Shamsa Rana: Media Turnarounds

The global mergers and acquisitions market reached a record $3,850bn (€2,720bn) over the first nine months of the year as a whole, but experienced a dramatic drop in the third quarter as the credit markets seized up and buy-out activity collapsed.

The volume of deals worldwide fell 42 per cent to $1,000bn during the third quarter, compared with the $1,740bn announced in the previous quarter, Dealogic, the financial data provider, said.

However, investment bankers remained confident M&A activity would pick up again next year.

“So long as the fundamentals remain positive, the current transaction focus will predominantly be on next year and whether corporates step up to the plate to offset some of the private equity drop-off in activity,” Kamal Tabet, head of financial sponsors at Citigroup, said.

Gavin MacDonald, global head of M&A at Morgan Stanley, said whether this M&A slowdown proved to be a hiatus or an ongoing decline in activity, would depend on whether economies tipped into a broad recession.

“If there is no recession, strategic acquirers will be active across sectors and mid-sized private equity deals will get financed,” Mr MacDonald said.

The level of activity during the first nine months was boosted by a significant increase in emerging market deal activity. Brazil, Russia, India and China M&A totalled $298.1bn during the first nine months of the year. Third- quarter volume reached $119.8bn. But the pace of private equity buy-outs – which have fuelled the M&A market for the past four years – dropped 68 per cent in the third quarter to $130.3bn.

There has only been one buy-out during that period of more than $10bn – Blackstone’s buy-out of Hilton Corp. There were $414.2bn worth of announced global buy-outs still outstanding at the end of September. The collapse in leveraged buy-outs contributed to a big decline in investment banking revenues, which fell to $15.5bn in the third quarter, the lowest level since the first quarter of 2005.

The slowdown is expected to hit the year-end bonus pool at investment banks. Compensation experts predict they could be down by as much as 10-15 per cent across the board.

Goldman Sachs led the global and US advisory rankings in the first nine months, while JPMorgan took the top slot in the European league tables. UBS took first place in the Asia Pacific region, excluding Japan.

When Google agreed to buy online advertising outfit DoubleClick five months ago, it put a lot of backs up.

US behemoths from Microsoft to AT&T expressed concern at the group’s newfound might. Antitrust regulators were alerted. Consumer groups complained. The deal was also one of the clearest illustrations yet of how Google has changed.

Just two years ago, the Financial Times has established, Google abandoned a potential acquisition of DoubleClick. At the time there were concerns that a fundamental part of the way the online advertising company does business – using “cookies” to collect banks of data on users so it can target adverts to them – conflicted with the much-touted ethical principles of Google’s founders, though that is not understood to have been one of the main reasons the deal fell through.

By proceeding with a deal in the spring, Google showed how it has struggled to apply its cherished business principles in practice, including its well-known internal motto: “Don’t be evil.”

Having publicly set themselves above others, its founders remain adamant their ideals will make a difference in the long term. “We haven’t had big companies before that had that kind of ethic,” Larry Page said recently. “I think we can be a positive force.”

That is not how some are coming to see it. The DoubleClick deal has amplified complaints that Google has on the one hand abused its users – invading their data privacy as well as adulterating search results with increased advertising – and on the other trampled over potential business partners.

Former executives and other observers argue that the increasingly complex nature of Google’s activities, particularly as it moves into new markets such as the one where DoubleClick operates, is forcing it to adapt and in some cases make compromises with its founding principles.

Facing growing numbers of commercial rivals and legal adversaries over copyright and other issues, it is not uncommon these days to hear comparisons to a company that many people in Silicon Valley love to hate: Microsoft.

In part, this is about image. “As you get more powerful, it’s natural for people to think this way,” said Mr Page.

But the backlash has substance, too. “When you’re a grown-up company,” says David Yoffie, a professor at Harvard Business School, “ ‘Don’t be evil’ is too simplistic. You have to evolve it and develop it.”

Google’s decision early last year to launch a censored search engine in China became an early lightning rod, since its stance appeared so clearly at odds with its self-declared mission – to make “the world’s information universally accessible and useful”.

Even some opponents of the decision concede it is hard to criticise Google over it. “I think reasonable, and ethical, people can disagree on which path is best to take [when dealing with China],” says Jonathan Zittrain, professor of internet governance and regulation at Oxford University, who was personally opposed to the move.

Nonetheless, there is growing evidence that Google’s nebulous claims to ethical superiority are backfiring – antagonising, in particular, other companies who see no basis for them, and who find they conflict with their own business interests.

“I think they have a view that what’s good for Google is good for the world,” snaps one business partner. “Every nation state reaches that conclusion at some point.”

An executive who has worked closely with Google’s most important business partners, adds: “I absolutely think their heart’s in the right place, but they’re trying to apply this [‘Don’t be evil’ principle] to increasingly difficult business situations.” As Google grows by acquisition, the challenges multiply.

Google’s $1.65bn purchase of the YouTube video-clip website last year encapsulates the tension between Google’s anti-establishment principles and its new-found status at the heart of the big-business establishment, with the frequent posting of copyrighted music, sport and film by the site’s users causing friction with media groups worldwide.

Stanford law professor Larry Lessig still sees the group more as saint than sinner. “Google has taken aggressive decisions to defend the . . . rights that the law allows them,” he says. “It was in some senses a public service to engage in these fights.”

But an executive at one big media company counters: “If they’re testing the limits of copyright, they’ve gone over the line and now they’re trying to get back.”

To its critics, the YouTube deal confirmed Google’s disregard for the rights of media owners. Internet companies cannot be sued for posting content that infringes copyright, as long as they respond promptly to requests to remove it – though Viacom, which has sued YouTube, argues these protections do not apply.

The company has spent much of this year developing a “digital fingerprinting” system to try to make it easier to identify copyrighted material. Opponents claim, though, that it has deliberately dragged its feet over the technology – and also that the work on fingerprinting is an admission that Google has not done enough up to now to fulfil its legal responsibilities.

Google itself insists that resolving the disputes is a priority. “I think there’s a huge incentive for Google and YouTube to get this right,” says Nigel Jones, Google’s chief lawyer in Europe. Such disputes are not just about the risk of getting sued. Unresolved, they could disrupt the future development of an industry that looks likely to rely increasingly on collaboration between internet operators like Google and incumbent media groups. “If potential partners aren’t happy with our progress, we won’t get the best content available,” says Mr Jones.

The other big row to engulf Google, over cookies, was also triggered by an acquisition, that of DoubleClick.

For any company claiming the ethical high ground, decisions about advertising sales were always going to be knotty. From the outset, Mr Page and co-founder Sergey Brin worried that advertising in any form could undermine the integrity of their work. In the academic paper where they first discussed the outline of their novel approach to internet search, they warned: “The goals of the advertising business model do not always correspond to providing quality search for users.”

For the young, idealistic, engineering-driven company they had created, “Don’t be evil” was a slogan that served a useful purpose in signaling that they were not about to make compromises as they looked for ways to make money, according to one Google official.

A small number of cases that have thrown a harsh light on the practices of some members of its salesforce appear to justify that early caution. Earlier this year, two Google salesmen antagonised some of the biggest media companies by actively recommending the search engine’s advertising system for use by websites that make money by distributing pirated content.

More recently, an over-zealous advertising rep wrote on a Google blog that advertising on the search engine could be a useful vehicle for interest groups seeking to counter criticism of the US healthcare system made by filmmaker Michael Moore.

Google executives deny that instances like these point to any broader conflicts between its advertising practices and its core values. “I don’t think there’s a trend here,” says Nikesh Aurora, head of Google’s European operations. “There are isolated cases.”

Yet Google’s rapid expansion, which has led to a sharp increase in its rate of hiring, seems likely to put a strain on its traditional way of inculcating its values.

“We try not to have too many controls,” says Mr Aurora. “People will do things that they think are in the interests of the company. We want them to understand the values of the firm, and interpret them for themselves.”

Google’s ambitious push into new online markets, meanwhile, has caused friction with even its closest allies, adding to suspicions about some of its motives.

In one notable instance in 2004, according to two people close to the situation, Google failed to deal openly with a looming clash of interests with AOL, at the time its most important business partner.

According to these people, Jonathan Miller, head of AOL at the time, had been personally assured by senior Google executives that they had no plans to launch a rival web-based e-mail product to AOL’s own service.

Weeks later, Mr Miller received a phone call from Eric Schmidt, Google’s chief executive, to warn him that the next day Google would be unveiling its Gmail service – an about–turn that made him “furious” and left the impression that Google was willing to “ride roughshod over its partners”, said one person close to the situation.

One business partner who has faced conflicts like this, attributes Google’s behaviour more to error than arrogance. Strains on its internal organisation, along with its highly decentralised approach to developing products, help explain how misunderstandings like this occur, this person says.

Google’s rapid growth, company executives admit, meant that for a long time it had too few employees to be able to talk to all the media companies that were worried about the impact of its growing power on their businesses. This just fed suspicions that Google, confident in its intellectual superiority, had an arrogant disregard for others.

Google’s expansion into new markets has left even some of its closest allies decidedly wary. “You don’t know what’s inside the box of chocolates,” one partner says of Google’s many new product initiatives.

A senior Google executive gives short shrift to such complaints. The media industry has traditionally accommodated relationships where companies are both partners and rivals, this person says. This is not an issue of questionable ethics: “It’s considered business.”

Meanwhile, Mr Schmidt has made it one of his main missions over the past year to build better relations with business partners.

Tensions like these could be nothing compared to what lies ahead. The implications of the company’s ambition, to bring information to everyone everywhere, are just coming into focus.

Google is unabashed about the extent of its aims. It is in the process of building a massive global computing platform capable of absorbing vast amounts of data. Recently it extended its mission to include “applications” – the clearest indication yet that it wants to assume the same role on the internet that Microsoft has played with the PC when it comes to providing the basic tools computer users rely on in their everyday lives.

These ambitions will inevitably lead to a backlash, Mr Page warned shareholders at this year’s annual meeting. “The scale of our opportunity is very, very large,” he said. “We need to scale to meet that opportunity. One of the impacts is that we will cause traffic in this area.”

Translation: as Google becomes the conduit for much of the world’s information, and the tools for manipulating it, it will inevitably feed many more commercial rivalries and public suspicions about its motives. What meaning will there be by then in the slogan: “Don’t be evil”?

Talismanic Chelsea coach Jose Mourinho has left the English Premier League club just six games into the new season.

Mourinho’s departure was confirmed by Chelsea in a stark, one-sentence statement posted on their Web site in the small hours of Thursday morning.

”Chelsea Football Club and Jose Mourinho have agreed to part company today by mutual consent,” it said.

The statement, printed a longside an oversized image of theclub’s emblem, left many questions unanswered. Nobody at Chelsea was immediately available for comment.

The official confirmation of Mourinho’s departure followed a rash of media reports which had said senior players, including captain John Terry, had received text messages from their Portuguese manager informing them he was leaving.

Mourinho, who was contracted until 2010, was hired by Russian billionaire owner Roman Abramovich in 2004 with a brief to break Manchester United and Arsenal’s domination of English soccer and make Chelsea the best club in Europe.

The former Porto boss made a stunning impact, winning the title in his first season, Chelsea’s first since 1955, and charming the media with his sharp sense of humour.

The self-styled ”special one” repeated the feat in 2006 but failed to make it a hat-trick last season when they finished second to Manchester United. Mourinho also won two League Cups and the FA Cup for Chelsea and had the remarkable distinction of never losing a home league game during his glittering reign.

However, European success eluded him and probably hastened his downfall. Chelsea twice lost to Liverpool in the Champions League semi-finals, last season on penalties.

ATTRACTIVE BRAND

Rumours began to surface last year that Abramovich was losing patience with the enigmatic Mourinho and was demanding a more attractive brand of soccer.

The signing of Ukrainian striker Andriy Shevchenko from AC Milan, a close friend of Abramovich, also appeared to cause friction between coach and owner.

Chelsea began this season poorly by their own high standards. A lacklustre 2-0 defeat at Aston Villa was followed by a dull 0-0 draw at home to Blackburn Rovers on Saturday that left them fifth in the table.

Mourinho bemoaned his luck in typical fashion.

”You cannot make an omelette without eggs,” he said, referring to injured internationals Frank Lampard, Didier Drogba and Michael Ballack.

Tuesday’s disappointing 1-1 Champions League draw at home to Norwegian outsiders Rosenborg Trondheim in front of just 25,000 fans proved the final act of a remarkable period in Chelsea’s history, but Mourinho walks away with a tremendous record.

Of the 120 league games he took charge of, his team won 85, drew 25 and lost just 10.

The new coach, whoever Chelsea choose, will have a tough act to follow.

Mervyn King will be forced to mount a public defence of his reputation as Bank of England governor after being driven into a striking policy U-turn on Wednesday in a bid to ease pressure on the UK banking system.

The Bank’s change of heart came after a series of high-level meetings on Tuesday involving the Financial Services Authority, the Treasury and some of the City’s largest institutions, where concerns were aired that the crisis at Northern Rock could spread to other smaller lenders, such as Alliance & Leicester and Bradford & Bingley.

Mr King will face an interrogation by MPs on Thursday over his stewardship of the financial system and his role in the recent run on the Northern Rock bank.

In an attempt to inject more liquidity into the system, the Bank has offered to lend tens of billions of pounds on three-month terms to cash-strapped banks that provide mortgages, starting with an initial injection of £10bn (€14.3bn) next week.

The move by the Bank, which had stood out among global central banks for taking a “tough love” line, came less than a week after Mr King warned that such actions could sow “the seeds of a future financial crisis”.

According to people who attended Tuesday’s meetings, Hector Sants, the FSA’s chief executive, urged the banks to lend to each other in the inter-bank market to prevent other smaller banks having to face a similar fate to Northern Rock. Regulatory officials were keen to stress that no other banks were facing imminent problems.

But Mr King stands accused of helping Northern Rock founder by acting tough with UK banks, only to step in later with emergency funding and finally agreeing to the action that bankers believe would have been enough to have headed off the debacle before it hit the high street.

Senior banking executives believe the recent crisis has also shown the frailty of financial regulation, where responsibility is split between the Bank, the FSA and the Treasury.

The Bank is expecting heavy criticism at Thursday’s hearing of the House of Commons Treasury select committee. But it insists the latest move was necessary because the situation had changed and action was needed “to alleviate the strains in longer-maturity money markets”.

The move is a significant change in direction for the Bank. Senior officials have been sceptical over the past month about whether similar action from the European Central Bank and the US Federal Reserve was effective. Until now, the Bank had only lent money at penalty rates overnight and only for high-quality collateral such as gilts.

The Bank and the Treasury insist the decision to change policy was not made under instructions from the Treasury.

Although the new policy is bound to raise questions about whether Mr King’s term will be renewed next year, the Treasury said on Wednesday night: “The governor has our absolute support.”

The troubled news division of CBS was haunted on Wednesday by a controversy from the past when Dan Rather, its former anchor, filed a $70m lawsuit against the company and three former superiors, accusing them of violating his contract and tarnishing his reputation.

The suit stems from a report Mr Rather presented three years ago questioning President George W. Bush’s service in the Texas Air National Guard. Mr Rather was forced to relinquish his post as anchor of the television network’s evening news after the authenticity of Vietnam-era documents used to support the report could not be verified.

In his complaint, Mr Rather claims that CBS made him a scapegoat and marginalised him in order to curry favour with government leaders. The network, he says, commissioned a “biased” report from an investigative panel, broke its promises to defend his reputation and effectively removed him from public reporting for two years.

In addition to CBS, the suit also names Sumner Redstone, the company’s chairman, Leslie Moonves, its chief executive, and Andrew Heyward, the former head of its news division, as defendants.

CBS denied the claims on Wednesday, saying: “These complaints are old news, and this lawsuit is without merit.”

The lawsuit has emerged at a time when CBS’s efforts to revive its news division under new anchor Katie Couric are foundering. In spite of a $15m annual pay package and a massive publicity campaign, Ms Couric’s newscast has spent its first year mired in third place behind ABC and NBC, and continues to lose viewers.

Just weeks ago CBS settled a separate lawsuit filed by Don Imus, a radio host who was fired by the company after making alleged racist remarks.

Mr Rather, once the face of the network, now hosts a weekly news programme on HDNet, a cable channel with limited distribution.

The New York Times has decided to end its Times-Select subscription service, a move that will make its top columnists and newspaper archives free on the newspaper’s website.

The decision, which will take effect at midnight on Monday, is an acknowledgment by senior management that the company stands to earn more money through advertising sales from increased traffic on its website than it did by asking readers to pay a fee for its premium content.

“The big thing that has happened really is that ... search has been far and away more than anyone imagined such a massive driver of traffic,” said Vivian Schiller, a senior vice-president at NYTimes.com.

The Wall Street Journal is also expected to re-examine the subscription model for its website following its acquisition by News Corp.

Entrepreneurs and venture capitalists around the world have rushed to copy the latest web trends emanating from Silicon Valley in recent months, according to new figures released on Monday.

The spreading international interest in Web 2.0 is being accompanied by a trend towards adapting for corporate users the new technologies developed for consumers, such as blogs, social networking and mash-ups.

This mirrors the evolution of the first wave of “dotcom” investing, which also expanded from its roots in consumer services in the San Francisco Bay area.

Private investment in Web 2.0 companies more than doubled in Europe in the first half of this year to $51.5m, according to figures from Dow Jones VentureOne and Ernst & Young. With Israel and China, other centres for VC investment, cash put to work outside the US climbed by nearly 60 per cent to $107m.

In the US, however, Web 2.0 investment fell back slightly to $357m, reflecting the large number of companies financed there in previous years. The pull-back was particularly acute in Silicon Valley, as big Web 2.0 investors such as Benchmark Capital, Kleiner Perkins Caufield & Byers and Omidyar Networks, the private financing vehicle of Ebay founder Pierre Omidyar, cut back on their investments.

The pause suggests some big investors are already heavily invested in Web 2.0 and unwilling to increase their exposure until they have more opportunities to cash in some investments, said Jessica Canning, director of research at VentureOne.

Private investment remains far lower than in the first wave of dotcom growth, and public stock market investors have so far barely dipped their toes in the water. It was In the stock market euphoria of the late 1990s, that prompted venture capitalists to pour pushed overall VC web investment above $100bn at the peak of the boom.

Yahoo has launched a new website similar to social networking sites MySpace and Facebook.

The service, called Mash, opened to a handful of trial users last Friday.

Mash marks Yahoo’s second attempt to cash in on the social networking craze. The first, a social network called Yahoo 360, has failed to gain much ground.

The company’s latest attempt comes as Jerry Yang, Yahoo’s co-founder and chief executive, is trying to revitalise its internet business, which has suffered from slower growth relative to that of its rival, Google.

Social networking has exploded in popularity. MySpace, the world’s biggest social network, was sold to News Corp in 2005 for $580m. Facebook, MySpace’s next-biggest rival, is thought to have walked away from a $1bn buy-out offer from Yahoo last year. Facebook and its backers now believe the site could be worth $8bn-$10bn.

Mash adds to a stable of Web 2.0 sites that have been acquired or developed by Yahoo. These include Flickr, the photo sharing service; del.icio.us, a website for sharing links on the internet; and Upcoming.org, an event planning service.

Warner Music will sell James Blunt’s new album through MySpace in an attempt to capitalise on the social networking site’s popularity among music fans.

From Tuesday, US consumers will be able to listen for free to Mr Blunt’s entire album, All the Lost Souls, from his MySpace webpage. If they like it, they can purchase a download for $9.99 that will play on Apple’s iPod, and will also receive a compact disc version in the mail.

The experiment reflects the music industry’s determination to find new ways to sell music at a time when it is being ravaged by piracy and continuing declines in CD sales.

Warner and other record companies are keen to establish alternatives to Apple’s iTunes digital media store, whose dominance in the online market has allowed it to dictate terms on pricing and other matters.

Several retailers, including Amazon.com and Wal-Mart, are ramping up efforts to challenge iTunes. One of MySpace’s chief attractions is that it already has a mass audience of young consumers who visit the site each day. Mr Blunt, for example, boasts more than 250,000 MySpace friends.

Warner will attempt to piggyback on that popularity by embedding a widget on Mr Blunt’s fan page powered by a technology partner, LaLa.com. The companies hope consumers will be drawn in by a seamless experience in which they can listen to an album for free as many times as they like or purchase it without ever leaving a single webpage.

Other record companies have also sought to tap into social networking sites.

In June, EMI announced a deal with SNOCAP, a music technology company, to sell songs without copyright protection through artist websites, fan blogs and social networking pages.

By contrast, Universal Music, the largest record company, has taken a more hostile view of MySpace. In November it filed a suit against the News Corp-owned site, accusing it of massive copyright violations. Warner has tried in the past to sell music through MySpace. However, those efforts gained little traction because the songs were encoded with copyright protection that made them incompatible with the iPod, the most popular music device.

They are enthusiastic about LaLa.com because it allows downloads to play on Apple devices while also affording a form of anti-piracy protection.

LaLa.com also supports variable pricing – something Apple has staunchly resisted – and has pledged to share consumer data with Warner. In theory, that could allow the record company to more effectively market music, ringtones, concert tickets and other products.

Remember private equity? It was the future once – the model not just for amassing vast personal wealth but for running companies, period. At present, it is shrouded in the  fog that covers most of the financial landscape. But when that clears, what place will private equity have in the scheme of things?

To answer the question, we must first deconstruct the model. How much of the industry’s returns in recent years came from running companies better, and how much  from financial engineering or simple leverage?

Indeed, how much of the takings for private equity managers came from their share of the profits and how much from management fees?

The hard-line advocates of private equity will tell you that nearly all the returns came from better management.

That ignores one obvious fact. The huge expansion of private equity in recent years coincided with two powerful cycles: mergers and acquisitions on the one hand and credit on the other.

It is worth recalling that not all M&A cycles are credit-driven. The last big one, which culminated in 2000, was funded mainly by the issuance of equity. This was because credit then was substantially more expensive than equity, as measured by the earnings yield. As a direct result, private equity never made it to the party. In 1999-2000, according to Citigroup, only 5-7 per cent of global M&A by value was accounted for by private equity.

This time round, of course, credit was substantially cheaper than equity. So in the first half of this year, private equity’s share of M&A globally was 31 per cent.

In this latest cycle, leverage was the key – and given the way interest rates kept falling and asset prices rising, it was money for old rope. This is not to say that superior management skills did not exist. But they were a much smaller part of the equation.

Indeed, evidence suggests that in recent years, the same top quarter or so of private equity funds have produced the lion’s share of the returns. Mostly, those were the old established firms that really did know how to manage better.

The other three quarters, it is fair to speculate, were largely opportunistic creations of the credit boom.

Why were they allowed to exist? Largely because admission to the top funds, as with hedge funds, is by invitation only. So institutions that had no experience of alternative asset classes – but which were urged by their consultants to diversify into them – had to take what they could get.

As for fees, a damning report came out last week from a couple of academics at the Wharton School of the University of Pennsylvania, who examined 144 funds over  14 years.

The study concluded that the average firm made a little over $5 from its share of the fund’s profits for every $100 it managed. Management fees, though, contributed double that.

In other words, for less talented firms the whole trick was to find enough gullible institutions to give you money in the first place. The 2 per cent management fee would make your fortune, whatever happened to your investments.

So where now? The short answer is that the industry will shrink. But it may take some  time to do so.

First, of course, there are still a number of big deals in the pipeline. Thereafter, even the more sanguine private equity managers I have spoken to argue that the industry has many further billions of equity still to deploy.

Maybe so. But pipeline deals, such as KKR’s for First Data and Alliance Boots, also involve hundreds of billions of debt which the issuing banks are desperately trying to offload.

Once that pig-in-the-python process is complete, they will be less willing to put up further debt to match the industry’s remaining equity. It might be objected that on paper, there is still a profitable gap between the cost of credit and the cost of equity. So on that basis, why should the banks not lend?

Because the cost of credit is only one part of the equation. The other bit is the level of supply. And that, I strongly suspect, has changed for the foreseeable future.

It is worth recalling that the Basel II rules will apply in Europe in just over three  months. They will introduce a risk-adjusted element to capital adequacy.

In other words, banks issuing leveraged loans to private equity will have to put up more capital than for a loan to an AA corporate. At a time when their capital will probably be squeezed by write-offs anyway, that is asking a lot.

There was a time when private equity did a humble but useful scavenging job – picking up family firms and the unloved divisions of big companies, then brushing them up for sale.

Once the fog lifts, that could well be its role again for quite a while.

And no more nonsense about visions of the future. Until the next time, anyway.

Jim Buckmaster doesn’t believe in maximising profits. He doesn’t believe in management. He doesn’t believe in brands. He doesn’t believe in discussing money and he doesn’t believe in smiling.

So much I had found out before meeting the chief executive of Craigslist, the internet classified ads company that claims to have twice as many users as Amazon – yet employs just 25 people out of a Victorian house in San Francisco.

Ahead of our meeting I gave myself two modest challenges: to make Mr Buckmaster talk financial and to make him smile. After all, he has enough to smile about. In 1999, he was an unemployed web programmer who posted his résumé on Craigslist, where it was spotted by the site’s founder, Craig Newmark, who offered him a job.

A year later he was made chief executive and now he is in the most delicious of positions. Hugely successful, he could also be hugely rich if he wanted to cash in his stake. Only he chooses not to. The high moral ground suits him better.

Mr Buckmaster ambles over to where I’m waiting at his chintzy Chelsea hotel. He is ridiculously tall (6ft8), is wearing flip flops, has dark hair with streaks of grey and is unshaven. He is decidedly attractive, so I’m disappointed that he directs his greeting and all subsequent remarks at the potted orchid over my left shoulder. He does not smile and his handshake is limp.

I tell him this interview slot usually goes to the CEOs of big companies like Nissan – whereas Craigslist is worth...how much? This attempt to extract some numbers falls flat.

“Er. We don’t give out financial metrics,” he says in a gentle, halting sort of way. “But I guess we have 25m users each month. I don’t know how many customers Nissan has.” These 25m users flock to the site to sell houses, second-hand sofas and their bodies – prostitution taking its place as a service for sale alongside ear candling and trumpet lessons. Most of these advertisers don’t pay, though estate agents and companies placing jobs ads pay between $10 and $75. How much is raised that way he won’t say.

The runaway success of the site is odd. The name Craigslist is awful and the design of the page – a long list of categories in tiny, cheap-looking type – is non-existent. “We try to stick with what the user finds useful,” he explains.

So the site is clear and fast. Users don’t like pop-up ads or big logos, so there aren’t any. They have one principle – to please users – and they follow this doggedly. Nothing else gets a look-in.

But what about motivation? If you shun profitability, isn’t it hard to get motivated? He disagrees.

“I get e-mails from people who have assembled their entire lives off of Craigslist. They’ve gotten their current job, spouse, the place they live, their friends and their dog off of this site. It’s a direct sort of philanthropy. We are helping people through our service.”

There are at least two ways that Craigslist is not helping. Earlier this summer the mayor of Atlanta was the latest to complain about the hookers who use it to tout for business. “The US is very fixated on matters of sexuality,” Mr Buckmaster sighs. “It’s mildly tiresome at times.” He is equally unmoved by claims the success of Craigslist puts newspapers out of business and costs jobs. “Newspapers are still very profitable,” he insists.

But if philanthropy is the aim, why not raise more revenue and give more away? “We don’t have any genius for giving money away. It’s difficult and time consuming. We give away 1 per cent of our revenues, and that is hard.”

So is that about $2m? I ask, hopefully, but no dice. “That might lead to unfortunate back-of-an-envelope calculations,” he says.

I show him a press cutting saying the company is worth over a billion dollars. “I don’t really know if that’s true or not,” he says in a faraway voice. In any case, he says, it’s hypothetical as it is not for sale. Isn’t he sometimes tempted? “No, I’m not. We run the business the way we want to run it. We have lifestyles we are satisfied with. We find this very enjoyable and fulfilling.”

Does he actually disapprove of money, I wonder.

“I’m not averse to riches or profit, but not at the expense of the user. We could raise more revenue, but I don’t see any of us pocketing it. It would sit with the rest of the money in the bank unspent.”

He spends his existing salary renting a nice house in San Francisco with his partner, who also works for Craigslist. He doesn’t own a car, but he does admit to enjoying travelling. On a whim I ask how much his jeans cost.

“I buy much more expensive jeans than I used to. These were one-two-five bucks,” he says.

He then looks stricken, as if the jeans thing was bad. “I’m a little uncomfortable with my current lifestyle, given where I came from,” he says. In his 20s and early 30s he used to lead a “monk-like existence”. Indeed, 10 years ago, when he was 34, his parents (his father was a chemistry PhD working for Dupont) had given up hope that their medical-school dropout of a son would ever do anything in career terms.

“I used to buy 50lb bags of wheat and grind it to make bread.” He does the hand movement, solemnly. “My grandmother spat the bread out.” A smile is suggested in his eyes but doesn’t make it to the mouth.

These days the amateur baker is increasingly in competition with the toughest internet companies, which are moving into classified ads. One competitor is Ebay (which bought 25 per cent of Craigslist from a former employee in 2004). Mr Buckmaster doesn’t seem terribly interested in the threat. “From the users’ perspective it can’t be bad if we are ever displaced by someone doing a better job,” he says, though clearly he doesn’t see that happening soon.

So if he doesn’t worry about competitors or profits, what does he worry about? He pauses for 10 interminable seconds. “I worry if I’ve made the right decision in keeping the company so small.” More people would mean more brains to serve users – but large organisations are dysfunctional. Small ones can be too, I say. He agrees: “Yeah. You just mustn’t screw it up.”

The interview is over and I have failed: no smile and no numbers. The photographer arrives and I suggest the picture is taken outside as the hotel is too frumpy. “Frumpy?” he exclaims, inexplicably amused. He smiles, broadly.

It seems the minute I stop trying, I succeed. Which is a little like Craigslist. While all those other internet companies strived so hard to make money and went bust, Craigslist wasn’t trying at all, but still hit the jackpot.

The management philosophy of Jim Buckmaster

● Listen to what users want. Try to make the site faster and better.

● Hire good people. “We work hard trying to get the right kind of folks.” It pays off: they hardly ever leave.

● No meetings, ever. “I find them stupefying and useless.”

● No management programmes and no MBAs. “I’ve always thought that sort of thing was baloney.”

● Forget the figures. “We are consistently in the black, so if we do better or worse in any given quarter it is absolutely irrelevant.”

● Occasionally, give people “a very gentle nudge”. This can be done over lunch or on the instant messaging boards.

● He doesn’t reply to any of his 100 daily messages, most of which beg Craigslist to do a deal. “I’m not real chatty on e-mail.”

● Put speed over perfection: “Get something out there. Do it, even if it isn’t perfect.”

● “Don’t screw it up by doing things that make people feel worse about their work.”

Given the Bank of England’s firm and principled stance against bailing out banks that have made risky lending decisions, its willingness to lead a rescue of Northern Rock may legitimately raise some eyebrows.

Never has the reputation and credibility of Mervyn King, the Bank’s governor, dangled from such a thin thread.

The Bank has also created moral hazard: other banks will consider riskier lending decisions in future in the knowledge that if they cannot fund themselves, the central bank will step in.

The only way Mr King can demonstrate that these twin risks are minimised is to show that Northern Rock shareholders are paying a heavy price for the privilege of jeopardising the Bank’s good reputation.

On Friday, however, the Bank, the Treasury, the Financial Services Authority and Northern Rock refused to disclose even the broad terms of the deal that was struck on Thursday night. An official statement said only that the loans were “authorised against appropriate collateral and at an interest rate premium”.

As the City noted the lack of substance in that statement, one wry remark going the rounds was that at least the Bank was not lending against “inappropriate” collateral.

Communications were also less than smooth. The Bank said it could not disclose the commercially confidential terms of the deal because it was a matter for Northern Rock. The mortgage lender blamed the Bank for not allowing it to reveal the deal. And the Treasury said the secrecy was necessary to protect financial stability.

UK banks can borrow unlimited amounts from the Bank of England at a penalty rate of 6.75 per cent if they have top-notch collateral. But since Northern Rock’s collateral is not of that quality, the Financial Times understands that the rate of interest on its loans is above that rate.

The Bank, however, is keeping quiet about just how far shareholders will be  clobbered by penalty interest rates.

Some City analysts argue that the rate of interest must be close to 6.75 per cent because the three-month rate at which banks borrow from each other on Friday stood at 6.82 per cent. However, the Bank would have had scope to extract a higher premium since it was clear that Northern Rock was unable to borrow funds almost regardless of price.

The deal is also understood to protect the Bank which, by accepting Northern Rock’s mortgages as collateral on its books, has now entered the mortgage business.

To minimise its exposure and that of the taxpayers – since the government would never let the Bank fail – Northern Rock has had to accept less than face value on the collateral it has deposited at the Bank.

That means that for every £1m of mortgage assets the Bank takes on its books, it returns less than £1m in cash to the stricken lender. The shortfall was described by someone familiar with the situation as considerably greater than 5 per cent, although the haircut would vary case-by-case according to the specific collateral Northern Rock deposited at the Bank.

Unable to demonstrate that it had guarded the public purse or avoided significant moral hazard, the Bank was on Friday drawing a subtle distinction between generalised lending to all banks – the route followed by the European Central Bank – and the tough deal it had struck with a solvent commercial entity facing a simple cash shortage.

But that distinction will be lost on most people, both in the UK and internationally. They will simply see a Bank leading a bail-out two days after primly warning that such lending sows “the seeds of a future financial crisis”.

Unless or until the terms of the deal are published, Mr King will struggle to repudiate that judgment.

Previous crises

The Bank of England has only made intermittent interventions into the banking market, remaining a passive observer of crises at BCCI (1991) and Barings (1995), writes Jim Pickard. Ironically, it had bailed out Barings in the late 19th century when the merchant bank was close to collapse.

In 1973 the Bank injected £100m into the banking system after problems at Cedar Holdings, a secondary mortgage lender, triggered a wider crisis.

In 1984 it paid £1 for the insolvent banking arm of Johnson Matthey.

In the 1990s recession it provided emergency support as smaller banks floundered. It paid £1 for National Mortgage Bank, a lender, in 1994 and sold it in 2000.

The turmoil in global banking hit the streets of Britain on Friday as thousands of Northern Rock customers queued up to withdraw their savings from the UK mortgage lender after it was rescued by the Bank of England.

As regulators and politicians called for calm, Northern Rock – Britain’s fifth-biggest mortgage lender – scrambled to contain the fallout after it became the first British bank in decades to be bailed out by regulators. One person close to the situation said customers had withdrawn about $2bn Friday but Northern Rock declined to comment on the figure, which would amount to 4 per cent of its deposit base.

The rescue demonstrates the risks from a decade of financial innovation in the capital markets, which allowed a small regional lender to wield financial clout far greater than its network of 76 branches would suggest.

It also shows how the turmoil in the financial system that resulted from excessive lending to Americans with patchy credit histories triggered the failure of a bank with no direct links to the US mortgage market.

Shares in Northern Rock plunged more than 30 per cent as analysts slashed their earnings forecasts for the bank. The news also dragged down share prices for other UK banks such as Alliance & Leicester, HBOS and Barclays.

The FTSE 100 saw sharp falls until US markets opened and helped soften the bearish tone. As the day wore on, sentiment soured again. The list of leading UK shares ended 74.6 points lower, almost 1.2 per cent down at 6,289.3. The FTSE Eurofirst 300 was 16.2 points lower at 1508.1, 1.1 per cent down.

In the US, equity markets pared early losses after economic data showed retail sales, excluding sales of vehicles, fell sharply in August. The data cemented investors’ expectations of at least a quarter-point interest rate cut from the Federal Reserve when policymakers meet on Tuesday.

The commerce department reported retail sales fell 0.4 per cent in August, excluding vehicle sales, compared with forecasts of a 0.1 per cent rise, and a 0.7 per cent increase in retail sales in July. The S&P500 was down 0.1 per cent to 1,482.45 by midday in New York. The Dow Jones Industrial Average of blue-chip stocks fell 0.01 per cent to 13,423.66.

Financials were among the worst performers, after Merrill Lynch, the world’s largest brokerage, warned that shaky credit markets had forced it to adjust the value of securities linked to risky subprime mortgages.

Concern over Northern Rock and the ability of UK banks to maintain new mortgage lending at attractive rates added to concerns about the housing market and the economy in general.

Under the terms of the bail-out, the Bank of England will provide an open-ended facility to Northern Rock, allowing it to access liquidity by posting mortgages or mortgage-backed securities as collateral. The rescue – finalised yesterday after days of negotiations involving the Financial Services Authority and the UK Treasury – came just two days after Mervyn King, governor of the Bank, insisted it would not intervene to bail out the markets.

According to people familiar with the matter, several banks considered buying Northern Rock. However, a deal was undermined by a shortage of liquidity and uncertainty about Northern Rock’s value. Adam Applegarth, Northern Rock’s chief executive, said the bank was not in talks with a buyer.

Additional reporting by Chris Giles, Lina Saigol, Paul J Davies and Saskia Scholtes in London

The long-forecasted end to Britain’s 12-year housing boom is drawing closer, new figures showing a 2.6 per cent drop in house prices in September seemed to suggest Friday.

A survey by Rightmove, the property website, showed the average asking price in the UK was £235,176; down from £241,474 in August.

The fall was exacerbated by a drop in the number of four-bed homes coming to market, which some blame on the introduction of home information packs for large houses.

But it may also indicate a wider slowdown after five rises in interest rates and the turmoil in bond markets had pushed up the cost of mortgages.

Commentators are likely to wait for official government data before concluding that prices are definitely falling.

However, the Rightmove data adds to a more gloomy picture of the state of Britain’s housing market.

The average property sat on the market for 86 days, compared to only 70 in May, according to Rightmove’s figures. The number of properties for sale per estate agent has also risen; from 52 in December to nearly 66 today.

The figures came only a day after the Royal Institution of Chartered Surveyors (Rics) published a survey that showed sentiment among estate agents had soured.

Rics said the Rightmove survey could, if anything, “understate the negative sentiment which has hit the housing market in recent days”.

Oliver Gilmartin, senior economist at Rics, said indices tended to lag the market during housing slowdowns.

Rightmove attributed the fall in its index in part to the introduction of Hips, which sellers of large houses now have to pay for. But Miles Shipside, commercial director, acknowledged interest rates and the credit squeeze had also damaged sentiment.

The boom had probably reached the peak, he said.

Asking prices in London were down by 2.5 per cent; the south-west down 4.1 per cent; and the south-east 3.3 per cent.

The fall was less marked in other regions such as the West Midlands, down 0.9 per cent, and Wales, down 0.2 per cent.

There were also striking variations within London where there have been fears that some prices could be affected by falling expectations of City bonuses as a result of market turmoil.

Kensington and Chelsea saw monthly growth of 0.7 per cent but asking prices tumbled by 7.8 per cent in Brent and 7.7 per cent in Camden.

Sterling dropped to a 14-month low against the euro on Friday as analysts called the top in the current UK interest rate cycle after the Bank of England revealed it had provided emergency funding for Northern Rock, the troubled mortgage lender.

The news added to the pressure on the pound, following weak house price data earlier in the week. Figures from the Royal Institute of Chartered Surveyors on Thursday showed house prices dropped for the first time in two years in August.

Worries were exacerbated on Friday by Rightmove’s UK house price index which showed a 2.5 per cent fall in London house prices – the most in three years.

Analysts said the Northern Rock news was likely to prompt a rethink on interest rates at the Bank of England, which has so far taken a tough line against easing UK monetary policy.

“If there is one resounding conclusion from the current turmoil, it is that UK interest rates are heading lower in the coming months,” said David Brown at Bear Stearns. “It may be anathema to the Bank but these are special circumstances now and they require exceptional central bank action.”

The pound fell to a low of £0.6903 against the euro – its lowest level since July 2006 and taking its losses against the single currency over the week to 1.6 per cent.

Kamal Sharma, currency strategist at Bank of America, said it was likely the pound would fall further given the reliance of the UK economy on revenue from the financial sector.