NBR Transcripts-March 9, 2009
Monday, March 09, 2009Merck & Schering-Plough Move Toward A Merger
SUSIE GHARIB: Merck has a prescription for surviving these tough economic times: a giant merger. It's paying $41 billion for Schering- Plough in a cash and stock deal. This is the second big drug deal this year, coming just weeks after Pfizer bid $68 billion for Wyeth. Analysts say the merger will give Merck a shot in the arm as it tries to replenish its dwindling pipeline of blockbuster drugs. Merck sales have struggled to recover since 2004, when it was forced to pull its top-selling painkiller, Vioxx off the market. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the release announcing the deal, Merck CEO Richard Clark boasts, we are creating a strong, global health care leader built for sustainable growth and success. Analysts agree the combination of Merck and Schering-Plough will strengthen the companies by combining their drug portfolios and research and development efforts. But buried deep in the announcement is word the merger will save $3.5 billion a year in operating costs. That translates into layoffs of 15 percent of the work force. Analyst Damien Conover says this is a continuing industry trend.
DAMIEN CONOVER, PHARMACEUTICAL ANALYST, MORNINGSTAR: When Pfizer acquired Wyeth, they stated that they are going to cut massive amount of sales force, a massive amount of people in the sales force and that really allows Merck to achieve some cost synergies through a merger of its own. So it sees that there's going to be less marketing effort on some of the products that Pfizer has. They can say, you know what, we don't need as much marketing effort and if we did a merger, we can cut even more people.
GURVEY: The Pfizer-Wyeth deal and now the merger of Merck and Schering-Plough are likely to be followed by other combinations. Throughout the day, rumors flew about Roche's bid for Genentech. The two are reportedly close to an agreement. Analyst Herman Saftlas says these types of mergers are inevitable because many of the companies have no other way to grow.
HERMAN SAFTLAS, PHARMACEUTICAL ANALYST, STANDARD & POOR'S: The old cost structures are heavily weighted toward sales personnel and detail men and plants and so forth and so on -- huge plants that are basically not being used. At this point, the companies have no other way of maintaining a rational cost structure without significantly cutting back on their staffs.
GURVEY: There may still be a fly in the ointment. Johnson & Johnson has a marketing agreement with Schering-Plough for an anti-inflammatory drug called Remicade. Merck may lose some rights to that drug unless it reaches a separate agreement with J&J. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
UAW Shifts Into Help Mode For Ford
SUSIE GHARIB: Big concessions today from union workers at Ford Motor. The United Auto Workers union approved sweeping cost cuts to their labor contract to help the auto maker with its turnaround. The move pressures GM and Chrysler, which both need major concessions from the UAW to meet the terms of their government loans. Even as unions face a challenging business environment, the political environment has turned friendly. As Stephanie Dhue reports, labor unions are working to cash in on one of their top priorities: a bill to make it easier to organize workers.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Emboldened by Democrats taking power in Washington, the Service Employees International Union marched outside the U.S. Chamber of Commerce and the White House in support of the Employee Free Choice Act. Andy Stern heads the union. He says the economy benefits when workers get a fair deal.
ANDY STERN, PRESIDENT, SERVICE EMPLOYEES INTERNATIONAL UNION: The Employee Free Choice restores what Franklin Roosevelt did as part of the economic solution to allow workers to have a partnership with their employer, to bargain about wages and benefits and to make sure that they get a chance to be in the middle class. And the good news, it worked in the past and it will work again today.
DHUE: The Employee Free Choice Act would let workers from a union when a majority sign up for it, without a secret ballot vote. It would also let an arbitrator determine the initial contract if employers and unions don't reach a deal within 120 days. Business groups like the U.S. Chamber of Commerce oppose the bill, saying it will stifle jobs and economic growth. Glenn Spencer heads the Chamber's workforce initiative. He says arbitrators writing contracts could be disastrous.
GLENN SPENCER, WORKFORCE FREEDOM INITIATIVE , U.S. CHAMBER OF COMMERCE: What you may wind up with is a situation where an arbitrator puts in place a contract that's just completely incompatible with a company's cost structure business model and the employer is going to have to live with that contract for two years, the only alternative being to go out of business.
DHUE: Unions are counting on support from the Obama administration and congressional Democrats. Labor Secretary Hilda Solis met with labor leaders in Miami in her first week on the job and tomorrow lawmakers in the House are expected to introduce the Free Choice bill. The battle comes at a time when unions are struggling for survival. Membership peaked in 1953 at 26.9 percent, when the auto, steel, and electrical industries were booming. Now unions represent just 7.6 percent of private sector employees. Charles Craver teaches labor law at George Washington University. He says if the law changes, union membership could grow quickly to 10 percent. But to return to their heyday, unions will have to change.
CHARLES CRAVER, PROF., GEORGE WASHINGTON UNIVERSITY LAW SCHOOL: The old unions, they still are acting as if they're organizing uneducated, blue-collar workers, when in fact, they're organizing well-educated, white- collar people who don't want to be associated with regular unions.
DHUE: A vote on the Employee Free Choice Act will be a test of the unions' political clout. Observers say without a compromise, it's unlikely the bill has the votes to pass the Senate. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Reviving the Economy: What Should Business Do?"-Pension Plan Repairs
SUSIE GHARIB: Last year was miserable for most investors. Even professionally managed pensions suffered steep losses, making 2008 the worst year on record for defined benefit funds. These are traditional pension plans that guarantee employees monthly payments at retirement. As we continue our series "Reviving the Economy: What Should Business Do?" Suzanne Pratt looks at how companies are coping with severe shortfalls in their pension plans.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's no secret that Ford Motor is struggling for survival. But Ford has another problem, too. Its pension fund is severely under funded and Ford is not alone. It's one of many U.S. companies in a range of industries that are grappling with massive pension deficits. At the end of last month, corporate pension plans sponsored by S&P 1500 companies were under funded by $373 billion. That compares to a $60 billion surplus at the end of 2007. In other words, the plans have only enough assets to cover 74 percent of their obligations, down from 104 percent at the end of 2007. Mercer Consulting's Adrian Hartshorn says there's no question defined benefit pension plans -- or what we consider old-fashioned pensions -- are in bad shape.
ADRIAN HARTSHORN, SR. CONSULTANT, MERCER: I think it's the hardest time that corporate pension funds have faced in the history of defined benefit pension plans. Whether you want to call that a crisis or not is open to interpretation.
PRATT: No real surprise as to why pensions are suffering. In the last year, the stock market has tanked and most plans are about 60 percent invested in equities. Under 2006 pension legislation, private firms must eliminate under funded pension obligations within seven years. At the end of last year, Congress granted some modest relief from those requirements and firms are lobbying for more help this year. While the timetable may change, companies have lots of money to recoup for retiring employees. Talk about bad timing for corporate America, already in the grips of the worst recession in decades. Credit Suisse analyst David Zion says repairing pensions now diverts cash that companies may desperately want to use for other business activities.
DAVID ZION, HEAD OF ACCOUNTING RESEARCH, CREDIT SUISSE: You could have a situation where instead of companies using their capital to pay a dividend, to buy back their stock, to pay down other debt, to grow their business, to invest in R&D, they may have to put it aside into their pension plan.
PRATT: In addition, experts predict earnings for some companies will take a hit in coming years, when firms use cash to shore up beleaguered plans. There are also defensive measures that companies could take. Many firms are likely to resort to cutting wages, jobs and future benefits to help cover pension losses. And still others may freeze plans or close them to new employees. Watson Wyatt's pension expert Mark Warshawsky says a likely consequence of current pension losses is that companies will move to a more conservative investment philosophy -- in other words, more bonds and less stocks.
MARK WARSHAWSKY, DIR. RETIREMENT RESEARCH, WATSON WYATT WORLDWIDE: The searing experience of the last few months, I think we will see more companies consider that and as I say, we've seen a slight movement in that direction already in the last two years.
PRATT: Short of a huge turnaround in the stock market, there's really no quick fix for the pension mess. And the longer and the deeper the recession, the harder it will be for companies to make up losses in their pension plans. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Kevin McCormally's Tax Tips-New Deductions
SUSIE GHARIB: It's that time of year again, a time to get out the calculators, the pencils and the forms and get ready to file your Federal income taxes. And to help you, once again this year we'll give you some advice every Monday night for the next five weeks. Our tax guru, Kevin McCormally, editorial director of "Kiplinger's Personal Finance," looks at two new deductions in tonight's tax tip.
KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: Most taxpayers claim the standard deduction. It's faster and easier and more valuable than itemizing. After all, the only reason to use this no- records-required write-off is if it's bigger than the total of all your qualifying expenses. And this year, there are two brand new opportunities that will allow millions of taxpayers to pump up the size of their standard deduction. Non-itemizers who own homes can now add either $500 if you're single or $1,000 if you're married to their standard deduction amount to account for property taxes paid during the year. On 2008 returns, a married couple under age 65 normally qualifies for a standard deduction worth $10,900, but if they paid at least $1,000 in property taxes, their standard deduction jumps to $11,900. This break is especially important for retirees who have paid off their mortgages. Since their state income tax probably fell when their paychecks ended and their mortgage interest deduction has disappeared, they may find the standard deduction the way to go and the $500 or $1,000 add-on makes it even sweeter. The other new break for non-itemizers goes to citizens who suffered losses from floods, fires or other calamities during 2008. Until now, only folks who itemized deductions could write off casualty losses to get tax relief to help them rebuild. But if the president proclaimed your area a disaster area in 2008, you can add your loss to your standard deduction amount. And there's no limit on how much you can add, either. If you deserve either of these new breaks, be sure to boost your standard deduction accordingly. It will save you money. I'm Kevin McCormally. KANGAS: If you have questions for Kevin McCormally, you can email him at the tax tips section of NIGHTLY BUSINESS REPORT's web site on pbs.org. You can also learn more about the stories in tonight's broadcast, watch our streaming video and take part in our daily blog. Just go to NIGHTLY BUSINESS REPORT on pbs.org. You can also email us at nbr@pbs.org.
"Last Word"-Happy 50th Birthday Barbie
SUSIE GHARIB: And finally tonight, Barbie turns 50 today. To mark the momentous occasion, Mattel has outfitted a real-life Malibu dream house. The 3,500-square foot home has Barbie images everywhere -- dolls, pictures, photos, you name it. But one of its special features is a closet filled with 50 pair of pink peep toe high heels. There's also a hair-raising chandelier made of long blonde locks. And Paul, even though Barbie sales are down about 6 percent in the U.S., Mattel is hoping Barbie's fans around the world will help her celebrate her half-century milestone. KANGAS: And she owns 50 pair of pink peek toe high heels. Susie, I tell you, the learning just never stops around here. GHARIB: I want to know where is Ken in all of this?
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street's bullish enthusiasm over the Merck deal didn't last very long. The Dow posted a 41-point gain after an hour of trading, with the NASDAQ up 13 points. But the early upturn ran into resistance as investors continued to fret over the weak economy and the desire to keep plenty of cash on hand. That resulted in an afternoon slide which sent stocks to fresh 12-year lows at the closing bell. The Dow Industrial Average ended down 79.89 at 6547.05. The NASDAQ Composite was down 25.21 to 1268.64, while the Standard & Poor's 500 Index fell 6.85 to 676.53. In the bond market, the 10-year note rose 3/32 to 99 1/32, putting the yield at 2.86 percent.
Once again topping the actives list today on 56 million shares, Citigroup (C) edging $0.02 higher.
Then Bank of America (BAC) a $0.61 gain there. An article in this week's "Barron's" financial notes that the bank could keep its loss reserves under control, it will have an impressive earnings power when the economy begins to improve.
General Electric (GE) a $0.35 gain.
Wells Fargo (WFC) up $1.36. Warren Buffett reportedly said that Wells Fargo, in which he does own a stake, will emerge better than ever from the U.S. credit crisis.
JPMorgan Chase (JPM) a $0.03 loss there, fifth in volume.
Schering-Plough (SGP) closed up $2.50. That deal includes .5767 share of Merck plus $10.50 a share in cash and today, a deal would be worth $22.60 to Schering shareholders.
Merck (MRK) was down $1.75 as we'll see right there below Pfizer.
And then US Bancorp (USB) moving down the list, up $1.37.
And ExxonMobil (XOM) $0.54 gain there.
Dow Chemical Co (DOW) closed down $0.80. Dow is going to acquire Rohm & Haas for $78 a share, but the two largest shareholders, the Haas family and Paulson and Company will get $3 billion in preferred stock. Rohm & Haas and Dow were halted in trading, Rohm up $4.90 at $68.70 and they reopened in after hours trading, Rohm stock up to $77.50 a share.
As you heard, apparently Roche is close to agreeing to acquire Genentech (DNA) for $95 a share now. That's up from a bid of $93 last week.
Capital One Financial (COF) up $0.42. It's going to cut its quarterly dividend from $0.375 to only a nickel a share and that'll begin in the second quarter, but it will save about $500 million annually.
Aflac (AFL), the big insurance company, down $1.95. UB Financial downgraded it from "neutral" to "sell" and Standard & Poor's downgraded it from "strong buy" to just a "hold" rating.
Big fertilizer company, CF Industries (CF) edged up $0.97. It rejected Agrian's buyout bid as being grossly inadequate and said it'll pursue a business combination with Terra Industries at $27.50 for Terra. That stock closed at $25.17, down $0.94 today.
Rio Tinto Plc (RTP) down $6.31. It's going to sell its Jacobs Ranch coal mine to Arch Coal for $761 million in cash. Arch Coal was up $0.02 at $12.55.
Halliburton Co (HAL) edged up $0.60. FBR Capital upgraded it from "market perform" to "out perform" because of the stock's limited downside risk.
And then Fair Isaac & Co (FIC) a software firm, got an upgrade from Wedbush Morgan from "sell" to "hold" on a valuation basis.
Apple (AAPL) topped the active list on NASDAQ. The Thomas Weisel brokerage cut its price target from $130 to $120 a share.
Google (GOOG) hit by selling today, down $17.68.
But Intel (INTC) edged $0.14 higher.
Cisco Systems (CSCO) a $0.56 drop.
Microsoft (MSFT) was off $0.13.
Oracle (ORCL) $0.62 loss there.
Amazon.com (AMZN) fell $1.20
Qualcomm (QCOM) $0.63 drop.
Research in Motion (RIMM) fell $1.09.
And Amgen (AMGN) down $0.11.
Then a major casualty, GMX Resources (GMXR) losing almost 25 percent of its value. The Jefferies brokerage cut its price target from $57 to only $18 a share after the company cut its oil and gas production estimate by 40 percent.
Those are the stocks in the news tonight.
