water

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Tar Heel Tattler – May 2006

State should sink money into water
By Edward Martin

To Bill Holman, it’s what you can’t see at Falls Lake that shows why North Carolina needs a billion-dollar bond issue for its water systems. The director of the state’s Clean Water Management Trust Fund is talking about the water supply for half a million residents of Raleigh and environs. What’s missing, at least in the lake’s upper reaches, is water.

Two years after the N.C. Rural Economic Development Center launched a project to assess water needs, much of North Carolina is locked in drought. Meteorologists categorize the Triangle’s as severe. The first three months of this year made up Raleigh’s driest first quarter on record.

When it comes to water, North Carolina is a paradox. Streams and rivers wrinkle the face of the state, lakes pock it, and an ocean brushes its cheek. But water is not evenly distributed, demand is soaring, neighboring states want to tap Tar Heel supplies, and some sources are overtaxed. With spring lawns turning brown and temperatures rising, the center has released a plan, Water 2030, calling for the bonds. Holman, whose organization was created by the General Assembly in 1996 to help local government meet water needs, says the bad news is that even $1 billion might not be enough to do what needs to be done.

Others agree. “In 1998, when we had the $800 million bond issue, we were meeting needs for the next five years,” says Billy Ray Hall, the Rural Center’s president. “But 25 years out, are we going to find ourselves in the same place three or four more times?” The center forecasts local water and sewer systems needing nearly $17 billion by 2030 to keep up with the estimated growth of 4 million people. That will push the state’s population to more than 12 million.

Getting competing interests to work for a bond issue won’t be easy. Many urban dwellers, Hall says, fail to recognize the need. “The driver for the growth in demand is people.” Though the decline of the textile industry has eased industrial demand for water, drug and biotech operations’ requirements are growing.

The Water 2030 plan urges the General Assembly to authorize the bond issue this session. Last year, the legislature established the State Water Infrastructure Commission to plan for what is needed and how to pay for it. Some project members, however, have griped that Gov. Mike Easley has been slow getting it going. A spokesman for the governor says no chairman has been named or meetings scheduled.

She finds smoother selling in America

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People – May 2006

She finds smoother selling in America
By Chris Richter

Lori Jarrett is an easy target. Her company, VirtuosoWorks Inc., was one of those software companies, moving to India in early 2003 for the cheap labor. On top of that, its signature software could take jobs from musicians.

But VirtuosoWorks came back to Greensboro in 2004, and it’s growing. Notion, its $599 software, enables users to compose music on a computer. As they write, they can listen using sampled notes from the London Symphony Orchestra.

Jarrett’s interest in music started early. Her father, Jack, was a music professor at UNC Greensboro when she was in elementary and middle school. After getting a bachelor’s in guitar performance from Virginia Commonwealth University in 1986, she planned to attend Manhattan School of Music to prepare for a career as a classical guitarist, but a bout with mononucleosis changed her mind. “I thought, if this were 20 years from now, I’d be in the same position,” Jarrett, 45, recalls. “I wouldn’t have health insurance. There are only a few people who have a career as a performer.”

Temp jobs had kept her afloat, and she dabbled with computers while at Bowery Savings Bank, eventually becoming its go-to person for information technology. In 1988, she moved to The Hongkong and Shanghai Banking Corp., now London-based HSBC Holdings, where she headed microcomputer support and purchasing for offices in North America and Chile.

She returned to Greensboro in 1994. Jarrett and her husband, software developer Rahm Sethuraman, started a company to outsource IT work to India, but the idea was ahead of its time. Two years later, they teamed up with her father to start a company to develop a music-notation software. Money grew tight, so they moved to India in 2003. They struggled until an oil-company executive who loved classical music invested $600,000.

VirtuosoWorks returned to Greensboro, Jarrett says, because they believed they had to be in the U.S. to market Notion. Operating costs increased more than 90%, but she says the company has thrived. It has about 40 employees, doesn’t outsource work and should gross $1.3 million this year. Jarrett, its CEO, wouldn’t say if it’s profitable.

She understands why some people fear for musicians’ jobs but considers them a choir of Chicken Littles. “People still want to hear live music. They always will. We don’t want to replace that.”

Official gets boot for going country

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Tar Heel Tattler – May 2006

Official gets boot for going country
By Frank Maley

Country singer Randy Parton has plans to turn Roanoke Rapids into an entertainment hub next year. Dolly’s brother is working on a project near Interstate 95 that includes a theater, stores, hotels, a convention center and aquarium in a town where the entertainment options don’t get much glitzier than CJ’s Bingo and Roanoke

Already, Carolina Crossroads Music & Entertainment District has helped produce excitement in the form of a minidrama that prematurely ended the tenure of one of the men who helped lure it to Roanoke Rapids. Rick Watson was CEO of the Northeastern North Carolina Regional Economic Development Commission, a public body that promotes the 16-county region, and of North Carolina’s Northeast Partnership Inc., a private nonprofit that does the commission’s bidding.

Watson told the nonprofit’s executive board in October that he planned to accept a position in early 2007 as an equity investor in a Parton company developing the Randy Parton Theater, the centerpiece of Carolina Crossroads. Until then, he would continue as CEO of the nonprofit and commission.

That didn’t sit well with the region’s county managers. They worried that Watson wouldn’t act in the Northeast’s best interest if, for example, it were trying to lure a competing entertainment complex. They urged the commission and nonprofit to start looking for a new CEO who would be barred from investing in its projects.

In February, Watson moved up his departure date to June 30, but the commission and partner-ship wouldn’t wait. On March 21, they terminated his contract, retroactive to March 1. By doing so, they have to pay him his full annual salary of $165,000 plus other compensation, for a total of $185,276.

By this time next year, if all goes as planned, the drama will be over, Watson’s replacement will be on the job, and the first phase of Carolina Crossroads will be built. It may not turn Roanoke Rapids into another Nashville, but project developers are not shy about comparing it to developments in Branson, Mo., and Pigeon Forge, Tenn. “Carolina Crossroads,” its Web site says, “will be built around music and high-end shopping.”

Kayak manufacturer: I’m back in the paddle again

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Tar Heel Tattler – May 2006

Kayak manufacturer: I’m back in the paddle again
By Arthur O. Murray

No man ever steps into the same river twice, for it’s not the same river and he’s not the same man.” The Greek philosopher Heraclitus said that in the sixth century B.C. Now, a High Point man who founded a kayak factory that left the Triad last year will embody the old Greek’s saying by opening another one there this spring, thanks, in part, to the newfangled notion of economic incentives.

Andy Zimmerman, 49, says he’s different — more experienced in the ways of business — from the man who started Wilderness Systems in 1986. After a series of buyouts and mergers, it became Confluence Holdings Inc., which moved from Trinity to Easley, S.C., last summer. These are certainly different times: Paddling was about to boom then, while growth these days is modest. And he hopes for a different — though still successful — outcome.

Earlier this year, he bought controlling interest in Bristol, R.I.-based Heritage Kayaks and renamed it Legacy Paddlesports. He has $121,000 in incentives from Guilford County commissioners and in mid-April was optimistic that he soon would get about $380,000 more from the state.

If he does, Zimmerman plans to employ up to 75 initially and increase that to 250 within three years. He has an option to lease part of a DaimlerChrysler Commercial Bus Division plant in Jamestown and hopes to be in full production by August, when the industry holds its major trade show in Salt Lake City.

Why move the business to the Triad? “It’s a great place for central distribution for the Northeast and the Southeast,” he says. “But the big thing is the trained work force that got left behind” by Confluence.

He started Wilderness Systems in his backyard. Trouble was, he had to take on too much debt — which lenders converted to equity — to pay for acquisitions. After three years as CEO, he departed because he couldn’t see eye-to-eye with his investors. He moved to Jackson Hole, Wyo., to snowboard and manage his investments. He kept a small stake in the company and stayed on its board until severing ties after Confluence bought Easley-based WaterMark Paddlesports in May 2005. “I knew they were going to move it.” About 120 lost their jobs when the company departed in August.

Zimmerman believes Legacy will find success with kayaks aimed at fishermen. He says he won’t let his business slip out of his control this time. “I’ve got the benefit of experience. We don’t want growth for growth’s sake.”