Tag Archives: Coverage
by Liz Hester
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.
by Liz Hester
Pacific Investment Management Co. will have a new head as Mohamed El-Erian unexpectedly resigned from the top job. While a succession plan was detailed, no reason was given for his departure.
Tom Lauricella, Julie Steinberg and Min Zeng wrote this piece for the Wall Street Journal:
Mohamed El-Erian abruptly stepped down as chief executive of Pacific Investment Management Co., the giant asset-management firm that emerged as one of the winners of the global financial crisis but has recently been hit by waning investor taste for plain vanilla bonds.
Mr. El-Erian will leave in mid-March after seven years at the helm of Pimco, which manages $2 trillion as a unit of Germany’s Allianz SE. He will remain on the German company’s International Executive Committee and will advise on global economic and policy issues.
The company has announced that Douglas Hodge will succeed Mr. El-Erian as chief executive.
His departure leaves Bill Gross, who founded Pimco in 1971 and oversees the world’s largest bond fund by assets under management, the Pimco Total Return Fund, as the sole public face of the company. Mr. Gross, Pimco’s co-chief investment officer with Mr. El-Erian since 2007, will become chief investment officer, the company said.
Reuters reported that the company didn’t offer a reason for the departure in a story by Svea Herbst-Bayliss:
The company did not give a reason for El-Erian’s departure, but the bond market was hit hard last year as investors moved money to stocks from bonds.
El-Erian will stay on to consult at the German insurer, but the news that he would leave Pimco took the investment community by surprise.
El-Erian, 55, is well known due to his frequent appearances on cable television and at investment conferences.
He sent out an email announcing his departure that failed to shed more light on the decision.
Bill Gross – the co-chief investment officer and co-founder of Pimco and manager for the $237 billion PIMCO Total Return Fund – tweeted “PIMCO’s fully engaged. Batteries 110 percent charged. I’m ready to go for another 40 years!”
Two years ago, Gross, now 69, told the New York Times, “Mohamed is my heir apparent.”
Bloomberg’s Alexis Leondis and Charles Stein pointed out that El-Erian was responsible for helping Pimco to diversify:
El-Erian, widely viewed as the successor to Gross in running the Pimco Total Return Fund (PTTRX:US), has led Pimco’s push to diversify beyond bonds, starting an equity unit and opening products such as exchange-traded funds and hedge funds in anticipation of an end to the three-decade bull market for fixed income. His resignation comes after record client redemptions at Pimco Total Return and a setback to the equity unit following the departure last year of Neel Kashkari, hired in 2009 to lead the stock expansion.
“For Pimco, it is a disappointment,” Kurt Brouwer, chairman of Tiburon, California-based Brouwer & Janachowski Inc., who has invested in Pimco funds since the 1980s, said in a telephone interview. El-Erian “ was brought in as the next generation of management and obviously it didn’t work out.”
El-Erian, who made a name for himself investing in emerging-market debt early on in his career at Pimco, is part of the firm’s investment committee that sets strategy guidelines. He is listed as manager of eight mutual funds with $10.2 billion, according to data compiled by Bloomberg, a fraction of the firm’s overall assets. His departure won’t prompt an exodus from Pimco funds, said Brouwer.
USA Today posted the Associated Press story by Bernard Condon that chronicled El-Erian’s storied investment career:
El-Erian helped steer the company through the tumult of the financial crisis and helped develop its concept of the “new normal” — a widely cited idea that economies will grow more slowly after the crisis and big investment returns will be hard to come by. He is widely published, and is the author of a 2008 best-seller “When Markets Collide.”
Pimco has struggled in the face of rising interest rates in the past year. Investors have pulled billions of dollars out of its flagship bond fund, the Pimco Total Return Fund. In the past 12 months, the fund lost 4 percent, according to FactSet.
The son of an Egyptian diplomat, El-Erian worked at the International Monetary Fund for 15 years, eventually rising to deputy director. After a stint at Citigroup, he joined Pimco where he made a name as a shrewd investor in emerging market bonds.
El-Erian then left to head a group that invests Harvard University’s endowment and other related money. He bought emerging-market stocks, and used derivatives to bet on stocks elsewhere and on commodities. He rejoined Pimco in 2008.
I’m sure there’s more to the story since Gross is keeping his job. Or maybe El-Erian will turn up at the head of another asset manager. It will be interesting to see where he ends up. But one thing’s for sure, we likely haven’t seen the last of El-Erian.
by Liz Hester
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.
by Liz Hester
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.
by Chris Roush
Lance Williams, the business editor of The Tennessean in Nashville, writes about what business news content the paper will publish from USA Today.
Williams writes, “Each day, the USA Today section inside The Tennessean will contain at least two pages of national business coverage. One page will be devoted to the biggest business news stories of the day, whether it’s the latest decision from the Federal Reserve or the newest headlines from Twitter or Google. This past week, for instance, USA Today had expanded coverage of the Detroit auto show.
“Meanwhile, the second business page of each day’s section will feature expanded markets coverage. Listings will include a recap of the biggest gainers and losers from the stock market along with a variety of listings, including top mutual funds, mortgage rates, commodities prices, foreign currency prices and recaps of foreign stock exchanges. There’s also a daily investing Q&A.
“In the weekend USA Today section, there will be additional business content with a special focus on retirement planning.
“All in all, it’s the best return on investment you can find — combining the best in local business coverage with all the markets-related coverage you’ve been asking for.”
Read more here.
by Liz Hester
It looks like turning around an Internet behemoth isn’t as easy as it sounds. Yahoo Chief Executive Officer Marissa Meyer ousted her No. 2 executive Henrique de Castro, indicating the company isn’t turning around as fast as expected.
Douglas MacMillan and Joann S. Lublin had this story in the Wall Street Journal:
Henrique de Castro, the chief operating officer Ms. Mayer poached from Google Inc.GOOG +0.66% in 2012, is departing this week. One of the highest-paid executives in Silicon Valley, Mr. de Castro exits after about a year on the job with a severance package that could be worth more than an estimated $42 million.
The departure is a further sign yet that Ms. Mayer is struggling to revive growth in Yahoo’s advertising business, which has continued to lose share to rivals Facebook Inc. FB +0.10% and Google. Mr. de Castro, functioning as the company’s top ad executive and liaison to marketers on Madison Avenue, failed to convince advertisers to spend more money to reach visitors to its websites and mobile apps.
“There’s been no sign of a turnaround at the company,” said Mark Mahaney, managing director at RBC Capital Markets.
A spokeswoman for Yahoo declined to comment on the circumstances of Mr. de Castro’s departure. She also declined to comment on the size of the package except to say that a performance-based portion of the package hasn’t been determined.
The Associated Press reported that de Castro would leave with restricted stock that hadn’t yet vested in a story by Michael Liedtke:
It’s doubtful de Castro would be leaving if he were bringing in the revenue that Mayer envisioned, said BGC Financial analyst Colin Gillis.
“This was one of her key hires and he is already gone,” Gillis said. “It doesn’t look good.”
Mayer, who knew de Castro from the days when both executives worked at Google, will likely be questioned about what went wrong when she reviews Yahoo’s financial results for the fourth quarter, scheduled to come out Jan. 28. The Sunnyvale, Calif., company hasn’t warned that it missed its revenue forecast for the three-month period ending in December, an indication that Yahoo must have at least been reasonably close to hitting that financial target set by Mayer. Yahoo had projected fourth-quarter revenue of about $1.2 billion after paying commissions to its ad partners, unchanged from the previous year.
De Castro, 48, will leave Yahoo with much of the money and stock that he got when Mayer lured him to California from a Google advertising job in Europe. His severance package includes $20 million of restricted stock that wasn’t scheduled to fully vest until late 2016. He also will receive $1.2 million to cover the next two years of his salary. His rights to another batch of restricted stock valued at $9 million also have vested.
Brian Womack of Bloomberg estimated that de Castro was leaving Yahoo $109 million richer. That’s an excessive annual salary by any standard:
De Castro, Mayer’s top lieutenant, joined Yahoo in November 2012 from Google. He will receive severance benefits and equity awards in line with his contract, Yahoo said yesterday. He made an estimated $109 million from his stint at Yahoo, including salary, bonus, stock awards, compensation for leaving Google and severance payments, according to Equilar Inc., a compensation researcher based in Redwood City, California.
The firing is another sign of Mayer’s struggle to get the company on track as Yahoo searches for more users and ad dollars amid rising competition from younger rivals.
“This is going to be a very challenging turnaround,” said Ben Schachter, an analyst at Macquarie Securities. “When we talk to advertisers, we don’t hear a lot of excitement for traditional display ads — be it on Yahoo or others.”
While the stock has surged, some investors have attributed the gains to optimism regarding Yahoo’s stake in Chinese e-commerce company Alibaba Group Holding Ltd., rather than faith in Mayer’s turnaround. Alibaba, which plans to sell shares to the public, more than doubled profit in the second quarter to $707 million.
Reporting for the New York Times, Vindu Goel pointed out that there was no ceremony around his departure:
There was none of the usual corporate boilerplate that typically sugarcoats such departures — no praise for his service from Yahoo’s chief executive, Ms. Mayer, no mention of a sudden interest that Mr. de Castro had taken in spending more time with his family. A Yahoo spokeswoman said the company had no further comment on the matter.
But Ms. Mayer, who left Google to become Yahoo’s chief executive in mid-2012, was clearly displeased with Mr. de Castro’s performance.
In a memo announcing the leadership reorganization to Yahoo’s staff, she wrote, “I made the difficult decision that our COO, Henrique de Castro, should leave the company. I appreciate Henrique’s contributions and wish him the best in his future endeavors.”
Meyer is juggling unhappy analysts and investors who are waiting for some good news about the company. It’s yet another black mark on her tenure at the top that de Castro was able to negotiate such a huge severance package. There must be more to the story than simply stagnant growth to throw money at him to leave. Here’s hoping some enterprising reporter can get to the bottom of it.
by Liz Hester
The grand experiment of hyper-local journalism being conducted by an online company is over. AOL announced today that it would sell a majority of Patch.
William Launder wrote in the Wall Street Journal that the deal would be especially hard for AOL CEO Tim Armstrong since he founded Patch:
The deal marks AOL’s effective exit from Patch, after years of trying to make the venture and its 900 local news sites profitable. For AOL Chief Executive Tim Armstrong, the deal has particular significance, as he helped found Patch before joining the Internet company, which acquired Patch around the time Mr Armstrong became CEO in 2009.
Under the deal, which is expected to close in the first quarter, AOL will transfer Patch to a new company majority owned and operated by Hale Global. AOL will retain a minority interest. Financial terms weren’t disclosed.
Hale Global describes itself as a “technology holding company” that specializes in turning around distressed businesses. The firm has a low profile in the world of digital media, but counts executives including Bobby Figueroa, a former executive at Google Inc. and Yahoo Inc., YHOO -0.17% among its staff.
In a joint statement, the companies said that Hale Global had “substantial experience in the areas of online media, local marketing, mobile, retail and advertising.” The companies said they planned to relaunch Patch, with changes aimed at making the sites appeal to mobile users and across social media.
The Financial Times story by Emily Steel outlined the weight Patch has been on Armstrong’s tenure:
Patch has been a lightning rod for criticism throughout Tim Armstrong’s nearly five-year tenure as AOL’s chief executive. Mr Armstrong was a co-founder of Patch, which AOL acquired for less than $10m in 2009 as part of a broader strategy to capitalise on predictions for fast growth in local digital media markets.
“Patch is an important source of information for communities, and the joint venture we created has a unified mission to provide local platforms and hyper-local content,” Mr Armstrong said.
Mr Armstrong saw Patch as a community news outlet that could prosper as traditional local media, such as newspapers, suffered steep declines in advertising and subscriptions.
But the strategy came under fire, particularly amid a 2012 proxy battle with Starboard, the activist investor that lambasted the investment. Mr Armstrong promised that Patch would be profitable by the end of 2013 or that AOL would sell it, seek partners of shut it down.
Struggles at Patch have weighed on AOL and Mr Armstrong as he pushes the company through its transformation from its roots as a subscription-based internet provider into an advertising-supported digital media company.
The New York Times story by Leslie Kaufman pointed out that AOL could see some revenue if Patch becomes profitable:
The financial terms of the deal were not disclosed. But the companies said that AOL would put Patch into a new limited liability company, which will be majority owned and operated by Hale. The deal effectively removes Patch from AOL’s financial books.
However, as a minority stake holder, AOL could benefit if Hale were able to make Patch profitable. Patch’s traffic continues to grow and in November passed 16 million unique visitors.
Patch has been a personal passion of Mr. Armstrong’s, and also a bit of an albatross. He helped create the network while at Google in 2007 and, upon arriving at AOL, was behind the decision to buy it in 2009. But Patch expanded too quickly and became unwieldy.
Over the years, Patch lost between $200 million and $300 million dollars and was the subject of a proxy fight as investors lost confidence. Mr. Armstrong had to promise to pare back his vision, and last year fired hundreds of staff members. There were no details on staffing plans announced at the time of the deal with Hale.
Edmund Lee wrote for Bloomberg Businessweek about the company’s finances — or lack of them:
AOL Chief Executive Officer Tim Armstrong had told investors he planned to turn Patch into a profitable business by the end of last year. As part of that effort, he eliminated about 500 positions, or close to half of its 1,000 employees, in August. The job eliminations cost the company between $14 million and $18 million, according to a filing at the time.
Patch was a pet project of Armstrong, who helped found the startup in 2007 by investing $4.5 million of his own money, allowing it to begin with coverage of three townships in northern New Jersey. It was sold to New York-based AOL for $7 million in 2009. Armstrong, as AOL’s CEO, recused himself from the deal and forfeited the $750,000 he made in profit. He also returned the $4.5 million he recouped from the sale in exchange for shares in AOL.
Patch reached about $70 million in sales last year, or about $78,000 per local site, up from $16 million in 2012. The average cost to operate each site is $140,000 to $180,000, Armstrong had told investors, leaving a wide chasm between revenue and expenses.
It’s yet another sign that media companies are having a hard time figuring out how to turn a profit in an increasingly online and digital world. Maybe having business executives run the local news outlets will help them find new revenue streams.
by Liz Hester
The economy got yet another mixed signal Tuesday with consumer spending in December climbing slightly. With last week’s job reporting coming in lower than analysts expected, this could be another way to confuse investors.
Writing for the Wall Street Journal, Jeffrey Sparshott and Paul Ziobro had this story:
Americans kept shopping at a steady pace as the holiday season wrapped up, suggesting the U.S. economy was on firm footing heading into this year.
Retail sales gained 0.2% in December and jumped 0.7% excluding auto sales, the Commerce Department said.
Though overall sales in prior months were revised modestly lower, they indicated a pickup in demand from consumers during the fourth quarter alongside other signs of a strengthening economy.
The final stretch of the year “was a pretty solid quarter for consumers,” said Julia Coronado, chief economist at BNP Paribas. “That certainly puts us on decent footing going into 2014.”
Consumer spending, which accounts for more than two-thirds of economic output, is expected to show a big contribution to U.S. growth in the final months of 2013. Economists now expect growth at or above a 3% annualized pace in the fourth quarter after registering a strong 4.1% rate in the third quarter.
U.S. households were resilient throughout much of last year despite higher payroll taxes, which sapped spending power, and Washington gridlock, which jolted confidence. Many Americans have been buoyed by rising prices for homes and a strong stock market. Debt burdens are down, leaving more disposable income and raising expectations for solid growth in consumer spending this year.
The Reuters story by Lucia Mutikani explained the disappointing job numbers and quoted analysts as saying the economy was heading in the right direction:
While a report on Friday showed job growth stumbled in December, that was largely dismissed as being due to cold weather, and economists said a wealth of other data suggest the economy is gaining strength.
“Weather aside, if we’re right in thinking that the underlying trend in jobs growth is still improving, households will continue to spend more freely in 2014,” said Paul Dales, senior U.S. economist at Capital Economics in London.
“This report supports our view that a 4 percent annualized rise in real consumption will help to generate a decent 3.0 percent gain in overall GDP in the fourth quarter,” he added.
The government report suggested holiday sales were better than some had expected, though at the cost of heavy discounting by shopkeepers. The National Retail Federation said a measure of holiday sales, which leaves out spending on cars, gasoline and restaurant meals, rose 3.8 percent in the November-December period from a year earlier, up from the 3.5 percent rise in 2012.
Bloomberg’s Michelle Jamrisko reported that other economic indicators showed that inflation was unchanged and the threat from the U.K. also eased:
Stocks rose, giving the Standard & Poor’s 500 Index its biggest gain of the year, after the retail sales report. The S&P 500 added 1.1 percent to 1,838.88 at the close in New York. The S&P Supercomposite Retailing Index rose 0.7 percent.
Another report today showed the costs of goods bought from abroad were unchanged in December, indicating little inflation pressure from overseas. The reading for the import-price index followed a 0.9 percent drop in November, according to figures from the Labor Department. Excluding fuel, prices fell 0.1 percent, the first decline since August.
Inflationary pressures also abated in the U.K., where consumer prices rose 2 percent in December from a year earlier, cooling to match the Bank of England’s target for the first time in more than four years, data from the Office for National Statistics showed today in London.
The U.S. retail sales report showed seven of 13 major merchant categories realized gains last month. The increases were paced by a 2 percent jump at grocery and beverage stores that was the biggest since October 2006.
The headline on Jayne O’Donnell’s story for USA Today said the holiday numbers presented a “mixed picture”:
But there’s disagreement over how positive the news is for retailers. Ken Perkins, president of stock analysis company Retail Metrics, says the season delivered “holiday coal in most retailers’ stockings.”
Of 29 retailers that have recently issued earnings guidance for their current quarter, which includes the holiday period, Perkins said 25 of them were negative. He attributes retailers’ problems to a shorter holiday shopping season, deeper discounts and a lack of must-have items.
The government’s results for December included the increasingly busy Monday after Thanksgiving, known as Cyber Monday, which fell on Dec. 2 this year. Most retailers feature deep online discounts that day.
The Commerce Department also lowered its estimated sales increase for November to 0.4% from 0.7%. October’s increase was cut to 0.5%, down a tenth of a percentage point.
The markets liked the news, which makes it a small victory for those betting on the economy’s continued recovery. While it’s only one month’s worth of data, it’s a good start to the year.
by Liz Hester
Merger Monday brought a huge announcement in the liquor world. Japanese whiskey maker Suntory is buying Beam Inc. for $13.6 billion. Since it’s the first large deal of the year and such an iconic American product, the coverage was extensive.
Few spirits are as American as bourbon. But the maker of some of whiskey’s most iconic brands, including Jim Beam and Maker’s Mark, will soon belong to an acquisitive Japanese beverage maker.
In a deal announced on Monday to buy Beam Inc. for $13.6 billion, Suntory of Japan struck one of the biggest takeovers in the liquor business in years, transforming it into the third-largest distiller globally.
The acquisition may also signal the last mega-deal in the spirits industry for some time. Beam has long been considered the most attractive big target for consolidation. Rivals like Brown-Forman, the maker of Jack Daniel’s, are controlled by families, performing well on their own and have shown little interest in potential takeovers.
The giants of the business — Diageo of Britain and Pernod Ricard of France — face many constraints on their ability to grow by mergers. While the two companies had considered bidding for the American whiskey producer, neither ultimately moved ahead.
The Wall Street Journal story by Mike Esterl in Atlanta and Hiroyuki Kachi in Tokyo had excellent background on the growing market for American whiskey:
Beam is positioned squarely in a part of the liquor business experiencing a powerful global upswing: bourbon whiskey. The traditional American spirit is made mostly from corn, aged in charred oak barrels and typically hails from Kentucky. Its popularity is building as some consumers grow tired of vodka, the top-selling U.S. spirit, and gravitate toward distillers of brown spirits with more than centurylong domestic roots.
Long in the doldrums, U.S. bourbon has made a comeback in the past decade and production in 2012 rose above one million barrels for the first time since 1973. Distillers have invested roughly $300 million to boost capacity since 2011. North American whiskey—including bourbon, Tennessee and Canadian whiskeys—accounted for more than half of the total growth in the $21 billion U.S. spirits market in the 52 weeks ended Oct. 12, 2013, according to store tracker Nielsen.
Unlike vodka, a popular “white” spirit with roots in Europe, bourbon is quintessentially American and has been re-popularized through television shows such as “Mad Men,” which is set in the 1960s and features then-advertising executives with rock glasses in hand.
Bourbon makers routinely play up their brands’ long local histories. Beam traces its flagship bourbon to 1795, when Jacob Beam sold his first barrel, the first of seven generations and 30 family members of master distillers. One of them, James or “Jim” Beam, restarted production after Prohibition was repealed in 1933.
In recent years, dozens of tiny “craft” distillers have also sprung up across the U.S. to capitalize on the growing thirst for brown spirits such as bourbon. Some bourbon brands—including Maker’s Mark—have said they are struggling to keep up with demand.
Bloomberg’s Clementine Fletcher and Leslie Patton wrote that Japanese companies are looking to increase overseas growth:
Suntory, the maker of Yamazaki whiskey and Premium Malt’s beer, is seeking to boost overseas growth as the population in its home country shrinks and ages. The company in 2012 had explored an offer for Beam alongside Diageo Plc. (DGE) Beam, whose largest shareholder is activist investor Bill Ackman’s hedge fund, in 2012 got 59 percent of its revenue from North America and 21 percent from Europe, the Middle East and Africa.
“Strategically, it makes sense for Suntory,” said Trevor Stirling, an analyst at Sanford C. Bernstein & Co. in London. “I’m a little surprised they decided to go it alone, but at the moment there are low yen interest rates.”
Beam rose 25 percent to $83.42 at the close in New York yesterday. The advance would mean a $342.5 million gain for Ackman’s Pershing Square Capital Management LP if its stake is unchanged from Sept. 30. The shares traded as high as $83.61, topping the offer price, indicating some investors expected competing bids. Deerfield, Illinois-based Beam gained 11 percent last year.
The takeover would be the largest overseas acquisition by a Japanese company since SoftBank Corp. (9984) acquired Sprint for $21.6 billion in a deal announced in 2012.
Fueled by a strong currency, Japanese companies embarked on an overseas buying spree that peaked with $113.5 billion worth of deals announced that year, data compiled by Bloomberg show. With the yen weakening, the value of overseas deals announced last year dropped to about $46 billion, the data show.
David Gelles wrote a sidebar for the New York Times pointing out that there might not be too many more deals like this one:
A big whiskey acquisition is a shot in the arm for the global spirits industry, but there may not be many more substantial liquor deals to strike.
By agreeing to acquire Jim Beam for $13.6 billion on Monday, Suntory, a privately held Japanese food and beverage producer, snatched up one of the most attractive targets left on the market, and will assume the mantle of the third-largest distiller globally.
With brands including Maker’s Mark and Jim Beam bourbon, Beam had been riding high in recent years.
“It’s a good deal for Beam shareholders,” said John Faucher, JPMorgan analyst. “Looking at the rapid growth we’ve seen in bourbon over the recent years, Beam is doing good job seizing the moment, striking while the iron is hot.”
But Beam is a company at least two other global spirits groups would have liked to own.
The Beam brands are incredibly valuable and Suntory looks to have edged out several others who would have liked to own it. I just hope that Suntory is going to use the Beam distribution network to increase its reach in the U.S. The more whiskey, the better.
by Liz Hester
As Detroit works through one of the biggest bankruptcies in municipal history, the auto industry begins to return to profitability. It’s one of the best turnaround stories of the year told through the annual auto show.
The Wall Street Journal had this story by Joseph B. White about the state of the city:
Leaders of the world’s major auto makers gathering in Detroit this week for the North American International Auto Show will find a far more hospitable climate than they’ve experienced during the past several years.
Detroit’s weather promises to be chilly and dank as ever. But the U.S. auto industry is enjoying blue skies. Sales in 2013 recovered nearly all the ground lost during the Great Recession in 2009, as demand for luxury cars and highly profitable trucks and sport-utility vehicles boomed and gasoline prices drifted down. The pace of growth in 2014 will slow, but most industry executives expect smooth sailing for the near term compared with the turmoil of recent years.
What could possibly go wrong? That will be the subtext as industry executives pitch new models to media and check out each other’s wares.
For Detroit’s restructured auto makers, one challenge will be to avoid repeating a pattern of boom and bust that’s plagued the U.S. car business since the early 1980s. Prosperity has tended to beget ill-advised diversification and bloated costs in Detroit. This time, however, the pain of near-death, bankruptcy and humiliating federal bailouts may not be so quickly forgotten.
The New York Times had this piece by Bill Vlasic about the boon the auto show will bring to the city:
Ever since Detroit filed for bankruptcy six months ago, political and business leaders here have insisted that the city’s long-awaited comeback has already begun.
This week is their chance to prove it, as thousands of automotive executives, suppliers and members of the news media descend on downtown for the annual North American International Auto Show.
The auto show has historically been a financial boon to the city, and this year is no exception. Organizers estimate that it will contribute $365 million to the local economy in wages and other spending.
Yet with the city mired in Chapter 9 bankruptcy, the event has taken on added importance. With Detroit’s worldwide reputation as shaky as its finances, it desperately needs a successful show to improve its battered image.
Reuters Deepa Seetharaman and Ben Klayman had a story about the changes in leadership at the top of the U.S. automakers and what that means for the industry:
This year is shaping up as a test of leadership at GM, Ford and Chrysler, five years after the U.S. auto industry’s searing restructuring. While the risks ahead are no longer life-threatening, how the companies respond will set their direction for years to come and signal whether the lessons of the financial crisis were embedded deeply enough.
“It’s a turn of an era,” Xavier Mosquet, senior partner and managing director at Boston Consulting Group, said in an interview. “Frankly, it is a totally different, new type of competitive situation that is emerging.”
Analysts see 2014 as a transition year, with slowing growth in the U.S. auto market and companies facing a renewed mandate to gain ground overseas. The 2015 contract talks with the United Auto Workers union also loom in the background.
In the weeks leading up to this year’s Detroit auto show, GM, Ford and Chrysler have all taken steps that highlight the leaders who will help them face what Mosquet described as the most competitive North American market in decades.
Kim Gittleson writing for the BBC said that the U.S. carmakers are gearing up for a year of transition:
This year promises to be one of transition for the big three, with Mary Barra taking over from Dan Akerson as the head of GM, while Ford boss Alan Mulally is set to depart at the end of this year.
In 2013, Chrysler avoided a public stock offering and finally came under complete ownership of Italian carmaker Fiat, giving boss Sergio Marchionne the chance to finally integrate the two firms, which badly need each other.
All of these developments are seen as good omens for the resurgence of the US car industry in 2014.
“Detroit is on the offensive again and it’s for very substantive reasons – good product, competitive costs, and improving brand reputation,” says Guggenheim car analyst John Casesa.
The Detroit Free Press had a story by Nathan Bomey about the relationship between Barra and the man she beat for the job – Mark Reuss:
Barra and Reuss rose through the GM ranks at a similar pace. She graduated from General Motors Institute and he from Vanderbilt University, but both joined GM as student interns and never left.
Both held high-level engineering jobs before being assigned to different roles at the height of GM’s crisis — Reuss as president of GM’s Australia unit and Barra as head of GM’s human resources division.
Although the leadership transition is not complete yet — CEO Dan Akerson retires Wednesday — Barra and Reuss already have a crisis on their hands.
Late Friday, GM recalled all of the 2014 Chevrolet Silverado and GMC Sierra full-size pickups with 4.3-liter and 5.3-liter engines to address a software issue that could cause exhaust components to overheat and ignite engine fires. The automaker said it issued the voluntary recall for 370,000 pickups after getting reports of eight fires with no injuries.
Despite the signs that GM and other auto companies are heading in the right direction, there are still some obstacles that they’ll have to overcome. But more importantly, the show is critical for Detroit as it attempts to come back from bankruptcy.