Filed under: Deals, Law, Blackstone Group L.P (BX), Recession

Alliance Data Systems (NYSE: ADS) seems ready to fight its buy-out dispute with Blackstone Group (NYSE: BX) all they way to the Supreme Count. But, it gave up the ghost, perhaps thinking that, even if it won the action, it would takes years and cause management distractions.

The original buy-out deal was for $6.76 billion or $81.75 a share. The stock now trades at $52.84. According to Reuters, ADS has now sued Blackstone for a much more modest “$170 million business interruption payment.” The two companies had looked at compromises to keep the deal on track, but nothing works.

The news isn’t only a victory for Blackstone. It shows that private equity firms can walk away from many of the deals that they made in early 2006. Weak credit markets are the cause of breaking the deals because they’ve driven higher interest rates and an economy that could injured profits at the businesses they planned to buy.

None of that says the core of the new reality, which is that financial buyers can take whatever promises they made and throw them out the window. No matter what they said, they can claim no obligations. It is an ethical collapse just as much as it is a financial one.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Deals, Electronic Arts (ERTS)

Electronic Arts (NASDAQ: ERTS) failed to win over the majority of Take-Two Interactive (NASDAQ: TTWO) shareholders with its hostile bid of $25.74.

According to the Wall Street Journal (subscription required), Electronic Arts now says it may lower its bid, with a company EVP saying that “The passage of time, whether due to regulatory issues or intransigence by Take-Two management, will diminish the value and certainty of our offer.”

I’m not so sure. Take-Two shareholders rejected the bid, presumably because they feel that it’s inadequate. It’s hard to comprehend how a lower bid would be more enticing. With just 8.3% of shares tendered in EA’s offer, the company is not close to completing a deal.

Take-Two executives state that the bid undervalues the company’s turnaround effort and upcoming release of the latest game in the Grand Theft Auto series.

But I think shareholders might be overdiscounting some of the bizarre risk factors that come with Take-Two Interactive, which has historically been a corporate governance Porta-Potty. Here’s a quick sample of the least boilerplate of the more than nine pages of risk factors included in the latest 10-K:

Our involvement, and the involvement of some of our former executive officers in a wide variety of lawsuits, investigations and proceedings has had, and might in the future have, a material adverse effect on us.

We and some of our former officers, directors and employees have been, and are subject to, a wide variety of lawsuits, investigations and proceedings, including the following:

Former Officers. Our former Chairman and Chief Executive Officer pled guilty to two felony counts relating to our historical stock option granting practices and the Securities and Exchange Commission instituted a civil action against him. In addition, certain other former officers have been convicted of crimes relating to their conduct during their employment with us.

Stock Option Granting Practices. In 2006, a Special Committee of our Board of Directors conducted an investigation into our historical stock option granting practices. The Special Committee determined that there were improprieties in the process of granting and documenting stock options and that incorrect measurement dates for some stock option allows had been used for financial reporting purposes. As a result, we recorded additional non-cash stock-based compensation expense and related tax effects with respect to some of our stock-based awards and restated certain previously filed financial information in our Annual Report on Form 10-K for the fiscal year ended October 31, 2006. Several derivative complaints and a class action complaint have been filed in say and federal courts against some of our current and former directors and some of our former executive officers relating to our historical stock option granting practices.

FTC Consent Order. We have entered into an agreement with the staff of the Federal Trade Commission containing a consent order that requires us to maintain a comprehensive system reasonably designed to ensure that all content in our electronic games is considered and reviewed in preparing submissions to a U.S. rating agency. We have also concurred to represent accurately the rating and content description for games we publish and to disclose to consumers the presence of any content relevant to the rating that wasn’t disclosed to the rating authority.

Personal Injury Actions. We’re named as a defendant in a number of personal injury and wrongful death actions.

SEC Investigation. We have received a notice from the SEC that it is conducting a formal investigation into certain stock option allows made by us. We’ve also received a “Wells” notice informing us of the SEC’s intention to file charges and seek a civil monetary penalty in connection with this investigation.

IRS Request for Information. We have received a request for information from the Internal Revenue Service relating to the granting and exercise of certain stock options and tax deductions taken by us with respect thereto.

Other Inquiries and Proceedings. We have received grand jury subpoenas issued by the District Attorney of the County of New York and from certain say attorneys general relating to some of our products, our historical stock option granting practices, the termination of our former auditors and other matters.

The investigations and charges against us or other current or former officers, directors or employees have imposed, and are likely to continue to impose, significant costs on us both financially and as a result of the distraction of our management team. While we’re unable to estimate the exact nature or amount of these future costs, we believe they’ll likely include:

• damage to our reputation and business relationships;
• professional fees in connection with the conduct of the investigations and the defense of related litigations and other proceedings;
• potential damages, fines, penalties or settlement costs imposed on us;
• advancement of certain expenses and reimbursement of certain amounts payable by, or on behalf of, our current and former officers, directors and employees subject to the investigation or named in any litigations or other proceedings pursuant to our indemnification obligations; and
• potential impairment of our capability to obtain coverage and reimbursement under existing insurance policies, and a potentially negative impact on our future insurance coverage.
• potential impairment on our capability to raise capital, debt and equity

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Filed under: Earnings reports, Deals, Intel (INTC), Advanced Micro Dev (AMD)

AMD (NYSE:AMD) announced its sixth straight loss. For the first quarter of 2008, the company reported a net loss of $358 million, or 59 cents a share, compared with a net loss of $611 million, or $1.11 a share, for the year-earlier period.

MarketWatch writes “Revenue was $1.5 billion, up from $1.23 billion for the year-ago period. Analysts had expected the chipmaker to report a loss of 48 cents a share on revenue of $1.52 billion, according to FactSet Research.”

The company’s survival as an independent company remains at stake. The firm stated that second quarter results would be down.

AMD still carries long-term debt of over $5 billion and with operating losses it remains difficult to see how the company can attack an amount of that magnitude while still investing aggressively in R&D. Larger rival Intel (NASDAQ:INTC) has the balance sheet and cash flow to continue to launch new chips, many of which have features superior to those of AMD products.

AMD may have only two choice now. One would be to sell the company to a more successful chip operation like Nvidia (NASDAQ:NVDA). The other is to auction off its graphics chip operation ATI, and hope that it can get enough money to help take down a big portion of its long-term debt obligations.

Either way, AMD is unlikely to look that same as it does now by the end of the year.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Deals, Management, Industry, Competitive strategy, Cisco Systems (CSCO), Employees

Cisco (NASDAQ: CSCO) is changing its M&A habits. Instead of taking companies it purchases and folding them into the parent, it will grant many to operate as independent divisions.

The Wall Street Journal reports, “We can’t purchase a company and tell it to do as we see fit if we don’t have a true understanding of the marketplace,” says Ned Hooper, Cisco’s head of business development, who is leading the new acquisition and integration strategy. In plain English that means the large router company will not purchase companies, fire all of the managers, and suck it into the parent.

While having companies operate as the equivalent of stand-alone entities may make the executives of companies bought by Cisco feel superior and might allow Cisco to have “experts” in the new industries it enters, the new plan has potential dangers.

Part of Cisco’s success is the strength of its management ranks, lead by long-term CEO John Chambers. Allowing companies to stay on their own allows them to make mistakes on their own. Some of that might be fine, at least in terms of learning from errors, but big mistakes make for large losses.

Just because a company has done well does not mean it has been managed well. Often success is the by-product of finding good market niches and creating new products.

Nothing beats good top management. Cisco may be forgetting that.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Forecasts, Deals, Industry, eBay (EBAY), EMC Corp (EMC)

Tech companies suffered in the huge world wide web explosion in 2000. Part of the problem was that many of them didn’t have adequate cash reserves to make it through the storm. They are concerned that the 2008 recession will be deja vu all over again.

According to The Wall Street Journal, “As of late last month, the technology sector — which already had been heavy on cash in the past few years — held almost $232 billion in cash and cash equivalents, up more than 6% from nearly $218 billion a year earlier, according to Standard & Poor’s.”

The move is mindless and absolutely unnecessary. Ebay (NASDAQ: EBAY) now has $3.6 billion and EMC (NYSE: EMC) has $4.5 billion according to the S&P numbers. The idea of building assets on the balance sheet makes no sense because both companies make money and have forecast to make money for the rest of the year. EMC had operating income of over $1.7 billion last year.

Wall Street does not like to see “unused” cash sitting around making 2.5% interest. Companies that don’t have announced M&A programs, huge share buy-backs, or special dividends are going to be punished for balance sheets that are too good.

And they should be.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Earnings reports, Deals, Industry, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO)

The deal for Yahoo! (NASDAQ: YHOO) to allow Google (NASDAQ: GOOG) to sell text ads on the portal’s search pages may happen more swiftly than most analysts believed. According to The Wall Street Journal, “Yahoo Inc. moved closer to outsourcing its search advertising to Google Inc. after an initial test of the system yielded what the two firms deemed positive results.”

The partnership could add several hundred million dollars of revenue to Yahoo!’s annual numbers. Most observers believe that regulators would be troubled by the two largest search companies joining forces.

The news still begs that question of whether any deal can be better than Microsoft’s (NASDAQ: MSFT) offer to purchase Yahoo! for over $29 a share. The first offer was at $31, but Microsoft’s shares, part of the payment, have declined since then.

Yahoo!’s actions to run away from Microsoft seem to go along the lines of trying to stay independent for the sake of being independent. In other words, the company has no answer to the question of why investors are better off if Yahoo! stands alone.

Since no one other than Microsoft wants to buy the portal, the answer is that Yahoo! has lost all options to defend its present strategy. A deal with Google does not, in any way Yahoo! can explain, make the company worth $30 a share.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Before the bell, Earnings reports, Deals, Google (GOOG), eBay (EBAY), Pfizer (PFE), International Business Machines (IBM), JPMorgan Chase (JPM), Merrill Lynch (MER), Southwest Airlines (LUV), Contl Airlines’B’ (CAL), Economic data

Futures eased slightly this morning as the market sought to catch its breath after sprinting higher Wednesday. All indices had strong gains after better-than-expected first-quarter earnings reports from JPMorgan Chase, Coca-Cola Co., and Intel Corp. The Dow industrials completed up 257 points, or 2.08%, the S&P 500 rose 30 points or 2.27% and the Nasdaq Composite shut up 64 points or 2.8%.

IBM (NYSE: IBM) reported very strong Q1 figures after the close Wednesday. The company had income from continuing operations of $2.3 billion, or $1.65 a share, up from $1.8 billion, or $1.21 a share, a year ago. IBM was aided by the weakness of the U.S. dollar, with some 65% of revenue coming from overseas. eBay also had a good quarter, with profit climbing 22%.

However, there was a disappointing earnings report from Merrill Lynch (NYSE: MER) this morning. The company lost $1.96 billion, or $2.19 a share, compared with net income of $2.16 billion, or $2.26 a share, a year ago, after billions of dollars of writedowns related to the subprime crisis. Merrill plans to cut about 4,000 jobs, or 10% of its workforce. Nokia (NYSE: NOK)’s quarterly income rose 25% to 1.22 billion euros, up from 979 million euros a year earlier, but missing analysts expectations of 1.38 billion euros, according to Bloomberg News. Pfizer (NYSE: PFE) also missed analysts’ estimates for the quarter, with profit falling 18%.

The U.S. dollar hit another all-time low against the euro, while oil prices hit an all-time high of more than $115 a barrel. According to the U.S. Energy Department, inventories of gasoline fell 5.5 million barrels last week. Related to the ongoing increase in oil prices, Continental Airlines reported a loss for the first quarter, while Southwest Airlines earnings declined. However, American Airlines yesterday posted a smaller-than-expected loss.

In the news this day, Yahoo! moves closer to deal with Google on outsourcing search advertising, according to the Wall Street Journal. Google (NASDAQ: GOOG) is expected to release earnings this afternoon.

In economic data, unemployment claims for the week ending April 5 will be released at 8:30 a.m. EST; the Philadelphia Fed report will be out at 10:00 a.m.

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Filed under: Deals, Industry, JPMorgan Chase (JPM), Bear Stearns Cos (BSC)

JP Morgan (NYSE:JPM) might be raising cash it does not need to prepare its balance sheet for more losses. The bank reported a $2.37 billion profit. That was down by half from a year ago, but was still an impressive number. The firm did set aside $4.4 billion for loan losses and took about $2.6 billion of write-downs tied to mortgages.

According to Reuters JPM “results calmed investors, who had hoped the bank would deal with the credit crisis superior than some others.”

So, why raise the capital? The answer might be in news that Wilbur Ross, billionaire specialist in Chapter 11 investing, is putting together cash from sovereign funds to invest in weak US financial stocks. According to Bloomberg “Ross will speak with Gulf investors in Abu Dhabi next week about 100 to 200 so-called thrift banks.”

Now that JP Morgan has acquired Bear Stearns (NYSE:BSC), it is nearly a sure bet that JPM CEO James Dimon will go looking for other bargains. He learned the practice under former boss Sandy Weill and his company is the product of a big merger with Bank One.

JP Morgan’s likely desire to buy smaller financial firms might be a sign that stocks in banks and brokerages are bottoming. Dimon wants a piece of that. Why should Ross have all the fun?

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Deals, Industry, Competitive strategy, Ford Motor (F)

Nissan and Chrysler will begin to build full-sized pick-ups together. According to The Wall Street Journal, “Chrysler will start building a huge pickup for Nissan at its truck plant in Saltillo, Mexico.” Nissan will also build some small vehicles for the US company.

The deal allows both companies to increase output from some of their plants, making more efficient use of manufacturing facilities and the arrangement could also cut design costs for the two automakers.

The new partnership raises the question of whether embattled Ford (NYSE:F) should do the same thing. Ford’s shares trade between $6 and $7 most days, about where they were when there were rumors of Chapter 11 two years ago. Ford now has only about 15% of the US market, and, if that share falls more, it has to raise the question of how viable it is for Ford to “go it alone” in the US market.

Ford could turn to several partners, but the most obvious one is Volkswagen. VW has said that it wants to expand into the US market and has had tiny success here. Since Ford losses money on many of its smaller automobiles, an area where VW is strong, it may make sense for Ford to take VW-produced vehicles for its domestic dealers and have a piece of a profitable joint venture instead of losing billions on its own.

At the end of the day, Ford has to do something.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Before the bell, Earnings reports, Deals, Contl Airlines’B’ (CAL), Economic data, Delta Air Lines (DAL)

U.S. stock futures were down slightly this morning, reflecting nervousness about economic data and earnings reports due out this day.

Stocks fell Tuesday for the second session in a row after disappointing earnings from Wachovia surprised the market. The Dow industrials ended the day down 23 points, the S&P 500 lost 5 points, and the Nasdaq Composite fell by 14 points.

In the news, Delta Air Lines (NYSE: DAL) and Northwest Airlines (NYSE: NWA) announced yesterday that they’ll combine to form the world’s largest airline, with a market value of $17.7 billion. The new airline will be called Delta. United and Continental might be next in line to tie the knot.

In another blow to the ailing airline sector, oil prices rose to an intraday record of more than $112 a barrel Tuesday as the U.S. dollar continued to weaken against other major currencies.

There was evidence of continuing deterioration in the housing market — according to a report by RealtyTrac for March, U.S. foreclosure filings rose 57% and bank repossessions more than doubled from last year. However, there was some good news from Detroit as Ford announces plans to step up production of the compact Focus by 30% to meet strong demand.

Economic data due out today includes the Producer Price Index, a measure of wholesale inflation, at 8:30 a.m. EST, the Empire State Manufacturing Survey at 8:30 a.m. EST, and the Housing Market Index at 1:00 p.m. EST.

It is a massive day for earnings, with BHP Billiton (NYSE: BHP), Johnson & Johnson (NYSE: