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If arrogance were the only attribute required in order to triumph in a legal battle with disgruntled shareholders, Lord Black of Crossharbour would already be celebrating his victory. Unfortunately, there’s the pesky matter of minority rights and a growing number of legal challenges to His Lordship’s omnipotence at Hollinger Inc. With each move he makes, another possible exit route is cut off, another flank attacked.

In the latest skirmish, Lord Black resigned his positions as chairman and chief executive officer of Hollinger Inc. – which he controls through his private holding company, Ravelston Corp. – just hours before a Canadian court was expected (by some) to force him to step down. At the same time, the press baron is trying to mount a takeover offer for the shares of Hollinger Inc. that he doesn’t already own, and that gambit could also be thwarted by minority shareholders.

Various investors of Hollinger Inc. have been trying to get Lord Black to leave the helm of Hollinger for more than a year now, ever since the operating unit of the company – Hollinger International, which owns the Chicago Sun, the Jerusalem Post and used to own London’s Daily Telegraph – became embroiled in a legal battle between Lord Black and its own minority shareholders. In November, four independent directors on Hollinger Inc.’s audit committee resigned en masse after urging Lord Black and his associates to step down.

The more recent attempts to oust Lord Black have come from Catalyst Fund General Partner I, a limited partnership investment fund that owns about 37 per cent of Hollinger Inc.’s series II preferred shares. Catalyst was also the one that convinced an Ontario court to appoint an independent investigator to look into various payments, transfers, loans and other agreements between Hollinger Inc. and Ravelston. The firm of Kroll Lindquist Avey was appointed to do so in September but later resigned due to a dispute over alleged conflicts of interest, and Ernst & Young was then given the job. Its report to the court is expected later this month.

Catalyst has been asking for Lord Black to resign because of what it alleges are a number of conflicts stemming from the inter-relationship between Ravelston and Hollinger Inc. (Ravelston controls 68 per cent of the unit’s voting stock). Among other things, the fund management company has complained about a $1.1-million payment to Ravelston from Hollinger Inc. that wasn’t properly approved by the company’s independent directors. Lord Black said in an affidavit that the payment was “an error” made by Hollinger executive Peter White. According to Catalyst, Ravelston also allegedly owes Hollinger Inc. over $25-million.

At the same time Lord Black was planning his resignation from Hollinger Inc. late last week, minority shareholders of Hollinger International were re-filing their lawsuit against Lord Black and his associates. The original suit, which claimed more than $1.2-billion in damages, was thrown out because the court ruled that it was improperly filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act. The latest filing, which asks for damages of $542-million, contains effectively the same allegations – widespread improper payments and transfers to Lord Black and his associates (these allegations haven’t been proven in court).

To sum up, Lord Black has resigned as chairman and chief executive officer of his operating company, Hollinger International, and now has resigned from those positions at its parent, Hollinger Inc. as well. He faces a $542-million lawsuit from Hollinger International shareholders, and a court-appointed investigator is looking into Hollinger Inc.’s finances as well, raising the possibility of future liability.

In addition, while the special committee in charge of Hollinger International recently agreed to allow Lord Black to receive his share of the proceeds from the $1.2-billion sale (after debt) of the London Telegraph, most of that money will go to Hollinger Inc. rather than to Lord Black, which makes all the difference. Minority shareholders and independent directors would have to approve any use of those funds. Lord Black’s buyout offer to Hollinger Inc. will also have to be approved by minority shareholders, as well as securities regulators.

The bottom line is that Lord Black finds himself hemmed in on all sides, with a rapidly-vanishing amount of territory on which to make his final stand. In one of the more pointed e-mail comments that turned up in the report from Hollinger International’s special committee, Lord Black said Hollinger “served no purpose as a listed company other than [the]relatively cheap use of other peoples’ capital.” The press baron’s experience with Hollinger and its minority shareholders, however – at two different levels – has been anything but cheap. And it could get a lot more expensive before it’s over.

Only a month or so ago, shares of Research In Motion looked wildly overvalued, trading at about 100 times profit estimates for the current year and about 50 times next year’s targets. Then a surprising thing happened: The Waterloo, Ont.-based wireless products maker turned in a stronger-than-expected third quarter, and more than doubled its profit forecast for the current quarter.

All of a sudden, the stock looked to be only somewhat overvalued, rather than egregiously overvalued. In fact, for a brief moment, it looked almost reasonable. So what did RIM stock do? It rocketed even higher, to the point where the shares are almost as overvalued as they were a month ago. Even when RIM took advantage of this runup and announced a massive share issue, the stock faltered only briefly.

In most cases, when a company says it is planning to issue close to $1-billion worth of new stock, the existing shares go down because of the dilution factor. After a share issue, the profit that would have been allocated to existing shareholders gets spread out over a bigger group, which reduces share profit.

Do RIM investors care? Apparently not. The stock briefly dipped on Thursday after the news, and then resumed its northward trajectory on Friday, climbing more than 7 per cent at one point — adding almost $450-million (U.S.) to RIM’s market value. Since mid-December, the share price has soared more than 60 per cent.

The justification for all this, of course, is that RIM, maker of the popular BlackBerry communications device, doubled its profit forecast for the current quarter — and so most analysts more than doubled their stock price targets. No one seemed troubled that RIM’s earlier forecasts were so off base, presumably because the miss was on the upside rather than the downside (no harm, no foul).

But analysts didn’t boost their estimates for just this quarter — they doubled their forecasts for the whole of this year and next year as well (forecasts “adjusted” to remove things such as litigation costs and options expenses, of course). Now the same oversized multiples the stock traded at before are being applied to these new estimates.

U.S. investment brokerage Bear Stearns & Co. Inc., for example, has a stock price target of $91, a 20-per-cent jump from the current price, and more than 100 per cent higher than a month ago. That’s 93 times the brokerage adjusted or “pro forma” profit target for this year, and 36 times its estimate for next year. And the 36-times figure for next year is only because Bear Stearns expects RIM to boost its annual profit by more than 150 per cent. The following year, the brokerage expects RIM’s profit to be more than triple this year’s.

If you look at profits that conform to U.S. generally accepted accounting principles — that is, profits that include a variety of expenses that “pro forma” profits do not — the picture is scarier. Bear Stearns’ $91 target becomes 171 times this year’s profit estimate and almost 50 times next year’s. Even Friday’s stock price of $76 works out to about 40 times estimates (45 times if you include option expenses).

And what about the dilution? Bear Stearns kept its $91 target despite the prospect of dilution because its target is based on share profit (pro forma) plus the value of cash on hand — and while the profit goes down as a result of the issue, the amount of cash goes up. But does having a lot of cash really make RIM’s operations that much more valuable?

RIM says having more money will make it look more financially secure and enhance the possibility of partnerships and big contracts, which is no doubt true — and it will allow RIM to cope with higher demand. But it’s a bit of a stretch to say that the entire $738-million it will raise with the issue should be added to the company’s profit for valuation purposes.

If you leave the cash out and look at RIM’s cash flow from actual operations, the picture isn’t all that rosy. In the nine months to November, RIM’s profit totalled $10.2-million, but only $3.3-million came from its core business — almost 70 per cent came from investments. And if RIM had expensed its stock options, it would have reported a loss of about $3.6-million for that nine-month period.

Yet, still the stock climbs. After RIM revised its profit forecast, Toronto-based Orion Securities Inc. more than doubled its 2005 profit estimate, noting the stock was selling for a mere 25 times that estimate. That was two days before Christmas, when the stock was $46 on the Nasdaq Stock Market, and Orion had a price target of $65 (up from its earlier target of $44).

The next day, the stock jumped more than 50 per cent, plowing through Orion’s target. On Friday, it closed at $76.25 on Nasdaq. Now, it is trading at more than 30 times RIM’s 2005 profit estimate — and that’s an estimate that assumes RIM’s operating profit will rise 230 per cent in 2005.

Can lightning strike twice? It had better, because only another sudden doubling of profit forecasts will make RIM’s stock look even remotely reasonable.

A small technology company with a goofy name goes public, and before long it is a market titan with a valuation larger than one of the Big Three auto makers. Haven’t we seen this movie before? Sure we have. The first time around it was Yahoo!, complete with exclamation mark (in case you weren’t excited enough already). This time it could be Google – no exclamation mark, but still plenty of heavy breathing about the billions of dollars it could be worth someday.

Most of the people getting all hot and bothered about a Google IPO are on Wall Street, of course, where brokers haven’t had a nice blockbuster technology offering for years. Mention hot IPO and people either think of brokerage firms “spinning” shares of tech firms to their favoured clients, or they think of infamous flameouts such as theglobe.com – which climbed tenfold on its first day in 1998 and soon after disappeared from the face of the earth.

But things are different now, some say. How? Well, for one thing, Internet companies actually make money. Yahoo, for example, has been turning in quarterly profits for some time now, and even Amazon has had a few. The bottom line at eBay, meanwhile, seems to grow by 60 per cent or 70 per cent every quarter. Let’s not be crass and point out that several of these companies exclude various expenses to produce those profits, including the cost of stock options (which would have caused Yahoo to lose $440-million last year instead of making a profit of $43-million).

Profits per se aren’t what has bankers all a-quiver, however – it’s the immense valuations that are being assigned to stars such as Yahoo and Amazon, as well as up-and-comers such as Netflix and even also-rans such as Ask Jeeves. Yahoo is selling for more than 114 times its estimated profit for this year, while Amazon sells for 92 times and eBay for 75 times. Netflix is trading at 100 times this year’s profit, and AskJeeves is selling for about 52 times.

So is Google just getting greedy for some of that hard-earned bubble IPO money, or is it getting its arm twisted by Wall Street? Probably a bit of both. It would take a superhuman effort to resist the prospect of becoming an instant billionaire, as co-founders Sergey Brin and Larry Page would in an IPO. And meanwhile, brokers are whispering in Google’s ear about how it could use the funds for acquisitions.

But isn’t Google the best in the business? No question. As search “engines” such as AltaVista and Yahoo started to grow long in the tooth in the late 1990s, Google came along with its patented “Page Rank” technology. Instead of using search terms (the old method), Google’s engineers came up with a way of determining which page was more likely to be useful to a particular searcher, based on the number of other pages that pointed to that page.

Although Google is clearly the title holder when it comes to fast and accurate searching, however, competition has been heating up with Yahoo since Yahoo bought Overture for $1.6-billion (U.S.), and there is a gorilla on the horizon: Microsoft. The software giant has been talking about improving the search function on its MSN service by designing its own search engine. More funds equals more ammunition for a fight with the world’s largest software maker.

So a Google IPO means that Wall Street gets its blockbuster issue, the market gets a nice big number to compare its other inflated valuations to, and Google’s founders not only become obscenely wealthy but have lots of money to go up against the Gates empire. Now all that needs to be done is to settle on what Google is worth.

All sorts of numbers have been tossed around over the past few months: anywhere from $15-billion to $25-billion, depending on who’s doing the talking. Yahoo is worth (using the term loosely) $27-billion, while eBay is worth $36-billion and Amazon $22-billion. That puts eBay just behind DaimlerChrysler, Yahoo in the same league as Alcoa, and Amazon near General Motors.

Of course, no one is quite sure how much money Google makes, but industry sources say it is expected to have sales this year of between $700-million and $1-billion, and to make about $200-million in profit. Not a bad business – and industry analysts say they expect sales next year of about $1.5-billion. Assuming Google can keep its returns high (and that these estimates are even close to reality), the company might have a profit of $400-million next year.

If you use next year’s estimated profit and apply Yahoo-style multiples, you get a market value of between $21-billion and $30-billion for Google – since eBay is selling for 54 times next year’s profit, and Yahoo is selling for 78 times. If you use a sales figure you get a potential market value of about $18-billion, since both Yahoo and eBay are selling for about 12 times next year’s estimated sales. Now you can see what has Wall Street so excited.

But will the fact that Google can be sold for those kinds of valuations justify the prices people are paying for eBay and Yahoo, or will it simply call attention to how absurd they are? That remains to be seen.

At a recent technology show in Europe, Research In Motion launched a new, consumer-friendly version of its popular BlackBerry handheld device – a smaller, blue-coloured unit dubbed the BlueBerry, expected to be much cheaper than its predecessor. In many ways, the device is a double-edged sword: it has the potential to expand RIM’s market reach, but it also thrusts the company further into a competitive minefield.

Until recently, RIM has concentrated on the corporate market, in part because the “always on,” instant e-mail features of its device – which began as a souped-up pager – appealed primarily to businesses, the kind with salesmen or executives who needed to be available at all times. Politicians and day-traders have also embraced the it, but the corporate market has been the company’s main beachhead and the core of its revenue base.

RIM has also focused on corporations out of necessity, partly because the BlackBerry and its monthly fees have been too expensive for non-business users – and partly because RIM’s e-mail software works best when installed and configured with a corporate e-mail server. Over the last year, however, RIM has been trying to broaden its appeal by licensing its software to other hardware makers, including phone companies such as Nokia. The launch of the BlueBerry is another step down that road.

Many of the analysts who follow the company have applauded these moves, since RIM was seen as too dependent on its own hardware in the past, and restricted to a single niche. They say the new unit – expected to cost $300 (U.S.), compared with the $500 price tag on the regular BlackBerry – could be a winner, and could help the chronically money-losing Waterloo, Ont. company make the leap into profitability. There are some hurdles that RIM has to overcome on the way, however, and they are substantial.

For example, as the company pursues licensing deals with phone companies such as Nokia and distribution arrangements with other providers to sell BlackBerrys and BlueBerrys, it becomes even more reliant on two things. It becomes more reliant on licensing fees and a share of the monthly charges phone companies charge, and it has to rely on those partners to market and sell its devices properly. If they don’t, RIM suffers.

In other words, if Vodafone or other phone company partners don’t discount the BlackBerrys and BlueBerrys to stimulate demand – or don’t discount them enough – they may not sell well. Part of the problem with that equation is that all the major telecom carriers are watching their pennies after the telecom market blowout, and may not be sufficiently motivated to eat into their cash flow for some theoretical future benefit. Even if they are, they could pressure RIM to take a smaller cut of the proceeds.

A related issue is that the phone companies are already busy pushing expensive e-mail-ready devices to stimulate demand for their new services – they’re called cellphones. Many of the newer phones that run on the GPRS, 1XRTT and GSM networks the companies have spent millions building are e-mail capable with always-on capabilities. They may not have thumb keyboards, but plenty of Europeans seem pretty happy with them.

And that’s not all. A U.S. company called Good Technology has been winning RIM customers away with its software – which runs on the BlackBerry, as well the Palm and Pocket PC. Although RIM denies that Good represents real competition, some analysts disagree. RIM has even had to play catch-up with Good: Good’s software offers e-mail updating (in which an e-mail read or deleted on the handheld is automatically read or deleted on the user’s PC), as well as viewing of attachments such as Word documents, and support for web-based e-mail accounts. RIM’s did not, until recently.

As if that weren’t enough, RIM is also wrestling with legal issues – issues that are crucial for a company that plans to gain revenue from licensing. As well as suing Good, the company is fighting a patent case launched by a U.S. company called NTP, which claims it developed technology used by RIM in its devices. After an initial ruling in NTP’s favour, a judge has sent the matter to mediation, and RIM said it has increased to $40-million the reserve it is keeping in case of a negative outcome.

RIM maintains that the NTP lawsuit has no validity, and some analysts agree; but they also note that the suit constitutes an “overhang” that affects the share price. Combined with the tricky transition RIM is trying to engineer, and the substantial risks it entails, even analysts who applaud RIM’s strategy are hesitant to rate the stock anything more than a “market perform” or “hold” – at least until the smoke starts to clear.

Call it the file-sharing war part two: the post-Napster battle. That’s what the major record companies, movie studios and music publishers are now engaged in, with a handful of file-sharing networks that sprang up following the death of Napster. The popular service, which at one time had 30 million users, was effectively killed by a series of multibillion-dollar lawsuits, which eventually resulted in a court order that Napster remove all copyrighted music from its network of servers. Getting rid of the new batch of file-sharing services may not be quite that simple, however.

The new services are known by several different names, including Morpheus, Kazaa and Grokster. They are all based on software from an Amsterdam-based company called FastTrack, which allows users to set up a virtual public network among themselves through which they can trade any type of digital content — music, videos, full-length movies, software, and so on. One key difference is that Kazaa or Morpheus users don’t share files by accessing a central group of servers, as Napster users did. That’s part of what made the company vulnerable, because it was held liable for the file-swapping.

Kazaa and Morpheus — and other file-sharing services such as Limewire and BearShare, which are based on the open-source software known as Gnutella — are “distributed” networks, meaning users download or upload files directly from another user’s computer. In the case of Gnutella, the software that runs the networks is freely available, which makes it difficult to find a company to pursue in court. FastTrack (which runs Kazaa) charges MusicCity (which runs Morpheus) a licensing fee for its software, but even if it was shut down, the software is not that hard to reproduce.

With these kinds of distributed networks, copyright holders are effectively forced to go after individual file-sharers — and in October alone, estimates are that well over half a million users swapped more than 2 billion digital files. File swappers, and some legal experts, argue that under copyright law consumers who pay for music have the right to make copies for other uses, such as playing them from their computer, in a car stereo and so on. Shutting down the file-swapping networks would prevent them from doing so — or they could switch to other methods, including using the latest version of Microsoft’s Instant Messenger or the file-sharing tools included in older chat-oriented software such as Internet Relay Chat.

Nevertheless, last month the Recording Industry Association of America (RIAA) filed a suit against MusicCity and FastTrack, and was joined in the action by the Motion Picture Association of America (MPAA), which is concerned that high-speed Internet access and new compression schemes make it even easier to swap entire full-length Hollywood movies as well as music. Earlier this week, the National Music Publishers Association, which represents about 800 music-publishing companies and licenses music through its Harry Fox subsidiary, also launched a suit. The plaintiffs are legendary songwriters Jerry Leiber and Mike Stoller, who wrote Jailhouse Rock.

While they have been pursuing Napster and its offspring in court, the major record labels have promised that two new on-line music services will take the place of file swapping. MusicNet is a consortium of EMI Music, Warner Music Group and BMG Music that plans to use RealNetworks technology, while Pressplay is a partnership between Sony Music and Vivendi, and has a technology deal with Yahoo. To complicate things, Napster is supposed to be part of MusicNet, while EMI Music has licensed its artist catalogue both to Pressplay and to MusicNet. Both services are expected to launch next year, although their launch dates have already been delayed several times.

Both Pressplay and MusicNet will likely involve restrictions that file-sharers are not likely to take kindly to, however. They are expected to be “tiered,” which means one monthly fee — $9.95, for example — will only allow you to access certain songs, or will only allow you to stream the music rather than downloading it onto your hard drive. MusicNet also has plans to provide music files which expire at the end of the month. Even users who pay the full price may be restricted to copying the file to one device only, while users who are looking for music from both EMI and Sony or Warner and Vivendi, meanwhile, will have to pay two monthly fees.

With those kinds of restrictions, it won’t be a surprise if file-swappers continue to find alternatives such as Morpheus and Kazaa, whatever the outcome of the case happens to be.

Amid the bad news about writedowns and so on in Research In Motion’s second-quarter report, the handheld device maker’s revenue gains stood out as a bright spot — sales climbed by 88 per cent from the same quarter the previous year. Unfortunately, there are just a couple of caveats: One is that the stock market has been pricing in revenue gains of far more than that, and the other is that RIM is now expecting its sales will fall slightly in the third quarter and show little or no growth in the fourth. That’s not the kind of thing investors in a stock selling for 70 times earnings want to hear.

One of the reasons why RIM’s revenues won’t be growing at the speed they were expected to previously is that some of the company’s partners are in serious financial difficulty, including would-be wireless data provider Motient Corp. The U.S. company, which had a deal to offer RIM’s BlackBerry handhelds, said recently that it would not be making a major interest payment on some of its debt and that it is cutting jobs and will have to restructure its finances. Last year, RIM said that it expected to add 50,000 BlackBerry subscribers as a result of an expanded agreement with Motient.

RIM has now taken a $23-million writedown on inventory and receivables as a result of Motient’s “weakened financial condition.” And that is only the latest black spot on RIM’s planned rollout in the United States. Only two months ago, both Motient and Aether Systems — another startup wireless provider — as well as telecom partner Cingular Wireless (a venture of BellSouth and SBC Communications) said they were not adding subscribers as quickly as expected. Cingular added 60-per-cent fewer subscribers than analysts had expected, raising obvious concerns about future sales. Aether has also cut over 40 per cent of its staff and lost $103-million in the most recent quarter.

Research In Motion chairman and co-chief executive officer Jim Balsillie said on Wednesday the company isn’t that concerned about problems with some of its U.S. partners because “we believe that the migration to next-generation networks will limit our exposure to their difficulties.” But the rollout of those next-generation networks — such as the GPRS (global packet radio system) services some North American and European carriers are starting to offer — is not coming as quickly as expected.

That leaves the company in a bind: Its sales of the older-style BlackBerry pagers and handhelds are slowing and profit margins are tightening, but the new markets it needs in order to keep growing have yet to fully develop. RIM said that it has shipped 20,000 of its new handhelds to BT Cellnet,a unit of BT PLC, as part of a deal for 175,000 of the devices — but there was little detail about future shipments. The rollout of GPRS networks by BT and others has been held up by technical and financial hurdles.

Company watchers have been hoping for news of other launches similar to BT’s, since this is where the company expects much of its growth will come from, but so far there has been little. VoiceStream (a unit of Deutsche Telekom) has said that it plans to start offering BlackBerrys in “early 2002,” but apart from that all RIM has are “memorandums of understanding” with Internet and telecom providers in France, Italy and the Netherlands. Many are waiting until they see whether next-generation services will sell, or whether consumers are willing to pay enough for them.

In its release, RIM said sales for the second quarter were $80-million (far below many estimates), sales for the third quarter will be as low as $70-million to $75-million, and the fourth quarter will be about the same — meaning sales for the year could be 15 to 20 per cent below estimates. The company said it would have an operating loss of 6 to 9 cents for the third quarter and a loss of 8 to 12 cents for the fourth — which would mean a loss for the year of anywhere from 4 to 11 cents. That compares with earlier profit estimates for the year of 22 to 34 cents a share.

And RIM is still far from bargain priced. Even before the company revised its earnings expectations, the stock was trading for almost 70 times this year’s average earnings estimates and 30 times next year’s earnings projections. The company is now saying that its earnings for next year may be between zero and 10 cents a share — compared with earlier estimates of between 48 and 76 cents. That means despite its recent fall, and the fact that it is now trading close to its 52-week low of $13.70, the stock is still trading at more than 150 times next year’s estimated earnings. That may have looked reasonable a couple of years ago, but not any more. Mathew Ingram writes analysis and commentary for globeandmail.com

Major North American stock markets are still shaky after the attacks on New York and Washington, the Dow Jones industrial average and the Nasdaq market index are near their lows and investors seem generally tense and nervous. On top of all that, the technology sector is firmly in the grips of a bear market. Sounds like the perfect time to launch an IPO, doesn’t it? That appears to be exactly what the folks at PayPal, the on-line payment service, were thinking: They filed a prospectus for an initial public offering on Friday.

To say the least, this seems like a bizarre – if not doomed – choice of timing. Apart from the malaise infecting technology stocks, the IPO market is virtually dead. It was on life support even before the terrorist attacks in the United States, and the events of Sept. 11 more or less pulled the plug completely: September was the first month since 1975 that saw no U.S. IPOs launched at all. Not just a few – none.

Not only that, there’s a recent cautionary example of just how wrong such an IPO can go: A network services company called Loudcloud – backed by former Netscape founder Marc Andreessen, among others – went public in March, just as the Nasdaq cratered. It raised $150-million (U.S.) but is still struggling, burning through $35-million per quarter, and the company recently laid off an undisclosed number of staff. From $7 after the issue, the stock is at $1.20, having lost over 82 per cent of its value.

But that hasn’t stopped PayPal from going ahead with its issue – which raises the question: Why the hell not? Why would any company decide to wade into the public markets now? The most likely answer is that it can’t afford to wait. Like many startups, PayPal has financed itself over the past two years with funding from venture capital groups, including Sequoia Capital, Clearstone Partners and Nokia Ventures, an arm of the Finnish cell-phone giant. But even venture capitalists have gotten stingy.

Its IPO filing shows that PayPal burned through about $30-million in the most recent quarter – although the company claims that its burn rate is decreasing. Rather than having any equity, it currently has a shareholders’ deficit of more than $164-million, as a result of losing over $230-million since its inception two and a half years ago. After the issue, which is expected to raise about $80-million, the company says it will have shareholders’ equity of $114-million and cash or cash equivalents of $123-million.

And what about the company’s business? PayPal is an on-line payments company, handling e-commerce transactions between individuals or companies. In many ways, it acts as a kind of virtual Western Union, allowing buyers and sellers on eBay or Yahoo’s auction Web site to exchange funds by cheque or credit card. It also functions as a bank, in the sense that users can withdraw funds from their PayPal accounts, are paid interest on any balance they have, and can access their account from automated teller machines.

One of the problems with that model, obviously, is that by functioning as a near-bank, PayPal is vulnerable to competition from actual banks – including Citigroup in particular, which runs an on-line payment service called c2it that has co-marketing arrangements with AOL Time Warner and Microsoft. Not surprisingly, Western Union also has its own services called BidPay (for auctions) and MoneyZap. But the real issue for PayPal is that eBay has its own on-line payment service known as BillPoint.

This is a serious problem because the majority of PayPal’s business comes from auctions – 70 per cent or so in the most recent quarter – and much of that comes from eBay (Yahoo, which also runs an auction site, has its own payment service called PayDirect). EBay promotes its own service prominently on all auction sites as the preferred method of payment. In fact, PayPal recently sent a letter to eBay users telling them the auction site was changing their payment preferences to BillPoint (also called eBay Online Payments) without their knowledge, a charge that eBay has denied.

On the plus side, the company says it has 10 million registered users, and handles an average of 165,000 transactions a day worth about $8-million, for a total of $747-million worth of transactions in the second quarter. But there’s no question the company faces a stiff headwind, particularly in the current economic environment – and the fact that it is going ahead with an IPO anyway has to be seen as a sign of desperation.

After virtually any disaster, natural or man-made, there must be rebuilding, and the attacks on New York and Washington are no exception. That’s not to say the World Trade Center has to be rebuilt, but the brokerage firms and banks and insurance companies that inhabited it have to somehow get back to work. In addition to the horrific human loss that has been suffered, those businesses have to replace the nuts and bolts of their operations, and that means buying everything from computers to phone networks.

According to Tower Group, a New York-based consulting firm that specializes in studying technology in the financial services industry, at least $3.2-billion (U.S.) will have to be spent by securities firms alone to replace the systems they lost when the World Trade Center towers collapsed. The firm expects $1.7-billion to be spent on hardware (including trading stations, sales stations, workstations, PCs, servers, printers, storage devices, cabling, hubs, routers and switches) and another $1.5-billion on consulting services and software to install and connect all the new hardware.

According to the New York Times, one securities firm ordered 200 PCs from Dell Computer within hours of the planes hitting the World Trade Center – and that was just the first in a rush of replacement orders. Dell said it had to step up production at its plant in Austin, Texas and has been more or less operating its plants at peak capacity around the clock. The company said it had sold more than 24,000 servers, laptops and desktop computers as of Monday and had turned three 18-wheelers into mobile support facilities. One law firm sent its own truck to Austin to pick up 400 computers.

Tower Group said in its report that it believes 30,000 securities positions (including trading, sales, research and operations) were destroyed in the two World Trade Center towers – and that as many as 15,000 to 20,000 positions will need to be replaced in nearby buildings, including the World Financial Center and Bankers Trust buildings. That includes 16,000 trading desks (including multiple workstations with multiple flat-screen displays) worth $52,000 each, 34,000 PC workstations at $5,000, about 8,000 Intel servers and 5,000 UNIX servers at a cost of about $370-million.

And those figures are just for the securities industry. Similar numbers will likely apply to the law firms, insurance companies and others that were located in the towers, although they most likely would not have five flat-screen computer displays on every desk the way a securities dealer would. And that’s just the computer equipment that has to be replaced – then there are the phone and data networks that have been destroyed or seriously damaged, not to mention the impact on the commercial real estate market in New York as a result of the collapse of the two immense office towers.

By some estimates, as much as 15 million square feet of office space has been either obliterated or damaged – equal to about 15 Empire State buildings, or all the office space in downtown Atlanta or Miami – in addition to more than 75,000 phone lines and over 20,000 miles of telephone and data cables. According to one report, tens of millions of dollars in phone switches are buried, and steel girders severely damaged one of the switching facilities for Verizon’s network. “We have a giant job cutting out the pieces that don’t work and reattaching the parts that do,” Hugh O’Kane, CEO of telecom consulting firm Levent Management, told Fortune magazine.

Obviously, some of the firms who have lost entire networks – both phone and data – will take the opportunity to upgrade to faster or more secure (or redundant) systems, rather than just duplicating what they had before. And that might mean a considerable amount of unexpected business for companies such as Cisco Systems, Nortel Networks and other networking equipment makers. Focusing on the sales of office equipment after such a terrible event no doubt seems cruel and insensitive, but eventually the world must return to normalcy, and helping companies recover is part of that.

There’s no question that the spending on computers and networking gear will provide tens of billions of dollars that those industries were not expecting to get. But will it be just a short-term blip? Perhaps. On the other hand, it might help PC makers such as Dell and networking equipment companies such as Cisco get through the next couple of quarters, until those industries and the economy itself begin to return to something approaching normal behaviour (assuming that ever happens, of course).

On the front cover of The Hitch Hiker’s Guide to the Galaxy, the traveller’s manual in Douglas Adams’ popular novel of the same name, was a simple piece of advice: “Don’t Panic.” This also happens to be good advice if you are an investor – and not just now, in the aftermath of the attacks on the United States, but at almost any time. In fact, many investors should probably have heeded that advice in 1999, when the market was deep in the throes of a buying panic. And it is just as timely now, when the impulse may be to sell just about everything you own and head for the hills.

If you were to sell everything, you would certainly have plenty of company: Despite all the talk about investors holding fast – or even buying stocks – to show their resolve in the face of terrorism and so on, the Dow Jones industrial average and the Nasdaq stock index both went into free-fall when trading opened on Monday, with the Dow dropping by almost 600 points or more than 6 per cent, and the Nasdaq off by about 6 per cent as well, or over 100 points. After an attempt at a rebound of sorts both indexes started to head south again, hitting lows not seen since the latter part of 1998. Tuesday brought a brief respite, but then the selling intensified again on Wednesday.

So should you join the stampede? Not unless you enjoy throwing good money after bad. The fact is that rash decisions are rarely wise decisions – unless you want to rely on the chance that you might accidentally make the right choice, which probably isn’t the kind of attitude you want to take when dealing with your portfolio. If that is the approach you want to take, then you might as well head down to Las Vegas and put some money on your favourite number, or throw a handful of darts at the stock pages. Throwing all your stocks out the window because of an all-consuming fear of a global meltdown sparked by last week’s events falls into the same category.

Not panicking also covers some of the behaviour that investors might feel compelled to take, apart from selling everything – such as the desire to buy stocks indiscriminately, as a gesture of patriotism or solidarity with the United States, as some financial advisors and columnists were recommending late last week. That may seem like a nice gesture to make, but it isn’t likely to help you or even the economy as a whole.

Holding tight to every stock you own is also not the wisest course, since there are stocks in certain sectors that arguably should be sold – shares in some airlines, for example, whose financial future might be in doubt as a result of a sharp drop in international and business traffic; or shares in certain large insurance companies who might find themselves on the hook for tens of billions of dollars in claims; or some hospitality stocks, on the assumption that travel might suffer.

Conversely, of course, the contrary impulse – to buy some of everything, since this must be an enormous buying opportunity if you were at all bullish before the attacks occurred – would also likely be an over-reaction. As difficult as it may be, investors should do what they (at least theoretically) attempt to do at other times, when there are no disasters and war is not looming large on the horizon, and that is to take a little time and think about what is happening and what it might mean for their portfolio, before coming to any conclusions about which stocks to buy or which to sell.

Warren Buffett, the legendary value investor known as the Sage of Omaha, told the TV show 60 Minutes on the weekend that he wasn’t planning to sell anything, and that depending on how much certain sectors fell on Monday, he might start looking at buying a few stocks. That may be boring and uninspiring, unlike the call to “Buy a stock for America!” that some market watchers have been promoting, but boring is how Mr. Buffett came to be worth $30-billion(U.S.) or so. It doesn’t make for great headlines, of course, but it helps to avoid a lot of the ups and downs of the day-trading crowd.

A survey of past catastrophic events and their effect on the stock market proves the point even better: According to data crunchers such as the folks at Markethistory.com, in virtually every case going back to the turn of the century, a disaster or war event of some kind has caused benchmarks such as the Dow and the S&P 500 index to slide by anywhere from 5 to 12 per cent – but in six months to a year, those indexes were higher than they had been, having made up all the ground they lost and then some. That goes for the bombing of the World Trade Center in 1993, the invasion of Kuwait in 1990, Pearl Harbor and the sinking of the Lusitania in 1915.

In other words, there are plenty of reasons for buying and selling stocks in the wake of the attacks in the United States – but some of them, however well-meaning they might be, are unsound.

Although the pieces of the puzzle haven’t all been put together yet, the early signs are that those responsible for the attacks in the U.S. are associated with militant Islamic leader Osama bin Laden. And what could possibly have sparked those horrific attacks? As with so many other aspects of U.S. foreign policy, much of the hatred that emanates from militant Islamic terrorist groups such as Mr. bin Laden’s can be traced back to a single thing: Oil – and more specifically, the U.S. government’s desire to maintain control over the vast quantities that exist in the Middle East.

Mr. bin Laden, a Saudi-born businessman who left the construction business to become a financier of international Islamic terrorism, is only the latest in a series of Middle Eastern figures who have become public enemy number one as a result of U.S. oil policy. Until Mr. bin Laden came along, for example, the most hated man in the Middle East was Saddam Hussein, the leader of Iraq – who some military intelligence observers feel may be involved in assisting Mr. bin Laden with the war of terrorism against the U.S. Many political analysts believe that the war against Iraq was fought largely to ensure that the oil would continue to flow from Saudi Arabia.

During the Gulf War, the U.S. stationed troops in Saudi Arabia at the request of the Saudi royal family – a move that Mr. bin Laden and other Islamic groups have said was an affront to Muslims, and one which many security experts warned against at the time, arguing that it would increase tension in the Middle East. “A lot of people advised [President George W.]Bush’s father not to put U.S. troops in Saudi Arabia – to put them ‘over the horizon’ rather than in the heartland of Islam,” said U.S. policy expert John Sigler, a professor of political science at Carleton University.

While the State Department argued that the troops should be located in some other area, Prof. Sigler said, the Pentagon decided that they needed to be on the ground in Saudi Arabia for reasons of “military efficiency.” Even after the Iraqi threat had eased, U.S. soldiers remained in what Mr. bin Laden’s group refers to as “the land of the two holy places” (Mecca and Medina). American officials said the troops needed to remain because they would protect the Saudi Arabian government of King Fahd from Iraqi attack – but Prof. Sigler said this was largely a fiction, presumably designed to justify keeping troops to protect Saudi oilfields.

Not only does the presence of non-Muslim soldiers inflame the religious passions of fundamentalist Islamic groups such as Mr. bin Laden’s, but their existence is also a regular reminder that the U.S. is primarily interested in the Middle East because of its oil supplies. Much of Mr. bin Laden’s anti-U.S. rhetoric – expressed in several rare interviews with Western reporters over the past few years – concerns the alleged “rape” and “plundering” of the Middle East by the United States, aimed at controlling the area’s oil for the benefit of the U.S. and other Western nations.

This idea is intricately intertwined with America’s policy on Israel. Some Muslim groups believe that the U.S. is in league with Israel to take control of the Middle East – driven, they argue, by Israel’s desire to crush all Islamic nations, combined with the American desire to control the source of the vast majority of the world’s oil. Within Saudi Arabia, meanwhile, many critics of the monarchy see the U.S. as supporting a “puppet” government for its own purposes, in the same way it did in Iran.

The problem for the U.S. is that anything it does to try and influence the flow or supply of oil involves a large part of the Middle East, and impacts on nations that have an abiding hatred for the U.S. – including Iraq, Iran and Libya. And despite sources of oil such as Alberta’s tar sands, some forecasters expect the U.S. and the rest of the Western world are going to need even more supply from the Middle East in the future: A study by the Center for Strategic and International Studies said the world will become increasingly dependent on the Middle East over the next 20 years.

The study said that oil-rich Persian Gulf nations will have to expand their oil production by almost 80 per cent over the next 20 years in order to keep up with demand, particularly demand from China and India. The potential for terrorism, supply interruptions and outright war will remain high, the study says – adding that getting more oil from Iraq will be “crucial” to meeting the world’s demands, since Iraq contains 11 per cent of the world’s oil reserves, second only to Saudi Arabia’s 25 per cent.

As long as the U.S. continues its growing demand for oil, in other words, it will be forced to deal with the troubled politics of the Middle East in one way or another, whether it wants to or not.

At first glance, everything looked peachy keen in Research In Motion’s quarterly results, released late on Thursday. The handheld device maker came in right on estimates with a 5-cent-per-share profit and revenue more than doubled over the same quarter last year. What could possibly be wrong with that?

Well, for starters, the profit wasn’t really a profit on the BlackBerry pagers that everyone is so in love with — and there are some other warning signals lurking around the edges of RIM’s results. It’s possible that investors don’t care whether RIM made any money selling its two-way pagers and a hybrid pager and Palm-style handheld in one.

Those who pushed the company’s stock price up by more than 7 per cent after the results came out didn’t seem to mind that the firm actually rang up an operating loss of more than $3-million and only made it into the black with the help of more than $9-million worth of gains on RIM’s investments.

Investors’ complacency aside, however, it’s important to note that RIM’s core business is still a money-loser — in fact, operating losses were up more than 40 per cent. Although the company’s revenue rose, expenses also increased at a pretty rapid clip: While sales were substantially higher than the same quarter last year, the company’s cost of sales more than tripled, with research and development expenses tripling and marketing and administration expenses doubling.

Gross profit margins fell to 38 per cent from 44 per cent and the company shipped about 25 per cent fewer units than it did in the previous quarter.

There are larger issues for RIM, however. For example, now that everyone is familiar with its “killer app” — always-on e-mail service — because of the publicity about all the high-tech CEOs who use a BlackBerry, what does RIM do for an encore? And how does it do so without eating into the business model that has convinced investors to pay almost 100 times forecasted earnings for the stock?

Those kinds of multiples are as rare as hen’s teeth nowadays, and it’s not clear what RIM has that justifies such a premium. Palm used to command that kind of multiple, too, back in the old days, but the handheld device maker is only valued at 1.5 times revenues now (it has no earnings), while RIM is still trading at more than eight times its revenue.

And in a jab at the Canadian company’s perceived dominance of the wireless e-mail-access game, a Palm executive said this week that Palm’s wireless Palm VII — which can access the Internet using a number of different networks — has more users than RIM does.

Users agree that RIM is far more elegant and efficient an e-mail solution, but for how much longer?

Wireless access is the Holy Grail for handhelds, and both Palm and the various PDAs that use Microsoft’s Pocket PC software (such as Compaq’s iPaq) are rolling out wireless e-mail and Internet access plug-ins or software that will make them far more competitive with RIM.

Rogers AT&T Wireless and Microcell’s Fido are both introducing next-generation GPRS (global packet radio system) high-speed digital networks, which will allow handhelds or telephones to access e-mail and the Internet at faster speeds.

RIM is working on a GPRS model, too, but it will be entering a fairly crowded field.

RIM executives have said they are working with Compaq and others to develop BlackBerry-style “solutions” that could be used to provide the same kind of always-on e-mail for the iPaq or other Pocket PC handhelds, and RIM also has a prototype of a BlackBerry-type unit that runs on Java software — the idea being that it could partner with some of the cellphone handset makers on a combined BlackBerry phone running Java.

The problem with these options, however, is that making a two-way pager that plugs into an iPaq or helping to make a BlackBerry Java phone would eat away at what RIM is: a proprietary handheld device maker with a unique e-mail solution.

In a nutshell, the problem is this: When always-on e-mail was unique to RIM, it stood out as a result — but when other players with more to offer and deeper pockets also have that capability, what will RIM have left that makes it worth the kind of premium it’s getting now?