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Google Unleashes Groupon Competitor

by The Huffington Post on June 1, 2011

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Google Offers , a Groupon-like local deals service, goes live on Wednesday. The beta service will initially be offered in Portland, Oregon, and will expand to New York and San Francisco later this summer. Google will integrate Offers with the newly announced Google Wallet , a “single tap” payment system for smartphones equipped with NFC technology, which Google also plans to roll out in the coming months. Google Executive Chairman Eric Schmidt and VP of Commerce Stephanie Tilenius walked onlookers through the simplicity of the service during Tuesday’s D9 conference in Palos Verdes, California. According to the demonstration, a user has only to select a desired coupon online to save the deal via his phone’s Google Wallet, which can access the coupon once the user has tapped the device at the point of sale. For example, Google is currently offering a $3 deal worth $10 of merchandise at Floyd’s Coffee Shop in Portland. Rather than print a coupon to present to the merchant, a Google Wallet customer would store the deal on his Google Wallet and use his phone at Floyd’s compatible NFC register to redeem the offer. Tilenius said that Google will charge a listing fee comparable to the cut that other coupon services take. However, Google won’t charge a fee for the transaction between customer and merchant or for the app that enables the transaction. Though Google Offers is currently limited to select retailers in Portland, Google says it will announce “thousands of partners” in the future and hopes to expand Offers beyond the Android platform. Late last year, Google was rumored to be negotiating a $5 to 6 billon acquisition of Groupon , but negotiations reportedly broke down in December. You can check out our slideshow to find out more about the upcoming Google Wallet and its features, and you can subscribe to Google Offers to receive notifications when the service becomes available in your area.

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Google Unleashes Groupon Competitor

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Why Sprint Wants To Block AT&T’s T-Mobile Buy

by on May 31, 2011

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By Sinead Carew and Diane Bartz NEW YORK/WASHINGTON D.C. | Tue May 31, 2011 5:08pm EDT (Reuters) – Sprint Nextel has formally asked U.S. regulators to block AT&T Inc’s proposed $39 billion purchase of T-Mobile USA, saying the deal “has no public interest benefit” and would harm competition even if it comes with conditions. Sprint — the most vocal opponent of the deal, which would create a new leader in the U.S. wireless market — said that even if the Federal Communications Commission forced AT&T to divest assets as a condition, that would not be enough. “The proposed transaction would produce no tangible public interest benefits and would impose serious anti-competitive harms that cannot be remedied through divestitures or conditions,” Sprint said on Tuesday, the deadline for initial responses to AT&T’s application to the FCC. Smaller rival Leap Wireless and advocacy groups like Free Press have spoken out against the deal, as have many individual consumers in FCC filings. On the flip side, AT&T said in a statement on Tuesday that it had support from groups including “community, civic and minority organizations,” as well as 13 governors. The deal requires FCC and Justice Department approval. AT&T argues that it needs T-Mobile USA’s spectrum to expand high-speed services faster and improve its network performance, which has been criticized by consumers. But Sprint, the No. 3 U.S. mobile operator, took issue with that argument, saying that AT&T has no lack of spectrum. Instead Sprint said AT&T’s problem is that it has “simply failed to upgrade or invest sufficiently in its network.” It said AT&T already has enough spectrum to cover 97 percent of Americans with high-speed mobile services. But Sprint argues that it may be come more difficult for consumers to pay for such services as smaller companies like itself would have less power to moderate service pricing after the deal as the two top carriers, AT&T and Verizon Wireless, would then control about 80 percent of the market. Like Sprint, T-Mobile USA — a unit of Deutsche Telekom — tends to appeal to more cost conscious consumers than AT&T so the worry is that the cheaper prices would end up being phased out over time. Sprint also argued in its lengthy filing with the FCC that AT&T’s control of wireline assets such as connections to mobile broadcast towers would “exacerbate the anti-competitive effects of the takeover.” A merger of AT&T and T-Mobile USA would increase AT&T’s share of the market to 44 percent from 32 percent, with Verizon continuing to hold 35 percent, according to Sprint, which estimated its own market share at 15 percent. As a result, manufacturers would have less incentive to build mobile devices for Sprint after the deal because of its smaller scale, the company said in its filing. Verizon Wireless is a venture of Verizon Communications and Vodafone Group Plc. (Editing by Matthew Lewis and Steve Orlofsky) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Why Sprint Wants To Block AT&T’s T-Mobile Buy

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Dr. Philip Neches: Where the Rubber Meets the Skype

May 11, 2011

In the early days of my company, one of our first big customers described our system as “where the rubber meets the sky:” wildly visionary yet entirely practical. It was a great complement. In 2003, the founders of Skype had a vision that was both wild and practical: “free” phone service. They realized that PC’s had become powerful enough to run packet-switching protocols for handling voice calls. Different packet-switching protocols had been used inside the telephone system for decades, but required expensive, special equipment owned and operated by the phone company. Skype’s founders realized that the user had already paid for both the PC and the Internet connection, so computer-to-computer voice calls needed no new spending by the user, hence the perception of being “free.” It gets better. The Skype founders realized that with the PC and the Internet doing almost all of the work of handling the call, their business would require only a tiny amount of capital compared to building out a new telephone system. Further, users would recommend the system to other users, so it would cost almost nothing to attract new customers. A handful of employees and a small fleet of computer servers could handle millions of users. It seemed like the Estonian founders discovered a new gold mine. In 2005, eBay snapped up the burgeoning enterprise for a reported $2.6 billion. Their timing could not have been worse. Wall Street’s love affair with Internet stocks was already over; the champagne toasts turned to a long, nasty hangover. Despite management turmoil, write-downs, and divestitures, Skype kept growing, reaching 663 million signed-up users by 2009 and handling 13% of all international calls by 2010. Skype kept adding services, including calls to and from ordinary wire-line and wireless phones, for a fee. Most of Skype’s revenues ($525M in 2008; $575M in 2009) are for those calls, and most of its expenses are settlements to ordinary phone companies for those same calls ($225M in 2008; $290M in 2009). These figures illuminate Skype as a money-making engine. With almost 50% gross margin, few employees (less than 1,000), and relatively low capital investment, Skype should be a solid money-maker. But a limited one. While Skype is valuable to its users, they already paid their PC manufacturer and Internet provider for all of the resources that deliver that value. Skype recovers none of this in their business model. Zip. Zero. Nada. The sizzle is that Skype is the world’s largest voice carrier, largest international operator, largest video conferencer, etc. The steak, or more exactly the hamburger, is that Skype is a reseller of conventional telephone minutes. A solid and profitable reseller, but a modest one by telecommunications industry standards. The thing is that other companies get the revenue for most of Skype’s sizzling services. If you think of Skype as a phone company with 663 million customers, it should be enormously valuable. The entire US telecommunications industry, with less than half as many customers, has an aggregate market capitalization of $383 billion . If that were the case, Microsoft’s $8.5 billion buy-out offer would be a steal. But Skype is not a phone company. It’s cash business is to resell conventional phone minutes. That cash business might, in a stretch, be worth one-third of Microsoft’s offer. So what it is? Perhaps the customer base? But a Skype account does Microsoft no good by itself. They will have to figure out how to invest even more money to follow up on that contact to sell them something else. The going rate on Facebook is about $1 per click-through . A click-through means that the user already has interest in the offer and wants to learn more, a big step ahead of where Microsoft will be with Skype users when the deal closes. Steve Ballmer is paying almost $13 per user. Make that $10 if you take out the value of Skype’s minute-reselling business. So it’s hard to see how Microsoft could possibly sell enough product to enough people to justify this heady price. Microsoft would have to sell an additional Xbox machine or Office license to each and every one of Skype’s 663,000,000 users for the deal to make sense. Ballmer does have an easier go than Meg Whitman. She spent almost $35 per user on Skype in 2005, and eBay never figured out how to leverage it. I don’t see it.

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Dave Johnson: Let Trade BE Trade

May 6, 2011

Since China’s admission into the World Trade Organization we have been packing up our factories and sending them over there. We have been buying so many things made in China, but they have not been buying very many things made here, and the resulting “trade deficit” has gotten worse year after year. Everyone is afraid of what China might do with all those trillion$ in US Bonds they have accumulated. We are told to be afraid, that we need to cut Medicare and Social Security and unemployment benefits and all the other things We, the People do for each other, and learn to be poor. There is a better way to solve the problem: let trade BE trade. Trade Should BE Trade Trade is supposed to be about trading . It is not supposed to just be a scheme to drive wages and living standards down by packing up factories and moving them across borders. It is not supposed to be “take a pay cut and a cut in benefits or we’ll move your job.” It is not supposed to be “well, we have something called globalization now so everyone should expect to be poorer and poorer every year.” Trade is supposed to be we buy what they make and they use the money we pay them to buy things we make. And then we use the money they paid us to buy things made there. And then they use the money we paid them to buy things made here. It is supposed to go on like that, and everyone does better and better. Better and better, not poorer and poorer. Let Me Take Your Order, Please So here is an idea for next week’s US-China Strategic And Economic Dialogue . Last year we “raised issues” and signed various memorandums of understanding but nothing changed. This time we have to stop putting off what has to be done. This time, let’s tell China that from now on trade will be trade. Here is what I mean: When the meeting begins Secretaries Clinton (State) and Geithner (Treasury) and Locke (Commerce) should slide a big stack of order forms across the table and say, “Your turn. Let us take your orders now, please.” That is what China can do with all of those US Bonds they have been accumulating. They can start trading , which means buying things from us . And we should say that those things should be things , not companies or farms or real estate or more factories. Our government should make it clear that it is their turn. It is time for trade to BE trade. And if not, we will put a big tariff on goods made in China until it is. Conditions We need to put a few conditions on the deal. Just like they do. They have not been trading with us, they have been seizing the means of production. There is a long list of schemes and manipulations and conditions China uses to rig the game, and it is time to stop this nonsense. The main unfair tactics China uses to its advantage : 1) Currency manipulation. China “pegs” its currency at a very low, or “weak” rate, so goods from China cost up to 40% less than they otherwise should. 2) Labor-rights suppression, which has lowered manufacturing wages of Chinese workers by 47% to 86%. 3) Massive direct government subsidization of export production in many key industries. 4) Environmental degradation that ends up affecting all of us. 5) Intellectual property theft and piracy, which mean that American products that could be sold are stolen instead. 6) A number of policies that block U.S. firms from market access. It is necessary to bring their currency to market rates, but this is not all that must be done to bring trade into balance. It helps; it doesn’t fix it. Do What They Do In our scenario our administration has handed a stack of order forms to the Chinese delegation, and said, “We’re ready to take your order now.” Tell them the deal for cashing in those bonds — and continuing to sell to us without big tariffs — is that China has to actually trade with us, and spend all of those accumulated bonds on goods made here. (I guess if they can tell Social Security recipients that their bonds have been spent they can set conditions on China cashing in theirs… right?) We don’t make that here anymore, you say? Well, here is a solution to that, too. We can just do what they do . We can say, you have to build a plant here that does that. And you have to “partner” with an American company before you can even do that. And you have to transfer your technology to that company. And after a few years your company goes away and the factory and the technology and the market will be ours. Believe it or not, that is what they say to our companies, and for far too long our government has let them get away with that. So along with the stack of order forms, they can tell China that we are going to start doing what they do. Go down the above list, point by point, and just do what they do. Leave out the labor-suppression and environmental degradation parts. We Can’t Just Go Back To The Old Way There are huge interests here and in China who have done very well because of the “trade” policies of recent years. With the economic crisis heading into the past they are pushing very hard to just go back to the way things were. Of course they are. And they are very, very powerful. The Chamber of Commerce runs hundreds of millions of dollars of campaign ads urging us to just go back to doing the things that brought them so much wealth and power. In China those who accumulated great wealth and power from these schemes are fighting hard to just keep it going. The imbalances have been just great for them, and they use the resulting wealth and power to push for more. But the resulting imbalances have been terrible for everyone else in the world . The imbalances have drained wealth and power from everyone else in the world. Can everyone else in the world overcome this or are we all helpless against the onslaught? Or do we have to wait for the next crisis to completely destroy everything and rebuild from there? This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture . I am a Fellow with CAF. Sign up here for the CAF daily summary .

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SEC Under Criticism Yet Again For ‘Light’ Penalty Against Big Bank

April 7, 2011

The nation’s fourth-largest bank agreed to pay an $11 million fine this week to settle federal charges that it misled investors by hiding critical facts and charging them excessive prices on portions of two billion-dollar securities during the height of the housing boom. Or put another way: For $11 million, one of the world’s biggest investment firms was able to violate basic investor protection rules, defraud its customers, not admit wrongdoing, avoid a trial and likely pocket the profit off similar deals. The investors lost millions. The firm pocketed millions more in profit, more than offsetting the fine. In late 2006 and early 2007, as financial firms rushed to close deals and dump inventory on investors eager to cash in while the good times lasted, Wachovia Capital Markets, a unit of the Wachovia Corporation, sold securities tied to a pair of complex financial products linked to home loans. The products, known as collateralized debt obligations, or CDOs, contained slices of bonds backed by home mortgages. From 2004 through 2007, Wachovia, purchased by Wells Fargo in the fall of 2008, arranged 160 such deals worth more than $75 billion, according to data provider Thomson Reuters. The two targeted CDOs — Grand Avenue CDO II, then worth $1.5 billion, and Longshore CDO Funding 2007-3, then worth $1.3 billion — were then diced up and sold to investors. The riskiest portions promised the highest returns. The Zuni Indian Tribe, whose reservation is in Arizona and New Mexico, and another investor bought some of Grand Avenue. What they didn’t know was that Wachovia, upon closing the deal in October 2006, struggled to find investors to buy those portions, according to a complaint by the Securities and Exchange Commission . The unit of the bank that helped underwrite the deal then marked them down on their books to 52.7 cents on the dollar, a reflection of what the firm thought the securities could fetch in the market at the time the deal closed. Four months later, a different unit of the bank sold those same securities to the Zuni tribe and an unnamed investor at 90 and 95 cents on the dollar, the complaint shows. Though that’s a slight discount than the face value of the securities, it’s far above what Wachovia thought they were worth when the deal closed in late 2006. Worse, the market continued to deteriorate. Wachovia never told their customers they had marked down those assets, or that they had paid “excessive” prices. Grand Avenue entered default in early 2008. In the Longshore deal, Wachovia engaged in something similar, according to the complaint. The firm, in order to avoid recognizing losses on rotting securities, marked up the assets backing the CDO by $4.6 million, above what the firm’s internal calculations showed, the SEC said. Investors weren’t told, nor were they told that the affiliate within Wachovia that carried out the deed hadn’t done so on an “arm’s-length basis.” Seven investors bought portions of Longshore. “Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor protection rules — don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair market value,” Robert Khuzami, the director of the SEC’s enforcement division, said in a statement . Wachovia defrauded its customers in numerous ways, according to a cease-and-desist order prohibiting Wachovia’s successor, Wells Fargo, from engaging in the same kind of conduct. The firm ripped off investors, didn’t tell them about it, and its internal compliance department failed to catch any of it. Wachovia gave up what the SEC calculated to be $6.75 million in ill-gotten profit, and a penalty of $4.45 million. Most of that money will go to the swindled investors. But one wouldn’t know the severity of the crime by looking at the penalty, market experts say. “Once again, the SEC is giving a bank a light tap on the wrist for egregious behavior,” said Janet Tavakoli, a Chicago-based derivatives expert and founder of Tavakoli Structured Finance. “Now it’s Wachovia, but they’ve done that with many other banks as well.” During the boom, CDO underwriters took home at least 1.5 percent of the CDO’s face value as fee, experts say. For the $1.5 billion Grand Avenue CDO, that’s about $22.5 million. For Longshore, that’s equivalent to $19.5 million. Combined, Wachovia likely made about $42 million in fees. The penalty for Wachovia’s violations is about a quarter of that. The SEC has come under withering criticism for its apparently lax approach towards penalizing the nation’s largest financial institutions for crisis-era securities violations. Since the onset of the crisis, the SEC has found problems at Citigroup, Goldman Sachs and Bank of America, among others. Citigroup misled investors in 2007 about its exposure to more than $50 billion in securities tied to subprime mortgages. Bank of America didn’t tell investors voting on its 2008 merger with ailing investment bank Merrill Lynch that it had authorized nearly $4 billion in employee bonuses at the firm, which lost nearly $28 billion that year. And Goldman Sachs allegedly helped set up a mortgage-linked investment for a favored client that was designed to fail, yet sold it anyway to its other clients, reaping the favored client nearly $1 billion. Citigroup settled for $75 million. Bank of America settled for $33 million. Goldman settled for $550 million. The three firms collectively hold more than $5 trillion in assets. Wells Fargo, which assumed Wachovia’s liabilities when it bought it in 2008 for about $13 billion, has nearly $1.3 trillion in assets. “The SEC may as well just, like on the back of a parking ticket, list the fines so that firms can do a cost-benefit analysis as to whether it’s worth breaking the rules,” said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co. “Based on what we see out of the SEC, it appears to generally be in the interest of corporations to break those rules.” Wachovia, Tavakoli said, faces numerous lawsuits tied to its sale of complex financial products and soured mortgage loans it made to home buyers across the country. “Wachovia has been involved in a number of dirty deals,” she said. “It has this huge background of problems, and for the SEC not to use its moral authority is ridiculous.” Rosner said the allegations against Wachovia — not disclosing the true price of securities to buyers, and misleading investors about the involvement of its affiliates — were common throughout the industry when it came to packaging and selling CDOs. “It seems strange that there would have only been two such deals,” he said. The SEC declined to comment beyond its statement. A Wells Fargo spokeswoman said the actions were taken by Wachovia during the early days of the credit crisis, and that it was pleased to have resolved the matter. ************************* Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 917-267-2335.

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Texas Instruments Makes $6.5 Billion Buy

April 5, 2011

SAN FRANCISCO — Texas Instruments Inc. is buying National Semiconductor for $6.5 billion in a marriage of two of the world’s premier makers of analog chips, which are widely used in electronics to transform signals such as sound into digital form that computers can understand. In scooping up National Semiconductor, TI is getting a storied Silicon Valley company whose history stretches back more than 50 years and is known for its power-management chips. The deal is the latest example of consolidation among big players in the technology world as trends such as the explosion in smartphones have shaken up the competitive landscape. Longtime foes have joined forces while friendships have frayed as the boundaries between companies’ business lines have blurred. TI has agreed to pay $25 per share. The all-cash transaction represents a 78 percent premium over National Semiconductor’s stock price before the deal was announced. TI and National Semiconductor have been long-running rivals. TI, a leader in chips for cellphones, said swallowing National Semiconductor would be good for both companies’ sales. TI’s CEO Rich Templeton said the combined companies’ sales team will be 10 times bigger than National Semiconductor’s current sales force. “This acquisition is about strength and growth,” Templeton said in a statement. “National has an excellent development team, and its products combined with our own can offer customers an analog portfolio of unmatched depth and breadth.” Dallas-based TI noted that it makes some 30,000 types of analog chips, while National, based in Santa Clara, Calif., makes 12,000. TI said that it owned about 14 percent of the $42 billion analog market last year, while National Semiconductor owned about 3 percent. TI said the analog business will rise to about 50 percent of the company’s overall revenue when the deal closes, which TI expects will be within the next six to nine months. Last year, they made up about 43 percent of the company’s $14 billion in revenue. The rest was made up of various different kinds of chips. Ashok Kumar, an analyst with Collins Stewart, said he expects the deal will clear antitrust scrutiny because despite consolidation in the analog chip market, “the market is pretty brutal” and pricing is aggressive. He said Texas Instruments’ recent decision to exit the mobile-phone “baseband” business (chips that help phones connect to cellular networks) has put pressure on TI to find ways to replace the lost revenue. The baseband segment brought in $1.7 billion in revenue last year, and is expected to go to zero by next year. TI will continue to make “applications processors,” a different kind of chip that acts as the central brain of cellphones. Kumar called the deal “a match of mutual necessity – for National more than TI.” “National has been lost for quite some time – they didn’t appear to have critical share in any market of consequence,” he said. “TI is not without its own set of problems, but they can more than survive. But the issue they’re facing longer-term is they’re being squeezed out of the handset in the post-PC environment.” TI executives have touted the untapped opportunities for TI in the analog market as a key reason to expand in that area while shrinking parts of the wireless business. Shares of National Semiconductor surged $10.20, or 72.5 percent, to $24.27 in extended trading, after the deal was announced. TI shares fell 65 cents, or 1.9 percent, to $33.46. In the regular session National Semiconductor shares lost 16 cents to close at $14.07, while TI lost 12 cents to $34.11.

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AT&T CEO: T-Mobile Deal Won’t Raise Cellphone Bills

March 30, 2011

By Kenneth Li NEW YORK (Reuters) – AT&T Inc (T.N: Quote, Profile, Research, Stock Buzz) Chief Executive Randall Stephenson disputed the commonly held belief that consumer bills would rise if there were fewer competitors in the U.S. wireless market. AT&T’s defense comes as it girds for a tough regulatory review of its $39 billion deal to snap up Deutsche Telekom AG’s (DTEGn.DE: Quote, Profile, Research, Stock Buzz) T-Mobile USA, the No. 4 U.S. mobile operator known for its lower prices. The deal would create a new industry leader. The combined company and Verizon Wireless, the current largest U.S. provider, would hold nearly 80 percent of the market. Stephenson, who spoke to a New York event sponsored by the Council on Foreign Relations on Wednesday, referred to a government report that showed prices on average fell 50 percent over the last decade despite five wireless mergers over the period. Concerns over surrendering too much control to few players prompted New York Attorney General to conduct a thorough review of the deal. Asked in an interview with Reuters global editor-at-large Chrystia Freeland about the need for price restrictions as a condition to garner regulatory approval, Stephenson said, “I’m not sure of the relevance of it. The U.S. market “is the most highly competitive in the world.” Stephenson said AT&T consumers once paid around $1.90 per megabyte of wireless data and now pay around 16 cents. The benefits of the merger would be nearly immediate, he said. In New York, where users of the Apple (AAPL.O: Quote, Profile, Research, Stock Buzz) iPhone have complained about dropped calls and slow wireless data speeds in certain areas, capacity would rise by 30 percent. AT&T expects the acquisition to raise its infrastructure spending by $8 billion over a seven year period. Among other benefits of the deal, Stephenson said AT&T also planned to work with Deutsche Telekom on lowering roaming charge costs, which cellphone users are required to pay when using their phones outside of the subscriber’s market. Shares of AT&T traded up 73 cents, or 2.4 percent, to $30.78 on the New York Stock Exchange. (Reporting by Kenneth Li, editing by Dave Zimmerman) Copyright 2011 Thomson Reuters. Click for Restrictions .

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eBay Makes A $2.4 Billion Bid

March 28, 2011

SAN JOSE, Calif. — EBay Inc. has agreed to buy GSI Commerce, a digital marketing and e-commerce company, for $2.4 billion. Ebay, which runs its flagship online auction site along with PayPal, its online payments business, said Monday the acquisition will bolster its capacity to connect buyers and sellers around the world. The online marketplace operator has agreed to pay $29.25 per share, a 51 percent premium to GSI’s closing stock price on Friday. GSI shares surged 50 percent, or 9.73, to $29.11 in morning trading. EBay has been working on improving its eBay.com website by doing things such as revamping its home page, cutting upfront listing fees it charges sellers and bolstering its search engine. CEO John Donahoe said in a statement that the GSI deal will enhance the company’s position as “the leading strategic global commerce partner of choice for retailers and brands of all sizes.” As part of the deal, eBay plans to sell GSI’s licensed sports merchandise business and 70 percent of shopping sites RueLaLa.com and ShopRunner.com. EBay hopes to complete the deal in the third quarter. It says its 2011 net income per share will be 30 cents to 34 cents lower than its earlier outlook. In January, it had forecast earnings of $1.56 to $1.61 per share. Its adjusted earnings won’t be affected. The company had forecast adjusted earnings of $1.90 to $1.95 per share in January. The company expects the acquisition of GSI to add to its earnings per share in 2012. Shares of eBay, which is based in San Jose, Calif., fell 73 cents, or 2.3 percent, to $30.97 in late morning trading.

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AIG Offers To Buy Back Mortgage Securities From Fed

March 11, 2011

(Reuters) – American International Group (AIG.N) offered on Thursday to buy back, for $15.7 billion cash, mortgage-backed securities the U.S. government took off the bailed-out insurer’s hands during the financial crisis. The announcement came as a surprise, though AIG — which nearly collapsed in the fall of 2008 partly because of the securities — said in a regulatory filing it has been preparing to make the offer for at least a year. The company said it has set aside the cash to pay for the deal and will still have “strong liquidity reserves” after it closes. AIG will pay for the residential mortgage-backed securities (RMBS) with cash from its insurance subsidiaries, which will then hold the securities in their investment portfolios, a person familiar with the situation said on condition of anonymity. AIG and the Fed have been in talks for “many months” about the deal, the person said. Given the insurance units’ needs to invest their capital, the source said the RMBS were an “attractive investment” at their current levels. The securities have actually increased in value since, giving AIG the opportunity to profitably pay back the government and regain them for its own portfolios. The source said AIG is hopeful the Fed will accept the offer soon, and that the company will have the cash to fund the offer ready as soon as next week. REDUCING AID AIG, which is 92 percent owned by the government, said the Federal Reserve Bank of New York will make a profit of about $1.5 billion on its residual equity interest in Maiden Lane II, the entity that holds the securities, if it accepts the offer. AIG said in a U.S. Securities and Exchange Commission filing that the total outstanding assistance to it will be reduced by about $13 billion, to some $26 billion in total, if its offer is accepted. That $26 billion figure has three parts: the government’s interest in a vehicle that holds shares in insurer AIA Group (1299.HK), a different Maiden Lane vehicle that holds interests in collateralized debt obligations and an undrawn line of credit. Maiden Lane II was formed in December 2008 and took over about $20.5 billion of residential mortgage-backed securities in a bid to ease liquidity pressure on AIG due to its securities lending program. “At the proposed purchase price, the Maiden Lane II securities have an attractive risk/return profile to AIG,” the company said in its offer letter. The source said AIG would split the securities roughly proportionally between life insurer SunAmerica and property insurer Chartis. AIG shares rose to $37.45 in after-hours trading from a $36.48 close. At current levels, the Treasury stands to make a profit of nearly $13 billion on AIG shares. People familiar with the plans have said the Treasury is likely to start selling off its stake in May. The source said Thursday that the Fed deal would help AIG convince potential investors that its insurance businesses had solid opportunities to grow their investment income. (Additional reporting by Paritosh Bansal; Editing by Tim Dobbyn, Gary Hill) Copyright 2011 Thomson Reuters. Click for Restrictions .

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The Groupon Deal That Wasn’t Such A Deal

March 9, 2011

NEW YORK — Did Groupon serve up a raw deal? According to users, a recent offer for an online printing service wasn’t the money-saver it first seemed. Some of the 1,435 Groupon users trying to redeem a March 2 deal that offered $50 worth of “Personalized Printing Online” from Vistaprint for $10 to customers in Baton Rouge, La., found that the Vistaprint site initially lacked the field for entering the coupon code at checkout. A Vistaprint rep responded to confused users on the offer’s comment board . “My understanding is that you all received a link to the Vistaprint website – unfortunately you cannot redeem through this main link (coupon code box is not enabled),” she wrote. “Groupon will be sending out the correct link shortly. Sorry for the delay, but thank you for your patience!” The follow-up email from Groupon gave the following instructions: We’re writing to inform you of an important change to the redemption instructions for this Groupon. The redemption instructions originally stated that you have to visit www.vistaprint.com to redeem your Groupon. The business has changed the website where you redeem your Groupon to www.vistaprint.com/groupon50, so please make sure to follow that step when using your Groupon. The new website led to a mirror version of the site — seemingly identical, but with a few important differences. The new site included the missing entry field for the Groupon code. It also readjusted sales rates so that a flat-rate 30 percent — or, in some cases, 31 percent — discount applied to all items on the site, a Vistaprint discount unmentioned in the Groupon offer. The non-Groupon Vistaprint site featured a wider range of discounts. For some items, only a 10 percent discount applied. For others, that number jumped to 40 percent. A cached version of the “specials” page shows discounts for business cards that are 80 percent off. Accessing Vistaprint through different sites acting as affiliates also led to different discounts. “Discounts on the homepage can always be different,” Vistaprint spokesman Jason Keith told The Huffington Post. “There could be a deal running on the homepage that’s completely different, and it’s possible, depending on the channel you come in with, you could see a different deal on a different day.” In short, the prices for an item can depend on the day it’s purchased or the site through which users access Vistaprint. This elaborate pricing structure leaves room for deal-seekers to carve out the most affordable option. For some items, the Groupon venue may end up to be a better buy, but for others, the same items could cost about the same or even slightly more. The original offer only told users that they’d receive $50 worth of inventory for $10, without any mention of other discounts. The Vistaprint mirror for Groupon says, “Groupon members, Enjoy $50 of products + 30% off all products site-wide!” But that 30 percent figure was added for the mirror — it was not a part of the initial deal, nor is it always materially cheaper than other deals on Vistaprint’s main site. Customers who believed that the Groupon deal would apply to the discount rates they found on the original site might end up paying a different amount than they’d anticipated on purchase. After all, for the first day or so, the original offer had a link that went to Vistaprint’s original site, not the dedicated Groupon site with its own prices and also stated that “This Groupon is valid for any item on the website, including sale items.” Though it’s unclear who was responsible for the change in discount amounts between Vistaprint and Groupon, some experts suggest that Groupon is responsible for ensuring that merchants’ practices regarding pricing stay consistent with customer expectations. “The burden has to fall on Groupon. If they want to maintain integrity, they have to make sure the merchant doesn’t bamboozle them or their customers,” said Sucharita Mulpuru, a retail analyst at the market research firm Forrester. Mulpuru said such incidents may lead to customer service complaints and wider trust issues. “Customers can become skeptical of repeat purchases,” she said. Some irritated users have already obtained refunds from Groupon for the initial $10 cost of the deal. Others have contacted Vistaprint to receive refunds on a faulty free-shipping promotion. The entire snafu recalls Groupon’s headache over a Valentine’s Day deal with the florist company FTD, which infuriated some Groupon customers who had to pay non-sale prices on sale items for their deal. In this case, sale prices are eligible for the offer — but they’re different sale prices. “Either consumers are just not going to care or not notice — if that happens, you’ll see more of this in the future,” said Mulpuru, “or it’ll raise a huge stink, and force a lot stricter restrictions around how offers are offered and the parameters around what’s allowed or not allowed.” A Groupon representative declined to comment for this story.

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J. Crew Shareholders Approve $3B Buyout

March 1, 2011

NEW YORK — Shareholders of preppy clothing seller J.Crew Group Inc. have approved a $3 billion deal to be taken private by two investment firms. The $43.50-per-share buyout by private-equity firms TPG Capital and Leonard Green & Partners is expected to close on or near next Monday. J. Crew CEO Millard (Mickey) Drexler, the former Gap Inc. chief credited with turning J. Crew around since coming aboard in 2003, will remain with the company. Questions about how the deal was negotiated by Drexler had raised concerns the deal might not be approved. Proxy advisory firm Institutional Shareholder Services last week had recommended against the deal. Hedge fund Mason Capital Management’s managing member Michael Martino wrote to J. Crew’s board on Feb. 11 and asked it to hold out for a higher offer. The firm has a 7.5 percent stake in J. Crew, which is based in New York. They said they would vote against the offer, according to an SEC filing. J. Crew began an 85-day “go shop” period when it would entertain other bids after it agreed in November to be bought by TPG and Leonard Green. It extended the period by a month after settling a shareholder lawsuit challenging the acquisition. Even after the extension, J. Crew said it was in talks with some interested parties but did not receive any firm alternative bids. J. Crew and Drexler have a history with TPG, which took a majority stake in J. Crew in 1997 and remained majority shareholder until the company went public in 2006. Shares rose 45 cents to $43.53 in midday trading, pennies above the buyout price.

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Murdoch Buys His Daughter’s Company

February 21, 2011

LONDON — Rupert Murdoch’s News Corp. has reached a deal to buy Shine Group, a television production company founded by the business magnate’s daughter Elisabeth, for 415 million pounds ($673.3 million). The company said Monday it signed a non-binding letter of intent and will proceed with the necessary regulatory filings to acquire Shine, the producer of popular British shows like “Masterchef” and “Merlin.” In a joint statement, Rupert Murdoch praised Shine’s “outstanding creative team” and said he expects his daughter to join News Corp.’s board once the deal is complete. Elisabeth Murdoch, a former managing director of Sky Networks who left her father’s company in 2000 to start Shine, said the alliance will help prepare her company for future growth. “I could not be happier or more proud that from such modest beginnings Shine will join such an extraordinary group of companies,” she said in the statement. News Corp. is one of the world’s largest media empires, and owns the Times and Sun newspapers in Britain, the Fox News Channel and the Wall Street Journal. News Corp. and Shine said they will continue to negotiate the final terms of the agreement, which will be subject to approval from both companies’ boards, the audit committee and the receipt of an independent fairness opinion. The companies did not say when they expect the deal to be completed. Once the deal closes, Shine Group will report to Chase Carey, News Corp.s’ deputy chairman, president and chief operating officer.

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GE Makes Big Move Into Oil Business

February 14, 2011

(By Megan Davies): General Electric Co (GE.N) is to buy a unit of British energy services firm John Wood Group (WG.L) for about $2.8 billion, the latest move by the largest U.S. conglomerate to boost its presence in oil services. GE’s acquisition John Wood’s well support division raised hopes of more deals in the oilfield services sector, where GE has recently been an active buyer of assets. GE, which is buying the unit through its oil and gas business, in December agreed to buy Britain’s oil drilling pipemaker Wellstream Holdings Plc for $1.3 billion. That followed a 2008 deal to buy pressure control equipment company Hydril for $1.1 billion and a 2007 deal to buy privately held oil and gas field equipment maker Vetco Gray. The U.S. company has said it could spend up to $30 billion on takeovers in the coming years as CEO Jeff Immelt renews GE’s focus on heavy manufacturing after reaching a deal to sell its media unit and scaling back the GE Capital finance arm. John Wood said it intends to return cash of no less than $1.7 billion to shareholders, helping to boost the company’s shares by 14.6 percent to 657 pence at 0921 GMT on Monday, their highest ever level. “We definitely think they John Wood got an attractive price. It was considerably more than what we were expecting,” said Royal Bank of Canada analyst Todd Scholl. “I would expect that, based on this valuation all of the oilfield services stocks would trade higher. The space certainly is very hot from an M&A perspective. We wouldn’t be surprised to see more deals.” Shares in oil services firm Petrofac (PFC.L) traded up 3.1 percent while London-listed pump and valve-maker Weir Group (WEIR.L), which has an oil field services division, rose 5 percent, with the latter helped by speculation that German conglomerate Siemens (SIEGn.DE) could be interested in it. GE said the John Wood unit acquisition would allow it to tap fast growing demand for enhanced oil recovery from mature oil fields. “Five years ago, drilling and production in GE did not exist,” John Krenicki, CEO of GE Energy said in a telephone interview. “Over the last five years we’ve built it up to be an industry leader.” He said that GE expects the deal to be ‘slightly accretive’ in 2011 assuming it closes by the end of the second quarter. Krenicki doesn’t anticipate more deals in the medium term in the specific area of drilling and production, but said there could be deals elsewhere. “Specific to this space — drilling and production — we think we have got what we needed for the medium term,” Krenicki said. “But the rest of the energy portfolio has capability to do more and we’ll look for things that make sense.” UNLOCKING PUZZLE Wood Group’s Well Support division is comprised of three business platforms — electric submersible pumps (ESPs), pressure control and logging services. GE said that deployment of electric submersible pumps are one of the most effective methods of enhancing production. “If you look at world oil production today, about two-thirds comes from 300 giant wells that are depleting about six percent a year,” said Krenicki. “Of those giant wells, only about one third of the oil has been extracted — for lots of reasons – cost, technology, difficulty. And world oil demand is to grow about 20 million barrels per day over the next decade.” “We know that these (electric submersible pumps) are the key to unlock this puzzle,” Krenicki said. John Wood said earlier in February it was looking into the possible sale of the well support unit. Sources previously told Reuters the company had put the division on the block and had hired Credit Suisse (CSGN.VX) to advise on the sale. Chief Executive Allister Langlands told reporters on Monday that John Wood would use some of the funds to pay for its purchase of oil production services company PSN, which it bought for $955 million in December, and added that the company will also look to make more acquisitions. “We’d like to expand our engineering business in Brazil, we’d like to grow our brownfield support business in Canada so those will be two areas that we continue to look at,” he said, adding that no deal was imminent. GE said on Sunday that Wood Group’s board intends to unanimously recommend the deal to its shareholders. It is expected to close later in 2011, GE said. (Additional reporting by Sarah Young; Editing by Dhara Ranasinghe and Erica Billingham) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Robert Kuttner: The Stimulus That Isn’t

December 20, 2010

On signing the tax-cut deal December 17, President Obama jubilantly declared “We are here with some good news for the American people this holiday season. This is progress and that’s what they sent us here to achieve.” So how have Republicans repaid Obama’s willingness to meet them three-quarters of the way? Bipartisanship evidently lasted about as long as the signing ceremony. First Republicans refused to approve the routine stop-gap bill to keep the government funded at current levels pending the budget resolution and next round of appropriations. They killed the DREAM Act, for decent treatment of well-behaved children of undocumented immigrants. Repeal of Don’t Ask Don’t Tell squeaked through the senate with the votes of a few socially moderate Republicans defying their leadership. The Republicans on the Financial Crisis Inquiry Commission, in a massive denial of reality, issued their own separate report, denying that the financial collapse had anything to do with deregulation or speculation. Coming along next is a set of Republican demands in the budget resolution for much deeper cutting of public outlay. So it’s clear that “bipartisanship,” even on heavily Republican terms, produces no follow-through and no reciprocity. This is bipartisanship in the spirit of Neville Chamberlain. You give, and immediately they are after you for more. It is astonishing how the Beltway echo-chamber, most egregiously the editorial page and news columns of the Washington Post (hard to tell the difference), thinks this deal is good for the Republic. The Post has become a cheerleader for policies that fail to cure the economy and show off Obama as a weakling waiting to be rolled again. The tax deal, re-branded as a stimulus program, is paltry and ineffective as economic tonic. What hardly anyone seems to have grasped is that the deal basically continues the status quo with almost no stimulus. If the tax rates on the books in 2010 did not produce a recovery, why should we expect that the very same rates will change the economy in 2011? The deal not only continues 2010 income tax rates into 2011 and 2012. It actually increases estate taxes slightly, since estate taxes lapsed entirely for one year in 2010. It also basically continues current unemployment benefits. Even the temporary 2-point tax break on Social Security taxes is a substitute for a more progressive and effective Obama tax break from the original stimulus of February 2009 that the Republicans refused to extend — the Making Work Pay tax credit. About the only new stimulus in the bill is a business tax break that increases the value of tax write-offs for new investment, valued at about $55 billion. Does anyone seriously believe that a $55 billion net tax cut in a $15 trillion economy will have more than trivial effect? Using Congressional Budget Office estimates of GDP growth, the deal might produce as many as two million jobs if businesses respond by investing more and consumers feel more confident about increasing their spending. Lovely, but the economy is currently short at least fifteen million jobs. The small stimulus effect will soon be undermined by the spending cuts that are already the Republicans’ next demand. Even the stopgap spending measure to continue spending next year at this year’s levels, which Republicans just blocked, is already a cut when you factor in inflation. Deeper spending cuts, about to be imposed by incoming Republican House leaders, will overwhelm any stimulus effect of the tax deal. Obama, according to well-placed sources, plans to introduce a “tax-simplification” scheme in the State of the Union address — get rid of tax preferences and lower tax rates, as proposed by the Bowles-Simpson commission, with no net stimulative effect. This is a classic case of trying to change the subject. This might or might not be sensible policy depending on the specifics. But what ails the economy has little to do with the particulars of the tax code. I don’t understand how Obama’s political advisers think this formula can produce his re-election. The tax deal was popular at a superficial level. Voters, when asked about the deal in a vacuum, apart from other economic issues, approve of bipartisan cooperation and they like tax relief when nothing else is on offer. (In that context, it’s noteworthy that the one part of the tax deal that respondents to the ABC- Washington Post poll did not like was the temporary cut in payroll taxes. The vast majority of Americans don’t want to weaken Social Security, even when the bait is tax relief.) But such polls tell us nothing about the President’s prospects for 2012. The 2010 off-year election was the second largest swing away from the incumbent party in the past 130 years (1930 produced a slightly worse swing against the Republicans), according to the political scientist Walter Dean Burnham. It was the worst mid-year swing against the Democrats ever. Ground Zero of this disastrous defeat was the Midwest. This is hardly surprising, because the working middle class in the industrial heartland, which provisionally voted for Obama in 2008, is facing devastation in states like Ohio, Pennsylvania, Michigan, Wisconsin and Minnesota. The 2010 swing there was huge. Without carrying the heartland of the Midwest, Obama does not stand a prayer of re-election, even if the broad public says it approves of his bipartisanship. But bipartisanship to what end? There is simply no way that the combination of upwardly tilted and puny tax breaks, spending cuts, and a re-jiggering of tax rates and loopholes is going to make a serious dent in either unemployment rates or underwater housing values in the Midwest. Joblessness and losses of household assets in these states will continue at depression levels, even if the national unemployment comes down modestly. Obama and his advisers are left with the vain hope that Republicans will nominate someone so lunatic that Obama will somehow squeak through. But be careful what you wish for. I vividly remember 1980, when some Democrats cheered the nomination of Ronald Reagan because he was too rightwing to get elected. The watershed year 2008 was a political moment when an incoming Democratic president had all the raw material for a dramatic break with the old order — when Republicans, Wall Street, and laissez-faire ideology were primed to take a richly deserved fall for the economic collapse. Obama chose not to pursue that course. Instead, he identified himself with reviving Wall Street and pursued a feckless bipartisanship and a feeble recovery program. Last spring, Obama and his aides were on the road assuring everyone that the administration’s economic program would produce a “Recovery Summer,” which never came. Now, Obama is repeating the mistake. Adviser Larry Summers’ valedictory message is that the even weaker tonic of the tax deal will somehow restore economic jobs and growth. Crying recovery, when recovery doesn’t come, is even riskier than crying wolf. Six months from now, when the economy is still in the doldrums, either Obama or some other Democrat had better stand up for a real economic recovery program — or no Republican will be too grizzly to be elected president in 2012. Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.

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Tax Cuts For Rich Move Forward In Senate

December 13, 2010

WASHINGTON — The Senate on Monday voted to move forward on a a two-year extension of the Bush tax cuts as well as a package of tax cuts and credits for the middle class, ethanol subsidies and a 13 month reauthorization of unemployment insurance. The vote follows months of insistent bipartisan concern about the size of the federal deficit. The vote is being held open to accommodate senators arriving in town, but the package already had 66 votes in favor of moving forward shortly after 4:15. Eight senators stood against the deal: Republican John Ensign (R-Nev.); Democrats Jeff Bingaman (N.M.), Sherrod Brown (Ohio), Russ Feingold (Wisc.), Kirsten Gillibrand (N.Y.), Pat Leahy (Vt.) and Mark Udall (Colo.); and Bernie Sanders (I-Vt.), who spoke for hours against the bill on Friday. UPDATE: As of 7:30 p.m. ET, the final vote stands at 83-15 (2 not voting). Of the 15 votes against, nine came from Democrats, five from Republicans and one from Sanders. The bill, with the unusual name of Reid-McConnell, originated in negotiations between President Barack Obama and congressional Republicans. House Democrats last week resolved to urge their leadership not to bring the bill to the floor, but lower-chamber leaders have been signaling that the House will consider the Senate product — though there will be attempts to amend it. “It’s clear it’s the right thing to do for middle-income Americans,” said Sen. Max Baucus (D-Mont.), chairman of the chamber’s finance committee. Baucus said he was confident the bill would make its way through the House. “It will pass,” he said. House Democrats are particularly offended by the estate-tax portion of the compromise, which funnels some $25 billion to some 6,600 families . The provision exempts the first $5 million in inheritance from taxation and reduces the rate on the rest. Rep. Jim McDermott (D-Wash.) said he objected to the unfairness of the package. It “gives $68 billion to the trust-fund babies with security, it’s going to last two years. To the unemployed, he gives $56 billion.” Extending tax cuts for two years, said McDermott, while giving unemployment insurance for one, shows a legislative chamber with its priorities far askew. When the deal was first announced, it was greeted with fury by some Democrats. “I’m going to argue forcefully for the nonsensicalness and the almost, you know, moral corruptness of that particular policy,” said Sen. Mary Landrieu (D-La.), walking into a meeting with Vice President Joe Biden and Senate Democrats to discuss the deal on last Tuesday. “This is beyond politics. This is about justice and doing what’s right.” On Monday, though, Landrieu said she would “reluctantly” vote to support cloture and move forward with the bill. “I’ll be voting yes today, but I’m hoping there will be some amendments,” she said before the vote. Landrieu was the 66th “aye.” Landrieu is working with Sen. Jeff Merkley (D-Ore.) to try to get a vote on an amendment that would end the tax cuts for the wealthy and apply the revenue to Social Security. But even if it’s considered, the amendment does not have enough votes to meet the filibuster-proof threshold of 60 that has become a standard requirement for legislation in the Senate. Asked what happened to her anger from last week, Landrieu said it remained — but it was only for the tax cuts for millionaires, not the entire package. “I’m still outraged about it,” she said.

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Larry Summers: If Tax Deal Goes Down There’s A ‘Significant Risk’ Of A Double Dip Recession

December 8, 2010

Senior White House officials significantly raised the stakes on congressional Democrats in their efforts to get a deal passed on the Bush tax cuts, warning on Wednesday that inaction would “significantly increase the risk” of a double dip recession. It wasn’t quite the metaphorical flare of mushroom cloud imagery, but outgoing senior economic adviser Larry Summers offered a fairly dire assessment of the stakes in the tax cut debate. “If they [Democrats] don’t pass this bill in the next couple weeks it will materially increase the risk that the economy would stall out and we would have a double dip,” he told a gathering of reporters at an off camera briefing. A double dip recession? “What I said it would significantly increase the risk,” Summers replied. The message was hardly subtle. But it certainly was debatable. Summers himself, downplayed the significance of continuing the Bush tax cuts back in September — though he was speaking, then, about the rates for the rich and the tax cut deal, at that point in time, did not include money for a 13-month extension of unemployment insurance or other tax incentives to help lower income workers. Asked whether the country would find itself dipping towards the economic doldrums if Congress waited a month or two to get a tax cut package passed, Rob Shapiro, a former commerce official in the Clinton White House and a proponent of the current tax cut deal, offered more sober-minded analysis. “The wait would not cause a double dip,” he said. “A double dip would come out of the reality of a relatively contractionary fiscal policy… I do think the deal that they announced is stimulative. And it ought to boost growth by some increment… But the issue is, that the deal certainly is not enough to lift the economy to a different place. Will we see what happened with the large stimulus happen here, which is once the stimulus is over the economy returns to slow growth? That’s the danger. And I keep on saying this, the single most important thing they can do to avert that is to stabilize housing prices.” Stabilizing the housing market, however, is not on the current congressional docket. And on Wednesday, the White House began a robust process of selling the deal to Democrats — skeptical, as they are, about an extension of Bush tax cuts for the wealthy and a generous revision of the estate tax. There were few carrots to go along with the sticks. Asked, for instance, if the White House would be willing to revise the informal compromise to bring more Democratic lawmakers on board, White House Press Secretary Robert Gibbs said any changes would be fine, so long as they didn’t result in decreased support. Then he cautioned: “The physics and the blood and the sweat that might be involved in that, I’m not entirely sure I would put it quite as simply as that.” If anything, the pitch being offered from the administration to the rest of the party was: take the package now or risk being blamed for an economic downturn. “I guess the question back for those who ask [why not fight for more] is where does this go, what is the end game and what are the consequences of playing it?” said senior adviser David Axelrod. “Do they have a sense of how this ends and how long will that take, because as Larry said there are real consequences to that. Just as the forecasts went up on the basis of this agreement they will go down if this agreement fails. That we know. We know that on January 1 people’s taxes will go up, we know that at the end of this month 2 million people will lose their unemployment insurance. And so there are real consequences to that decision. We, I think we all stipulate, the president did, no one likes those provisions that they dislike but on the other side of the ledger are significant things that will help people and help the economy. And what we know for sure is that without any of it we are facing a really difficult situation.” Added Gibbs: “I think you would really have to ask somebody who says… lets have some eight week fight and on February the 15th come in and say, alright, now we are ready to make a compromise, who on earth, who on earth thinks that that is somehow going to be a fundamentally better agreement than the one we are looking at right now? No one I have ever talked to.”

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Michael Wenger: The People Who Need This Deal

December 8, 2010

The current outrage among progressives about the tax deal negotiated by President Obama and Republicans reminds me of a philosophical debate we used to have when I was an anti-poverty community organizer in the late 1960s in southern West Virginia. Most organizers were idealistic middle-class college students or recent college graduates who were convinced they were on the side of the angels in trying to change a system that unfairly condemned the powerless to a daily struggle for economic survival while those with political and economic power wielded their power for personal gain at the expense of the powerless. We believed passionately that compromise equaled “selling out” and that it was better to fail while standing on principle than to take half a loaf. But while we could and would trade our community organizing efforts for economically secure careers after a few years, those who were struggling to put food on their tables, a roof over their family’s head, and clothes on their children’s backs were less interested in changing the system than they were in making it to the next day. To them, as President Obama alluded to in his press conference, an abstract debate about principle was a luxury they couldn’t afford. That’s what progressives need to keep in mind over the next few days as this deal moves toward a vote in Congress. I stand with progressives in disliking this deal. By telegraphing his willingness to compromise before the negotiations even began, President Obama significantly weakened his position. Thus, Republicans knew they didn’t have to budge on the tax cuts for the rich. Nonetheless, it is difficult for me to see how progressives can justify a no vote on the deal if they really care about their middle and working-class constituents. First, a close look at the deal reveals that it is heavily weighted on the side of the middle and working class. Of the approximately $990 billion that this deal is expected to cost, $79 billion is a result of tax cuts for the wealthy. Add another $68 billion for the estate tax changes, and you have a total of $147 billion wasted on the rich. That’s not chump change, but it amounts to less than 15% of the total. On the other hand, the total cost of extending middle income tax cuts and unemployment compensation benefits, providing a one-year payroll tax holiday, indexing the alternative minimum tax for inflation, and extending the earned income tax credit, the child tax credit and the college tuition deduction amounts to $617 billion, or more than 60% of the total. The remaining $226 billion is for business incentives for capital investments and for research and development. In sum, this doesn’t seem like such a bad deal. Second, and more important, failing to pass this deal means sticking it to out-of-work parents who need the unemployment compensation check to make it into next week, to students who need the college tuition break to make into the next semester, and to the working poor who need the Earned Income Tax Credit to make ends meet. To those who argue that if we hold out and stand on principle, we can get a better deal, I would remind them that they’re not the ones at risk. They will still be able to dine out at their favorite restaurant, return to a comfortable home, write a check for the rent or the mortgage, and fall asleep under their electric blanket. If their strategy fails, no harm done — to them. From a strictly political point of view, this is not a bad deal either. First, by putting more money in the pockets of those who will spend it quickly and by providing additional incentives for business, it clearly will help to strengthen the economy, which is, after all, the key to the President’s re-election prospects. Second, passage of this deal will open the door to possible votes during the lame duck session on the Dream Act, the Start Treaty, and “don’t ask, don’t tell.” Third, when the 2012 election comes around, Democrats will be able to point to the blatant Republican hypocrisy about the deficit, and with the economy stronger, they’ll be able to puncture the Republican argument that we shouldn’t raise anybody’s taxes in an economic downturn. Progressives may feel that extending tax cuts for the rich is immoral and that the president could have gotten a better deal. In my opinion, they are correct. But they didn’t have the courage to bring the tax cut extension to a vote before the mid-term elections, when they might have succeeded in getting a better deal. So, as they ponder their vote while seeking to get out of town in time to be able to spend Christmas opening presents with their families, they should think about those who will spend a present-less Christmas choosing between heating their home, if it hasn’t already been foreclosed, and feeding their kids. Those are the people who need this deal, and they need it now. The views expressed here are solely those of the author.

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Will The Obama-GOP Tax Deal Really Create 3.1 Million Jobs?

December 8, 2010

The new tax cut compromise between the Obama administration and congressional Republicans, which will add $593 billion to the $1 trillion federal deficit, is now also being touted as a back-door stimulus plan. Some economists have estimated that when you add up the deal’s different provisions, it will create 3.1 million new jobs. Unfortunately, the model on which those forecasts are based makes some flawed assumptions that lead to an overestimation of the positive effects.

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Jared Bernstein: A Plan Comes Into Focus and It’s All About Jobs

December 7, 2010

As you probably know by now, a framework is emerging from the negotiations between the administration and the Congress on what to do about the expiring Bush tax cuts. As this plan takes shape — and I’ll be the first to admit there’s stuff to like and dislike about it — one thing is clear: it’s a much stronger plan on our number one priority — JOBS — than anyone expected. Our administration and our friends in Congress fought hard to block the two-year extension of tax cuts for the top 2% of households, and if there were a way to hold that line without putting working families and our economy at risk, we would have done so. Those temporary high-end cuts do not stimulate growth or jobs. But agreeing to them does break the stalemate and in doing so, sets the stage for a package that both shields the middle-class from an imminent tax increase and promotes significant economic growth and jobs. That said, some would have had us take up this fight, regardless of the costs to the working families and the broader economy. But in a fragile recovery, with an opposition determined, as seen in numerous votes so far, to block permanent middle-class tax relief without permanent cuts for the wealthy, a victory in that fight would have been a Pyrrhic one. And, as he said yesterday, President Obama was simply “not willing to let working families across this country become collateral damage to political warfare in Washington.” In the absence of a deal, that collateral damage would amount to well over a million jobs and tax increases of $3,000 for millions of middle-class families. So the President stood firm on these key principles: 1) if we must accept tax cuts for the wealthiest Americans over the next two years, then taxes must not go up for lower and moderate income families, and 2) we must do all we can to support jobs and growth. We won big on both. Here’s what’s in the plan agreed to this morning: A full extension of Unemployment Insurance for 13 months, an extension that will protect more than 7 million workers from losing their benefits, will help the unemployed make ends meet, and will create more than 600,000 jobs next year. It’s probably the single most effective thing we can do to support jobs and the economy. A new, job-creating payroll tax cut for workers: a 2% payroll tax cut for rover 155 million workers, providing about $120 billion in tax relief administered through higher paychecks. The key word here is “new.” This piece of the agreement goes beyond extending policies that were already in place and is widely recognized as a potent way to generate jobs and growth. If you earn $25,000 a year, this boosts your take home pay by $500; if you earn $50,000 a year, it adds $1,000; and if you earn $75,000, it adds $1,500. That’s real money that will help strapped working families, and, once they pump it back into the economy, will create more jobs. The CBO recently reviewed this idea and wrote: A payroll tax holiday that applied to the employees’ share of the tax would have the advantage of directing more of the reduction to households more likely to spend it, even reaching taxpayers who could not qualify for a rebate on the basis of income tax returns. Extending the Bush tax cuts for two years: The deal extends the Bush income tax rates for two years. As noted, that meant breaking through the political impasse by accepting a) a temporary extension of the high-end cuts, and b) a regressive adjustment to the estate (the Lincoln-Kyl proposal–read about it here). We strongly object to both, and I assure you, these are fights we will live to have another day. But it also means staving off a significant tax increase for millions of middle-class families — more than $2,000 for the typical family in the middle of the income scale. The deal also fixes the AMT to ensure that an additional 21 million households will not be hit with a tax increase. A set of other tax credit extensions, essential to the well-being of lower-income and middle-class families. These include the Earned Income Tax Credit, a wage subsidy to low-income workers that will benefit 10.5 million working parents with 15 million kids, the1,000 Child Tax Credit, an extension which preserves tax relief to 6.5 million lower-income families with 18 million kids, and the American Opportunity Tax Credit, helping millions of families to partially offset the cost of college. Business tax cuts targeted at investment and growth, including full expensing of investments and an extension of the R&D credit. All told, we’re talking about serious tax relief and targeted jobs measures quickly getting to work in an economic recovery that remains fragile. A typical working family with two members whose combined earnings are $75,000 comes away from this deal with over $2,000 in tax relief from the rate extensions, and another $1,500 from the payroll tax cut. So that’s the deal as it stands, folks. Like I said, we don’t love everything about it — our opposition to the high-end and estate cuts not only remains strong, but reversing those policies will be at the heart of the fight over taxes, jobs, and deficits over the next two years. In the meantime, it’s all about jobs, and in that regard, there’s a very strong plan taking shape here.

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Dean, Ex-Obama Advisers Lament President’s Tax-Cut Deal

December 7, 2010

WASHINGTON — Obama’s decision to craft a deal with Republicans on the Bush tax cuts may have been, as administration officials insist, the product of economic and political necessities. But it has created deep reservoirs of distrust with the president’s ability to handle high-stakes negotiations and has compelled even former staffers to level blunt criticisms about the White House’s politics. “I think the president made a huge mistake in supporting any extension of tax cuts,” said Steve Hildebrand, the deputy national director of Obama’s presidential campaign and a strategist who has long grown sour on Washington. “We can’t afford it as a country, and we should recognize that. We need his leadership and bipartisan congressional leadership on it. And the whole idea of negotiating with Republicans who won’t negotiate in good faith, it is not the direction the president should be taking.” Hildebrand — while hesitant to discuss politics over policy — was reacting to the deal reached Monday evening that would extend the Bush tax rates for two more years in exchange for a 13-month extension of unemployment benefits and other tax cuts provisions the president has long favored. He wasn’t the only former Obama hand to speak critically about such an exchange, but the first since the administration announced the deal. That none of the measures would be paid for was a major problem, Hildebrand and other Democrats stressed. Writing hundreds of billions in tax cuts was simply incompatible with supporting long-standing safety net programs, let alone protecting the country’s long-term fiscal security. “We clearly have to deal with the deficit; it is probably the biggest problem facing the country,” said former DNC header Howard Dean. “But you can’t deal with the deficit from a political point of view if you say to Democrats, we are going to cut Social Security and Medicare and, by the way, give tax cuts to those who make a million dollars a year.” Antipathy, however, was saved as much for the process of securing the final tax cut package as for the substance of the package itself. Suggesting that the deal could die in the House, Dean echoed a question other Democrats offered in the hours after Obama’s announcement: Was enough secured in return? “I’m not so sure you can get the House to agree to this in conference committee,” he said. “And what about the president’s other priorities: Don’t Ask Don’t Tell, START, DREAM Act? I mean, do we not get anything for the $700 billion?” Certainly, Democrats got something, perhaps even more than expected. Discussing the arrangement with the Huffington Post, senior administration officials stressed that even the labor federation “AFL-CIO did not think…we could keep” the 13 months of unemployment insurance. The actual cost of the provisions that the White House secured, meanwhile, was pricier than the cost of extending the Bush tax cuts for the rich — $215 billion (including UI) versus $95 billion, all over two years. And so it wasn’t entirely surprising that some more progressive-minded columnists and economists opined favorably (albeit with caveats) about the final package. As Ezra Klein noted , “the end result is between $200 and $300 billion more in tax breaks, tax credits and unemployment insurance” that is, effectively, a stimulus. And yet, for skeptical lawmakers, it was hard to ignore how bungled the entire process seemed to be. What could the president have gotten had he stood a bit firmer in negotiations? “I don’t like this at all,” Rep. Jerrold Nadler (D-N.Y.) said. “The president has not put up much of a fight.” Moreover, why should the caucus trust the White House to re-litigate this same battle when the tax rates expire two years from now? “My view is that if you’ve got a problem, deal with it now and you don’t kick it down the road for later,” Rep. Peter Welch (D-Vt.), who is whipping members to oppose the deal, told the Huffington Post. “Two years from now, we are going to have the reality of a Republican majority in the House, and we know their point of view on this. They will be for more tax cuts and higher deficit…this was our best chance.”

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Anthony Tjan: In Negotiations, Play Stupid to Win Smart

December 7, 2010

In my last blog, I shared with you one of my partner’s sayings that he learned from his uncle, “play stupid, and win smart.” His uncle was a skilled poker player with an uncanny ability to hide his emotions. Other players bought into his “play stupid” routine, and he’d later disarm them with his winning hands. This is a real skill, since in general, the brain lags the mouth. Our impulse is to speak our minds, talk first, think and act later. As a natural extrovert, I never fully appreciated the importance of this play stupid, win smart philosophy until I reflected and noted common patterns in business negotiations and other high stakes tasks where pausing before reacting would have made a significant difference in the outcome. This has made me more cognizant to try (and this is difficult because emotions often override logic) to follow this DVR-inspired approach in important and sensitive business situations: Pause. Consider business situations as a mini movie in production in which you are the director. When you have any new and sudden disruption to filming (i.e. new information, a new competitive entrant, a new shift in available resources, etc.), the first call to action should be to take a pause. Play. Let the movie play out in your head and think about the various scenarios and how you can use the new information or situation to your advantage. Mute. Remind yourself to hit your internal mute button so that you keep your thinking to yourself unless there is a compelling reason to share. Think like a poker player and ask if there is any upside to sharing what you know with the counter-party. There usually isn’t. Rewind and Record Again. Appropriately reset your actions and hit “record” again to move toward your desired “win smart” ending. The act of pausing to contemplate the various scenarios that are likely to play out is critical. As in physics, every action has a equal and opposite reaction. The key is to avoid any unwanted consequences. In a recent negotiation with a company, it came to our attention that another party had put an offer on the table. It turned out that the other party was a group with whom we were actually planning to partner on the deal. We had proposed the opportunity to them shortly before the negotiation. My knee-jerk response was to call up the person with whom I had been dealing and offer some harsh criticism on what they had done and to effectively tell them that we were done working with them. Period. But I paused to ask myself how that course of action would benefit me. In truth, the only benefit would have been to make me feel better right at that moment. Unfortunately this seems to be a common mistake that people make in their “talk first” decision-making process in order to feel better in the moment — but it doesn’t move them toward their goal. Playing the movie forward and carefully considering the likely outcomes, I realized that remaining silent and using the knowledge to our advantage was a far better approach than flying off the handle. Why? Scenario A: Get mad, other party has no chance to explain themselves and our reaction will hinder the probability of working with them; Scenario B: Get mad before thinking about what alternative partners might do the deal with us, which may lead to no deal at all; Scenario C: Get mad, tell the other party we can do the deal on our own, which would have made them bid up the price on the deal to try to win it for themselves. We’d be putting the dog in the corner, so to speak, and they’d be left to bark or bite. By remaining silent, we could effectively play stupid and win smart. Having that knowledge gave us two pieces of valuable insight: first the other party showed how much they really wanted to do the deal, and second, their behavior to try and get the deal on their own illustrated a lack of professional protocol and gave us an early and helpful signal that this might not be the type of partner with whom we wanted to work. We quickly mobilized another partner on the deal and we proposed a joint deal at the original agreed-to price, which was accepted. It is too easy to forget the desired goal in moments of emotion. Here the goal was to win the deal at a reasonable price and silence and restraint were our best friends toward winning smart. This article first appeared on Harvard Business Publishing on November 30, 2010.

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Google Acquires One of NYC’s Largest Buildings for $1.8B

December 6, 2010

Google has signed a contract to buy 111 Eighth Avenue, a 15-story brick building of nearly 3 million square feet in the Chelsea submarket of Manhattan, for more than $1.8 billion, a source close to the deal confirmed for CoStar. It’s the largest single…

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Google Acquires One of NYC’s Largest Buildings for $1.8B

December 6, 2010

Google has signed a contract to buy 111 Eighth Avenue, a 15-story brick building of nearly 3 million square feet in the Chelsea submarket of Manhattan, for more than $1.8 billion, a source close to the deal confirmed for CoStar. It’s the largest single…

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Lori Wallach: Obama Trade Policy Perils: Korea FTA Talks Resume Tomorrow

November 29, 2010

That the Obama administration did not agree at the G-20 summit to push the same NAFTA-style Korea free trade agreement (FTA) that former President George W. Bush signed in 2007 is understandable. It’s projected to increase the U.S. trade deficit, is wildly unpopular in both countries, and replicates the most threatening NAFTA provisions that promote offshoring and financial deregulation . And, its chapter on labor rights bans references to the International Labor Organization (ILO) Conventions that establish, well, the internationally recognized labor rights. The real question is why the Obama administration would have been willing to sign off on the Bush agreement in Seoul if only the Koreans had agreed to some more market access for U.S. cars and cows. And why they might go for a deal based on those narrow fixes when talks resume tomorrow near Washington. …especially since a large bloc of senior Democratic legislators, unions and other Democratic base groups made clear months ago that a short list of critical deNAFTAization fixes were necessary to avoid a nasty battle in Congress. Recent polling has shown that perhaps the one issue that unites Americans across diverse demographics is opposition to more-of-the-same trade policy. The elections confirmed this , with an unprecedented number of candidates from both parties campaigning on fair trade themes. In its current form, the Korea deal is definitely more-of-the-same . But you wouldn’t know it from the media coverage. You’d think that all anyone cares about are market access issues related to automobiles and beef – and that refusing to move another Bush NAFTA-style FTA somehow undermines Obama’s efforts to double exports in five years. That, despite a recent study showing that, in fact, U.S. exports to countries with which we have NAFTA-style trade deals have grown at half the pace of exports to other countries. I hope they fix the lopsided auto market access provisions and, while they’re at it, the textile terms, which are also unfairly uneven. But dealing with cars and cows is far from sufficient to make the deal acceptable policywise, much less to avoid the foreseeable political disaster if Obama makes Bush’s NAFTA-style trade deal his own. The administration must remove the offshoring-promoting foreign investor protections that provide special privileges to firms that relocate and the new rights for Korean firms to use UN and World Bank tribunals to attack domestic regulatory policies and demand U.S. taxpayer compensation for regulatory costs. A major exception must be added to safeguard recent U.S. and Korean financial reforms from the Bush text’s deregulation requirements. The footnote banning reference to the ILO conventions has to be removed as well. In short, Obama should follow through on his campaign promises . He explicitly identified the Korea FTA’s labor provisions and the “investor-state” enforcement mechanism as problems that needed addressing. Getting rid of the investor-state private corporate enforcement of the deal’s new foreign investor rights is especially critical. Korea is a major capital exporter with about 270 establishments currently in the U.S. that would be newly empowered to raid the Treasury and attack domestic policies using foreign tribunals. These provisions elevate corporations to the same status of sovereign governments by providing them with the right to privately enforce a public treaty. So far, over $326 million in compensation has been paid out by governments to corporations under NAFTA’s similar terms. The cases include attacks on natural resource policies, environmental protection, and health and safety measures. Korea has just as much of an interest in fixing these provisions as we do, and there are indications that Korean officials would be amenable to doing so. Certainly, the Korean public is as upset over them as we are. Anyone who saw the tens of thousands of Korean protestors on the streets during the G-20 FTA talks this month is aware that inking Bush’s NAFTA-style deal does not improve U.S. standing or relations in Korea. That a bad Korea FTA deal was not completed in Seoul means the Obama administration has time to make the handful of other essential changes to Bush’s agreement and avoid a politically disastrous flip-flop on his campaign promises for trade reform. The question is: Will President Obama seize this opportunity to tackle our jobs crisis by starting to reform our failed trade policy like he promised as a candidate? His promised trade reform is a sure winner policywise and politically.

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Lori Wallach: Obama Trade Policy Perils: Korea FTA Talks Resume Tomorrow

November 29, 2010

That the Obama administration did not agree at the G-20 summit to push the same NAFTA-style Korea free trade agreement (FTA) that former President George W. Bush signed in 2007 is understandable. It’s projected to increase the U.S. trade deficit, is wildly unpopular in both countries, and replicates the most threatening NAFTA provisions that promote offshoring and financial deregulation . And, its chapter on labor rights bans references to the International Labor Organization (ILO) Conventions that establish, well, the internationally recognized labor rights. The real question is why the Obama administration would have been willing to sign off on the Bush agreement in Seoul if only the Koreans had agreed to some more market access for U.S. cars and cows. And why they might go for a deal based on those narrow fixes when talks resume tomorrow near Washington. …especially since a large bloc of senior Democratic legislators, unions and other Democratic base groups made clear months ago that a short list of critical deNAFTAization fixes were necessary to avoid a nasty battle in Congress. Recent polling has shown that perhaps the one issue that unites Americans across diverse demographics is opposition to more-of-the-same trade policy. The elections confirmed this , with an unprecedented number of candidates from both parties campaigning on fair trade themes. In its current form, the Korea deal is definitely more-of-the-same . But you wouldn’t know it from the media coverage. You’d think that all anyone cares about are market access issues related to automobiles and beef – and that refusing to move another Bush NAFTA-style FTA somehow undermines Obama’s efforts to double exports in five years. That, despite a recent study showing that, in fact, U.S. exports to countries with which we have NAFTA-style trade deals have grown at half the pace of exports to other countries. I hope they fix the lopsided auto market access provisions and, while they’re at it, the textile terms, which are also unfairly uneven. But dealing with cars and cows is far from sufficient to make the deal acceptable policywise, much less to avoid the foreseeable political disaster if Obama makes Bush’s NAFTA-style trade deal his own. The administration must remove the offshoring-promoting foreign investor protections that provide special privileges to firms that relocate and the new rights for Korean firms to use UN and World Bank tribunals to attack domestic regulatory policies and demand U.S. taxpayer compensation for regulatory costs. A major exception must be added to safeguard recent U.S. and Korean financial reforms from the Bush text’s deregulation requirements. The footnote banning reference to the ILO conventions has to be removed as well. In short, Obama should follow through on his campaign promises . He explicitly identified the Korea FTA’s labor provisions and the “investor-state” enforcement mechanism as problems that needed addressing. Getting rid of the investor-state private corporate enforcement of the deal’s new foreign investor rights is especially critical. Korea is a major capital exporter with about 270 establishments currently in the U.S. that would be newly empowered to raid the Treasury and attack domestic policies using foreign tribunals. These provisions elevate corporations to the same status of sovereign governments by providing them with the right to privately enforce a public treaty. So far, over $326 million in compensation has been paid out by governments to corporations under NAFTA’s similar terms. The cases include attacks on natural resource policies, environmental protection, and health and safety measures. Korea has just as much of an interest in fixing these provisions as we do, and there are indications that Korean officials would be amenable to doing so. Certainly, the Korean public is as upset over them as we are. Anyone who saw the tens of thousands of Korean protestors on the streets during the G-20 FTA talks this month is aware that inking Bush’s NAFTA-style deal does not improve U.S. standing or relations in Korea. That a bad Korea FTA deal was not completed in Seoul means the Obama administration has time to make the handful of other essential changes to Bush’s agreement and avoid a politically disastrous flip-flop on his campaign promises for trade reform. The question is: Will President Obama seize this opportunity to tackle our jobs crisis by starting to reform our failed trade policy like he promised as a candidate? His promised trade reform is a sure winner policywise and politically.

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Charles Gasparino: GM IPO Continues Trend of Rewarding Those Who Failed

November 18, 2010

What do the General Motors and the nation’s big banks have in common? They’ve both been bailed out by the federal government and, were it not for government largess, neither would be here today celebrating the automaker’s largely successful stock offering. It’s an irony that has escaped most of the media amid all the hoopla over GM’s “initial public offering,” which is an odd way to describe what is happening now regarding GM’s return to the public markets. IPOs, of course, are usually reserved for relatively new companies that have created new products or services in such a way that investors see promise in their future. GM, on the other hand, is a washed up maker or inferior cars. Its laundry list of problems — from failing to compete with Japanese brands to a bloated work force — pushed the company into bankruptcy in 2009, from which it emerged only after a $50 billion bailout from the government. Thanks to yesterday’s stock sale, GM is about 2/3 the way through paying back the money it owes the taxpayer. The rest is expected to be paid back over the next few years. So far, it’s unclear if the taxpayers will benefit from any of this; now stripped of many of its liabilities and flush with government handouts, GM is marginally profitable again. The stock opened at a healthy $33 a share (it “popped” on the opening a couple bucks before coming down a bit in price). But some analysts say it will have to double in value over the next year or so for the taxpayer to be made whole. While it’s unclear whether taxpayers will make money out the GM fiasco, it’s pretty clear Wall Street already has. Yesterday’s rally in the stock market was attributed to strong demand for the IPO of a company designated Too Big To Fail. Traders who managed to get their hands on the new GM shares were “flipping” them or selling them sometime after the market opened, which is why the price shot up at the opening before settling down as investors took profits on the initial run up. Even worse were the fees raked in by the big Wall Street firms that underwrote the stock issue. Let’s not forget that GM has company on the government’s Too Big To Fail list, and it’s the big Wall Street firms like Morgan Stanley, JP Morgan, Bank of America, Goldman Sachs and Citigroup, the top underwriters of the deal. Combined, the banks received $135 billion in bailout money during the 2008 financial crisis, and that doesn’t consider the countless billions they received through guarantees and other subsidies over the past two years. They are said to split a little under $120 million in fees, which we are all told is low compared to some other corporate deals. Recently some people at the Wall Street firms have complained not just about the relatively low fees but also about the fact that they had to split those fees with several minority-owned firms, which also have positions in the underwriting group. These outfits, of course, received a much smaller portion of the deal, so they made less money than the big firms. But executives at the large banks noted that many of the minority firms and their executives have made political donations to President Obama, which given the government’s ownership stake in the company, accounted for their presence on the deal. Give me a break. The saddest part about this nonsense is that it actually made its way into the deal’s coverage by a financial news television station (hint: it’s not the one I now work for now). Why is it such nonsense? Aside from the fact that many of GMs’ employees are in fact minorities, that all of the big firms in the main underwriting group were also big contributors to the Obama presidential campaign (for more on this check out my new book Bought and Paid for ), or that in just one example of political cronyism, Tom Nides, the No. 2 executive at lead underwriter Morgan Stanley has been appointed for a top position in the Obama White House, not one minority-owned firm needed a bailout in 2008. In other words, maybe it should be the minority-owned firms running the deal instead of the likes of Morgan Stanley and Goldman Sachs?

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Antitrust Suit Against Inbev, Anheuser-Busch Falls

October 28, 2010

ST. LOUIS — The latest quest by 10 Missouri beer consumers who tried to block InBev’s $52 billion takeover of U.S. beer giant Anheuser-Busch fell flat Wednesday when an appeals court refused to resurrect their antitrust lawsuit. A three-judge panel of the 8th U.S. Circuit Court of Appeals upheld a federal judge’s decision to throw out the lawsuit last year. The suit claimed the 2008 merger of Belgium-based Inbev and St. Louis-based Anheuser-Busch – which created the world’s largest brewer – would diminish competition and raise beer prices. The panel suggested that allowing the lawsuit to go forward now could be counterproductive and fruitless. It was not immediately clear whether the plaintiffs planned more appeals. Messages left with several of their attorneys weren’t returned Wednesday. Federal regulators scrutinized the merger on antitrust grounds but ultimately signed off on it with few caveats. The deal was consummated in November 2008, two months after the group of self-described beer consumers sued. The lawsuit initially sought to block InBev’s acquisition of Anheuser-Busch, the maker of Budweiser that at the time controlled nearly half of the U.S. beer market. The suit cast the deal as a “plain violation” of federal antitrust law, among other things. If the deal went through, the lawsuit insisted, “the beer market in the United States would be controlled by absentee foreign owners (while) consumer welfare and choice and the benefits of competition would be substantially lessened and tend toward the creation of a monopoly.” The suit also claimed that “the constant threat of InBev, the largest brewer in the world, to enter the market” substantially affects the market behavior of Anheuser-Busch and other U.S. brewers. U.S. District Judge Jean Hamilton wasn’t swayed, siding with InBev and Anheuser-Busch when she tossed out the lawsuit in August 2009. In upholding Hamilton’s decision, the 8th Circuit suggested that allowing the lawsuit to go forward could be counterproductive to plaintiffs’ mission. Judge James Loken wrote in the panel’s ruling that a court degree ordering the companies to split would hurt not only employees and distributors, but “damage competition and consumers by crippling the operations of the largest domestic producer of immensely popular products.” Loken also noted that any price benefit for beer drinkers was unclear. Katherine Barrett, Anheuser-Busch Cos. Inc.’s senior associate general counsel, said the brewer welcomed Wednesday’s ruling against “this meritless lawsuit” bearing claims that were “unsupported and speculative.” The deal, in passing regulatory muster, followed the Justice Department’s demand that InBev sell Labatt USA, which sold its Canadian beer in the U.S. “The merger did not increase concentration or adversely affect competition in the U.S. market, and was in full compliance with (federal antitrust law),” Barrett said in a statement. The lawsuit and the deal it sought to scuttle came against the backdrop of an already consolidating U.S. brewing sector. In mid-2008, London-based SABMiller PLC and Molson Coors Brewing Co., based in Denver, combined their U.S. and Puerto Rico operations into MillerCoors, a month after the Justice Department concluded the joint venture wouldn’t reduce competition. In the months before its merger, InBev insisted that what ultimately became Anheuser-Busch InBev would not violate antitrust laws because it would combine breweries that operate in different geographic markets.

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Dollar Thrifty Deal Could Make Rental Cars More Expensive

September 13, 2010

DALLAS — While corporate travelers have been grounded by the slow economy, a lot of vacationers have still been renting cars. That says a lot about why Hertz and Avis are fighting over Dollar Thrifty, a chain known for lower rates that appeal to leisure travelers. Dollar Thrifty Automotive Group Inc. has accepted Hertz’s latest bid of about $1.56 billion for the chain. That would top Avis’ latest offer of more than $1.3 billion. Whoever wins the fight for Dollar Thrifty, renting a car or SUV on vacation might cost a bit more. Fred Lowrance, an analyst with Avondale Partners, said the number of cars offered by a combined Hertz and Dollar Thrifty would be smaller than the two companies’ current fleets. That could lead to higher prices for renters. “You’ll have some fleet coming out of the system, kind of like what we see with the airlines,” Lowrance said, “and as travel demand comes back, you’ll probably see some increases.” Jonathan Weinberg of AutoSlash.com, which tracks the rental business, says car renters have been suffering sticker shock because the recession forced the companies to cut back on fleet upgrades and keep cars longer. “So you end up paying more and you get a car that’s older,” he said. The rental business peaked in 2007 at $30 billion in revenue. It struggled after air travel – a primary source of rental-car customers – slowed significantly the following year. Revenue should reach roughly $25 billion this year, according to research firm IBISWorld. Enterprise controls about 37 percent of the U.S. market, followed by Hertz at 20 percent, Avis Budget at 17 percent, and Dollar Thrifty at under 7 percent, says IBISWorld. The industry has been consolidating for several years. Avis and Budget were spun off by their former owner as Avis Budget Group Inc. in 2006, and Enterprise bought National and Alamo in 2007. Now Hertz wants to add the Dollar and Thrifty brands to its business. “The Dollar Thrifty value segment perfectly complements Hertz’s business, which is premium business and leisure,” said Neil Abrams, a former Hertz executive and now a rental car consultant in Purchase, N.Y. For Avis, the strategy is simple, Abrams said: “They don’t want Hertz to get Dollar Thrifty,” which competes against Avis’ Budget Rent A Car brand. Hertz argues that if Avis were to buy Dollar Thrifty, it would control more than half the value market, which could cause antitrust regulators to question such a deal. To avoid any regulatory hurdles for its own deal, Hertz is conducting a sale of its Advantage value brand. Advantage is far smaller than Budget, Dollar and Thrifty. Dollar Thrifty said late Sunday that its board accepted Hertz Global Holdings Inc.’s new offer of $50 per share, up from the $41 per share it offered in April. Including restricted stock and stock options, the offer is worth $1.56 billion, according to a Hertz spokesman. The new offer includes $43.60 in cash plus 0.6366 of a share of Hertz common stock and $6.87 per share to be paid by Dollar Thrifty as a special cash dividend before the deal closes. Dollar Thrifty would get a $44.6 million reverse breakup fee if Hertz backs out. Avis’ last offer for Dollar Thrifty was $1.3 billion in cash and stock, or more than $47 per share. Some Dollar Thrifty shareholders protested the board’s rejection of the Avis offer, but the board discounted the Avis offer for lack of a breakup fee and said it didn’t adequately address antitrust concerns. Dollar Thrifty, headquartered in Tulsa, Okla., delayed a special shareholders meeting to vote on the Hertz offer from Thursday until Sept. 30. Credit rating agency Moody’s Investors Service, meanwhile, said it is reviewing all its ratings on Hertz for possible downgrade, affecting about $1.8 billion in debt. Moody’s said it expects the Dollar Thrifty acquisition to bring significant long-term benefits to Hertz but said it is concerned that the funding for the deal could put a strain on Hertz’s ability to maintain its current credit profile. Dollar Thrifty shares rose $2.67, or 5.4 percent, to $50.58. Avis shares climbed 73 cents, or 7.1 percent, to $10.95, while Hertz shares gained 79 cents, or 7.9 percent, to $10.84.

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Burger King SOLD To Equity Firm 3G Capital $3.26 Billion

September 2, 2010

CHICAGO — Burger King Holdings Inc., the nation’s perennially No. 2 hamburger chain, said Thursday that it is selling itself to little-known private equity firm 3G Capital in a deal valued at $3.26 billion. Its shares soared to an 18-month high. Thursday’s $24-per-share tender offer comes after a day of speculation about the deal that sent shares up more than 15 percent. The offer is a nearly 46 percent premium over the company’s stock price before rumors of a buyout began circulating. Under the terms of the deal with 3G, Burger King’s Chairman and CEO John Chidsey will become co-chairman of the board. 3G Managing Partner Alex Behring will be the other co-chairman. Burger King, with its 12,100 locations around the world, lags its far larger competitor McDonald’s Corp., and has struggled to keep up with its rival during the economy’s rollercoaster of the past two years. Among the biggest problems: high unemployment among its most important, but notoriously fickle, group of customers: young men between 18 and 34. It’s more than the bad the economy that’s led to five consecutive quarters of declines in an important performance measure of sales at locations open at least a year. Burger King’s once-unique concept of flame-broiled burgers isn’t so rare any more, thanks to a boom in gourmet hamburgers from smaller competitors such as Five Guys, The Counter and In-N-Out Burger. And it’s hard for Burger King to make solid profits while competing with McDonald’s super-low prices. “McDonald’s is just eating their lunch,” said Bob Goldin an analyst at the food consulting firm Technomic Inc. “Burger King’s very heavily focused on a core audience of the younger male. And with that group, their attention goes to wherever has a better deal or whatever is hotter.” Burger King is based in Miami and became publicly traded in 2006, four years after a earlier consortium of investment firms acquired the company. The group – TPG Capital, Bain Capital Partners and Goldman Sachs Funds – still owns 31 percent of Burger King’s outstanding shares and have agreed to tender their stock in the deal. 3G Capital, a six-year-old firm founded by Pavel Begun and Cory Bailey, has described its investment strategy in simple terms: buy businesses at a discount, hold onto them for long-term growth and don’t get bogged down with quarterly results. While the New York company has a slew of partial or controlling holdings in South and Central American businesses, it hasn’t made many huge waves – or fully bought out many corporations. But its investments hint that its strategy involves investing in businesses that deal heavily with consumers. The firm owns controlling or partial stakes in major beer maker Anheuser-Busch InBev, Lojas Americanas, a major non-food and online retailer in Latin America, and America Latina Logistica, the largest railroad and logistics company in Latin America. 3G Capital is expected to begin its effort to acquire the outstanding shares by Sept. 17. Burger King shares rose $4.57, or 24.2 percent, to $23.43 in midday trading Thursday. ___ Fredrix reported from New York.

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United-Continental Merger Addresses Justice Department Antitrust Concerns

August 27, 2010

MINNEAPOLIS — United and Continental airlines moved a big step closer to their proposed combination on Friday, with the Justice Department saying it has no more antitrust concerns about the deal. On Friday, the two airlines said they would lease takeoff and landing slots in Newark to Southwest Airlines. The Justice Department says that clears up its main competitive concern. Shareholders at Continental Airlines Inc. and United parent UAL Corp. are set to vote on the deal on Sept. 17. The combination would create the world’s biggest airline. The Justice Department says the two airlines overlap on a limited number of routes. The biggest overlap was at Newark (N.J.) Liberty International Airport. Continental and United operate 442 daily roundtrip flights in and out of Newark. Under the deal announced Friday, Southwest would get enough slots from Continental to operate up to 18 roundtrip flights there by June 2011. The move increases competition for Continental at its Newark hub, as well as for United. Currently, Southwest operates a few flights at New York’s LaGuardia Airport but none at Newark or Kennedy. Mike Boyd, an airline and airport consultant in Colorado, said giving up a few slots at Newark was an easy decision for the combining giants. “United and Continental want to get this merger done,” Boyd said, and if federal regulators “stick their nose in there and say, ‘Give something up,’ they’re going to give it up.” Bob Jordan, Southwest’s executive vice president for strategy, said Newark would complement his airline’s service at LaGuardia and increase competition in the New York market. Southwest said it was still deciding what cities it would serve from Newark. From LaGuardia, it flies only to Chicago and Baltimore. ___ Koenig reported from Dallas.

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Local Governments Held Hostage By Bank Deals

August 5, 2010

In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution. … Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated. To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.

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Video: Barratt Sees `Light at The End of The Tunnel’ for BP: Video

July 20, 2010

July 20 (Bloomberg) — Jonathan Barratt, managing director at Commodity Broking Services Pty in Sydney, talks with Bloomberg’s Linzie Janis about the outlook for BP Plc. BP seeks cash to meet the costs of the worst oil spill in U.S. history. BP’s talks to sell half its stake in Alaska’s Prudhoe Bay oil field to Apache Corp. stalled twice over the weekend, raising doubts about whether the deal will be completed, said a person with knowledge of the matter.(Source: Bloomberg)

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Video: BP-Apache Talks on Prudhoe Bay Stake Said to Stall: Video

July 19, 2010

July 19 (Bloomberg) — BP Plc’s talks to sell half its stake in Alaska’s Prudhoe Bay oil field to Apache Corp. stalled twice over the weekend, raising doubts about whether the deal will be completed, said a person with knowledge of the matter. Bloomberg’s Scarlet Fu reports. (Source: Bloomberg)

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Video: BP-Apache Talks on Prudhoe Bay Stake Said to Stall: Video

July 19, 2010

July 19 (Bloomberg) — BP Plc’s talks to sell half its stake in Alaska’s Prudhoe Bay oil field to Apache Corp. stalled twice over the weekend, raising doubts about whether the deal will be completed, said a person with knowledge of the matter. Bloomberg’s Scarlet Fu reports. (Source: Bloomberg)

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Video: Atkins Says SEC Case Against Goldman Sachs `Very Weak’: Video

July 16, 2010

July 16 (Bloomberg) — Paul Atkins, a former member of the Securities and Exchange Commission, talks about Goldman Sachs Group Inc.’s $550 million settlement with U.S. regulators yesterday and the outlook for the SEC. Goldman Sachs was accused by the SEC of defrauding investors in a mortgage-backed collateralized debt obligation by failing to tell them that hedge fund Paulson & Co., which was planning to bet against the deal, had helped to design it. Atkins speaks with Deirdre Bolton on Bloomberg Television’s “InBusiness With Margaret Brennan.” (Source: Bloomberg)

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David Fiderer: Why Goldman Got the S.E.C. to Back Off

July 15, 2010

The weaknesses in the S.E.C.’s case against Goldman were always obvious. To win, the government needed to prove that Goldman lied, and that the lie mattered. The truth is that the bigger deceptions were not lies, but distractions. All the marketing materials and legal documents for Abacus 2007-AC1 were distractions from the most important part of the deal, which was accessible from data service providers but never disclosed by Goldman. Nowhere did Goldman divulge the current performance data on the assets insured by the CDO, 90 deeply subordinated tranches of subprime mortgage bonds. At the end of the day, an investor who bought Abacus 2007-AC1 was buying a static portfolio of risks. It didn’t matter who chose the underlying investments in the CDO, or whether John Paulson was destined to receive a windfall. If you were a sophisticated investor who had done his due diligence, you didn’t need to be told that the deal was designed to fail. You would have figured it out for yourself. If you actually reviewed the performance of mortgage backed securities held by the CDO and understood how cash flow waterfalls and delinquency triggers worked, then you could see that subordinate tranches being insured for the benefit of Goldman were already worthless when the CDO closed. You could also figure out that the rating agencies had deliberately delayed announcing downgrades of the RMBS within the CDO, in order to keep the markets and the deal flow moving. But the dirty little secret on Wall Street was that all too often, due diligence was a sham. People went through the motions without a thorough understanding of what they were doing, like school kids who write reports by plagiarizing the encyclopedia. Investors saw triple-A ratings and stopped thinking. Goldman didn’t need to lie in order to sell “shitty deals.” It only needed to find a greater fool with an impressive resume at a multibillion-dollar institution who didn’t ask too many questions. And it was able to keep the scam going because all CDOs remain shrouded in secrecy to this day. The only people who can buy access to CDO performance data on ABSNet are actual investors, who are subject to nondisclosure agreements. The risk to Goldman is that more of its dirty laundry would be exposed. As we learned from David Viniar’s testimony before the Financial Crisis Inquiry Commission, the company remains in lockdown mode. And once again, the S.E.C. shows little appetite for digging deeper, especially since its new COO of the Enforcement Division is a 30-year-old kid from Goldman.

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Video: Geffner Says Both Sides Won in Goldman SEC Settlement: Video

July 15, 2010

July 16 (Bloomberg) — Ron Geffner, a partner at Sadis & Goldberg LLP, talks with Bloomberg’s Susan Li about Goldman Sachs Group Inc.’s agreement to pay $550 million and change its business practices to settle U.S. regulatory claims it misled investors in collateralized debt obligations linked to subprime mortgages. Under the deal, Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said. Geffner speaks from New York. (Source: Bloomberg)

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ITA Software: Google Buys Travel Software Maker For $700M

July 2, 2010

SAN FRANCISCO — Google Inc. plans to buy travel technology company ITA Software Inc. in a $700 million deal that would enable the Internet search leader to steer more of the airline reservations booked on the Web. The all-cash acquisition announced Thursday signals Google’s intention to challenge flight-comparison services that are ITA customers, including Kayak, FareCompare, Hotwire and Microsoft Corp.’s Bing Travel. The deal is likely to face a rigorous review by federal antitrust regulators. “There is clearly more room for competition and innovation” in online travel, Google CEO Eric Schmidt said in a conference call. “We will improve the way flight information is organized.” ITA Software, a 500-employee company created in 1996 by computer scientists at the Massachusetts Institute of Technology, sells technology that helps run the reservation systems of many airlines, including American, Southwest, Alaska and Continental. Its software also powers the tools that other travel websites use to track air fares. The widespread reliance on ITA’s technology means federal regulators are likely to spend six months to a year trying to determine whether the acquisition will give Google an unfair advantage in the rapidly growing online travel market, said Ted Henneberry, an antitrust lawyer in Washington for Orrick, Herrington & Sutcliffe. “This is going to raise a lot of eyebrows,” he said. Schmidt declined to predict when the deal might close, but said he expected Google would ultimately win approval after regulators take a “fair amount” of time to review the deal. “We are pretty confident that this is pro-competitive and pro-consumer,” Schmidt said. He declined to say how much Google will have to pay if the proposed purchase is blocked by regulators. Both the Federal Trade Commission and U.S. Justice Department declined to comment Thursday. Online travel industry analyst Henry Harteveldt predicted the acquisition will be cleared because ITA Software isn’t a direct competitor to Google. If it clears the antitrust hurdle, Google will be picking up expertise that will help improve the quality of its search results in one of electronic commerce’s biggest markets. Consumers and small-business travelers in the U.S. will spend about $45 billion on airline tickets booked online this year, and that figure is expected to rise to $59 billion by 2014, Harteveldt said. And with thousands of engineers at its disposal, Google conceivably could build upon ITA’s success in the airline industry to expand into hotel, rental car and cruise reservations. Google is counting on ITA’s expertise to improve the quality of its search results when people are looking to make airline reservations. Schmidt predicted the biggest winners in this deal would be consumers, but he also predicted Google would be able to drive more traffic to airlines and travel agencies such as Orbitz and Expedia. Google would profit from ITA’s technology by selling more ads alongside the flight data. Bing has been picking up more traffic with features that help people figure out whether the prices of airline tickets are likely to increase or decrease. Like other search engines specializing in travel, Bing checks multiple sites at once for the best deals and sends users to those sites to book there. Travel websites generally earn fees for sending traffic to flight booking sites, but Google appears more interested in improving its travel search service so that it can retain users and sell more ads. “That’s the allure for them,” said Gary Reback, an antitrust attorney who has been trying to convince regulators that Google has been abusing its power. “They want to control all that traffic” that has been going to the specialty travel sites. Google intends to honor all of ITA’s existing contracts if the acquisition is approved. It’s unclear whether Google would still want to work with some of its rivals after the contracts expire. This isn’t the first Google acquisition to come under intense scrutiny. Regulators took nearly a year to approve the company’s $3.2 billion purchase of online ad service DoubleClick in 2008 and six months to OK its recent $750 million takeover of mobile ad service AdMob. Those successes may have emboldened Google to buy ITA Software, too, Henneberry and Reback said in separate interviews. “If the government lets this one go through, then I don’t know what it will take for them to stop any deal” by Google, Reback said. Shares in Google rose 40 cents to $439.89 in extended trading Thursday after the announcement. Earlier, its shares ended the regular session down $5.46, or 1.2 percent, to close at $439.49. ___ AP Business Writer Marcy Gordon in Washington contributed to this report.

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UBS Tax Deal: Switzerland Approves Treaty With U.S. On Second Try

June 16, 2010

GENEVA — The Swiss parliament on Tuesday approved a treaty with the United States that will hand thousands of files on suspected tax cheats to U.S. authorities, but obstacles remain that could delay the deal for several more months. The government hopes the agreement will eventually end UBS AG’s three-year battle with U.S. tax authorities that culminated in revelations the bank had for years helped American clients hide millions of dollars in offshore accounts. Under the treaty that was painstakingly crafted by Bern and Washington last year after months of negotiations, Switzerland has agreed to divulge the names of 4,450 UBS clients suspected of tax evasion. Swiss authorities have already transmitted the names of about 400 UBS clients who signed waivers as part of the Internal Revenue Service’s voluntary disclosure program, according the Swiss Federal Tax Administration. A further 100 UBS clients gave their consent directly to Swiss authorities. Lawmakers in Switzerland’s lower house voted 81 to 61 in favor of the government-backed deal, and 53 abstained. The vote passed after the powerful Swiss People’s Party dropped its opposition. The nationalist party and the left-wing Social Democrats blocked a first attempt last week to have parliament approve the treaty, which has been portrayed by some as a nail in the coffin for Swiss banking secrecy. But details remain to be ironed out that could yet hold up the deal. Parliament’s lower house decided Tuesday that the treaty can be put to the Swiss public in a referendum before it finally becomes law. The upper house has yet to approve such a referendum and has until Friday to deliberate. A popular ballot would make Switzerland miss a late August deadline to hand over all 4,450 names because the vote would be held in November at the earliest. Frank Keith, a spokesman for the Internal Revenue Service, said the U.S. tax agency expects Switzerland to honor an agreement to divulge the names of UBS clients suspected of tax agency. He added that the U.S. is “prepared to use all available options, including the U.S. courts, should the present efforts fail.” The deal is crucial to UBS, which has faced intense pressure from U.S. authorities since 2007. Last year the bank agreed to turn over hundreds of client files and pay a $780 million penalty in return for a deferred prosecution agreement. But Washington has signaled that unless UBS reveals the further 4,450 American names demanded in the U.S.-Swiss agreement, it may face a crippling civil investigation just at a time when the bank is recovering from the subprime crisis and seeking to rebuild its U.S. business. UBS spokesman Jean-Raphael Fontannaz said the bank will not comment as long as the decision-making process in parliament is still ongoing. Justice Minister Eveline Widmer-Schlumpf tried to disperse fears of some lawmakers that the treaty might open the door to the United States – or other countries – receiving client data from other Swiss banks. “This is about a single agreement … on a clearly defined group of clients who allegedly committed tax fraud or tax evasion,” she told parliament, adding that it will have “no impact on future cases.” Widmer-Schlumpf said she was confident that the United States would accept a delay in handing over the names if the Swiss people were asked to vote on the deal in a referendum. But William Sharp, a tax lawyer who represents some American UBS clients, said he would be surprised if the U.S. passively accepted a further delay. “The deferred prosecution agreement may be revisited in a more aggressive context, the settlement agreement may be deemed in breach, or the U.S. may seek to move Switzerland to ‘black list’ status, among other choices,” Sharp said. Shares of UBS closed up 1.97 percent in trading Tuesday, reaching 15.51 Swiss francs ($13.6) on the Zurich exchange. The Swiss business organization economiesuisse said Tuesday’s vote was an important step for Switzerland and showed it was living up to its commitments toward the U.S. Business groups have warned that failure to ratify the deal risked losing thousands of jobs should Washington decide to retaliate. ____ Associated Press Writer Frank Jordans contributed to this report.

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Prudential’s Thiam Faces Showdown Talks with Investors After AIA Bid Fails

June 2, 2010

By Kevin Crowley and Jon Menon June 3 (Bloomberg) — Prudential Plc Chief Executive Officer Tidjane Thiam spent three months failing to persuade investors to pay $35.5 billion for AIA Group Ltd. Now he has to convince them that he should keep his job. Thiam, 47, dropped his attempt to win shareholder support for the company’s biggest takeover yesterday and agreed to pay a 152.6 million-pound ($223 million) breakup fee to American International Group Inc. Prudential Chairman Harvey McGrath , 58, is leading discussions with shareholders about the company’s and the management’s future, according to two people with knowledge of the matter. Thiam plans to remain as CEO, the people said. “This deal has not been handled well in terms of the problems with the regulator and the price,” said Robert Talbut , chief investment officer at Royal London Asset Management Ltd., which manages about $52 billion and is a Prudential shareholder. “We would like to have a meeting with management to better understand how the company got themselves into that predicament.” Thiam will publicly meet shareholders for the first time since the deal’s collapse at the firm’s annual general meeting in London on June 7. He is facing criticism from investors for failing to consult with shareholders before making its record bid for AIG’s main Asian unit and then having a rights offer delayed almost two weeks by the U.K. regulator. ‘New Leadership’ There must be “new leadership” with “a clear strategy to stimulate the share price,” said Guy de Blonay , who helps manage 21.1 billion pounds at Jupiter Asset Management Ltd. in London. “The inability to put the deal through has shown some weakness. There’s clearly a capability issue emerging.” Thiam became CEO eight months ago after spending 18 months at the insurer as finance director. He has worked at London- based Aviva Plc, where he helped orchestrate a 16.9 billion- pound bid for his current employer. The offer was rejected and abandoned by Aviva CEO Richard Harvey within a week. “Tidjane remains our chief executive — there is no change,” Prudential spokesman Robin Tozer said in a telephone interview yesterday. “Our management is speaking to shareholders all the time about a variety of issues.” It isn’t the first time a failed takeover has placed pressure on a Prudential CEO. The insurer was outbid by AIG in 2001 for American General Corp. in an attempt to become the biggest seller of annuities in the U.S. The failure contributed to the ouster of Prudential CEO Jonathan Bloomer in 2005. Dividend Strategy Thiam has his supporters. Shareholders “agreed with the strategy of the deal, but not on the price,” said Paul Morgan , a fund manager at Barings Investment Services Ltd. in London, which has $44 billion under management. “This shouldn’t be the endgame for him.” Rival U.K. insurers Aviva and Legal & General Group Plc have been generating more cash to fund dividend payments to shareholders in the past six months. To regain investor confidence, Thiam needs to adopt a similar low-risk strategy, Morgan said. “The company needs to get back to basics.” Thiam could be replaced by fellow executives including Clark Manning , CEO of Prudential’s U.S. division, or Michael McLintock , head of the insurer’s fund unit, M&G Investment Management Ltd., said Marcus Barnard , a London-based analyst at Oriel Securities Ltd. Thiam, along with McGrath and Prudential’s Asia CEO Barry Stowe , were “pretty committed” to the AIA takeover, said Barnard, who has a “sell” rating on the stock. “It’s not clear whether the three people want to stay on or whether they have the mandate to run the business from shareholders.” Mark Tucker Former CEO Mark Tucker may replace Thiam on a temporary basis should he leave, the London-based Times reported today, without saying where it got the information. McLintock, 49, and Tucker, 52, couldn’t immediately be reached for comment. Manning, 51, declined to comment. One shareholder calling for an immediate change of management is Robin Geffen , founder and chief investment officer of Neptune Investment Management Ltd. in London. Geffen announced May 27 he had garnered 20 percent of investors to oppose the takeover. Prudential said it was asking AIG to lower the price a day later. “They really have shown complete contempt for shareholders,” he said. “It’s never good to leave the lunatics in charge of the asylum. Their positions are completely untenable.” Prudential Breakup McLintock, who has run M&G since before it was bought by Prudential in 1999, should “take over as soon as possible,” Geffen said. Half of Prudential’s largest 10 investors supported his attempts to stop the takeover, he said, declining to identify particular shareholders. Prudential may be a takeover target itself or face pressure to break up the group, according to Jonathan Newman , an analyst at Brewin Dolphin Holdings Plc in London. The insurer has three separate divisions spread over the U.K., U.S. and Asia. “This is a pot of three businesses that don’t have to stay together, therefore, a break up should be on the cards at some point,” Newman said. To contact the reporters on this story: Kevin Crowley in London at kcrowley1@bloomberg.net ; Jon Menon in London at jmenon1@bloomberg.net

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Prudential’s Failed AIA Bid May Cost Company $660 Million, Thiam His Job

June 2, 2010

By Kevin Crowley and Jon Menon June 2 (Bloomberg) — Prudential Plc said the collapse of its $35.5 billion takeover of American International Group Inc.’s main Asian unit will cost it about 450 million pounds ($660 million). The failure may also cost Chief Executive Officer Tidjane Thiam his job. The costs, about a third of 2009 operating profit, include 153 million pounds in break fees and 81 million pounds in underwriting charges and currency hedges, Prudential said in a statement today. The insurer also said it’s in talks to end the deal after failing to win a $5.1 billion cut in the price. Thiam sought to lower the purchase price after shareholders including BlackRock Inc. said the transaction was too costly. The takeover is the biggest to collapse since miner BHP Billiton Ltd. abandoned its $66 billion acquisition of Rio Tinto Group in November 2008, according to data compiled by Bloomberg. “What a mess,” said Ben Collett , head of equities at broker Louis Capital Markets in Hong Kong. “This will make it very hard for Thiam to continue. Even if they claw back some costs for the deal, it’s still a massive waste, and is anyone in the mood for that in Europe?” Prudential, which was due to pay AIG in dollars after raising the cash in pounds, may have made a “significant gain” on a 500 million-pound currency hedge, according to Barrie Cornes , a London-based analyst at Panmure Gordon & Co. with a “buy” rating on the stock. The insurer fell 2.7 percent to 560 pence as of 9:15 a.m. in London today. The stock rose 2.2 percent to HK$64.90 at the 4 p.m. close of trading in Hong Kong. Offer Cancelled Prudential will also cancel a $21 billion rights offer it had planned to fund the offer. The share sale would have been the biggest by a British company. At least 20 companies worldwide postponed or withdrew initial offerings in May as the European debt crisis sent the MSCI World Index of developed- nation stocks down 9.9 percent. “We agreed with shareholders that a renegotiation of the terms was necessary given market movements, but it has not proved possible to reach agreement,” Thiam said in the statement today. AIG Chief Executive Officer Robert Benmosche , 66, may return to an earlier plan of a public offering in Asia to divest AIA, which operates in markets spanning China to Australia and has more than $60 billion in assets. “Without a doubt, the size of AIA magnifies the execution risk of closing a deal,” said Angelo Graci , managing director at Chapdelaine Credit Partners, a New York-based bond broker. “At this point it’s difficult to see another single buyer come in with a competitive price.” AIA IPO AIG announced it would divest AIA in October 2008 and last year said it would seek a public listing on an Asian stock exchange. AIG, which was rescued by the U.S. in 2008, could return to its earlier plan of holding a stock offering, the Treasury Department said May 26. “It’s not surprising given that Prudential’s shareholders initially thought AIA had more high-growth China exposure than it did,” said Winston Barnes , head of sales and trading for Asian markets at WJB Capital Group Inc. in San Francisco. “I would expect if Pru doesn’t come back again, AIA would IPO in Hong Kong.” Thiam, who took over as CEO in October, “will probably have to review his position,” said Paul Mumford , who helps manage 417 million pounds including Prudential shares at Cavendish Asset Management Ltd. in London. Mumford opposed the deal when it was announced in March. The original takeover offer included about $25 billion in cash and the rest in securities linked to Prudential shares. Prudential’s planned revision to $30.4 billion included $23 billion in cash, the insurer said yesterday. Break Up? The combined company would have created the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam. Prudential’s shareholders may now favor breaking up the business, according to Rupert Armitage , head of U.K. equities at Shore Capital Group Ltd. “It leaves them very vulnerable to a break up,” he said in a Bloomberg Television interview. “The chairman and the CEO, having staked their reputations on it, it puts them in an almost untenable position.” Prudential’s bid was hurt by a series of mistakes in dealing with regulators and shareholders. Ivory Coast-born Thiam, 47, was criticized by shareholders in March for agreeing to join the board of Paris-based bank Societe Generale SA , a decision he reversed a day later. Prudential was also forced to delay the start of the planned rights offer in May after the U.K. regulator asked the firm to hold more capital in reserve. Opposition to Deal Neptune Investment Management Ltd., a London-based investor, said on May 26 it had 20 percent of shareholders to back its opposition to the transaction. Thiam, who needed 75 percent of shareholders to back the offer, made a failed attempt to resurrect the deal by asking AIG to reduce the price two days later. The takeover was to be the world’s biggest this year, according to data compiled by Bloomberg. The collapse of the deal deprives Prudential’s advisers of as much as 850 million pounds in fees. Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc. AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley. To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net ; Kevin Crowley in London at kcrowley1@bloomberg.net

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Prudential Discussing Price Cut for AIG Asia Unit After Slump Soured Deal

May 28, 2010

By Kevin Crowley May 28 (Bloomberg) — Prudential Plc , the U.K. insurer seeking to buy American International Group Inc. ’s Asian unit in a $35.5 billion acquisition, said it’s talking with AIG about changing the terms of the deal. Discussions between the companies “may or may not lead to a change in the terms of the combination,” Prudential said today in a statement. Chief Executive Officer Tidjane Thiam, 47, was in New York yesterday to make his case to executives that the price for AIA should be cut, a person with knowledge of the situation said. Thiam is facing criticism from major investors as he asks for $21 billion, the biggest rights offer for an acquisition on record. Prudential’s market value is 13.8 billion pounds ($20 billion). The deal has already been delayed by the U.K. regulator over concerns about the insurer’s capital reserves and the biggest decline in equity markets since the financial crisis has dampened investors’ enthusiasm for the takeover. “It’s probably the least ideal market to raise capital,” said James Buckley , a London-based fund manager at Baring Asset Management Ltd. who helps oversee $44 billion, including Prudential stock. “The market is not completely closed for small rights offers, but for major deals like Prudential, it’s inevitably tough.” Investors owning as much as 20 percent of Prudential stock plan to vote against the takeover at the annual general meeting on June 7, Neptune Investment Management Ltd. , a London-based shareholder, said this week. Thiam needs 75 percent of investors to support the rights offer for the deal to succeed. BlackRock, Fidelity BlackRock Inc. and Fidelity Investments are among major Prudential shareholders that have voiced concern the deal is too expensive, said the person, who declined to be identified because the discussions are private. Some shareholders are demanding a reduction to as low as $30 billion, a price AIG’s board is unlikely to approve, the person said. “We have a signed agreement with Prudential, and we expect them to use their best efforts to live up to it,” Mark Herr , a spokesman for New York-based AIG, said late yesterday. Speculation the deal would collapse was “unfounded,” Prudential spokesman Ed Brewster said earlier this week. “The acquisition of AIA by Prudential represents a compelling combination that can deliver very attractive long-term returns to our shareholders,” he said. Public Offering Option The U.S. Treasury Department, which helped fund the $182.3 billion bailout of AIG, hasn’t asked the company to find a compromise on the AIA deal, spokesman Andrew Williams said in an e-mail. He commented after the Daily Telegraph reported that the Treasury encouraged the insurer to negotiate to preserve the takeover of AIA. AIG, which is selling assets to repay the U.S. bailout, had been planning a public offering of AIA until announcing the Prudential deal in March. AIG could return to the public- offering option if Prudential shareholders reject the deal, Jim Millstein , the Treasury’s chief restructuring officer, said this week in Washington. “It would certainly be a mistake to not be willing to renegotiate,” said Angelo Graci , managing director at Chapdelaine Credit Partners in New York. “There are meaningful risks to going back and pursuing an IPO; it would take longer, and the valuation would have a significant amount of uncertainty.” AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc., the data show. Funding Plans Prudential plans to fund the AIA purchase through the $21 billion rights offer, including fees to banks, $10.5 billion of new shares and other securities and by selling debt. The offer is the biggest in U.K. corporate history. Capital Research & Management Co., Prudential’s biggest shareholder, would have to pay about 1.89 billion pounds to take up its rights in full, data compiled by Bloomberg show. The next three biggest holders, Blackrock, Legal & General Group Plc and Norges Bank, would pay a total of about 1.96 billion pounds for their full allocation of shares. Not all Prudential’s directors plan to take up their rights in full, Chairman Harvey McGrath said this week. Michael McLintock , CEO of Prudential’s fund-management unit, would have to pay about 3.4 million pounds to fully back the transaction. “In uncertain times investors aren’t as willing to take as much risk, and it makes it harder to raise funds for expansion,” said Peter Braendle , who helps oversee about $51 billion at Swisscanto Asset Management AG in Zurich and hasn’t decided whether he’ll back the rights offer. “Investors prefer to have a bit more cash.” Market Concern Prudential, which yesterday posted its steepest increase since August, was down 0.8 percent at 543 pence as of 9:43 a.m. in London trading. The insurer’s share price was 602.5 pence on Feb. 26, the last trading day before the deal was announced. Prudential shares were suspended in Hong Kong earlier today before the company’s statement. The combined Prudential-AIA would be the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam. Paying $35.5 billion for AIA will create an entity worth $60 billion by 2013, Thiam said this month. “The deal raises the question why the company is trying to pursue it if a substantial number of shareholders are opposing it,” said Tom Kirchmaier , a fellow at the London School of Economics. “For me the concerns in the debt market just mirror those in the equity market, and the market might just kill a deal which it considers a bad deal.” To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

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Prudential Discussing Price Cut for AIG Asia Unit After Slump Soured Deal

May 28, 2010

By Kevin Crowley May 28 (Bloomberg) — Prudential Plc , the U.K. insurer seeking to buy American International Group Inc. ’s Asian unit in a $35.5 billion acquisition, said it’s talking with AIG about changing the terms of the deal. Discussions between the companies “may or may not lead to a change in the terms of the combination,” Prudential said today in a statement. Chief Executive Officer Tidjane Thiam, 47, was in New York yesterday to make his case to executives that the price for AIA should be cut, a person with knowledge of the situation said. Thiam is facing criticism from major investors as he asks for $21 billion, the biggest rights offer for an acquisition on record. Prudential’s market value is 13.8 billion pounds ($20 billion). The deal has already been delayed by the U.K. regulator over concerns about the insurer’s capital reserves and the biggest decline in equity markets since the financial crisis has dampened investors’ enthusiasm for the takeover. “It’s probably the least ideal market to raise capital,” said James Buckley , a London-based fund manager at Baring Asset Management Ltd. who helps oversee $44 billion, including Prudential stock. “The market is not completely closed for small rights offers, but for major deals like Prudential, it’s inevitably tough.” Investors owning as much as 20 percent of Prudential stock plan to vote against the takeover at the annual general meeting on June 7, Neptune Investment Management Ltd. , a London-based shareholder, said this week. Thiam needs 75 percent of investors to support the rights offer for the deal to succeed. BlackRock, Fidelity BlackRock Inc. and Fidelity Investments are among major Prudential shareholders that have voiced concern the deal is too expensive, said the person, who declined to be identified because the discussions are private. Some shareholders are demanding a reduction to as low as $30 billion, a price AIG’s board is unlikely to approve, the person said. “We have a signed agreement with Prudential, and we expect them to use their best efforts to live up to it,” Mark Herr , a spokesman for New York-based AIG, said late yesterday. Speculation the deal would collapse was “unfounded,” Prudential spokesman Ed Brewster said earlier this week. “The acquisition of AIA by Prudential represents a compelling combination that can deliver very attractive long-term returns to our shareholders,” he said. Public Offering Option The U.S. Treasury Department, which helped fund the $182.3 billion bailout of AIG, hasn’t asked the company to find a compromise on the AIA deal, spokesman Andrew Williams said in an e-mail. He commented after the Daily Telegraph reported that the Treasury encouraged the insurer to negotiate to preserve the takeover of AIA. AIG, which is selling assets to repay the U.S. bailout, had been planning a public offering of AIA until announcing the Prudential deal in March. AIG could return to the public- offering option if Prudential shareholders reject the deal, Jim Millstein , the Treasury’s chief restructuring officer, said this week in Washington. “It would certainly be a mistake to not be willing to renegotiate,” said Angelo Graci , managing director at Chapdelaine Credit Partners in New York. “There are meaningful risks to going back and pursuing an IPO; it would take longer, and the valuation would have a significant amount of uncertainty.” AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc., the data show. Funding Plans Prudential plans to fund the AIA purchase through the $21 billion rights offer, including fees to banks, $10.5 billion of new shares and other securities and by selling debt. The offer is the biggest in U.K. corporate history. Capital Research & Management Co., Prudential’s biggest shareholder, would have to pay about 1.89 billion pounds to take up its rights in full, data compiled by Bloomberg show. The next three biggest holders, Blackrock, Legal & General Group Plc and Norges Bank, would pay a total of about 1.96 billion pounds for their full allocation of shares. Not all Prudential’s directors plan to take up their rights in full, Chairman Harvey McGrath said this week. Michael McLintock , CEO of Prudential’s fund-management unit, would have to pay about 3.4 million pounds to fully back the transaction. “In uncertain times investors aren’t as willing to take as much risk, and it makes it harder to raise funds for expansion,” said Peter Braendle , who helps oversee about $51 billion at Swisscanto Asset Management AG in Zurich and hasn’t decided whether he’ll back the rights offer. “Investors prefer to have a bit more cash.” Market Concern Prudential, which yesterday posted its steepest increase since August, was down 0.8 percent at 543 pence as of 9:43 a.m. in London trading. The insurer’s share price was 602.5 pence on Feb. 26, the last trading day before the deal was announced. Prudential shares were suspended in Hong Kong earlier today before the company’s statement. The combined Prudential-AIA would be the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam. Paying $35.5 billion for AIA will create an entity worth $60 billion by 2013, Thiam said this month. “The deal raises the question why the company is trying to pursue it if a substantial number of shareholders are opposing it,” said Tom Kirchmaier , a fellow at the London School of Economics. “For me the concerns in the debt market just mirror those in the equity market, and the market might just kill a deal which it considers a bad deal.” To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

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THL Partners Sells Michael Foods to Goldman Buyout Fund for $1.7 Billion

May 21, 2010

By Jason Kelly and Matthew Boyle May 21 (Bloomberg) — Private-equity firm Thomas H. Lee Partners LP agreed to sell Michael Foods Inc., a supplier of refrigerated foods, to a fund run by Goldman Sachs Group Inc. for about $1.7 billion. Thomas H. Lee, also known as THL Partners, will continue to own about 20 percent of the company after the deal closes, according to a statement today from Minnetonka, Minnesota-based Michael Foods. Private-equity dealmaking is accelerating as the economy stabilizes and financing becomes available for new transactions. Thomas H. Lee, based in Boston, will make about three times the $290 million it put up to buy Michael Foods in 2003, said a person familiar with the deal who declined to be named because the company is closely held. “Food companies have always been a favorite of private- equity firms because of the strength and stability of their cash generation,” Christopher Growe , a Des Peres, Missouri-based analyst with Stifel Nicolaus & Co., said in an e-mail. “With the credit market wide open today, it would seem like we could see a much more active private-equity market.” $1.05 Billion Purchase Thomas H. Lee agreed to buy Michael Foods for $1.05 billion in 2003 from a group of owners including private-equity firms Vestar Capital Partners and Goldner Hawn Johnson & Morrison Inc. Executives also held part of the food company, which they took private in April 2001 for about $800 million. Doughnut seller Dunkin Brands Inc. and Aramark Corp. are among Thomas H. Lee’s holdings. The firm started in 1974 and has invested in about 100 companies. Michael Foods makes egg products, refrigerated potato edibles, cheese and dairy items. The company reported 2009 sales of $1.54 billion, a 15 percent decline from 2008. As the world’s largest processor of eggs, according to its website, the company gets about two-thirds of sales from related products, such as AllWhites liquid egg whites. Crystal Farms cheese and Simply Potatoes are among its brands. Its net income rose 48 percent in 2009 to $69.5 million, compared with $46.9 million in the year-ago period, the company said on its website in March. James E. Dwyer Jr., Michael’s president and chief executive officer, has pursued a strategy of lowering costs and focusing on higher-margin items such as low- cholesterol and pre-cooked egg products. He joined the company in November from supermarket firm Ahold USA. Advising Michael Foods and THL were BofA Merrill Lynch, according to today’s statement. Weil, Gotshal & Manges LLP was their legal adviser. Law firm Fried, Frank, Harris, Shriver & Jacobson LLP advised Goldman Sachs’s GS Capital Partners fund. To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net

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Citigroup Didn’t Say Morgan Stanley Was Short When Selling `Jackson’ CDO

May 21, 2010

By Bradley Keoun May 21 (Bloomberg) — Citigroup Inc. sold a series of mortgage-linked securities without disclosing that Morgan Stanley helped shape them while betting they would fail, two people with knowledge of the matter said. Marketing documents for the $205 million Jackson Segregated Portfolio, underwritten by Citigroup in 2006, don’t say who picked the underlying mortgage bonds. A Morgan Stanley unit helped select the bonds, the people said, speaking anonymously because the deal was private. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million of losses, data compiled by Bloomberg show. “Failure to identify that there was a third party participating who would take a short position would have been extremely relevant to the purchaser of this product,” Duke University law professor James Cox said. Regulators have been scrutinizing Wall Street firms’ sales of subprime mortgage securities that later defaulted and contributed to the worst credit crisis since the Great Depression. They include some of the more than $500 billion of collateralized debt obligations, created by pooling mortgage bonds and other debt and packaging them into new securities, sold by Wall Street from 2005 through 2007. Citigroup did say in the Jackson marketing documents that its interests in the deal “may be adverse” to those of investors in the CDO’s bonds. SEC Vs. Goldman “We expressly disclosed in marketing the Jackson CDOs that the collateral selection may have included factors adverse to investors,” said Citigroup spokeswoman Danielle Romero-Apsilos . “Having said that, we remain committed to enhancing the transparency of all financial transactions in which we are involved.” Morgan Stanley spokesman Mark Lake said he couldn’t comment. Both banks are based in New York. The Securities and Exchange Commission last month accused Goldman Sachs Group Inc. of misleading investors by failing to disclose hedge fund Paulson & Co.’s role in picking collateral it bet against. Goldman Sachs calls the claims unfounded. Citigroup hasn’t been publicly accused of any violations tied to the Jackson deals. In a quarterly filing this month, Citigroup said it’s cooperating with “various formal and informal inquiries” into subprime-mortgage-related activities and is in talks to resolve some of them. $60 Billion of CDOs Citigroup sold $59.3 billion of CDOs from 2005 to 2007, according to a November 2008 report by Sanford C. Bernstein analyst Brad Hintz . In late 2008, the bank had to get a $45 billion bailout, partly because of losses on mortgage-backed securities that it kept for itself. Citigroup lost almost $30 billion in 2008 and 2009 before reporting a $4.43 billion profit in the first quarter. Citigroup sold the Jackson CDOs in August and September of 2006, data compiled by Bloomberg show, just as delinquency rates on U.S. subprime mortgages began to climb . The Jackson deal was a synthetic CDO, in which derivatives linked to mortgage bonds were pooled together and packaged into new bonds that could be sold to investors. On the other end of the derivatives was a “short” investor who would get paid if the underlying bonds soured. To get the deals done, most underwriters of synthetic CDOs initially took the short positions, sometimes with a plan to sell them off later. When Citigroup set up Jackson, it arranged with Morgan Stanley to take over the short positions once the deal closed, the people said. Citigroup allowed the firm to help select the bonds linked to the derivatives because Morgan Stanley would have a stake in the performance of the securities, they said. 80 Bonds There were 80 mortgage-backed bonds that in turn were underwritten by firms including Citigroup, Morgan Stanley, Lehman Brothers Holdings Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp., according to the marketing documents. Citigroup’s Citibank NA banking subsidiary was the initial short counterparty to the Jackson derivatives, according to the documents. The Jackson marketing documents said Citigroup might have information about the bonds or business relationships “that may or may not be publicly available or known to the other parties to the transaction,” and that the lender had no obligation to disclose “any such relationship or information.” The documents go on to say, “In no event will Citibank or any of its affiliates be deemed to have any fiduciary obligations to the holders of the notes.” Slashed to Junk Morgan Stanley was named in the Jackson marketing documents only as a currency-hedge provider for $35 million of euro- denominated securities. In April 2007, all seven series of the Jackson bonds were cut to junk grade by Moody’s Investors Service. Six of the seven later defaulted, wiping out 76 percent of investors’ principal, according to Bloomberg data. There’s no public data on the buyers of the securities, or on the performance of the Morgan Stanley unit that shorted the Jackson deals. In its suit against Goldman Sachs, the SEC said the bank’s disclosures for the Abacus 2007-AC1 CDO were misleading because they omitted Paulson’s role in selecting the underlying bonds. Goldman Sachs told investors that an independent manager, ACA Management LLC, picked the bonds. Goldman Sachs “misled investors by representing that ACA selected the portfolio without disclosing Paulson’s significant role in determining the portfolio and its adverse economic interests,” according to the SEC suit. Paulson wasn’t accused of wrongdoing. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

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Google’s $750 Million AdMob Purchase Approved by U.S. Antitrust Regulator

May 21, 2010

By Jeff Bliss May 21 (Bloomberg) — The U.S. Federal Trade Commission unanimously approved Google Inc. ’s $750 million acquisition of AdMob Inc., rejecting claims the purchase would reduce competition in the fledgling market for advertising on mobile devices. The deal “is unlikely to harm competition in the emerging market for mobile advertising networks,” the FTC said in a statement on its website today. Google, owner of the world’s most popular web search engine, is the leader in Internet advertising. With San Mateo, California-based AdMob, it would form the largest mobile- advertising company. The FTC said its decision was influenced by Apple Inc.’s recent inroads in the market, indicating there may be more competition than originally thought. Regulators’ concerns were allayed by the introduction of iAd, a program that generates revenue from ads placed on Apple’s handheld devices. Google and AdMob combined had 21 percent of the U.S. market in 2009 — a market that has been doubling in size annually — according to Karsten Weide , an analyst with researcher IDC in San Mateo. Delaying Decision In recent weeks, the FTC delayed its decision on the deal to examine the developments involving Cupertino, California- based Apple, said two people familiar with the matter. The FTC was concerned with conditions Apple is placing on software developers and advertisers for the iAd system, the two people said. “As a result of Apple’s entry into the market, AdMob’s success to date on the iPhone platform is unlikely to be an accurate predictor of AdMob’s competitive significance,” the FTC statement said today. Steve Dowling , a spokesman for Apple, declined to comment immediately. Today’s 5-0 decision by the FTC’s commissioners suggests a shift in thinking following earlier signals from the agency that it was preparing to oppose Google’s acquisition of AdMob. Earlier this year, the agency indicated it may challenge the combination when it sought sworn declarations from Mountain View, California-based Google’s competitors and advertisers, according to people with direct knowledge of the matter. Challenge Recommended The FTC staff had recommended a challenge, according to people familiar with the case who spoke on condition of anonymity in advance of today’s announcement. Some attorneys said it would have been difficult for the FTC to show Google’s dominance because the market is still in its early stages of development. One of the FTC’s considerations in bringing a case should be “evaluating whether the firms involved in the transaction are likely to be the key players down the road,” Barry Nigro, former deputy director of the agency’s Bureau of Competition, said before the FTC’s decision was announced. Advertisers said they were concerned the acquisition would lead to higher rates. “We want it to be competitive,” said Simon Buckingham, chief executive officer of Appitalism Inc., a New York-based software developer. “I’m not going to have any choices” if the deal goes through. Building Scrutiny Antitrust scrutiny of Google began building before the company announced the AdMob purchase in November. Google dropped plans for an agreement with Yahoo! Inc. in 2008 after the Justice Department signaled it would try to block the deal. Google and Yahoo are the leading search-engine companies and a combination might give them power to raise ad rates. Three companies — Foundem, Ejustice.fr and a Microsoft Corp. service called Ciao from Bing — in February filed antitrust complaints against Google with the European Union. The FTC has been monitoring Google since at least 2007, when the company bought Internet advertising company DoubleClick Inc. In voting 4-1 not to block the DoubleClick deal, FTC commissioners warned that “we will closely watch these markets and, should Google engage in unlawful” conduct, “the commission intends to act quickly.” To contact the reporter on this story: Jeff Bliss in Washington jbliss@bloomberg.net .

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Prudential Seeks to Win Investor Backing for AIA Bid After Overcoming FSA

May 17, 2010

By Kevin Crowley May 18 (Bloomberg) — Prudential Plc Chief Executive Officer Tidjane Thiam took 11 weeks to convince the U.K. regulator to authorize its $35.5 billion takeover of American International Group Inc. ’s main Asian unit. He now has three weeks to convince his investors. Thiam and his management team will start a fresh round of investor meetings today as they seek to gain the 75 percent of shareholder support needed to push through the $21 billion rights offer that will fund the takeover of AIA Group Ltd. in the biggest purchase in Prudential’s 162-year history. Prudential yesterday sought to win over investors by promising to double Asian profits within three years and extract $1 billion from AIA within that period for dividends and investment in growth. The company published the targets along with details of its rights offer 12 days after the Financial Services Authority blocked the document on concern over the insurer’s capital reserves after the takeover. “I’m sure Tidjane and the management will get a hard time from some investors, but armed with the information released today they will be able to make up for some of the missteps of the last few weeks,” said Martin Brown , a Glasgow-based fund manager at Ignis Asset Management Ltd., a top 30 Prudential shareholder. “The targets and disclosures are reassuring and broadly positive.” Investors are scheduled to meet to vote on the rights offer on June 7. The company published its prospectus for the offer on its website and issued listing documents for Hong Kong today. Thiam, 47, yesterday said the value of AIA will probably rise to $60 billion, 80 percent more than its sale price, within three years. Prudential also revised up its cost savings and revenue estimates from when it announced the deal in March. New Financing Plan To meet the FSA’s requirements, Prudential was forced to sell $5.4 billion of hybrid capital and set up a $1 billion reserve fund. The regulator was concerned that reserves could get trapped in markets such as Hong Kong in the event of a collapse in stock or bond prices, Thiam said. Hybrid capital, which combines elements of debt and equity, is more expensive to sell to investors than the $5 billion of senior debt the insurer had planned to issue because it acts as a bigger buffer against losses. “There is still a risk the deal does not proceed,” said Jonathan Jackson, head of equities at Killik & Co., which has 2.1 billion pounds ($3 billion) under management, including Prudential shares. “The timing of the fundraising is not ideal given the market’s current nervousness over sovereign debt issues.” The delay also cost Thiam some goodwill from investors who welcomed the Ivory Coast-born Frenchman’s promotion from finance director seven months ago. Critical Investors Shareholders including Neptune Investment Management Ltd., which owns about 50 million pounds of Prudential stock, have criticized his handling of the deal. Managing director Robin Geffen said he is trying to rally fellow shareholders to oppose the takeover. “They will have quite a lot of trouble raising that cash,” David Cumming , head of U.K. equities at Standard Life Plc, said in an interview with British Broadcasting Corp. yesterday. “We and other shareholders believe the price is too high and the financial case for the deal hasn’t been particularly well articulated.” Standard Life owns Prudential shares. Thiam went on a series of investor meetings after announcing the agreement with New York-based AIG on March 1. He apologized yesterday for cutting some of the meetings to 45 minutes, when conventionally they have been an hour long. “We have apologized profusely and I apologize again,” he said. “I know that investor meetings don’t last 45 minutes.” Legal Restrictions The insurer was unable to provide investors with more than a summary of AIA accounts until yesterday because of legal restrictions surrounding the rights offering. “There was a real sense of frustration because we wanted to say something but we were restrained,” Chairman Harvey McGrath said. “That did give rise to some frustrations” among shareholders, he said. “This is something of a leap in the dark for the Pru,” said Paul Mumford , who helps manage 417 million pounds, including Prudential shares, at Cavendish Asset Management Ltd. in London. “This is not about business diversification; this is a case of putting an awful lot of eggs into a Far Eastern basket.” To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

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Daewoo International Jumps on Report Posco Is Planning $3 Billion Takeover

May 9, 2010

By Sungwoo Park and Saeromi Shin May 10 (Bloomberg) — Daewoo International Corp. rose the most in seven months in Seoul trading after South Korean media reported Posco may be the preferred bidder for the trading company with a 3.4 trillion won ($3 billion) offer. Posco , Asia’s third-biggest steelmaker, is the front runner for a controlling stake in Daewoo International because its bid is higher than Lotte Group ’s, the Chosun daily newspaper reported today, without citing anyone. Posco offered 3.4 trillion won for Daewoo International, trumping Lotte’s 3.2 trillion won bid, Internet news provider MoneyToday reported May 8, citing people with knowledge of the deal. Both companies are seeking the entire 68.15 percent stake in the company that’s up for sale, MoneyToday said. “Investors view that a takeover by Posco would be more positive for Daewoo International’s shares in the near term,” said Chung Yon Woo , an analyst with Daishin Securities Co. in Seoul. “Daewoo’s business is directly linked to Posco as it trades the company’s steel products while it has little relationship with Lotte.” An acquisition by Posco would be more favorable for Daewoo International because of potential “synergies” with the steelmaker, Park Jong Ryeul , an analyst at HMC Investment Securities Co., wrote in a report on May 7. Daewoo International shares climbed as much as 6 percent to 37,550 won on the Korea Exchange, the biggest gain since Oct. 7. The shares were up 2 percent as of 11:05 a.m. The benchmark Kospi stock index added 1.3 percent. Acquisition Priority Posco and Lotte last week submitted final bids for Daewoo, which trades steel, crude oil, cement and auto parts and is leading a natural gas project in Myanmar. Posco Chief Executive Officer Chung Joon Yang , spearheading a $30 billion overseas expansion, called the trading company a “top” acquisition priority. Choi Doo Jin , a spokesman for Posco, said today he’s unable to confirm the reports. A Lotte Group spokesman said he cannot confirm them. Officials at Korea Asset declined to comment. “We expect some synergies from the deal as Daewoo handles about a fourth of Posco’s steel exports and has raw-material development know-how as Posco seeks to boost mining assets,” said Shin Yoon Shik , an analyst at Meritz Securities Co. in Seoul. The reported bid price looks “not that expensive, so won’t have a negative impact on the stock.” Posco shares climbed 1.1 percent to 477,500 won. The Korean mill last month said it plans to invest about $5 billion on overseas mines, joining rivals scouring the globe for iron ore and coal supplies as raw-material costs jumped. State-controlled Korea Asset Management Corp., leading the sale as the biggest shareholder of Daewoo International, said last week it plans to select a preferred bidder this month. To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net .

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Prudential Delays Start of $21 Billion Rights Offer Amid Talks on Capital

May 5, 2010

By Kevin Crowley May 5 (Bloomberg) — Prudential Plc , the British insurer buying American International Group Inc.’s main Asian unit, delayed the start of a $21 billion rights offer pending discussions with the U.K. regulator about its capital position. “Prudential does not expect this to affect the overall timing for the completion of the transaction,” the London-based company said today in a statement. The talks with the Financial Services Authority relate to “the capital position of the enlarged group” after the takeover, Prudential said. The insurer is betting the purchase of AIA Group Ltd., the biggest acquisition in its 162-year history, will provide long- term revenue growth in the world’s fastest growing region and offset weaker demand for life insurance in the U.S. and U.K. Chief Executive Officer Tidjane Thiam, who took over the role October, needs 75 percent of investors to approve the rights offer at a shareholder vote on May 27. “It’s very unusual for the FSA to come into the frame at this stage in the deal,” said Paul Mumford, who helps manage 600 million pounds ($910 million) at Cavendish Asset Management Ltd. including Prudential shares. “It’s come out of the blue. Everyone was expecting the prospectus to come out this morning. It’s quite embarrassing for the company.” Including fees to underwriters, the rights offering will surpass the 13.5 billion-pound ($20.5 billion) share sale by Lloyds Banking Group Plc in November. Credit Suisse AG , HSBC Holdings Plc and JPMorgan Cazenove Holdings are managing the deal, which is fully underwritten by 33 banks. Bigger Rights Offer? “We can only assume that the FSA wants the company to have more capital or a higher quality form of capital, but both would suggest a bigger rights issue than initially planned,” said Marcus Barnard , a London-based analyst at Oriel Securities Ltd. with a “sell” rating on the stock. “If the market sees this as a sign that the deal might not happen then perversely the shares could rise.” Prudential rose 9.5 pence, or 1.7 percent, to 568 pence at 8:08 a.m. in London trading. The stock closed at 602.5 pence on Feb. 26, the last day before the fundraising was announced. To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

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Birthday Call to United Chief Led to Air Merger in Three Weeks

May 3, 2010

By Zachary R. Mider, Mary Jane Credeur and Mary Schlangenstein May 3 (Bloomberg) — The phone call that would result in a merger creating the world’s largest airline came on UAL Corp. Chief Executive Officer Glenn Tilton ’s 62nd birthday. Continental Airlines Inc. CEO Jeff Smisek had read press reports that UAL Corp.’s United was in talks with US Airways Group Inc. He didn’t want to lose Houston-based Continental’s “best partner for the future,” he said today in an interview. “I gave Glenn a call and told him I was a much prettier girl,” said Smisek, 55, who will become CEO of the combined carrier. That April 9 conversation marked the start of three weeks of intense negotiations that would span several of the airlines’ hub cities, including Los Angeles, Cleveland and New York, said people familiar with the matter, who asked not to be identified because the meetings were private. Tilton was traveling in Santa Fe, New Mexico, on the day he received Smisek’s call, “which happened to be my birthday,” he told analysts on a conference call. Today’s merger agreement calls for a stock swap valued at more than $3 billion. United’s name and Chicago headquarters will be retained, and Tilton will be nonexecutive chairman until the end of 2012 or two years after the deal’s closing, whichever is later. Smisek and Tilton succeeded where the airlines had failed in 2008, when the companies came close to a merger agreement before Continental, then led by CEO Larry Kellner , abandoned the talks. Los Angeles, Cleveland The week after the initial phone call, Tilton and UAL Chief Financial Officer Kathryn Mikells met in Los Angeles with Smisek and his CFO, Zane Rowe , said a person with knowledge of the meeting. The participants settled on most terms of the deal, including the provision for a merger of equals with no control premium, the person said. Also on the executives’ itinerary was a meeting in Cleveland, where Continental lead director Henry Meyer III lives and runs KeyCorp , Ohio’s second-largest lender, the person said. Choosing a date on which to value each airline’s stock became a sticking point, Tilton and Smisek said today on a conference call. The accord for each Continental share to be exchanged for 1.05 UAL shares was reached at an April 27 meeting at a Radisson hotel in Memphis, Tennessee. “I had no idea,” said Richard Markham, the hotel’s general manager. “They must have been incognito.” Close to Graceland The Radisson was built in the mid-1970s and has 211 guest rooms and a bar and restaurant called Cayenne’s, Markham said in an interview. The property is located about 3 miles (4.8 kilometers) from Graceland, the former home of Elvis Presley . “Jeff chose an illustrious venue, the airport Radisson,” Tilton said in an interview. “I was given a memento of that occasion, a plastic passkey, nicely framed.” Tilton’s gift to Smisek was a pair of cuff links with the colors of both airlines, a person familiar with the matter said. After each carrier’s board met by phone yesterday to approve on the deal, Tilton said he and United’s advisers dined on steak, champagne and scotch at the Palm restaurant in midtown Manhattan. Smisek said he ate bangers and mash and sipped pinot noir at his hotel and then went to bed. To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net ; Mary Jane Credeur in New York at mcredeur@bloomberg.net ; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net .

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