Tag Archives: Company coverage

Ocwen

New York regulator looks at mortgage servicer

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Benjamin Lawsky, head of New York’s Department of Financial Services, is looking into the nation’s fourth-largest mortgage servicing company for conflicts of interest. It’s another blow to the image of the industry.

Michael Corkery had this story in the New York Times:

New York State’s top banking regulator said he had new concerns about Ocwen Financial, one of the nation’s largest mortgage servicing companies, creating another regulatory headache for the company.

In a letter to Ocwen released on Wednesday, Benjamin M. Lawsky, supervisor of the state’s Department of Financial Services, said his office had found a “number of potential conflicts of interest” between Ocwen and other public companies with which it has relationships.

Ocwen, which is based in Atlanta, is the brainchild of William C. Erbey and has grown in recent years into a major player in the mortgage industry. Inside Mortgage Finance said Ocwen services 2.3 million home loans.

Mr. Lawsky said he was concerned that potential conflicts between Ocwen and four other publicly traded companies of which Mr. Erbey is chairman could “harm borrowers and push homeowners unduly in foreclosure.” For example, Mr. Lawsky said Ocwen’s chief risk officer also was the chief risk officer of another of the companies, called Altisource Portfolio Solutions, “and reported directly to Mr. Erbey in both capacities.”

Mr. Lawsky said the chief risk officer, who has since been removed from his duties at Altisource Portfolio, “seemed not to appreciate the potential conflicts of interest posed by this dual role, which is particularly alarming given his role.”

The Financial Times reported that Ocwen disclosed the relationships in regulatory filings, which it feels is sufficient:

DFS said his interest in such businesses “raises the possibility that management has the opportunity and incentive to make decisions concerning Ocwen that are intended to benefit the share price of affiliated companies, resulting in harm to borrowers, mortgage investors, or Ocwen shareholders as a result”.

Ocwen said, “These agreements are fully disclosed in our public filings, and we believe them to be on an arms-length basis. We look forward to addressing the matters raised by NY DFS and will fully co-operate.”

Ocwen has expanded rapidly in recent years as it snapped up billions of dollars worth of assets that give the company the right to collect payments on thousands of American home loans. In 2009, it spun off Altisource, which in addition to providing mortgage servicing, also stands to profit by selling and renting homes that have been foreclosed on.

The servicing firm’s practices have been under growing regulatory scrutiny. This month, DFS halted indefinitely Ocwen’s purchase of servicing rights from Wells Fargo, citing concerns about its ability to handle the increased servicing.

In December, Ocwen agreed to provide $2bn in loan modifications to homeowners to settle with the Consumer Financial Protection Bureau, which said it found years of “significant and systemic misconduct that occurred at every stage of the mortgage servicing process” including foreclosures.

Housing Wire’s Trey Garrison added the background that Lawsky (whose name he spells wrong below) is concerned about the company’s ability to service mortgages, which prompted Lawsky to halt a $2.7 billion servicing deal with Wells Fargo:

In addition to information on Ocwen’s officers, directors and employees, Lawskey’s office wants all documents sufficient to show the nature and extent of services provided to Ocwen by each of the affiliated companies, including all agreements for such services, and copies of all agreements between Ocwen and the affiliated companies concerning procurement of third party services. Ocwen is also being probed about its agreements concerning the outsourcing of information management to the affiliated companies.

Regarding the Ocwen/Wells Fargo deal, the DFS says it is concerned about Ocwen’s ability to handle Wells Fargo’s portfolio of mortgage servicing rights, a deal that was announced last month and which would have given Ocwen the right to service some $39 billion in mortgages.

Wells Fargo’s portfolio of residential mortgage servicing rights holds roughly 184,000 loans linked to the transaction. The portfolio represents approximately 2% of the banks total residential servicing portfolio.

While this story might seem small, it’s yet another black mark on the mortgage industry, which has suffered since the crisis. Investors have turned to servicers in the anticipation that housing will post gains and this is an area that will help show some type of returns. But it seems that they may have to look for those, especially if litigation becomes a bigger risk or regulators are putting a stop to deals.

Home Depot

Home Depot sees Christmas in the Spring

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The world’s largest home improvement chain is doing some work on its own bottom line. After reporting sales less than analysts expected, Home Depot is banking on higher demand after winter storms and premium products to increase the bottom line.

Dhanya Skariachan wrote for Reuters that the retailer is predicting higher demand as people make repairs after a tough winter:

Winter storms and record cold in much of the United States hurt Home Depot’s (HD.N) fourth quarter sales of everything from lumber to building materials.

But the world’s largest home improvement chain expects to benefit this spring when Americans begin to repair snow damaged homes and gardens.

“We know firsthand that many homeowners have some major repairs ahead of them which suggest we should have a great spring selling season,” Chief Financial Officer Carol Tome said on Tuesday, adding that sales at stores open at least a year were up so far in February despite harsh winter weather.

The comments came after Home Depot missed sales estimates and relied on tight cost controls to beat profit estimates in the fourth quarter, which ended February 2.

Some Wall Street analysts said the retailer held up pretty well in the quarter plagued by inclement weather in its key U.S. market and weakness in the Canadian currency.

The Wall Street Journal’s story by Shelly Banjo and Michael Calia led with the addition of high-end products as a way to make more money:

Home Depot Inc. is adding more upscale items to its lineup, as its customers show a willingness to splurge on their homes.

The giant home-improvement retailer said sales of premium products have posted four straight quarters of growth. The results highlight the growing divergence between chains that can cash in on wealthier shoppers who benefit from rising home and stock prices, and retailers like Wal-Mart Stores Inc. that cater to lower-end customers and are suffering because of reductions in federal food stamp outlays and unemployment benefits.

Home Depot’s customers are spending more. The number of shopping trips where customers spent more than $900 increased by 5.5% in the three months ended Feb. 2, compared with a 2.5% increase for tickets under $50. Those bigger tickets helped sales excluding newly opened or closed stores rise 4.9% in the U.S.

“We want to make sure we have products across the entire price spectrum, but we are adding on the higher end and also adding products with innovation that would come with a premium price,” Chief Financial Officer Carol Tomé said in an interview.

To that end, Home Depot this spring will introduce a higher-end patio furniture line, a new gourmet barbecue system and a toilet seat that comes with an integrated LED light. It is also adding new products at lower price points

Kyle Stock pointed out in a Bloomberg Businessweek story that the retailer also held sales in various markets in the spring, much like the after Thanksgiving sales of other retailers:

The marketing masochists at Home Depot (HD) are again trying to make Black Friday happen in the spring. As if one day a year of bleary-eyed shopping rugby isn’t enough. Nothing cultivates commerce like a ginned-up shopping holiday—so the thinking goes—and this one is even more random than the post-Thanksgiving scrum. Americans don’t give gifts en masse every spring, and other retailers don’t respond with similar blanket deals.

Home Depot doesn’t even hold its spring sales event on the same day, choosing to play it out over several weeks “on a market-to-market basis based on climate by geography.” Sounds festive, right? That’s like Santa canvassing the southern hemisphere in July. Still, never underestimate the American consumers’ demand for a killer patio and a lush lawn. Home Depot’s mantra: “Spring is our Christmas.” May through July is always the company’s busiest period.

There’s plenty of evidence that Home Depot’s Black Friday push will pay off handsomely this year. For one, rising home prices have spurred consumer confidence and emboldened do-it-yourselfers to tackle bigger, more expensive projects. Home Depot said purchases greater than $900 were up 5.5 percent in the recent quarter as shoppers splurged on appliances and flooring. “The housing market is in the early innings of a recovery,” Robin Diedrich, an analyst with Edward Jones, told Bloomberg. Indeed, Home Depot estimates home sales and price appreciation will add 2 percentage points to its sales growth this year.

The New York Times pointed out in a story by Elizabeth A. Harris that earnings for the retailer were mixed, beating expectations but not by much:

Home Depot’s profits were higher than expected, at 73 cents a share, while analysts surveyed by Thomson Reuters were expecting earnings of 71 cents a share. Sales at stores open at least a year rose 4.4 percent over the same period last year.

Overall sales, however, dropped 3 percent over last year, from $18.2 billion to $17.7 billion. (This year’s fourth quarter contained one week less than the same quarter last year.) This year-over-year comparison was an especially difficult measure for the company because last year included a significant bump in sales because of Hurricane Sandy. Carol B. Tomé, Home Depot’s chief financial officer, said the company had $255 million in fourth-quarter sales last year that came with the rebuilding efforts.

Home Depot estimated that the company lost $100 million in sales during January because of the weather, because although its stores sell more snow-clearing equipment and heaters during storms, traffic falls considerably.

The weather was a good and bad point for the retailer since it kept people from getting to stores in the quarter, but will likely prompt them to spend more in the spring. Investors seemed to like what they heard in the earnings report, sending the stock up 4 percent on the news.

HSBC

HSBC earnings disappoint

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Europe’s largest bank fell short of expectations as revenue declined and they didn’t cut enough costs. The economy is begining to recovery but not fast enough for the bank to  meet its targets.

Bloomberg’s Howard Mustoe and Gavin Finch had this story:

HSBC Holdings Plc (HSBA), Europe’s largest bank, posted full-year profit that missed analyst estimates as a cost-cutting drive fell short of targets and revenue shrank. The stock slumped in Hong Kong and London.

Pretax profit for 2013 rose 9 percent to $22.6 billion from $20.7 billion in the year-earlier period, the London-based bank said in a statement yesterday. That was lower than the $24.6 billion median estimate of 30 analysts surveyed by Bloomberg. HSBC’s Hang Seng Bank Ltd. (11) unit in Hong Kong posted record earnings for the year, boosted by an accounting gain.

HSBC, which gets most of its profit from Asia, is focusing on the most lucrative markets amid increased regulation and compliance costs. While Chief Executive Officer Stuart Gulliver has closed or sold 63 businesses since 2011, costs are running above his target of about 50 percent of revenue, while return on equity, a measure of profitability, is still short of his goal.

“The miss is driven by revenue softness and costs not falling as much as expected,” said Ian Gordon, an analyst at Investec Plc in London with a buy recommendation on the shares. “The dividend is also below expectations.”

The Reuters story by Steve Slater and Matt Scuffham pointed out that HSBC makes most of its money in Asia and is looking to find a way to offset that as the economy slows:

Gulliver is under pressure to show how HSBC can replace income lost from the sale of U.S. businesses and a stake in a Chinese insurer, and worries that Asia’s economic growth is slowing.

He remained optimistic about longer-term prospects for emerging markets, which have been hit hard by a U.S. decision to wind down stimulus measures, but warned of “greater volatility in 2014 and choppy markets”.

He predicted China’s economy would grow by 7.4 percent this year, Britain’s should expand by 2.6 percent, the United States by 2.5 percent and western Europe 1.2 percent.

HSBC reported 2013 pretax profit of $22.6 billion, up from $20.6 billion in 2012 but below the average forecast of $24.3 billion in a Thomson Reuters poll.

Shutting businesses hit the bank’s revenues, which fell 5 percent. Stripping out the impact of disposals, underlying revenue was $63.3 billion, up from $61.6 billion.

Margot Patrick and Max Colchester wrote for the Wall Street Journal that HSBC could also be hurt by rules requiring it to hold more capital:

Chief Executive Stuart Gulliver warned that rising capital requirements could hinder the bank’s ability to ever hit the upper end of its 12% to 15% return-on-equity target, a measure of how much profit a company generates from shareholder funds. He also dashed hopes of a share buyback in the near term by saying he didn’t think it would happen in 2014.

HSBC, with $2.7 trillion in assets, is regarded as one of the world’s most stable banks because of its strong capital ratios and exposure to rapidly growing emerging economies. Mr. Gulliver said on Monday the bank has succeed in becoming “leaner and simpler” since starting a restructuring in 2011 that included exiting 63 businesses and shedding tens of thousands of jobs.

But analysts have been concerned about the bank’s ability to hit its return targets and jump-start revenue growth in an uncertain global economy. Return on equity in the year was 9.2%, up from 8.4% in 2012. The bank missed its cost-efficiency target, too, and said both figures had been affected by repayments to U.K. customers who were wrongfully sold insurance on loans and credit cards.

Profit before tax fell in many of the regions where HSBC operates. In Asia Pacific excluding Hong Kong, pretax profit slipped to $7.76 billion from $10.45 billion. Latin America pretax profit fell to $1.97 billion from $2.38 billion. The decline was offset, though, by a better performance from Europe, where last year’s $3.41 billion pretax loss swung to a $1.83 billion gain.

Andrew Peaple wrote in the Heard on the Street column that HSBC is working hard to get, well, nowhere:

Moreover, HSBC’s balance sheet is in decent shape, with core tier one equity up to 10.9% of its risk-weighted assets. The rising dividend could eventually be accompanied by share buybacks: HSBC will seek shareholder approval for that this spring.

Still, the problem for HSBC is that since 2011 it has effectively been running hard to stand still. It has promoted itself as a key beneficiary of global growth thanks to its expertise in trade finance. But with emerging-market growth increasingly checkered, it’s getting harder to judge HSBC’s revenue outlook. On the expense side, the low-hanging fruit of lower loan provisions, cost savings and decreasing regulatory fines can only be plucked so often.

And that’s really the point investors should think about – that cost cutting and capital management isn’t the talk of a growing company. Those are measures that stagnant companies take to continue to show growth on paper. While it’s no surprise that banks are having trouble making money as the global economy slows, it is hard to see where they’ll turn after all the costs have been cut and capital managed.

Comcast Netflix

Comcast and Netflix reach streaming agreement

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Netflix is striking deals now to make sure its content will stream without interruption. It reached an agreement with Comcast for an undisclosed amount to directly connect to its network.

The New York Times had these details in the story by Noam Cohen:

Comcast, the country’s largest cable and broadband provider, has reached an “interconnection agreement” with Netflix to ensure that its videos would be streamed directly — and thus faster and more reliably — to Comcast’s customers, both companies announced Sunday.

The terms of the multiyear agreement, including whether Netflix was paying for its direct connection, were not disclosed, other than to say that the company “receives no preferential network treatment.”

The announcement confirmed reports that had trickled out late last week, already detecting a more direct Internet path of Netflix videos to Comcast customers. The agreement is expected to be fully put in effect in a matter of weeks.

That the technical details of how streaming videos arrive on a customer’s screen is the subject of corporate announcements and news media coverage speaks to the outsize importance of Netflix and Comcast in how movies and television are watched.

The Wall Street Journal story by Shalini Ramachandran pointed out that the agreement comes less than two weeks after Comcast agreed to buy Time Warner Cable creating the largest TV provider:

The deal comes just 10 days after Comcast agreed to buy Time Warner Cable Inc. The acquisition, if approved, would establish Comcast as by far the dominant provider of broadband in the U.S., serving 32 million households before any divestitures it might make. It also comes amid growing signs that congestion deep in the Internet is causing interruptions for customers trying to stream Netflix movies and TV shows.

People familiar with the situation said Netflix Chief Executive Reed Hastings didn’t want streaming speeds to deteriorate further and become a bigger problem for customers.

In a statement confirming the broad outlines of the deal, the companies on Sunday said the agreement would provide “Comcast’s U.S. broadband customers with a high-quality Netflix video experience for years to come.”

The debate has been heating up over who should bear the cost of upgrading the Internet’s pipes to carry the nation’s growing volume of online video: broadband providers like cable and phone companies, or content companies like Netflix, which make money by sending news or entertainment through those pipes.

While several big Web companies in recent years have started paying major U.S. broadband providers for direct connections to get faster and smoother access to their networks, Netflix has held out—until now.

Steven Musli wrote for CNet that many are concerned that the deal will damage net neutrality, which would prevent Internet providers from discriminating against traffic on their networks:

Under the so-called “paid peering” deal, Netflix will be allowed to connect directly to Comcast’s network instead of going through intermediaries, as it formerly did.

The companies have for years been locked in a dispute over the cost of delivering Netflix streams to its customers over Comcast’s broadband network. While Netflix wanted to connect to Comcast’s network for free, the cable giant sought compensation for the heavy traffic that Netflix users generate, arguing that it costs the company a lot to deliver Internet video.

In recent months, the dispute appeared to be heating up, with suggestions that Comcast customers were seeing their connections to Netflix degraded. Netflix released data last month that showed the average Netflix streaming speed decline 27 percent since October.

The deal is likely to presage similar agreements with other broadband carriers such as AT&T, Verizon, and Time Warner Cable, which have also refused Netflix’s request to connect to their servers without compensation.

Although the two companies say Netflix is not receiving preferential treatment, observers worry that the deal may deal a setback to Net neutrality, which aims to prevent broadband providers from blocking access or discriminating against Internet traffic traveling over their connections.

Timothy B. Lee wrote in The Washington Post that the deal signals the end of net neutrality:

In recent months, the nation’s largest residential Internet service providers have been demanding payment to deliver Netflix traffic to their own customers. On Sunday, the Wall Street Journal reported that Netflix has agreed to the demands of the nation’s largest broadband provider, Comcast. The change represents a fundamental shift in power in the Internet economy that threatens to undermine the competitive market structure that have served Internet users so well for the past two decades.

The deal will also transform the debate over network neutrality regulation. Officially, Comcast’s deal with Netflix is about interconnection, not traffic discrimination. But it’s hard to see a practical difference between this deal and the kind of tiered access that network neutrality advocates have long feared. Network neutrality advocates are going to have to go back to the drawing board.

One clear lesson, though, is that further industry consolidation can only make the situation worse. The more concentrated the broadband market becomes, the more leverage broadband providers like Comcast and Verizon will have over backbone providers like Cogent. That gives the FCC a good reason to be skeptical of Comcast’s proposed acquisition of its largest rival, Time Warner Cable. Blocking that transaction could save the agency larger headaches in the future.

While blocking the transaction is the best move in one man’s opinion, access to the Internet for companies of all sizes is an important issue. If companies with deep pockets are able to buy better access then it will be harder for competition to start-up and earn customers. And when competition suffers, it’s been proven, so do consumers.

Bloomberg_logo_grey

Bloomberg seeks manufacturing reporter in New York

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Bloomberg News seeks a strong, energetic reporter in its New York bureau to cover U.S. manufacturers.

General Electric, United Technologies and 3M anchor the beat, along with smaller companies as news merits. The reporter will be responsible for breaking news and crafting features on those companies’ businesses — including aerospace and energy — as well as on U.S. industrial trends and corporate strategy, finance, and management.

The applicant must demonstrate excellent writing skills, a passion for breaking news, an ability to cultivate sources and a spirit that is both competitive and collaborative.

Qualifications:
-Bachelor’s degree or equivalent experience
-Knowledge of the economy, financial markets and business
-Minimum of three years of experience in business journalism
-Ability to write quickly and concisely under pressure

To apply, go here.

frankieflack

Frankie Flack: Screw biz journalists, I love embargoes

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If there’s one things business reporters seem to hate about my kind, it’s the embargo: an agreement to receive information, but sit on it until a specific time. TechCrunch has waged a gleeful war on the practice, and even the august Wall Street Journal  doesn’t like to play the embargo game. So if both ends of the business-press spectrum hate the embargo, there must be an open-and-shut case against us sneaky flacks, right?

Hardly.

Flacks love embargoes for two reasons, and both of those reasons serve the public good just as much as our clients.

The first reason we love embargoes is that it gives journalists the time to get things right. The reality is that, given the constraints, most reporters do one hell of a job reporting in real time. Let’s say the accuracy rate is 99 percent. Or even 99.9 percent. Here’s the thing: my bosses don’t want to take the 1 in 1000 chance that their news will get screwed up. They’d rather send things out under embargo and eliminate that tiny silver of potential error.

We’re not the only ones. I’ve written before about how the government uses embargoes, and that’s something to behold. Reporters and editors are ushered into a windowless room. The door is locked. All communications are cut. They get the figures for economic growth of jobless claims or whatever and have 30 minutes to review them, under embargo. Then, at the appointed house, the  phone lines are open, stories are filed and — voila! — the world has its economic numbers.

Do you remember the GDP ever being inaccurately reported? Me neither. Compare that to, say, the mess made of the coverage of the Obamacare Supreme Court decision. Sure, that was an exception, but — again — my clients don’t want to be an exception.

The other reason we love embargoes is that it forces the press to consider news independently, without seeing which way their peers are going. If I let a dozen journalists know that I’m launching a new product on Monday at noon, they can’t look around see if other media are writing about it. They have to assess the newsworthiness in a vacuum. That’s a good thing for me. Otherwise, everyone will take their cues for Reuters or AP (or, God forbid, PopSugar) and you’ll get the wonder of pack journalism.

Having to assess each and every piece of news that comes across the transom  makes the job of journalists that much harder. And I sympathize: the volume of email and the torrent of pitches is just ridiculous. Of course, embargoes are a (partial) solution to that problem, too. A story that you can chew on and gather context about without a looming deadline or a competitor’s piece to match can be a nice luxury.

The official reason that TechCrunch and others reject embargoes is that they’re essentially gentleman’s agreements, and the benefits of breaking an embargo and publishing information whenever an outlet damn well pleases can sometimes outweigh the risks of any punishment (screwing over all of the embargo-biding outlets in the process). But broken embargoes argue against embargoes. It argues against dumb embargoes. There’s no way in hell I’m going to tell a corporate secret to a reporter that I can’t trust, and anyone who doesn’t exercise that kind of diligence gets what they deserve.

But that doesn’t mean that the concept is flawed. When it’s well-executed between a flack and a reporter who have history, an embargo is a classic win-win. In fact, I have a great story in the hopper right now. And I can’t wait to give it some of my buddies. Under embargo, of course.

Energy Future Holdings

Energy Future Holdings may file for bankruptcy

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Energy Future Holdings, formerly known as TXU, is likely to file for bankruptcy court protection. The company was part of one of the biggest leveraged buyouts in history, and the news will likely tarnish the idea of large deals.

The Wall Street Journal story by Emily Glazer and Mike Spector said the company was lining up loans after a deal with creditors fell through.

One of the biggest leveraged buyouts of an American company is preparing to file for bankruptcy protection, brought to its knees by heavy debt and a misguided bet on the direction of natural gas prices.

Energy Future Holdings Corp., previously called TXU Corp., is lining up loans to keep two subsidiaries operating during bankruptcy proceedings after months of talks have failed to produce an agreement with creditors on reworking its $40 billion-plus in debt, according to people familiar with the matter.

The two sides may yet reach a last-minute agreement, but prospects for a streamlined bankruptcy where creditors agree in advance on a restructuring plan have dimmed, the people said. The filing would likely result in a split of Energy Future’s two large operating subsidiaries, they said. A bankruptcy would be the 10th largest by assets in U.S. history.

The acquisition was part of the frenzied leveraged buyout boom where private-equity firms used massive amounts of debt to back a series of corporate takeovers including TXU, hotelier Hilton Worldwide Inc., office-building owner Equity Office Properties Trust and hospital operator HCA Holdings Inc.

James Osborne wrote for the Dallas Morning News that the company will likely fight to stay together despite its financial troubles:

CEO John Young has argued publicly against splitting up the company and its subsidiaries, Luminant, Oncor and TXU Energy. But he is facing creditors groups eager to extract as much value as they can from investments in some cases now worth pennies on the dollar.

The scenario under discussion would split Energy Future’s competitive arm, which controls generator Luminant and retailer TXU Energy, from its regulated arm, which controls transmission company Oncor.

Energy Future is in the process of setting up two $4 billion loans for each of the divisions to allow them to continue operating through bankruptcy separately.

But a source close to Energy Future cautioned that the company has no plans to cut a deal for the breakup before filing for Chapter 11. And once the case goes to court, the company will continue to lobby to keep its subsidiaries together.

The Reuters story by Nick Brown added this background about the creation of the company and how it got into so much debt:

Energy Future Holdings was created in October 2007 in a $45 billion buyout of Dallas-based TXU Corp, the biggest electricity generating and distribution company in Texas.

The buyout, led by KKR & Co (KKR.N), TPG Capital Management LP TPG.UL and the private equity arm of Goldman Sachs (GS.N), saddled the company with debt just as natural gas prices were about to plunge, making its coal-fired plants unprofitable.

Many industry experts believed the company would choose to skip a $270 million interest payment and file bankruptcy last November, but the company chose to make the payment, extending its runway for restructuring talks.

Its next day of reckoning may be fast approaching. Sometime this month or next, Energy Future expects to receive an opinion from auditors on whether it can survive as a going concern based upon its annual financial statements. It may have trouble convincing auditors to grant a positive opinion, given that it does not have enough cash to afford the $3.8 billion of bank debt that matures in October. Failure to secure such an opinion would trigger a default of EFH’s $20 billion of bank debt, meaning lenders could push the company into bankruptcy.

Maureen Farrell wrote a blog post for the Wall Street Journal that several banks could make even more money on the deal:

Three investment banks — Citigroup, Morgan Stanley and J.P. Morgan — could earn up to $300 million in fees, if they provide bankruptcy financing to Energy Future Holdings, the company formerly known as TXU.

If Energy Future Holdings files for bankruptcy, the three banks could earn another helping of sizable fees from the utility. Citi, Morgan Stanley and J.P. Morgan were among the consortium of banks that put together financing for the TXU buyout, the largest private-equity deal ever. KKR & Co., TPG and Goldman Sachs Group Inc. took TXU private in 2007 for $32 billion plus $13 billion in assumed debt.

Now, according to the WSJ’s Emily Glazer and Mike Spector, these three banks are talking to the company about providing debtor-in-possession financing, which allows a company to operate during bankruptcy proceedings. Bank of America, which was not an underwriter on the original deal, is also reportedly among the possible DIP lenders.

The high-profile bankruptcy will likely put a small tarnish of the notion of large deals, but leveraged buyouts on the scale of TXU aren’t the norm these days. What will remain to be seen is what this will mean for the funds holding TXU and its investors. It will also likely make many companies think twice about the debt loads they add to their deals.

facebook

Coverage of Facebook’s latest acquisition

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Facebook announced its biggest acquisition to date, purchasing Internet text service WhatsApp for $16 billion to $19 billion. The number depends on if you count the $3 billion in restricted stock options. Either way, it’s a vast sum of money.

Reed Albergotti, Douglas MacMillan and Evelyn M. Rusli wrote for the Wall Street Journal that the service is more popular than Twitter.

Facebook Inc. agreed to buy messaging company WhatsApp for $19 billion in cash and stock, a blockbuster transaction that dwarfs the already sky-high prices that other startups have been able to recently command.

The 55-employee company, which acts as a kind of replacement for text messaging, has seen its use more than double in the past nine months to 450 million monthly users. That makes its service more popular than Twitter Inc., the widely used microblogging service which has about 240 million users and is currently valued at about $30 billion.

 The transaction, which includes $3 billion in restricted stock units to be granted to WhatsApp’s founders and employees over four years, ranks as the largest-ever purchase of a company backed by venture capital.

Besides making its founders billionaires, the deal marks an enormous windfall for Sequoia Capital, the only venture firm that backed WhatsApp. Sequoia invested about $60 million for a stake valued at up to $3 billion in the deal, according to a person familiar with the matter.

The New York Times story by David Gelles, Brian X. Chen and Nick Bilton outlined how WhatsApp has been run and how they’ve opposed selling ads.

Mr. Koum and Brian Acton, two former Yahoo executives, founded WhatsApp in 2009.

Unlike traditional business leaders, the two founders spent most of their time throughout the day keeping the service running smoothly. Mr. Acton focused on the servers, while Mr. Koum looked at the overall product and made sure it looked and acted the same consistently across different devices.

Mr. Koum and Mr. Acton have said they want to make messaging accessible to anyone, regardless of what phone they own, where they live or how much money they make. They have also been adamant about refusing to sell advertising — they say that ads detract from intimate conversations.

WhatsApp received about $10 million in funding two years after the company was founded. It quickly became profitable.

Facebook, meanwhile, has struggled to gain traction in messaging.

Mr. Zuckeberg tried to acquire SnapChat last year for a reported $3 billion, but SnapChat turned down the offer.

While Facebook Messenger, the company’s chat platform, is popular with users, recent attempts to create its own direct messaging service have failed.

The Financial Times story by Hannah Kuchler and Tim Bradshaw pointed out that one lone backer would made billions in the deal:

The company’s sole venture capital backer, Sequoia Capital, had a stake in the “high teens” before the acquisition, which will be worth about $2.5bn to $3bn. Sequoia, a Silicon Valley-based firm, said it had invested almost $60m in the company.

Facebook is assembling a suite of apps as it seeks to dominate social networking as users move to mobile devices. The company approached Snapchat, the ephemeral messaging app last year to propose a deal, according to two people familiar with the matter. In 2012, it bought Instagram, the photo sharing app, for more than $1bn.

The company is also separating the functions on its core site into several apps, most obviously creating Facebook Messenger, in what was seen as an attempt to enter the chat app market. Facebook said the messaging app would sit alongside WhatsApp.

The Reuters story by Gerry Shih and Sarah McBride pointed out the popularity of non-social networking sites:

Combining text messaging and social networking, messaging apps provide a quick way for smartphone users to trade everything from brief texts to flirtatious pictures to YouTube clips — bypassing the need to pay wireless carriers for messaging services.

And it helps Facebook tap teens who will eschew the mainstream social networks and prefer WhatsApp and rivals such as Line and WeChat, which have exploded in size as mobile messaging takes off.

“People are calling them ‘Facebook Nevers,’” said Jeremy Liew, a partner at Lightspeed and an early investor in Snapchat.

WhatsApp is adding about a million users per day, Facebook co-founder and Chief Executive Officer Mark Zuckerberg said on his page on Wednesday.

“WhatsApp will complement our existing chat and messaging services to provide new tools for our community,” he wrote on his Facebook page. “Since WhatsApp and (Facebook) Messenger serve such different and important users, we will continue investing in both.”

Smartphone-based messaging apps are now sweeping across North America, Asia and Europe.

“Communication is the one thing that you have to use daily, and it has a strong network effect,” said Jonathan Teo, an early investor in Snapchat, another red-hot messaging company that flirted year ago with a multibillion dollar acquisition offer from Facebook.

“Facebook is more about content and has not yet fully figured out communication.”

It may not have figured out communication, but it certainly isn’t afraid of paying for what it wants. Facebook needs to find a way to capture some of the growth in mobile and with younger people who might be cooling to the site and its ads. What will be interesting is if the purchase will pay or if it will become yet another expensive toy.

Reuters Logo

Reuters parent reports fourth-quarter loss

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Thomson Reuters Corp., the parent of the Reuters news service, swung to a fourth-quarter loss as the financial data provider posted restructuring charges and revenue declined at its core financial and risk division.

Tess Stynes of The Wall Street Journal writes, “In the latest period, revenue from the financial and risk division fell 2.4% to $1.67 billion.

“The company’s Eikon financial desktop platform, launched in the wake of the financial crisis, has only recently shown signs of growth.

“‘While the external headwinds were stronger than anticipated at year-end, particularly in Europe and the emerging markets, I am pleased with the progress we continued to make inside the company and with our customers,’ Chief Executive James C. Smith said in a news release. ‘I am confident this progress will accelerate in 2014.’

“Thomson Reuters reported a loss of $351 million, or 43 cents a share, compared with a year-earlier profit of $352 million, or 42 cents a share. Excluding items, adjusted earnings were 49 cents.”

Read more here.

AOL

AOL reverses 401(k) change

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In one of the biggest public relations gaffes so far this year, AOL Inc. Chief Executive Officer Tim Armstrong blamed rising benefits costs on health care and two babies. As the criticism mounted about the policy change, Armstrong reversed course and reinstated the benefits policy.

William Launder had this story in the Wall Street Journal.:

AOL Inc. AOL +0.28% ’s Chief Executive Tim Armstrong said Saturday the company would reverse a recent change to its employee 401(k) policy and he apologized for remarks used to explain the rationale for the initial change in the benefits policy.

The company had recently moved to a policy in which employees get an annual lump sum 401(k) contribution from AOL at the end of the year, rather than matching contributions each pay period.

Mr. Armstrong said in an email to staff on Saturday that AOL will reinstitute matching contributions from AOL for each pay period. “As we discussed the matter over several days, with management and employees, we have decided to change the policy back to a per-pay-period matching contribution.”

On Thursday, Mr. Armstrong had caused a stir with employees and on social media when he said that care for two staffers’ “distressed babies” in 2012 cost the company about $1 million each. He used that example to help explain the rationale for changing the 401(k) policy.

Mr. Armstrong was accused of using the infants as cover for the unpopular policy change and was criticized for singling out the two mothers.

Slate published a story by Deanna Fei, the mother of one of the babies Armstrong mentioned:

“Two things that happened in 2012,” Armstrong said. “We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost. So when we had the final decision about what benefits to cut because of the increased healthcare costs, we made the decision, and I made the decision, to basically change the 401(k) plan.”

Within hours, that quote was all over the Internet. On Friday, Armstrong’s logic was the subject of lengthy discussions on CNN, MSNBC, and other outlets. Mothers’ advocates scolded him for gross insensitivity. Lawyers debated whether he had violated his employees’ privacy. Health care experts noted that his accounting of these “million-dollar babies” seemed, at best, fuzzy.

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I take issue with how he reduced my daughter to a “distressed baby” who cost the company too much money. How he blamed the saving of her life for his decision to scale back employee benefits. How he exposed the most searing experience of our lives, one that my husband and I still struggle to discuss with anyone but each other, for no other purpose than an absurd justification for corporate cost-cutting.

The New York Times story by Leslie Kaufman mentioned an incident earlier this year where Armstrong apologized after firing an employee for taking pictures of him:

But the commotion surrounding AOL’s benefits program was the second time in the last year that Mr. Armstrong has been forced to apologize for his actions or comments during internal meetings.

During a tense meeting in August with employees at AOL’s troubled Patch unit, a collection of local news sites, he fired an employee who was taking photographs of him during the meeting. He apologized four days later. AOL recently sold a majority stake in Patch to Hale Global, a turnaround firm.

In the current incident, Mr. Armstrong came under criticism for what numerous AOL employees thought were insensitive remarks while discussing the company’s increased medical costs. To make his point, he cited specific health care examples.

As Bloomberg pointed out in a story by Edmund Lee and Michelle Yun, the gaffe detracted from AOL’s earnings and outlook:

The latest incident overshadowed AOL’s fourth-quarter earnings, which were released Feb. 6. While the New York-based company exceeded analysts’ sales and profit estimates, the 401(k) uproar made it harder for Armstrong to tout the results. In his memo, he said the performance “validated our strategy and the work we have done on it.”

The Motley Fool’s Alex Planes says Armstrong “may be the worst CEO of the decade”:

Revenue has fallen almost 30%. Earnings per share have been cut in half. Free cash flow is two-thirds lower today than it was when Armstrong took the company public again.

What has AOL done under Armstrong’s leadership? Its three major moves were acquisitions. AOL bought Patch in 2009, TechCrunch in 2010, and Huffington Post in 2011.

When Tim Armstrong took the reins at AOL in 2009, it was a company largely dependent on subscriber revenue for its profitability. Tim Armstrong’s AOL today is still a company dependent on subscriber revenue for its profitability. Nothing Armstrong himself has done has changed that equation in the slightest, and it’s clear from the results over the duration of his tenure that this is a losing equation over the long run. Instead of blaming employees who get handed a bad medical break, maybe he should be taking a long, hard look in the mirror instead.

Armstrong’s apology may be too little too late. Instead of focusing on AOL’s better-than-expected performance, investors were treated to a public relations nightmare. Fei’s story in Slate is shockingly personal and the ordeal of her daughter’s birth is in stark contrast to AOL’s need to cut costs. The way the company handled this story is terrible. Reinstating the benefits might be the right thing to do, but somehow it feels like an afterthought.