Iron Man and the Merchants of Death
The phrase "Merchants of Death" takes center stage in the movie Iron Man, which is a spectacular exposé of a subject that dominates the American economic landscape but about which Americans have very little knowledge. The phrase and the movie deal with the odd juxtaposition of capitalism and war as found in the weapons industry. Here we have innovations and efficiency of the type we associate with the private commercial sector but serving ends that are the very opposite of capitalism. The industry serves war, not peace, depends on coercion, not human volition, and profits from destruction, not creation.
The movie itself follows the career of Tony Stark (Robert Downey, Jr.), a billionaire engineering genius who inherited his father's weapons company and took it to new heights. Touring Afghanistan, he is captured by a guerilla army and here he experiences an epiphany. It is his weapons that they are using to solidify their control over the population. He had long consoled himself that his bombs were being used to defend freedom but now he sees that they are used by anyone who seeks to control others — the very opposite of his propaganda. He makes an escape and sets out on a new course to build a high-powered exoskeleton to beat back the very thugs he had inadvertently empowered with his own weapons.
Now, in the film, the bad guys get his guns because a rival in the corporate structure had been double-dealing behind the scenes. In real life, the scenario is a bit different. Traditional merchants of death sold to anyone. The more their weapons were used, the more wars resulted, and the higher the profits. Now, with controls in place on weapons contractors, it's no longer that simple. What happens now is that the state simply changes its mind on who are its friends and who are its enemies. It sells guns to friends ("freedom fighters") until times change and the same people become enemies ("terrorists").
It seems incredible until you realize the memory loss that Americans have toward US foreign policy. The 1980s are not exactly ancient history but in those days, the Reaganites had as a core doctrine of US policy that Islam constituted a valiant ally in the struggle against Communism. The Mujahideen in Afghanistan were leading the struggle against Soviet control, and the leaders of this army were courted and celebrated in Washington, particularly by conservatives. We were told that they shared our struggle because they believed in traditional values, freedom, and a strong defense. They were given vast weapons and the CIA assisted in their ultimately successful effort to oust the Soviets.
Once the Mujahideen had the Soviets out of the way, they seized control of the country and imposed a dictatorship and an antidrug theocracy with a government that became known as the Taliban. The Taliban must have been shocked when Washington suddenly turned on them since they were merely carrying out the "traditional values" for which they had been previously celebrated. Now, suddenly, they were being called a dictatorial band of thugs that had to go. Once overthrown by Washington, they moved into the mountains and became an essential part of what is today collectively known as Al-Qaeda.
So the labels changed: from freedom fighter to terrorist in one decade. But the weapons remained the same: their equipment and resources and bombs were almost entirely provided by the same folks who backed them to the hilt the previous decade.
So Iron Man telescopes events somewhat, but the core of the truth is there — though hardly ever spoken about in American public life. Nor is this something new. The problem of the Merchants of Death has been around for at least a century.
The existence of such an industry scandalized Americans in the interwar period, and there was one treatise that led the way in helping to foment the outrage. In fact, it was a bestselling book in 1934 with the title Merchants of Death.
We are justified in calling it the first megaselling conservative book of the 20th century. Why conservative? The lead author was H.C. Engelbrecht, and, most importantly, its coauthor was Frank C. Hanighen, who would later become the founder of Human Events, which was the most important weekly publication on the Right in the 1940s and 1950s. In other words, the phrase "Merchants of Death" did not originate on the Left but on the Right, during the New Deal period, when the people later called conservatives became alarmed about the union between big corporations and big government.
This book is not a typical left-wing style attacks on commerce as the essence of war. In fact, it argues the opposite: "The arms industry did not create the war system. On the contrary, the war system created the arms industry."
The blame, then, lies not with the private sector that makes the weapons:
All constitutions in the world vest the war-making power in the government or in the representatives of the people. The root of the trouble, therefore, goes far deeper than the arms industry. It lies in the prevailing temper of peoples toward nationalism, militarism, and war, in the civilization which forms this temper and prevents any drastic and radical change. Only when this underlying basis of the war system is altered, will war and its concomitant, the arms industry, pass out of existence.
The book holds up as a marvelous analysis of how the merchants of death profited from World War I, a fact that the public found riveting and helped solidify a strong antiwar temperament in the electorate during those years. This raised consciousness led to a broader insight about the nature of the warfare state, namely, that the only way to restrain it was to keep centralized power of all sorts at bay. The leading spokesmen for the ideal here was later called the Old Right by Murray Rothbard.
How it came to be that the Old Right cause would later be taken up by the New Left, while the New Right came to embrace the warmongering creed of the Old Left — well, let's just say it was a complicated maneuver accomplished in a brief period of time in the late 1950s. Murray Rothbard was there and he chronicled the transition blow by blow. His book is called The Betrayal of the American Right. Sure enough, checking the book, on page 58, we find a nice discussion of Human Events, Frank Hanighen, and the problem of the Merchants of Death.
So there we have the connection between Rothbardian political analytics and the hottest movie in theaters today. The real Iron Man is Rothbard, whose influence on the way we view the world seems to rise with every day.
Global adjustment will be long and painful
By Wolfgang Münchau
So this crisis is about to end, right? There are two failsafe ways to justify a solid dose of optimism: define the crisis in a sufficiently narrow way; and, even better, look at the wrong crisis. In that spirit I am happy to state my optimism about the prospective end of the subprime crisis.
But this would be disingenuous. It is no accident that our multiple crises – property, credit, banking, food and commodities – have been happening at the same time. The simple reason is that they are all part of same overriding narrative. The mother of all these crises is global macroeconomic adjustment – a rare case, incidentally, where the word “crisis” can be used in its Greek meaning of “turning point”.
It is a huge global macroeconomic shock. How long the financial part of the crisis will go on will depend to a large extent on how bad the economic part of the crisis gets.
The economic part of the story started more than a decade ago with a liquidity-driven global boom. Property, credit and equity bubbles were all part of this.
So was a Ponzi scheme that later became known as Bretton Woods II, a gravity-defying design that allowed the US to run persistent current account deficits. The dollar surplus in the newly industrialised countries was recycled back to the US and European markets, where various categories of asset prices were driven up and banks lured into excessive risk-taking. It could not last, and did not.
If excess liquidity was the ultimate cause of this crisis, the real estate sector was its most important driver. Experience shows that housing cycles are long and symmetrical: downturns last as long as upturns. We also know from the past that house prices undershoot the long-term trend on the way down, just as they overshoot it on the way up. You can see this quite easily when you look at long-run time series of inflation-adjusted house prices for several countries.
The last property downturn in the US and the UK lasted some six years. This is not a prediction of what will happen this time, more like a best-case scenario – because this bubble has not only been more intense than previous ones; it has also bubbled on for longer.
But even if we take six years as an estimate of the peak-to-trough period, that means the housing downturn will last until 2012 in the US and a couple of years longer in the UK. It is difficult to see how either of these countries could grow close to trend as long as the housing market is in recession.
When you look at the global macro side, you are looking at similar timescales of adjustment. An important part of the adjustment will be a rise in the US and UK household savings rates. That, too, might take several years to accomplish, during which period economic growth could be below trend.
The really important question about the US economy is not whether the official recession starts in the first or second quarter, but how long this period of economic weakness will last overall. In Japan and Germany macroeconomic adjustment of similar scale took more than 10 years, starting in the 1990s. Even if you believe that the US is structurally stronger, the country will probably not replenish its savings in a couple years.
If global inflation rises, as I expect, this process will become even more difficult. The central banks will have less room for manoeuvre. Fiscal policy is constrained, which leaves the exchange rate as the main tool of adjustment. This would necessitate a weak real exchange rate during the entire period of adjustment.
Obviously inflation would make everything worse, and our future scenarios will depend critically on the inflation outlook. A rise in inflation might alleviate the pressure on some mortgage holders, but is not a good environment for a country to build up savings. If higher inflation were tolerated by the central bank, it would clearly prolong the macroeconomic adjustment process. If it were not tolerated, interest rates would go up and we might experience a re-run of the 1980s. It would get a lot worse before it got better.
Either way, adjustment would take time. Would you really want to predict that under any of those scenarios, the worst was already over for a fragile financial sector? There may be no global financial meltdown. But our multiple crises could easily return with a vengeance, like one of those bloodstained villains in a horror movie who rises to fight his last battle.
It will end at some point, but several pockets of the financial market remain vulnerable in the meantime: US government bonds (under an inflation scenario); US municipal bonds (if the downturn is severe and long); several categories of credit default swap; credit card debt securities among others.
Our macroeconomic adjustment is not going to be as terrible as the Great Depression. But it might last longer. There will be time for optimism, but not just yet.
New York oil price crosses 120 dollars for first time
©AFP - Asif Hassan
NEW YORK (AFP) - Oil prices crossed 120 dollars a barrel in New York Monday following fresh unrest in Nigeria, Africa's largest oil producer, and rising tensions between the West and Iran.
New York's main oil futures contract, light sweet crude for June delivery, briefly hit 120.20 dollars, before slipping back at 1520 GMT to 120 dollars, a gain of 3.68 dollars from the closing price on Friday.
In London, Brent crude for June delivery hit an intraday record high of 118.50 dollars around 1515 GMT. It later traded up 3.24 dollars at 117.80. Trading volume in London was light as Britain marked a bank holiday.
Oil rallied close to a record 120 dollars a barrel last week on supply concerns linked to workers' strikes at a Scottish refinery and in Nigeria.
With the strikes resolved, crude prices were largely driven by movement in the US dollar, according to analysts.
"This stubborn oil bull just refuses to die," said Phil Flynn at Alaron Trading.
Oil prices surged Monday on supply jitters from Nigeria and geopolitical tension in Iran, analysts said.
"Nigeria is the lingering hotspot the markets will be focusing on," said MF Global analyst Ed Meir.
"The news over the weekend has been mixed; ExxonMobil said it has restarted 300,000 barrels per day of Nigerian production out of total of 800,000 sidelined earlier, but there are reports of fresh violence, as another pipeline explosion has shut in more oil production," he added.
Fresh militant attacks in Nigeria, Africa's biggest producer, have forced oil major Shell to shut down more of its oil production.
Nigerian militants attacked an oil ship off the coast of the west African country and took two people hostage, a military spokesman said Sunday. Shell accounts for about one-half of Nigeria's 2.1 million barrels-per-day output.
"A few oil delivery lines are affected and some oil has spilled into the environment," a Shell spokesman said.
Prices also got support from tensions between Iran and the West.
Iran said Monday it would reject any offer that violates its right to the full nuclear fuel cycle after world powers said they had prepared a new package to end the atomic crisis.
Oil players fear the ongoing tension could result in Iran -- the second-biggest OPEC producer after Saudi Arabia -- using oil as a bargaining chip.
Oil prices rose three percent Friday on better-than-expected employment figures in the United States which raised hope the world's biggest economy might avoid a recession.
The bombing by Turkish warplanes of Kurdish rebel bases inside Iraq and the strengthening of the dollar against the euro also supported oil prices.
Meanwhile, recent positive sentiment out of the United States has improved the demand prospects for most commodities.
"The market is also obviously responding to the US nonfarm payrolls report that suggests that the recession here is less severe than had been feared and thus suggesting that hopes for reduced US demand are ill-advised," said Dennis Gartman, editor of The Gartman Letter.
Why Britain’s economy will change
By Martin Wolf
What does the economic turmoil mean for the UK economy? This is not a question about prospects for the next year. It is deeper than that: how well can an economy long characterised by soaring house prices, exploding debt and a dynamic financial sector adjust to a new world?
Attitudes to the new “special liquidity scheme” for banks tell us how little politicians want to consider the worst possibilities. Thus, Alistair Darling, chancellor of the exchequer, told the Commons on April 21 that the scheme would “help alleviate the problems that have seen banks reluctant to lend to each other and in turn support the provision of new mortgage lending”. But Mervyn King, governor of the Bank of England, says “the scheme is not designed to send the mortgage market back to the rather wild lending before the turmoil began last summer”. On the contrary, there “needs to be some adjustment in the housing market”.
Mr King is closer to the truth, not least on what the scheme is likely to achieve. Its beauty is that it makes only existing high-grade assets liquid. It is not a commitment to creating a market for future fruit of the financial sector’s imagination. But it should eliminate concerns over illiquidity of existing high-grade mortgage-backed securities. Early evidence suggests that it is working: spreads between rates at which banks lend to one another and expected official rates have contracted by about 10 basis points, though they remain very high.
Mr King states that “the objective is not to protect the banks but to protect the public from the banks”. The two can never be separated, alas: it is because banks are so important to the public that they are supported by the government, on the public’s behalf. But this scheme is a decent attempt to draw this line. It leaves the banks to cope with the illiquidity of low-grade paper they now hold. It also provides no bail-out of long-term losses for solvent institutions. So more capital is needed. Recent moves to raise it are welcome.
Accept, then, that these official efforts are not going to bring back the credit boom and should also not do so. The last thing the UK needs is more highly leveraged purchase of overpriced houses. But how bad is the let-down for the economy then going to be? In a recent speech, Charles Bean, the Bank’s chief economist, offers an answer*.
Surprisingly, Mr Bean argues that even though house prices are likely to fall, possibly significantly, this does not itself guarantee a sharp slowdown in consumer spending. But this point may not matter since, as he admits, reduced growth in credit seems certain to slow growth in consumer spending. The ratio of household liabilities to disposable income jumped from 105 per cent at the end of 1996 to 164 per cent at the end of 2006. This is much the highest ratio in the Group of Seven leading high-income countries, the US equivalent being just 138 per cent. Such a rise cannot be repeated.
To this fact must be added the negative shocks to prices and real incomes from oil prices at close to $120 a barrel and a doubling of prices of non-fuel commodities since 2004. The fall in sterling will ultimately boost real output substantially. But it will also raise inflationary pressure in the short to medium term. The combination of rising inflation with the impact of the credit squeeze on consumption and investment creates a mild stagflation – the combination that makes the monetary policy job of a central bank most difficult.
The right thing for the Bank to do is to anchor inflationary expectations, even at the risk of a sharp economic slowdown. That is also what it is mandated to do. The UK may indeed be following the US economic path, as David Blanchflower, a member of the monetary policy committee, argues. But the Bank cannot follow the Federal Reserve in its aggressive slashing of interest rates. The role of the Fed is different, because of the greater importance of the US to the world economy and the benefits of the doubt the world still gives it. Nobody has to invest in the UK and nobody outside the UK has to trust sterling.
Pressures from politicians and businesses on the MPC will grow. These must be resisted. The MPC must focus on keeping its balance on Mr Bean’s tightrope. This is one of the reasons the special liquidity scheme is so important: it allows the Bank to separate general monetary policy from its measures to unfreeze the financial system. It maintains the room to focus its monetary policy on stabilising inflation and so the economy, at least in the longer term.
Thus, after 62 quarters of positive growth and a rise of more than 50 per cent in gross domestic product, the UK confronts difficult times. But are these short-term or much longer-term economic difficulties?
The UK is a country in which financial intermediation grew by 126 per cent, in real terms, between 1992 and 2007. If the growth of debt is now to slow, as it must, this explosion of the financial services industry cannot continue. The challenges ahead, therefore, are far more structural than merely cyclical. A new economy will emerge. The transition will be more painful than the government cares to admit. It is unavoidable, all the same.
India considers ban on trading in food futures
By Raphael Minder in Madrid
India’s finance minister said on Monday he was considering a blanket ban on trading in food futures, underlying growing concerns in Asia over the role of hedge funds and financial market traders in the recent surge in commodities prices.
If India imposes a ban, it would come only five years after the country introduced such futures trading as part of a broader push to develop India as a leading financial centre.
Speaking on the sidelines of the Asian Development Bank annual meeting in Madrid, P. Chidambaram said his worries over market speculation were shared by governments across the region and that India was “facing a very grave crisis on the food front”.
The surge in the cost of basic staples has sparked some social unrest in Asian countries such as China and Indonesia. It has also fuelled inflation to the point that it is now threatening to dent the spectacular economic progress of countries such as Vietnam and China.
In his keynote address to the ADB annual meeting, Haruhiko Kuroda, the bank’s Japanese president, on Monday called for determined action to secure food supplies for Asia’s poorest people, according to Reuters. The region houses two-thirds of the world’s poor.
“The global fight against poverty will be won or lost in our region,” Mr Kuroda told delegates. “Soaring food prices are hitting the poor very hard. This price surge has a stark human dimension and has greatly affected over a billion people in Asia and the Pacific alone,” he said.
Mr Kuroda said “money and ideas” were needed to boost development and called for the ADB’s current $56bn capital base to be increased to fund more loans.
“The absence of such measures could seriously undermine the global fight against poverty and erode the gains of past decades,” Mr Kuroda said.
Trading activities are also coming under fire from governments in energy-hungry Asian countries that are dependent on oil imports. “It is the big speculators that have taken the oil price to a level that is unacceptable and they just want to ruin the developing countries,” said Ishaq Dar, Pakistan’s new finance minister. “The price of oil and food should remain within reasonable limits. These are commodities that could massively hurt the developing countries.”
The attacks on food and oil speculators echo some of the criticism voiced by governments in 1997, when much of Asia plunged into financial crisis.
In a sign that Asia is seeking to reduce its exposure to sudden capital outflows that could trigger a repeat of the crisis a decade ago, Asian finance ministers at the weekend agreed to turn about $80bn of existing bilateral currency swaps into a common facility that could be used for emergency funding.
The agreement was described by a senior Japanese finance ministry official as an “incremental but significant” advance towards turning the so-called Chiang Mai Initiative into the foundations for an autonomous Asian monetary fund. Japan has been the driving force behind this initiative, after the International Monetary Fund and the US shot down its proposal to create an Asian fund at the time of the 1997 crisis.
Asian countries are trying to coordinate more closely their food policies and overcome distribution hurdles. However, such problems were highlighted yesterday when the Philippines failed to attract offers for 675,000 tonnes of rice during an auction in Manila.
Furthermore, Asian countries diverge in their food needs as well as agriculture policies. For instance, Malaysia and Indonesia have been leading production of palm oil that can be converted into biofuel, Mr Chidambaram said on Monday that “food being converted into biofuels is the single biggest reason why we are facing this crisis.” He added: “To put mildly, [the conversion of land for biofuels] is foolish, to put it strongly it is a crime against humanity.”
The Democrats
The challenge in Indiana
Hillary Clinton prepares to lock horns with Barack Obama, yet again
ANOTHER Tuesday, another make-or-break primary: or, in this case, two. Democratic voters in Indiana and North Carolina will troop to the polls on Tuesday May 6th for the latest skirmish in the Democrats' long civil war.
As has consistently been the case since Barack Obama stunned the Clintonians by trouncing her in Iowa, back in January at the start of this cycle, it is Hillary Clinton who has the most to lose. Despite some recent sign that the gap has narrowed, it is expected by all analysts and pollsters that she will lose in North Carolina (by around 7%, according to an average of polls produced by RealClearPolitics, a website), and this result is to some extent discounted. With a large black vote, plus a significant number of “upscale” whites working in the high-tech businesses and academic institutions that make up the Raleigh-Durham-Chapel Hill “research triangle”, this state is strong Obama territory. In Virginia, which has a similar profile, he won by a whopping 29% in February. My Obama's fortunes have waned a bit since that Potomac primary, but no-one expects Mrs Clinton to win. Should, somehow, she manage it, Mr Obama will be in serious trouble, and the Democratic nomination will once again be turned on its head.
Indiana, though, is another matter. It ought to be solid ground for Mrs Clinton. It resembles states like Ohio and Pennsylvania, where she has done well, being somewhat conservative, mostly white and above all relatively poor. Average incomes in Indiana are $36,500, versus $40,000 for Pennsylvania, where Mrs Clinton won by 9.2%. Her appeal has consistently been strongest to voters earning between $15,000 and $100,000 a year.
This expectation carries great danger, though. Should Mrs Clinton stumble in Indiana, her campaign will almost certainly be doomed. Her recent comeback critically depends on maintaining the momentum generated since her breakthrough in Ohio on March 4th, which has allowed her continually to close the gap in the popular vote between her and Mr Obama. If that process goes into reverse, she will lose the most convincing argument that she is able to deploy to the wavering superdelegates who will determine the final outcome because the tally of elected delegates is so finely balanced.
But this time there are some risks for Mr Obama as well. He badly needs a resounding success to counter a period of well over a month in which the news has been unremittingly bad for him. He has lost primary after primary since his big wins in February. He has looked tired and listless. He has been battered by his association with Tony Rezko, a Chicago businessman now on trial for money-laundering and corruption, and hurt far more than that by his former pastor, Jeremiah Wright. His association with Mr Wright, who takes a bleak and combative view of the state of race relations in America has unsettled many white Americans.
Mr Obama has strongly asserted that his own views are precisely the opposite of Mr Wright's, and everything in his record bears that out. But the fact that he has so closely associated with Mr Wright for two decades is worrying: given that their views are supposedly such polar opposites, it does at the least show odd judgment on Mr Obama's part to have chosen this particular cleric to marry him and his wife and to baptize their two daughters.
If, as the polls predict, Mrs Clinton wins in Indiana, she will continue to argue that Mr Obama is incapable of “closing the deal”. But she, of course, cannot close the deal either. A win in Indiana is unlikely to come as such a boost to Mrs Clinton as her wins in Ohio and Pennsylvania did. Indiana is firmly in the Republican camp in presidential elections, rather than being a crucial swing state like those two. And Mr Obama will probably, through his win in North Carolina, have negated most of the gains, in delegates and popular votes that Mrs Clinton made in Pennsylvania.
The bottom line is that to prevail, Mrs Clinton needs a series of big wins, and she has been getting only moderate ones. With the remaining primaries likely to be fairly evenly divided between the two contenders, in the absence of a shock win in North Carolina, it is increasingly hard to see a plausible path that could carry Mrs Clinton to the nomination. That does not mean, of course, that she will give up trying to find one.
Microsoft's Failed Yahoo Bid Puts Pressure on Ballmer (Update3)
May 5 (Bloomberg) -- Microsoft Corp.'s decision to drop its pursuit of Yahoo! Inc. increases the pressure on Chief Executive Officer Steve Ballmer to make his money-losing Internet business succeed against Google Inc.
Ballmer's bid for Yahoo, the most-visited Web site, signaled that Microsoft was making little progress against Google in Internet search advertising, said Charles Di Bona, a Sanford C. Bernstein analyst. Ballmer withdrew his bid over the weekend after Yahoo refused a sweetened offer of almost $50 billion, leaving investors asking what his online strategy will be.
``They've got to come out sooner rather than later with a pretty well articulated vision,'' said New York-based Di Bona.
The danger for Microsoft is that Google, owner of the most popular Web search engine and winner of the most online advertising dollars, will expand its dominance while Ballmer plans a new course. Google gained 10 percentage points of market share in Internet queries since June, providing 59.8 percent of the searches done in March, according to researcher ComScore Inc. in Reston, Virginia.
Ballmer and Kevin Johnson, president of Microsoft's Internet unit, met two days ago in Seattle with Yahoo co-founders Jerry Yang and David Filo, two people familiar with the negotiations said. Redmond, Washington-based Microsoft, the largest software maker, offered to raise its $44.6 billion bid by about $5 billion, to $33 a share. Yang and Filo refused to accept less than $37 a share, the people said.
Microsoft was probably right to walk away because its return from the purchase would have been too small if it had paid more than $35, Di Bona said.
`Square One'
The text promotions that run next to search results account for more than half the $41 billion market for Internet ads. With Yahoo, Microsoft would have tripled its share of U.S. online searches and would have become the biggest seller of graphical- display ads on the Internet.
Smaller acquisitions and investments in technology may not be enough to reverse the fortunes of the Internet unit, which lost $228 million last quarter.
``They're back to square one,'' said Chris Hickey, an analyst at London-based Atlantic Equities who recommends holding Microsoft shares. ``The fact that Microsoft wanted to do this deal shows what a difficult position they're in to start with. This reminded investors of Microsoft's poor market position and the long-term risk to its business from online competitors.''
Stock
Microsoft jumped 81 cents, or 2.8 percent, to $30.05 at 9:40 a.m. New York time in trading on the Nasdaq Stock Market. Before today, the shares had dropped 18 percent this year amid concern that sales of Microsoft's Windows software, which runs more than 90 percent of the world's personal computers, are slowing and that buying Yahoo would prove expensive.
Ballmer told employees in a May 3 e-mail that Microsoft can improve its search business without Yahoo. ``We have a strategy in place,'' he wrote. ``We are absolutely committed to being the leader.''
Microsoft has spent $7.5 billion on its Internet unit over the past 2 1/2 years, estimates Matt Rosoff, an analyst at Kirkland, Washington-based Directions on Microsoft. The online services business lost $745 million last fiscal year as Google outsold Microsoft in Internet ads by a 7-to-1 margin.
The company released its AdCenter Internet-advertising service two years ago to challenge Google with a program that targets ads by age, gender and location. Microsoft also bought Seattle-based AQuantive Inc. in August for $6 billion to gain tools that help advertisers track the success of their marketing efforts.
Other Buys
Microsoft may have to pursue other acquisitions, such as Time Warner Inc.'s AOL, to win more Internet visitors, Hickey said. Ballmer also may go after News Corp.'s MySpace social- networking site, Di Bona said.
Microsoft may come back with a new offer for Yahoo later, Heather Bellini, a UBS AG analyst, said before the decision. Oracle Corp., the third-biggest software maker, initially abandoned its bid for BEA Systems Inc. after BEA asked for 24 percent more than Oracle's $17-a-share bid. The companies agreed to the buyout three months later at $19.38 a share.
``There are no properties of the size of Yahoo that could replace it for Microsoft,'' Roger Kay, president of Endpoint Technologies Associates in Wayland, Massachusetts, said today in an interview with Bloomberg Radio. ``There are some smaller properties, including Facebook, MySpace and AOL, but they're not nearly as desirable.''
Value
Without a transaction with Microsoft, Yahoo's stock is worth about $21 a share, Kay said. The company fell $5.40, or 19 percent, to $23.27 on the Nasdaq. Earlier the stock dropped as much as 20 percent, the most since July 2006.
Ballmer probably can't catch Google in search advertising, said Charlene Li, an analyst at Cambridge, Massachusetts-based Forrester Research. Instead, he should customize searches to be useful to Microsoft's e-mail and instant-messaging users, building an audience from his own assets, she said.
``They're just so far behind and losing share,'' Li said. ``It's really hard competing against someone like a Google, and even a Yahoo.''
Google may benefit from the collapse of the deal as Web sites flock to the ``safe choice in an uncertain world'' for search ads, Goldman Sachs Group Inc. analyst James Mitchell in New York said in a report yesterday.
Yahoo reiterated over the weekend that Microsoft's offer wasn't enough. Yang had argued the company's rank in the U.S. search market and its Asian operations warranted a higher bid. He considered a combination with AOL and tested advertising software from Google. Last week, a person familiar with the matter said Yahoo might agree to a broader deal with Google.
``With Microsoft's withdrawal, we'll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders,'' Yang, 39, said yesterday in a blog post. ``We'll continue to execute on our plan.'' He also said the company will keep exploring options to increase its value.
Yahoo Drops Most in 2 Years as Microsoft Abandons Bid (Update5)
May 5 (Bloomberg) -- Yahoo! Inc. fell the most in almost two years on the Nasdaq after Microsoft Corp. abandoned its $44.6 billion takeover of the Internet search company because executives couldn't agree on a price.
Yahoo was cut to ``sell'' by Citigroup Inc. and ThinkPanmure LLC analysts and the stock fell as much as 20 percent. Microsoft Chief Executive Officer Steve Ballmer said on May 3 he wasn't prepared to pay the $37 a share Yahoo executives demanded. Microsoft, the world's biggest software maker, offered $33.
The move leaves Yahoo CEO Jerry Yang to prove he can revive sales and the share price by keeping the company independent. Sunnyvale, California-based Yahoo, owner of the No. 2 search engine, fell 32 percent on the Nasdaq in the year before Microsoft's offer. Bigger rival Google Inc. expanded revenue more than three times faster than Yahoo last quarter.
``Yahoo's stock is going to crater, and Yahoo shareholders are going to go bang on everyone's head and say, `How does this benefit me?''' said Richard Williams, an analyst in Short Hills, New Jersey, at Cross Research who advises investors to hold on to Microsoft shares and doesn't own any.
Yahoo fell $5.18 to $23.49 at 9:50 a.m. New York time on the Nasdaq Stock Market. Earlier the shares dropped as low as $22.97, the most since July 2006. Redmond, Washington-based Microsoft rose 77 cents, or 2.6 percent, to $30.01, while Google advanced $11.80 to $593.09.
Pressure
``Yahoo is going to be under a lot of pressure,'' said Peter Falvey, managing director at Boston-based technology-merger adviser Revolution Partners. ``A lot of shareholders are going to say, `Hmm, maybe we overreached.'''
Ballmer and deputy Kevin Johnson met May 3 in Seattle with Yahoo co-founders Yang and David Filo, two people familiar with the talks said. Yang and Filo refused to accept less than $37 a share and flew back to California. Ballmer called Yang to inform him of the decision just before it was announced, the people said.
Yahoo Chairman Roy Bostock reiterated over the weekend in a statement that Microsoft's offer wasn't enough. The company will continue to expand search advertising sales while improving its display advertising business, he said.
``With Microsoft's withdrawal, we'll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders,'' Yang, 39, said yesterday in a blog post. ``We'll continue to execute on our plan.'' He also said the company will keep exploring options to increase its value.
Yang's Stance
Yang had argued the company's rank in the U.S. search market and its Asian operations warranted a higher bid. He considered a combination with Time Warner Inc.'s AOL and tested advertising software from Google. Last week, a person familiar with the matter said Yang might agree to a broader deal with Google.
``Both sides reported that the trial went very well,'' Jeffrey Lindsay, an analyst at Sanford C. Bernstein in New York, said yesterday in a Bloomberg Television interview. ``It would strongly suggest to us that they do have something in the works with Google.'' Bernstein rates Yahoo shares ``market perform.''
Ballmer, 52, had set an April 26 deadline for Yahoo to come to terms and as the days passed, it seemed possible he would take the offer straight to Yahoo investors. Over the weekend, Ballmer said he won't do that. That would result in a ``protracted proxy contest,'' and Yahoo indicated it would make decisions that Microsoft would find ``undesirable,'' Ballmer said.
Falling Behind
If Yahoo agrees to use Google's search advertising, it would lose its own ad customers and engineers who work in that field, Ballmer said.
Yahoo already had a ``poison pill'' anti-takeover defense and a severance plan that would compensate any employee displaced by an acquirer.
Yahoo has failed to keep pace with Google. While Yahoo's sales climbed 14 percent last quarter, Google posted growth of 46 percent. Yahoo and Microsoft remain a distant second and third behind Mountain View, California-based Google in Web searches.
UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor magazine, has said that Microsoft could come back and buy Yahoo later on if it walked away this time. Microsoft may approach Yahoo again in three to six months, said Robert Breza, an RBC Capital Markets analyst in Minneapolis.
Oracle Corp., the third-biggest software maker, initially abandoned its bid for BEA Systems Inc. after BEA asked for 24 percent more than Oracle's $17-a-share bid. The two companies agreed to the buyout three months later at $19.38 a share.
``To say we are disappointed is an understatement,'' William Morrison and Robert Coolbrith at New York-based ThinkPanmure wrote in a report yesterday. Rejecting Microsoft's offer is ``likely to go down as one of the more destructive decisions for shareholder value in the history of Internet stocks.''
No comments:
Post a Comment