NBR Transcripts - February 28, 2005
Monday, February 28, 2005SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: He says he didn't know anything about the huge accounting fraud at WorldCom, even though he was CEO at the time. Bernie Ebbers takes the stand in his own defense today at his fraud and conspiracy trial and we were in the courtroom for his testimony.
PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: Federated Department stores goes on a shopping spree, picking up a rival chain, the May Department stores. It's an $11 billion deal that isn't very well-received by investors in other retailers.
GHARIB: A bad drug reaction on Wall Street. Shares of both Biogen Idec and Elan Pharmaceuticals plummet after the firms pull a promising multiple sclerosis drug from the market.
KANGAS: And it's a daunting task, rebuilding a country in the wake of a massive disaster. That's what faces Sri Lanka now. Tonight we begin a special series of reports looking at how the island nation is trying to meet the challenge.
GHARIB: I'm Susie Gharib.
KANGAS: and I'm Paul Kangas. This is NIGHTLY BUSINESS REPORT for Monday, February 28.
Good evening, everyone. Bernie Ebbers stunned the legal world today, taking the stand to defend himself against fraud and conspiracy charges. In a New York courtroom, the former CEO of WorldCom flatly denied he played any role in the massive accounting scam that pushed the telecom giant into bankruptcy. As Suzanne Pratt reports, legal experts say Ebbers bold move is a risky strategy.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Five weeks into the fraud trial of Bernie Ebbers and the former WorldCom chief opted to tell his side of the story. Under questioning from his top lawyer, Ebbers calmly denied any knowledge or participation in the $11 billion accounting fraud that pushed WorldCom into bankruptcy. Ebbers flatly refuted the testimony of former WorldCom CFO Scott Sullivan, who claimed earlier in the trial that Ebbers pressured him to cook the books. Ebbers said today quote, he never told me he made an entry that wasn't right. If he had, we wouldn't be here today, end quote.
JACOB ZAMANSKY, ATTORNEY, ZAMANSKY & ASSOCIATES: Scott Sullivan repeatedly said that that he told Bernie that he was making phony accounting entries; that it was wrong and he told him every step of the way. Bernie is absolutely denying that, so it's really Scott Sullivan's word against Bernie Ebbers.
PRATT: Ebbers told the jury he had some misgivings about Sullivan's youth when Sullivan took over as WorldCom CFO. But he went on to say that Sullivan handled himself well, end quote, Scott had an uncanny knowledge of the technical details of accounting, end quote. In contrast, Ebbers portrayed himself as a simple man, describing how he had trouble completing college because his marks weren't so good. He also said the closest he came to an accounting course was a class he took in basic economics. ZAMANSKY: So far it looks like he's a regular guy. He's somewhat detached from the accounting. But again cross-examination is what they call the crucible of the truth, and we'll see if it holds up during cross.
PRATT: Cross-examination began late this afternoon, without the government scoring any major points. But under questioning from prosecutor David Anders, Ebbers appeared to be a hands on manager who knew plenty of the financial details at WorldCom. Observers say Ebbers may also be a big risk taker because the decision to take the stand is very unusual.
SETH FARBER, ATTORNEY & FORMER U.S. ATTORNEY, DEWEY BALLANTINE: It's something you see occasionally in white collar cases, but it's a very high risk move to do. And by most reports, it looked like his defense was going reasonably well and this changes the whole complexion of things.
PRATT: Cross-examination of Ebbers is expected to continue tomorrow morning. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
GHARIB: A landmark merger today between the nation's two largest department store chains. Federated Department stores is buying rival May Department stores for $11 billion in cash and stock. In addition to the purchase price, Federated will take on $6 billion worth of May's debt. The deal brings together some of the most storied names in retailing: Macy's, Bloomingdales, Marshall Field's and Lord & Taylor. The new Federated will be a powerhouse with 1,000 stores and $30 billion in annual sales. The combination is also expected to have significant financial benefits.
TERRY LUNDGREN, PRESIDENT & CEO, FEDERATED DEPARTMENT STORES: We're expecting to get cost synergies from this transaction in the neighborhood of about $450 million in 2007, the second year, second full year of operation. And we'll see substantial sales synergies as well, because we're going to apply and marry the best practices of both companies. Ultimately, the winner here will be the customer, because we're going to improve the shopping experience.
GHARIB: After today's news conference, I sat down with Federated Chairman and CEO Terry Lundgren. We'll bring you that interview later in the program.
KANGAS: Wall Street headed lower this morning on profit taking from Friday's rally and a 9.2 percent tumble in January new home sales when a rise was expected. The drug sector was undermined by huge losses in Biogen, Idec, and Elan stocks, after the company suspended sales of their multiple sclerosis treatment. Details on that later. ' By noon, the Dow was down 88 points, NASDAQ off 19. Plagued by weak bonds and higher oil prices, the Dow fell as much as 105 points in mid afternoon, but then it recovered slightly. It closed down 75.37 at 10,766.23. NASDAQ Composite down 13 2/3 points at 2051.72. Standard & Poor's 500 down 7 3/4 points ending at 1203.60. In the bond market, the 10-year note fell 29/32 to 96 30/32, lifting the yield to 4.38 percent.
GHARIB: More now on that big merger between Federated Department stores and May Department stores. The two retailers have been negotiating on and off for several weeks. So when I met with Federated Chairman and CEO Terry Lundgren, I asked him why he persistently pursued May.
LUNDGREN: In order for us to be a strong competitor to all the formats that are out there, the national formats in particular, this combination need d to occur so that we could have a national presence and fill in the geography that's missing in our model today.
GHARIB: So, Mr. Lundgren, what's the grand strategy here?
LUNDGREN: There is an obvious opportunity to expand the Macy's name plate in particular across the country. When we looked in the past at Burdines (ph) in Florida and Rich's, great names and in Atlanta, all these various names, we talked to consumers and the consumers prefer the Macy's name plate. So now we can add these other markets into our overall scheme and be able to address the business on a national scale.
GHARIB: So we'll be seeing Lord & Taylor being called Macy's or Bloomingdale's? LUNDGREN: I don't know about that. I think Lord & Taylor is an interesting and kind of a unique opportunity to smaller stores and we have to get into that, look at that much more closely than we have up to this date before making a decision.
GHARIB: It seems those that the customers who go to May are looking for more of a moderated price merchandise. And that Bloomingdale's and Macy's are a little bit more upscale. Don't you think you might lose some customers?
LUNDGREN: They do have many stores that in the more moderate category as you say. So do we. We have stores in Montana. We have stores in Idaho and stores in various places that you might not think about a Macy's operating in, and those are also more moderate markets and we perform well. So we think we can apply our formula, which is different, long explanation, but different than the May Company model to those markets and I think serve customers on an individual basis, not on a mass scale basis.
GHARIB: Are you considering selling any of the stores given that the underlying real estate values of the properties are pretty high?
LUNDGREN: More than likely there will be some divestiture of some stores, but we have to really wait and see what happens here. Frankly it's going to be in conversations on a state by state basis to really understand what makes sense for the regulators as well, what makes sense for ourselves, so it's really too early to say, predict what the outcome of that would be.
GHARIB: Certainly by bringing these two big companies together you've gotten even bigger. What is your growth strategy?
LUNDGREN: It's a fair question. We grew last year, so we already are making progress on that subject, and we grew in the face of all the chains that we've put into our stores last year. So, we do believe in fact that we have a story that's getting traction and we believe many of these ideas, we call it our four priorities of assortments and marketing and in store shopping experience and simplifying pricing will apply to the May stores as it has to ours and they'll grow along with our stores.
GHARIB: You said today that you're expecting cost savings of 450 million, but you're also taking on $6 billion in debt. What's your timetable to deal with all of that debt?
LUNDGREN: We have so much cash coming out of this machine after a couple of years that it will be easy for us to make our decisions about paying down debt or buying back stock or whatever it is that we choose to do. So we feel very comfortable about the debt to capitalization ratios in the out years.
GHARIB: Where are the cost savings going to come from?
LUNDGREN: There's going to be cost savings certainly in some of the duplicative, centralized functions, so we've got today we'll have two corporate offices, two logistics organizations, two credit organizations and obviously ultimately we'll only need one.
GHARIB: Federated stock has done very well under your tenure. It's been a little bit volatile recently. Why should investors be buyers rather than sellers of your stock?
LUNDGREN: I think we've got a great financial story. (INAUDIBLE) we're going to pay a dollar dividend. Federated pays $0.54 today, 85 percent increase in dividend for the Federated shareholder. We're paying attention to shareholders. We're paying attention to customers and we treat our employees well and so I think that you put all that together and I think we're a stock to buy.
GHARIB: There aren't too many independent free standing department stores left, but do you see Sax and Neiman Marcus in your future?
LUNDGREN: I got enough to focus on right now and I'm not going to say that we'll never acquire anybody else, but today, I'm focused on making this transaction close in the next few months and then ultimately making it execute to a very, very high standard so our customers of both companies are very satisfied.
GHARIB: Mr. Lundgren, good luck to you, thank you very much.
LUNDGREN: Thank Susie.
GHARIB: President Bush is working with the nation's governors tonight to find ways to rein in the soaring costs of Medicaid, the health care program for the poor. The state leaders met with the president today to look at ways to solve the problem. But as Stephanie Woods reports, the governors are concerned that the major burden of Medicaid will ultimately shift to their states.
STEPHANIE WOODS, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Bush told the governors he wants the Medicaid program to work despite proposing $60 billion in cuts over the next 10 years.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We also recognize that the system needs to be reformed and we want to work with you to do so. There's no better group of people to work with than the governors.
WOODS: The governors oppose the cuts since their states are already overwhelmed by an aging population and soaring costs for drugs and nursing home care. The $324 billion Medicaid program now gobbles up one out of every five dollars spent by the states and now surpasses education spending in most states.
GOV. BILL RICHARDSON, (D) NEW MEXICO: What is holding a deal back is when you are devoting $60 billion less over 10 years to an essential program, you are shifting responsibility to the states.
WOODS: So, the governors are discussing ways to drive down the cost of prescription drugs. They are also considering charging modest co-payments and making it harder for people to transfer assets so they can qualify for Medicaid nursing home care.
GOV. MITT ROMNEY, (R) MASSACHUSETTS: What we'd like to do is find a way to control the costs and at the same time, provide the support that our citizens truly need. Medicaid should help those that really need our help, not just those that have found ways to game the system and qualify for the program.
WOODS: While the state leaders agree the system needs to be changed, they don't necessarily want Uncle Sam to dictate what those changes should be. And many governors don't want the program cut without broader improvements in overall health care.
GOV. TOM VILSACK (D) IOWA: Rather than trying to shoehorn reforms into a specific number, that addresses perhaps a year or two issue, we ought to be focused on a set of reforms that will allow us to deal with the health care issue.
WOODS: Governors are also reluctant to support the cuts the administration wants without a guarantee that Congress will support the reforms that the governors want. Stephanie Woods, NIGHTLY BUSINESS REPORT, Washington.
KANGAS: Now let's take a look at some stocks in the news tonight.
The volume leader by far on the big board trading, 77 million shares, Elan Corporation (ELN) plunging $18.90. That's 70 percent of its value gone. The company and Biogen Idec voluntarily suspended marketing their Tysabri multiple sclerosis treatment because it is linked to one death and a serious illness in another case and of course, Biogen stock tumbled 42 percent. We'll see that later. However, stocks who have competing multiple sclerosis drugs did quite well. Let's have a look at some of those. Serono (SRA), Schering AG (SHR) and TEVA Pharmaceuticals (TEVA) all nicely on the upside on the bad news for the two other companies.
Time Warner (TWX) was up $0.09.
Then Lucent Technologies (LU) $0.07 loss.
ExxonMobil (XOM) still rising, up another nickel.
NorTel Networks (NT) down $0.13 and that was fifth in big board volume.
Pfizer (PFE) down $0.57.
May Department Stores (MAY) off $0.84. Of course Federated's buyout is worth about $35 a share, but JPMorgan thinks the Federated May merger makes the acquisition of other department store chains that are out there less likely.
Let's have a look at a couple of them and they went down today. Dillard's A (DDS.A) and Saks (SKS), both on the downside.
Citigroup (C) was down $0.56. The company announced late today it's going to cut 1400 jobs or 3 percent of its corporate and investment bank workforce this year.
Texas Instruments (TXN) down $0.23.
General Electric (GE), tenth in volume, $0.42 loss.
General Motors (GM) hurting the Dow with that loss of $1.22. Bank America downgraded it from "neutral" to "sell" and did the same with Ford (F) and Ford stock fell $0.35 to $12.65
Best Buy (BBY) moved up $2.33. JPMorgan upgraded it from "under weight" to "over weight." Stock did nicely.
Linens 'n Things (LIN) losing $0.51. Bank America downgraded it from "buy" to just a "neutral" rating. And the home builders today hurt by that 9.2 percent drop in January new home sales and of course higher interest rates also hurt Hovnanian Enterprises (HOV) down $1.78.
Let's have a look at some others in the sector. Centex Corporation (CTX), Lennar Corporation (LEN) and Ryland Group (RYL) all on the downside today.
Mylan Laboratories (MYL) moved up $0.66. The company has terminated its $4 billion attempt to buy out King Pharmaceutical. King dropped $0.70 to $9.55.
Bradley Pharmaceuticals (BDY) down $3 1/2. Company says the SEC is conducting an informal inquiry regarding possible Federal security law violations by Bradley.
Chicago Bridge & Iron (CBI) moved up $0.65. The company is set a 2 for 1 stock split and a 50 percent boost in its cash dividend.
Volume leader on NASDAQ, Biogen Idec (BIIB) plunging $28.63. That's a 42 1/2 percent plunge and of course on the withdrawal of the Tysabri, the multiple sclerosis drug.
Microsoft (MSFT) $0.09 loss.
Intel (INTC) dropped a dime.
Google (GOOG) moving up $2.12.
And Cisco Systems (CSCO) a $0.22 gain. That was fifth in volume.
Apple Computer (AAPL) moved up $0.36. Keep in mind this is the first day of trading for the 2 for 1 split stock. Meanwhile, Lehman Brothers brokerage upgraded its price target from $73 to $94 a share.
TEVA Pharmaceuticals (TEVA) we saw earlier, up $2.55.
Yahoo! (YHOO) $0.54 gain.
$0.11 drop in Dell (DELL).
Qualcomm (QCOM) was down $0.95, tenth in volume.
USF Corporation (USFC) up $8.98. This is the old U.S. Freightways and Yellow Roadway is going to acquire this company for $45 a share cash or 9/10 of a share of Yellow. Yellow stock fell $3.56 to $57.75 today.
And XM Satellite Radio (XMSR) up $4.23, nice more there on news the company will boost its monthly subscription rate by $3 to $12.95 as of April 2nd.
And those are the stocks in the news tonight, Susie?
GHARIB: Paul It's been just over two months now since a massive tsunami struck in the Indian Ocean. One of the countries hardest hit was Sri Lanka, which saw more than 40,000 people killed and the economy crippled in the northern and eastern areas of the island. Tonight we begin a series of reports looking at how Sri Lanka is trying to come back from that disaster. From Colombo, Anish Trivedi looks at a unique political situation that is challenging an economic recovery.
ANISH TRIVEDI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's a land divided, a country ravaged by 20 years of civil war. Since 1983, the Sri Lankan government has been fighting Tamil rebels, the LTTE in the north and the east. For the LTTE, the fight is for a separate homeland. For most Tamils, however, it's a fight for equality, something they say they have never had.
MOAHAN BALENDRA, ATTORNEY & JUSTICE OF THE PEACE: Ever since independence, by design or otherwise, it's been certain areas of Sri Lanka which have been benefiting from government-sponsored projects. And also the concentration of the private sector also has been in the western province; that is, in or around Colombo.
TRIVEDI: That part of Sri Lanka accounts for over 70 percent of the investment in the country. For the Tamils, that's meant little development where they are.
P. SIVASUBRAMANIAM, DIRECTOR, TAMILS REHABILITATION ORGANIZATION: This struggle, as we see it, is not even a struggle for language, for the preservation of culture. It's an economic struggle. At the heart of it, the basis of it, it's economic survival.
TRIVEDI: With the tsunami in December destroying large parts of the north and east, the country's Tamils believe it is time to redress the imbalance. The LTTE has criticized the government's relief effort, saying it is channeling aid into the south and the west and away from the areas that were hardest hit. Aid workers in the country say it's not a deliberate attempt to keep assistance away from some regions.
GEORGE WILLIAMS, WORLDVISION: We are getting aid to all of the areas, but we also have logistical issues that have to be resolved. When it comes to trucking, we have to ensure that we are able to send the right types of trucks to do it, based on the infrastructure available. TRIVEDI: To solve things satisfactorily, both sides will need to work together, something they've had little success doing in the past.
BALENDRA: There should be a mechanism whereby the government on one side and the LTTE, which controls most of the north and the east, work out an equitable system whereby aid is evenly distributed.
TRIVEDI: Unless these issues are resolved rapidly, Sri Lanka's Tamils believe the country's problems will only get worse.
SIVASUBRAMANIAM: It will be an opportunity missed, a disaster of great proportion which we will not be able to reverse, polarization of the country into two hardened areas where not only will the northern and the eastern parts of Sri Lanka feel disenfranchised and continue to feel they are better off on their own rather than as part of the whole country. And similar things will happen in the south.
TRIVEDI: With over $1.5 billion in aid pouring into Sri Lanka after the tsunami, the government has the funds to develop infrastructure and industry in the entire country. If it does, it may end the hostilities and the Tamils' need for their own nation. The road to peace for Sri Lanka has been a long one. Now, with the country laid to waste, not by war, but by a tidal wave, there is hope that the effort of rebuilding homes and rebuilding lives will finally unite the country and its people. Anish Trivedi, NIGHTLY BUSINESS REPORT, Colombo.
KANGAS: Tomorrow, Sri Lanka tries to rebuild its tourism industry.
GHARIB: It look like Continental Airlines now has deals in place to cut labor costs by half a billion dollars a year. Continental reached tentative contracts today with the unions covering its pilots, flight attendants, mechanics and dispatchers. If approved by the union rank and file, the wage cuts would take effect at the end of March. Continental will also issue options for 10 million shares of common stock to employees.
KANGAS: A management shakeup at Circuit City; its chief operating officer has resigned. John Froman leaves the company as the troubled electronics retailer weighs a $3 billion takeover bid by a private investment group, Highfields Capital. Also today, Circuit City cut its ties with Amazon.com. It plans to focus on its own Web site instead of the few sales generated by the Amazon partnership.
GHARIB: Here's a look at what's happening for tomorrow. We'll get a check on the manufacturing sector from the Institute of Supply Management's manufacturing index for February. Also tomorrow, January construction spending and the nation's big automakers report February sales.
Tonight's commentator says it's time to give credit where credit is due when it comes to keeping the economy on track. Here's Glenn Hubbard, professor of economics at the graduate school of business at Columbia University and former chairman of the White House Council of Economic Advisors under President George W. Bush.
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIVERSITY: Like a detective story, economic policy can have an unsung hero. In the case of tax cuts on investment, that hero is the Federal Reserve. The Fed's victory over inflation constitutes what is in effect the biggest tax cut for investment over the past two decades. That inflation is associated with economic instability is clear in the memory of those who lived through the great inflation of the '70s and early '80s. Inflation's rise was accompanied by a stop/go monetary policy with some serious downturns. During this period, equity values of U.S. companies stagnated, as did growth in living standards. As a teacher, I know that students' interest in inflation has faded. On the one hand, this shift in perception is understandable, as inflation peaked in 1979, declining to about 2 percent a year today. On the other hand, monetary policy has played a key role in reducing inflation and interest rates, and improving economic outcomes. Lower inflation acts as a tax cut on investment, lowering interest rates, decreasing the cost of investment, and increasing corporate equity values. This increase in capital accumulation raises our living standards, boosting output per worker and raising consumer spending. President Bush correctly notes that tax reform is needed to stimulate saving and investment. But it is the Fed, wisely insulated from the political process, that's done a remarkable job in cutting the inflation tax on investment. We shouldn't take that effort for granted. I'm Glenn Hubbard.
KANGAS: Recapping today's market action, the Dow takes a dive after a brokerage downgrade of a key component of the index, General Motors. The blue chips fall 75 points. NASDAQ Composite loses 13 points. To learn more about the stories in tonight's broadcast, go to nbr.com.
GHARIB: That's it for NIGHTLY BUSINESS REPORT for Monday, February 28. 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.
