Deal Mania in the Air
More evidence that the smart money senses a global economy on the mend: Takeover activity is humming. The big-daddy deal at present, of course, is Kraft Food's (KFT) Nov. 9, $16.4 billion hostile bid for Cadbury (CBY). The British sweets purveyor made a sour face, so Kraft has a month to win over shareholders. On the same day, Google (GOOG) said it was buying AdMob, a provider of mobile ad technologies, for $750 million in stock. Other action: French insurance giant AXA (AXA) and a partner offered $10.2 billion for all of AXA Asia Pacific, a partly-owned Australian unit—which promptly rejected the proposal. On Nov. 11, Hewlett-Packard (HPQ) said it's planning to buy networking-equipment maker 3Com (COMS) for $2.7 billion, including debt. The Wall Street Journal reported that Reynolds American (RAI) is near a deal to buy Niconovum, a Swedish maker of products to help smokers quit, and that Motorola (MOT) may sell its set-top-box unit. And all this may be just the beginning. Deutsche Bank (DB) analysts reckon next year could see a major M&A wave. Their reasoning? Capital markets are back on track, confidence is rising, and valuations remain way below pre-credit crunch levels.
An About-Face on E-Cars
While other automakers are stressing electric cars and hybrids, Chrysler is backing away. When the company was owned by Cerberus Capital Management, run by Robert Nardelli, and begging for bailout cash from the feds—it eventually got $12.5 billion—it pledged to build an array of electric vehicles and put 500,000 of them on the road by 2013. Then along came bankruptcy and a deal under which Fiat (FIATY) got 20% ownership in return for contributing small cars and clean diesel engines. On Nov. 4, when Fiat CEO Sergio Marchionne outlined plans to spend $23 billion on new models, electric cars were throttled back to a tiny portion of Chrysler's future sales as the company decided to put its cash behind cars that will sell in bigger numbers. In other auto news, General Motors Chairman Ed Whitacre contradicted his own management—and the Treasury Dept.—by saying that GM may not be ready for an IPO in 2010. GM also sent Nick Reilly, its international operations boss, to run its Opel unit until a permanent CEO can be found.
Priceline Flies High
Forget staycations—consumers are hitting the road again. They're just doing it on the cheap, which is fine with Priceline.com (PCLN). The online travel agency on Nov. 9 posted a tripling of third-quarter profits and a sunny outlook for the rest of the year; the next day its shares soared by 18% to a nine-year high. Despite the recession, a marketing campaign featuring William Shatner and the name-your-own-price service led to boffo bookings this summer.
The cable goliath and General Electric (GE) appear to be nearing the finish line: A Comcast (CMCSA) deal for NBC Universal may be announced in coming days. Comcast and NBC owner GE have worked out a formula that values the network, its cable channels, Universal studio, and theme parks at $30 billion. Under the accord, Comcast would merge its own channels with NBC, owning 51% of the new company and kicking in as much as $6 billion. GE would hold the remaining 49% but would still need to acquire the 20% stake that French conglomerate Vivendi owns. Vivendi is thought to be ready to sell at the right price.
Dodd's Reform Plan
Senator Christopher Dodd (D-Conn.), head of the Banking Committee, staked out a tough position on Nov. 10 when he unveiled his 1,136-page financial reform package. It would combine banking regulation into a single new agency, stripping the Fed of some powers and handing oversight of "systemically risky" institutions to a panel of regulators. Other ideas, including derivatives reform and a consumer protection agency, resemble those in pending House legislation. The plan drew potshots from banks but little sniping from the GOP, suggesting cross-aisle palaver had preceded going public. Still, much is likely to change before the full Senate votes, as Dodd and his backers all but acknowledged.
See "Senator Dodd Unveils Bank-Reform Bill"
The Rally Continues
The dollar may be diving like a blue whale, but investors keep piling into U.S. stocks. The S&P 500 climbed 2.7% in the three days ended on Nov. 11, notching a 13-month high and raising its 2009 gain to 21.6%. Among the reasons: dandy profits at American companies and reassurances from Group of 20 finance ministers and central bankers that they'll keep the stimulus spigot open until the recovery is secured. Some 80% of S&P 500 companies that have released earnings this quarter topped expectations—a record since at least 1993, according to Bloomberg. On top of that, nonfarm productivity jumped by an annualized 9.5% in the third quarter, while unit labor costs fell 5.2%. Then there's the downside: U.S. joblessness hit 10.2% in October. And the dollar continued its descent, sliding since March by 15.7% vs. a basket of other major currencies.
One close vote in the House, one giant leap for health-care reform. After weeks of give-and-take, the House of Representatives on Nov. 7 managed to push through a bill by the tiny margin of 220 to 215. One Republican, Joseph Cao of Louisiana, voted in favor, while 39 Democrats turned thumbs-down. No sooner was the bill passed than it came under savage attack for failing to curb costs adequately and restricting coverage of abortion-related services. The Senate aims to begin debating its version on Nov. 16.
Verdict: Not Guilty
Were they simply lousy money managers, or did they lie to clients? A federal jury in Brooklyn apparently decided on the former, acquitting on Nov. 10 two former Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, of securities fraud. Many viewed the trial as a test case for prosecutions growing out of the subprime crash. Cioffi and Tannin oversaw funds that collapsed in 2007 after making huge bets on mortgage securities, resulting in $1.6 billion in losses. Prosecutors alleged that they deceived investors, waxing optimistic about the funds while in private they foresaw disaster. But that's often tough to prove, and jurors didn't buy it. Cioffi, 53, and Tannin, 48, still face civil charges brought by the SEC.
The Galleon Case Widens
Ripples from the Galleon Group insider trading case are spreading, and the Street is worried. On Nov. 5 federal prosecutors in New York accused 14 more people—including an attorney and Wall Street traders—of trading on nonpublic information. Then, on Nov. 11, The Wall Street Journal reported that a key witness told a judge he had bought information from a Marvell Technology Group (MRVL) staffer, the first detailed indication that a corporate insider was paid off. Investigators are also tracking transactions at one of the largest and highest-profile hedge funds, SAC Capital Advisors.
AIG (AIG) CEO Robert Benmosche has made plenty of waves in his three months at the helm, starting with his early bluster about not being pushed into selling assets too soon. On Nov. 11 he found himself in rough water again after The Wall Street Journal said he'd threatened in front of board members to quit because of pay limits imposed by Washington, which owns 80% of the bailed-out insurer. Ben- mosche's own $10 million pay package got the O.K. in October. In a letter to employees, Benmosche didn't deny the report, though he termed it "speculative." He acknowledged his ire over the pay caps but assured employees: "I and the board remain totally committed to leading AIG through its challenges and to continuing to fight on your behalf."
A Roadblock for Oracle
As Oracle (ORCL) waits, Sun is fading. Back in April, the top database maker offered $7.4 billion for Sun Microsystems (JAVA), which makes computer hardware and software, but on Nov. 9 the European Union formally objected to the combo. Regulators fear Oracle's ownership of Sun's open-source MySQL database would stifle competition. Oracle disagrees, but with the deal in limbo, Sun continues to burn money. On Nov. 6 it said revenues sank 25% during its first quarter, ended Sept. 27, and losses hit $120 million. The EU has until Jan. 19 to make a final call. U.S. officials have already approved the deal.
Chipmakers Make Peace
The feud between the chipmaking kings of China and Taiwan came to an end on Nov. 10 with a victory for the Taiwanese. China's Semiconductor Manufacturing International (SMI) said it agreed with its bitter rival and the industry's top player, Taiwan Semiconductor Manufacturing (TSM), to settle lawsuits alleging theft of trade secrets. SMIC will pay $200 million to TSMC and give it shares and warrants worth a 10% stake in the Shanghai company, which hasn't made money since 2007. SMIC also said its founder and CEO, Richard Chang, had resigned. Despite its history of red ink, SMIC could prove valuable to TSMC, which only possesses one small plant in China. SMIC operates large facilities in Shanghai and Beijing and owns a former Motorola (MOT) chipmaking fab in the northern city of Tianjin.
See "TSMC's Next Move in China"
Why You'd Better Beware of the 'Big Shift'
Conventional wisdom says productivity is a key driver of corporate profitability. Yet this long-held assumption is challenged by a report from Deloitte's Center for the Edge. The study, led by John Hagel III and John Seely Brown, finds that despite major improvement in labor productivity over the past four decades, many U.S. industries have experienced "alarming" declines in return on assets (ROA), a key metric of corporate performance. The authors say that trend is being driven by what they term the "Big Shift"—a tremendous increase in competitive pressures, combined with the increasingly pervasive digital infrastructure.
In a follow-up report released on Nov. 10, Hagel & Co. delve deeper into the numbers to figure out how the Big Shift is playing out in nine U.S. industries. Surprisingly, the steepest declines in ROA came in technology, telecommunications, and media—sectors traditionally regarded as innovation hotbeds. The auto industry also had a poor showing, though that's not so startling. Banking, retail, consumer products, and insurance fared better. But only two sectors, health care and aerospace/defense, saw ROA climb. Keep in mind that these industries are subject to heavy government regulation, which tends to muffle competition.
Overall, the Deloitte report provides fodder for those, like BusinessWeek's Michael Mandel, who argue that the woes of the U.S. economy extend beyond the financial sector and began showing up well before the housing bubble. (Deloitte's Center for the Edge, "2009 Shift Index")