"NBR Transcript" - January 31, 2005
Monday, January 31, 2005PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: U.S. firms ring up a raft of big deals today -- almost $30 billion worth, with the biggest, a $16 billion buyout of AT&T by SBC. That essentially closes the books on one of America's oldest companies, dating back more than 125 years.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: But this telecom expert says that today's deal is loaded with risks and could be a real minefield for SBC. Scott Cleland of Precursor gives us his analysis.
KANGAS: Nothing desperate about Disney's earnings. Thanks to "Desperate Housewives" and other hit TV shows, the media giant racks up better-than-expected earnings for its fiscal first quarter.
GHARIB: Then, you can get there from "here, if "there" is Taiwan and "here" is China. Direct flights between the two countries are up and running again, after more than five decades on hold.
KANGAS: I'm Paul Kangas.
GHARIB: And I'm Susie Gharib. This is NIGHTLY BUSINESS REPORT for Monday, January 31.
Good evening, everyone. It was the return of mega-merger Monday, with a flurry of big mergers and acquisitions today. The total price tag of four deals: about $30 billion. And the new combinations involve some of America's best-known corporate names. We begin with the biggest. SBC confirmed today it is buying AT&T for $16 billion. The deal creates the nation's largest telephone company, but also marks a dramatic change for one of the most storied companies in American business history. Scott Gurvey takes a look back at AT&T's remarkable 128-year history.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Alexander Graham Bell founded what began as the Bell telephone company in 1877. Over the course of a century, it grew to monopolize the industry. Along the way came revolutionary technical advances, as well as antitrust challenges which AT&T fought off until 1984. Faced then with a court order to split up, AT&T divested its local telephone operations, keeping its long distance network. It was the wrong move. Competitors quickly entered the long distance market, while the most valuable asset proved to be the wire into the home, which AT&T gave to the local phone companies. SBC was the smallest of those companies, but grew through aggressive acquisitions over the next 20 years. Now it lays claim to an American icon. In a telephone briefing today, SBC CEO Ed Whitacre was vague about the AT&T brand's future.
VOICE OF EDWARD WHITACRE, CEO, SBC COMMUNICATIONS: The AT&T brand is a terrific brand and I'm certain it will live on in a way that will make them proud and us proud and we'll just have to figure that out in the next few days. But it is a great name. It's not going away.
GURVEY: What is going away are AT&T shares, traded all these years under the ticker "T" for telephone. Holders will get a bit more than three-quarters of a share of SBC for each telephone share they own, plus a $1.30 special dividend. That values the transaction at about $16 billion. SBC also assumes $6 billion in AT&T debt.
VIKTOR SHVETS, TELECOM ANALYST, DEUTSCHE BANK: It's reflective of the fact that it's a rapidly declining company. So when AT&T -- when SBC claims quite correctly that synergies could pay for the entire acquisition price and basically they have assets of AT&T for nothing, it is not far from the truth.
GURVEY: Deutsche Bank has an investment banking relationship and owns shares in both AT&T and SBC. SBC faces a host of regulatory hurdles before this deal is done. But experts say what was unthinkable just a few years ago is now doable. In a new book, AT&T's former public relations chief cites three reasons the company ran out of time while trying to move away from its declining long distance business.
DICK MARTIN, AUTHOR, "TOUGH CALLS": One is wireless service replaced traditional long distance calls. The economy got bad. But something that nobody has written about is that AT&T's biggest competitor, MCI, engaged in wholesale accounting fraud.
GURVEY: Analysts say Verizon may now consider a long distance network acquisition and say MCI or Qwest are likely targets. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
KANGAS: A mega-merger is also in the works in the insurance industry. MetLife is buying Travelers Life and Annuity from Citigroup. The price tag, $11.5 billion in cash and stock. The deal will make MetLife the largest insurer of individuals in North America based on sales. MetLife will also be able to sell insurance through Smith Barney brokers and at Citibank branches. Today's sale is the latest move by Citigroup to shed assets no longer considered strategic. In 2002, it spun off Travelers Property and Casualty. Analysts believe the rest of Travelers should fare better with MetLife than under Citigroup's umbrella.
ANDREW KLIGERMAN, INSURANCE ANALYST, UBS: Excellent fit. Gives Met the scale, the dominance to rationalize costs that it couldn't have done otherwise.
KANGAS: UBS has done investment banking and other business with MetLife. Today's deal also includes Citigroup's international insurance business. And analysts say the acquisition could boost MetLife's overall business.
GHARIB: There is a new chapter tonight in the story of one of the best-known names in American journalism. The Pulitzer Company, known for its Pulitzer Prize awards, is being bought by newspaper publisher Lee Enterprises. Lee will pay $64 a share for Pulitzer. It's a deal worth about $1.5 billion. Lee publishes in smaller markets, including the "Wisconsin State Journal" in Madison. Pulitzer publishes the "St. Louis Post-Dispatch," the "Arizona Daily Star" and a dozen other daily newspapers. The sale will mean a big payday for Pulitzer family members. They control 88 percent of their namesake company's voting stock.
And Eastman Kodak is buying printing technology firm Creo for about $980 million to get a bigger foothold in the commercial printing business. It's another step in Kodak's aggressive efforts to turn itself into a digital products company and turn away from its traditional film business. Creo's systems manage images and convert computer files into plates that are used to print magazines and books. Kodak says today's deal is probably the last of its kind, wrapping up $3 billion worth of acquisitions over the past two years to make that strategic shift.
KANGAS: Wall Street staged a broad rally this morning in reaction to everything from that flurry of mergers to the Iraqi election and lower oil prices. At midday, the Dow was 75 points higher, NASDAQ up 27. The market lost some of its luster this afternoon as oil rebounded while investors grew cautious ahead of the upcoming Fed meeting on interest rates. The Dow Industrial Average came in with a gain of 62 3/4 points at 10,489.94. NASDAQ Composite ended 26 1/2 points higher at 2,062.42. Standard & Poor's 500 up almost 10 points at 1181.27. In the bond market, the 10-year note rose 3/32 to par and 30/32, putting the yield at 4.13 percent.
Back now to our top story, the $16 billion buyout of AT&T by SBC. For some analysis on what this deal means to the telecommunications industry, Stephanie Woods sat down with Scott Cleland, CEO of Precursor, which provides telecom research for institutional investors. She began by asking if SBC is getting its money's worth.
SCOTT CLELAND, CEO, PRECURSOR GROUP: They're assuming an enormous amount of risk. They're making a big bet. Because AT&T has been falling like an anchor on its revenues, and so they're hoping that they can reverse that trend.
STEPHANIE WOODS, NIGHTLY BUSINESS REPORT CORRESPONDENT: So will this buy them growth?
CLELAND: No, I think it will make SBC the largest negative growth company in the market.
WOODS: SBC says it expects to save $15 billion by combing the companies. What is that going to mean for customers, employees?
CLELAND: Well, there clearly are huge cost savings, because you are going to be able to eliminate a lot of redundant infrastructure and people. You know, probably 10,000 plus people will lose their jobs because of the merger.
WOODS: This purchase now closes the chapter on 125 years of corporate history. AT&T was the stock for widows and orphans at one time. It was an entryway into the middle class for a lot of workers. Recently it's been a company that struggled with its corporate identity. What does this mean for the telecommunications industry and the country?
CLELAND: Well, you know, the bigger they are, the harder they fall. This is a case of a company that employed almost 700,000 people, now only has about 50,000. Where it used to be one of the main companies in the Dow, it's no longer in the Dow. And it's being, you know, bought now in a fire sale by one of its baby Bell brethren.
WOODS: Did regulators kill AT&T?
CLELAND: This was a series of really bad decisions by AT&T leaders over a long period of time. These were strategic decision mistakes. They got into computers and got out at the wrong time. They got into wireless and then got out at the wrong time. They got into cable at the wrong time and out at the wrong time. So there's just a whole history of making big strategic wrong decisions at the wrong time.
WOODS: What do you expect will be the fallout of this merger? Is this going to open a telecom merger flood gait?
CLELAND: Well, it certainly suggests that. What's really interesting is remember, AT&T was SBC and the other baby bells main nemesis in Washington. These two companies were fighting tooth and nail over everything and it's really ironic now that they're on the same side.
WOODS: What does this mean for Verizon and Bell South? Are they going to feel the need to play catch up?
CLELAND: Bell South has proven that it's very disciplined and conservative and so I would seriously doubt that they would make a big acquisition now. They had their opportunity. They decided not to pull the trigger over a year and a half ago with AT&T. Verizon has been very clear that they're big and they're growing and they're executing and I would put Verizon in big contrast to SBC is they have a -- Verizon has a very clear, coherent, focused and disciplined strategy. SBC appears to be very opportunistic and all over the place. What's weird about this merger is SBC is investing in long distance facilities, which Internet protocol and its Internet (ph) have devalued transport technology the most. So it's very odd that they're -- SBC is investing in the part of the business which has been most depreciated and most vulnerable.
WOODS: But is it worth it just to buy the business enterprise customers?
CLELAND: There's an outdated view that the enterprise customer is a cash cow. Over the last five years since the bubble, the average large big business chief technology officer has become very savvy at squeezing the margins of all vendors and so SBC is going to find a rude awakening trying to serve those enterprise customers that have an enormous amount of savvy and an enormous amount of leverage to drive their prices down.
WOODS: We've been speaking with Scott Cleland of Precursor. Thank you.
GHARIB: The world's biggest insurance broker, Marsh & McLennan, has agreed to pay $850 million to settle charges it conspired to rig bids. Back in October, New York's attorney general accused Marsh of colluding with American International Group and other insurers to fix prices. In today's settlement, Marsh neither admitted nor denied those charges.
Two big votes of confidence today for United Airlines. Both its pilots and flight attendants unions have OK'd new labor deals. And late today, both were approved by the bankruptcy court. The new pilots' contract will save the carrier $180 million a year in labor costs. For the flight attendants, it's a $131 million savings. But United is not out of the financial woods yet. Paul, as you recall, last week its machinists union rejected a cost-cutting contract and threatened a strike.
KANGAS: Susie, within the hour, the bankruptcy judge approved a temporary wage cut for United Machinists, clearing the way for a 10 percent pay cut while negotiations on a permanent contract continue. Now let's take a look at our stocks in the news tonight. Big board volume leader on 29.6 million shares Pfizer (PFE) losing $0.19.
Followed by Sprint FON Group (FON) moving up $0.68. Speculation around today that Verizon might try to acquire Sprint.
Merck & Company (MRK) a $0.03 gain.
SBC Communications (SBC) down, I should say up $0.14 on that AT&T news.
Wyeth (WYE), the pharmaceutical down $3.35. The company reported a fourth quarter loss of $1.32 a share and that includes a $4.5 billion charge for the recall of its fen phen diet drug. That was $1 billion more than expected, incidentally. Also the company issued a disappointing 2005 forecast. That was fifth in volume.
AT&T (T) itself fell $0.52 on that mostly stock swap merger rumor with SB - merger takeover with SBC.
Citigroup (C) a $0.67 gain.
Procter & Gamble (PG) which of course is going to be taking over Gillette, $0.92 loss.
General Electric (GE) up $0.38.
And Gillette (G) itself, tenth in volume down $0.88.
Disney (DIS) up $0.40 on the regular close. After the close, first quarter earnings came in at $0.34, up from $0.33 a year ago and that was $0.05 better than the Street was expecting. In after hours trading I saw Disney stock as high as $28.80 a share.
ExxonMobil (XOM) up $0.33. Fourth quarter record earnings $1.30 a share, up from $1.01 last year and that was $0.25 ahead of the Wall Street estimate.
Marsh & McLennan (MMC) up $1.41. Company as we just heard, agreed to pay $850 million to settle those bid rigging charges and a lot of investors appear happy that the whole thing is behind the company.
Delta Air Lines (DAL) moving up $.36. Merrill Lynch upgraded it from "sell" to "neutral."
Mattel (MAT), the toy maker, up $1.10. Fourth quarter earnings up 33 percent to $0.68 versus $0.49 last year. Worldwide sales rose 6 percent and the Ryan Beck (ph) brokerage upgraded it from "market perform" to "out perform."
Look at this gain, Aviall (AVL) up $5.11. The company got from General Electric exclusive worldwide distribution rights in the after market to sell engine parts for several of GE's jet engines. The lifetime value, somewhere around $5 billion it's estimated.
Sealed Air (SEE) up $4.15. Fourth quarter earnings $0.81, comfortably higher than $0.70 last year and sales up 9 percent. Standard & Poor's upgraded the stock from a "hold" to a "buy."
Major loser, Sirva (SIR) which is in the relocation business for corporate employees. Company cuts its fourth quarter guidance from earnings of $0.15 to $0.17, all the way down to a loss of $0.16 to $0.20. Last week the company's CFO resigned.
Harsco (HSC) which is in the steel milling business, fourth quarter earnings comfortably higher, $0.84 up from $0.62 a year ago. Revenues jumped 26 percent, nice move in the stock.
Energizer Holdings (ENR) up $3.61. "Wall Street Journal" today reported that the Procter & Gamble takeover of Gillette could force other mergers in the industry and suggests Colgate, Kimberly Clark and Energizer might make a good combination.
NASDAQ 100 (QQQQ) up $0.48.
Apple Computer (AAPL) hitting a new yearly high, up $2.92.
Google (GOOG) gained $5.28. Fourth quarter earnings due out for Google tomorrow, the Street estimate, $0.77. Most think it will beat that by $0.04 or $0.05.
Microsoft (MSFT) gained a dime.
Intel (INTC) $0.21 rise there, fifth in dollar volume.
eBay (EBAY) $0.40 gain.
Cisco Systems (CSCO) up $0.14.
Nextel Communications (NXTL) $0.32 rise.
Yahoo! (YHOO) gained $0.59.
Applied Materials (AMAT), tenth in volume, down $0.14.
Creo (CREO) up $1.82. As you heard, Eastman Kodak will acquire this company for $16.50 a share in cash.
And then finally we see a good gain in Noven Pharmaceutical (NOVN) rising $2.82. The Pacific Growth brokerage upgraded the stock from "equal weight" to "over weight."
Those are the stocks in the news tonight. Susie?
GHARIB: Paul, there was an unusual sight on the runway at Taipei's international airport today: planes that had flown in nonstop from China. For the first time in 56 years, direct flights are running between the mainland and the island, under an agreement reached earlier this month. As Hope Ngo reports, it's a huge breakthrough for both sides.
HOPE NGO, NIGHTLY BUSINESS REPORT CORRESPONDENT: In a relationship marked by turmoil and mistrust, a breakthrough now in the form of nonstop flights between airports in Taipei and Kaohsiung on Taiwan, and Beijing, Shanghai, and Quangzhou in China. The flights will straddle the traditional lunar New Year holidays between January 29 and February 20, when millions of Chinese and Taiwanese return to their home provinces. The planes take an unusual route. Instead of flying from China directly across the Taiwan Strait, they will travel through Hong Kong air space.
FRANK CHING, POLITICAL COMMENTATOR: And they say this is because of military reasons. They don't want to see planes flying directly from the mainland to Taiwan because they say they would only have 10 minutes warning if the planes were not passenger planes, you know, if they were attack planes from the mainland.
NGO: There's another catch. Only China-based Taiwan businessmen, their employees and their families are allowed to take these flights. In spite these restrictions, analysts say the flights are a major break through in Chinese Taiwan relations.
JOSEPH CHENG, CITY UNIVERSITY OF HONG KONG: Everybody understands that some kind of a dialogue and some agreements on concrete practical issues are essential to lower the tension of the Taiwan straits area and to make sure that the dialogue will go on, that both sides will come to their senses, both sides will remain reasonable and have a better understanding of each other.
NGO: Understanding is crucial, especially in light of China and Taiwan's economic dependence on each other. Taiwan is one of China's biggest trading partners, having put as much as $100 billion U.S. in investments. As many as one million Taiwanese now live and work in China. In spite of this, Taiwan's government has fought long and hard against establishing direct trade, transport, and postal ties.
All links between the two arch-rivals are routed through Hong Kong, Macao, South Korea, or Japan, although China recently said it wants to build a superhighway linking Beijing with Taipei as part of a national expressway network plan. Analysts believe the recent development is part of Taiwan President Chen Shui Bian's move to score points, not with China, but with the United States.
FRANK CHING: The direct flights to some extent have materialized mainly because of the pressure from the Taiwan business community, and also to some extent from the Bush administration of the United States which has been trying very hard to persuade the two sides to engage in negotiations.
JOSEPH CHENG: When Bush first became president in 2001, he was very pro Taiwan. You remember that on TV he said he'd do anything it took to help Taiwan's defend itself. Now I think there's a feeling on the part of the U.S. government that Chen Shui Bian is a trouble maker and I think he's trying hard now to get rid of that image of himself.
NGO: Direct flights may bring some welcome relief to rising tensions between China and Taiwan. But they don't address Beijing's concern that Taiwan President Chen Shui Bian and his government might push ahead with plans to hold a referendum that will decide the island's sovereignty and create another wedge with China. Hope Ngo, NIGHTLY BUSINESS REPORT, Hong Kong.
KANGAS: Tomorrow, the go-it-alone strategy of one Midwestern retailer flying in the face of industry consolidation.
GHARIB: The Congressional Budget Office is calling for Medicare and Medicaid reform. The CBO says costs for the health insurance programs are rising at unsustainable rates. Currently Medicare and Medicaid consume 4 percent of U.S. gross domestic product. CBO's director says that could soar to as much as 50 percent in the next 50 years if spending isn't curbed.
KANGAS: One of China's largest oil and gas companies is looking for black gold in Cuba. Sinopec has signed a production deal with the state-run Cuba Petroleo to pump oil on the communist island. This isn't Cuba's first outside oil investor. Spain and Canada have also oil pacts with Cuba. Brazil is also exploring a possible investment in Cuban oil.
GHARIB: Here's a look now at what's happening tomorrow. The Federal Reserve begins a two-day policy meeting in Washington. Also tomorrow, the January ISM manufacturing index and December construction spending, and earnings reports from Avon Products, Chubb, Google, MGM Mirage, and Yum! Brands.
Tonight's commentator takes a closer look at President Bush's plans to add private accounts to Social Security. Here's Glenn Hubbard, professor of economics at Columbia University and former chairman of the White House Council of Economic Advisors under President George W. Bush.
GLENN HUBBARD, FORMER CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS: President Bush has promised that Social Security reform will be a domestic priority over the next four years. While it is long-term trends -- longer lives and more time spent in retirement -- that make Social Security a top priority, the youngest baby boomers will retire as the president's second term ends.
Personal accounts have emerged at the centerpiece of reform. With personal accounts, you could deposit a portion of your payroll tax into an investment account you would own. Most of the current payroll tax would continue to fund traditional Social Security benefits. This reform would strengthen opportunities to build wealth for millions of Americans who have few financial assets today. And while politicians find it difficult to save Social Security surpluses, personal accounts would be off limits to political spending impulses.
What about the cost of putting part of payroll taxes into personal accounts? Pre-funding Social Security benefits through personal accounts by diverting a portion of payroll taxes is akin to prepaying part of a mortgage. Higher Federal debt in the near term is offset by lower Social Security obligations in the longer run. Some complain that personal accounts will limit Social Security's ability to make transfers from higher-income to lower income workers. But public policy can encourage personal accounts and provide a robust minimum benefit for low-income retirees. Social Security reform can deliver personal accounts, a more stable future for Social Security and a stronger commitment to low-income seniors. I'm Glenn Hubbard.
KANGAS: Recapping today's market action, a slew of corporate mergers spurs investors to buy stock across the board. The Dow gained 62 points, while the NASDAQ climbed 26 1/2 points. To learn more about the stories in tonight's broadcast, go to nbr.com.
GHARIB: And that's NIGHTLY BUSINESS REPORT for Monday, January 31. I'm Susie Gharib. Good night, everyone. Good night to you, Paul.
KANGAS: Good night, Susie. I'm Paul Kangas wishing all of you the best of good buys.
