Tag Archives: Company coverage
by Liz Hester
The company is so ubiquitous that its name is a verb. But being part of the lexicon isn’t a pathway to riches. What’s most interesting about Google’s earnings this quarter is the business media’s portrayal of a 19 percent rise in revenue as a misstep.
Rolfe Winkler and Alistair Barr wrote for the Wall Street Journal that increased costs caused the drop in profit:
Fast-rising expenses eroded Google Inc.’s first-quarter profits, disappointing investors and sending Google shares lower in after-hours trading.
The Internet-search giant said revenue for the quarter rose 19% to $15.4 billion from $13 billion a year earlier, excluding the Motorola Mobility business Google plans to sell to China’s Lenovo Group Ltd. Analysts had projected revenue of $15.5 billion on that basis, according to S&P Capital IQ.
But expenses grew faster—at 23%. As a result, Google’s net income increased 3% to $3.65 billion, or $5.33 a share, from $3.53 billion, or $5.24 a share. The figures were adjusted for the pending Motorola sale and a 2-for-1 stock split.
Excluding stock-based compensation and other items, Google said earnings were $6.27 a share; on that basis, analysts had predicted $6.41 a share.
“The top line was pretty good, but the margin compression probably disappointed the market,” said Brian Wieser, an analyst at Pivotal Research Group. “The margin erosion trend seems to be well in place.”
The New York Times headline said earnings “disappoint” in a story by David Streitfeld, which pointed out Google is making acquisitions in order to post growth — at some point:
Its core digital advertising business is so dominant that analysts are questioning just how much it can continue to grow. So Google is unleashing its vast cash hoard on robotics, artificial intelligence, smart thermostats and, just this week, high-altitude drone satellites.
The only thing all these acquisitions have in common is a focus on the future — often, the distant future.
The risk in thinking about what will be big in 2050, however, is that you can lose sight of 2014.
Google’s first-quarter earnings report, released after the market closed on Wednesday, surprised Wall Street. The company has traditionally gushed profits without breaking a sweat. Now it takes more of an effort.
One big reason was a problem of several years’ standing: Internet users are migrating to mobile devices, but ads on phones and tablets still do not have the familiarity and appeal they do on bigger computers. And they are not as profitable for Google. Google’s ad volume jumped 26 percent in the quarter, which sounds good but is less than expected, while the amount advertisers pay dropped 9 percent, which sounds bad and is.
The CNET story by Seth Rosenblatt led with the fact investors didn’t like the news either:
Google’s shares fell sharply in after-hours trading Wednesday following first-quarter earnings and sales that missed Wall Street’s expectations, thanks in part to its continued acquisition binge and the ongoing shift in ad revenue from desktop to mobile.
The stock was down 5.85 percent to $524 per share immediately after the markets closed.
Colin Gillis, senior technology analyst at BGC Financial, said “a little [investor] pullback is healthy.”
“[Cost-per-click on] mobile’s a major problem. People have had a decade to optimize their [desktop] sites,” he said. Even though mobile ad revenue is rising, it’s not rising as fast as desktop is shrinking.
Kevin Shalvey wrote for Investor’s Business Daily that Google’s fall was based on lower pay ad clicks:
Google since mid-2011 has focused on building mobile-ad technology, in part to increase revenue from users in emerging countries where smartphones are used more widely than traditional desktops.
But worldwide paid clicks on ads grew just 26% in Q1, down from 31% growth in the three months prior. Analysts expected 29% growth, says Seyrafi.
Advertisers still aren’t willing to pay as much for a click on a mobile ad. Google’s overall cost-per-click, or CPC, rate slipped 9% from a year earlier, although it remained unchanged from Q4.
“I believe, in the medium to near term, mobile pricing has to be better than desktop,” Chief Business Officer Nikesh Arora told analysts on the post-earnings conference call.
CNNMoney attributed the stumble to mobile in a story by James O’Toole:
The challenge for Google is convincing marketers to pay as much for mobile ads as they do for desktop ads, a task that’s become increasingly pressing as Web usage shifts to smartphones.
Google Chief Business Officer Nikesh Arora said in a conference call Wednesday afternoon that the company’s mobile ad revenue is being held up in part because merchants haven’t spent enough time developing their mobile sites, assuming that customers will make more purchases via desktop.
“The journey is just beginning for advertisers on the mobile side,” he said. As advertisers begin to see the potential of mobile ads, including location targeting, Arora added that the gap between desktop and mobile ad rates would likely close.
“Right now we can lead the horse to water, but we can’t make it drink,” he said.
Part of the way Google is addressing this issue in the meantime is through the “enhanced campaign” strategy it introduced last year, which requires advertisers to buy across multiple platforms.
Taken all together this might indicate that Google will likely continue to see earnings growth slow in the near-term. What isn’t so clear is how they’re positioning themselves for the future. If you believe in the acquisitions and that cost cutting could come into play, then this might be a temporary setback. Otherwise, it could be the beginning of a long decline.
by Liz Hester
General Motors Co. continues to make headlines as Chief Executive Officer Mary Barra deals with the aftermath of recalls and public relations crises. Last week, two top employees were suspended, while Tuesday there were several more follow-up stories about what’s going on at the automaker.
Jeff Bennett wrote for the Wall Street Journal that GM is trying to increase safety standards:
General Motors Co. Chief Executive Mary Barra sought to shift the focus on Tuesday to the auto maker’s coming new vehicles and away from investigations of a troubled ignition-switch recall, but struggled amid a barrage of questions about its responses to the probes.
In New York ahead of an auto show, Ms. Barra deflected questions about a potential U.S. criminal probe, saying she wasn’t aware if the Department of Justice has sought documents from the company, and declined to say when GM expected to answer all questions posed by auto-safety regulator National Highway Traffic Safety Administration.
“We are working on those every day,” she said of the NHTSA inquiry while surrounded by a media crowd peppering her with questions. GM Global Product Chief Mark Reuss was recruited to help provide crowd control after her speech.
GM said it is forming a product integrity organization under Mr. Reuss that will include a newly named vehicle safety czar. GM named engineering veteran Jeff Boyer as vice president of global vehicle safety and charged him with handling all safety-related issues including recalls. His group will be moved into the new organization. Mr. Reuss declined to provide more details on how the group will work but did say he will make additions to the team in the coming days.
Writing for the Detroit Free Press, Nathan Bomey reported that Barra was also cleaning up the company’s leadership in the wake of the recalls:
Two members of General Motors’ senior leadership team are leaving the company three months after a transition to a new CEO and amid a crisis over the automaker’s failure to fix an ignition switch defect.
Selim Bingol, senior vice president of public policy and communications, and Melissa Howell, senior vice president for human resources, will “pursue other interests,” GM said in a statement.
A company spokesman, Greg Martin, said the departures were not connected to the recall of 2.6 million small cars from 2003 through 2010 for defective ignition switches. The ignition switch defect is tied to at least 31 crashes and 13 deaths in Chevrolet Cobalts and Saturn Ions.
Bingol, has led GM’s public relations team since 2010 when he was tapped by former CEO Ed Whitacre. His successor will be named later.
Howell, who had been in the top HR job since February 2013, joined the automaker in 1990.
The New York Times had a story by Alexandra Stevenson pointing out that GM still had some (or one) willing to defend the company:
General Motors has come up against a tide of criticism. Its chief executive has been grilled by lawmakers for creating a “culture of cover-up,” it has been fined, and it faces investigations by a Senate panel and regulators over when it knew about serious safety issues.
But there is at least one person outside the company who is willing to step forward to defend G.M.: J. Kyle Bass, the hedge fund manager who made a name for himself betting against subprime mortgages.
He is now betting on G.M., which is under political scrutiny for a decade-long delay in dealing with a defect tied to 13 deaths.
“The question is why isn’t anyone defending General Motors, and I think neither side of the aisle can gain political capital by defending them,” Mr. Bass said in an interview. “They’ve been indicted in the public court of opinion. If you’re talking about true legal liability, it is de minimis.”
Mr. Bass’s $2 billion hedge fund, Hayman Capital, owns eight million shares of G.M., according to a person close to the firm. It is a stake that is small relative to the size of the $51 billion company, but it is the fund’s single biggest holding.
James Detar wrote for Investor’s Business Daily that GM workers stood in the way of an internal inquiry into the faulty ignition switch:
General Motors (GM) came under fresh scrutiny as a report analyzing documents released last week indicated that co-workers apparently blocked an in-house investigation into a faulty ignition switch linked to 13 deaths.
GM shares, which had fallen 30% from a Dec. 26 high to last Friday, rose as much as 3% early Monday. Some analysts have said that the strong auto market in the U.S. and China could offset losses associated with recent recalls.
In a report released Monday based on GM internal emails released by the company last week, Bloomberg found that engineer Brian Stouffer began trying in summer 2011 to determine why some ignition switches caused cars to stall, resulting in accidents. But upper-level managers reassigned him three times in a year, hampering his investigation.
As the story continues to unfold, I’m reminded of something that one of the smartest public relations executives once told me. The gist of the advice was that once a company uncovers something that’s gone wrong, the best way to deal with it is all at once and upfront. It might be painful to air all the dirty laundry at once, but it does prevent the days and days of front-page and bold website headlines as stories unfold slowly. Once the original story is broken, it’s most likely to all come out.
by Liz Hester
Citigroup Inc. finally had some good news as earnings beat analysts’ expectations for the quarter. But reporters had many different takes on the overall story.
Michael Corkery had this story for the New York Times:
Investors and analysts feared the worst from Citigroup, the global bank that has been besieged for months by regulatory problems and an industrywide trading slump.
But Citigroup managed to beat Wall Street expectations on Monday, with a 4 percent increase in first-quarter profits, compared with a year earlier.
The positive results come after a string of recent stumbles, including Citigroup’s failure to pass the Federal Reserve’s stress test and a costly fraud in its Mexican unit that has spawnedmultiple criminal investigations and broader questions about whether the bank is too large to manage effectively.
“We came into this worrying everything else was going to get worse,” said Moshe Orenbuch, a banking analyst at Credit Suisse. “It was not the case.”
Citigroup’s surprisingly good profit drove its shares up 4.4 percent, as investors expressed relief that the results were not as bad as expected.
Still, the results reflected little broad improvement in the bank’s ability to expand its fundamental businesses.
The Wall Street Journal story by Christina Rexrode and Saabira Chaudhuri focused on CEO Michael Corbet’s promise to deal with the bank’s the regulatory issues:
Speaking after Citigroup reported better-than-expected first-quarter earnings Monday, Mr. Corbat faced more than a dozen questions from analysts on the bank’s recent failure to win regulatory approval to return capital to shareholders.
“Is the Fed denial a wake-up call for Citi or not?” CLSA analyst Michael Mayo asked. “We’re wide awake,” Mr. Corbat replied after declaring earlier, “I want, and I know shareholders deserve, an industrial-strength, permanent solution that paves the way for sustainable capital return over time.”
Mr. Mayo has a “buy” rating on Citigroup.
The nearly two-hour analyst call, coming less than three weeks after the Federal Reserve rejected the bank’s capital plan last month, was dominated by questions over the so-called stress tests.
By contrast, the third-largest U.S. lender by assets fielded only two questions on mortgage lending and one on fixed-income trading, two of the most pressing concerns on Wall Street.
While Corbat might have faced his toughest questions about regulation, Reuters reporter David Henry decided to lead with expense cutting, another focus for the bank:
At a meeting with 300 senior Citigroup officials in the first week of February, Chief Executive Michael Corbat said the bank needed to focus on two things above all else this year: expenses and efficiency.
The bank’s first quarter results on Monday showed just how much work Citigroup executives have ahead of them in those areas.
In Citigroup’s main businesses, revenue fell 3.5 percent in the quarter while operating expenses eased only 1.5 percent compared with a year earlier, the bank said. It still needs to cut another 3.5 percent, or $1.5 billion, from its annual operating expenses to meet its own 2015 targets for efficiency, according to Reuters calculations.
The company’s expenses are too high given its weak revenues, said Gary Townsend, a longtime bank stock investor who owns Citigroup shares and formerly ran Hill-Townsend Capital.
High costs have bedeviled Citigroup for a decade. For years, the bank’s problems were mainly linked to its failure to fully integrate businesses built up over years of acquisitions.
That integration is mostly done. But now the bank, like other major American banks, is struggling to cut costs as it seeks to cope with the expense of complying with a welter of new laws and regulations following the financial crisis.
Executives at Citigroup, which had to be rescued by the U.S. government three times during that crisis, in the past 18 months have already eliminated $2.8 billion from the company’s overall annual expense base through layoffs and assorted reorganization and productivity steps, Chief Financial Officer John Gerspach said on a conference call with analysts. A big chunk of that stems from the company’s December 2012 announcement that it was eliminating more than 11,000 jobs.
Dakin Campbell wrote for Bloomberg that Corbat was taking responsibility for the company’s shortcomings in the stress test:
The bank will focus on preparing for the 2015 stress test rather than requesting additional buybacks or dividend increases this year, Corbat said today on a conference call with analysts.
The stress-test rejection means “it’s hard to imagine” a scenario in which the company can meet its 2015 goal of reaching a 10 percent return on tangible common equity, Chief Financial Officer John Gerspach said today on a conference call with journalists.
Corbat said his conversations with regulators lead him to conclude they aren’t opposed to the bank’s business model or strategy. The CEO said he expects the board to hold him responsible for the stress-test failure.
“I’m accountable,” Corbat said on the call. “It is something I’m sure the board will hold me accountable for in 2014 when they reflect upon the year.”
I’m sure the board will hold him accountable and likely so will investors. Citigroup has had a tough time since the financial crisis and its latest regulatory problems. Maybe Corbat can turn it around and maybe not, but the profit is a good start.
by Liz Hester
Last week, Yahoo announced yet another strategy to win over Internet users – moving into original TV programming.
The Wall Street Journal had this story by Mike Shields and Douglas MacMillan:
Yahoo Inc. is raising its ambitions in online video, with plans to acquire the kind of original programming that typically winds up on high-end cable-TV networks and streaming services like Netflix, people briefed on the company’s plans said.
The company is close to ordering four Web series, these people said. And unlike in years past, Yahoo isn’t looking for short-form Web originals, but rather 10-episode, half-hour comedies with per-episode budgets ranging from $700,000 to a few million dollars, the people said.
The projects being considered would be led by writers or directors with experience in television. “They want to blow it out big time,” said one of the people briefed about the plans.
Yahoo Chief Executive Marissa Mayer is hoping to show off TV-caliber content to advertisers on April 28 when Yahoo holds its “NewFront” event that is Internet companies’ answer to the so-called upfront ad-sales presentations made by TV networks each spring.
David Carr of the New York Times called Yahoo a “permanent adolescent in search of an identity” in his column about their latest move:
At a time when the culture is addicted to high-end television narratives, Yahoo wants in on the action, partly because while its site may have (flat) traffic — 700 million global visits a month — and (declining) revenue, it has zero cachet and no discernible way forward.
For many years, digital media players watched longingly as HBO and then AMC, FX and Showtime managed to rise above the clutter on television, where Americans still spend five hours a day. So last year, when Netflixbroke through with “House of Cards,” it made sense that companies like Amazon, Hulu and Yahoo would want to follow suit.
There are signs that it is working — streaming for Amazon Prime tripled in the last year and the company has introduced its own device, Fire TV, which will fight for shelf space in your home along with Apple TV, Chromecast and Roku. At the same time, Comcast is seeking a merger that will give it the scale to invest in technology, and HBO Go is pushing to follow the consumer onto mobile. “People always want to be what they aren’t,” said Jonah Peretti of BuzzFeed when we discussed the crisscross the other day.
The prize is dear. Winning in the distribution of high-end content is about mining an audience, and you can’t blame technology companies for believing they have relevant skill sets.
Bloomberg Businessweek reported in a story by Claire Suddath that Yahoo is planning to pay for its new content by selling ads:
Yahoo’s shows will theoretically be ad-supported and available to people for free online, aligning it more closely with YouTube (GOOG) than, say, Netflix’s subscription-driven strategy. Also unlike Netflix (NFLX), which captured an existing audience with the already-beloved Arrested Development and then jumped headfirst into the serialized drama fray with House of Cards, Yahoo is looking for 10-episode comedy series with a per-episode cost that’s less than “a few million dollars,” as the Journal put it—or about the price of a regular network sitcom. That’s a deft move on Yahoo’s part: Audiences already have plenty of novelistic dramas, but what they can’t get online (as original content, anyway) is a new half-hour comedy that really makes them laugh.
The moves by Yahoo and Microsoft are just part of a larger erosion of the traditional TV audience. The shrinking started in 2011 when Nielsen (NLSN) reported that the number of U.S. homes with television sets dropped for the first time in 20 years. As a result, the number of people who watched traditional TV programming, via broadcast or cable, started to decline as well. So far the decline has been slight but in a few years will probably pick up speed. Last year 86 percent of Americans still had cable—down from 88 percent just three years before. The premium cable channels have been hit the hardest: 32 percent of people subscribed to HBO, Showtime, or Starz last year, down from 38 percent in 2012, according to NPD group. Meanwhile, the number of Netflix subscribers rose 24 percent, to 31.1 million people.
As cable audiences shrink and the providers reduce competition by merging (Comcast and Time Warner), there is room for more original programming. The big question is whether Yahoo can move into that space. The firm’s reputation as an Internet innovator and go-to location for content has been damaged during the past few years. Many earlier adopters have left the platform for others. It will be interesting to see if it can win back users or if this is just another phase in its identity search.
by Liz Hester
SAC Capital settled charges of insider trading Thursday, and sources close to the firm are saying that this is likely the end of the line for charges.
The Wall Street Journal story by Christopher M. Matthews led with the news that prosecutors are not likely to continue pursuing founder Steven Cohen:
After a decadelong probe into SAC Capital Advisors LP, federal prosecutors won approval of a $1.8 billion settlement with the hedge fund but appear to have all but given up efforts to charge its billionaire founder, Steven A. Cohen.
On Thursday, a federal judge approved a guilty plea entered on behalf of SAC and a landmark insider-trading settlement with the firm. Prosecutors and the Federal Bureau of Investigation have eyed Mr. Cohen for years, but haven’t been able to mount a criminal case against him personally. While prosecutors aren’t barred under terms of the settlement from indicting Mr. Cohen or other SAC traders, no new charges are imminent, according to a person familiar with the matter.
U.S. District Judge Laura Taylor Swain accepted the criminal settlement in federal court in Manhattan, calling the pact unprecedented. “The defendants’ crimes were striking in their magnitude and strikingly indicative of a lack of respect for the law,” Judge Swain said.
After years of denials, the hedge fund agreed to plead guilty to insider trading in November and pay a $1.8 billion penalty, marking a high point in the government’s yearslong clampdown on such illicit practices. Over the past two decades, SAC became one of the most successful hedge funds in the world, earning billions of dollars in profits for Mr. Cohen and his investors.
The New York Times pointed out all the recent changes at the firm, including a new name, in a story by Matthew Goldstein and Ben Protess:
Now the 57-year-old investor is hoping for a less litigious transition for his firm, as it becomes a so-called family office, rechristened Point72 Asset Management, that will manage about $9 billion of his own fortune.
Federal authorities, speaking on condition of anonymity, privately acknowledge that additional charges against SAC employees are unlikely unless new evidence surfaces. And the authorities, who still have a smattering of insider trading cases to file against other hedge funds, have seen a slight downtick in reports of suspicious trading.
But to shake fully its tainted past — and steer clear of the spotlight — Mr. Cohen’s firm will have to do more than plead guilty and change its name. And for Mr. Cohen, who has not been criminally charged despite spending the better part of a decade under investigation, a few legal hurdles remain before he can exhale.
Mr. Cohen still faces a civil action from the Securities and Exchange Commission, which during the course of the case could identify additional wrongdoing and permanently bar him from managing money for outside investors. The Federal Bureau of Investigation, authorities say, also continues to examine a handful of stocks for signs of insider trading at SAC, while several former employees who cooperated with the investigation have yet to be sentenced, a sign the case is not officially closed.
Patricia Hurtado’s story for Bloomberg offered this background on the investigation, which has been going on since 1999:
The alleged scheme involved more than 20 companies and went back as far as 1999. Indicted in July, the hedge fund agreed in November to plead guilty to four counts of securities fraud and one count of wire fraud, and to shutter its investment advisory business.
Cohen’s firm managed about $11.9 billion in assets as of Feb. 1, according to regulatory filings. Executives at the hedge fund had expected to start this year with only $9 billion after returning capital to investors.
The grand jury indictment of the fund outlined criminal conduct by at least eight former SAC Capital employees. Noah Freeman, Donald Longueuil, Wesley Wang, Richard Choo-Beng Lee, Richard Lee and Jon Horvath have all pleaded guilty. Two portfolio managers, Mathew Martoma and Michael Steinberg, were convicted separately after trials in Manhattan federal court.
The government said SAC Capital encouraged its employees to obtain an informational “edge” over competitors, and hired people specifically for their contacts with insiders at publicly traded companies.
Manhattan U.S. Attorney Preet Bharara, whose office has pursued SAC Capital and its employees for more than six years, described the hedge fund as a “firm with zero tolerance for low returns but seemingly tremendous tolerance for questionable conduct.”
The saga has been long and drawn out, but it does bring up the issue of, what’s the point of it all? Years of government time and effort, and the man responsible likely isn’t going to face criminal prosecution. While he may not be able to manage others money, his personal wealth is still more than the vast majority of hedge funds have in their coffers. It’s hard to see the punishment.
by Liz Hester
The mega merger between Comcast and Time Warner is under regulatory review, and Tuesday Comcast went into great detail to make the case that it should go through.
The Wall Street Journal story by Gautham Nagesh and Steven Perlberg outlined these details:
Comcast Corp. on Tuesday submitted a lengthy document to federal regulators to justify its $45 billion proposed purchase of Time Warner Cable. But its filing also had the effect of showing the many ways in which the combined entity could use its leverage over both cable lines and programming to pressure competitors.
In a 180-page statement with the Federal Communications Commission, Comcast walked through the various parts of the media industry that could be affected by the deal, including online video, television programming, and broadband Internet access, as well as local ad sales in the cable market.
So far, Washington has reacted to the proposed acquisition with cautious skepticism. FCC officials say they can’t talk about pending mergers. Many analysts say they expect it will be approved, with conditions imposed by regulators.
The Associated Press (via the Washington Post site) had these details of Comcast’s argument in favor of the merger:
Comcast has agreed to not discriminate against any traffic in its network through 2018 as a condition of its $30 billion purchase of NBCUniversal, which was completed last year. The company vowed to maintain the commitment despite a federal appeals court decision that struck down the FCC-imposed rules in January.
Comcast says pay-TV alternatives like streaming services from Netflix Inc., Amazon.com Inc. and others have created competition in video, while there is at least one broadband Internet competitor in more than 98 percent of its markets.
“Comcast and Time Warner Cable do not compete against each other in any area. So this transaction will not result in any reduction in consumer choice in any market,” said Cohen on a conference call with journalists Tuesday.
Cohen also responded to calls by Netflix CEO Reed Hastings to extend “Net neutrality” protections to the so-called “interconnection” area between major Internet backbone providers such as Comcast. In February, the two companies reached a deal in which Netflix pays Comcast to ensure its video streams faster and more consistently to Comcast subscribers. But Hastings said last month that the fee amounts to an “arbitrary tax” to companies like Comcast that act as gatekeepers to their networks.
The New York Times added in a story by Edward Wyatt and Eric Lipton that those looking to kill the deal were also getting ready to present their case:
Opponents, too, have been gearing up for a fight. A leading critic of the deal, Public Knowledge, a nonprofit group funded in part by donations from Google, DirecTV, Dish Network and other Comcast rivals, has hired SKDKnickerbocker, a prominent public relations firm led by Anita Dunn, a former White House communications director, and Hilary B. Rosen, a Democratic strategist and former lobbyist.
The maneuvers by both sides portend months of wrangling with regulators at the Federal Communications Commission and the Justice Department’s antitrust division — the two entities that have to approve combining the two huge cable TV and Internet service providers.
On a Tuesday call with reporters, the Comcast executive who oversees the company’s government affairs operations, David L. Cohen, made his case in favor of the $45 billion deal.
“There has been a lot of discussion about whether big is bad, and sometimes when companies join together, big can be dangerous,” Mr. Cohen said. “Sometimes big is necessary and good.”
Alina Selyukh and Liana B. Baker wrote for Reuters that Comcast is also arguing that its merger would be good for consumers:
Comcast also made the case that its sales of service including broadband to small and large businesses could present companies with an alternative to telecom providers such as Verizon and AT&T.
The company also reaffirmed its commitment to so-called network neutrality rules, which ban Internet providers from slowing down or blocking access to content online, and that have been struck down by a court as formal FCC rules in January.
Comcast, thanks to a condition placed on its 2011 merger with NBC Universal, is now the only company bound to uphold net neutrality for the next five years and has promised to apply it post-merger when it becomes larger.
The FCC is now reviewing how to rewrite the net neutrality and the treatment of web traffic, including the fees content companies pay Internet service providers in so-called interconnection deals, is likely to be part of the agency’s review of the merger.
Net neutrality is actually a huge point, especially for small businesses. If their pages load slower than bigger alternatives, that could make online sales even harder. Creating a huge company that spans all the major markets might seem like a monopoly, but it if guarantees equal access, then it might not be bad. The caveat is that it’s only for the next five years. What happens after that?
by Liz Hester
The finance world is buzzing with news of even more regulations for various parts of the markets.
The Wall Street Journal reported in a story by Ryan Tracy and Stephanie Armour that capital requirements for large banks are about to go up, potentially making it even harder to get a loan:
U.S. regulators are set to impose another curb on risk taking at the largest U.S. banks Tuesday as part of a continuing push to force big banks to gird themselves against periods of market stress.
Under the new “leverage ratio,” scheduled for a vote by the Federal Deposit Insurance Corp. and the Federal Reserve, the eight biggest U.S. firms would have to double the amount of capital they hold as protection against every loan, investment, building, security and other asset on their books—not just the risky ones.
The rule could force big banks to add tens of billions of dollars in new capital, though many have been bulking up since regulators first floated a leverage ratio in July
The biggest companies would be required to maintain loss-absorbing capital worth at least 5% of their assets, and their FDIC-insured bank subsidiaries would have to keep a minimum leverage ratio of 6%. The amounts, which are line with what banks expected from regulators, compare with the 3% set out by international accord.
For the largest banks, satisfying the new requirement will likely be manageable in the near term, but analysts warned it could constrain future growth since it would limit each bank’s ability to increase its asset base, forcing it to either raise more cash from investors or shed assets elsewhere if it begins to bump up against the ratio’s limits.
“In an environment where you are getting strong economic growth, it could be a limiting factor with how much you can grow,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette, & Woods.
And that’s not all for the conglomerate banks. They may also have to worry about their trading businesses as well. Nelson D. Schwartz wrote in a New York Times story that many are calling for trading surcharges:
But a burst of outrage in recent days generated by Michael Lewis’s new book about the adverse consequences of high-frequency trading on Wall Street has revived support in some quarters for a tax on financial transactions, with backers arguing that a tiny surcharge on trades would have many benefits.
“It kills three birds with one stone,” said Lynn A. Stout, a professor at Cornell Law School, who has long followed issues of corporate governance and securities regulation. “From a public policy perspective, it’s a no-brainer.”
Not only would the tax reduce risk and volatility in the market, Professor Stout said, but it would also raise much-needed revenue for public coffers while making it modestly more expensive to engage in a practice that brings little overall economic benefit.
Despite these arguments, and support from many economists on the left for what European advocates have called a “Robin Hood tax,” even backers acknowledge the idea faces a struggle to become law, especially in the United States but also more broadly in Europe.
Not only are Republicans in Congress against new taxes in general, as are many Democrats, but opposition from deep-pocketed campaign donors on Wall Street is enough to persuade even politicians who might favor the idea to back off. Last Wednesday’s Supreme Court ruling allowing individuals to make much larger campaign donations to candidates and political parties strengthens the hand of donors.
But it’s not all rosy on the other side of the pond either. Mark Cobley reported for Financial News that banks could also have to set aside more to cover their pensions:
The UK’s five largest banks may have to find billions of pounds of extra high-quality capital to back their pension schemes under regulations coming in next year.
Pensions consultancy Redington has calculated the requirement as £12 billion. It cautions that it has used figures from the banks’ 2012 accounts. Banks could have reduced their liability by reducing equity exposure since then.
Redington based its analysis on an announcement in December by the Prudential Regulation Authority, the Bank of England’s risk watchdog, on how it would apply new EU capital requirements to banks’ pension finances.
The PRA said that under part of the EU Capital Requirements Directive IV, which comes into force on January 1 next year, the quality of capital banks hold against their pension schemes would have to be higher. Around half of their pension risk will have to be backed by core Tier 1 capital, the highest quality, consisting of shareholders’ equity and retained earnings.
All these new rules on various parts of the business don’t bode well for banks, particularly those with lending and trading in multiple countries. While it has always been complicated to be a multinational bank, regulators around the world are asking them to hold more money, which only means there’s less for the rest of us to borrow.
by Liz Hester
It’s not looking good for brick and mortar bookstores these days. On Thursday, Liberty Media said it would sell most of its holdings in Barnes & Noble, signaling that physical books are becoming a relic of the past.
The New York Times had this story by Michael J. de la Merced:
Liberty announced on Thursday that it would divest the vast majority of its stake in the struggling bookseller through private sales of its holdings. Liberty Media took a 17 percent stake in Barnes & Noble for $204 million in 2011. After the latest move, Liberty will have just under a 2 percent stake.
Other investors in the bookseller were much less sanguine about the move. The stock slid more than 10 percent on Thursday morning, trading at around $19.79 a share.
The sale removes one of Barnes & Noble’s major backers as the company tries to navigate the changing landscape for books and media. Its Nook business, once considered its brightest hope, has instead sputtered, with sales dropping more than 50 percent in the most recent fiscal quarter from a year ago.
The Reuters story by Phil Wahba and Siddharth Cavale pointed out that the Nook also has been performing poorly:
Prior to that deal, Liberty had been in talks to buy the whole company for $17 per share, or about $1 billion. At that time, Liberty had praised the potential of the Nook.
Instead, the Nook business has faltered, with sales down 50 percent last quarter as the company did not launch a new device for the 2013 holiday season.
Losses from the Nook have run to hundreds of millions of dollars as it tried to keep up with deep-pocketed technology rivals Amazon.com Inc and Apple Inc. Barnes & Noble will continue to develop Nook products, but only with a partner yet to be named.
Barnes & Noble’s retail business has shown much more stability in terms of sales, and profits at its bookstores and college campus stores are up.
Maggie McGrath of Forbes quoted that Liberty tried to put a positive spin on the news, but that investors were still spooked:
“Liberty Media has been a strong supporter of the company and Greg Maffei and Mark Carleton have been and continue to be tremendous partners at an important time in the Company’s history,” Leonard Riggio, Barnes & Noble chairman, said in a statement Thursday morning. “Liberty’s decision to retain a portion of its investment and have active involvement on our board underscores Liberty’s ongoing commitment to Barnes & Noble,” he said, adding that Liberty’s reduced ownership also gives his company greater flexibility to pursue various strategic options (but did not clarify what those strategic options are).
Despite these optimistic tones, other Barnes & Noble investors were not quite as satisfied with the news, sending shares of Barnes & Noble for a near-12 drop in Thursday morning trading. Shares of Liberty, meanwhile, were relatively unaffected by the news, trading for an 0.53% decline Thursday morning. Interestingly, it’s the struggling bookseller that’s had the better 2014 on the market: Liberty is down 7.7% in 2014 trading, while Barnes & Noble is up a whopping 50% for the year.
Part of the Barnes & Noble stock boost traces back to its third quarter earnings report, which was released in February and revealed that the company turned a profit despite a decrease in revenue. However, as Forbes’ Steve Schaefer reported at the time, the Nook tablet business, which was supposed to be a shining star for the company, posted a more-than 50% drop in revenue for the quarter and its profit was even worse. “Sales of the actual device and its accessories dropped 58.2% to $100 million due to both lower volumes and lower selling prices, while sales of content for the Nook fell 26.5% to $57 million,” he wrote, noting that Nook’s quarterly loss was 62 million. The silver lining? This loss was 67.5% smaller than a year earlier.
The Wall Street Journal story by Jeffrey A. Trachtenberg and Martin Peers made the point that the sale could ultimately free up Barnes & Noble for other strategic moves:
The divestiture removes a potential impediment to Barnes & Noble separating its retail stores from other parts of its businesses, an idea the company has considered in recent years. CEO Michael Huseby said in February a split was still being studied. Liberty, one of the biggest investors in the company, had the right to block the sale of any major portion of its business; it will lose that right in reducing its stake.
“Barnes & Noble will gain greater flexibility to accomplish their strategic objectives” as a result of the sale, Liberty Media Chief Executive Greg Maffei said.
One large investor pointed out that the Barnes & Noble investment was a relatively small stake for Liberty, “which has much bigger arenas in which to play.” Liberty lately has been trying to spark a consolidation of the cable-TV industry, among other efforts.
Barnes & Noble shares closed Thursday at $19.12, down $2.99, or 13.5%
Barnes & Noble’s stock rallied 66% between early February and Wednesday, when it closed at $22.11. That followed a stronger financial performance at the company. Mr. Huseby has cut costs, helping Barnes & Noble to report a profit for the third-fiscal quarter compared with a year-earlier loss and despite a 10% drop in revenue.
The retailer also reported a stronger-than-expected holiday performance at its 663 consumer bookstores. Core comparable sales, which exclude Nook-related digital products, were down only 0.5%. for the third fiscal quarter ended Jan. 25, compared to a 2.2% decline in the year-earlier quarter.
So while things aren’t looking totally dire at the retailer, it’s likely another blow to the publishing industry as another large buyer pulls back from purchases. And it doesn’t bode well for the fate of retail book stores despite the turnaround efforts.
by Liz Hester
Well, the good times at Citigroup didn’t last long. The bank had yet another public relations blow when it reported fraud was discovered in its Banamex Mexico unit.
Ben Protess and Michael Corkery reported in the New York Times that now the government is getting involved:
Just as Citigroup was putting a troubled past of taxpayer bailouts and risky investments behind it, the bank now finds itself in the government’s cross hairs again.
Federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit, according to people briefed on the matter, one of a handful of government inquiries looming over the giant bank.
The investigation, overseen by the F.B.I. and prosecutors from the United States attorney’s office in Manhattan, is focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup — as other banks have been accused of doing in the context of money laundering — ignored warning signs.
The bank, which also faces a parallel civil investigation from the Securities and Exchange Commission’s enforcement unit, hired the law firm Shearman & Sterling to lead an internal inquiry into the fraud, said the people briefed on the matter, who spoke only on the condition of anonymity. At a meeting last month, the bank’s lawyers presented their initial findings to the government.
The bloom of activity stems from Citigroup’s disclosure in February that its Mexican unit, Banamex, uncovered an apparent fraud involving an oil services company.
Apparently, at least two people have lost their jobs due to the digressions, Dakin Campbell reported for Bloomberg:
Citi terminated two traders in 2013 for violating our code of conduct,” Danielle Romero-Apsilos, a spokeswoman for the New York-based bank, said today in an e-mailed statement. “We escalated this issue to regulators and took immediate action against these individuals.”
The fixed-income traders engaged in unauthorized transactions that may have resulted in losses of as much as “tens of millions of dollars,” Reuters reported earlier today, citing two sources close to the matter.
Banamex, which Citigroup acquired in 2001, is the biggest unit in the bank’s Latin America operations, which account for about 20 percent of total revenue. Citigroup reported Feb. 28 that fraud on loans made by the unit to a Mexican oil-services firm would cut last year’s profit by $235 million.
Elinor Comlay and David Henry’s story for Reuters had much of the background on the situation, including troubles with the firm’s top executive in Mexico.
Mexico’s bank and securities regulator, the National Bank and Securities Commission, is aware of the matter, which was investigated internally by the bank, a spokesman for the regulator said.
The trading loss, even if realized, would be small in the scheme of Citigroup’s $13.7 billion of earnings for 2013. The Mexican unit, which has in the past enjoyed a good deal of autonomy, has suffered much bigger losses from bad loans to homebuilders and oil services company Oceanografia.
Some Citigroup officials are asking whether the U.S. Federal Reserve’s decision last week to veto its plan to boost dividends and buy back more shares was linked to its Mexico troubles.
Citigroup has cut the compensation for Manuel Medina-Mora, who has run Banamex for many years and is also co-president of Citigroup – a role in which he oversees global consumer banking.
Medina-Mora was paid $9.5 million in total compensation for 2013, according to a proxy statement filed by Citigroup on March 12. That was down from the $11 million he received for 2012.
The filing said a factor in his pay was control issues at Banamex USA, a unit of Banamex, which the U.S. government has faulted for not doing enough to stop money laundering by customers. Citigroup last year consented to an order from the Federal Reserve to take corrective steps.
The Times story also pointed out the most recent troubles for the firm.
The case represents another setback for the bank, which has also come under fire from regulators in Washington. Last week, the Federal Reserve rejected Citigroup’s plan to increase its dividend. The rebuke embarrassed the bank and raised questions about the reliability of its financial projections.
The scrutiny coincides with Citigroup’s recent announcement that it faces a separate, and perhaps more threatening, investigation from federal prosecutors in Massachusetts. The prosecutors, who have sent subpoenas to Citigroup, are examining whether the bank lacked proper safeguards against clients laundering money. Citigroup, the people briefed on the matter said, has hired the law firm Paul, Weiss, Rifkind, Wharton & Garrison to handle that case, which stems from the prosecutors’ suspicion that drug money was flowing through an account at the bank.
Together, the developments threaten to complicate Citigroup’s relationships with government authorities, who had previously lost faith in the bank after it required two bailouts and came to epitomize Wall Street’s role in the financial crisis. While Citigroup’s chief executive, Michael L. Corbat, has repaired ties to regulators using a blend of contrition and self-accountability, the latest investigations could test those improvements.
Corbat just can’t seem to catch a break. Ever since taking over the bank, he’s had to continually put out crises and handle inquires. It’s hard to imagine business as usual or clients being thrilled about the latest news.
by Liz Hester
General Motors Co. announced yet another recall, adding to the totals this year as new Chief Executive Mary Barra works to stem the bad press from the company’s handling of problems. The move comes before Barra testifies in front of Congress this week, giving lawmakers even more ammunition in questioning her.
Jeff Bennett had this story in the Wall Street Journal:
General Motors Co. recalled another 1.6 million vehicles Friday, expanding an earlier ignition-switch recall and disclosing other problems with newer cars and recently launched pickup trucks and sport utilities.
GM has now recalled about 4.8 million vehicles world-wide since early February, when it announced the first recall of 2005-2007 Chevrolet Cobalts and several related small cars to fix an ignition-switch defect linked to 13 deaths.
GM’s latest recalls came just days before the auto maker’s chief executive, Mary Barra, is set to be grilled by lawmakers over the company’s handling of safety defects. House and Senate subcommittees have hearings scheduled Tuesday and Wednesday for their investigations into why GM waited nearly a decade after its engineers discovered the ignition-switch defect to order repairs for vehicles on the road. Lawmakers say they also want to know why the federal agency that regulates auto safety didn’t act more quickly on the problem.
The New York Times story by Christopher Jensen pointed out that the number of vehicles being recalled in such a short period is derailing the good will that marked the beginning of the year for GM:
Having so many recalls, particularly in such a short period of time, is a problem for General Motors, which is still trying rebuild its reputation and is more vulnerable than an automaker like Toyota, said Kevin Lane Keller, a professor of marketing at Dartmouth’s Tuck School of Business.
“One of the advantages of having a strong brand is that it helps you weather a crisis more easily,” he said.
G.M. has recalled about 2.5 million of its small cars, including 2.2 million in the United States. The automaker has acknowledged that it knew about the defective ignition switches for more than a decade but did not recall the vehicles. That has prompted governmental investigations, including a congressional inquiry that will start on Tuesday with Ms. Barra scheduled to testify.
On Friday, the automaker also said it was aware of a 13th death related to the faulty ignition switches. It said the crash involved a 2007 Cobalt and occurred in Quebec, Canada.
G.M. recalled about 758,000 vehicles in the United States in 2013, ninth among automakers, according to the National Highway Traffic Safety Administration. Toyota was first, with about 5.3 million vehicles, followed by Chrysler with 4.7 million and Honda with almost 2.8 million.
Writing for Automotive News, Mike Colias and Nick Bunkley reported earlier this week that some of GM’s problems were caused by not giving a new part number to a redesigned switch, something one of their sources called a “cardinal sin”:
Stung by rising warranty costs, General Motors decided in the mid-1990s to pull design work for ignition and turn-signal switches from suppliers and put its own employees in charge. One of the first projects for the in-house team was the ignition switch for the Saturn Ion and Chevrolet Cobalt.
“We wanted to have control over the design,” Ray DeGiorgio, the lead design engineer for the Ion and Cobalt ignition switch, said in an April 2013 deposition obtained by Automotive News. “So we brought them in-house.”
That part has now been linked to at least 34 crashes and 12 deaths over the past decade. It’s also at the center of a deepening mystery in the wake of GM’s recall of 1.6 million 2003-07 vehicles fitted with the defective ignition switch:
Why did GM authorize a redesign of the part in 2006, eight years before the recall? And why was the change made so discreetly — without a new part number — that employees investigating complaints of Ions and Cobalts stalling didn’t know about it until late last year?
These questions, among many that will be posed by lawmakers and federal safety regulators looking into GM’s handling of the recall, have confounded some former GM engineers, who say the company’s reports to regulators describe a sequence of events that was fundamentally at odds with standard operating procedure.
Not assigning the new part number would have been highly unusual, according to three people who worked as high-level GM engineers at the time. None of the engineers was involved in the handling of the ignition switch; all asked that their names not be used because of the sensitivity of the matter.
“Changing the fit, form or function of a part without making a part number change is a cardinal sin,” said one of the engineers. “It would have been an extraordinary violation of internal processes.”
That raises some difficult questions for Barra as she gets ready to speak to Congress. Ben Klayman and Richard Cowan had this in a story for Reuters:
GM built a system to deliberately keep senior executives out of the recall process. Instead, two small groups of employees in the vast GM bureaucracy were tasked with making recall decisions, a system GM says was meant to bring objective decisions.
It means that lawmakers may also focus on asking who is responsible for a system that failed so badly that there weren’t red flags raised for those higher up the food chain.
“In this day and age, to think that stuff like this can be kept quiet or forgotten is ridiculous,” independent auto analyst and author Maryann Keller said. “The right question to ask is who knew, when did they know and why was this not brought forth to be dealt with. Did they hope that it was just going to go away?”
The company has recalled 1.6 million cars for a problem first noted in 2001, spurring the congressional enquiries as well as investigations by federal safety regulators, who will also testify, the Justice Department, and GM itself.
GM has said Barra and other top executives did not learn of the defective switches until January 31, explaining that smaller groups of lower-level company executives are responsible for leading a recall. Some executives who might use this argument include former CEO Rick Wagoner and his immediate successor Fritz Henderson, who have not discussed the matter publicly.
The more people dig into the internal processes behind the recalls, the worse it seems. Not alerting top executives makes it harder to gain traction for spending money to fix problems. It also shows a lack of oversight, which is alarming, particularly when you think about how many of these vehicles are produced. The questions continue to mount and how Barra handles them will be a true test of her ability.