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How AT&T's blocked merger affects you

Thu, Sep 1 2011

The at&t logo is seen at their store in Times Sqaure in New York April 21, 2010.

Credit: Reuters/Shannon Stapleton

NEW YORK (Reuters) - AT&T Inc is expected to soon present a proposed solution to U.S. antitrust regulators to salvage its planned $39 billion acquisition of smaller rival T-Mobile USA, according to people close to the matter.

Even as the No. 2 U.S. wireless service provider gears up for a lengthy court battle against the Justice Department, AT&T is prepared to make concessions to address concerns that the T-Mobile deal is anti-competitive and could cause wireless prices to rise.

This two-track plan will allow AT&T to try to find a settlement before the lawsuit reaches the court.

"AT&T is pretty determined that they can find a solution, and they are pretty confident," one of the sources said, requesting anonymity as the talks are private.

The U.S. government on Wednesday sued to block AT&T's purchase of T-Mobile USA, a deal that would vault the combined company above Verizon Wireless as the No. 1 player in the United States.

If AT&T fails to defeat the lawsuit, it would have to pay T-Mobile parent Deutsche Telekom an estimated $6 billion in cash and other assets as part of the original deal.

Details of AT&T's proposed settlement were not available, but it is expected to include pledges to maintain T-Mobile's relatively cheap mobile subscription plans, and asset sales.

AT&T may have to sell up to 25 percent of T-Mobile's business, including airwaves and customers, two sources said, to address the government's concern that just three companies would control 90 percent of the U.S. wireless market if the merger goes through.

Bob Doyle, a former antitrust enforcer now in private practice, said it would be difficult for AT&T to reach a settlement with the Justice Department as there would have to be divestitures on both the national and regional level.

While there might be several buyers for regional assets, the only possible buyers for national assets are Verizon Wireless and No. 3-ranked Sprint Nextel Corp -- which could cause another round of antitrust scrutiny.

"Verizon's a no go. Sprint may be a no go also," said Doyle.

AT&T, led Chief Executive Randall Stephenson, declined to comment, referring questions to its previous statement that it believed in the merits of its deal and planned to fight the government's suit.

JUDGE LIKES TO ACT QUICKLY

U.S. District Judge Ellen Segal Huvelle in Washington, D.C., was selected at random to preside over the case, one of the biggest antitrust court battles in years.

She has a reputation for speedy rulings, which would be welcome to AT&T compared with months or even years of uncertainty. For Deutsche Telekom, it has tried for years to find a way out of its T-Mobile business, and has no Plan B.

AT&T has asked for an expedited hearing, and one source expects the case could go to court in two months.

The carrier and regulators had been in preliminary discussions over divestures before the Justice Department filed its 22-page lawsuit on Wednesday. In those talks, AT&T had offered to divest up to 10 percent of T-Mobile assets.

"That was part of the frustration in that AT&T expected that they would have had much more meaningful discussions and figure out where everyone was, and whether they could close the gap," the source said.

AT&T wants another meeting with the Justice Department as soon as possible, but "I don't know if and when a new meeting is scheduled, given yesterday's news," said a person familiar with the discussions.

Still, the Justice Department could prefer a settlement to avoid the risk of losing the case in court.

"It is always scary to go off to litigation. I suppose there's a chance that the government could get cold feet," said Stephen Calkins, who teaches law at Wayne State University.

Antitrust regulators have a mixed record in court. The Justice Department lost in 2004 when it tried to stop Oracle Corp's purchase of PeopleSoft Inc. It also failed to prevent SunGard Data System Inc's buy of Comdisco Inc in 2001 -- a case also presided over by Judge Huvelle.

AT&T's lead antitrust attorney shepherding this deal is Richard Rosen of Arnold & Porter LLP, a former head of the communications section of the Justice Department's antitrust division.

"He was the chief over there for many years and socializes with a lot of the staff over there. He's well known and respected," said a source close to the AT&T talks with Justice.

Rosen was lead counsel in Cingular Wireless's $41 billion buy of AT&T Wireless, as well as AT&T's buys of Dobson Communications, Centennial Communications, and wireless properties divested by Verizon and Alltel.

Deutsche Telekom also has antitrust star George Cary of Cleary Gottlieb Steen & Hamilton LLP, who argued for the U.S. Federal Trade Commission in its successful fight against the Staples merger with Office Depot in 1997.

Since so few antitrust cases are litigated, Cary's success is unusual.

"He's one of the best. He's exceptional. George Cary is the Lou Gehrig of antitrust," said David Balto, a former FTC policy director now in private practice.

(Reporting by Nadia Damouni in New York and Diane Bartz in Washington, additional reporting by Carlyn Kolker, Peter Lauria and Nicola Leske, editing by Tiffany Wu, Gary Hill)

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A screen grab shows the access to Netflix online, as displayed on a television screen, in Encinitas, California July 25, 2011.

Credit: Reuters/Mike Blake

LOS ANGELES/NEW YORK (Reuters) - Starz Entertainment will pull all of its movies and television shows from Netflix Inc's streaming service early next year, depriving Netflix customers from online viewing of new releases out of two major Hollywood studios.

Pay-TV operator Starz, controlled by John Malone's Liberty Media, said on Thursday it had ended talks to renew a deal that expires February 28. After that date, Starz will stop providing its content, which includes exclusive rights to first-run Sony Corp and Walt Disney Co movies, for streaming on Netflix.

Shares of Netflix were down 8.7 percent at $213 in after-hours trade, from a close on the Nasdaq of $233.27.

Netflix was offering to pay somewhere in the $200 million to $300 million range annually for rights to stream Starz content, a source familiar with the negotiations said. Starz balked at that offer, the source said.

Netflix Chief Executive Reed Hastings said in June it "wouldn't be shocking" to pay up to $200 million, a figure some analysts had predicted.

The original online streaming rights are believed to have been agreed for around $30 million a year four years ago, people familiar with the deal have said.

Starz, in a statement, called its decision to end talks with Netflix "a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging" of its content.

The news came the same day that an unpopular Netflix price hike of as much as $6 per month took effect. The breakdown with Starz was a surprise because investors had expected the parties to reach a deal, said Brett Harriss, an analyst with Gabelli & Co.

"Netflix just effectively raised prices by 60 percent, and a big chunk of their content walked away," Harriss said.

Thursday's announcement could open up the possibility that Starz might now court another online streaming provider, such as Amazon.com Inc or Google Inc's Youtube.

Starz was not immediately available for further comment.

Netflix spokesman Steve Swasey said the company was "confident we can take the money we had earmarked for Starz renewal next year and spend it with other content providers to maintain or even improve the Netflix experience."

Netflix said Starz movies and shows account for just 8 percent of U.S. subscribers' viewing, and the company had projected that to fall to 5-6 percent by the first quarter of 2012, right when the deal dies.

Starz is the exclusive distributor of first-run Sony and Disney movies on pay-TV in the United States under an agreement that allows it to distribute the programing wholesale on multiple platforms, including online streaming.

But Netflix -- which has grown faster than partners expected -- triggered a deal clause in the first quarter when it announced it now has more than 22.8 million subscribers in the United States, of which nearly two-thirds were streaming videos, sources told Reuters in June.

Under terms of the original contract, the trigger allowed Sony to ask Starz for better financial terms, the sources had said.

Sony's content already was removed from the Netflix streaming service while negotiations were underway. Disney movies were accessible.

(Reporting by Lisa Richwine, editing by Robert MacMillan, Matthew Lewis and Carol Bishopric)

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HP makes dramatic choices

Thu, Aug 18 2011

• Breakingviews: HP strategy points to uncertain future

A HP Invent logo is pictured in front of Hewlett-Packard international offices in Meyrin near Geneva in this August 4, 2009 file photograph.

Credit: Reuters/Denis Balibouse/Files

NEW YORK/BANGALORE (Reuters) - Shares of Hewlett-Packard slumped by more than 20 percent to a six-year low on Friday as investors wiped about $16 billion off the market value of the world's biggest PC maker in a resounding rejection of its plan for a major shake-up.

Investors also appeared to lose confidence in Chief Executive Leo Apotheker after a flurry of HP announcements on Thursday including an $11.7 billion acquisition offer, a shuttering of its mobile efforts and the potential spin-off its PC business.

This was on top of disappointing financial guidance for the third quarter in a row. HP may also be risking future PC sales as its customers could flee to rivals like Dell Inc in the uncertainty, one analyst said.

"They're doing too many things at the same time," said Sterne Agee analyst Shaw Wu.

Even if it makes sense in the long term, HP should not have told the world it was thinking of getting rid of its PC business, which brings in 16 percent of its profits, Wu said.

"Why would anybody want to do business with them if it's up for sale," he said. "To have this in limbo for 12 months is going to be pretty material."

On top of this, investors worried that HP's offer of nearly $12 billion for British software company Autonomy Corp was too high and questioned why it was giving up so soon on the mobile business it bought for $1.2 billion from Palm Inc, Wu said.

HP shares fell as low as $22.76 on Friday making it the biggest loser on the New York Stock Exchange. Before the announcements its shares had closed at $31.39 on Wednesday. Investors fled to rivals like Dell, pushing its shares up nearly 3 percent, as it is expected to profit from HP's chaos.

"There's not a lot of confidence in (Apotheker's) management," said Wu, noting that he had to lower guidance every quarter since he joined HP. "This is just further proof,"

At least two brokerages downgraded Palo Alto, California-based HP, and five cut their price targets, mainly citing uncertainty and expenses related to the restructuring.

"Last night HP may have eroded what remained of Wall Street's confidence in the company and its strategy," Needham & Co said in a research note.

Gleacher & Co analyst Brian Marshall cut his price target for the stock to $39 from $50 saying he "materially underestimated the magnitude and timing of this metamorphosis."

He said however that HP "is undergoing a sound strategy transformation by focusing on high-growth, high-margin opportunities in the enterprise/commercial markets."

With a forward 12-month price-to-earnings ratio of 5.6, the company is trailing its peers, including Dell, Apple and IBM according to Starmine SmartEstimate.

Before Thursday's news HP's stock had already lost nearly a fifth of its value since it reported quarterly results in May.

HP said it has already stopped production of its WebOS-based devices like its TouchPad tablet, which failed to attract buyers.

Cypress Semiconductor Corp -- the main supplier of touch controllers for TouchPad -- will also hurt if the company pulls the plug on the product, brokerage Collins Stewart said.

Cypress' shares fell 1 percent to $16.93 on Friday.

HP has been struggling with its once hugely popular PC business, as niftier gadgets like Apple's iPad have eaten into its business.

Thursday's weak forecast follows smaller rival Dell's lowered revenue outlook earlier this week that dragged down both stocks.

Both companies have been venturing out of traditional comfort zones and into enterprise solutions and services, but continuing soft sales have been a constant source of trouble.

Brokerage Robert W. Baird said HP is no longer a "safe haven" stock and expects it to lose market share.

HP's decision to spin off the PC business reflects commoditization, as consumers change the use of computers, and this may hurt Intel, the world's largest supplier of PC chips, brokerage Nomura said in a note.

"A reversal in average selling prices would remove a key revenue driver over the last six quarters (for Intel)."

(Additional reporting by Rachel Chitra in Bangalore; Editing

by Don Sebastian, Joyjeet Das, Dave Zimmerman)

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NEW YORK (Reuters) - After a series of failed takeover attempts and accounting scandals, Computer Sciences Corp is attracting potential activist investors looking to take advantage of a weak share price to push for a breakup.

The $4.5 billion market cap company's shares have dropped 40 percent so far this year to below $30, valuing it at a steep discount to peers.

Its government services business faces an uncertain outlook amid prospective cuts in U.S. government spending, dragging down the value of its higher growth Information Technology services.

Adding to its problems, Computer Sciences is also caught up in an accounting investigation, shareholder lawsuits and a long dispute with the U.K. National Health Service regarding alleged delays in developing healthcare IT systems.

Activist investors are doing the math, evaluating a breakup and other ways to boost Computer Sciences' sagging share price, people familiar with the situation said. But Computer Sciences is aware of the pressure and has been reviewing it options as well, the people added.

Representatives for Computer Sciences declined comment.

Computer Sciences has been a target of multiple takeover attempts in the past and investors and potential buyers have long bet that separating the Falls Church, Virginia-based company's commercial IT services from its government services could boost value.

Its North American Public Sector, which provides outsourcing and consulting services to the Defense Department and other federal agencies, accounts for a little more than a third of its revenues.

The rest comes from data-center outsourcing and developing enterprise software applications. Computer Sciences' revenues totaled $16.2 billion in the 12 months ended July 1, 2011.

The company trades at about 6 times its earnings. Accenture Public Ltd Co, a close competitor in terms of size, scale and reach, trades at about 17 times earnings, said Morningstar analyst Swami Shanmugasundaram.

Shanmugasundaram said the commercial business has a higher growth profile and better margins than the government business, and splitting them up would "definitely" be good for shareholders.

"Because of its growth profile and execution issues ... I do expect CSC to trade at a discount (to peers), but this is too much of a discount," he said.

CSC PROBLEMS

People familiar with Computer Sciences management's thinking said the company believes the two units belong together and it wants to sort out several pending issues before determining its strategic direction.

The U.S. Securities and Exchange Commission is in the middle of a probe related to Computer Sciences' accounting errors, which primarily involve accounting irregularities in Europe's Nordic region.

The issues could "divert management's focus, result in substantial investigation expenses and have an adverse impact on the firm's reputation and financial condition," Computer Sciences has said in a statement.

The U.K. government, meanwhile, is reviewing whether a contract to install next-generation healthcare IT systems in the country should be continued after Computer Sciences allegedly missed deadlines. The company said this week it would likely meet the U.K. health agency in September to discuss the matter.

These challenges could prove a hurdle for any activists looking to buy into the company.

Activists would also have to wait it out if they launched a campaign either against the board, as all 10 Computer Sciences board members have been just reelected for a full year. The current board members have served long terms, with only four of the directors joining after 2007.

FAILED MATCHES

Over the last decade or so, private equity firms, big technology companies and prime defense contractors have looked at the company as a takeover target, but its presence in both the commercial and government sectors proved to be a hurdle.

In early 2006, Computer Sciences received an offer in the low $60s per share from a consortium of three private equity firms and a large technology company, the sources said.

But Chief Executive Van Honeycutt wanted at least $65 per share and rejected the bid, they said.

Lockheed Martin Corp was also interested at the time, but was not prepared to buy the entire company and its efforts did not gain traction, these people said.

In 1998, Computer Associates -- now known as CA Technologies -- unsuccessfully made a hostile $9.8 billion takeover bid for Computer Sciences.

It is unclear if any of these or other potential buyers would still be interested. Hewlett Packard Co bought Computer Sciences competitor EDS for $13.9 billion in 2008, while others such as Dell Inc and Oracle Corp have different priorities for takeovers, sources said.

The sheer size of a deal would also be a challenge for private equity firms in the near term, sources said.

But if government and commercial businesses were separated in a tax-free spinoff, the two units would attract more buyers, the sources said.

"If the company is really going to earn what Wall Street thinks it's going to earn, it is extremely attractive from a value perspective," a source said.

"That said, the company needs to reposition strategically and the question is: Can they get there on their own?"

(Reporting by Soyoung Kim and Nadia Damouni in New York; additional reporting by Saqib Ahmed in Bangloare; editing by Andre Grenon)

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