NBR Transcripts-February 14
Monday, February 14, 2005PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: And now there are three: the third massive merger in the telecom industry in as many months is in the works tonight. This time it's Verizon buying MCI for almost $7 billion.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: The world's largest insurer, American International Group, comes under more scrutiny from New York's attorney general. We'll tell you why AIG and the AG could soon find themselves at odds again.
KANGAS: There are a lot of newly empty offices at Office Max. We'll tell you why the company is looking for a new chief executive officer tonight.
GHARIB: And these newlyweds are celebrating Valentine's Day today, but maybe we should call them "newly webs." that's because they met online and show how cyberspace is a booming place for the business of love.
KANGAS: I'm Paul Kangas.
GHARIB: And I'm Susie Gharib. This is NIGHTLY BUSINESS REPORT for Monday, February 14.
Good evening, everyone. Another giant corporate marriage in the telecom industry today. Verizon Communications, the nation's largest phone company, announced it is paying $6.7 billion for MCI. In agreeing to the cash-and-stock offer from Verizon, MCI spurned a sweeter offer from Qwest Communications. Today's deal comes just two weeks after SBC agreed to buy AT&T. We have two reports tonight looking at the Verizon-MCI hookup and why telecom companies are rushing to the altar. We begin with Scott Gurvey in New York.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Analysts say that the purchase of MCI was a defensive move in the wake of Qwest Communications' bid for the nation's second largest long distance company and its 14 million residential and one million business customers.
RICK BLACK, TELECOM ANALYST, BLAYLOCK & PARTNERS: It is a good deal for Verizon simply that they get to take one of the prime assets off the marketplace and put it into its stables sort of in letting another company do so. So from that perspective, it's a good deal. Does Verizon have to make the deal at this point in time? We didn't think that it had to. But I think that it was sort of pushed into play by the fact that Qwest went after MCI earlier.
GURVEY: Blaylock and Partners has done business with Verizon in the last year. Without MCI, Verizon faced the prospect of being a distant also- ran to SBC, which two weeks ago announced a deal to buy AT&T for $15 billion. Today's deal is a combination of stock, cash, and dividends valuing MCI at $20.75 a share. At that price, there is no premium over last Friday's close. The price is also said to be half a billion dollars less than the offer from Qwest. Some MCI shareholders were apparently unhappy and sold shares on the news. Verizon shares also fell on word the deal will dilute earnings for three years. And there is speculation Qwest might make another bid.
TODD ROSENBLUTH, TELECOM ANALYST, STANDARD & POOR'S: We think it's possible that Qwest is still interested in MCI assets. We think Qwest needs to make a strategic decision as to where to go and MCI is still their favorite asset, so there is still speculation out there that they may get into the ring.
GURVEY: Verizon insists that it is a much better suitor than the much smaller Qwest and says the deal contains a breakup fee to discourage other bidders.
VOICE OF IVAN SEIDENBERG, CHMN & CEO, VERIZON: I'm very comfortable that we have a compelling offer for shareholders and I'm not particularly concerned about somebody coming in over the top. There's a very high hurdle for them to meet to make that happen.
GURVEY: Verizon expects to squeeze as much as $1 billion in annual operating costs out of the combined companies. That translates into at least 7,000 layoffs. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
STEPHANIE WOODS, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Woods in Washington. Just a few more mergers and the country will be down to two giant regional phone companies, with Verizon the juggernaut of the east and SBC the juggernaut of the west.
PAUL GLENCHUR, TELECOM ANALYST, STANFORD WASHINGTON RESEARCH GROUP: Maybe Qwest joins with a Bell west and Bellsouth becomes part of bell east, and we just have two large bells carving up the country. It's possible.
WOODS: For now, big corporate customers are relieved, because financial scandals at MCI and Qwest and weak balance sheets in the industry left few strong choices for service.
HANK LEVINE, ATTORNEY, LEVINE, BLASZAK, BLOCK & BOOTHBY: In the short term, this is clearly good news. We are going to get stronger match-ups with stronger competition. In the long term, the jury is out, because if we do end up with east and west, or two mega-carriers, we will have problems in the competitive marketplace. If we do end up with a third strong one, this could end up being a big win in the sense of stronger carriers, but also strong competition.
WOODS: So far, the Bush administration has taken a market-based approach to competition, viewing new technologies like broadband over power lines or Wi-Fi as the force to keep prices and service competitive. Former FCC Commissioner Reed Hundt, who once called a Bell long distance merger unthinkable, says regulators now have an opportunity to ensure competition.
REED HUNDT, FORMER CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION: It's about whether these mergers are just going to be rubber stamped or whether the government is going to look at them in a way that creates some new paradigm for competition.
WOODS: Mergers aren't the only shakeup in the telecommunications industry. Policy could be changing, too. FCC Chairman Michael Powell is stepping down and there are new telecomm leaders in Congress and already there are discussions about rewriting the 1996 telecom act. Stephanie Woods, NIGHTLY BUSINESS REPORT, Washington.
KANGAS: Wall Street opened narrowly mixed with the financial sector lower on news that New York's attorney general has issued subpoenas for American International Group. We'll have details on that a bit later. But the techs stocks were firm after an analyst boosted Apple Computer's earnings outlook. At noon, the Dow was off 20 points, while the NASDAQ Composite was up 3 points. Some further improvement in tech sector helped the blue chips trim their losses but trading was lackluster. The Dow industrial average closed down 4.88 at 10,791.13. The NASDAQ Composite gained 6 1/4 points to 2082.91. Standard & Poor's 500 rose just a fraction at 1206.14. In the bond market, the 10-year note rose 5/32 to 99 13/32, putting the yield at 4.08 percent.
GHARIB: Our market guest tonight says the Dow and NASDAQ will move sideways in 2005. Joining us now Jeffrey Saut, chief investment strategist of Raymond James. Hi, Jeff.
JEFFREY SAUT, CHIEF INVESTMENT STRATEGIST, RAYMOND JAMES: Good evening.
GHARIB: Let's start with your analysis of why you think that the market's major averages are going to be going sideways.
SAUT: I think you've got earnings that are regressing to single digit growth. I think you've got rising inflation and I think you've got a Federal Reserve that's raising interest rates. And I think in a finance centric economy, I think that gives you a muddle forward economy and a sideways trading range for the overall major market indices.
GHARIB: If we had someone here who was espousing the more bullish case, they would say, well, the Fed has been telegraphing to us what interest rates are going to be so we have been able to still find good stocks. Earnings are still growing, maybe not as robustly. So they would make a case that way that it is still a good climate to invest in stocks and where else would you put your money? What would you say to that kind of argument?
SAUT: Historically stocks out return most other asset classes when they're valued correctly and what price you pay for them. But at 17 to 19 times this year's guesstimated earnings and I am suspect that earnings are going to come in as well as a lot of analysts believe they are, stocks are optimistically priced by historic measurement Susie.
GHARIB: We know that Fed Chairman Alan Greenspan is going to be speaking on Capitol Hill this week. Is there anything in particular that you are going to be listening for and what the Wall Street reaction might be?
SAUT: I think the Street in aggregate is going to be looking for the word measured again. Whether he uses that word or not I think the tone of the Fed is going to be more along the current deficit. I think Mr. Greenspan, while he is not real worried yet, I do think he is becoming increasingly concerned with the current account deficit.
GHARIB: Let's talk a little bit about what investors should be doing in this kind of a climate. Certainly there are places to make money. Are there any themes that you are investing in that would be of interest to long-term investors?
SAUT: Well, I think energy still has many years left to go, not just oil and gas, but coal as well. I think coal is still well under priced of natural gas and barrels of oil. I think emerging markets are parsimoniously priced in terms of P/E ratios and I think you'll get outsized growth in the Pacific Rim area.
GHARIB: Tell us about energy, whether it's oil or coal. Any specific stocks that you would still get a good return on at this stage?
SAUT: For the past three years, since turning bullish on the energy complex in general, I have been recommending Exxon, British Petroleum and ChevronTexaco as the big three behemoths. In the juniors, our Houston- based energy team has been particularly high on ultra petroleum and a recent one we've brought under research coverage, Plains Petroleum.
GHARIB: Jeff, do you own any of these stocks or does your firm have a position in any of them?
SAUT: The firm doesn't have a position in them. I own these stocks.
GHARIB: OK. What about any other themes besides energy?
SAUT: I still remain very high on the commodity-based names. I think that the outsized growth in the emerging markets are going to cause a demand for things like timber. I have been very bullish on timber, names like Plumtree Timber and Ranier Timberlands for the past two and a half, three years. I like the raw materials and the basic commodities, the base metals, the nickels of the world, the coppers of the world. And I have a theme on water. I think water is a particularly attractive sector to invest in.
GHARIB: Name a stock in the water sector that you would be investing in.
SAUT: Watts Water Technology, WTS. They build water treatment plants and basically build the infrastructure. And I think China, which where 90 percent of their rivers are polluted, I think there is a huge opportunity in China and India for water treatment plants and clean water.
GHARIB: And just for disclosure reasons, do you own that stock as well?
SAUT: Yes, I do.
GHARIB: OK. Jeff, thank you very much. We appreciate your coming on the program.
SAUT: My pleasure.
GHARIB: We've been speaking with Jeff Saut of Raymond James.
KANGAS: There's a break in the fraud trial of former WorldCom CEO Bernie Ebbers. U.S. District Judge Barbara Jones adjourned the proceedings at 1:00 p.m. today for reasons she didn't explain. The trial will resume again on Wednesday. This morning, prosecutors wrapped up their questioning of Scott Sullivan, WorldCom's former chief financial officer and the star witness against Ebbers. Sullivan testified about a memo he sent Ebbers on January 23 of 2002, warning that MCI, a unit of WorldCom, would not be able to pay a planned dividend. Two weeks later, Ebbers told reporters that dividend was not in jeopardy. Ebbers' lawyers are expected to begin cross-examination of Sullivan when the trial picks back up.
GHARIB: The corner office is open at Office Max. The company's CEO resigned today, the result of an internal investigation into its accounting. The nation's third largest office products retailer says it overstated operating income for the first fiscal quarter of 2004, leaving out rebates and payments to vendors. That led to income being understated in the next two quarters, and that led to today's departure of Christopher Milliken, as well as the firing of two other employees. Analysts say that Office Max's efforts to find a new CEO could be hampered by bad timing, Paul and that's because rival Office Depot is also looking for a new CEO.
KANGAS: Office Max shares slid more than 5 percent on that news, Susie, closing down $1.73 to $30.02. Now let's take a look at the rest of our stocks making news tonight.
Most active big board issue on 18 million shares, Lucent Technologies (LU) moving up a nickel.
Followed by Pfizer (PFE) with a $0.33 gain.
And then Sprint FON Group (FON) losing $0.19.
Qwest Communications (Q) down $0.17, but of course we've heard it lost out to Verizon on the takeover bid for MCI.
Hewlett-Packard (HPQ), whose earnings are due out Wednesday, $0.53 loss there, fifth in big board volume.
EMC Corporation (EMC) down $0.09.
Verizon Communications (VZ) itself was a $0.12 loser.
And then American International Group (AIG) down $1.63. As we mentioned, the company got subpoenas from the New York attorney general and the SEC regarding its accounting practices for non-traditional insurance products. The stock traded as low as $70.35 during today.
Procter & Gamble (PG) up $0.55. Of course they're going to take over Gillette.
And SBC Communications (SBC), which is combining with AT&T, an $0.11 gain today.
Nokia (NOK) moved up $0.09. It's in a deal to put Microsoft music player software in its phone handsets. That's the first time those two firms have cooperated.
ConocoPhillips (COP) was up $1.93. Deutsche Bank securities upgraded it from "hold" to "buy" citing the company's successful resolution to its problems in Venezuela and Deutsche Bank also upgraded its price target for the stock from $91 to $113 a share.
DPL (DPL), the old Dayton Power & Light, up $1.77. It's going to sell its interest in 46 private equity funds to Alpinvest/Lexington for $850 million and both Fitch and Standard & Poor's rating services put the company's debt ratings under review with positive implications.
W.R. Berkley (BER), the insurance holding company, up nicely on fourth quarter earnings of $1.31, way up from $1.07 last year and $0.06 above the Street estimate and revenues were up a very respectable 19 percent.
Duke Energy (DUK) up $0.61. Smith Barney upgraded it from "hold" to a "buy."
Global Signal (GSL) rising $1.38. The company has gotten exclusive rights from Sprint to lease or operate 6600 wireless communications towers. That deal is good for 31 years.
Smithfield Foods (SFD) up $2.09. The company sees third quarter earnings coming in at $0.86 to $0.87, way up from the Street estimate of $0.61 and way up from $0.38 a year ago, so very positive outlook there.
Armor Holdings (AH) dropped $2.43. Goldman Sachs downgraded it from "in line" to "under perform." Friday, the company disappointed a number of analysts with its earnings outlook.
Brunswick Corporation (BC) down $1.68. RBC Capital Markets downgraded it from "outperform" to just a "sector perform" rating.
Google (GOOG) topped the active list, up $5.59, even though 177 million shares were released from lock up, but apparently a lot of the insiders are going to stay the course.
NASDAQ 100 (QQQQ) a $0.17 gain.
And then Apple Computer (AAPL) rising $3.42. UBS securities boosted second quarter earnings estimate by $0.04 to $0.45 a share and full year earnings estimate by $0.20 to $2.15 a share and UBS also boosted its price target on the stock from $85 to $99 a share.
Microsoft (MSFT) a $0.04 gain there.
And then fifth in dollar volume was Intel (INTC), a $0.14 gainer.
eBay (EBAY) up $2.25.
And Cisco Systems (CSCO) $0.27 gain.
MCI (MCIP) itself down $0.82 as you saw earlier.
Yahoo! (YHOO) an $0.18 gain.
And Dell (DELL) down $0.43.
Taser International (TASR) rose $1.03. The company said it received three follow on orders and a new separate order from the Singapore police for stun guns and the total price of the deal about $675,000 worth of business.
And Ariba (ARBA) up $1.36. It's going to pay a lower than expected $37 million to settle a patent infringement suit with ePlus Incorporated.
And those are the stocks in the news tonight. Susie.
GHARIB: Thank you Paul. Today is Valentine's Day, February 14. If you're looking for love, you may choose to look for it online and you won't be alone. Internet dating is big business these days with Americans spending nearly half a billion dollars a year on web-based dating services. As we wrap up our series looking at the business of love, Erika miller looks at what has become the leading category of paid content on the Internet.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Newlyweds Allison Baker-Weiss and Mark Weiss met through match.com five years ago. They say it was love at first sight.
MARK & ALLISON WEISS, MET ON MATCH.COM: We got together and we spent five or six hours together, and we both knew that absolutely, this was -- I knew she was the girl for me right away and within a month or a month and a half. Two and a half months. All right. We moved in together.
MILLER: The couple is just one of a growing number that are finding love online. A recent survey by weddingchannel.com shows that 12 percent of newly married or engaged couples met over the Internet, the majority of them on match.com. The site is a unit of Barry Diller's publicly traded IAC Interactive Corp.
BARRY DILLER, CHAIRMAN, IAC/INTERACTIVE: There is someone for everyone. The thing is where is that someone? And if this thing, this match gets you there and gets you to filter out all those people and find you one, two, three of the someones that could be for you -- what a fantastic thing to do.
MILLER: But there are signs the honeymoon may be over. The online dating industry's revenues rose by more than 70 percent a year in 2002 and 2003, but they grew by only 19 percent last year and are forecast to gain just 9 percent this year, due to high customer dissatisfaction. Match.com, however, disputes any notion of an industry slowdown. It projects revenues will grow 25 to 35 percent a year for the next five years, largely because of expanding overseas business.
JIM SAFKA, CEO, MATCH.COM: Clearly this is a global opportunity. We're number one in Europe and we're just getting started in Asia Pacific. So that is going to fuel a big part of our growth.
MILLER: The company is also focusing on turning more browsers into subscribers. Although more than 15 million people visit the site worldwide, only one million actually pay for the privilege of contacting other members. At the same time, competition is increasing. Today there are over 900 dating sites in the U.S. alone -- up 12 percent from a year ago. Match.com's chief rival is Spark Networks, which owns J-Date for Jewish singles and other sites for college students, gays and older singles. Sparks is listed on the Frankfurt stock exchange. It scrapped plans for a U.S. IPO last August, although it says it may reconsider this year. Other giants in the field are Yahoo! personals and e-harmony, which got $110 million in venture capital two months ago. One way match.com hopes to standout from the pack is with its search technology.
SAFKA: In many ways, we're in the search business. And in the search business, you have to have the most powerful search tools. And so, we've got the most members and the most popular searching capabilities to be able to find people that have characteristics of folks that you'd be looking for.
MILLER: Experts say it's clear that online dating has lost its stigma. 21 percent of U.S. Internet users have surfed a personals site and more than half of those people have posted a personal ad. Talk show host and relationship expert Dr. Joy Browne believes there is a major cultural shift under way.
DR. JOY BROWNE, AUTHOR, DATING FOR DUMMIES: I get the sense that online dating is where personals were about 15 years ago, because personals started out as being very kind of risqué‚ and fringe, and then became very mainstream and a huge source of revenue. And everyone was doing it. And I think online dating is really there now.
MILLER: In some ways, online dating is a victim of its own success. When two people find their match, they generally stop subscribing to dating services. But match.com says word of mouth advertising is worth far more than lost business. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
KANGAS: Tomorrow, we look at why the cost of health care is soaring off the charts.
GHARIB: A move forward in assuring the safety of prescription drugs: today the White House tapped Lester Crawford, the current acting commissioner of the Food and Drug Administration, to permanently head that agency. Crawford's nomination comes at a time when the FDA's drug approval process is under intense scrutiny. The agency has also been asked to take a bigger roll in protecting the nation's food supply from terrorism.
KANGAS: Pilots at ATA Airlines have agreed to a wage cut. The deal trims their salary by 20 percent and will save the bankrupt carrier's parent ATA holdings an estimated $12 million over the next four months. 78 percent of the union's rank and file voted in favor of the wage cut. The deal also slices company contributions to the pilot's pension plan in half.
KANGAS: Here's a look now at what's happening for tomorrow. February retail sales come out and December business inventories. Also tomorrow, earnings from Applied Materials, Deere and Company, Nordstrom, and Qwest Communications.
Tonight's commentator says President Bush is right to want to reform Social Security. But he thinks the president is going about that in the wrong way. Here's Mark Zandi, chief economist of economy.com.
MARK ZANDI, CHIEF ECONOMIST, ECONOMY.COM: The president's effort to reform Social Security is in full swing. His stated goal is to solve the system's financial problem. While laudable, the system will be broke some 40 years from now. The president's plan should not be adopted. His plan includes two principal proposals. The first is to establish private savings accounts. The second is to cut benefits. Private savings accounts do not address the system's financial problem. To see why, consider that to finance the accounts and pay beneficiaries, the government will have to borrow more. More government bonds will push interest rates up. Stock prices would likely be higher, but bond prices and housing values, which depend on interest rates, would be lower. Taken together, the average participant would be no better off than if she had remained in the current system. The plan does address the system's financial problem, but only by cutting benefits. The president is coy regarding just how he will do this, but it is likely that the initial benefit of future retirees would eventually be nearly half that received under the current system. A better solution would be to simply allow the tax cuts implemented during the president's first term to expire. Earmark the additional tax revenues for Social Security and its financial problem would be solved and then some. Social security should be reformed. To adopt the president's plan out of a sense of urgency, however, would be a mistake that generations to come would pay for. This is Mark Zandi.
KANGAS: Recapping today's market action, stocks close the day narrowly mixed. The Dow falls almost five points, while the NASDAQ Composite gained 6 1/4 points. To learn more about the stories in tonight's broadcast, go to nbr.com.
GHARIB: And that's NIGHTLY BUSINESS REPORT for Monday, February 14. I'm Susie Gharib. Happy Valentine's Day everyone and to you, too, Paul.
KANGAS: And to you too, Susie. I'm Paul Kangas, wishing all of you the best of good buys.
