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.