Delinquency rates up

The national average is 4.41%, so states in white have delinquency rates at or below the national average.

Laborers International Union leaving AFL-CIO

The Laborers International Union of North America announced that it will be leaving the AFL-CIO as of June 1. The union represents about 700,000 workers in the construction industry and is already part of the Change to Win coalition, which has attracted a number of breakaway unions that cite the AFL-CIO's heavy emphasis on electoral politics and not enough emphasis on attracting more people to the labor movement.

Burger King IPO

Burger King's long-awaited IPO (there's a 2000 BusinessWeek story talking about it) has finally arrived. Today's IPO consisted of 25 million shares priced at $17, which represents a 19% stake in the company.

Wachovia to acquire Golden West

Wachovia (#4 commercial bank in terms of assets, #5 in terms of revenue) agreed to buy California thrift Golden West Financial (the #2 Savings & Loan) for $25.5 billion, a 15% premium. Wachovia says the purchase will help the bank expand in affluent, fast-growing markets in the West. Golden West is an adjustable-rate mortgage specialist but will also give Wachovia 285 new branches, including 123 in California and 26 in Texas.

Shares of Wachovia fell fell 6.7%, the biggest decline since October 2002. Investors worried that Wachovia may have overpaid for Golden West, amid signs of weakness in the mortgage industry as interest rates rise. Wachovia also said the purchase will cut earnings per share by 11 cents in 2007 and seven cents in 2008.

Stories:
Wachovia CEO defends surprise Golden West deal
Wachovia to Acquire Golden West Bank for $26 Billion
Wachovia sees deal as fortification
Wachovia acquires Golden West

GM to sell Isuzu stake

GM said it will sell its 7.9% stake in Isuzu Motors for $300 million, unraveling a 35-year equity alliance to raise much-needed cash to revive its ailing business. In the widely expected move, Japanese trading houses Mitsubishi and Itochu will each take a 3.5% stake and Mizuho Corporate Bank (a unit of Mizuho Financial Group) will buy the remaining 0.9%.

Burger King CEO Resigns

Burger King Chairman and CEO Greg Brenneman resigned today.

John Chidsey, the company's president and CFO, will immediately take over as Burger King's CEO. He's the company's ninth CEO in 11 years.

Brian Swette, a current independent director, will serve as non-executive chairman. SVP and Treasurer Ben Wells will fill Chidsey's spot as CFO.

More Bad News from GM and Delphi

Delphi
Officials of Delphi's two largest unions (UAW and IUE-CWA) rejected the company's latest proposed wage and benefit cuts. Officials of both unions said there was nothing in the proposal to even warrant taking it to union members for a vote. The proposal included a pay cut from $27 to $22 an hour in July 2006 and to $16.50 an hour in September 2007. The proposal also included new, larger health care premiums. As a result of the rejection, Delphi is likely to file Friday in bankruptcy court to void labor agreements covering over 33,000 union members.

GM
General Motors laid off 500 salaried employees at facilities across the country. The layoffs are the first wave of job eliminations in a program aimed at reducing the number of salaried and contract workers 7%.

Housing Banks May Be Forced To Cut Dividends

The Federal Housing Finance Board proposed rules this month that would require the banks to retain more of their earnings as capital to build up a bigger cushion against potential losses. The move comes in the wake of embarrassing stumbles by some of the 12 regional home-loan banks. The proposed rule probably will force most of the home-loan banks to slash their dividends, a big source of income for many of the more than 8100 commercial banks, thrifts, credit unions and insurers that own the banks. The proposal may also discourage the home-loan banks from purchasing mortgage loans made by their members, drying up a small but important source of housing finance and marginally increasing mortgage costs for consumers.

Source: WSJ

Lucent and Alcatel Merging

Lucent and Alcatel announced that they were in talks to effect a "merger of equals."

Here are some financial publications' take on the merger:
http://www.businessweek.com/technology/content/mar2006/tc20060324_429614.htm
http://www.forbes.com/2006/03/24/lucent-alcatel-merger-0324markets03.html

Google Settles Suit

Google agreed to pay $90 million in legal fees and advertising credits to settle a lawsuit filed against it and other Internet companies last year alleging that the companies knowingly overcharged for online advertisements and conspired to continue doing so.

As of this writing, the stock is at $347.76, down 1.73%.

Source: Wall Street Journal

GOOG

Google had a couple of good days Thursday and Friday of last week, but it's been beat up pretty bad this week. After a 2.9% drop today, it is trading at $353.88, down over 25% from its high of $475.11 in January.

AT&T-BellSouth Merger

Two of my four predictions in February 2005 (#1, #2) after the SBC-ATT merger was announced has already come true, as MCI was swallowed up by Verizon.

Now, it looks like a third one is being confirmed as BellSouth gets swallowed up too, by the new AT&T.

The short story:

• AT&T is offering 1.325 shares for each share of BellSouth, which amounts to a 17.9% premium, $37.09 a share at Friday's AT&T closing price, or $67 billion for all outstanding shares. AT&T will also take on BellSouth's debt of $22 billion, putting the total price of the deal at $89 billion. (Compare that with the paltry $16 billion SBC paid for the old AT&T.)
• Current BellSouth shareholders will own 38% of the new company.
• AT&T will own all of Cingular Wireless after the deal. (Will they change the name of the company to AT&T Wireless?)
• About 10,000 jobs will be eliminated after the merger. This is in addition to the job cuts already announced after the SBC-AT&T deal.
• Although the boards of both companies have already approved the deal, there could be regulatory hurdles due to the size of the combined company. (It would constitute a very large portion of the Ma Bell of olden days.)

Google sell-off

Google CFO George Reyes today said advertising revenue growth is bound to slow, sparking a sell-off in their stock. Google shares dropped as much 13%, or more than $50 in heavy trading, before recovering to close down $27.76 at around $362.62, a decline of 7.1%.

Wait a second. Google points out the obvious fact that a $6 billion dollar company is not going to grow 90% this year, and this causes a 7% plunge in the stock price. Sounds like a case of inflated expectations to me.

Burger King IPO

Number-two fast-food chain Burger King filed documents for an initial public offering. Its stock-market debut is likely within six months. Shooting for maximum proceeds of $400 million, the IPO - which touts the fast-food chain's turnaround tale - would top the $391 million raised by Domino's Pizza in 2004. Burger King, which owns or franchises 11,141 restaurants in 67 countries, holds a 12% share of the fast-food-restaurant category, which is expected to grow by 4.2% over the next five years. Burger King's share is less than half of #1 McDonald's and just microscopically ahead of #3 Wendy's, which has been making steady progress to overtake Burger King in the last few years.

Founded in 1954, Burger King has amazingly enough never been a public company. It was sold by its founders to Pillsbury in 1967. Pillsbury was then acquired by Grand Met PLC in 1988, which in turn merged with Guiness in 1991 to form Diageo. "As a result, Burger King Corporation became a small, non-core subsidiary of a large conglomerate, making it difficult for the brand to prosper," the company said in an IPO document.

From 1989 to 2002, the company ran through eight CEOs before being acquired by private-equity firms Texas Pacific and Bain Capital Partners for about $1.5 billion. Since then, the company says, it's been "focused on turning a great brand into a great business." It boasts of its seven consecutive quarters of same-store-sales growth and a rise of 11% in average per-restaurant sales over the past two fiscal years. In the six months ended December 31, Burger King reported net income of $49 million on revenue of $1.02 billion(*).

In its third fiscal quarter, now underway, Burger King said it'll record an expense of $367 million for a cash dividend paid to shareholders, prominently including Texas Pacific and Bain. The company also agreed to pay a one-time $30 million fee to terminate its management agreement with the private-equity firms upon completion of the IPO. Meanwhile, the strong stock-market debut of Chipotle - a spinoff of Burger King archrival McDonald's - and the hefty $2.43 billion price fetched by the private sale of Dunkin' Donuts provide evidence of strong investor interest in fast-food-chain operators.

Source: CBS MarketWatch, Chicago Tribune

(*) Note: I have seen many websites (including WikiPedia) that advertise Burger King's revenue as $11 billion a year. That figure is not correct. That is the total sales at Burger King restaurants whether company owned or franchised, not the revenues of Burger King Corporation.

More Trouble at the AFL-CIO

Two of the nation's biggest construction unions - the Laborers International Union of North America and the International Union of Operating Engineers - announced they are leaving the Building and Construction Trades Department of the AFL-CIO and may soon leave the AFL-CIO altogether. The two unions plan to create a rival building trades group, the National Construction Alliance. Joining the alliance will be the bricklayers, iron workers, and the Teamsters. Together, the alliance will have 1.5 million members. Leaders of the Laborers and Operating Engineers called the AFL-CIO Building Trade Department bureaucratic and out of touch with the new realities of the labor market.

Source: The Wall Street Journal

More on Google

A follow-up on my previous post...

Google has a superb balance sheet:

• $10.3 billion in assets, with an incredible $8 billion of that in cash and marketable securities, and very little in bogus goodwill
• almost no debt, resulting in stockholder equity of $9.4 billion

They also had a very good income statement in 2005:

• Revenue of $6.14 billion, an increase of 92.5% over last year's $3.19 billion
• Net income of $1.47 billion even with coming in under expectations

However, it is trading at $381.50 (down a further 3.7% from yesterday's price as of the time I'm posting this). That's 76x earnings. Does anyone really expect that Google is going to double in revenue and income again next year as it did from 03 to 04 to 05? Price seems a little bit high to me, although let me stress that I am NOT expecting a dotcom-like meltdown since this is a company with a clearly proven business model.

Google's Problems not all tax-related

Taxes were a problem for Google's fourth-quarter earnings, but not as much as investors may have been led to believe. Google's fourth-quarter net income of $1.54 a share, excluding items, missed expectations by 22 cents. (In response, Google shares dropped 12% in after-hours trading Tuesday, 7% Wednesday and 1.4% yesterday.) Google executives stressed that most of the earnings shortfall was attributable to the company having a higher U.S. tax bill than anticipated.

But a closer look at Google's results show that only half of the earnings shortfall - 11 cents a share - may be related to taxes. Google had to record more taxes than expected in the fourth quarter because more of its expenses were allocated to its international operations than it had expected, compared with its U.S. operations. That, in turn, raised U.S. pretax profit as a proportion of Google's total, and a greater percentage of Google's profit was taxed at a higher domestic tax rate. The company's effective tax rate for the fourth quarter was 41.8%; the rate for the full year was 31.6%, compared with Google's projection of about 30%.

Google recorded about $2.14 billion in pretax profit for the year. Applying Google's prior estimate of a 30% effective tax rate to that gets a tax bill of $642.6 million. Google had an actual tax of $676.3 million, the upshot being that the company paid $33.7 million more in taxes than it expected, a figure all attributable to the fourth quarter. However, this equates to only 11 cents a share, using Google's diluted share count of about 304 million. Scott Devitt, an analyst with Stifel Nicolaus, uses different numbers to arrive at a similar conclusion and says the company is off base in blaming most or all of its shortfall on the tax issue. The analyst, who has a "sell" rating on Google shares, stresses that whatever the particular reason for the shortfall, the stock is vulnerable to the market's ever-rising expectations.

Source: Wall Street Journal

Response to Comment

The problem is, that everyone has been saying the end of real estate boom is near for 3 or so years from now. Eventually the predictors of doom will be proven right.

Yes, but there's one additional thing to consider. In 1996 the "predictors of doom" were saying that the market was overvalued and prices would crash. They were not proven correct until 2000, but when the market did hit bottom in 2002 prices were in fact lower than in 1996. So it's not just a matter of time, but an actual price consideration.

Note that the real-estate bubble will not burst a-la the dot com stock bubble.

I agree it will never be as bad as the dot com stock bubble. The reason for the difference is clear - unlike stocks, homes are physical assets.

I think prices will only stagnate or wane slowly over the years...

Here I disagree. Current prices are sustainable only because of very low interest rates and absurdly generous financing options. I see prices dropping as much as 20% in a relatively short period.

Chipotle IPO

Investors piled into the initial public offering of Chipotle Mexican Grill today. After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald's, sold 1.8 million shares. After the offering, McDonald's will have an 88% voting interest in Chipotle and a 69% economic interest.

Chipotle debut marked the biggest opening-day gain for a U.S. IPO since late 2000 and the biggest opening-day percentage gain on the New York Stock Exchange since Martha Stewart Living Omnimedia went public in 1999. Investors are excited about the chain's growth potential as its CEO, Steven Ells, said he plans to use the bulk of the proceeds from the IPO to open 80 to 90 stores this year. Part will be used to pay down a $30 million line of credit with Chipotle's parent.

At $44, shares of Chipotle are trading at roughly 80 times earnings.

Disney acquiring Pixar

Disney agreed today to buy Pixar in a stock deal valued at $7.5 billion based on Disney's closing price of $26. They expect the deal to close this summer.

Disney is offering 2.3 shares of its stock for each Pixar share. That's a 3.8% premium on Pixar's closing price of $57.57, which already is up 8% since January 3 on investor anticipation of a deal. There's no collar on the agreement, which means the value will rise or fall with Disney's stock price. Disney is issuing new stock but says it will buy back shares to return to the current float in 2007.

This deal will make Jobs, who owns about half of Pixar, Disney's #1 shareholder with 6.6%. He will join the Disney board.

Chipotle IPO

Chipotle Mexican Grill, a fast-growing 489-store U.S. restaurant chain and pioneer in the "fast- casual" dining segment, is being spun off by parent corporation McDonald's. In a filing with the SEC, Chipotle raised its forecast price range to $18 to $20. That raises the expected value of the 7.9-million-share offer to $150.1 million, based on the midpoint of the forecast. The shares are expected to price on Wednesday evening and make their market debut on the New York Stock Exchange under the symbol "CMG" on Thursday. Chipotle aims to use the proceeds of the offering to drive an aggressive growth plan to fund restaurant openings and to pay back debt to McDonald's. It plans to open 80 to 90 new stores this year.

Happy New Year?

One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable.

[...]

No one wants to hear that. It's almost irresistible to believe that after all we investors have endured--the hellish bear market, the recession, the scandals--we've emerged from the crucible sadder but wiser, finally willing to face the truth about stock values. But it isn't so. The amazing reality is that we haven't learned our lesson even yet.

Two Books on AT&T

End of the Line: The Rise and Fall of AT&T by Leslie Cauley
Grade: C

I managed to finish this book because the story is captivating, but the book definitely is not. The analysis is superficial, and Cauley clearly runs out of new things to say so she ends up repeating the same things over and over and over again. As one example, she mentions AT&T strong balance sheet (pre-Armstrong) a half dozen times, and even gets it wrong - on one page, she says AT&T long-term debt was $126 billion; elsewhere she says $12 billion. Her description of the personalities involved is likewise superficial and repetitive. She mentions Armstrongs "Big Blue way of looking at things" at least a dozen times (I am not exaggerating). There's even a entire discussion (regarding negotiations with Time Warner Cable) that is given in its entirety twice (pp. 189 and 190).

Another serious complaint is that the language of the book is inappropriately informal for the subject matter, even downright vulgar in a couple of places. Her very poor writing style just adds to the book's generally sloppy impression. This impression is not aided by the careless errors that pepper the book (e.g., referring to Microsoft as a cable giant). Didn't anybody edit this thing before it hit the shelves?

Most annoying of all is the approach of following parallel lines to that fateful summer of 2000, then backing up to follow another line of thought. It seems to be an attempt to highten the drama, but it fails miserably. A chronological order would have made the story much more interesting as well as making it much easier for the reader to figure out what went wrong with AT&T and maybe learn something from the book. But perhpas this is just as well since Cauley's research would not have been up to this task.

I bought this book expecting some new insights, but there was nothing in here one wouldn't already know from reading the Wall Street Journal as the collapse was happening. Cauley simply did not do any homework or dig beneath the surface in the least. Overall, a very weak effort.


Tough Calls: AT&T and the Hard Lessons Learned from the Telecom Wars by Dick Martin
Grade: D-

The back cover says that this book is "an up-front seat for the roller coaster ride" and a "look at how a great company tumbled" that will give us a "tour of AT&T's wild ride" and "chart the dissolution of an American icon." Not one of those comments is even remotely warranted.

I was expecting to find interesting insider discussions of important questions like:

• Did AT&T make any mistakes during the "trivestiture" in January 1996 (akin to giving away the wireless licenses to the RBOCs in the 1984 breakup)? Martin doesn't say, beyond talking about the PR fallout of the layoffs. These layoffs were only a side issue of the broader business strategy; communication mistakes surrounding them hardly merits mentioning at all.
• Was pursuing cable the right strategy for Armstrong to implement? Probably, but Martin doesn't weigh in on this.
• Did AT&T overpay for MediaOne? Of course, but again Martin is silent.
• Did AT&T further compound its cable problem by putting poor executives (first Hindery and then Somers) in charge of broadband? Not a peep.
• How should AT&T have handled the $2 billion @Home acquisition? Silence.
• Were all these problems unavoidable due to AT&T's pre-1996 succession planning problems? The only aspect of this question that Martin bothers to discuss is the PR fiasco surrounding Walter's departure. As if that were the most important aspect of AT&T's succession problems. He strikes me as having an exaggerated sense of his importance to the organization.

AT&T was a corporate icon for 130 years and had 4 million stockholders. Surely there were "hard lessons learned" as the subtitle claims, lessons that are valuable in the broader context of the modern corporation. However, from reading this book you would get the impression that AT&T's only mistakes were in communications. Martin gives us an incredibly myopic view of just the PR efforts related to AT&T's various missteps. Outside the PR business, who cares? Nobody! This could (indeed should) have been the business book with the broadest appeal in a decade. Instead we got a book that only PR people could stomach. It was so monumentally boring it literally put me to sleep more than once. I bought this book to read about AT&T; if I cared about Martin's actions I would have bought his biography instead.

Despite naming the first chapter "Don't dance to the music of your own buzz" it seems that Martin has done exactly that. His book is the ultimate example of form over substance, confusing the need to address important business questions facing AT&T with the buzz surrounding him and the mostly irrelevant matter of how the answers were communicated. Whether the answers were the right ones or not, Martin is unwilling (or more likely, unable) to say. If this book is an example of the caliber of executive thinking at the level of Executive Vice President at AT&T no wonder the company sank so far so fast.

Google Buys 5% of AOL

Google will invest $1 billion for a 5% stake in Time Warner's America Online unit. Google will become the only shareholder in AOL other than Time Warner. Google also will have "certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL," the companies said in a statement.

Two thoughts come to mind:

(1) The writing is on the wall. Time Warner is slowly laying the groundword for a spin-off of AOL. It looks like it's 5% down, 95% to go.

(2) This values the whole of AOL at $20 billion. Interesting, very interesting! At its peak in December 1999, AOL had a market cap of $210 billion. Ouch!

Pepsico Market Cap Exceeds Coca-Cola's

Today, for the first time in history PepsiCo's market cap ($98.4 billion) closed above Coca-Cola's market cap ($97.9 billion). Symbolic? Yes. Meaningful? That depends on whom you ask.

Source: AJC

Nikkei breaks 15,000

The Nikkei finished up 258.35 points at 15,130.50, its highest close since Dec. 13, 2000. Yesterday ir briefly rose to 15,013.24, climbing above 15,000 for the first time since Dec. 14, 2000.

I ran across the most interesting graph of the Nikkei (see page 1). It overlays the period 1982-1992 for the Nikkei against the period 1992-2002 for the S&P500. The similarity is uncanny. However, there seems to have been a divergence after 2002 with the S&P recovering after 2002 while the Nikkei remained in a 12-year funk in the period 1992-2004.

While I don't think we will return to the returns that people came to expect from the S&P, I also don't think we are headed for a prolonged slump like the Nikkei experienced. A big reason for the Nikkei's decline was the Japanese practice of cross-holding where two companies doing business together would cement the relationship by buying large chunks of each other's stock. At the peak in 1990 more than half of the Nikkei's market cap was cross-held. As the slump began, companies began dumping their cross-holdings exacerbating the market decline. By the time the market hit bottom, less than 20% of the Nikkei's market cap was cross-held. This much healthier number is probably part of the reason that the Nikkei has been able to stabilize and start climbing again.

More on Real Estate

I was waiting for my rental car at the counter this afternoon when I overheard one of the clerks talking to another about how she had bought a 6 bedroom / 4.5 bath house for $600,000 because she could turn around and sell it for $800,000.

The end (of the real estate boom) is near!

When people start thinking that they can make a guaranteed 33% profit (I don't know what timeframe she was thinking about, but I'm sure it was as ridiculously short as the gain was ridiculously large), it is time for sensible investors to stay clear of real estate. This is definitely starting to sound too much like the irrational exhuberance regarding stocks in 1999-2000 for my comfort.

Most Successful Business Leaders?

Lessons from the Top: The 50 Most Successful Business Leaders in America by Thomas Neff and James Citrin

This book includes two convicted felons and one accused felon - Bernie Ebbers, Dennis Kozlowski and Ken Lay - as well as Hank Greenberg (who resigned from AIG in disgrace and may yet become the fourth felon in the book), Michael Eisner (who was recently ousted from Disney) and Mike Armstrong (who pretty much single-handedly managed the sinking of AT&T).

Now I know that hindsight is 20/20, but six stinkers (and some other questionable choices) in a list of 50?

A great read, highly recommended ... for the IRONY!

SBC Acquisition of AT&T Closed

SBC Communications announced today that it has closed the books on its $16.9 billion acquisition of AT&T immediately following its receipt of final regulatory approval.

It is worth noting that the new company going forward will use the AT&T name, iconic blue and white logo, and NYSE stock symbol (T).

Cisco buys Scientific-Atlanta in $6.9 billion deal

Source: Yahoo

Koch Industries buys Georgia-Pacific in $21 billion deal

Georgia-Pacific stock rose more than 36% to $47.28 in trading yesterday — close to the price offered by Koch.

Source: AJC

MCI-Verizon Merger Approved

MCI today announced the certified results of its shareholder vote that approved its merger with Verizon. The company said that the results show 64.6% of outstanding shares and 88.2% of votes cast were in favor of the merger. Also today MCI's Board of Directors declared a special dividend of $5.60 per share in accordance with the merger agreement. The special dividend will be paid on October 27 to shareholders of record at the close of business on October 17.

"Little evidence of a housing bubble"

A paper in this quarter's Journal of Economic Perspectives by Himmelberg (the Fed of NY), Mayer (Columbia) & Sinai (Wharton) says that their "analysis reveals little evidence of a housing bubble." We'll see if they know what they are talking about. Myself, I am skeptical myself since part of their analysis involves constructing new measures for evaluating the cost of home ownership because existing measures (which seem to indicate prices are exuberant) are not adequate. Whatever.

Ameriprise

American Express Company completed the distribution to its shareholders of all of the outstanding shares of Ameriprise Financial (the former American Express Financial Advisors).

Delta files for bankruptcy

Northwest too

Federated-May merger complete

Transaction closed today.

Third Union Is Leaving AFL-CIO

The United Food and Commercial Workers just became the third union to quit the AFL-CIO. The 1.3 million member union said it was committing itself to the new Change to Win Coalition, following in the footsteps of the Teamsters and the Service Employees International Union.

In addition to the UFCW, Teamsters and SEIU, the new labor coalition includes three AFL-CIO member unions (the United Farm Workers, Laborers' International and Unite Here) and the United Brotherhood of Carpenters and Joiners.

Source: Wall Street Journal

Who would fall for this?!

I have been getting these stupid flyers that claim "Buy stock XXXX, which is poised to skyrocket." It's a well-known variation on the scam; the only thing that has impressed me is the increasing quality of the production. One even posed as a 32-page investment magazine with a variety of articles, but if you actually looked through it, it was only pushing one particular stock.

Got another one today and actually took a minute to read through it. A footnote reads, "[The producer of the flyer] may hold positions in the company mentioned." Even more ridiculous, it discloses that, "The profile of XXXX is a paid advertisement by a third party shareholder to XXXX in the amount of 250,000 shares of stock that need to be sold to pay for the cost of this advertising." And most farcical of all we are treated to "The target price was determined arbitrarily."

Who would fall for this?!

Obviously, this scam works or they would have stopped sending me the flyers. But I am amazed to learn that there are enough people dumb enough to fall for this pitch to keep it alive.

What is even more unbelievable is that they obtained my name due to my Financial Planning Association membership. I have cancelled my membership not just for the obvious reason that I believe they violated their duty to take reasonable care with my information, but even more so because the FPA apparently has enough members who might fall for this scam to make them worth targetting.

Ford and GM Hurting

After a disappointing performance in the first half of the year, Ford Motor Company is considering cutting more salaried workers, a company spokesman said Friday. Ford spokesman Oscar Suris wouldn't confirm a report in The Wall Street Journal that said Ford may lay off up to 30% of its white-collar work force - about 10,500 of its 35,000 salaried workers - in North America over the next few years. But he noted that earlier this week, Ford CFO Don Leclair said "nothing is off the table" when asked about possible cuts during a conference call to discuss second-quarter earnings.

Ford already has announced plans to reduce its salaried work force in North America by 2,700 people by the end of this year. It also has said it will reduce the use of agency workers and other purchased services by 10%. But Suris said the company is considering even more aggressive measures. "We have operating challenges that include our cost structure and excessive production capacity, and we have plans to address that," Suris said.

Ford said it earned $946 million in the April-June period versus a profit of $1.17 billion in the year-earlier period. It lost $907 million in North America, down $1.4 billion from a year ago. Ford's U.S. sales were down nearly 4% in the first six months of this year.

So Ford made $1.853 billion on sales outside the US? Man, if they could somehow wipe their US operations off the face of the Earth, they would be on easy street!

Ford CFO Don Leclair said the automaker would no longer issue quarterly earnings forecasts. GM withdrew its earnings outlook for 2005 after reporting a stunning $1.1 billion first-quarter loss in April. Both GM and Ford have been hurt by a dramatic slowdown in sales of profitable mid- and large-size sport utility vehicles amid high gasoline prices. They are also struggling with higher borrowing costs following cuts in their debt ratings to "junk" status by the Standard & Poor's rating agency in May.

Yuan to fluctuate

China ended the yuan's peg of about 8.3 per dollar that had been in place since 1995 and will allow it to fluctuate versus an unspecified basket of currencies, the central bank said on its Web site. The new yuan rate strengthens the currency to 8.11 per dollar.

To Rein In CEO Pay, Why Not Consider Outsourcing The Post?

Outsourcing is the rage. It is possible to find qualified and cheaper workers to write software and perform other tasks in India, China, Taiwan, Turkey, etc. It makes competitive sense to outsource. Which leads to the following statement. Maybe it's time for American CEO's to include themselves in the outsourcing strategy. Certainly from a compensation standpoint it could be a great deal. US executives are by far the highest paid in the world, and their pay seldom has anything to do with performance. Directors give executives a boatload of money before they have done a lick of work. And when they fail, they are given another boatload of money so it doesn't hurt too much when the door hits them on their way out. If outsourcing the CEO's job isn't appealing, then what is the solution? Directors have to put a price tag on every single form of compensation so shareholders truly know what is going on. And directors have to stop rewarding incompetence. If a CEO is fired for screwing up, no more exorbitant severance packages.

(The Wall Street Journal, 19-Jul-2005, Midwest ed., p. B1)

Real Estate

Built on the assumption that home prices will continue to rise, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take. Unlike conventional 30-year mortgages, interest-only loans typically don't require payments toward the principal for three to seven years, substantially lowering the costs of entry and making it easier to qualify for the loan. [1]

But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that's raising fears of crash that could plunge the economy into a recession. "When this market adjusts, it's going to be painful," said UCLA economics professor Edward Leamer, who has been warning of a California housing bubble for three years. "Borrowers are getting in over their heads, and lenders are too."

The growth of interest-only mortgages reflects a fundamental shift in the way many Americans think of their homes. Rather than places to grow old in, they see homes as part of their investment portfolios — in fact, a much better bet than the stock market in recent years. In California alone, homeowner equity has grown by a whopping $1 trillion since 2000, according to the California Building Industry Association. Even borrowers who can afford the higher payments of a conventional mortgage are opting for interest-only loans, so they can free up more cash to invest in retirement plans, college education funds or other home purchases, [2] said Mark Carrington, director of information products for LoanPerformance, a mortgage research firm.

[1] Yes, interest-only loans typically don't require payments toward the principal for 3-7 years, but at the end of this period eventually you *will* have to start paying down principal and/or re-finance your loan (either of which will result in a higher payment). Furthermore, we are in a period of historically low rates, and interest-only loans are generally variable-rate. So at the end of the interest-only period, rates will almost certainly be higher, causing payments to be even higher still. People are jumping into these loans under the assumption that their income will be substantially higher in 3-7 years; in most cases that assumption is unwarranted.

[2] Retirement investments or college funds would not be an altogether bad reason to do this. However, this statement is inaccurate. In most cases, the only reason people get into these loans is to buy a lot more house than they could otherwise be approved for (and often a lot more house than they can actually afford). Their payment is still a stretch, and any savings are used to finance current consumption not investing.

SCOTUS: Sorry, Andersen, Our Bad

The Supreme Court Tuesday unanimously threw out the conviction of accounting firm Arthur Andersen, a symbolic victory for a nearly defunct company torn apart in a document-shredding case involving the fallen energy giant Enron. In a 9-0 opinion, the justices concluded that "jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing." Chief Justice William Rehnquist wrote the opinion, saying, "Indeed, it is striking how little culpability the instructions required."

The conviction had essentially forced Arthur Andersen out of business. The company, which is down to a couple of hundred employees handling the remaining legal issues facing it, said it was pleased by the decision even if it did nothing to bring the former Big Five accounting firm back to life.

"We are very pleased with the Supreme Court's decision, which acknowledges the fundamental injustice that has been done to Arthur Andersen and its former personnel and retirees," the firm said in a statement. "We pursued an appeal of this case not because we believed Arthur Andersen could be restored to its previous position, but because we had an obligation to set the record straight and clear the good name of the 28,000 innocent people who lost their jobs at the time of the indictment" and protect the firm against a flood of civil lawsuits.

There's a reason people talk about "liberal media bias"

While I'm not given to idiotic conspiracy theories about this, it's a well-known fact that most reporters vote Democrat. This clearly results in a kind of group-think, where the "obviousness" of certain "facts" is uncritically accepted.

Today's the headline at the top of the AJC's business page blares out at me, "GDP report fans stagflation talk." Well, if you read the story, you learn that the economy in 2005Q1 grew 3.1% (less than the expected 3.5%). This (pretty good) rate is the weakest growth pace in two years, when growth has ranged from this quarter's 3.1% to a high of 7.4% (in 2003Q3) and averaged a very healthy 4.3%. Yet one not-blistering quarter (but still over the magic 3%) and out comes the "stagflation" talk.

During Clinton's tenure as President, 13 of the 32 quarters had less than 3.1% GDP growth, and I don't recall any "stagflation" "talk" being "fanned." Something to think about...

More Trouble for Krispy Kreme

Krispy Kreme Doughnuts announced that Canadian franchisee KremeKo has filed in the Ontario Superior Court of Justice to restructure under bankruptcy protection. Krispy Kreme owns 40.6% of KremeKo.

Krispy Kreme Doughnuts is trading at $5.93, down 82.7% from their all-time high of $34.33 (on 4/29/2004, exactly one year ago tomorrow).

Response to Comment on Google

Google shares on Friday leapt by 7% on Friday after reporting blow-out quarterly earnings for the third time since becoming a public company last year, powered by the continuing boom in advertising linked to search engine results.

IPO = 95.96, Stock value as of this posting = 216.80. God, I wish I had gotten in on the ground floor for this.

Getting in on the ground floor is great, as long as you are able to recognize when the elevator has gotten to the top and don't ride it all the way back to the basement. There is just no way that Google is worth $216.88 a share, which is 151x 12-month earnings which are widely described as "blow-out." Consider what will happen once earnings are no longer "blow-out." The multiple and stock price is going to come crashing down. As well it should ...

Keep in mind this is a company with rapidly shrinking margins. In 2002 it was 22.7% ($100M/$440M); it 2004 it was 12.5% ($399M/$3.19B). Yes, revenue is growing at an incredibly fast pace, but is this real? (let's remember Enron, WorldCom, Global Crossing and to a lesser extent AOL with their revenue "growth") And is it sustainable? Revenue from 2003 to 2004 may have doubled from $1.5B to $3.2B, but it is not going to double again in 2005.

Can anyone seriously believe that Google with $3.2B of revenue and $400M of earnings is worth $60 BILLION??? Let's compare it to the companies immediately above and below it on the market cap list - Hewlett-Packard and 3M. HP has $82B in revenue and $3.5B in income; 3M has $20B in revenue and $3.1B in income. Not only are both of these companies' INCOME approximately the same size as Google's REVENUE, but 3M has a healthier profit margin (15.5%) than Google. There's just no way that Google is fairly valued at its current price.

More on the Verizon/MCI/Qwest saga

Curioser and curioser...

Verizon Communications said yesterday it is paying $1.1 billion ($25.72 a share) to acquire a 13.7% stake in MCI directly from its largest single stockholder [Mexican investor Carlos Slim Helu]. The transaction removes a major wild card in Verizon's bid to fend off a higher-priced offer to acquire MCI by Qwest Communications.

42% of first-time home buyers put 0% down

Today, the typical first-time home buyer might finance the entire cost of the house and pay only the interest owed on the loan for the first several years. The latest option? A monthly "minimum payment" that doesn't even cover the interest. [...] buyers have been experimenting with more aggressive financing in the best of all times, when interest rates remain low and home prices continue to appreciate.

Source: Money

Buick and Pontiac strive to avoid Oldsmobile's fate

More bad GM news...

At an analysts' conference last week, GM Vice Chairman Bob Lutz said both lines are "damaged" and that dropping one of the venerable names - both date back more than a century - was possible unless there's a turnaround. Lutz said closing a brand, as it did with Oldsmobile after the 2003 model year, was something that GM hoped to avoid. But he said that, if the carmaker's brands don't hit sales targets, "then we would have to take a look at a phase-out. I hope we wouldn't have to do that. What we've got to do is keep the brands we've got." GM officials have tried to backtrack somewhat on Lutz's comment, saying there are no plans to drop a brand and that he was only answering a question about a hypothetical. They say they're confident the brands will get the investment needed to grow.

But auto experts look at GM's continued slide in market share along with the financial problems caused by its current cost structure, and say the possible end of another GM brand isn't as much a surprise as the fact that a top GM executive would raise the possibility. "It's a signal to folks that it's going to happen," said Walter McManus, director of the Office for the Study of Automotive Transportation. "They're very careful not to speculate about things that aren't going to happen." Buick had 1.8% of the U.S. market in 2004, just ahead of the 1.7% share that Oldsmobile had in 2000, when GM announced the end of that line. Pontiac had a 2.8% share.

SunGard Acquired by group of private firms

A consortium of seven private investment firms is paying $10.8 billion to acquire financial data powerhouse SunGard Data Systems in the nation's second-largest leveraged buyout ever. Under the terms of the agreement, SunGard stockholders will receive $36 in cash for each share of SunGard common stock they hold. Also $500 million in bonds will remain outstanding, so the total transaction is valued at $11.3 billion.

The deal would be exceeded in size among takeovers of public companies by private investors only by the Kohlberg Kravis Roberts $29.4 billion purchase of RJR Nabisco in 1989.

SunGard creates a variety of financial software, including products that manage complex stock trades, insurance holdings, mutual funds and corporate finances.

(SunGard purchased an employer of mine back in 1999.)

Most people "above average" financially

According to a Money poll conducted February 11-15, when asked "How do you rate your financial status?" Americans answered:

• 53.7% feel they are better off than other people of the same age and education level
• 36.3% say they are on par
• 9.9% believe they have fallen behind

54-10. Wow! How can people's perception be this far off from reality?

The "Please don't hurt me" Defense?

Scott Sullivan, the former CFO chief of WorldCom testified Tuesday that CEO Bernard Ebbers repeatedly ignored evidence that company finances were deteriorating and simply said, "We have to hit our numbers." Scott Sullivan said he told Ebbers the only way to meet Wall Street estimates for the third quarter of 2000 would be to book improper accounting entries to boost revenue and cover up expenses. "He looked at the information, and he didn't say a lot," Sullivan said. "He looked up and said, 'We have to hit our numbers."' Sullivan said he interpreted the remark as an instruction to go ahead with the improper entries.

I don't buy this defense, which has been / will be used by other CFOs and CAOs in the recent spate of fraud trials. If you are the CFO or CAO and the boss tells you to cook numbers, you grow a pair and refuse. That's all there is to it. Take away all the fancy business-speak, and it really is THAT simple. I mean, c'mon now, this defense boils down to, "He told me to to commit a crime, so I did." If a mugger tried that defense, we'd throw his butt in jail, right? Same for these guys, as far as I'm concerned.

The Parade of Shame

In addition to the Ebbers trial which ended yesterday with a guilty verdict, other C-level executives currently or soon-to-be on trial:

• Richard Scrushy, former CEO of HealthSouth
• Dennis Koslowski and Mark Swartz, former CEO and CFO of Tyco
• Ken Lay and Jeffrey Skilling, two former CEOs of Enron
• Richard Causey, former Chief Accounting Officer of Enron
• Joseph Nacchio, former CEO of Qwest

IAM Local 709: "Never mind!"

One for the "D'OH!" files . . .

Striking Lockheed Martin machinists began going back to work at midnight, just hours after they had overwhelmingly approved a new contract, just one week after launching a walkout. By a vote of 1532 to 537, IAM Local 709 ratified the contract. Union members rejected the same basic terms February 27, although the deal was approved at Lockheed facilities elsewhere. Opponents in Marietta said they objected to rising health care and retirement insurance costs. But those concerns seem to have diminished during a week on picket lines in which workers had no insurance coverage at all. The company said it made no significant changes to its offer before Tuesday's second vote. "There were some minor modifications that were specific to Marietta," corporate spokesman Tom Greer said. "But the economics were exactly the same." Stevens [president of IAM Local 709] attributed the change of heart to more information. "People have a better overall understanding of the contract than they did the first time they voted," he said Tuesday. "The company didn't move on the economic terms." Outside the Cobb Galleria Centre, where Tuesday's balloting took place, it was hard to find Local 709 members who said they voted to ratify the contract, even though it passed by a 3-to-1 ratio. "This is the same thing we turned down two weeks ago," said Jerry Worley, a 23-year Lockheed employee who works on the F/A-22 assembly line. "I don't know why they even brought us back." In 2002, the union's walkout also ended with no major changes in the deal that was initially turned down.

Source: Atlanta Journal-Constitution

Ebbers guilty over $11bn WorldCom fraud

A jury had found Bernie Ebbers, the former head of WorldCom, guilty of the biggest accounting fraud in history over his role in the firm's $11 billion collapse. After deliberating for eight days, the New York jury found Ebbers guilty on nine counts, one each of conspiracy and securities fraud and seven of false regulatory filings. He faces a possible 85 years in jail when sentenced on June 13. Ebbers had claimed that he knew nothing of the fraud going on in his company and had little knowledge of financial matters, something Assistant US Attorney William F Johnson called the "aw shucks" defense.

GM slashes earnings estimate

General Motors warned its 2005 earnings will be as much as 80% [and at least 50%] below its prior forecast due to slumping North American auto sales, sending its shares down 12% to a 13-year low. GM said it now sees full-year earnings of about $1 to $2 per share, excluding special items, down from its previous target of $4 to $5 a share.

GM said its previous outlook was based on North American vehicle-production volume of 1.25 million vehicles, but since then production schedules have been reduced by about 70,000 vehicles and pricing competition has been tougher than expected in North America. "One of the issues we've had for North America is the increasing drag of health-care costs on North American profitability," said GM CFO John Devine.

[Possibly more important that the earnings is...] The company said it also expects negative operating cash flow in 2005 of about $2 billion, before its settlement with Italian automaker Fiat and its GM Europe restructuring, versus the previous target of positive $2 billion.

S&P affirmed its long-term ratings on GM and GMAC at BBB-, one step above junk status, and their short-term [commercial paper] A-3 ratings. But it said in a statement, "We now view the rating as tenuous. The rating could be lowered at any point if we came to doubt that GM was on a trajectory to improving its financial performance to more satisfactory levels in 2006 and beyond."

[Thanks to DVD for the link.]

Iger to succeed Eisner as Disney CEO

The Walt Disney Co. announced today that its president, Robert Iger, will succeed Michael Eisner as Chief Executive Office and that Eisner will leave his post one year earlier than previously announced.

Jetsgo, Canada's third-largest airline, ceases operations

Jetsgo grounded its fleet after jet-fuel prices rose by two-thirds in the past year and the company became the target of safety investigations from federal regulators. The shutdown stranded 17,000 customers. "Passengers are advised to make alternative travel arrangements prior to going to the airport as there will be no Jetsgo staff or aircraft available," Jetsgo said in a statement released at two minutes after midnight.

Jetsgo, which employed 1350, will seek permission from a Quebec court to consider options for reorganizing. Jetsgo, led by President Michel Leblanc, spent "big" on ads and expanded too quickly beyond its flight bases in Montreal and Toronto, Raymond James analysts said in January. Leblanc, who started Jetsgo in June 2002, is the former head of Royal Aviation, which he sold for C$84 million in 2001 to Canada 3000 before it went out of business after the 9/11 attacks in New York and Washington.

WestJet [Canada's second-largest airline] stock climbed C$4.33 to C$15.50 after earlier touching C$16.90 [at which peak the shares had risen 51%]. Shares of ACE Aviation [parent company of Air Canada, the nation's largest airline] climbed C$3.26, or 10%, to C$35.50.

Source: Bloomberg

[Thanks to DVD for the link]

Unhappy Fifth Anniversary

Today is the fifth anniversary of the top of the bull market, at least as indicated by the Nasdaq composite index (the DJIA had peaked a couple of months earlier).

On 3/10/2000 the Nasdaq stood at 5049. By the time the bear market saw its worst day (10/9/2002), the index had dropped to 1114 (a gut-wrenching 78% plunge). Today it closed at 2060 (up 85% from its low, but still down 59% from its high).

Yup

Strike at Lockheed. Forget finance; what really ticks me off is the darned rubber-neckers who added 10-15 minutes to my commute this morning.

More on the Real Estate Bubble

Pop! That is the sound of the real estate bubble bursting. [...] One piece of evidence is the Dinner Party Index. The boom is over when more people are bored by real estate anecdotes ("My next-door neighbor got three times her asking price before she even put it on the market.") than have got new ones. Another reason the value of your house is about to plunge is that the Los Angeles Times, The New York Times and The Washington Post all say that it isn't.

Possible Strike at Lockheed Plant

Story 1: Machinists at Lockheed Martin's aircraft plant in Marietta GA are preparing to strike next week after rejecting a tentative contract agreement that was backed by union leaders. It would be the second walkout in three years if the union follows through on its threat. Machinists shut down production for 49 days before signing their current contract in 2002. Union members voted 1240-602 on Sunday to reject a tentative deal that had been endorsed by union leaders, and about 70% cast strike ballots. IAM locals at Lockheed facilities in California, Mississippi and West Virginia ratified agreements with virtually identical terms. Local 709 members are 54 years old on average, which makes retirement issues critical in negotiations.

The elements of the deal in question:

• 10% wage increase over three years.
• $1,500 signing bonus.
• 17.8% increase in company's pension contributions.
• Increase in amount of 401(k) contributions company will match.
• Company pays 87% of employee medical plans, down from 100%.
• Company caps payments to retirees' Medicare Supplemental Insurance.
• New hires not eligible for retiree medical plan.

Story 2: Machinists gave Lockheed Martin formal notice Tuesday that they intend to strike next week at the Marietta plant. "I personally hand-carried a letter" to plant management, said Cornell Stevens, president of IAM Local 709. Lee Rhyant, the Lockheed executive vice president who oversees the plant, wasn't there at the time, but the two men later spoke by phone. "We had a good conversation, and there were no hard feelings at all," Stevens said. The union's letter starts a countdown to a strike that could begin Tuesday at the earliest [since five days notice is required].

Story 3: Federal mediators are trying to avert a machinists strike at Lockheed Martin's Marietta plant that could begin as soon as Tuesday. "Anytime there's a possibility of a work stoppage that could have this much impact on the economy and national defense, it's on our radar screen," said Jack Buettner, regional director for the Federal Conciliation and Mediation Service.

(I drive past the Lockheed plant on my way to work.)

Housing

New home sales fell 9.2% nationwide in January from the month before. Sales ran at a rate of 1.1 million units a year, 4% below the same month a year earlier, and the lowest rate since July.

German economy in worse shape than previously stated

More than 5.2 million Germans were out of work in February, new figures show. The figure of 5,216,000 people, or 12.6% of the working-age population, is the highest jobless rate in Europe's biggest economy since the 1930s. The news comes as the head of Germany's panel of government economic advisers predicted growth would again stagnate. Speaking on German TV, Bert Ruerup said the panel's earlier forecast of 1.4% was too optimistic and warned growth would be just 1% in 2005.

[Thanks to DVD for the link]

Federated-May merger a go

Price: Each share of May stock will be converted into $17.75 in cash and 0.3115 shares of Federated stock. Based on the 10-day trading average of Federated stock as of last Friday, that equates to $35.50 per share, or $11 billion total purchase price. Federated would also assume May debt that totaled about $6 billion at the end of 2004.

The combined company would have about 950 department stores and an additional 700 bridal and formal wear stores. It would operate in every state except Alaska, along with Guam, Puerto Rico and the District of Columbia. The combined company will be in the nation's top 65 markets except Jacksonville, Florida.

Federated doesn't plan to change May store names before 2006, but then will rename its stores - even some Bloomingdale's stores - as Macy's. That means that May store names including Filene's, Foley's, Hecht's and Kaufmann's could disappear next year. The names Rich's (an institution in my current home of Atlanta) and Burdines (a Florida landmark) are in the process of disappearing right now.

Source: Associated Press

Some home buyers may be overextended, experts fear

I always worry when "experts" start pointing out what's blatantly obvious to the rest of us. "Some" home buyers "may" be overextended?

Experts are concerned that home buyers who have chosen adjustable-rate loans or interest-only mortgages could have financial problems if home prices decline or flatten out. Although nationwide prices, adjusted for inflation, have risen a dizzying 36% since 1995, according to the Center of Economic Policy Research, they are due for an adjustment eventually.

"Although"? Perhaps "because" is a more accurate word there.

Many people I know personally have over-extended to ridiculous proportions to buy the most house they can. ("Can" being a relative term here.) The confidence with which people say, "An interest-only loan is OK because when I have to start paying principal, my income will have gone up." Really? How do you know that ... cause my crystal ball is not quite that good. Particularly scary are adjustable-rate mortgages (or even worse, adjustable-rate interest-only loans) because when interest rates go up increasing these people's housing payments, that's precisely the same time that house prices fall because people can afford less house when rates rise.

And recently, I've even started hearing about an extreme case of the interest-only mortgage: the negative-equity mortgage, where the monthly payment is not sufficient to pay off even the interest due so your mortgage balance goes up. The rationale for taking on such a loan? "My house is going to appreciate more than the additional debt accruing on my mortgage." Yeah, good luck with that. What really upsets me is that if/when the market crashes down around people making idiotic decisions like that, my house price is going to suffer right along with theirs.
Ever heard the word "bubble," people?

[Source of the quoted paragraph was the business section of the Atlanta Journal-Constitution a few days ago. Sorry, no link.]

MCI in play

Wow. My prediction regading MCI took even less time to materialize than I expected.

The Cliff Notes version of the facts:

• On February 4, MCI received an unsolicited $6.3 billion takeover bid from Qwest Communications International.
• On February 14, Verizon made an offer to buy MCI for $6.7 billion in stock and cash. (Each share of MCI stock would garner $14.42 in Verizon stock, $1.50 in cash and $4.50 in MCI dividends.)
• Today, Qwest upped its offer for the second time. (Under the latest Qwest offer, each share of MCI stock would receive $15.50 in Qwest stock, $3.10 in cash and $6 in MCI dividends.) The revised Qwest offer is worth about 20% more than the Verizon offer.
• Also today, MCI reported a loss of $32 million in the fourth quarter of 2004 and a loss of $3.89 billion ($12.12 a share) for all of 2004 (due to heavy bankruptcy-related impairment charges in the third quarter). Quarterly revenue fell 10% to $4.97 billion (from $5.5 billion a year before) and annual revenue fell 15% to $20.7 billion.
• MCI's board will review Qwest's offer while pressing ahead with a deal with Verizon, says CEO Michael Capellas told investors on a conference call. Verizon is the "right partner" for MCI, he said.

The "insights" from the "experts" and other observations:

• The SBC-AT&T and Verizon-MCI transactions are an acknowledgment of what insiders have known for a while: that the long-distance business as a stand-alone service is, for all practical purposes, dead. "I think we all knew it was over two to three years ago," says Dominic Endicott, head of the telecommunications practice at Booz Allen Hamilton. "The deals are just cleanup work." Raul Katz, CEO of Adventis, a consulting group in Boston, goes a step further. "The long-distance business was always dead," referring to the industry's ultimately fruitless scramble to figure a way around the Bells' grip on the local phone markets. "It was just a matter of when it was going to die."
• Qwest has a market value of just $7.5 billion but $17 billion in debt. Analyst believe that if Qwest wins the bidding war, it will use MCI's $5 billion cash reserve to help pay down its debt.
• Analysts have said Qwest is a weaker partner for strategic reasons. It doesn't own its own wireless network, which is considered critical for growth in the telecom industry. It also serves a primarily rural, 14-state region where there are few business centers, so a marriage with MCI would not likely result in as many cost efficiencies.
• Although Verizon is the strongest among the regional phone companies, it faced a difficult task of determining whether it would be cheaper to build its own corporate client base, rather than buy MCI's, analysts said. With most of MCI's business going away or under attack from stiff competition, some said it could have been more effective for the company to build its own roster of customers.

Articles:

• http://www.usatoday.com/money/industries/telecom/2005-02-14-verizon-mci-usat_x.htm
• http://www.usatoday.com/money/companies/earnings/2005-02-25-mci_x.htm?POE=MONISVA
• http://www.eweek.com/article2/0,1759,1760078,00.asp?kc=EWRSS03119TX1K0000594
• http://www.bloomberg.com/apps/news?pid=10000103&sid=aj2OsGSJ9V0Q&refer=us
• http://money.cnn.com/2005/02/14/technology/verizon_mci/
• http://www.cbsnews.com/stories/2005/02/14/ap/business/main673848.shtml
• http://www.washingtonpost.com/wp-dyn/articles/A22085-2005Feb13.html

Trump Makes Out OK in Trump Bankruptcy

A judge refused to allow shareholders to file a competing bankruptcy plan for Trump Hotels & Casino Resorts, eliminating a key obstacle to court confirmation of the casino company's Chapter 11 reorganization.

The deal submitted by the company includes the following perks for Donald Trump:

• Remains Chairman and CEO, at a $2 million a year salary
• Retains a 26% stake in the restructured company (reduced from 56%) as well as a 25% stake in the Miss Universe Pageant
• First dibs on serving as contractor for any construction project over $35 million undertaken by the company after it emerges from bankruptcy, including a proposed 1250-room hotel tower at Trump Taj Mahal Casino Resort and planned capital improvements at Trump Plaza Hotel and Casino and Trump Marina Hotel Casino
• The right to veto any changes made in bankruptcy court
• The right to veto the sale of any casinos. If any casinos are sold, he would receive up to $100 million in tax indemnification for personal tax liabilities incurred from the transaction.
• A licensing deal giving Trump Hotels exclusive rights to the Trump name and image, valued at approximately $124 million

Not a bad deal for the person who ran the company into the ground in the first place.

Fed will probably increase rates again

Short-term interest-rate futures contracts traded at the Chicago Board of Trade show strong expectations that the Federal Reserve will follow up February's rate hike with quarter-point increases at its next two meetings, on March 22 and May 3. Fed funds contracts are fully priced for a quarter-point hike in March and despite the Fed's repeat projection for "measured" increases, the March contract reflects a 68 percent chance for a more-aggressive half-point hike that month. The odds that the Fed's target stands at 3% on May 3, up from its current 2.5%, are priced by the market at 97 percent. The futures market is less certain the Fed will raise its target to 3.25% on June 30, putting just better than 50-50 odds on that outcome.

Source: MarketWatch

Boeing to sell assets

Boeing is moving closer to its goal of design and final assembly for its commercial jets, agreeing to sell aircraft assembly plants in Kansas and Oklahoma to a Canadian investment group that hopes to boost demand for the facilities' services with business from smaller airplane makers. Twin deals announced yesterday will add $1.6 billion cash to company coffers.

In the first deal, Toronto-based Onex Corp., agreed to buy Boeing's aircraft plant in Wichita, plus other work sites in Tulsa and McAlester, for $900 million in cash and the assumption of $300 million in debt. The announcement ended more than a year of speculation about the future of the Chicago-based aerospace giant, which wants to focus on design and final assembly, leaving the development of components and other aircraft pieces to others. Onex also plans to invest an additional $1 billion in the Wichita and Oklahoma plants during the next five years as it modernizes those facilities and prepares to build Boeing's new 787 Dreamliner, the company's next-generation jet. Onex plans to form a new company — as yet unnamed — to run the plants.

In the second deal, Boeing said it would sell its Rocketdyne rocket engine subsidiary to United Technologies Corp., parent of jet-engine maker Pratt & Whitney, for about $700 million cash. Rocketdyne has sites and assets in California, Alabama, Mississippi and Florida and 3,000 employees.

Federated and May discussing merger

Federated Department Stores reportedly is discussing the acquisition of its chief rival, May Department Stores, in a deal that would create a combined company with $30 billion in sales. Federated, which operates Bloomingdale's and Macy's chains, is in preliminary discussions with May, which operates Filene's, Famous-Barr, Marshall Field's and Lord & Taylor. [...] Federated has a market value of $9.7 billion, while May is valued at $9.2 billion. In 2002, the companies discussed a potential merger, but a deal could not be reached. [...] Last Friday May's chairman and CEO, Gene Kahn, resigned suddenly with no explanation and the company named president John Dunham to serve as acting chairman and CEO. That development could clear the way for Federated Chairman and CEO Terry Lundgren to lead a combined company.

Winn-Dixie Files for Bankruptcy

Supermarket giant Winn-Dixie Stores Inc., which has struggled to compete with Wal-Mart Supercenters and other grocery chains in the Southeast, said Tuesday it has filed for bankruptcy protection from its creditors while it reorganizes its finances. [...] Winn-Dixie and 23 of its U.S. subsidiaries filed to reorganize under Chapter 11 late Monday in U.S. Bankruptcy Court for the Southern District of New York. [...] The Jacksonville-based company also announced Tuesday that it has secured $800 million in credit from Wachovia Bank to help pay for its reorganization, the release said. The new credit amount, subject to court approval, replaces the company's previous $600 million credit line. [...] Winn-Dixie's shares closed Friday at $1.47 on the NYSE and had not opened for trading Tuesday. Its 52-week high was $8.42 per share. [...] Winn-Dixie lost $399.7 million, or $2.84 per share, for the three months ending Jan. 12. That compared with a loss of $79.5 million, or 57 cents per share, for the same quarter last year. Second-quarter revenue was $3.08 billion, compared with $3.23 billion a year ago. Excluding $258 million in restructuring and income tax charges and $72.2 million in expenses related to discontinued operations, the company lost $69.4 million, or 50 cents per share. That exceeded the 11-cents-a-share loss forecast of analysts surveyed by Thomson First Call.

Question: why was the loss almost 5 times what the analysts expected? Did they drop the ball? AGAIN?

The article does not mention this, but Winn-Dixie is the 13th largest grocery retailer, with approximately 1150 stores (920 with the Winn-Dixie name and 230 of subsidiaries such as SaveRite) and annual revenues in the $13 billion range.

Google

Google (GOOG) is worth $52 billion??? It's trading at 133x earnings. Absurd!!! Apparently we learned absolutely nothing from the dot-com bust. We seem to be cruisin' for another bruisin'.

XOM surpasses GE

ExxonMobil Corporation has replaced General Electric as the world's largest company in terms of market value. The market value of ExxonMobil, the world's largest publicly traded oil company, appreciated to $381 billion exceeding the market value of GE by about $1 billion.

German Economy Stagnant since July

Germany's economy shrank 0.2% in the last three months of 2004 (confounding hopes of a 0.2% expansion). The Federal Statistics Office said growth in the third quarter had been zero. It said growth for the whole of 2004 was 1.6% (down from an earlier estimate of 1.7%).

The German economy actually contracted in 2003 (as opposed to the near-zero but positive growth previously reported), in what was a year of healthy growth for most other OECD countries.

[Thanks to DVD for bringing this to my attention]

WSJ weighs in on HP

Text in black is mine; text in blue is the Wall Street Journal's; text in red is FTP Online's.

http://www.ftponline.com/weblogger/forum.aspx?id=1&Date=1/26/2005&blog=#311

"Many knew it at the time, but now everyone should: Walter Hewlett was right."

Hewlett was the board member from the founding family who argued that the Compaq merger would depress HP's stock and make the company overly reliant on the PC industry with its negligible or nonexistent profit margins. Since then HP has laid off thousands of workers and has a 55% decline in its stock price to show for those sacrifices.

"Since the merger, HP has lost market share and failed to revive its profit margins. It relinquished the #1 position in market share of personal computers last year to Dell. The Compaq merger hasn't helped in other areas either. In the 12 months ended in September, IBM and Dell gained share in network servers, while HP fell to 26.6% from 28.7%, Morgan Stanley says. HP's operating margins in business services have fallen for two years."

http://www.ftponline.com/weblogger/forum.aspx?ID=1&DATE=01/27/2005&BLOG=#313

"At bottom, they made a huge error in asserting that the merger of two losing computer operations, HP's and Compaq's, would produce a financially fit computer business. The irrefutable evidence on how wrong they were is contained in the two companies' own merger proxy, which precisely laid out the healthy operating margins that the combined company expected to be earning in its 2003 fiscal year (HP's ends Oct. 31) on its computer operations. The margins weren't earned then, and in 2004 they weren't either—not by a long shot. Only the prodigious, money-coining strength of HP's star business, Imaging and Printing (better known as 'printers'), has kept the company looking respectable."

Public accounting standards could force HP to write off $14.5 billion in goodwill allocated toward the value of Compaq. HP is carrying $15.8 billion in goodwill [that's the excess of purchase price over book value for an acquisition] on its books.

Twenty top executives have left in what some call a brain drain, and the legendary HP culture has been deliberately destroyed to be replaced by an "East Coast management culture." But the fundamental problem is that HP is not a leader in any of its markets other than printers. Fiorina recently decried the media's and analysts' inability to see HP as a software company, yet she has virtually gutted all marketing for HP's software.

HP Chronology

I have cross-referenced the chronology against the stock price (adjusted for dividends and an October 2000 2:1 stock split).

July 1999: HP appoints Fiorina as president and CEO. [$27.24]

June 2000: HP completes divestiture of Agilent Technologies. [$58.18]

September 2000: Fiorina is named chairman of the board of directors. [$45.33]

October 2000: HP announces plans to acquire middleware vendor Bluestone Software. [$43.46]

March 2001: HP creates a new business organization, HP Services. [$29.39]

September 2001: Plans are revealed for HP to acquire Compaq in an all-stock deal. [$15.20]

May 2002: HP officially closes its acquisition of Compaq. [$18.22]

January 2005: HP announces that it will merge its PC and printer divisions. [$19.59]

That's an annualized return of -5.8% per year over Fiorina's 5.5-year reign.

Fiorina out!

Carly Fiorina's nearly six-year reign at Hewlett-Packard ended today as the company's board forced her out as chief executive, disappointed by her efforts to make the technology giant whose strongest business is printers more nimble and innovative. HP shares jumped more than 6%. Board members said they fired Fiorina because she failed to execute a planned strategy of slashing costs and boosting revenue as quickly as directors had hoped. Fiorina had championed the 2002 acquisition of Compaq despite fierce resistance from shareholders and directors. Critics have called the merger a drag on profits.

Good riddance. She was not a good leader at Lucent, and she has not been a good leader at HP. Here is a good chronology of the highlights of Fiorina's tenure at HP.

Problems at Krispy Kreme

Krispy Kreme's turnaround efforts began in earnest Tuesday with the layoff of about 125 workers, or 25% of the work force, at its corporate headquarters and other key facilities. The struggling doughnut chain also said it was getting rid of its corporate jet to conserve cash. Krispy Kreme said the cuts would affect workers about one quarter of the workers at its Winston-Salem headquarters and at plants where doughnut mix is made, equipment is manufactured and doughnuts are distributed. Krispy Kreme's 360 United States stores are owned and operated by franchisees; as such, they are not affected by the corporate cuts announced Tuesday.

Krispy Kreme said the moves are necessary to avoid a cash crunch. The company said it also will need additional credit to fund operations and capital expenditures by March 25, when a waiver from its primary lenders expires. "There can be no assurance that the company will be able to reach any agreement with the banks or that funding will be available when and in the amounts needed," the company said. Last month, the company's lenders agreed to push back to March 25 a deadline under which the company would be in default of its credit line because it has not filed quarterly financial statements for the period that ended Oct. 31. In the agreement, Krispy Kreme agreed not to borrow any more cash without its lenders' consent.

Krispy Kreme closed at $7.21, down 9.2% for the day and 85% from its all-time high. (When I wrote this post, the stock was trading at $9.64.)

Vacation v The Economy

The next time you get one of those emails (or see one of those TV commercials) pontificating on how American workers are getting cheated and abused because European workers get so much more vacation than American workers...

Average Vacation Days
France 37 days
Germany 35 days
U.S. 13 days

... I urge you to remember the other side of the coin ...

Unemployment Rate (January 2005)
Germany 10.0%
France 9.7%
U.S. 5.4%

Real GDP Growth (2005 Prediction)
Germany 1.0% [Edited based on more recent information]
France 1.7%
U.S. 3.5%

This thought was inspired by this Bloomberg article (condensed below).

German unemployment jumped to the highest level since World War II as new rules added welfare recipients to the jobless register. The number of people out of work in January rose by 227,000 to 4.71 million in seasonally adjusted terms, including 230,000 new jobless claimants. The adjusted unemployment rate rose to 11.4%, a seven-year high, while the unadjusted jobless total passed 5 million for the first time since the war. Schroeder's government had cut jobless benefits and forced claimants to take low-paid jobs in an attempt to get more people into work in Europe's largest economy.

Economy and Labor Minister Wolfgang Clement said he expects a further rise in unemployment in February, though experience from other countries suggests the new policies may eventually cut the jobless total by as much as 20%. Even before the labor-market changes, German unemployment had risen for 11 straight months, as companies moved jobs to countries with lower labor costs and stagnant domestic demand deterred hiring. In December, Germany had the second highest unemployment rate after Spain among the 12 countries that share the euro, at 10% on a comparable basis.

Disregarding the effects of the new labor law, seasonally adjusted unemployment was "stable," Labor Agency Vice-President Heinrich Alt said. The adjusted unemployment rate is higher than it has been since March 1998, when it was 11.5%. The record rate was set in October 1997 at 11.8%. "Unemployment has grown steadily over the last three decades and then reunification came on top of that," said Bert Ruerup, the head of Schroeder's council of economic advisers. The government last week pared its forecast for economic growth in 2005 to 1.6% from 1.7%. [New predictions indicate that even this number is overly optimistic. March estimates indicate growth could be as small as 1%. By contrast U.S. growth is predicted to be 3.5% in 2005. - ALD] Germany is losing 1,200 full-time jobs a day, Juergen Thumann, head of the BDI industry federation, said last week. Unemployment won't decline unless labor costs are cut, he said.

[Thanks to DVD for emailing the Bloomberg article to me.]
[Edited on 3/1/2005 based on more recent information.]

Fed boosts rates another quarter point

The Federal Reserve raised the fed funds rate to 2.5%, but after six rate hikes is it time to slow down?

The Decline of Lucent

Adapted from chapter one of Optical Illusions by Lisa Endlich. The comments in brackets are my own.

No industry looked more promising [in 1996] or bled more money [in 2000-2002] than telecommunications. With a collapse in market capitalization of more than $4 trillion [yes, that's Trillion with a capital T] and job losses in excess of 500,000, the telecom meltdown ranks as the greatest stock market debacle ever.

[This is something that's often lost as the dot-com bust has somehow dominated headlines related to the 2000-2002 stock market collapse. The dot-com losses in terms of both the companies' bottom lines and the stock market wealth wiped out are the merest drop in the bucket compared to the telecom collapse.]

Lucent was born in April 1996 as a spin-off of the foundering telecom giant AT&T. It was the largest initial public offering ever, and because each AT&T shareholder became a Lucent shareholder (along with the new investors attracted by Lucent's stellar performance), it was not long before Lucent was the most widely held stock in America. Lucent was born at the inception of the greatest market bubble ever, at the outset of an investment boom that poured billions of dollars into the telecommunications industry. Lucent's startling transformation from an obscure division of AT&T to the sixth-largest corporation in America and then to a company gasping for its financial life left investors and observers by turns delighted, shocked, confused, and finally dismayed as they sought an explanation for the company's descent. The speed of Lucent's decline was as staggering as its magnitude. In the space of twenty-four months, the market capitalization of the company dropped by a quarter of a trillion dollars as its stock price plummeted by 99 percent. Lucent went from spending $100 million to advertise its new name to turning off lights and shuttering bathrooms to save pennies. [emphasis mine]

This is the story of a financially sound company steeped in world-class talent, dominant in one of the world's fastest-growing industries, that in the space of two painful years found itself branded with a junk-bond credit rating, under investigation by the SEC for its fraudulent accounting practices, fighting off rumors of insolvency, and, hat in hand, begging its bankers for a little more time. But the story is surprisingly dramatic for a telecom equipment vendor, complete with a boardroom coup, a stock rise and fall in the shape of Mount Everest, and a series of financial and product decisions that left the company enfeebled.

Lucent's leaders were the men and women of AT&T, the people who practically invented the modern corporate structure. As an old-world stalwart turned new-world bellwether, Lucent experienced the fallout from this historic event with as much force as any ethereal dot-com. When it was over, CEO Henry Schacht was forced to admit that the frenzy that engulfed the stock markets had badly distorted the company's value structure, tampered with its moral compass, and led to decisions that would never have been made in saner times. [Right, Henry, it's the market's fault.]

Additional mistakes by AT&T

• Hanging on to Western Electric for years when it should have spun out on Day 1 after divestiture in 1984.
• Handing over its wireless licenses to the RBOCs at divestiture
• Spinning out its recently acquired McCaw Cellular/Vanguard Cellular, the one industry sector that demonstrated growth and value creation.
• Acquiring NCR and then completely dropping the ball in the computer industry.
• Failing to join with other industry participants in a full-scale assault on the regulatory foundations of RBOC dominance, letting the RBOCs fight tactically as needed and ultimately be victorious.

Some of the above are discussed in this article.

Some Telecom Predictions

(1) AT&T will not re-enter the wireless arena. The pending merger will put the kibosh on the pending deal to lease wireless capacity from Sprint.

(2) MCI can not survive as an independent company. It will be bought by either Verizon (in a bid to regain its number one slot from SBC, which will be number one after combining with AT&T) or BellSouth (in a bid to join the big boys SBC and Verizon).

(3) If BellSouth is not the one to merge with MCI, it will be in trouble itself in the new telecom landscape.

(4) Sprint will be in trouble too, no matter what else happens. Maybe it can merge with whoever doesn't get MCI.

Some links with additional analysis and predictions (with more detailed explanations of the reasoning):
http://www.business2.com/b2/web/articles/0,17863,1022825,00.html
http://www.internetnews.com/xSP/article.php/3466691
http://www.itworld.com/Tech/2428/050131sbcattdeal/

The Job Losses Begin

SBC and AT&T plan to eliminate about 13,000 jobs — twice as many as some on Wall Street had expected — as part of a plan to slash costs by $15 billion. Of those cost savings, which the companies dubbed "synergies," about 60% will come from job cuts, said Rick Lindner, SBC's CFO, in a meeting with analysts Tuesday. The companies now employ a combined total of 210,000 workers.

SBC itemized where some of the cuts will come. For example, it said it plans to jettison at least 5,125 jobs (26% of the total that both companies have) in a segment that serves business and government customers. An additional 2,600 people in corporate functions such as legal, human resources, finance and advertising will be let go. The cuts are in addition to those already announced by the two companies for 2005.

Response to Comment

On a related note, it looks like AT&T will be getting back into the wireless game once again, after the Cingular aquisition is complete, by leasing bandwidth from Sprint.

(1) I don't think that will happen anymore. Here's a link to another story from the same source you provide in your comment below. http://www.engadget.com/entry/1234000163029846/

(2) I'll go further, I don't think this re-entering the wireless market will happen at all now. Why would SBC set up an operation to compete with its own Cingular joint venture?

(3) This is further evidence that AT&T has been run by a bunch of yahoos. You divest your wireless business, and just a couple of years later you are going to invest what I'm guessing would be huge amounts of money to get back in? WTH?

The Decline and Fall of AT&T

AT&T's revenue has declined from $51 billion in 1999 to $30 billion in 2004, and its residential customer base declining from a peak of 60 million in 2000 to about 24 million at the end of 2004. Now those numbers are not QUITE as horrible as they look in that the 1999 numbers include all the cable and wireless customers who were spun-off and not lost outright, but they are nonetheless very poor results.

In 1999, I (and others) looked at AT&T as a massive cash cow. It was declining in influence and size, and its markets were under attack by wireless and broadband companies and its core business long distance operations were under attack by fiercer-than-expected competition from WorldCom, MCI and Sprint. But it also didn't need to make any massive investments to maintain its existing business, and this business was (a) quite profitable and (b) generating a great deal of revenue and free cash flow. Under these circumstances, I would have expected AT&T to follow a conservative strategy for its core business. If innovation or a new market needed exploring, a joint venture or subsidiary could be set up with the cash flows from the core telephone and business services operation. Beyond that, the company could have / should have paid dividends, lots of them. It didn't need and couldn't effectively use the excess cash.

Instead of this, AT&T embarked on an ill-advised (and ill-fated) strategy under former Chairman and CEO C. Michael Armstrong, which resulted in losses of over $53 billion related to a cable company acquisition spree (MediaOne, TCI, etc.) and the subsequent divestiture of these same companies. Armstrong later advocated splitting the company into four separate entities, a plan which was only partially implemented with the sale of the cable operations to Comcast and the spin-off of AT&T Wireless into a separate company (a company which was utterly unable to compete in the wireless marketplace and was very quickly gobbled up by Cingular Wireless).

[Come to think of it, that sounds almost word-for-word like what happened at Tyco, with an acquisition spree ending in 2001, and the subsequent abortive strategy to break up into 5 companies.]

In October 1999, AT&T had a market capitalization of $152 billion. Today, what's left of that mighty empire is less than $16 billion. Add to that the $47 billion that Comcast paid for AT&T's cable assets and the $50 billion that AT&T Wireless was worth at its spin-off (ignoring the fact that AWE's return was basically a straight line decline and the company was valued at considerably less than that when it was finally put out of its misery by Cingular), and you arrive at $113 billion. So in five years, Armstrong made $39 billion disappear like a fart in the wind. That's a total return of -25.7% or -4.5% per year for five years. Thank you, and good riddance.

Ma Bell to re-unite with Baby Bell

SBC to acquire AT&T

SBC Communications Inc. said yesterday that it would buy AT&T Corp. for around $15.7 billion, making SBC the largest U.S. telecommunications company and ending the independence of the company that created the telecommunications industry over a century ago and is still one of the world's most recognized corporate names.

Former Federal Communications Commission chief Reed Hundt had deemed a reunion of AT&T with one of the companies spun off in a 1984 government anti-trust action "unthinkable" in 1997. But since then AT&T has had a steep decline in fortunes. (See next post up for a discussion of my thoughts on this.) Even so, the $16 billion deal may take until mid-2006 to clear intense regulatory scrutiny.

SBC will issue 0.78 of a share for each AT&T share, valuing AT&T at $18.41 a share. AT&T will then pay a special cash dividend of $1.30 a share. Combined, the deal would value AT&T at $19.71 a share, equal to its closing stock price on Friday. No premium!! The total price would thus be $14.7 billion in SBC stock and $1.0 billion for the special cash dividend.

Analysts have criticized the $16 billion purchase price for the deal as too much for a company with shrinking revenues and questionable growth prospects.

Sources:
Reuters (at Yahoo Finance)
Associated Press (at Yahoo Finance)

Something which neither of these stories mentions, but which was in a story in this morning's AJC, is that this deal may strain relations between SBC and BellSouth (SBC's partner in the Cingular Wireless joint venture) because BellSouth has long wanted to acquire AT&T but could not settle on terms with the AT&T board.

[edited to add link to AJC story]

Oracle to acquire Peoplesoft

The Oracle Corporation announced early yesterday that it would acquire PeopleSoft for $10.3 billion, ending a bitter takeover fight that had lasted more than 18 months.

The shares of both PeopleSoft and Oracle rose sharply yesterday. PeopleSoft shares rose $2.47 a share [10.3%] to close at $26.42 a share, just under the offer price [an indication that Wall Street thinks this is a done deal]. And Oracle's stock price increased $1.35 a share [10.2%] to close at $14.63 [an indication that Wall Street think this is a good deal].

http://www.nytimes.com/2004/12/13/business/14CND-ORACLE.html