European Stocks Are Little Changed; Xstrata Rallies, Shell Drops

By Adam Haigh - Feb 2, 2012 7:03 PM GMT+0700

European (SXXP) stocks were little changed as Glencore International Plc’s talks to buy Xstrata Plc (XTA) boosted mining companies, offsetting declines at Royal Dutch Shell Plc (RDSA) and Unilever. U.S. index futures were little changed, while Asian shares rose.

Xstrata jumped 10 percent after confirming that Glencore made an approach about an offer for the coal, copper and nickel miner. Royal Dutch Shell Plc and BP Plc (BP/), Europe’s two biggest oil companies, fell more than 1 percent. Unilever dropped 4 percent as the world’s second-largest consumer-goods maker posted revenue growth that missed analysts’ estimates.

The Stoxx Europe 600 Index rose 0.1 percent to 259.82 at 12 p.m. in London, paring an earlier gain of as much as 0.4 percent. The gauge yesterday rallied to its highest level since Aug. 1. Futures contracts on the Standard & Poor’s 500 Index expiring in March advanced less than 0.1 percent today. The MSCI Asia Pacific Index added 1.2 percent.

“You have a lot of liquidity and strong companies with strong cash flows thinking valuations are strong right now,” said Virginie Maisonneuve, head of global equities at Schroder Investment Management Ltd., which oversees $284 billion. “We could see a wave of mergers and acquisitions, but it has to be at the right valuation. It has to be a marriage that makes sense. The good deals will go through.”

The Stoxx 600 rose 4 percent in January for its second consecutive month of gains. The gauge has rallied 21 percent from its lowest level last year as the European (SXXP) Central Bank boosted lending to banks and U.S. economic reports exceeded estimates.

U.S. Jobless Benefits

Applications for unemployment benefits in the U.S. fell to 371,000 in the week ended Jan. 28 from 377,000 the previous week, according to the median economist estimate in a Bloomberg News survey. The Labor Department will release the figures at 8:30 a.m. in Washington today.

Xstrata surged 10 percent to 1,236.5 pence after confirming that Glencore has held talks to buy the shares in the company that it doesn’t already own. That would add mines from Africa to Asia to the world’s largest listed commodity trader. Glencore has made an all-share offer, Zug, Switzerland-based Xstrata said today in a statement to the London Stock Exchange. Glencore already holds a 34 percent stake in Xstrata and the rest of the company is valued at 21.9 billion pounds ($35 billion) based on yesterday’s closing price.

Glencore’s shares added 5.4 percent to 455.15 pence. The company said in a statement that there’s no certainty of an offer.

Novo Nordisk, Benetton

Novo Nordisk A/S (NOVOB) rose 4 percent to 707 kroner after the world’s largest insulin maker posted net income that climbed to 4.69 billion kroner ($829 million) from 3.95 billion kroner a year earlier. That exceeded the 4.06-billion kroner average estimate of 21 analysts surveyed by Bloomberg.

Benetton Group SpA (BEN) surged 16 percent to 4.68 euros after the Benetton family, the company’s largest shareholder, said it will offer 276.6 million euros ($364 million) for the shares it doesn’t already own in the company. Edizione Holding SpA, which owns 67 percent of Benetton, will offer 4.60 euros a share, it said in a statement last night on the Italian bourse.

Shell fell 1.7 percent to 2,231 pence after Europe’s largest oil company reported fourth-quarter net income of $6.5 billion, compared with profit of $6.79 billion a year earlier. Excluding one-off items and inventory changes, profit missed analysts’ estimates. BP, Europe’s second-biggest oil producer, lost 1.3 percent to 476.7 pence.

Unilever Shares Slide

Unilever dropped 4 percent to 2,004 pence as the maker of Hellmann’s mayonnaise and Lynx deodorants said it expects difficult economic conditions and elevated commodity costs to persist this year.

“We cannot recollect a more challenging year as 2011,” Chief Financial Officer Jean-Marc Huet said in a teleconference with reporters today. “The global economy is still in poor shape and we expect it to continue.”

Deutsche Bank AG (DBK) lost 1.5 percent to 33.54 euros after saying that profit tumbled 76 percent in the fourth quarter as the euro area’s sovereign-debt crisis curbed trading. Net income fell to 147 million euros from 601 million euros a year earlier. That missed the 556 million-euro average estimate of 12 analysts surveyed by Bloomberg.

TeliaSonera AB (TLSN) slid 1.1 percent to 45.68 kronor after reporting fourth-quarter profit that missed estimates as customers in the Nordic countries continued to abandon their fixed-line telephones. Net income fell to 4.97 billion kronor ($738 million) from 5.31 billion kronor a year earlier, Stockholm-based TeliaSonera said in a statement today. Analysts had estimated profit of 5.2 billion kronor.

AstraZeneca Plc (AZN) sank 4.3 percent to 2,957.5 pence after saying 2012 will be challenging for the industry. It’s guidance for this year was “disappointing,” according to Goldman Sachs Group Inc. analyst Keyur Parekh.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Apple Infiltrates $3.8 Trillion Market With IPad: Tech

By Peter Burrows - Feb 2, 2012 1:06 PM GMT+0700
Enlarge image

The iPad faces little competition among corporations such as financial services and pharmaceutical firms. Photographer: Ramin Talaie/Bloomberg

Apple Inc. (AAPL), without much effort on its part, is making rapid headway in selling to corporations.

After years of being the also-ran to Microsoft Corp. (MSFT) in the workplace, Apple has seen its iPad become a standard business tool. According to an IDG Connect survey, 51 percent of managers with iPads say they “always” use the device at work, and another 40 percent sometimes do. Seventy-nine percent of the respondents use the iPad for business when outside the office.

Even as Amazon.com Inc. (AMZN)’s Kindle Fire and other tablets play catch-up in the consumer market, the iPad faces little competition among corporations such as financial services and pharmaceutical firms. Apple’s iPhone, meanwhile, is the top- selling smartphone, forcing businesses to accommodate workers who use it. That has helped set the stage for Apple’s Mac computer to make its own inroads in the corporate world.

“We haven’t seen a single pharma deploy on anything but the iPad,” said Matt Wallach, co-founder of Veeva Systems Inc., a Pleasanton, California-based maker of sales software for drug companies. “I’ve seen a lot of devices come and go over the years. Nothing touches the speed of adoption of the iPad.”

Microsoft and Intel Corp. (INTC) have dominated the office- technology market for three decades, accounting for almost all the personal computers on workers’ desks. The seeds for the “Wintel” hegemony were planted in 1981, when International Business Machines Corp. tapped the two companies to help create its first PC. That fueled an information-technology industry that now generates $3.8 trillion a year, according to research firm Gartner Inc.

Making an Effort?

Microsoft and Intel have struggled in their efforts to compete with the iPad, though that may change later this year when a tablet-friendly version of Windows debuts. Windows PCs also are under attack. While total PC shipments dropped 5.9 percent in the fourth quarter, the Mac grew almost 21 percent, according to Gartner.

The real threat to the corporate-technology industry is if Apple decides to pursue the market more aggressively, said Frank Gillett, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. Apple can take advantage of its popular iTunes and App Store platforms to distribute software to companies in a user-friendly way, he said. That in turn would help promote the company’s hardware products.

Bill Evans, a spokesman for Cupertino, California-based Apple, declined to discuss the company’s corporate strategy.

Big Opportunity

Apple sold 3.8 million Mac computers to companies in the past fiscal year, according to data compiled by Bloomberg. That amounts to 3 percent of the market.

If Apple were to boost that to 18 million Macs a year, similar to the sales level of No. 3 PC maker Lenovo Group Ltd. (992), it would bring in about $23 billion. Given workers’ desire to use Apple products, the company would probably be able to reach that point with far less investment than rivals such as Hewlett- Packard Co. (HPQ) or Dell Inc., said Anand Srinivasan, an analyst at Bloomberg Industries.

Because companies also pay for warranties and additional services, profit margins might be higher than for Apple’s consumer Mac business, he said.

“Apple has lots of room to grow in the commercial space,” Srinivasan said.

In any case, iPad sales to companies will accelerate this year, said Tom Mainelli, an analyst at Framingham, Massachusetts-based IDC, a sister firm to IDG Connect. Many large companies focused in 2011 on testing the device and running trials for ways to use the tablet, he said. Now, those pilot programs are turning into mass purchases by customers.

Corporate Ecosystem

Mainelli expects iPad shipments into commercial markets, which includes education and health care, to rise more than 50 percent to higher than 6 million in 2013 from this year. The device was a common sight at last week’s World Economic Forum in Davos, Switzerland. Apple’s iPhone also has pushed into the business world, often supplanting Research In Motion Ltd. (RIMM)’s BlackBerry. The company shipped 37 million of the phones last quarter, making it the market leader in smartphones.

Fidelity Investments has developed iPad applications that let clients check mutual funds and retirement accounts without having to boot up a PC, said Richard Blunck, executive vice president of digital distribution at the firm. At pharmaceutical companies, salespeople use iPads to show product information to doctors on a moment’s notice. During Apple’s quarterly conference call last week, Chief Financial Officer Peter Oppenheimer cited Royal Dutch Shell Plc, Credit Suisse Group AG and Nike Inc. (NKE) as companies that have issued iPads to employees.

Android Software

For companies considering tablets, the main alternatives are devices that run Google Inc. (GOOG)’s Android operating system. Many chief information officers are concerned that Android isn’t as secure as Apple’s iOS software, said Santiago Becerra, CEO of MeLLmo, a corporate app developer.

Companies also have to go through a lengthy testing phase before letting a device access its networks, and it’s easier to qualify the iPad than each of the many Android tablets on the market. For now, MeLLmo only makes apps for the iPad.

“There are so few CIOs looking at Android that it’s not worth it for us right now,” Becerra said.

Microsoft could still slow Apple’s momentum. Tablets with the new Windows 8 may have an easier time running Microsoft Office, a staple for most office workers. That could give Windows 8-based tablets a big advantage, since Microsoft hasn’t created an iPad-compatible version of Office.

Doing Nothing?

Apple has succeeded with corporations without building a large sales force or a corps of consultants and field technicians. Wallach, who sold pharmaceutical-sales software for years before co-founding Veevo, says he has only dealt with one person at Apple who focused on his industry.

“It would be strong to say they’re doing absolutely nothing, but it’s pretty close,” Wallach said.

According to Apple’s website, the company is now seeking a salesperson dedicated to pharmaceutical companies in eastern Pennsylvania.

“If Apple is starting to hire reps around the country focused just on accounts in their region within one industry, that would be a definite signal of their intention to sell with a stronger vertical focus,” Wallach said.

About 10 other corporate-focused positions are listed on Apple’s website, including sales positions in New York, Seattle and Austin, Texas, as well as a “B2B Quality Coach,” to help Apple salespeople “deliver exceptional business-to-business experiences.”

Apple has made other moves to ease corporate buying. The company rolled out a volume purchasing program, letting businesses place large orders for iPad apps, rather than requiring each employee to go to iTunes and enter a code and their own credit card number.

Not every company wants Apple to focus more on their needs. Fidelity’s Blunck would rather have Apple continue to make breakthrough consumer products that create new ways for its customers to use Fidelity’s services.

“I’ll take that all day long, versus having them spend all their time on enterprise’s needs,” he said.

To contact the reporter on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Deutsche Bank Profit Tumbles

By Nicholas Comfort and Aaron Kirchfeld - Feb 2, 2012 6:35 PM GMT+0700

Deutsche Bank AG (DBK), Germany’s largest bank, said fourth-quarter profit fell 76 percent, more than analysts estimated, as Europe’s debt crisis curbed trading and the company wrote down holdings.

The bank fell as much as 3.1 percent in Frankfurt trading after reporting net income of 147 million euros ($194 million), below the 556 million-euro average estimate of 12 analysts surveyed by Bloomberg. The investment bank posted a 422 million- euro pretax loss.

Chief Executive Officer Josef Ackermann, who steps down in May, said 2012 will be another “challenging year.” With his departure approaching, Deutsche Bank set aside funds for litigation and wrote down holdings in Greek government bonds, Icelandic generic drug maker Actavis Group hf, a Las Vegas casino and its BHF-Bank AG unit. The charges led to a loss of 722 million euros at the corporate investments unit.

“Ackermann might be trying to clear the slate for the new management, but it still doesn’t look pretty,” said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt.

The shares were 55 cents lower at 33.50 euros by 12:12 p.m. in Frankfurt. Deutsche Bank has advanced 19 percent since the European Central Bank said Dec. 8 it would offer unlimited three-year loans to lenders -- a decision Ackermann described to CNBC last week as important in easing some of the banking system’s “funding challenges.” Bloomberg’s 43-company European banks index climbed 16 percent in the period.

‘More Gratifying’

Anshu Jain, who takes over as co-CEO with Juergen Fitschen in May, told reporters today at a press conference in Frankfurt that January was “more gratifying” for the investment bank than the second half of 2011.

Deutsche Bank wasn’t alone in reporting lower profit in the final three months of last year. New York-based JPMorgan (JPM) Chase & Co., the biggest U.S. bank by assets, posted a 23 percent decline in profit on lower investment-banking fees and revenue from trading stocks and bonds. Earnings at Goldman Sachs (GS) Group Inc., also based in New York, dropped 58 percent, leading the firm to cut compensation in response to falling revenue. Among the five largest Wall Street banks, only Morgan Stanley posted an increase in trading income, excluding accounting gains, in 2011.

Debt Trading

Deutsche Bank scrapped its forecast for operating pretax profit of 10 billion euros for 2011 in November and announced 500 job cuts amid a “significant and unabated slowdown in client activity.” Ackermann’s purchase of Deutsche Postbank AG (DPB) and Sal. Oppenheim Group to build up consumer-banking and wealth-management have failed to make up for lower investment banking.

“The scale of the economic slowdown in Europe and around the world will largely depend on further progress in solving the sovereign debt crisis,” Ackermann said at the press conference. This will be “another very challenging year.”

Deutsche Bank sees a pretax return on equity of about 15 percent to 18 percent in the near term because higher capital requirements are weighing on the industry, Ackermann said today. It may be able to reach about 20 percent in terms of pretax ROE in the longer term after it sheds legacy assets, he said today. In the past, Ackermann had set a goal of 25 percent.

The investment bank’s loss compared to a 603 million-euro pretax profit a year earlier and the 233 million-euro profit estimate from nine analysts. Revenue from debt trading dropped to 1.04 billion euros from 1.61 billion euros, missing the 1.47 billion-euro estimate of analysts, while equity trading revenue decreased to 539 million euros from 872 million euros.

‘Poor Quarter’

“Fixed income had a poor quarter because it’s so linked to the sovereign debt crisis in Europe,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA who has an “underperform” rating on the stock. “That hit them hard.”

Deutsche Bank booked costs of 380 million euros at the investment bank related to litigation and 154 million euros for U.K. and German bank levies.

Investment banks won’t reach their previous peak revenue levels in the foreseeable future even if market conditions improve, Ackermann said today. The German firm is in “an ideal position to continue our growth and further increase profitability” at the corporate and investment bank, he said.

Pretax earnings at the consumer banking unit climbed to 227 million euros from 222 million euros, missing the 384 million- euro average estimate of analysts. The bank took charges on Greek bonds held at Postbank. Profit from the asset and wealth management business rose to 165 million euros, missing the 180 million-euro estimate of analysts.

Capital Gap

Deutsche Bank cited a “more challenging market environment” at the asset and wealth management division.

In November, the company announced a strategic review of its global asset-management division, excluding operations of the DWS mutual fund unit in Germany, Europe and Asia. Executives decided last month to pursue a sale of the businesses, which have almost 400 billion euros in assets under management, according to two people with knowledge of the matter.

European leaders are demanding that some of the region’s largest banks increase reserves after financial firms agreed to accept losses on Greek debt to help rescue the country. Deutsche Bank was among six German banks told to raise a total of 13.1 billion euros to boost core Tier 1 capital as a ratio of risk- weighted assets to 9 percent or more by June 30, after writing down the value of sovereign bonds.

‘Legal Risks’

The company said Dec. 8 that it expected to plug the 3.2 billion-euro gap calculated by the European Banking Authority six months early, without saying how it will meet the goal.

Deutsche Bank is “well capitalized and will be able to meet the stricter regulatory capital requirements before the relevant deadline,” Ackermann said, referring to the EBA targets.

Germany’s largest lender expects savings to exceed 1 billion euros in 2012, strengthening its capital base and creating “scope for investments in growth fields,” he said.

Deutsche Bank’s core Tier 1 ratio at the end of 2011 was 9.5 percent under Basel 2.5 rules, a measure that differs in some respects from the EBA criteria. Risk-weighted assets rose by 44 billion euros in the fourth quarter as the bank adopted the stricter rules and implemented a “safety margin taken to cover unforeseen legal risks from the financial crisis,” according to the statement.

The company plans a dividend of 75 cents a share for 2011, unchanged from 2010, according to the statement.

Deutsche Bank booked an impairment of 407 million euros related to Actavis, 97 million euros in expenses related to BHF- Bank and a 135 million-euro charge from the Cosmopolitan Resort & Casino in Las Vegas, which it took over in 2008 when the developer defaulted on a loan. The lender took an 144 million- euro impairment on Greek bonds at its private clients and asset management unit, according to the statement.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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Glencore Offers to Buy Out Rest of Xstrata

By Elisabeth Behrmann and Brett Foley - Feb 2, 2012 5:30 PM GMT+0700

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Feb. 2 (Bloomberg) -- Glencore International Plc is nearing an agreement to combine with Xstrata Plc, adding mines from Africa to Asia to the world's largest listed commodity trader, said two people with knowledge of the plan. Elliott Gotkine reports on Bloomberg Television's "First Look" with Caroline Hyde. (Source: Bloomberg)

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Feb. 2 (Bloomberg) -- Peter Voser, chief executive officer of Royal Dutch Shell Plc, discusses the company's fourth-quarter profit reported today, dividend policy and investment focus in oil-rich shale in the U.S. He speaks from London with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)

Glencore International Plc (GLEN), the world’s largest publicly traded commodities supplier, is in talks to buy the shares in Xstrata Plc (XTA) that it doesn’t already own to add coal, copper and nickel mines from Africa to Asia.

Glencore made an approach about an all-share offer for “a merger of equals,” Zug, Switzerland-based Xstrata said today in a statement to the London stock exchange. Glencore holds 34 percent and the rest of the company is valued at 21.9 billion pounds ($35 billion) based on yesterday’s closing price. Glencore said in a statement there’s no certainty of an offer.

Joining Xstrata with Glencore, located two miles away in Baar, would reunite two groups that separated a decade ago when Xstrata bought Glencore’s Australian and South African coal mines for $2.5 billion and went public in London. The combined company may be valued at about 52 billion pounds after excluding Glencore’s stake in Xstrata.

“Glencore being such a dominant trader and marketer of commodities, and Xstrata being such a strong operator of difficult assets, I think it creates enormous value,” Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management Ltd. in Sydney, said by phone before the statement. “On one end you have great mining expertise, on the other you’ve got great marketing expertise. Two and two together should make five.”

Xstrata Shares

Xstrata shares rose as much as 14 percent in London, the most since April 2009, and Glencore rose 5.6 percent. Glencore shares gained as much as 6 percent in Hong Kong before they were suspended from trading after Bloomberg reported the potential deal, citing two people with knowledge of the plan. Shares in mining companies in Australia gained the most in more than two weeks as measured by the S&P/ASX 200 Resources index.

Under U.K. takeover rules, Glencore is required to announce a firm intention to make an offer by no later than 5 p.m. on March 1, Xstrata said.

A transaction may generate savings of as much as $704 million, Credit Suisse Group AG said in a report in October. A deal would be the biggest for Xstrata since it ended a 29.2 billion-pound offer for London-based Anglo American Plc (AAL) in October 2009 after Anglo’s board snubbed the approach. BHP Billiton Ltd. withdrew from what would have been the world’s biggest mining deal, a $66 billion offer for Rio Tinto Group in 2008.

“Combining gives them that much more scale to compete against some of the bigger players,” including BHP and Rio Tinto (RIO), Cameron Peacock, a Melbourne-based market analyst at IG Markets Ltd. said by phone.

Credit Default Swaps

Xstrata was 9.5 percent higher at 1,226 pence at 9:35 a.m. in London, valuing it at about 36 billion pounds. Glencore gained 4.2 percent to 450.05 pence at the same time.

Credit-default swaps on Glencore tumbled 83 basis points to 240, the lowest since June, according to CMA prices at 9 a.m. in London. A decline signals improvement in perceptions of credit quality.

Glencore’s 1.25 billion euros ($1.64 billion) of 5.25 percent bonds maturing in March 2017 are trading at about 105.6 cents on the euro to yield 4 percent, after the price rose as high as 107.6, according to Bloomberg Bond Trader prices.

Joining the companies would reunite Glencore Chief Executive Officer Ivan Glasenberg, 55, with his Xstrata counterpart Mick Davis, 53.

Coal Trader

Glasenberg, a former coal trader who led the company to a $10 billion initial public offering in May, said in August the commodities trader is “aggressively” seeking mergers and acquisitions as market valuations slide. He said in an April interview there was “good value” in a combination with Xstrata. He declined to comment today on the deal in Moscow.

A South African native and Australian citizen, Glasenberg is the second-richest person in Australia with an estimated net worth of $7.2 billion, Forbes Magazine said today. Gina Rinehart, the Australian mining heiress and media investor, is the richest person, valued at $18 billion.

Mining takeovers are accelerating as companies struggle to replace depleting deposits and China’s industrial growth stokes metals demand for construction, cars and appliances. Global mining deals swelled to $98 billion last year, the highest level since 2007, from $76 billion in 2010, according to data compiled by Bloomberg. The average premium for takeovers last year was 23 percent, according to the data.

‘Rude Health’

“There’s really nothing technically that should be preventing large-scale M&A activity,” Daniel Rohr, an analyst at Morningstar Investment Services Inc. in Chicago, said by telephone yesterday. “Balance sheets across the industry are in rather rude health and large miners have massive cash balances that seem to grow larger with each passing quarter.” Mining companies may spend $134 billion developing assets this year, up 23 percent from 2010, according to a report last month by Citigroup Inc. Glencore had $18.3 billion in long-term borrowings as of Dec. 31 and Xstrata had borrowings of $7.2 billion, according to data compiled by Bloomberg. Both have a Baa2 rating from Moody’s Investors Service.

Combined, Xstrata and Glencore would report net income of about $11.2 billion in 2012 and Glencore would control about 65 percent of a merged company, assuming a takeover with no premium attached, Credit Suisse said in October.

Glencore, which owns mines, plants and warehouses, had a first-half profit of $2.5 billion, up 68 percent on a year earlier. It may post adjusted net income of $4.4 billion for 2011, according to the average estimate of 15 analysts surveyed by Bloomberg. It’s due to report earnings on March 5.

‘Major Competitor’

Joji Okada, chief financial officer of Mitsui & Co., Japan’s second-largest trading house, said the deal would create “a major competitor.”

“I’m concerned that the competition for developing resources will really intensify,” he told reporters in Tokyo today. “We feel that there’s a threat of a major competitor emerging.”

Xstrata’s Davis, a South African, built the group through more than $30 billion of deals since its purchase of Glencore’s coal mines and its London IPO in 2002, adding copper, nickel and zinc. His largest deal was the $18.1 billion acquisition of Canadian nickel producer Falconbridge Ltd. in 2006.

He abandoned a hostile bid for platinum producer Lonmin Plc in October 2008 after metal prices plunged and it withdrew from bidding for Australia’s WMC Resources Ltd. in 2005 after being trumped by BHP. (BHP) Xstrata produced 85.3 million metric tons of coal last year.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Brett Foley in Melbourne at jriseborough@bloomberg.net

To contact the editors responsible for this story: Amanda Jordan at ajordan11@bloomberg.net; John Viljoen at jviljoen@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net

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Sony Doubles Loss Forecast

By Mariko Yasu and Naoko Fujimura - Feb 2, 2012 6:25 PM GMT+0700

Sony Corp. (6758) more than doubled its annual loss forecast, underscoring the challenge for incoming Chief Executive Officer Kazuo Hirai in reviving Japan’s biggest consumer-electronics exporter.

The company blamed a stronger yen, cuts in production caused by last year’s Thailand floods and the cost of exiting a display-panel venture with Samsung Electronics Co. for widening its forecast to 220 billion yen ($2.9 billion) from 90 billion yen in November. The loss in the 12 months ending in March will be the fourth in a row, a first since the Tokyo-based company was listed in 1958.

Sony today cut sales targets for cameras, personal computers and PlayStation 3 game consoles, and said its mobile- phone unit performed worse than expected. It will consider alliances to pare TV operating costs, close down less- competitive businesses, and make the medical business a core unit, Hirai said in his first public comments since being named to replace Howard Stringer starting April 1.

“Sony is a very weak company,” said Edwin Merner, president of Atlantis Investment Research in Tokyo who manages $300 million and does not hold Sony shares. “To turn around at this time will be very, very difficult. As they go downhill, they pick up speed.”

TV Commitment

Hirai, 51, who worked in Sony’s music and entertainment divisions, established his reputation by turning around the PlayStation unit and edged out three other candidates with engineering backgrounds for the top job. Stringer, 69, will become chairman of the board after a shareholders meeting in June, the company said in a statement yesterday.

During a joint news conference today, Hirai reaffirmed his commitment to TVs. The world’s No. 3 maker is maintaining a sales target of 20 million sets, though the business may lose between 220 billion yen and 230 billion yen, including the cost of exiting the venture with Samsung (005930), Chief Financial Officer Masaru Kato said today.

That compares with a November forecast for a 175 billion- yen loss and adds to 480 billion yen in losses since 2004. The company took a 63 billion-yen loss for ending the venture with Samsung.

“Televisions are important as an output device,” Hirai said. “Withdrawing or shrinking would cut a link for customers to experience” Sony content.

‘Dipped in Poison’

The maker of Bravia TVs has lost ground to Samsung and LG Electronics Inc. (066570), both of which sell TVs profitably. Sony’s rating was cut by Moody’s Investors Service last month and Fitch Ratings in December, with both citing the difficulty of turning around TV operations.

Sony and fellow Japanese television makers Sharp Corp. and Panasonic Corp. (6752) have been crippled by the strengthening yen, which forced Sharp to predict a record $3.8 billion loss yesterday.

“Sony is dipped in poison,” said Yoshihiro Okumura, who helps manage the equivalent of $365 million at Chiba-Gin Asset Management Co. in Tokyo. “Sony’s president will change, but no one can see how Sony will change.”

Sony forecasts the euro trading at 100 yen, compared with an earlier projection of 105 yen. An appreciating yen damps the repatriated value of Sony’s overseas sales, while a weakening won inflates Samsung and LG’s. The strengthening currency will hurt profit by as much as 20 billion yen, Kato said.

Medical Chips

The company dropped 2.6 percent to close at 1,328 yen in Tokyo trading today, before the announcement. The stock has plunged 53 percent in the past 12 months and more than 60 percent since Stringer, 69, took over in June 2005.

Hirai said he will close down less-competitive businesses and consider forming partnerships, though he will present specific plans in the future.

“Unless we steer drastically toward reform, we may confront a situation where decision-making comes with enormous pain,” he said. “If we hold back, we cannot take a step forward.”

Today, he named Executive Vice President Hiroshi Yoshioka to head the medical business, saying Sony should rely on its technological strengths in image sensors to expand in the field.

The company developed three sensors it says are smaller, capture better images and consume less power. Sony is spending 140 billion yen by March 31 to double its production capacity of complementary metal-oxide semiconductors, or CMOS, said Tadashi Saito, head of the chip business.

Sales Cuts

“We will speed up innovation, especially in the medical business,” Hirai said.

Sales targets for the PlayStation 3 were cut to 14 million units from 15 million. The console will have a 10-year lifespan, Hirai said recently, suggesting the five-year-old player won’t be replaced soon.

In December, Sony introduced its latest handheld device, PlayStation Vita, in Japan. Sales reached 500,000 units during the first three weeks, Hirai said last month. The product will be offered in the Americas and Europe starting Feb. 22.

Sony cut sales projections for cameras to 21 million units from 23 million and reduced its forecast for personal-computer sales to 8.4 million from 9.4 million. Camcorder and Blu-ray disc sales also should be lower than projected, the company said.

The impact from Thailand’s worst floods in 70 years is estimated at as much as 70 billion yen, Kato said. Japan’s worst earthquake on record in March also cost the company as much as 70 billion yen.

In the fiscal year starting April 1, the company may project an operating profit of about 200 billion yen because it won’t repeat those one-time costs, Kato said.

“All they can do now is downsize by shutting unprofitable businesses and reducing the number of products,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm. “It is inevitable.”

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.

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Global Strategists Abandoning Bearish Views After Missing Rally

By Michael Patterson and Inyoung Hwang - Feb 2, 2012 3:19 PM GMT+0700

Strategists at the biggest banks are capitulating on their bearish forecasts after the best start to a year for global stocks since 1994 and gains of more than 7 percent in emerging-market currencies.

Just two weeks after saying that investors should “remain cautious,” Larry Hatheway, the chief economist at UBS AG (UBSN), raised his recommendations on global shares and high-yield bonds in a Jan. 23 note to customers entitled, “Wrong, but not too late.” Royal Bank of Scotland Group Plc (RBS), and Benoit Anne, the global head of emerging-markets strategy at Societe Generale (GLE) SA, said their estimates for developing nations were proven wrong.

The MSCI All-Country World Index (MXWD) climbed 5.7 percent in January, surprising strategists at Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Barclays Plc (BARC) who had forecast first-half losses because of Europe’s debt crisis. JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C), which predicted the rally in stocks, say it will continue as the U.S. housing market rebounds and China eases lending restrictions to bolster economic growth.

“In hindsight, everybody was so beared up at the end of last year,” Mary Ann Bartels, the New York-based head of technical and market analysis at Bank of America, who predicted on Dec. 27 that the Standard & Poor’s 500 Index would probably fall about 15 percent in the first half before recovering, said in a Jan. 31 phone interview. “There was nowhere for the market to go but up.”

ECB, Fed

Investor confidence improved after the European Central Bank announced a three-year lending program for banks, the Federal Reserve said it will keep benchmark interest rates low through at least 2014 and reports showed a stronger U.S. labor market and slower Chinese inflation.

Last month’s advance in the MSCI All-Country index, which tracks equities in 45 developed and emerging countries, is the best performance during any January since 1994, data compiled by Bloomberg show. The gauge, which sank 9.4 percent last year, added 0.1 percent at 8:18 a.m. today in London.

An index of global high-yield and emerging-market debt compiled by Bank of America rose 3.1 percent, the biggest January increase since 2009.

India’s rupee, Brazil’s real, the Mexican peso and the Hungarian forint all strengthened more than 7 percent against the dollar as investors added about $7.7 billion to emerging- market equity funds during the past month, the biggest inflows since the four weeks ended April 27, data compiled by Bloomberg and Cambridge, Massachusetts-based research firm EPFR Global show. All four currencies weakened at least 11 percent in 2011.

Emerging Markets

“Most people were positioned for fairly weak markets, a continuation of last year,” Tim Ash, the global head of emerging markets research and strategy at RBS, said by phone on Jan. 30.

The London-based strategist had anticipated a “difficult” start to the year, with emerging-market assets rallying closer to the middle of 2012. Ash wrote in a Jan. 27 note that the rally suggested the timing of his previous forecast was wrong and he predicted emerging-market currencies will continue to strengthen.

SocGen’s Anne wrote in a November research note that emerging markets would face “severe weakness” before rebounding after the first quarter. He said in a Jan. 26 report that “we have been proven wrong so far” and the rally may extend as economic data improves.

Goldman, Barclays

David Kostin, a New York-based strategist at Goldman Sachs, and Barry Knapp, the head of U.S. equity strategy at Barclays in New York, were among forecasters who predicted U.S. stocks would begin the year with losses.

Those projections may still prove prescient should Europe’s debt crisis worsen and slow global economic growth.

The S&P 500 fell for a fourth day on Jan. 31, the longest slump since November, as Greece negotiated with European officials over the terms of a second rescue package and a report showed American consumer confidence trailed estimates. The U.S. economy expanded 2.8 percent in the fourth quarter, Commerce Department figures showed on Jan. 27, less than the 3 percent median estimate of economists surveyed by Bloomberg.

“We suspect stocks are due for a near-term correction,” Gina Martin Adams, a New York-based strategist at Wells Fargo & Co. (WFC), wrote in a Jan. 30 report. “Day-to-day economic releases may move from market tailwind to market headwind.”

Martin Adams advised in a Jan. 4 interview on Bloomberg Television to own “defensive” stocks and predicted a “rocky climate” for investors to start the year.

Relative Value

The S&P 500 may slip to between 1,200 and 1,250 in the next two months, though the index is unlikely to drop to last year’s low reached in October, Bank of America’s Bartels said in the Jan. 31 interview. Equities will probably resume gains in the second half, she said.

Valuations on stocks, high-yield corporate bonds and real- estate investment trusts are “attractive” and these securities will probably outperform government debt as emerging nations loosen monetary policy and the ECB’s lending program lowers the risk of a financial crisis in Europe, according to UBS’s Hatheway, who sets the firm’s asset-allocation recommendations.

China reduced the amount lenders are required to keep in reserve for the first time since 2008 in December and central bankers in Brazil, the Philippines, Thailand and Chile have all cut benchmark interest rates this year. The MSCI All-Country index trades for 13 times reported profits, compared with an average of 21 times during the past 15 years, according to data compiled by Bloomberg.

‘Stars Aligned’

Hatheway lifted his rating on global equities to “overweight” from “neutral” in the Jan. 23 research note.

Improving U.S. economic data and “the turning point in the policy cycle in the emerging economies will both tend to diminish some of the concerns people have had,” Hatheway said in a Jan. 31 phone interview. “I still think the consensus is quite cautious.”

Developing-nation assets will probably extend their gains should figures due on Feb. 3 show U.S. payrolls and employment in January exceeded economists’ estimates, SocGen’s Anne said in a Jan. 30 phone interview from London. U.S. employers probably added 145,000 jobs last month as the unemployment rate held at 8.5 percent, according to the median estimates in a Bloomberg News survey.

“I got stuck with my defensive views for too long,” Anne said. “If we do get confirmation that the payroll number is a decent number, no shocking surprise to the downside, then presumably all stars will be aligned for another leg of the rally.”

Too Bearish

Any declines in emerging-market equities are a buying opportunity, Geoffrey Dennis, the global emerging-market equity strategist at Citigroup, said in a phone interview on Jan. 30. The New York-based strategist, who wrote in a December report that stocks would probably gain at the start of the year, predicts that the MSCI Emerging Markets Index (MXEF) will climb to 1,225 this year, about 20 percent above its current level.

“We do think Europe will survive this year, the global economy is doing fine and the next obvious piece of good news may be when China cuts banks’ reserve requirements again, which may happen any day,” Dennis said on Jan. 30.

The S&P 500 will probably climb to 1,430 by the end of this year from 1,312.41 on Jan. 31, according to Thomas Lee, the chief U.S. equity strategist at JPMorgan in New York.

His estimate is 6 percent higher than the average forecast of 12 strategists compiled by Bloomberg on Jan. 30. While the rally may face a short-term “pause,” it will resume this year as investors purchase shares of companies most tied to economic growth, Lee wrote in a Jan. 26 report.

“Investors had gotten just too bearishly positioned,” he said in a phone interview on Jan. 30. “Investors need to go from defensive to cyclical exposure. That’s going to be something that takes time.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editors responsible for this story: Laura Zelenko at lzelenko@bloomberg.net; Nick Baker at nbaker7@bloomberg.net

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IPO Shares May Be 5X as Expensive as Google

By Lee Spears and Brian Womack - Feb 2, 2012 12:01 PM GMT+0700

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Feb. 1 (Bloomberg) -- David Weild, senior adviser at Grant Thornton LP, and Nicholas Thompson, senior editor at New Yorker magazine and a Bloomberg contributing editor, talk about Facebook Inc.'s planned initial public offering. They speak with Cory Johnson on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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Feb. 2 (Bloomberg) -- Gary Rieschel, founder and managing director of Shanghai-based Qiming Venture Partners, talks about Facebook Inc.'s planned initial public offering and the social-networking website's business prospects for the China market. Facebook filed to raise $5 billion in what would be the largest Internet IPO on record. Rieschel speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Facebook Inc. may command a valuation more than five times higher than Google (GOOG) Inc. as it seeks to raise $5 billion in the world’s largest initial public offering of an Internet company.

The social-networking company, which filed for the IPO yesterday, may be valued at as much as $100 billion in the sale, two people with knowledge of the matter said last week. At that level, the company would trade at 26.9 times 2011 sales, compared with about 5 times for search-engine operator Google, whose market value has jumped eight-fold since its IPO.

“Google was an awesome IPO,” and its success since is the reason Facebook can come out at such a high valuation, said Tim Cunningham, who helps oversee about $75 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “That hope and potential is exactly why it’s potentially a $100 billion deal.”

Facebook co-founder Mark Zuckerberg is asking investors to pay more than double the valuation of Google’s 2004 IPO even as competition from Google+ and Twitter Inc. increases. Menlo Park, California-based Facebook wrested the lead in U.S. online display ads from Yahoo! Inc. (YHOO) in 2011, taking a 16.3 percent share, according to researcher EMarketer Inc.

Facebook didn’t disclose the number of shares it plans to sell in its filing yesterday, and the amount it is seeking to raise may change. The company is considering a valuation of $75 billion to $100 billion, said the people, who declined to be identified because the matter is private.

More Advertising

Based on the top end of that range, Facebook would be valued at 100 times its 2011 net income. Fast-growing companies’ price-to-earnings ratios often start high and gradually fall. Google, which at its IPO was valued at 121 times trailing 12- month earnings, now trades at about 20 times.

Sales at Facebook, which became the dominant social- networking site in 2008 by leapfrogging pioneer MySpace Inc., surged 88 percent to $3.71 billion in 2011. Net income in that period jumped 65 percent to $1 billion. Facebook’s revenue may rise to $6.5 billion to $6.9 billion this year, EMarketer estimates show.

The site, which has amassed more than 800 million users, makes money by selling ads to companies that want to reach that growing base. Industry wide, spending in the U.S. online display ad market may surge 20 percent this year, according to EMarketer.

Keep Momentum

To capture those ad dollars, Facebook will have to find ways to continue to engage users. U.S. visitors to Facebook in December spent an average of 7 hours on the service, a 32 percent increase from a year earlier, according to Reston, Virginia-based researcher ComScore. Visitors spent about 4.5 hours on Google’s sites and even less on Yahoo’s.

“The greatest challenge obviously is keeping the advertising momentum because advertising is their key source of revenue,” Debra Aho Williamson, an analyst at EMarketer, said of Facebook. While almost 90 percent of 2011 sales probably came from ad revenue, Facebook also is seeking new sources, such as credits that users buy and redeem for goods and services, she said.

Zuckerberg co-founded Facebook in 2004 with his college roommates, creating a site that allowed students to interact via the Web. He later made the service accessible to everyone, intensifying competition with sites such as MySpace and Friendster, founded in the two years before.

MySpace, Friendster

Neither could fend off Facebook, which had a reputation for innovative features like News Feed, which lets people check on friends’ activities in a single place, said Nate Elliott, an analyst at Forrester Research Inc. in New York. News Corp. (NWS), which bought MySpace in 2005, sold the site last year for less than one-tenth the price it paid. Friendster reinvented itself as a social-gaming platform following its 2009 purchase by Malaysia’s MOL Global Ltd.

Facebook raised $1.5 billion from backers including Goldman Sachs Group Inc. and Digital Sky Technologies, according to a January 2011 statement, an investment that implied a total value of $50 billion for Facebook. The company’s valuation is currently pegged at about $74 billion by SharesPost Inc., which handles trading of closely held companies.

Facebook Versus Groupon

Facebook’s sales indicate the stock would be more than twice as expensive as Groupon Inc., which raised $805 million in an IPO in November 2011, including an over-allotment option. The online coupon site went public at a valuation of $12.8 billion, or about 10 times sales in the 12 months through Sept. 30. The company is trading 7.5 percent higher than its IPO price.

LinkedIn Corp. (LNKD), whose IPO price made it more costly than Salesforce.com Inc., peaked at more than double its offer price in July. The offering valued LinkedIn at $4.25 billion, or 14.5 times trailing 12-month sales.

Google, one of Facebook’s main competitors in Web advertising, raised $1.9 billion in its IPO, including an over- allotment option. Founders Sergey Brin and Larry Page wound up halving the size of the offering after accounting errors and an interview with “Playboy” magazine attracted scrutiny from regulators.

They priced the shares at $85 apiece, giving Google a market value of about $23 billion, or about 10 times sales in the 12 months through June 30, 2004. Today the Mountain View, California-based company is worth more than $180 billion, making it the most valuable Internet company.

Profit Margins

Like Google, Facebook’s stock “has the potential to stay very high,” said Anupam Palit, a senior equity analyst at the New York-based GreenCrest Capital Management LLC.

Facebook may achieve an operating margin of more than 40 percent over the next two to three years, according to Palit. While that puts the company on par with Google, it’s also more than twice as big as Yahoo’s 2012 projection and about 16 times more than Web-services provider AOL Inc. (AOL), according to data compiled by Bloomberg.

Sustaining growth and its user base may help Facebook avoid the fate of AOL and Yahoo, whose fortunes have dimmed since their 1990s-era IPOs, said Dan Veru, chief investment officer at Palisade Capital Management LLC.

AOL’s Fate

“The moment you try to hold onto what you have, you end up like AOL and Yahoo,” said Veru, whose Fort Lee, New Jersey- based firm manages $3.4 billion. “The history of the Internet industry is littered with franchise-dominant players that are footnotes.”

Yahoo, once the biggest search engine in the U.S., went public in 1996 at a valuation of more than 200 times annualized 12-month sales, based on the nine-month figure disclosed by Yahoo in its prospectus then. Following the ouster of CEO Carol Bartz in September, the company trades at about 4 times trailing 12-month sales and is exploring options as revenue sinks.

AOL hasn’t fared any better. More than a decade ago the company, once the top U.S. Internet service, attempted to leverage that status by buying Time Warner Inc. (TWX) for $124 billion in stock and debt, then the largest deal in the country’s history.

The AOL-Time Warner combination was ultimately dismantled in 2009 with a spinoff of Internet operations as subscribers fled and ad sales plunged. AOL’s market value is now about $1.8 billion, compared with as much as $165 billion before the Time Warner tie-up.

For Facebook, consistent creativity should help spur sales growth and keep users interested, said Forrester’s Elliott.

“Facebook gives people a reason to come back, more than any other social space that has gone before, more than any other social space that we see online today,” he said. “They’re constantly introducing new features and new ways for people to engage with the site.”

To contact the reporters on this story: Lee Spears in New York at lspears3@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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Romney Defends ‘Poor’ Remark, Stays on Attack

By Julie Hirschfeld Davis - Feb 2, 2012 12:00 PM GMT+0700

Mitt Romney sought to seize the upper hand in the Republican presidential race after his 14-point triumph in Florida, assailing rival Newt Gingrich as not a “pure conservative” even as he defended his own attitude toward economically disadvantaged Americans.

As the contest moved west in advance of Nevada’s Feb. 4 caucuses, the former Massachusetts governor said Gingrich had strayed from core party principles by advocating action to curb climate change, criticizing a Republican Medicare plan and backing a national mandate to purchase health care. For his part, Gingrich has branded Romney a “Massachusetts moderate” to stoke resistance to his candidacy among the Republican base.

“I’m not saying he’s not conservative; I’m just saying he’s not the pure conservative he would have people believe,” Romney said yesterday of Gingrich, the former U.S. House speaker.

Romney, 64, a former private equity executive, is facing fresh questions about whether he is out of touch with less- fortunate people after remarking to CNN in an interview that “I’m not concerned about the very poor” because they have many programs to help them.

He told reporters on his campaign plane yesterday that his comment was taken out of context.

Romney Protests

“No, no, no, no,” Romney protested when asked about his statement. “I’ve said throughout the campaign my focus, my concern, my energy is going to be devoted to helping middle- income people, all right?” He said poor people have an “ample safety net,” including Medicaid, housing vouchers, food stamps and the Earned Income Tax Credit.

“If there are people that are falling through the cracks, I want to fix that,” Romney said. “Wealthy people are doing fine. But my focus in the campaign is on middle-income people.”

Gingrich, 68, defiant after his double-digit loss in Florida and vowing to stay in the race for months grappling for delegates, pounced on Romney’s comments, saying they illuminated a “perfect distinction” between himself and his competitor.

At a rally in Reno, Nevada, Gingrich said he is “fed up with politicians of either party dividing Americans against each other. I am running to be the president of all the American people and I am concerned about all the American people.”

Gingrich has cast his candidacy in populist terms, portraying Romney as beholden to Washington politicians and Wall Street bankers. He attributed his Florida loss to the large spending disparity between Romney and his allies, who hammered him with negative televisions advertising, and Gingrich and his own backers.

People-Power

“We are going to pit people-power against money-power in this campaign,” Gingrich said.

Real estate developer Donald Trump, whose flirtations last year with his own presidential run added an unpredictable element to the Republican contest, planned what he billed as a “major announcement” today in Las Vegas. Several news organizations reported it would be an endorsement of Gingrich, citing anonymous campaign sources. Gingrich’s campaign didn’t respond to requests for comment from Bloomberg News.

“I have no idea what the Donald is going to do,” Gingrich told reporters yesterday in Reno. “He is always interesting, and I don’t know of anybody who does a better job of getting attention by announcing that he will presently announce something.”

Pressing for Advantage

Romney arrived in Las Vegas last night and drew hundreds of people to a rally in a paper warehouse, pressing for advantage in Nevada, where Texas Congressman Ron Paul and former Pennsylvania Senator Rick Santorum, also were campaigning ahead of the caucuses. The race was shifting into a different phase, featuring a series of caucuses that will test the candidates’ organizational strength.

There are six contests in February -- starting with this weekend’s Nevada balloting and rolling caucuses in Maine that last into next week. They continue with Colorado and Minnesota on Feb. 7 and then primaries in Arizona and Michigan on Feb 28.

Santorum, counting on support from socially conservative voters who oppose abortion rights and gay marriage, was endorsed by Sharron Angle, a Tea Party-aligned politician who lost her 2010 bid to oust Senate Majority Leader Harry Reid of Nevada.

Santorum “has never wavered in his support for family values, understanding the impact that strong families have on a prosperous economy,” Angle said in a statement yesterday to National Review Online. “His continuous opposition to amnesty, Obamacare, the bail-outs and cap and trade are a perfect fit with our main street Tea Party movement.”

Republican Foes

Keeping an eye on his Republican foes, Romney also refocused his fire on President Barack Obama, portraying him as a feckless leader, “detached from reality” and lacking the ability to reignite the lagging economy.

“He does not know how to lead America; he is detached from the American people,” Romney said at a rally in Eagan, Minnesota. “I will stay in touch with the American people, and I will lead us back to prosperity.”

Romney also said Obama displayed “naivete” about foreign affairs, reflected by an announcement yesterday by Secretary of Defense Leon Panetta that the NATO-led coalition in Afghanistan would end its primary combat role in mid-2013.

“Why in the world do you go to the people that you are fighting with and tell them the day you are pulling out your troops?” Romney said at the rally. “It makes absolutely no sense.”

Most Diverse State

Romney’s win in Florida -- the most populous and diverse state to weigh in so far in the Republican race -- earned him 50 delegates and dealt a blow to Gingrich after the former speaker had triumphed in South Carolina’s Jan. 21 primary. Gingrich, who finished second in Florida, vowed to press on, as did Santorum, who ran third, and Paul, who finished fourth.

Romney beat Gingrich in the urban centers of Miami, Fort Lauderdale and Palm Beach County, in the cities of southwest Florida, across a swath of Central Florida from Tampa to Orlando and Daytona Beach, and in northeast Jacksonville. Gingrich defeated Romney in 35 less-populated counties -- painting a contrast between Romney’s urban and suburban support and Gingrich’s appeal to rural Republicans.

To contact the reporter on this story: Julie Hirschfeld Davis in Las Vegas, Nevadaat jdavis159@bloomberg.net.

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net

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Morgan Stanley Facebook Role May Cement IPO Lead for Third Year Running

By Douglas MacMillan, Lee Spears and Serena Saitto - Feb 2, 2012 12:01 PM GMT+0700

Morgan Stanley (MS) may cement its status as the top underwriter for U.S. initial public offerings for a third year running with its lead role on Facebook Inc. (FB)’s planned $5 billion sale.

Getting picked for the IPO, which Facebook disclosed in a regulatory filing yesterday, is a coup for Morgan Stanley and Michael Grimes, 45, a banker at the firm since 1995 who has longstanding ties to Facebook Chief Operating Officer Sheryl Sandberg, 42.

Grimes, the global co-head of the bank’s technology investment banking unit, and his Morgan Stanley colleagues won the biggest share of business underwriting U.S. IPOs by Internet companies last year, helping propel them to the top ranking in all U.S. IPOs, according to data compiled by Bloomberg. Facebook’s sale would be the biggest Internet IPO on record.

“This means a huge windfall for them,” said Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank. “The fact that they have led so many high-profile social media deals in the last year is proof positive that Morgan Stanley is most likely to be able to get this deal done.”

Morgan Stanley worked on IPOs by Zynga Inc. (ZNGA) and LinkedIn Corp. (LNKD), among the biggest Internet debuts in the U.S. last year, helped by Grimes’s connections with venture capital firms. Grimes, a Los Angeles native, meets regularly with investors in search of promising startups, has close ties to firms such as Sequoia Capital and is an early adopter of his clients’ products.

Networking

Grimes met Sandberg in 2001, at a party in Silicon Valley where she was job hunting after having worked at the U.S. Treasury Department during the Clinton administration, according to a 2008 interview with Grimes. Sandberg at that same party also met Eric Schmidt, then chief executive officer of Google Inc. (GOOG), who subsequently hired her, according to Grimes.

Morgan Stanley led Google’s 2004 IPO, by which time Sandberg was a senior executive there. Grimes, an early user of Facebook, has described Sandberg as a consummate networker and a decisive leader who is highly persuasive.

JPMorgan Chase & Co., Goldman Sachs Group Inc. (GS), Bank of America Corp., Barclays Plc (BARC) and Allen & Co. also will help with the sale, Facebook said in the filing. Morgan Stanley, listed first in the filing, stands to earn a larger share of the fees collected by securities firms for arranging the IPO. Facebook has a $2.5 billion revolving credit facility with affiliates of Morgan Stanley, JPMorgan, Goldman Sachs, Bank of America and Barclays, the filing shows.

JPMorgan’s Dimon

JPMorgan’s CEO, Jamie Dimon, has a long-time friendship with Sandberg and spoke with her about the IPO at various times, two people familiar with the matter said. That relationship helped JPMorgan edge out Goldman for a top spot in the IPO, they said. Morgan Stanley and JPMorgan found out last week they would be the lead names on the filing, said one of the people.

A spokeswoman for JPMorgan and Jonathan Thaw, a spokesman for Facebook, declined to comment.

Goldman Sachs, whose equity capital markets revenue slid to No. 4 among U.S. rivals in 2011, failed to win the lead role in Facebook Inc.’s initial public offering after scuttling a private sale of the Internet company’s stock to U.S. investors.

Underwriter Fees

The average fee on the IPOs of Yandex NV, Zynga, Renren Inc. (RENN) and Groupon Inc., the four Internet companies that each raised more than $500 million in U.S. initial offerings last year, was 5.1 percent, data compiled by Bloomberg show. At that percentage, a $10 billion Facebook IPO would generate fees of as much as $510 million for its underwriters.

Bankers handling Facebook’s IPO may collect fees of as little as 1 percent to 1.5 percent of the total amount raised in the sale, said two people with knowledge of the matter. Facebook hasn’t set a final fee, said the people.

Facebook Chief Executive Officer Mark Zuckerberg, 27, hired Sandberg in 2008 from Google to gain expertise in online advertising sales. Sandberg received $30.9 million in total compensation in 2011, making her the best-paid senior executive at Facebook, according to the filing, while Zuckerberg received $1.49 million. Sandberg isn’t on Facebook’s board.

Brokering Alliances

During a career that has spanned Google, McKinsey & Co. and the U.S. Treasury Department, Sandberg has honed what friends, colleagues and former employees say is a penchant for brokering alliances, fostering loyalty and setting priorities.

Facebook filed to raise $5 billion, though the amount may change. It had been discussing raising as much as $10 billion, a person with knowledge of the matter said late last year. At that size, Facebook’s IPO would be the biggest ever by an Internet or technology company, data compiled by Bloomberg show, trumping the combined U.S. and German debut from Infineon Technologies AG (IFX) totaling about $5.85 billion in 2000.

On underwriting league tables, Morgan Stanley took 20 percent market share for IPOs by Internet companies on U.S. exchanges in 2011, according to data compiled by Bloomberg. Morgan Stanley also led all U.S. IPOs last year with a 13 percent share, selling an estimated $4.6 billion of shares and generating an estimated $262 million in fees, the data show.

To contact the reporters on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net.

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net

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Facebook Files to Raise $5B in Biggest Internet IPO

By Brian Womack and Ari Levy - Feb 2, 2012 12:01 PM GMT+0700

Facebook Inc. (FB), the social- networking website that in eight years changed the way the world communicates, filed to raise $5 billion in the largest Internet initial public offering on record.

Facebook, whose meteoric rise spawned an Oscar-winning film and captivated Wall Street, yesterday named Morgan Stanley as the lead underwriter on the IPO, while reporting a 24-fold increase in sales over the past four years to $3.71 billion in 2011.

The planned IPO dwarfs Google Inc. (GOOG)’s 2004 offering and tests whether social-networking providers deserve market values that rival such established companies as McDonald’s Corp. (MCD) and Caterpillar Inc. The Menlo Park, California-based company is considering a valuation of $75 billion to $100 billion, people with knowledge of the matter said last week.

“The $100 billion valuation that’s being tossed around just puts it at a level we’ve never seen,” said Jeffrey Sica, chief investment officer of Morristown, New Jersey-based Sica Wealth Management LLC, which oversees $1 billion. “They have to be able to show that not only do they deserve to be at that level, but they have multiple channels to create new revenue.”

Sales Surge

Co-founded in 2004 by then 19-year-old Mark Zuckerberg, Facebook has grown into the world’s dominant social- networking site, squelching competitors such as MySpace Inc. with its more than 800 million users. While Facebook’s sales almost doubled last year, the company faces increasing competition from rivals such as Google, which debuted its own social-networking service last year, and short-message social site Twitter Inc., the filing shows.

A $100 billion market capitalization would value Facebook at 26.9 times trailing 12-month sales, more than double Google’s valuation when the search-engine operator went public in 2004. Facebook recruited Chief Operating Officer Sheryl Sandberg, a former Google executive, in 2008 to help expand the company globally.

Facebook didn’t specify the number or price of shares it will offer, and the $5 billion amount is a placeholder used to calculate fees and may change. The U.S. Securities and Exchange Commission’s public website suffered a slowdown yesterday as traffic surged, forcing the agency to bring on additional capacity, according to spokesman John Nester.

Facebook Bankers

The stock would trade under the symbol FB on either the Nasdaq Stock Market or the New York Stock Exchange. The company plans to use the proceeds for working capital and other general corporate purposes.

In addition to Morgan Stanley, Facebook hired JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Barclays Plc and Allen & Co. to manage the IPO.

Net income last year surged by almost two-thirds to $1 billion, the filing showed. Last year, Facebook said it expects U.S. regulators to require that it disclose financial results by April 30, 2012, if the company hadn’t gone public by then. Facebook decided to wait until 2012 for its IPO to give Chief Executive Officer Zuckerberg more time to gain users and boost sales, people familiar with the matter said in 2010.

Zuckerberg, 27, is the company’s top holder with 28.4 percent of the shares, the filing shows. He also has proxy agreements with fellow stockholders that potentially give him voting control over more than half the shares.

Social-Media IPOs

Accel Partners remains the top outside stakeholder with 11.4 percent of the investor votes, while Dustin Moskovitz, one of Zuckerberg’s co-founders, holds 7.6 percent voting power.

Facebook would follow a crop of social-media companies that went public in 2011, the biggest year for U.S. Internet IPOs in more than a decade, according to Bloomberg data. Nineteen companies raised $6.6 billion in 2011, the most since 101 raised $11 billion in 2000, the data show. Professional-networking site LinkedIn Corp. (LNKD), music-streaming service Pandora Media Inc., daily-deal site Groupon Inc. and social-gaming company Zynga Inc. all sold shares last year.

In outlining its potential risks in the filing, Facebook cited hacker attacks, regulatory scrutiny, a shift to mobile technology and rivals such as Google+. The company also said it would face competition in China if it manages to gain access to that market, where its site is currently blocked.

Mobile Technology

Facebook is increasing its focus on mobile technology to take advantage of the shift to smartphones and tablets. It expects its next 1 billion users to come mainly from mobile devices, rather than desktop computers.

The company made at least 10 acquisitions in 2011, including group-messaging service Beluga in March. In addition to buying startups, Facebook has enabled hundreds of others to get off the ground by offering an easy, cheap and fast way for them to reach millions of potential customers, said Shervin Pishevar, a managing director at Menlo Ventures in Menlo Park, California.

“There will be a lot of $1 billion-plus companies built on these platforms,” said Pishevar, who owns Facebook shares.

Venture firm Accel Partners first led a $12.7 million investment in Facebook in 2005. Other investors include Microsoft Corp. and PayPal co-founder Peter Thiel, as well as Greylock Partners.

Top Investors

As the site’s popularity grew, banks, hedge funds and mutual fund companies started buying stock. In January 2011, Facebook said it raised $1.5 billion in a financing round led by Goldman Sachs that valued the company at $50 billion. Goldman Sachs, funds managed by the firm, and Digital Sky Technologies bought $500 million of stock, while Goldman Sachs offered $1 billion of shares to non-U.S. clients.

While Facebook has steadily added users since its creation, it has faced increased scrutiny over its protection of user data. In November, the company agreed to settle privacy complaints with the Federal Trade Commission. The move may help allay criticism that it doesn’t do enough to shield the information it prods users into sharing.

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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Sony’s Hirai Must Face $2.3B Losses of TV Unit

By Mariko Yasu - Feb 2, 2012 6:32 AM GMT+0700

Incoming Sony Corp. Chief Executive Officer Kazuo Hirai’s biggest challenge will be to solve a puzzle that bedeviled Howard Stringer for eight years: how to make money selling televisions.

Japan’s largest electronics exporter said yesterday that Hirai, 51, will succeed Stringer, 69, in April. Sony’s TV business may lose 175 billion yen ($2.3 billion) this fiscal year, adding to the 480 billion yen in losses since 2004.

Sony has lost ground to South Korea’s Samsung Electronics Co. (005930) and LG Electronics Inc. (066570), both of which sell TVs profitably. The Tokyo-based company and fellow Japanese television makers Sharp Corp. and Panasonic Corp. have been crippled by the strength of the yen, which forced Sharp to predict a record $3.8 billion loss yesterday.

“The most pressing issue is to turn around the TV business,” said Ryosuke Katsura, analyst at Mizuho Securities Co. “Then he can prove to investors that he can make a change, but investors are skeptical how much he can do.”

Hirai, who worked in the company’s music and entertainment divisions, established his reputation by turning around Sony’s PlayStation unit and edged out three other candidates with engineering backgrounds for the top job.

Born in Tokyo on Dec. 22, 1960, Hirai grew up in Japan and the U.S., graduating from the International Christian University in Tokyo in 1984 with a bachelor’s degree in liberal arts.

Cycling, Driving

After graduation, he joined a joint venture set up in Tokyo by Sony and CBS Inc. The business later became Sony Music Entertainment Inc., Sony’s main music unit.

Hirai, whose hobbies include cycling, driving, as well as collecting cameras, watches, model railroads and telescopes, moved to Sony Computer Entertainment (6758) America in 1995 and became president of the U.S. unit in 1999. He was promoted to president of Sony Computer Entertainment Inc. in 2006, replacing Ken Kutaragi, developer of the PlayStation.

“The path we must take is clear: to drive the growth of our core electronics businesses - primarily digital imaging, smart mobile and game; to turn around the television business and to accelerate the innovation that enables us to create new business domains,” Hirai said in a statement.

The Japanese company is revamping the main TV business that is forecast to lose 262.5 billion yen in the two years to March 2013 because of a strengthening yen against the dollar and euro, and competition with rivals including Samsung.

Appreciating Yen

An appreciating yen that damps the repatriated value of Sony’s overseas sales -- while a weakening won inflates Samsung and LG’s -- and weakening consumer demand has prompted Sony to forecast an unprecedented fourth consecutive annual loss in the year to March. The company will discuss the health of its TV business while reporting its third-quarter earnings today.

“Japanese TV makers are facing too many troubles; the stronger yen, falling prices, sluggish demand and sliding market share due to competition,” said Yoshihiro Okumura, who helps manage the equivalent of $365 million at Chiba-Gin Asset Management Co. in Tokyo. “If they can introduce a hit product or a next generation product, then the situation may change.”

The maker of Bravia televisions, Vaio computers and PlayStation game consoles may project a wider loss than predicted three months ago, according to analysts’ estimates compiled by Bloomberg. Sony in November said it may have a 90 billion yen loss in the year to March. That compares with the 147 billion yen average loss projected by 18 analysts. Sony hasn’t had four consecutive years of losses since it was listed in 1958.

Sony’s Slide

Sony, which slid by more than 60 percent since Stringer took the helm in June 2005, fell 1.9 percent to 1,364 yen in Tokyo trading yesterday before the announcement. The stock slumped 53 percent last year, lagging behind a 26 percent jump for Apple Inc. (AAPL) and an 11 percent gain for Suwon, South Korea- based Samsung.

“It was my honor to recommend him to the board for the positions of president and CEO, because he is ready to lead, and the time to make this change is now,” Stringer said in the statement.

Sony, which exited a display-panel venture with Samsung and bought out partner Ericsson AB’s stake in their mobile-phone partnership, has introduced new tablet computers and game devices to take on Apple and try to revive profit.

Sony’s rating was cut by Moody’s Investors Service last month and Fitch Ratings in December, with both citing the difficulty of turning around the unprofitable TV business. Moody’s, which assigned a negative outlook to Sony, also downgraded Panasonic Corp. (6752)’s rating.

Losing Value

Sony has been hobbled by a yen that reached a postwar high, waning sales, a Japan earthquake that crippled factories and Thailand flooding that cut production. Worth $100 billion in September 2000, Sony is now valued at $18 billion, compared with Cupertino, California-based Apple at $425 billion.

The world’s No. 3 TV maker lowered its annual sales projection to 20 million sets from 22 million in November and said it was taking a 50 billion yen charge for streamlining the TV operation.

The company is countering with plans to write down the value of some facilities, reduce the number of models and cut expenses at its marketing units.

“There was such a huge expectation when Sony announced its first foreign CEO,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, which oversees the equivalent of $68 billion. “Hirai needs to rebuild Sony so that the company can produce something that cannot be copied by others. Sony was once such a company.”

To contact the reporter on this story: Mariko Yasu at myasu@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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