Yahoo Owners May Prefer Microsoft Bid to Google Fight

 (Bloomberg) -- Jerry Yang, who pledged last year to lead his team of ``Yahoos'' to victory, may find investors would rather team up with Microsoft Corp.

Yahoo! Inc. rose the most since its first day of trading when Microsoft offered $44.6 billion for the company, the second-most popular search engine, on Feb. 1. Yang, who returned as Yahoo's chief executive officer to try to reverse a two-year stock slump, had presided over a 32 percent drop before the bid.

Microsoft said Yahoo executives snubbed its overtures last year in favor of tackling Internet search leader Google Inc. independently. Yahoo's stock performance shows investors don't embrace that strategy and that Yang's promises to revamp the company's search engine and gain on Google were in vain.

``It's hard to look shareholders in the eye and say it doesn't make sense,'' Robert Doll, chief investment officer of global equities at BlackRock Inc. in Princeton, New Jersey, said of Microsoft's unsolicited offer. ``There won't be a whole lot of options for Yahoo.'' He oversees $1.3 trillion in assets, including stock in Microsoft, the world's biggest software maker.

Microsoft's $31-a-share bid came three days after Sunnyvale, California-based Yahoo posted an eighth straight quarter of declining profit and projected sales that trailed most analysts' estimates.

Shares Gain

Yahoo was trading at $19.18 before the offer. The shares rose 48 percent in Nasdaq Stock Market trading on Feb. 1 and advanced 95 cents to $29.33 at 4 p.m. New York time today. Microsoft fell 26 cents to $30.19, while Google dropped $20.47 to $495.43.

Google Chief Executive Officer Eric Schmidt called Yang to suggest a potential partnership between the two companies to thwart Microsoft's bid, the New York Times and the Wall Street Journal reported today, citing people familiar with the matter.

``Yahoo has a lot of options, and you can look at what analysts have said about those options,'' spokeswoman Diana Wong said when asked about the Journal's report. Yahoo said in a statement on Feb. 1 that it will review the offer ``promptly.''

Yang, 39, agreed to take over at Yahoo in June, replacing Terry Semel, after its share of Web searches tumbled and the company lost out on sales of graphics-based ads mainly to social-networking sites like News Corp.'s MySpace and Facebook Inc.

In Semel's six years at the helm, he built Yahoo's online ad business through acquisitions and internal development. While the shares jumped almost sevenfold under his watch, Google's rising dominance led the stock to plunge 35 percent in 2006, and investors began calling for Semel to resign.

Yahoos Rally

``I'm ready to rally our near-12,000 Yahoos around the world,'' Yang said on a conference call when he took over. He planned to foster ``a winning culture, while strengthening our leadership team to galvanize Yahoos around our goals.''

Microsoft's bid came too soon for Yang to prove himself, said Ellen Siminoff, who worked with him at Yahoo for seven years and now leads Mountain View, California-based Efficient Frontier, which helps companies advertise on search engines.

``It's hard to get any sort of change that quickly,'' Siminoff said. ``He would rather sell having fixed the company than sell after a perception of weakness.''

Microsoft chose Yahoo as a partner after repeatedly coming in a distant third in Internet searches and failing to bolster advertising revenue on its own. Yahoo would give Redmond, Washington-based Microsoft the most popular group of Web sites in the U.S., which reach about 500 million people worldwide.

Reviewing the Deal

The U.S. Justice Department is ``interested'' in reviewing the antitrust implications of the deal, agency spokeswoman Gina Talamona said last week. Neelie Kroes, commissioner of competition for the European Commission, said her agency also would scrutinize a Microsoft-Yahoo deal.

The offer ``raises troubling questions'' for Web users, Google said yesterday, questioning whether Microsoft would seek to exert ``inappropriate'' influence over the Internet. Microsoft General Counsel Brad Smith disputed the claims in a statement.

Microsoft and Yahoo explored ways to work together in late 2006 and early 2007, according to a letter by Microsoft CEO Steve Ballmer to the Yahoo board dated Jan. 31. Yahoo rejected the idea of being taken over by Microsoft a year ago, according to Ballmer, 51.

``I doubt that Jerry and David want to sell Yahoo,'' said Mark Cuban, the billionaire owner of basketball's Dallas Mavericks, who sold Broadcast.com to Yahoo in 1999. ``But this is a very smart move for Microsoft. There will surely be a ton of duplication on the technology side, which should cut costs significantly.''

Next Step

The offer from Microsoft is one of many options Yahoo is evaluating, Yang and Chairman Roy Bostock said in a Feb. 1 e- mail to employees obtained by Bloomberg News. The board will respond after reviewing the alternatives, they said. If Yahoo accepts the deal, Yang stands to get about $1.6 billion in cash or Microsoft stock for his 52.8 million shares.

Microsoft may seek to oust Yahoo board members should they reject its offer, said a person familiar with the matter, who asked not to be identified. Under Yahoo's bylaws, stockholders must nominate directors by March 13, ahead of the company's annual meeting, the person said. Microsoft spokesman Frank Shaw declined to comment. Wong didn't immediately return a voicemail message.

Yahoo's advisers, Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., are approaching other potential bidders in search of a higher offer, the New York Times reported Feb. 2.

 

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Unilever Growth to Sputter as P&G Takes Market Share in India

(Bloomberg) -- Unilever, which sells soap to more than 500 million Indians, may see global revenue growth slow in 2010 as Procter & Gamble Co. and ITC Ltd. step up marketing in Asia's third-biggest economy.

The world's second-largest consumer products maker has relied on accelerating shipments of Surf Excel detergent in India to make up for sluggish sales in Europe. Now Cincinnati- based Procter & Gamble is stocking Indian stores with Olay skin- care products after nearly halving the local prices of Ariel and Tide detergents in 2004.

Asia and Africa, which make up about a third of Unilever's worldwide sales, will see their share of the company's growth fall to 2 percent in 2010 from 3.3 percent in 2007, according to Brussels-based brokerage Petercam SA. Revenue from the two continents rose 11.4 percent in the first nine months of last year, helping offset 1.9 percent growth in Europe and 4.2 percent in North and South America.

``Unilever is quite heavily dependent on the region for growth, so a slowdown there would hurt growth at Unilever as a whole,'' said Yann Gindraux, an analyst at Vontobel Holding AG in Zurich, speaking about Asia and Africa. He rates the stock ``sell'' and expects sales in the regions to expand by 9 percent in 2009 from 11 percent last year.

Unilever's overall sales growth will slow to 4.9 percent in 2010 from an estimated 5.3 percent in 2007, according to the median of five analysts in a Bloomberg survey.

2010 Expectations

Amid expectations of slowing growth by 2010, Unilever will return to 25.15 euros over the next 12 months -- about where it was at the start of the year -- according to analysts' estimates. The shares closed at 22 euros in Amsterdam trading yesterday, down 32 cents. Fourteen analysts recommend buying the stock. Another 14 say ``hold'' and nine ``sell.''

P&G, the world's largest consumer-goods maker, will continue to gain share in the next five years in India, according to Ali Dibadj, an analyst at Sanford C. Bernstein in New York, who rates the stock ``outperform.'' Hindustan Unilever Ltd., 52 percent owned by the London- and Rotterdam-based parent, lost ground in shampoo, bath soap, toothpaste and tea in the quarter ended Sept. 30, compared with the year earlier, according to the company. Its share of the shampoo market declined by more than a percentage point to 47.7 percent, the company said.

ITC, the largest Indian cigarette maker and partly owned by British American Tobacco Plc, is also making inroads. It started selling more brands including Fiama Di Wills shampoo and Superia soap last year as the government raised tobacco taxes.

`Profitable' Cigarettes

The tobacco maker ``has a very profitable cigarettes business which will help it to invest and expand its personal- care portfolio,'' said Anand Shah, an analyst at Angel Broking in Mumbai, who has a ``neutral'' rating on the stock. ``It has the ability to take losses in this segment as long as it grows its sales. This strategy will still satisfy investors.''

Rising prices of raw materials have made it more difficult for consumer-goods makers to pass on higher costs. The price of palm oil, used to make soaps and foods, has surged 70 percent in the past year.

``Given the competition, profitability will continue to be under pressure,'' said Macquarie Securities Ltd. analyst Unmesh Sharma, who has an ``underperform'' rating on Hindustan Unilever. He expects the stock to drop to 180 rupees ($4.57) in the next year from 190.9 rupees. The company has a market value of about $11.8 billion.

India is Unilever's biggest market in Asia, generating about 6 percent of annual sales. It has sold soap in the country since 1888 and controls about half of the sales of products such as skin creams, bathing soaps and shampoo.

 

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Company Default Risk Rises as Recession, Lending Concerns Mount

(Bloomberg) -- The risk of companies defaulting rose after reports showing a contracting U.S. service industry and tightening lending standards by banks fueled concern that borrowers will find it tougher to raise cash.

Benchmark credit-default swap indexes in the U.S. and Europe reached the highest levels in two weeks, a sign of eroding investor confidence in corporate creditworthiness. Contracts tied to the bonds of SLM Corp., the biggest U.S. student lender, rose after Standard & Poor's late yesterday cut the company's credit rating to one level above junk. Contracts on NXP BV, the chipmaker bought by a Kohlberg Kravis Roberts & Co.-led group, soared to the highest on record.

U.S. service industries unexpectedly shrank in January at the fastest pace since the last U.S. recession, an Institute for Supply Management index showed today. Banks lifted borrowing costs and made it harder for companies and households to raise funds over the past three months, the Federal Reserve's Senior Loan Officer Opinion Survey yesterday showed.

The weak economic and lending data ``is going to question people's ability to be optimistic about whether the monetary and fiscal stimulus is enough to turn things around later in the year,'' said Matthew Mish, a credit strategist at Barclays Capital in New York. Investors ``are going to have to confront the reality that the financial markets across the board are still extremely distressed and things aren't functioning properly.''

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates worsening perceptions of credit quality; a decline, the opposite.

CDX North America

The Markit CDX North America Investment Grade Index, a benchmark gauge of default risk tied to the bonds of 125 companies, climbed 7.5 basis points to 117 basis points at 10:11 a.m. in New York, according to Deutsche Bank AG. In Europe, Markit iTraxx Crossover Index of 50 companies with mostly high- risk, high-yield credit ratings soared 34 basis points to 503. In Asia, the Markit iTraxx Japan index increased 3 to 68.

A gauge of investor confidence in the U.S. high-yield, high- risk loan market fell to the lowest since it started trading Oct. 3. The LCDX Series 9, which falls as sentiment worsens, dropped as much as 0.55 point to 92.2, according to Goldman Sachs Group Inc.

Sallie Mae

Credit-default swaps on Reston, Virginia-based SLM, known as Sallie Mae, climbed 35 basis points to 435 basis points, according to broker Phoenix Partners Group in New York, the biggest climb in two weeks. S&P cut the company's credit rating to BBB- and said it may lower it further on concerns that ``higher funding costs, reduced profitability and potential asset quality deterioration will keep pressure on'' the company.

Contracts on NXP BV, soared 97 basis points to 943, according to CMA Datavision in London. KKR's purchase of Eindhoven, Netherlands-based NXP for 3.4 billion euros in August 2006 was ill-conceived because the chip industry relies on economic growth more than other businesses, the Financial Times today said in its ``Lex'' column. While it's unlikely the company will go bankrupt, the buyout firms probably won't achieve the profit levels they expected, the paper said.

Financial companies are reluctant to lend because they may face losses exceeding $265 billion on securities linked to subprime mortgages, Standard & Poor's said last week.

 

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Apple Adds Pricier IPods, IPhones With More Storage

(Bloomberg) -- Apple Inc. unveiled higher-priced models of its iPhone mobile handset and iPod media player with double the memory of previous versions.

The iPhone will now be available in a 16-gigbyte model for $499 and the iPod Touch in a $499, 32-gigabyte edition, the Cupertino, California-based company said today in a statement.

Apple's iPod shipment growth slowed last quarter, signaling that demand for the devices may be abating. The company introduced new models of the iPod, including the touch-screen version, in September to stimulate sales. Chief Executive Officer Steve Jobs said he expects to sell 10 million iPhone handsets this year.

Apple fell 11 cents to $131.54 at 9:39 a.m. New York time in Nasdaq Stock Market trading. The shares had dropped 34 percent this year before today.

 

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Treasuries Rise as Service Industries Contract, Stocks Decline

(Bloomberg) -- Treasuries rallied, pushing two-year note yields close to a four-year low, on growing speculation the Federal Reserve will cut interest rates further after a report showed service industries unexpectedly contracted last month.

Two-year notes gained the most in a week as traders bet the central bank will slash its benchmark rate by a half-percentage point next month, the third reduction this year. Yields have tumbled about 2 percentage points since mid-September, when the Fed started lowering rates to avert a recession amid a slumping housing market.

The report ``strongly corroborates people who have already been saying we're in recession,'' said T.J. Marta, a fixed- income strategist at RBC Capital Markets in New York. ``We're going to retest the lows in yields.''

The two-year yield fell about 11 basis points, or 0.11 percentage point, to 1.94 percent at 10:20 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield touched 1.837 percent on Jan. 23, the lowest since April 2004. The price of the 2 1/8 percent security due January 2010 rose about 1/4, or $2.50 per $1,000 face amount, to 100 11/32. Ten-year note yields fell 11 basis points to 3.54 percent.

The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, the lowest since October 2001, the last time the U.S. was in a recession, from 54.4 the prior month, the Tempe, Arizona- based ISM said. A reading below 50 signals contraction.

100 Percent

Traders now see a 100 percent chance that policy makers will cut their lending target a half-point to 2.5 percent at their next scheduled meeting on March 18, compared with a 68 percent chance yesterday, according to futures on the Chicago Board of Trade.

The gap between two- and 10-year note yields widened to about 1.6 percentage points, the most since September 2004, from 1.58 basis points yesterday. Shorter-maturity notes are more sensitive to Fed rate changes, while debt maturing in 10 years or more is influenced more by inflation expectations.

U.S. stocks fell, increasing demand for the fixed payments on government debt. The Standard & Poor's 500 Index dropped 1.6 percent in early trading.

 

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U.S. Stocks Fall After Service Industries Unexpectedly Shrink

(Bloomberg) -- U.S. stocks fell for a second day after American service industries declined to the lowest levels since 2001, reinforcing speculation the economy has tipped into a recession.

Exxon Mobil Corp., General Electric Co. and AT&T Inc. led declines in New York trading, and all 10 industry groups in the Standard & Poor's 500 Index dropped, after the Institute for Supply Management's index fell more than forecast in January. Goldman Sachs Group Inc. posted its biggest two-day drop since November on Oppenheimer & Co. analyst Meredith Whitney's downgrade of the largest securities firm.

``As the recession unfolds, then profits will disappoint,'' Stuart Schweitzer, who helps oversee $420 billion as the global markets strategist at JPMorgan Private Bank, said in a Bloomberg Television interview from New York. ``It's already under way.''

The S&P 500 lost 23.77, or 1.7 percent, to 1,357.05 at 10:24 a.m. in New York. The Dow Jones Industrial Average decreased 209.81, or 1.7 percent, to 12,425.35. The Nasdaq Composite Index slipped 32.45, or 1.4 percent, to 2,350.4. Shares also fell in Asia and Europe.

About six stocks dropped for every one that rose on the New York Stock Exchange after the ISM's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9 from 54.4 the prior month. A reading of 50 is the dividing line between growth and contraction.

GE, the second-largest U.S. company by market value, dropped 59 cents to $34.78. AT&T, the nation's biggest phone company, declined $1.09 to $37.07.

Energy Shares Slump

Crude oil for March delivery fell 1.7 percent to $88.47 a barrel in New York after the ISM report bolstered speculation fuel demand will slow in the U.S., the world's biggest energy consumer. Gold and copper prices also declined, dragging down shares of mining companies.

Exxon Mobil Corp., the biggest U.S. energy company, lost $1.49 to $83.95. Chevron Corp., the second-largest, declined $1.74 to $80.28. Freeport-McMoRan Copper & Gold Inc. retreated $3.85 to $87.33. Newmont Mining Corp. fell $1.04 to $49.87.

Goldman dropped $6.17 to $194.63. The firm was cut to ``perform'' from ``outperform'' by Oppenheimer's Whitney. The stock's valuation ``will not be sustainable in a year when Goldman Sachs will probably deliver results that will not be substantially better than its peers,'' Whitney wrote in a note dated Feb. 4.

Citigroup Inc., the biggest U.S. bank by assets, lost 73 cents to $28.49. Merrill Lynch & Co., the nation's third-largest securities firm, dropped $1.79 to $55.94. The S&P 500 Financials Index retreated 2.7 percent.

Ratings Watch

Banks and brokerages also retreated after Fitch Ratings said collateralized debt obligations may be downgraded as many as five levels. The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to ratings guidelines proposed by Fitch today. CDOs that package high-yield assets may be cut as many as three levels for the portions first in line for losses.

National Semiconductor Corp. fell 72 cents to $18.30. The maker of chips for devices such as Apple Inc.'s iPhone said revenue this quarter will be as much as $455 million. That's below the $484 million average estimate of analysts in a Bloomberg survey. The company on Dec. 6 forecast sales of $474 million to $495 million.

Texas Instruments Inc., the biggest maker of mobile-phone chips, dropped 88 cents to $30.28. Intel Corp., the world's largest chipmaker, lost 40 cents to $20.67.

Fed Bets

Traders boosted bets on Federal Reserve interest-rate cuts after the ISM report. Fed funds futures indicate a 98 percent chance policy makers will lower the target for overnight loans between banks by 0.5 percentage point to 2.5 percent by its March 18 policy meeting. That compares with 68 percent odds yesterday. The rest of the bets are for a quarter-point reduction.

General Motors Corp. slipped 66 cents to $26.91. GMAC LLC, the lending company that General Motors Corp. sold to a hedge fund manager, lost $724 million in the fourth quarter because home buyers didn't keep up with their mortgage payments. A group led by Cerberus Capital Management bought a 51 percent stake in GMAC in 2006.

NYSE Euronext slipped $4.06 to $78.67. The owner of securities exchanges on both sides of the Atlantic said fourth- quarter earnings more than tripled on record equity trading and new listings. Excluding merger costs and one-time charges, profit was in line with the average estimate of 12 analysts surveyed by Bloomberg.

 

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U.S. Economy: Service Industries Unexpectedly Shrank in January

(Bloomberg) -- U.S. service industries unexpectedly contracted in January at the fastest pace since the 2001 recession as the housing slump deepened and consumer spending cooled.

``This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.''

The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, from 54.4 the prior month, the Tempe, Arizona-based ISM said. A separate report today by Royal Bank of Scotland Group Plc showed Europe's service industries grew in January at the slowest pace since 2003.

Stocks fell and Treasury notes rallied as traders added to bets that the Federal Reserve will cut its benchmark rate by another half a percentage point at or before its March meeting. Today's reports also show the economic slowdown that began with a U.S. housing downturn is jeopardizing Europe's expansion and increasing pressure on the European Central Bank to follow the Fed and cut rates.

The ISM published the data, which assesses retailers, banks and construction companies, more than an hour earlier than scheduled. The release time was changed because of concerns about a ``breach'' of embargoed information, ISM spokeswoman Andrea Waas said in a telephone interview.

``The possible breach was very general information disclosed during a private conversation by someone who is normally not involved in the report process but was involved this month due to unique circumstances,'' Waas wrote later in an e-mailed response to questions. ``It was an innocent slip of the tongue.''

Worse Than Anticipated

The index was projected to fall to 53, the median forecast in a Bloomberg News survey of 65 economists. Estimates ranged from 51 to 55. A reading of 50 is the dividing line between growth and contraction, and the index has averaged 57.6 since its inception in July 1997.

``The economy is shrinking,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``How much is still uncertain.''

The yield on the benchmark 10-year Treasury note fell to 3.54 percent at 10:31 a.m. in New York, from 3.64 percent late yesterday. The Dow Jones Industrial Average dropped 1.5 percent to 12,449.9. Equities also retreated in the U.K., Germany, France and Italy.

Royal Bank of Scotland said its purchasing managers' index for services dropped to 50.6, the lowest since July 2003, from 53.1 in December. Retail sales in the euro region declined 2 percent in December from a year earlier, a record, the European Union's statistics office in Luxembourg said today.

European `Shocker'

The services data are ``a shocker,'' said Holger Sandte, chief European economist at WestLB in Dusseldorf. ``The ECB certainly wants to see more evidence for a marked slowdown, but the data will give them pause for thought on interest rates.''

Today's U.S. services report included a new composite index to reflect changes in current measures of business activity, new orders, employment and supplier deliveries. The contribution from each sub-index is equal.

The new composite index was 44.6 in January. It would have been 53.2 in December, according to Bloomberg calculations based on a formula provided by ISM.

The ISM group's index of new orders for non-manufacturing industries fell to 43.5 from 53.9 the prior month.

An index of employment dropped to 43.9 from 51.8, and a gauge of supplier deliveries decreased to 49 from 52.5.

A measure of prices paid also dropped to 70.7 from 71.5.

Payrolls Drop

The housing recession is hurting other parts of the economy. Employers in January reduced payrolls for the first time in more than four years, the Labor Department reported last week. Service providers added 34,000 workers to payrolls after an increase of 143,000 in December. Builders trimmed staff by 27,000 workers.

``Risks to growth remain,'' Federal Reserve policy makers said Jan. 30 when they cut the benchmark interest rate by a half point. The action followed an emergency three-quarter-point reduction the prior week. Investors are betting policy makers will lower the rate by another half point next month, according to futures trading.

Manufacturing, which accounts for about 12 percent of the economy, unexpectedly expanded in January, showing business investment is holding up even as other areas weaken, according to a report from ISM last week.

 

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