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Coca-Cola moves to enter homes


With the announcement that Coca-Cola Co. is buying a 10 percent stake in Green Mountain Coffee means that soon you’ll have the option of making your own single-serve Coke at home. The real question is what will happen to Coke’s global distribution network and its relationship with bottlers.

Michael J. de la Merced had this story in the New York Times:

Coca-Cola agreed on Wednesday to buy a 10 percent stake in Green Mountain Coffee Roasters, as it seeks to cement ties with the fast-growing coffee company.

Under the terms of the deal, Coke will buy about 16.7 million shares in Green Mountain for about $1.25 billion. The shares were priced at $74.98 each, representing the volume-weighted average price for the last 50 days.

In return, Green Mountain will be the official maker of the soda giant’s single-serve cold beverages, built on its popular Keurig pod-based system. Some of the proceeds from the investment will go toward expansion of its forthcoming Keurig Cold product.

Writing for the Wall Street Journal, Mike Esterl and Annie Gasparro:

The pact represents a major strategic shift for Atlanta-based Coke, which has relied on restaurant fountain systems and legions of bottlers to deliver its namesake cola to consumers since 1886.

It coincides with a nearly decade-long decline in U.S. soda consumption, a trend that puts pressure on Coke and rivals such as PepsiCo Inc. and Dr Pepper Snapple Group Inc. to find new ways to court drinkers.

In a conference call with reporters, Coke Chief Executive Muhtar Kent said the partnership represents “a real game-changing” innovation for the industry but that the company isn’t abandoning its traditional routes to market.

“This is not a zero-sum game,” he said, adding that Cokes bottlers will have “a very complementary role” in how the company’s products are marketed under the Keurig system.

Coke said it will make its global drink portfolio—which includes hundreds of other brands including Sprite, Fanta, Minute Maid and Powerade—available around the world through Green Mountain’s KeurigCold system. Green Mountain says the system should be available in fiscal 2015, which begins Sept. 28.

A Coke spokesman said the company has the option to increase its minority equity stake in Green Mountain to 16% during the first 36 months of the partnership.

Bloomberg reported in a story by Leslie Patton and Duane D. Stanford that while Keurig is working with Coca-Cola on developing the cold brew machine, Keurig may also partner with other beverage makers:

The companies are together working on the Keurig Cold single-cup beverage brewer that will be sold in Green Mountain’s fiscal 2015, which starts later this year. Green Mountain will make and sell Coca-Cola branded pods to go with the machine.

“This is what consumers told us they wanted,” Green Mountain CEO Brian Kelley said on the call. Coca-Cola cold-drink brands are “popular,” he said.

Still, Green Mountain will partner with other cold-beverage companies to sell single-serve pods that work in the Keurig Cold, he said. Kelley declined to discuss what other brands may be added and didn’t rule out PepsiCo Inc.

“We will have a number of partners and a number of brands on the system,” he said.

Jeff Dahncke, a spokesman for PepsiCo, declined to comment.

Kelley has been introducing new brewing machines and increasing advertising to get consumers to continue buying Keurig K-Cup packs. The Waterbury, Vermont-based company has been seeing more competition as grocery stores including Whole Foods Market Inc. begin selling private-label coffee pods.

The Reuters story by Lisa Baertlein and Phil Wahba:

“We’ll do deals with brands consumers love,” said Kelley, who added that Green Mountain has coffee deals with most major chains, including Starbucks (SBUX.O) and Dunkin’ Donuts

“We are really excited to start with Coca-Cola,” said Kelley, who came to Green Mountain from the world’s largest soda maker, where he was viewed as a product-savvy executive with expertise in product and supply chain management.

Green Mountain’s cold drink machine is scheduled to debut in fiscal 2015, which begins in October this year.

Coca-Cola CEO Muhtar Kent said on the call that the deal would give his company access to new business opportunities. He added that it would enhance Coca-Cola’s bottling system and that its bottlers would have a complimentary role.

“This gives Green Mountain a beverage partner with some hugely powerful global brands. For Coke, it gives them access to some really cool, new cutting-edge pod cold-beverage technology,” said John Sicher, editor and publisher of Beverage Digest.

Sicher said soda sales in the United States have been in decline since 2005, while growth in pod-based coffee brewing has boomed.

Coca-Cola has a lot to lose as global soda sales decline. The company has come under fire as many scientists have pointed to its products as a factor in the rise of obesity and some have even tried to ban large-sized sodas. It’s an interesting move into a new product area, signaling that Kent is willing to look at anything to keep his company on top.


Microsoft goes with the cloud


In selecting Satya Nadella to head Microsoft, the company’s board opted for a 22-year veteran and someone who has led its cloud computing efforts. Microsoft took six months in the search process, ultimately coming up with someone intimately familiar with the corporate bureaucracy.

The New York Times had this story by Nick Wingfield:

Microsoft on Tuesday announced that Satya Nadella was its next leader, betting on a longtime engineering executive to help the company keep better pace with changes in technology.

The selection of Mr. Nadella to replace Steven A. Ballmer, which was widely expected, was accompanied by news that Bill Gates, a company founder, had stepped down from his role as chairman and become a technology adviser to Mr. Nadella.


In Mr. Nadella, Microsoft’s directors selected both a company insider and an engineer, suggesting that they viewed technical skill and intimacy with Microsoft’s sprawling businesses as critical for its next leader. It has often been noted that Microsoft was more successful under the leadership of Mr. Gates, a programmer and its first chief executive, than it was under Mr. Ballmer, who had a background in sales. Mr. Ballmer, 57, said in August that he was stepping down.

The Economist story detailed how the appointment fits into Ballmer’s reorganization and emphasis on services over devices:

Two months before he said he would relinquish his job, Mr Ballmer unveiled a reorganisation of the giant firm’s business structures, accounting and management, declaring that Microsoft would henceforth be a “devices and services” company. Since then much of the talk about Microsoft—apart from gossip about who might succeed Mr Ballmer—has been about devices. Microsoft is buying Nokia’s ailing mobile-phone business, which is by far the biggest maker of smartphones that use Microsoft’s mobile operating system. The firm’s Surface tablet, despite encouraging results last quarter, has not sold well. Its Xbox entertainment console, however, has gone like hot cakes.

The appointment of Mr Nadella, a software engineer who has been at Microsoft for 22 years, is a reminder that services—especially the ones the firm sells to businesses—are every bit as important as consumer devices, and probably more so. Microsoft is not only battling Apple and makers of devices that run on Android, Google’s mobile operating system, as computing shifts from the personal computer to the smartphone and the tablet. The software giant is also fighting to retain business custom, as enterprise computing also becomes mobile and shifts from desktops and corporate data centres to cloud software and remote servers.

Under Mr Nadella’s leadership, the old “server and tools” division increased revenue by 9% in the year to June, to $20.3 billion (more than a quarter of total revenues), and operating income by 12.8%, to $8.2 billion, making it the best performing of the company’s big divisions. Mr Ballmer’s reorganisation makes comparisons since then difficult, but the new “commercial” segment saw revenue climb by 10% in the six months to December.

The Wall Street Journal story by John Kell and Shira Ovide said that Nadella would likely continue Microsoft’s current course, calling him a “safe choice”:

The appointment of Mr. Nadella, who is 46 years old and leads the Microsoft division that makes technology to run corporate computer servers and other back-end technology, is considered a safe choice. It comes after a lengthy search during which the company considered a long list of external and internal candidates.

Mr. Nadella, who will also join the company’s board, said his selection marked a “humbling day” and vowed to reinvigorate Microsoft’s role as a leader despite stiff competition in markets such as mobile devices and what the industry calls cloud services.

“Our industry does not respect tradition—it only respects innovation,” he said in a letter to employees. “The opportunity ahead will require us to reimagine a lot of what we have done in the past for a mobile and cloud-first world, and do new things.”

Little in Mr. Nadella’s public history at Microsoft, however, suggests he will break from the company’s pattern as a fast follower, rather than a trend setter.

“As Microsoft continues down the right lane of the highway at 55 mph with its new CEO in hand, the fear among many investors is that other tech vendors from social, enterprise, mobile, and the tablet segments continue to easily speed by the company in the left lane of innovation and growth,” wrote analysts at FBR Capital Markets.

The Bloomberg story, written by Dina Bass and Peter Burrows, led with the news of John Thompson taking over as chairman from Bill Gates:

With Microsoft Corp. (MSFT:US)’s appointment of John Thompson as chairman to replace co-founder Bill Gates, the world’s largest software maker is looking to the veteran technology executive as the main outside voice in its new leadership structure.

Thompson was the lead independent director heading the board’s search for a new chief executive officer, resulting in the appointment of Microsoft insider Satya Nadella to replace Steve Ballmer, the Redmond, Washington-based company said in a statement today. While the naming of Thompson and Nadella, who were already involved in Microsoft’s transition, signal continuity, it’s also the biggest break in the company’s history as the Gates-Ballmer duo who have been in charge for more than three decades step aside.

The former CEO of Symantec Corp. (SYMC:US), Thompson, 64, is stepping in at a crucial point as Microsoft remakes itself to better compete with rivals including Apple Inc. (AAPL:US) and Google Inc. (GOOG:US) In picking Thompson, the board is betting that he’ll be able to use his experience running a security-software company to help turn around Microsoft.

“Thompson’s going to be a major voice for the company,” James Staten, an analyst at Forrester Research, said in an interview. “They wouldn’t have made him chairman, if he didn’t have strong opinions about how to drive the company forward. And Satya is looking for strong partners on the board.”

Making changes at a company the size of Microsoft can seem nearly impossible. It’s hard to change the culture and shift directions. Nadella has a lot of work to do, particularly on the consumer side of the business. Whether he can innovate and keep investors happy will be critical to his success.


Frankie Flack: Pack journalism invades business journalism


So last month, I was taking a short mental health break (flacking, believe it or not, can be draining at times), and I ran across a weird little story at Gizmodo about a company that will take your ultrasound and, using 3-D printing, create a life-size replica of your fetus. The story wasn’t, strictly speaking, “news” (CNet wrote on a related effort 18 months ago). And it wasn’t, strictly speaking, “important.”

Readable? Yes. Strange. Yes? Critical information that would allow me to better understand the world? No.

My beef isn’t that some digital journalist, somewhere, saw the 3-D fetus story decided it was worth a writeup. Hell, Gizmodo got my eyeballs. My beef is how widespread this stupid little story was. The Gizmodo story I read gave credit to Fast Company’s Co.Design for the story. Co.Design noted that it saw the news first on some site called WebProNews, which also covered the story. WebProNews got the start on the fetus piece from a post on PopSugar. Business Insider also wrote the story, also crediting PopSugar.

To recap: some of the nations largest and quickest-growing business and technology sites all wrote essentially the same, carbon-copy story based on one ur-post from a fashion-and-celebrity blog. A large number of real journalists, getting paid real money, took time out of their day to make sure that this particular meaningless story made it on their site.

Now, pack journalism has always been a problem. During the 1996 Olympics, I took a drive through the neighborhood where falsely suspected bomber Richard Jewell lived, and it was a circus: a hundred cameras, a thousand people, just waiting to report the same marginal set of facts. And that’s a moment that is re-played, with a different cast and a different location, with great frequency. But the Internet has compounded the problem: in the pursuit of the viral, you now have more people chasing less important things.

This isn’t just sour grapes. Once, in the past year, I had a client that was able to capture the zeitgeist. Reporters were crawling out of the woodwork to talk to us. As a flack, I should have been in my glory. Except that all but maybe a half-dozen of the stories followed the same cookie-cutter script. Sure, the bolus of coverage was great, but if I could have siphoned some of that off, given it to some deserving but under-covered story, I would have

That’s my real complaint: no matter how quickly a writer can bang out a re-write of the story of the day, there is still an opportunity cost. Those are minutes not writing about something else that might be equally cool. Minutes not spent finding that exclusive. The reality is that I — and pretty much all flacks — have at least one interesting, stupid-simple story that hasn’t been told yet. We’ve love to share it with you.

So before you go and write the eight-hundredth piece about 3-D printing or the new iPhone or the Bud Light Super Bowl commercial, ring up your favorite flack and give him 60 seconds. We’ll all be better off for it.

Jos. A Bank

Jos. A Bank makes another move


While the rest of the country was watching the Super Bowl, Jos. A Bank was trying to remain an independent company. In the latest chapter of the drama around the men’s retailer, the company is now talking with Eddie Bauer.

Michael J. de la Merced had this story in the New York Times:

As Jos. A. Bank continues to rebuff a hostile takeover bid by Men’s Wearhouse, the clothier is exploring at least one alternative deal that would keep it independent.

The company is in talks to buy Eddie Bauer, the outdoor clothing retailer, according to people briefed on the matter.

Jos. A. Bank publicly released a letter to Men’s Wearhouse on Sunday accusing its bigger rival of failing to properly disclose the antitrust risks in its takeover bid. (The letter made no mention of the talks with Eddie Bauer.)

Both Sunday’s letter and the discussions with Eddie Bauer represent the latest twists in a monthslong drama over two of the country’s biggest men’s wear sellers.

Jos. A. Bank moved first by bidding $2.3 billion for its bigger rival last fall, hoping to create a powerhouse that could better compete with the likes of Macy’s and Dillard’s.

Men’s Wearhouse rebuffed the attempts and later turned the tables, offering to buy its onetime suitor. At the moment, it has bid $1.6 billion while threatening to nominate two candidates for the target company’s board, who if elected would replace its chairman and chief executive.

Bloomberg’s David Welch said Jos. A. Bank was looking at several other retailers for potential combinations after deeming the Men’s Wearhouse offer too low:

Jos. A. Bank, in an earlier filing, disclosed an interest in pursuing other targets it didn’t identify. While talks for Eddie Bauer are the main focus now, one of the other retailers considered was men’s clothier Brooks Brothers Inc., one of the people said. Arthur Wayne, a spokesman for Brooks Brothers, didn’t immediately respond to an e-mail seeking comment.

Golden Gate had committed financing to help Jos. A. Bank buy Men’s Wearhouse as part of an unsolicited $2.3 billion bid in October. Men’s Wearhouse rebuffed that overture; the two sides never entered talks and the two companies have been in conflict since then.

Men’s Wearhouse made its own offer for Jos. A. Bank in November, raised that bid in January, and said it will directly approach Jos. A. Bank’s shareholders with a cash tender offer.

In its letter today, Jos. A. Bank said the Men’s Wearhouse offer “substantially undervalues our company” and that “we see no benefit in commencing negotiations with Men’s Wearhouse.”

The Reuters story led with the rejection of the latest offer:

Jos. A. Bank Clothiers Inc on Sunday rejected yet another offer by rival Men’s Wearhouse Inc, the latest in a prolonged acquisition battle between the two men’s clothing retailers.

In response to Men’s Wearhouse offer last week that it is open to sweetening its spurned buyout offer under certain conditions, Jos. A. Bank said the proposal was still undervaluing the company.

“After carefully reviewing your offer with our financial and legal advisors, we continue to believe that your offer to acquire Jos. A. Bank substantially undervalues our company and that your proposal is not in the best interests of our stockholders,” said the letter to Douglas Ewert, president of Men’s Wearhouse.

“Accordingly, we see no benefit in commencing negotiations with Men’s Wearhouse.”

Earlier in the week, Jos. A Bank’s five largest shareholders were pushing for a sale, according to Bloomberg’s David Welch and Jodi Xu:

Jos. A. Bank Clothiers Inc. (JOSB), which is resisting a takeover by Men’s Wearhouse Inc., has been told by five of its largest shareholders to start talking to its rival about a sale, said people with knowledge of the matter.

Firms including P. Schoenfeld Asset Management LP and Beacon Light Capital LLC have urged Jos. A. Bank to engage Men’s Wearhouse and discuss its $1.61 billion hostile bid for the Hampstead, Maryland-based company, the people said, asking not to be identified discussing private information. The five investors own about 17 percent of Jos. A. Bank, according to the people and data compiled by Bloomberg.

Pressure on Jos. A. Bank’s board of directors, led by Chairman Robert Wildrick, is mounting after it refused to negotiate with Men’s Wearhouse and instead toughened the company’s anti-takeover defenses. Men’s Wearhouse today said it is prepared to raise its offer if it can justify doing so through discussions or due diligence, and asked Jos. A. Bank to form a special committee of directors to re-consider its offer.

The investors seeking a deal between the two companies also include Franklin Resources Inc. (BEN), Pentwater Capital Management LP and Praesidium Investment Management Co., the people said. Jos. A. Bank’s board is also facing a lawsuit by Eminence Capital LLC, which said this month that it plans to nominate two new directors. Eminence owns about five percent of Jos. A. Bank, according to a statement from the fund.

The back and forth of this story is fascinating. It’s anyone’s guess if a combination will happen and what it will look like if it does. Eventually Jos. A Bank will have to make a decision or risk losing the confidence of investors.


Amazon earnings up, but disappointing


Internet giant Amazon.com Inc. missed analysts’ expectations for its fourth-quarter profit as it cost them more to get customers’ orders to them.

Bloomberg’s Adam Satariano had this straightforward story:

Amazon.com Inc. (AMZN:US), the world’s largest Web retailer, reported fourth-quarter revenue and profit that trailed analysts’ estimates after sales growth slowed outside the U.S. and holiday shipping costs surged.

Net income was $239 million, or 51 cents a share, the Seattle-based company said today in a statement. Analysts on average had projected profit of 69 cents a share, according to data (AMZN:US) compiled by Bloomberg. Revenue rose 20 percent to $25.6 billion, trailing the $26.1 billion average estimate.

Amazon’s dominance of U.S. e-commerce isn’t translating globally, with international sales growth slowing to 13 percent in the quarter from 21 percent a year earlier. Meanwhile, expenses are climbing as Chief Executive Officer Jeff Bezos pumps money into warehouses to speed shipments, a cost Amazon may try to offset as it considers raising the price of its Prime delivery service for the first time, the company said today.

David Streitfeld led his story in the New York Times with the news that Amazon is planning to raise shipping fees:

Amazon investors might have finally heard the news they have been waiting for: The retailer is raising shipping fees.

Amazon has 237 million active customers but as a general rule makes almost no profit. Thursday’s announcement that the company was considering raising prices by as much as 50 percent on its $79 Prime shipping program could mean $500 million for its skimpy bottom line.

“This is the first time we’ve ever seen Amazon flex its muscles in terms of pricing,” said Gene Munster, an analyst with Piper Jaffray. “It’s hugely significant.”

The news came in a conference call when the Seattle-based retailer discussed its fourth-quarter earnings. The announcement helped deflect disappointment that Amazon’s torrid growth might be slowing.

Amazon has been pouring money into new ventures, ranging from new warehouses to free videos for Prime subscribers. The eternal question is when it will turn all that expansion into profit.

Raising fees for the estimated 25 million Prime subscribers indicates that moment might be sooner, rather than later.

The Wall Street Journal’s Greg Bensinger pointed out that expenses have been weighing on the company:

The company ramped up expenses during the quarter, hiring 70,000 temporary workers at its warehouses and distribution centers in expectation of big sales gains. But the holiday season was marred by shipping problems at United Parcel Service Inc. that caused some customers to get their packages after Christmas, prompting Amazon to issue $20 purchase credits. (Please see related article on page B5.)

Its shares were down about 5%, or $20.01, in after-hours trading, after falling as much as 10%. The shares gained 4.9% to $403.01 at 4 p.m. on the Nasdaq Stock Market. The stock was up 63% last year.

“They have gotten a lot of hall passes on profitability; maybe that run is over,” said Colin Gillis, a BGC Partners analyst. “They’re selling widgets and they’re doing it basically at cost; you’ve got to sell a lot of widgets if you’re not making money on them.”

Investors’ faith in Amazon has relied in part on consistent sale gains fueling the company’s lavish spending on warehouse construction and secretive internal projects that it has indicated will yield bigger returns in the future.

The Reuters story by Bill Rigby and Edwin Chan led with Amazon’s expectation for a loss:

Amazon.com Inc missed Wall Street’s estimates for the crucial holiday period and cautioned investors about a possible operating loss this quarter as shipping costs climb, pushing its shares down more than 5 percent.

The world’s largest online retailer faced lofty expectations going into one of the most heavily competitive holiday seasons in years, with retailers vying to out-do each other with steep discounts. It was a contest that many retail industry executives have blamed on Amazon.

The Seattle-based company, which has spent freely to forge new markets in cloud computing and digital media, is experiencing slower growth at home after years of rip-roaring expansion, and its international business continues to underperform.

Amazon expects operating results for the current quarter to range from a $200 million loss to a $200 million profit, compared with a $181 million profit a year ago.

To cover rising fuel and transport costs, the company is considering a $20 to $40 increase in the annual $79 fee it charges users of its “Prime” two-day shipping and online media service, considered instrumental to driving online purchases of both goods and digital media.

Amazon has worked hard to become everyone’s go-to Internet retailer. They’re even talking about pre-shipping items to people based on what’s in their shopping carts. The fact that it might not even make a profit is telling. It has sacrificed shareholder value for market share, which may not pay off in the long run.


Google selling Motorola to Lenovo


One thing about Google, it’s not one to invest in businesses that aren’t working. Less than two years after buying Motorola, Google is selling the unit to Lenovo.

Rolfe Winkler and Spencer E. Ante had this story in the Wall Street Journal:

Google Inc.’s experiment making Motorola phones has ended after just 22 months, with the company unloading the handset business to China’s Lenovo Group Inc. for $2.91 billion but keeping a valuable trove of patents.

The deal unwinds the Internet company’s costly move into smartphone hardware after it acquired Motorola Mobility for $12.5 billion in May 2012. Google has struggled to compete in the cutthroat phone-hardware business—its share of the world-wide smartphone market fell to about 1% last year from 2.3% a year earlier, according to IDC.

Google said it will retain the vast majority of Motorola’s patent portfolio, a key motivation of the original transaction that lets it defend those phone makers who use its Android software against patent suits. Google’s Android software powers the majority of the world’s smartphones.

The deal also signals the rising ambitions of Lenovo, which is seeking to be a bigger player in the global technology market.

Lenovo, which last week agreed to buy a server business from International Business Machines Corp., gains a brand that would catapult its place in the global smartphone market to third from fifth, yet far behind Samsung Electronics Co. and Apple Inc., according to IDC. Lenovo became the No. 1 personal-computer maker last year after buying IBM’s PC business in 2005.

The New York Times story by David Gelles, Claire Cain Miller and Quentin Hardy offered this context about the sale:

That  acquisition was Google’s largest by far, and the biggest bet that Larry Page, its co-founder, has made since returning as chief executive in 2011. Google wanted Motorola’s patents and a cellphone maker to help its mobile business, and named Dennis Woodside, a former Google operations executive, as C.E.O.

Selling a major portion of the business would be a concession of defeat for Google and particularly for Mr. Page. Motorola has continued to bleed money, aggravating shareholders and stock analysts, and its new flagship phone, the Moto X, did not sell as well as expected.

This is the second time Google has sold off assets it acquired after buying Motorola Mobility, which was its largest-ever acquisition. In 2012, just months after that deal was completed, Google sold Motorola Home, which included its set-top boxes and cable modems, to Arris for $2.35 billion.

Google will retain most of the patents it acquired as part of its original deal for Motorola, while granting Lenovo a license to use certain ones for its new handsets.

And in a blog post on Wednesday, Mr. Page characterized the initial Motorola deal as more about patents than hardware. “We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users,” he said.

Bloomberg’s Alex Sherman, Brian Womack and Edmond Lococo pointed out that the sale is technically a loss, but not too big of one:

While Google has invested in Motorola, the unit’s revenue has declined. Motorola’s third-quarter sales fell by about a third, even as the company released Moto X, the first smartphone introduced under the direction of Google’s leadership. In November, Google announced it was rolling out a new lower-cost smartphone called the Moto G. Google reports fourth-quarter results tomorrow.

Motorola’s patents have also shown signs that they weren’t a bargain. Google has lost patent cases or was delivered disappointing sums in cases that involved some of the intellectual property. Google had estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology.

“This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere,” said Google CEO Larry Page in a statement about selling Motorola to Lenovo.

A $2.91 billion sale of Motorola is a far cry from the $12.4 billion that Google paid for the business. Yet Google doesn’t appear to be taking much of a loss, analysts said. After closing the agreement to buy Motorola in 2012, Google got the unit’s $2.9 billion in cash. Google last year also sold Motorola’s set-top box business to Arris Group Inc. for $2.24 billion. And Google keeps the majority of Motorola’s patents, which it can license.

 “It’s probably not as bad as it first appears,” said Aaron Kessler, an analyst with Raymond James & Associates, who rates Google the equivalent of a buy.

Reuters pointed out some of the difficulties that Chinese companies are facing in the U.S. market in a story by Nadia Damouni, Nicola Leske and Gerry Shih:

Chinese companies faced the most scrutiny over their U.S. acquisitions in 2012, according to a report issued in December by the Committee on Foreign Investment in the United States. Analysts say political issues could cloud the deal, especially with Lenovo trying to seal the IBM deal at the same time.

In the deal for the Motorola handset business, Lenovo will pay $660 million in cash, $750 million in Lenovo ordinary shares, and another $1.5 billion in the form of a three-year promissory note, Lenovo and Google said in a joint statement.

In two years, China’s three biggest handset makers – Huawei, ZTE Corp and Lenovo – have vaulted into the top ranks of global smartphone charts, helped in part by their huge domestic market and spurring talk of a new force in the smartphone wars.

The deal looks like a good one for both Google and Lenovo, especially since Google keeps access to the patents it wanted and Lenovo gets access to the U.S. market. While it’s rare to see a behemoth like Google make a misstep, this will likely not be considered one of them.


Bloomberg wins suit over publishing call transcript


In a victory for  financial news media, a U.S. appeals court said Bloomberg News acted lawfully when it secretly obtained a recording of a conference call between Swatch Group and securities analysts and published a transcript, reports Jonathan Stempel of Reuters.

Stempel writes, “The 2nd U.S. Circuit Court of Appeals in New York on Monday said Bloomberg’s handling of a February 8, 2011, call discussing the financial performance and prospects of the world’s largest watchmaker constituted ‘fair use’ under U.S. copyright law, and deserved the U.S. Constitution’s First Amendment protection of press freedom.

“Upholding a lower court dismissal of a lawsuit by Swatch against Bloomberg, the 2nd Circuit said Bloomberg’s methods, while ‘clandestine’ and reflecting a ‘lack of good faith,’ helped ensure that companies do not selectively disclose material information.

“Eliminating selective disclosures had been a goal of the U.S. Securities & Exchange Commission when in 2000 it adopted Regulation FD, or fair disclosure. The 2nd Circuit said it did not matter that Swatch, as a foreign issuer, was not subject to the regulation.

“‘Although Bloomberg obtained the recording without authorization and put it to commercial use without transforming it, Bloomberg’s use served the important public purpose, also reflected in Regulation FD, of ensuring the wide dissemination of important financial information,’ Chief Judge John Katzmann wrote for a three-judge panel of the 2nd Circuit.”

Read more here.


Netflix gains subscribers; stock soars


Investors piled into Netflix shares Wednesday after the streaming video service added more than 2 million customers in the last quarter of 2013. Netflix’s gains presents a conundrum for mainstream cable providers and network television, as well as Internet service providers.

Reuters had this story by Lisa Richwine and Ronald Grover about the company’s earnings:

Netflix Inc added more than 2.3 million U.S. customers in the fourth quarter, sending its shares up 17 percent in after-hours trading, and said it was testing different pricing plans for its monthly TV and movie streaming service.

The world’s largest video streaming company on Wednesday reported net income of $48 million for the quarter, up from $8 million a year ago. Earnings-per-share were 79 cents, Netflix said in a statement, beating the 66 cents average forecast of analysts surveyed by Thomson Reuters I/B/E/S.

The strong U.S. subscriber growth, a closely watched barometer of company performance, came in at the top end of Netflix’s forecast range. Netflix also signed up 1.74 million new customers in foreign markets, bringing its worldwide total to 44.4 million.

Answering critics who question how big Netflix could grow, the company said it expected to add more U.S. subscribers in the first quarter of 2014 than in the year-ago period.

The Wall Street Journal story by John Kell and Amol Sharma focused on the company’s pricing strategy and how to tier offerings for different consumers:

The company, which provides streaming videos as well as DVDs by mail, charges $7.99-per-month and currently allows users to access the service from two screens simultaneously—enabling sharing among relatives and friends. The company said it hopes to eventually offer new members three options. It has tested other approaches, including a $6.99 offering that would allow a single stream and a three-stream alternative.

In a letter to shareholders, Netflix said that if it were to make changes to pricing for new members, existing members would get “generous grandfathering of their existing plans and prices.” As a result, “there would be no material near-term revenue increase.”

“It is not clear that one price fits all,” Netflix Chief Executive Reed Hastings said on a video webcast during which the quarterly results were discussed. “We’re trying to figure out some models of good-better-best price tiering.” The company said in the letter it is in “no rush” to implement new member plans.

The last major pricing overhaul by Netflix came in 2011, when it tried to move away from offering a single plan for streaming and DVD-by-mail by introducing two separate plans. The company reversed course after a customer backlash and a major dent in its stock price.

Justin Bachman wrote for Bloomberg Businessweek that Netflix could run into trouble as higher end video and increased usage strains the broadband infrastructure:

That growth could come alongside higher costs if Verizon Communications (VZ) and other high-speed Internet companies decide to charge video streamers like Netflix, Amazon (AMZN), and Hulu more because of their higher usage of the digital infrastructure. At peak times, Netflix viewers represent about a third of U.S. broadband Internet capacity, according to some estimates. In a case decided last week, Verizon successfully blocked federal rules on net neutrality, which could allow the Internet providers to block streaming services or to charge higher fees for their heavy data loads.

Netflix Chief Executive Officer Reed Hastings dismissed those concerns Wednesday in the company’s quarterly earnings chat with two Wall Street analysts, arguing that any such efforts “would significantly fuel the fire for more regulation, which is not something that they’re interested in,” he said of the Internet service providers. “I think our economic interests are pretty co-aligned.”

He also predicted that the gradual introduction of higher-resolution 4K video from Netflix and other services will slowly boost ISPs, which will expand their technical capabilities to deliver the bandwidth needed for such video. Most people who get Internet service from major high-speed players such as Comcast (CMCSA), Time Warner Cable (TWC), and AT&T (T) do not currently have download speeds that can handle this kind of video.

The Associated Press story (via the Washington Post) pointed out that the stock surge comes after a costly falter in 2011:

The strong showing follows a year in which Netflix’s stock nearly quadrupled in a resounding comeback from a steep downturn triggered during the summer of 2011 after the Los Gatos, Calif. company split apart its Internet video service and DVD-by-mail service. The division resulted in price increases of as much as 60 percent for customers who wanted to keep both options.

Hastings apologized and the uproar eventually died down as the company began stockpiling its $8-per-month streaming service with more original programming, such as the Emmy-award winning “House of Cards.” The second season of that series will be released Feb. 14, contributing to management’s optimism about its subscriber growth for the current quarter ending in March.

As more people connect their TVs to the Internet and buy mobile devices, Netflix’s streaming service is emerging as a must-have pastime. Meanwhile, the DVD-by-mail service is gradually dying as more subscribers abandon watching video on physical discs. The company ended December with 6.9 million DVD subscribers, down from 13.9 million in September 2011.

While the short-term gain in subscribers is good news for the company and its investors, there are some capacity and other technological issues looming. It’s possible that the end of net neutrality could cost Netflix as consumer demand eats into bandwidth.


Deutsche Bank posts loss


Deutsche Bank shocked the market with its surprise week-early earnings announcement, which was more than a $1 billion loss.

The Wall Street Journal had this story by Ulrike Dauer, David Enrich and Eyk Henning:

Deutsche Bank AG’s surprise €1 billion ($1.35 billion) fourth-quarter loss suggests that a new phase of banking cleanups is getting under way in Europe, a likely precursor to other European lenders absorbing financial hits.

European regulators, trying to douse the Continent’s banking crisis, are working on a round of examinations of banks’ books, scheduled for completion later this year. The goal is to identify lurking losses and force banks to set aside more money to cover future bad loans and, where necessary, to raise more capital.

Deutsche Bank’s loss appeared to partly reflect the bank acting in anticipation of the greater regulatory scrutiny, analysts said. The bank announced its quarterly results late Sunday, more than a week earlier than planned. On Friday, The Wall Street Journal had reported about the bank’s lackluster financial performance. In Frankfurt, Deutsche Bank’s shares fell 5.4% on Monday.

The loss, compared with analysts’ expectations of a nearly €700 million profit, is the latest blow to Deutsche Bank’s management, led by co-CEOs Anshu Jain and Jürgen Fitschen.

It marks the third time in the past five quarters that Deutsche Bank’s results have missed market expectations. And the bank, one of Europe’s largest by any measures, is facing an array of government investigations into the conduct of the bank and its employees.

Jack Ewing wrote for the New York Times that an economic turnaround in Europe isn’t likely to help the bank anytime soon:

Anshu Jain, the co-chief executive of Deutsche Bank, argued during a conference call on Monday that, despite the loss, “2014 will represent the turning point” in dealing with lingering problems of the financial crisis, which include a long list of legal woes and pressure from regulators to reduce risk.

If so, and if Deutsche Bank were part of a turnaround among European banks, it would be good news for the euro zone economy, which is barely growing, in part because credit is scarce.

But it may be more likely that any revival of Deutsche Bank and its big competitors, like Barclays and HSBC, will be based on growth in Asia or the United States and pass Europe by, said Kern Alexander, a professor of law and finance at the University of Zurich. The midsize banks that do much of the business and consumer lending in Europe will continue to struggle, Mr. Alexander said.

“The big global banks that are more multinational and more diverse are able to weather the storm,” he said. “The big question is, Will the banks be able to make loans and help the economy turn the corner?”

The Reuters story by Thomas Atkins emphasized the legal troubles the bank is having, something that is plaguing the entire industry as it works to recover from the financial crisis:

The unexpected loss is likely to compound the problems that have dogged the bank over the past year, especially a lengthening list of lawsuits and regulatory matters, and to redouble pressure on co-chief executives Anshu Jain and Juergen Fitschen to prove their turnaround plan is on track.

In a statement, the German bank said it would meet its 2015 targets but warned that 2014 would again be tough: “We expect 2014 to be a year of further challenges and disciplined implementation.”

The bank said that litigation cost it 528 million euros in the quarter, bringing the year’s bill for fines and settlements to 2.5 billion euros and lowering its litigation reserves to 2.3 billion euros at year-end.

Deutsche Bank was fined $1.9 billion in December by the U.S. Federal Housing Finance Agency to settle claims that it defrauded two U.S. government-controlled companies in the sale of mortgage-backed securities before the 2008 financial crisis.

It was also fined 725 million euros by EU antitrust regulators for rigging interest rates.

The lender has suffered a hailstorm of criticism in recent weeks, fanning a sense of crisis at Germany’s flagship lender as the list of scandals, investigations and negative headlines lengthens, while costly settlements and a downturn in trading revenue weigh on profit.

Bloomberg had this story by Nicholas Comfort, which had some analysts praise for investors:

The bank agreed to pay U.S. financing companies Fannie Mae (FNMA) and Freddie Mac 1.4 billion euros to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities. The European Commission fined Deutsche Bank 725 million euros on Dec. 4 for its part in rigging interest rates linked to the London interbank offered rate. The company said Dec. 19 that it reached a settlement to forfeit 221 million euros to end a derivatives contract with Italian bank Banca Monte dei Paschi di Siena SpA.

“Deutsche Bank management deserves credit,” Kian Abouhossein, an analyst with JPMorgan Chase & Co. (JPM) in London who has an overweight recommendation on the stock, wrote in an e-mailed report today. The firm “is still in restructuring mode but management has delivered on our wish-list of aggressive exposure reduction, bringing forward of cost savings and settlement of some litigations.”

It looks like management still has a lot of work to do. Deutsche Bank’s exposure to bond markets and the European economy were big drags for the quarter. The New York Times story pointed out that the European economy is more credit dependent than the U.S. and that financial firms are caught in a tough spot of needing to make more loans in a down market. It’s a hard cycle to break.

Shell logo

Shell warns on earnings


Taking over one of the top oil jobs would never be easy, but for Shell CEO Ben van Beurden announcing a drop in earning for his company was likely difficult. It’s never a good sign for the global economy when energy companies are seeing earnings decline.

The Wall Street Journal’s Justin Scheck had this story about the announcement:

The steep costs of oil and gas development from Canada to Kazakhstan, sometimes with little to show for the giant investments, came back to haunt Shell on Friday when it announced its first profit warning in 10 years.

The Anglo-Dutch company said it now expects fourth-quarter earnings of $2.2 billion, down about 70% from $7.3 billion a year earlier. Full-year earnings are expected to total about $16.8 billion, down from $27.2 billion in 2012. “Our 2013 performance was not what I expect from Shell,” said Mr. van Beurden, who took over as Shell’s CEO just three weeks ago.

The bad news is the latest sign of profit pressure squeezing the world’s largest oil firms, including Shell, Chevron Corp. and Exxon Mobil Corp. All of them invested heavily on remote projects in places like deep water, frozen tundra and mountainous jungles. A surge in development costs and flat oil prices have made it harder to justify the costs of such projects, and the industry’s giants arrived late to the shale boom in North America, overpaying for assets.

Shell, the world’s second-largest publicly traded oil company by output, has been an especially big spender for the past decade. Shell estimated that its net capital-spending costs hit $44.3 billion in 2013, up nearly 50% from 2012.

But some of the company’s investments are struggling. Shell owns a stake in a Kazakh oil field that has cost more than $30 billion and is more than eight years overdue. Shell wrote down by more than $2 billion last year the value of its shale assets in North America. Sea ice and an oil-rig crash hurt an Arctic exploration project after an investment of more than $4 billion.

The New York Times Stanley Reed reported that many investors and analysts were surprised by the news:

“We’re a bit shellshocked this morning after this profit warning, which is highly unusual for an integrated oil company,” analysts at Sanford C. Bernstein in London wrote in a research note.

Analysts had expected $4.9 billion in adjusted earnings for the quarter, according to Bloomberg News. Shell also took a $700 million impairment write-down.

Shell’s shares fell more than 4 percent as markets opened in London, though they recovered some ground and closed the day down 0.9 percent.

Mr. van Beurden, who was head of refining at Shell when he took over the top job at the beginning of the year from Peter Voser, who has retired, seems to have inherited a situation that has grown more difficult since his promotion was announced last year.

Neill Morton, an Investec analyst, wrote in a note that “Shell has broken with its recent custom of disappointing on earnings day. It is now dishing up the bad news ahead of time.”

Mr. van Beurden said that “our focus will be on improving Shell’s financial results” and “achieving capital efficiency.”

Improving the finances is important, but some believe that management should focus on itself, according to a CNBC story:

Ishaq Siddiqi, a market strategist at London-based broker ETX Capital said it was worrying news from an oil major which is clearly suffering from management’s inability to get on top concerns regarding capital discipline.

“This is unlikely to change this year leaving markets worried about the group’s outlook,” he said in a morning note.

“Shell is not an isolated case however, as weak industry conditions for downstream oil are likely to hit sector peers too. For Shell itself, management must now implement more aggressive targets for group strategy in order to turn a page and improve capital efficiency which would go some way in improving operational performance.”

Shell said that a high level of maintenance activity during the last quarter affected high value oil and gas production volumes. A weak Australian dollar also hit earnings. It added that its Upstream Americas unit continued to incur a loss and the security situation for its Nigeria operation continued to remain challenging. Upstream oil operations search for and recover crude oil and natural gas, whilst downstream production processes the materials collected during the upstream stage.

 The New York Times pointed out that it takes years to develop an oil field or other operation and make it profitable:

The company has now reported three straight quarters of disappointing earnings, and it may be tough for a new chief to turn things around quickly. The oil industry is a long-term business and it takes years to develop oil fields and other installations that, which, once completed, usually operate for decades.

The disappointing earnings “won’t just stop because of a new guy” at the helm, said Oswald Clint, an analyst at Sanford C. Bernstein, in an interview by telephone on Friday.

Obviously putting a new CEO in place doesn’t change past performance, but it will determine if the company is able to turn around its recent investments. But in the short-term it looks like van Beurden will have some explaining to do.