AOL enters the import/export business
AOL Inc. (AOL) today is firing hundreds of people, after closing its $315 million acquisition of HuffingtonPost. Many of these are journalists. For example, AOL exec Jonathan Dube tweeted:
I have just laid off dozens of the most talented journalists & product folks I know. Need talent? Let me know!
In a memo detailing the moves, AOL CEO Tim Armstrong tried to soften the blow:
With the acquisition of The Huffington Post and this renewed focus on editorial creation, we have increased the number of staff dedicated to content creation to over 1200 people and remain a net importer of journalists.
That's right, AOL is a net importer of journalists. But doesn't that also mean that AOL is a gross exporter of journalists?
What a wonderful new euphemism. So much better than firing people or terminating people or even laying them off. And don't even get me started on reducing headcount (only applicable at places where bodies are not required, like cable TV).
And I know what you're thinking: "Don't exporters require an ultimate destination?" Yes, they do. In the case of AOL, its journliats are being shipped off to a the unemployment lines (which import even more journalists than does AOL).
Insider trading defense: It's just a bunch of lies
Prosecutors have what appears to be a very strong case against Raj Rajaratnam, with taped conversations and dozens of cooperating witnesses. But the defense team is not going to go down easy.
Raj Rajaratnam enters the courthouse earlier this week.
In opening remarks Wednesday that ran over an hour and a half, defense attorney John Dowd began to dismantle what many assume to be the strongest evidence against his client, hedge fund manager Raj Rajaratnam: 2,400 taped phone conversations and testimony from former colleagues who accuse the financier of illegal insider trading.
Dowd, the chair of Akin Gump's criminal defense group, told the jury that witnesses for the prosecution would say things about the 53-year-old money manager that are "false and given to save their own skins." The government will take conversations out of context to make innocent statements sound criminal, Dowd said.
On the other hand, he portrayed his client as an honest, hardworking product of the American dream, someone whose determination and brilliance allowed him to attend some of the country's finest schools, rise through the ranks at investment bank Needham & Company, and eventually create his $7 billion hedge fund Galleon.
"To win this case, Raj's counsel has to successfully attack the credibility of the government's witnesses," says Stuart Meissner, a former securities prosecutor who worked in the New York Attorney General's investor protection office under Eliot Spitzer. "Much like in an organized crime case, the defense has to show that the witnesses are untrustworthy criminals." More
HCA holds its own in a tumbling market
Hospital chain HCA Holdings Inc. last night defied the odds by raising $3.79 billion in its initial public offering. And now it's doing the same thing in its first day of trading.
HCA (HCA) has hovered between 2% and 4% above its $30 IPO price so far this morning, despite the broader market being down nearly 200 points. Not exactly a first-day "pop," but more than holding its ground while those around it tumble.
How come? One explanation is that public investors have been clamoring for a large, successful hospital operator ever since HCA went private in 2006 for $33 billion.
"That deal sucked a lot of the equity out of the hospital sector," explained one healthcare investment banker. "There are lots of smaller players, but I think people have been waiting for the big dog to return."
HCA reports $24.46 billion in 2010 revenue, compared to less than $13 billion for Community Health Systems (CYH) or $9.2 billion for Tenet Healthcare Systems (THC). On the other hand, HCA also has more than $28 billion in debt, compared to just $13.2 billion for CHS and Tenet combined (the merged number may ultimately matter, since CHS has been trying to buy Tenet for the past few months).
If HCA shares continue to rise during the upcoming weeks and months, expect other privately-held hospital chains to seriously consider IPO of their own. The Blackstone Group (BX), for example, bought Vanguard Health Systems in 2004 for $1.75 billion. TPG Capital bought IASIS Healthcare that same year for $1.4 billion. And Chicago-based GTCR has been building its Capella platform since 2005, when it acquired a quartet of HCA hospitals.
Not its first IPO rodeo
Today actually represents the third time that HCA has gone public. Its first IPO came in 1969, just one year after being founded by Dr. Thomas Frist Sr., his physician son Tom and Jack Massey. Another Frist son, Bill, also went into medicine, but is better known for later becoming Senate majority leader (he currently is a partner at healthcare-focused private equity firm Cressey & Co.).
The company would decide in 1988 that its stock was undervalued, and was taken private in a $5.1 billion leveraged buyout. It returned to the public markets four years later, soon after which it merged with Columbia Healthcare -- the company founded by current Florida Gov. Rick Scott.
Scott left in 1997, as federal authorities probed allegations that HCA had over-billed Medicare for certain services. Thomas Frist Jr. took over, and in 2000 HCA agreed to pay $840 million in criminal and civil penalties. At the time, it was the largest government fraud settlement in U.S. history -- and also became an issue in Scott's gubernatorial run last year.
HCA again returned to the private markets in 2006, when it was acquired for $33 billion by Frist Jr., Kohlberg Kravis Roberts & Co. (KKR), Bain Capital and Merrill Lynch Private Equity. The group already had recouped most of its initial equity investment via three dividend recaps last year, and is easily in the black following last night's IPO. It also retains nearly a 70% equity stake, post-IPO.
Is Spain the new Ireland?
It's no surprise markets are going wobbly. Moody's is telling us we have seen the movie now playing in Spain, and it doesn't end well.
Moody's downgraded Spain's credit rating by a notch while keeping its outlook negative, meaning another downgrade could come soon. The rating agency warns the cost of bank restructuring could exceed the government's estimates.
Foreclosure bait?
This is a familiar theme but not a very reassuring one. Moody's and its rival S&P made similar comments over and over again last summer about Ireland. And though the rating agencies have gotten a lot wrong in recent years, they nailed this call.
The Irish government spent much of last year insisting it had its banking problems under control, but ended up having to ask for a bailout from the European Union and the International Monetary Fund, largely for the sake of recapitalizing the banks again. Irish taxpayers, unhappy with this result, threw the government out on its ear, but the bills still have to be paid.
Spain's banking problems are, by all accounts, not quite as acute as Ireland's, where you had a nice helping of fraud to go with that giant property bubble.
But the Spanish government's estimate that it can get the matter in hand by spending 20 billion euros ($27.6 billion) is looking more and more like wishful thinking. European bank stocks tumbled, led by Spanish giants Banco Bilbao (BBVA) and Santander (STD), each off 3% or more.
Moody's said it believes recapitalization of the savings banks known as cajas will cost at least twice as much, say 40 billion to 50 billion euros. And it says that should the global economic recovery take a detour into slumpville, the costs could double even that estimate, at 110 billion to 120 billion euros.
That is about 10% of Spanish gross domestic product, which is a large tab indeed -- though less than a third of what Ireland is on track to pay.
But even that tab would be dwarfed by the bill that might come due if Moody's ends up downgrading Spain again – something it warns might become necessary if bank recapitalization costs keep rising and push the country into a European bailout.
The ratings could also face further downward pressure if the recapitalisation needs for the banking sector increase further beyond Moody's current expectations, as this would result in a further rise in government debt and increasing pressure on debt affordability. A need to access the EFSF, although unlikely in Moody's view, would probably lead to a downgrade to below the Aa range.
And who knows what exciting things might happen then.
Also on Fortune.com:
Happy Birthday bull market? What a load of bull.
If you go by the strict definition of the word, yesterday marked the second anniversary of a bull market. You could have fooled me.
The total return is even higher. So why don't we feel better?
If you want to find a pessimist's pessimist, look no further than the Tea Party. According to a recent poll, only 3% of Tea Partiers think a recovery has taken hold in the U.S. The rest, of course, think we're all going to economic hell in a socialist hand basket.
On the one hand, I'm inclined to keep most of that 97% consigned to the place in my mind I reserve for the political fringe. On the other hand, the news that yesterday marked the second anniversary of a bull market got me thinking. If this is what a bull market feels like, maybe the entire system is broken. With a widening wealth gap, persistently high unemployment, and the prospect of another oil-led recession on hand, it seems, well, inappropriate to put on party hats and break out sparklers for the event. Maybe the answer really is Sarah Palin. (Just kidding.)
We can argue all day long (and we do) about the qualitative issues, but some things are inarguable. Such as:
--The stock market is up 95.6% from its March 9, 2009 low.
--We have seen six quarters of economic growth in this country.
--Job growth, while tepid, is also improving. Last month the US netted 192,000 new jobs. More
Angry Birds creator pigs out on $42 million
Rovio, the company responsible for the gaming phenomenon Angry Birds, today announced that it has tapped the venture capital market for $42 million.
Accel Partners and Atomico Ventures co-led the round, with Felicis Ventures also participating. Atomico's Niklas Zennström, co-founder of Skype, will join the Rovio board of directors.
"Gaming is where we come from, and remains our core business, but we are transforming the company into more of an entertainment company," explains Mikael Hed, co-founder and CEO of Rovio. "We are in a mode of aggressive expansion, so there is a good likelihood that we'll raise additional funds in the future."
That ability to transform is what Rovio's new investors are banking on, since it is impossible to know if the company is able to produce another gaming giant like Angry Birds (the old "hits business" problem).
Their belief is that Angry Birds is in the midst of becoming the next Pac-Man or Super Mario Brothers -- franchises that spawned everything from breakfast cereals to plush toys to television programs. Or maybe even something that doesn't have a gaming genesis, like SpongeBob or Peanuts.
"This really is a very broad-scale consumer phenomenon," says Rich Wong, a partner with Accel. "If you look at the all the data, including Google search trends, you realize that Angry Birds has gone well beyond gaming."
Pre-Marketing 3.10.11
* Merrill Goozner: The curse of involuntary entrepreneurship
* Arielle Bikard: The SEC and the government shutdown scenario
* Stacey Higginbotham: Fusion-IO's IPO filing is code for "please buy us"
* Morning Call: U.S. futures point lower, London opens soft, European shares tumble on Spain downgrade and the Nikkei hits a 5-week low.
* Carlos Slim widens his wealth lead over Bill Gates
* Eric Jackson: Apple's best app might be a succession plan
* Rock bottom: Israeli VC funds raised zero dollars last year
* Bill Gross bails on U.S. Treasuries, one month after comparing Ben Bernanke to Satan
* Advent International is the latest PE shop to shutter operations in Japan
* Tweet of the Day: @dfjjosh I always find it funny when @TechCrunch insists on calling Verifone "Square-competitor Verifone". What's next, "Blekko-competitor Google"?
* Quote of the Day: "If you are evil in this life, you have to come back and sell to retailers in your next life," Jeff Bussgang, Flybridge Capital Partners.
* AOL layoffs begin today, particularly on the content side. I'm sure Arianna will mention this the next time she talks about American job growth (or lack thereof)
* Politico: "Later today, Treasury will announce that the TARP bank programs have generated more than $36 billion in income for taxpayers to date. This number includes more than $14 billion in interest and dividend payments from the bank programs. In total the bank programs disbursed $245.46 billion and total cash returned is now $243.16 billion. Profit isn't far off."
Don't sweat the oil speculators
Rounding up the speculators sounds almost as appealing as killing all the lawyers. But neither will cool seething crude prices.
That is a point worth considering as oil markets run wild. Big traders are making a record bet that crude prices, up 26% over the past year, will rise further as unrest rattles the Middle East.
Notice the trend?
It's tempting to view that bet as irresponsibly driving up gas prices and endangering a tepid economic recovery. How can market fundamentals that justified $80 oil six months ago do the same for $105 oil now? Can't we blame some dark conspiracy?
Alas no. The reality is that bets on higher oil prices are little more than a rational response to steadily rising fuel demand in a world of increasingly uncertain oil supplies.
Governments in Tunisia and Egypt have fallen, and other oil-producing countries face threats of their own. Political problems aside, there are questions about whether the big oil exporters actually have it in them to fill in for further supply disruptions.
And if Saudi Arabia can't pump as much as we think or is running down its inventories faster than we expect, we could soon face a world in which $105 oil and $3.50 gasoline look like a bargain.
"When supply struggles to keep up with demand, the market becomes vulnerable to speculative demand shocks driven by concerns about events that have not happened yet," says Lutz Kilian, an economist at Michigan who has studied the oil shocks of the past four decades. "It is fashionable to argue that this phenomenon is distinct from supply and demand, but that is nonsense."
Kilian says that in a world of tight and uncertain supply and steadily growing demand, traders start to like the risk-reward profile of buying oil futures contracts in anticipation of future shortages.
In effect, it is this demand for oil inventories that has been driving prices up since Egypt and Libya came under pressure. Naturally, given the oil-importing world's dependence on crude from Saudi Arabia , the effect could be even greater if unrest breaks out there.
The Saudis have been saying they can pump up the volume if there is further disruption to other exporting countries. But talk of oil going to $140 or $150 a barrel starts to look distinctly reasonable if you consider what might happen if it turns out Saudi output isn't what we think – let alone where prices might go if things get ugly politically.
Analysts at Bank of America Merrill Lynch say oil could trade as high as $240 a barrel over the next year, were the dominoes to start falling.
That is not their base case, mind you. Most Wall Street economists are still expecting oil to average around $100 or so for 2011, which obviously assumes the Middle East simmers down and the global recovery creeps ahead.
But if something does come unglued, there is not a lot the United States can do about it. Though the gadflies may buzz about cracking down on futures trading or releasing fuel from the Strategic Petroleum Reserves, our failure to take things like conservation seriously mean that as usual we are struggling to fix a long-term problem with a short-term mindset.
"People talk about the market being broken, but what's really broken is that people going to work can't choose to stop using gasoline," said Lisa Margonelli of the New America Foundation, who grapples with this problem at her energytrap.org web site. "The yelling about speculators is beside the point."
Also on Fortune.com:
HCA finds lots of IPO buyers, in a seller's market
It looks like investors aren't worried about the uncertain future of healthcare reimbursements.
Reuters is reporting that hospital chain HCA (HCA) is expected to raise over $3.7 billion in its IPO, by pricing 124 million shares at the high end of its $27 to $30 per share offering range. Nothing official yet, however, and this follows an earlier Reuters report that the pricing could approach $31 per share.
[Update: The company priced 126.2 million shares at $30 a piece, raising $3.79 billion]
Either way, HCA's success -- it will be the largest private equity-backed IPO in history -- is coming against some pretty serious odds. Conventional wisdom in the capital markets right now is that healthcare providers are to be sold, not bought.
"The only part of healthcare we're touching right now are back-end services," explained a private equity investor with several healthcare investments. "There is way too much uncertainty in anything that requires government reimbursement."
When healthcare reform legislation first passed, many investors began to salivate over the millions of newly-insured customers. But then folks began worrying about cost controls, plus the prospect of the legislation being either repealed or ruled unconstitutional. Add to that a bubbling debate over entitlement reform, and companies like HCA look quite vulnerable. After all, 40.7% of the company's 2010 revenue derived from Medicare and Medicaid.
As HCA explains in its prospectus:
"Changes in government health care programs may reduce the reimbursement we receive and could adversely affect our business and results of operations... Current or future health care reform efforts, changes in laws or regulations regarding government health care programs, other changes in the administration of government health care programs and changes to commercial third-party payers in response to health care reform and other changes to government health care programs could have a material, adverse effect on our financial position and results of operations."
But none of this apparently bothers those who have spoken for around $3.7 billion worth of HCA shares.
Only time will tell if it's a smart bet, but I'm certain that owners of other privately-held healthcare services providers will watch the HCA after-market very closely. After all, most of them still think that now is the time to sell.
"You have a lot of other PE-backed hospitals companies like Vanguard, IASIS and Capella that have been waiting for this to happen," says a healthcare investment banker. "HCA is considered the Cadillac and, now that it's priced, others probably will try to slot in right behind them."
HCA was taken private for $33 billion in November 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain Capital and Merrill Lynch Private Equity. Its IPO underwriters include BoA Merrill Lynch (BAC), Citi (C) and J.P. Morgan (JPM).
BofA says $200 oil would mean recession
How high do oil prices have to go to stall the recovery?
No one knows for sure, of course. But some early guesses by top economists start in the neighborhood of the 2008 oil spike, which peaked out at $147 a barrel.
Fueling recovery worries
Though that is still 40% above the current price of U.S. crude, it is not exactly reassuring news. Strong global demand, together with questions about dwindling spare oil production capacity, are making a repeat visit to spikeland look more likely.
Oil hitting $140 a barrel could mean that "some of the advanced economies will start to double dip," NYU economist Nouriel Roubini said Wednesday in Dubai. He said the U.S. economy is expanding fast enough that it will probably avoid a relapse, but added that a price spike could leave it at "stall speed."
Dr. Doom isn't the only one thinking this way. Bank of America chief economist Ethan Harris is concerned enough about rising oil prices that he trimmed his global economic growth forecast by a tenth of a percentage point Wednesday.
The modest cut is noteworthy because Harris has been bullish about economic growth in recent months, while playing down any U.S. inflation risks, thanks to stronger than expected economic numbers.
"As the data flow has improved, we had been leaning toward bumping up our global growth call," Harris wrote in a note to clients Wednesday. "Unfortunately, the oil price surge more than cancels out that upgrade."
BofA economists said Monday they believe oil prices in Europe, recently around $115 a barrel thanks to Mideast unrest and the Continent's dependence on easily refined sweet oil grades, could "temporarily" hit $140 in the next three months.
Though they expect the Brent price to fall off after a second-quarter surge, that spike could deal a damaging blow to a recovery in Europe that makes the one here look downright sizzling.
BofA raised its full-year average oil price to $108 in Europe from $88, and to $101 in the United States from $87.
Even at that, Harris isn't quite waving red flags about recession. But if oil prices take off and stay elevated, it could mean curtains for growth.
If the production shutdown spreads outside of Libya, we will be revisiting our forecast again and if oil prices go above their historic peak of about $150/bbl on a sustained basis, a global recession becomes a real risk; at $200/bbl a recession seems almost certain.
As if you need another one, this is surely a sign of the times: look who's doomsaying now.
Also on Fortune.com:
