MarketView for August 15

 

 

Summary  

 

The major equity indexes rose for a third day on Monday as the Street used 17 billion in acquisition announcements, including Google's announced acquisition of Motorola Mobility, as an excuse to jump back into the market after weeks of violent selling activity. Acquisitions are often viewed as a sign major corporations sitting on big cash piles are willing to pay for shares even as economic growth remains sluggish.

 

Motorola Mobility jumped in price by 55.8 percent to $38.13 after Google offered $12.5 billion to buy the company, which would be Google's biggest deal ever. Google shares ended down 1.2 percent at $557.23.

 

With Monday's gains, the losses incurred last week have now been wiped out. Among big winners were banks, which have been a frequent target for selling. Bank of America Corp rose 7.9 percent to $7.76, making it the largest percentage gainer within the Dow Jones industrial average. Shares of Bank of America advanced after the bank said it plans to sell its credit card business in Canada to TD Bank Group.

 

Shares of other cell phone companies also rose, riding hopes of additional takeovers or the possibility of business shifting to Google's competitors. Blackberry maker Research in Motion advanced 10.4 percent to $27.11 while Nokia jumped 17.4 percent to $6.29.

 

Three days of market gains follow weeks of intense volatility and a sharp selloff that put the S&P 500 in negative territory for the year. After the rebound, the S&P is now down just 4.2 percent on the year.

 

A meeting on Tuesday by French and German political leaders was expected to result in initiatives needed to restore confidence in credit and other markets.

 

Shares of Lowes were up 0.9 percent at $19.68 after it reported weaker-than-expected quarterly sales and cut its fiscal-year outlook. Wal-Mart and Home Depot report earnings on Tuesday.

 

In other deal news, Transocean is paying double the market price for Aker Drilling to refresh its aging fleet of Norwegian drilling rigs and boost flagging orders. Transocean shares gained 3 percent to $57.26.

 

Empire State Manufacturing Declines Again

 

The New York state manufacturing sector contracted for the third straight month in August, tempering hopes that the first-half slowdown in the economy might be turning around.

 

Manufacturing led the recovery in the past couple of years, even though it only represents about 12 percent of overall economic activity. However, growth in the sector has slowed sharply in recent months.

 

The survey of manufacturing plants in New York State is one of the earliest regional guideposts to U.S. factory conditions and analysts said it boded poorly for the larger national survey due at the beginning of September.

 

The general business conditions index fell to minus 7.72 from minus 3.76 the month before, the New York Federal Reserve's Empire State index showed on Monday.  New orders fell to their lowest level since November 2010, slipping to minus 7.82 from minus 5.45, while inventories fell to minus 7.61 from minus 5.56.

 

However, the employment gauge showed a slight improvement. The index for the number of employees inched up to 3.26 from 1.11 and the average employee work week index rose to minus 2.17 from minus 15.56. Prices paid eased, falling to 28.26 from 43.33. The index was also at its lowest level since November 2010.

 

The outlook for the months to come also deteriorated, falling to the lowest level since February 2009. The index of business conditions six months ahead dropped to 8.70 from 32.22.

 

Google to Buy Motorola Mobile

 

In a bid to strengthen its mobile business, Google announced on Monday that it would acquire Motorola Mobility Holdings, the cellphone business that was split from Motorola, for $40 a share in cash, or $12.5 billion. The offer, Google’s largest ever for an acquisition, is 63 percent above the closing price of Motorola Mobility shares on Friday. Motorola manufactures phones that run on Google’s Android software.

 

Android has become an increasingly important platform for Google, as global smartphone adoption accelerates. The platform, launched in 2007, is now used in more than 150 million devices, with 39 manufacturers. The acquisition would turn Google, which makes the Android mobile operating system, into a full-fledged cellphone manufacturer, in direct competition with Apple.

 

The deal answers a big question about Google’s next strategic step in wireless. Google has been battling with Apple and Microsoft over patents. Last month, Apple and Microsoft led a consortium of technology companies in a $4.5 billion purchase of roughly 6,000 patents from Nortel Networks, the Canadian telecommunications maker that filed for bankruptcy in 2008. Google, which lost out in the bidding, acquired more than 1,000 patents from I.B.M. However, Motorola holds more than 17,000 patents.

 

While the acquisition will move Google directly into the telecommunications hardware business, Larry Page, Google’s chief executive, said in a blog post that “this acquisition will not change our commitment to run Android as an open platform. Motorola will remain a licensee of Android and Android will remain open. We will run Motorola as a separate business.”

 

Still, the deal is certain to attract significant antitrust scrutiny. The Federal Trade Commission is already investigating Google’s dominance in several areas of its business. The company has agreed to pay a $2.5 billion reverse termination fee, if it walks away, and Motorola will pay a $375 million break-up fee if it takes another offer, according to a person close to the transaction, who was not authorized to speak.

 

In a conference call on Monday morning, Google said it was confident that it will be able to win regulatory approval, since the deal will ultimately improve competition in the smart phone market.

 

“We think this is a competitive transaction,” David Drummond, the company’s chief legal officer said. “This is not a horizontal transaction, Google has not materially been in the handset business.”

 

The acquisition of a major handset maker may still pose a significant challenge to the search giant, which has not specialized in manufacturing or marketing of smartphones. Last year, it closed down the online store for its first Google-branded phone, the Nexus One, citing the store’s underwhelming performance. A Motorola tie-up may also irk other phone manufacturers, like Samsung and HTC, which will now be competing directly with Google.

 

And while Google has made dozens of acquisitions in recent years, most of them have been for less than $1 billion, despite a current war chest of some $40 billion in cash. On the company’s official blog, Mr. Page said Google was purchasing the handset maker to bolster its Android mobile operating system and increase the number of patents it owned.

 

Android accounted for 43.4 percent of smartphone sales in the second quarter, according to Gartner Research, a major increase from the year ago period, when it made up about 17 percent of sales.

 

“Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anticompetitive threats from Microsoft, Apple and other companies,” Mr. Page said.

 

Carl C. Icahn, Motorola Mobility’s second-largest shareholder, had urged the company last month to “explore alternatives regarding its patent portfolio to enhance shareholder value.” Mr. Icahn owns 9.03 percent of Motorola Mobility. On Monday, he applauded the transaction, calling it “a great outcome for all shareholders of Motorola Mobility, especially in light of today’s markets.”

 

The acquisition has been approved by both boards.

 

Time Warner Cable to Buy Insight for $3 Billion

 

Time Warner Cable said it will buy cable operator Insight Communications from Carlyle Group for $3 billion in cash to broaden its presence in the U.S. Midwest. The deal was reached after months of negotiations and a fruitless auction of Insight that involved other strategic and private equity bidders.

 

TWC had dropped out of the auction because it believed Carlyle was asking for too much. Carlyle originally was seeking $3.5 billion to $4 billion, sources said earlier this year. Executives at TWC have said any acquisition targets will not be valued at higher multiples than TWC's own stock.

 

Insight is the 10th-largest cable operator in the United States. It sells cable television, high-speed Internet and telephone services and serves 750,000 customers in Illinois, Indiana, Kentucky and Ohio.

 

TWC, the No. 2 U.S. cable operator, believes it can create annual cost efficiencies of around $100 million through programing expense savings and cost reductions. It also expects tax benefits from inheriting Insight's $300 million in net operating losses.

 

Purchasing Insight is TWC's biggest acquisition since it was spun off from former parent Time Warner n 2009.

 

Transocean to Buy Aker Drilling for $1.43 Billion

 

Transocean is paying twice the market price for Aker Drilling in order to refresh its aging fleet of Norwegian drilling rigs and boost flagging orders. Transocean, the owner and operator of the Deepwater Horizon rig at the center of last year's Gulf oil spill disaster, is paying $1.43 billion, or 26.50 crowns per Aker Drilling share, a 98.5 percent premium to Friday's close and 62 percent above its 30-day average price.

 

Transocean lost contracts in the second quarter and its profit fell as costs rose more quickly than the deep water drilling industry could recover from the Gulf drilling ban following the Deepwater disaster. The rig market off Norway, the world's eighth-largest oil exporter, has been tight in recent months, with not enough rigs to cope with high demand for drilling. The deal adds $1 billion of contracts to Transocean's books.

 

"The transaction is expected to be immediately accretive to Transocean's earnings," Steven Newman, Transocean's chief executive officer, told a conference call. "It allows us to immediately upgrade our fleet in the increasingly tightening ultra-deep water market segment."

 

By Monday afternoon Transocean had acquired shares representing 8.7 percent of the capital in Aker Drilling, which together with pre-commitments by shareholders for the offer means it will control at least 67.6 percent of the company, above the threshold for completing the deal.

 

Aker Drilling, spun off from Aker Solutions earlier this year, operates two harsh-environment, ultra-deepwater semi-submersible rigs and is expected to take delivery in 2013 of two drill ships under construction.

 

Transocean has been drilling wells off Norway since the early 1970s under various names and today owns five rigs off the Nordic country. After the deal with Aker Drilling, the firm will own seven rigs and boost its market share of the rig market in the Nordic country to 25 percent, making it the largest in the market.

 

Transocean was keen to acquire new, cutting-edge rigs to renew its aging fleet especially at a time when demand is growing for rigs that can drill in ultra-deepwater, at depths below 1,500 meters and in harsh environments like the Arctic.

 

The deal is backed by Aker Drilling's main shareholder Aker Capital A/S, a subsidiary of Aker ASA, with 41 percent, and by other shareholders holding 19.5 percent, including funds managed by TPG-Axon Capital.