Delta-Northwest Deal Grounded

The pilots' unions of the two commercial airlines cannot agree on how to create a seniority list for a combined venture After years of speculation and rumor about airline mergers, it appeared that the long-awaited era of consolidation of the nation's commercial carriers was finally at hand: Delta Air Lines (DAL) was negotiating to merge with Northwest Airlines (NWA), a marriage that was certain to force other major carriers to find partners of their own. But, as in the past, the prospect of megamergers in the airline industry turned out to be one more mirage—with the pilots of Delta and Northwest torpedoing the latest wave of deals. On Mar. 17 the head of Delta's pilots' union told members in a letter that he and his counterparts at Northwest had been unable to reach an agreement on how to create a seniority list for the combined airline. And with Delta and Northwest executives having effectively made that a precondition of the broader merger, the deal was dead—with only recriminations to follow. "We approached the negotiating table not at an extreme, but in the middle; not adversarial, but cooperative. The other committee took a different approach," Lee Moak, the head of Delta's pilots, wrote to members, declining to publicly identify Northwest as the discussion partner. Profitability Isn't Out of the Question While Delta management wouldn't discuss the latest setback, it's clear they are proceeding on the assumption a deal won't happen. Less than 24 hours after Moak sent his missive to the other pilots, Delta management announced a sweeping restructuring plan designed to counter the recent spike in fuel prices (BusinessWeek.com, 3/12/08). The surge above $110 per barrel this week is likely to cost the airline an extra $2 billion this year. In a presentation to Wall Street investors, Delta President Ed Bastian said the Atlanta carrier would cut 2,000 jobs and ground dozens of planes to keep the airline in the black. "It is not out of the question for Delta to be profitable this year," Bastian told investors. "We're moving quickly to take care of managing our business." In addition to the job cuts, Bastian said the carrier plans to scale back the number of domestic flights by 10% this year, largely by reducing the number of direct flights between smaller cities that don't connect through one of its hubs. Also on Tuesday, United Airlines (UAUA) said it would cull 15 to 20 planes from its fleet this year as part of an effort to reduce unprofitable flights. Pressure to Negotiate a Deal At Delta, Bastian says the airline will shift some of its planes into the international arena (BusinessWeek.com, 5/7/07), by beefing up service to underserved markets in countries such as Africa, China, and India. "We're going places where others aren't," he said. "It's truly new white spots—markets where there is no U.S. competitor." As for the prospects of a merger, Bastian declined to comment, saying only, "We are proponents of consolidation, but it has to be the right deal." Already, some Wall Street analysts are questioning whether Delta management was in fact committed to making the Northwest merger happen. To be sure, there was pressure on Delta Chief Executive Richard Anderson to negotiate a deal: Many of the hedge funds that bought Delta debt during the carrier's 2005 bankruptcy—and converted it into sizable equity stakes when the airline emerged from Chapter 11 the following year—were pushing management to pursue a merger. And when Anderson asked the pilot unions from Delta and Northwest to find a way to combine the seniority lists for both carriers, it appeared to be a prudent move to avoid the pilot infighting that has poisoned the merger between the former US Airways Group (LCC) and America West. But looking back, Anderson—who before joining Delta last year had served as CEO of Northwest—had to have known enough about each of the pilots' unions to think it unlikely they would find common ground. With hundreds of Delta pilots opting to retire before the bankruptcy, the remaining pilots were on average far younger than their peers at Northwest. That meant that in a merger, many Delta pilots would be bumped back to flying smaller planes—an action that would also have meant taking a pay cut. Industry Consolidation Delayed And when Northwest pilots refused to cede too much ground on the seniority issue, Delta pilots opted to walk. "Pilots are like a bunch of spoiled kids, and it would have required adult supervision to make the merger work," says Roger King, airline analyst for CreditSights, an institutional research firm in New York. "It's a testament to management's impotence that the deal wasn't done—or more probably, to management's real desire to not do the deal. I think they pursued the merger just to get the shareholders off their backs." King belongs to the camp that believes airline mergers are overrated, with the integration issues—such as appeasing the pilots' unions—outweighing any benefits. And that's particularly the case, he says, with Delta and Northwest, where there's so little overlap in their route structures that the cost savings would be negligible. The management teams "were looking at years of execution risk, without any huge economic benefits," he says. If Delta and Northwest opt not to force the pilots back to the table—and Bastian's presentation suggests Delta has already moved on—that eliminates the pressure on other carriers to respond. All of which suggests the prospect of airline mergers will be a topic of debate and speculation for years to come.

Delta to eliminate 2,000 jobs, trim domestic routes

Hammered by record fuel costs and the weakening national economy, Delta Air Lines Inc. says it plans to cut up to 2,000 jobs through voluntary payouts offered to half of its workforce. Orlando International Airport's third busiest carrier says it will reduce domestic flights while adding more international routes and it will stay open to merging with another airline. Delta President and Chief Financial Officer Edward H. Bastian delivered the news Tuesday at the 2008 JPMorgan Aviation and Transportation Conference in New York. Delta also filed with the SEC the heart of Bastian's remarks in a memo he and CEO Richard Anderson sent to employees today. Bastian noted that in the past three months, fuel prices have jumped nearly 20 percent and the airline's 2008 fuel bill is now expected to increase by nearly $900 million more than it projected for the year and $2 billion more than 2007. Oil hit $112 a barrel Monday. In April, Delta (NYSE: DAL) will offer two buyouts to U.S., non-pilot employees -- a total of about 30,000 people. Delta also has identified 700 managerial and administrative jobs for elimination. The job cuts -- about 3 percent of its workforce -- will save it up to 10 percent in costs this year. Bastian says global expansion would be the key to the airline's long-term success. This summer, more than 40 percent of its capacity will be dedicated to international flying, where fares better cover higher fuel costs. Fuel prices and a weakening domestic economy have put significant pressure on the profitability of Delta's U.S. network, Bastian says. Delta is cutting domestic capacity by an another 5 percent by August -- a 10 percent year-over-year domestic reduction. The airline said the cuts would come from parking 15 to 20 mainline aircraft and 20 to 25 regional jets. Delta also will thin frequencies and reduce point-to-point routes. Delta is aiming to recover fuel price increases in its ticket prices. In the past year, Delta has regularly increased systemwide domestic fares, boosted fuel surcharges, increased international fares and increased select service fees, Bastian says. Delta is targeting $550 million in productivity initiatives for 2008 to save money. Bastian says Delta has identified $200 million in capital expenditures to be deferred or eliminated. It will sell mainline and regional aircraft as they are removed from the schedule to improve liquidity and eliminate overhead. As Delta's potential merger with Northwest Airlines seemed to be unraveling Tuesday, Bastian emphasized Delta will continue to explore its strategic options. Delta emerged from bankruptcy in April 2007. It posted net income of $1.6 billion on $19.2 billion in revenue last year, compared with a net loss of $6.2 billion on $17.5 billion in revenue in 2006. However, the airline had a net loss of $70 million on $4.7 billion in revenue in the fourth quarter, and noted a 26 percent rise in fuel prices.

Credit Suisse Spent $1.8M Lobbying

Credit Suisse Spent $1.8M Lobbying in 2007 on Financial Market Regulation, Mortgage Caps WASHINGTON (AP) -- Credit Suisse Securities, a unit of Swiss financial services company Credit Suisse Group, spent $1.8 million last year to lobby on financial market regulation and other issues. The company lobbied on issues related to hedge fund supervision, securities regulation, reform of Fannie Mae and Freddie Mac, executive compensation and rules for reviewing foreign investment in the United States, according to a disclosure form posted online Feb. 13 by the Senate's public records office. Credit Suisse and many other large banks have lobbied to increase the size of the mortgages that can be purchased by the Fannie and Freddie, the two U.S. mortgage finance agencies, from $417,000 to $729,750. That cap was temporarily raised for mortgages in high-cost areas in the economic stimulus package signed by President Bush last month. The company spent $880,000 in the second half of last year to lobby on the same issues. Lobbyists are required to disclose activities that could influence members of the executive and legislative branches, under a federal law enacted in 1995.

Nokia Lobbied on Patent, Visa Reforms

Nokia Rings Up $540,000 in 2007 to Lobby Government on Patent, Immigration Reforms and Trade WASHINGTON (AP) -- Nokia Corp. spent $540,000 in 2007 to lobby on patent and immigration reform legislation among other numerous issues. The the world's largest mobile phone maker spent $430,000 lobbying on its own behalf in the second half of 2007, according to a disclosure form posted online Feb. 13 by the Senate's public records office. The Finnish company also lobbied on data security, intellectual property, tax credits for research and development, recycling programs, and Internet- and trade-related matters. The technology industry, facing increasing global competition, has lobbied intensely for more visas for highly skilled foreign professionals, more funding for U.S. math and science education programs and a permanent extension of tax credits for research and development. Nokia lobbied Congress, the Federal Trade Commission, the Federal Communications Commission, the White House and other agencies. It spent $110,000 in the first six months of 2007 to lobby on largely the same issues. Lobbyists are required to disclose activities that could influence members of the executive and legislative branches, under a federal law enacted in 1995.

GlaxoSmithKline Spent $8.2M on Lobbying

GlaxoSmithKline Spent $8.2 Million Last Year Lobbying on Drug-Related Issues WASHINGTON (AP) -- British pharmaceutical maker GlaxoSmithKline PLC spent more than $8.2 million last year lobbying the federal government on pharmaceutical issues. Glaxo advocated against patent-reform legislation that could weaken legal protections on drug patents. Technology companies supported efforts aimed at improving the U.S. patent system, but drug makers argued it could weaken patent protections by reducing infringement penalties. The patent-reform bill passed the House last year, but is pending in the Senate. ADVERTISEMENT The company also lobbied for increased funding for the Food and Drug Administration. Glaxo opposed a proposal by House Democrats that would have allowed the government to negotiate drug prices for seniors in Medicare. Currently private health insurers serve as the go-between drug companies and seniors. The measure, aimed at wringing lower prices from drug companies, stalled in the House after President Bush threatened to veto it. Lobbyists for the company also promoted free-trade agreements with Peru, Colombia, Panama. Congress approved the agreement with Peru late last year; the others are still under consideration. London-based Glaxo spent $4.6 million on lobbying in the second half of 2007, according to a government disclosure form posted online Feb. 13. Under a federal law enacted in 1995, lobbyists are required to disclose activities that could influence members of the executive and legislative branches.

Yahoo sees growth up, argues for higher Microsoft bid

NEW YORK (Reuters) - Yahoo Inc (YHOO.O) said on Tuesday it is on track to meet its 2008 earnings forecast and gave a rosy revenue view for the next two years as it makes a case for a higher takeover price from Microsoft Corp (MSFT.O). The remarks allayed concerns about Yahoo's financial performance this quarter, since it would have less room to negotiate with Microsoft if those numbers fell short, analysts said. Yahoo, whose shares rose as much as 7 percent, will take its case to investors in meetings this week. "They're putting this out to say we're not falling apart," said Martin Pyykkonen of Global Crown Capital. "They're putting very general, pie-in-the sky comments out there that, while not impossible ... look kind of aggressive." Microsoft has not yet sweetened its $42 billion bid, and a recent Reuters poll showed many analysts expect the software maker to prevail in the Yahoo takeover without doing so. But Yahoo, which reaffirmed its financial forecasts for the first quarter and full-year 2008, argued on Tuesday that its acceptance of an offer would immediately propel several key businesses for Microsoft. "Yahoo provides meaningful strategic value and warrants a significant acquisition premium above its equity value," the company said in an investor presentation filed with the U.S. Securities and Exchange Commission. Microsoft had no immediate comment. ACCELERATED GROWTH IN 2009, 2010 Yahoo believes it can nearly double operating cash flow to $3.7 billion in 2010. It forecast a rise in revenue, excluding payments to affiliates, to $8.8 billion from an estimated $5.7 billion this year. "Yahoo is positioned for accelerated financial growth -- we have a powerful consumer brand, a huge global audience and a highly profitable operating model," Yahoo co-founder and Chief Executive Jerry Yang said in a statement. Yahoo said it first presented the three-year view to its board on December 2007, well before Microsoft made its offer public on February 1. The forecasts are based on revenue and cash flow growth that outpace median estimates from six analysts for both 2009 and 2010, Yahoo said in its filing. Key growth areas for the company include Internet display and video advertising, where it expects $1.9 billion in added revenue over the next three years, excluding payments to affiliates. It also expects $1.4 billion in added search revenue, a growth rate that would keep it in line with the market as a whole. These and other factors would provide immediate benefits to Microsoft if a deal was reached, the company said. Yahoo said its assets would move Microsoft from a "sub-scale" position in Internet search and display, enhance its foothold in Asia and potentially shift a loss-making online business to significant profitability. It estimated the market value of holdings in Asia at about $9 per share, not including private assets of China's Alibaba Group, and said its board is continuing to evaluate all of its strategic alternatives. Shares of Yahoo rose 6.6 percent to $27.56 on the Nasdaq. Microsoft gained 1.9 percent to $28.94.

Equity LifeStyle Properties Stock Rises

Equity LifeStyle Properties Shares Rise As Analyst Forecasts Above-Average Profit Growth NEW YORK (AP) -- Shares of Equity LifeStyle Properties Inc. are rising after an analyst initiated started covering the stock and rated it "Outperform." In a note to clients Tuesday, Keefe, Bruyette & Woods analyst Bill Carrier said the real estate investment trust is positioned for above-average earnings growth. Shares jumped $3.55, or 7.6 percent, to close at $50.22 Tuesday. Shares have traded between $39.70 and $57.35 in the past 12 months. Carrier said the Chicago-based company represents an attractive investment because it owns high-quality properties in good locales, with more than half of its sites in retirement hotspots such as Florida, Arizona and California. "Even during this period of slow new home sales, in our view, Equity LifeStyle Properties is well positioned to grow earnings at an above-average pace with below-average risk," Carrier said. Carrier forecasts 2008 earnings of $3.24 per share and a target price of $53.

Fed delivers 3/4 point cut

WASHINGTON/NEW YORK (Reuters) - The Federal Reserve slashed U.S. interest rates on Tuesday, boosting Wall Street, which was already higher on stronger-than-expected investment bank earnings. Tuesday's three-quarters of a percentage point rate cut was less than the full percentage point many in the market had expected, but the Fed left the door open to an additional reduction. However, it noted its future action would take inflation concerns into consideration. ADVERTISEMENT "A lot of people were hoping for a full percentage point, so a lot of people are probably disappointed," said Robert MacIntosh, chief economist at Eaton Vance Management, in Boston. "I don't think they should be. Inflation is an issue." Global stock markets were up early in the day in anticipation of the Fed's move and on stronger-than-expected earnings news from Goldman Sachs Group Inc (NYSE:GS - News) and Lehman Brothers Holdings Inc (NYSE:LEH - News). By the end of U.S. trading, the Dow Jones industrial average (DJI:^DJI - News) jumped 420 points, or 3.5 percent, while the Nasdaq and S&P 500 indices rose more than 4 percent. The dollar soared to its largest single-day gain against the yen in nine years and rallied against the euro as traders responded to the less-than-expected rate cut. But U.S. Treasuries fell as investors poured into stocks. The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 percent, the lowest since February 2005. "The Fed's action is yet another forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy," said Arun Raha, a senior economist with Swiss Re, in New York. "It clearly does not believe that the action it took last week to expand its securities lending program, or its emergency measures over the weekend to increase market liquidity, are enough. The economy is in, or close to, a recession, but increasing oil prices have kept inflationary pressures from abating, complicating the Fed's task." MARKET, ECONOMIC STRESS The central bank has now cut rates by an aggressive 3 percentage points since mid-September, including 2 points since the start of the year. In addition, it has said in recent days it would provide around $400 billion worth of liquidity to thaw frozen credit markets. "Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the central bank said. "There's been tremendous panic, people throwing the baby out with the bath water, preparing for a Category 5 hurricane, and that presents a buying opportunity," said Chip Hanlon, president of Delta Global Advisors Inc in Huntington Beach, California. Goldman Sachs, which has largely avoided the mortgage-related losses that have plagued much of Wall Street, said first-quarter earnings fell by half as it recorded steep losses on corporate loans and other assets. Yet the results at the largest U.S. investment bank exceeded expectations. Lehman Brothers, whose shares have been pummeled in recent days on concern it is the most vulnerable to troubled mortgages and leveraged loans next to Bear Stearns (NYSE:BSC - News), suffered a sharp fall in bond trading revenue but benefited from rising merger advisory revenue. RISKS REMAIN, READY TO ACT In a statement outlining its rate move, the Fed said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to lowering borrowing costs further if needed. However, in the first double-dissent since September 2002, two officials -- Philadelphia Federal Reserve Bank President Charles Plosser and Dallas Fed chief Richard Fisher -- voted against the decision. They preferred less-aggressive action out of a concern sharp rate cuts could further fuel inflation. Still, the Fed said it expected inflation to ease, partly because unemployment looked set to rise. "The Fed has shown that they are focused on getting the economy back on its feet first and foremost, and they will worry about inflation later," said K. Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund in Greenwich, Connecticut. The rate action came two days after the central bank announced up to $30 billion in financing to facilitate the sale of cash-strapped investment bank Bear Stearns, an unusual intervention bank officials said was necessary to prevent cascading defaults in the financial system. Its backing for JPMorgan Chase and Cos (NYSE:JPM - News) agreement to buy Bears Stearns was one of a number of emergency steps the Fed announced on Sunday. It also said it would extend loans to a wider array of Wall Street firms, not just commercial banks, for the first time since the Great Depression. In addition, the Fed lowered the interest rate on "discount window" lending by a quarter-point on Sunday. On Tuesday, in concert with its decision to cut its target for overnight interbank lending by three-quarters of a point, it lowered the discount rate again by a matching amount, to 2.5 percent. "The Fed is not only providing low-cost oxygen to the markets at a critical point in the business and credit cycle, it has also increased the flow of this oxygen quite significantly," said Brian Bethune, an economist for Global Insight in Lexington, Massachusetts.

Smallcaps Can Test Investors' Patience

Investing in Small-Cap Stocks During Downturn Can Require Patience, Strong Stomach NEW YORK (AP) -- Investors who managed to remain calm during Wall Street's latest tempest could find they have what it takes to invest in small-cap stocks. While they often outperform many of their larger rivals, small-capitalization stocks tend to show more volatility. And it often requires the hand of a deft investor to pluck the sound picks from amid the shaky ones. ADVERTISEMENT This year hasn't been easy for small-cap investors. The concerns about bad mortgage debt, tightness in credit and the overall economy that have battered that rest of Wall Street have leaned somewhat harder on small-cap stocks. The Russell 2000 index of smaller companies is down 11 percent for the year, while the Standard & Poor's 500 index, which tracks large-cap companies, is off about 9.4 percent. Mark Crennan, who works as a markets analyst, said he doesn't worry about the size of the companies he invests in with his own money but that when he does look at small-caps now he is more closely examining their balance sheets. With the credit markets having dried up compared with only a few months ago, it's more important than in years past for small-cap companies to be on sound financial footing. That's partly because companies that could once grow by gobbling up rivals are now finding it harder and more expensive to tap into the credit markets. Small-cap companies often show bigger moves than the rest of the market on sizable up or down days. Crennan noted that there is no guarantee that smaller stocks will snap back and outperform larger issues as they did for much of the first part of the decade. Jonathan Vyorst, portfolio manager of the Paradigm Value Fund, said while many investors flock to bigger companies for safety during economic slowdowns, such moves are now less appealing because so many investors have already shifted their holdings to favor bigger names. Vyorst, who helps run the small-cap value fund with about $113 million in assets, said there are bargains to be found for investors who can stomach the outsize ups and downs that many small stocks show. "Right now there are plenty of companies you can find that are selling at dirt-cheap prices that require you maybe to put up with volatility for a half year or year. Their values are real. Nobody makes money in this business without being very conscious of what the valuation of the stock is and what they're paying for it," he said. And of course not all small-cap names are poised to move higher should the economy begin to show signs of recovery. Wall Street's glum mood in recent months shows that few investors are expecting a quick turnaround in the economy. "It's definitely a spotty market because there is a tremendous amount of volatility," he said. He said some small-cap companies are at levels well above what their profit levels justify, while others are cheap by comparison. "This is clearly a stock pickers market," he said. "There are plenty of good small-cap companies out there that have been cut in half. It's going to be a tougher time but that's how you make your money." Stephen Wood, senior portfolio strategist of Russell Investments, is cautious about small-caps. He notes that the classic situation in which small-cap stocks can do well is when the economy is beginning to climb out of recession. He added that the punishing atmosphere on Wall Street these days doesn't offer investors an ideal time for making significant changes to portfolios, he said. He cautions investors against making big moves into smallcap stocks given the uncertainty gripping Wall Street over where the economy is headed. "I don't think you should jettison where you are but I don't know that you want to proactively overload in this environment." Wood said investors looking to make bets should instead search for well-managed operations of any size and be willing to wait for returns. "The stock market is a very effective mechanism to take money from the impatient and give it to the patient," he said.

Millennium Pharmaceuticals Shares Rise

Millennium Pharmaceuticals Shares Rise; Cowen Analyst Expects Upbeat 1st-Quarter Velcade Sales NEW YORK (AP) -- Shares of Millennium Pharmaceuticals rose, while Cowen and Co. analyst Rachel McMinn expects sales of the company's key drug to rise. The stock rose 84 cents, or 6.3 percent, to close at $14.25 Tuesday. Shares have traded between $9.49 and $17.19 over the past 52 weeks. McMinn, in a note to investors, said sales of the blood-cancer treatment Velcade are likely tracking ahead of Wall Street expectations and she expects first-quarter sales of $77.4 million. Meanwhile, the company presented updates to its development pipeline during Cowen's annual health care conference, she noted. On Monday, the company said it plans to initiate a midstage brain-tumor treatment study on its MLNM0518 drug candidate in combination with Genentech during the second half of 2008. Also, it plans to move its cancer treatment candidate MLN8237 into a larger midstage study.