GDP Expands Slightly Amid Gloomy Signs
By KELLY EVANSMay 1, 2008
The economy expanded slightly in the first quarter, but its faint pulse didn't allay concerns the U.S. is in or headed toward recession.
The gross domestic product -- the nation's total output of goods and services -- increased at a 0.6% annual rate, the same as in the fourth quarter of 2007. But underlying data -- on consumer spending, business investment and construction -- paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories.
Excluding inventories, GDP shrank at a 0.2% pace, the first contraction in more than 16 years. Excluding inventories and exports, the economy contracted at a 0.4% rate after increasing 1.3% in the fourth quarter.
"It would be a grave mistake to interpret [the GDP] number as even suggesting the economic and financial crisis is over," said Bernard Baumohl, managing director of the Economic Outlook Group LLC. "Clearly, this economy will remain in a recessionary environment for the rest of the year."
Many economists said the economy is likely to contract this quarter. Morgan Stanley economists predict GDP will decline 2%. Forecasters said the rebate checks being distributed by the government should help spur consumer spending, which accounts for more than two-thirds of GDP. But they disagree over how big the impact will be and whether it will occur this quarter or sometime in the second half.
Second-quarter GDP "will probably be negative but will certainly get some support from the rebate checks," said Nigel Gault, chief U.S. economist at Global Insight, a Waltham, Mass., forecasting firm. But, he said, "My worry is that once the impact [of the stimulus checks] fades away, we're still looking at the same underlying problems."
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• Economists React: Recession Still 'Likely'
Those problems -- the housing crisis and credit mess, and soaring energy and food prices -- are battering consumers, and the toll is evident in the latest GDP figures. Spending by consumers, who are gloomier than they have been in decades, rose 1% at an annual rate, its weakest performance since 2001. A new Wall Street Journal/NBC News poll found that 81% of Americans think the U.S. is in a recession.
Purchases of durable goods -- big-ticket items such as cars, appliances and home electronics that are intended to last for three years or more -- plummeted at a 6.1% pace in the first quarter after increasing 2% in the fourth quarter.
Meanwhile, capital spending dropped at a 2.5% rate after rising 6% in the previous quarter. And export growth was less of a boon to GDP than in past quarters.
The buildup of inventories boosted GDP by nearly a full percentage point, but partly reflected weak sales that could lead to production cutbacks down the road. Government defense spending also bolstered first-quarter growth. Housing, meanwhile, continued to plummet, chopping more than a percentage point off first-quarter growth.
"The pain that consumers and businesses are experiencing is real," said Mark Vitner, senior economist at Wachovia Corp.
Mr. Vitner had been reluctant to say the economy was contracting, but now believes the U.S. is in a recession. "One thing that puts us in that camp is the run-up in energy prices and the likelihood they're going to remain high," he said. "That leaves everyone with less money to spend on anything else."
The U.S. could experience a recession this year even if the downturn doesn't comply with the common rule of thumb that defines a recession as two consecutive quarters of negative GDP. The National Bureau of Economic Research, the nonprofit group that is the official arbiter of when recessions begin and end, defines a recession as a period of significant decline in economic activity -- including GDP, income, employment and retail sales -- that lasts more than a few months.
One positive sign in the report: Inflationary pressures remain at bay. The price index for personal consumption expenditures in the first quarter rose 3.5% from a year ago; that compared with a 3.9% increase in the fourth quarter. Excluding food and energy, the price gauge rose 2.2% from a year ago, compared with 2.5% in the fourth quarter.
A separate report showed U.S. labor costs -- also a gauge of inflation -- increased at their slowest pace in two years. The employment-cost index rose 0.7% in the first quarter, the Labor Department said. Wages and salaries increased 0.8% and benefit costs advanced 0.6%.
Wednesday, April 30, 2008
Tuesday, April 29, 2008
Bank Stocks Remain Scary to Some
Bank Stocks Remain Scary to Some
Rally Offers No Comfort to Morgan Stanley Analyst, Expecting Long Drag on Lenders From Housing Bust
By DAVID GAFFENApril 29, 2008; Page C6
Bank stocks are no longer inducing night sweats among investors, but Morgan Stanley analyst Betsy Graseck doesn't feel comfortable with the sector's recent surge.
Shares of financial-services companies have rebounded since the middle of March, after a lot of investor pessimism was washed out in the wake of the announced Bear Stearns Cos. purchase by J.P. Morgan Chase & Co. and the Federal Reserve's efforts to heal ailing credit markets.
The Philadelphia Stock Exchange/KBW bank-stocks index has gained 11% since March 17, but Ms. Graseck says the rally is fool's gold. In a commentary Monday, she advised selling bank shares and lowered her overall estimates for 2008 earnings at the large-cap banks by 26%. Her earnings estimates for the sector in 2008 are 7% lower than the consensus.
"We think it is a mistake to chase this rally," she wrote. "The risk is much greater that credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends" more than the market expects.
Her thesis, essentially, is that the consumer environment looks pretty lousy. Ms. Graseck said that consumer net worth is likely to fall 11% over the next two years because of the housing bust and that loan losses will continue to rise.
She said current market prices on the large banks imply a return to more normal earnings after the downturn recedes, but she doesn't expect this to happen for another few years. She also expects further dividend cuts from a handful of the largest banks and anticipates the financial-services industry will be raising more capital in time.
In December, Ms. Graseck named Citigroup Inc. the firm's best "short idea" for 2008, which seemed like a catch-up move, as the brokerage had maintained "overweight" ratings long into the bank's selloff. But this idea has worked out well. Citigroup shares are down 9.6% on the year, though the stock has rebounded in recent days along with the rest of the sector.
Rally Offers No Comfort to Morgan Stanley Analyst, Expecting Long Drag on Lenders From Housing Bust
By DAVID GAFFENApril 29, 2008; Page C6
Bank stocks are no longer inducing night sweats among investors, but Morgan Stanley analyst Betsy Graseck doesn't feel comfortable with the sector's recent surge.
Shares of financial-services companies have rebounded since the middle of March, after a lot of investor pessimism was washed out in the wake of the announced Bear Stearns Cos. purchase by J.P. Morgan Chase & Co. and the Federal Reserve's efforts to heal ailing credit markets.
The Philadelphia Stock Exchange/KBW bank-stocks index has gained 11% since March 17, but Ms. Graseck says the rally is fool's gold. In a commentary Monday, she advised selling bank shares and lowered her overall estimates for 2008 earnings at the large-cap banks by 26%. Her earnings estimates for the sector in 2008 are 7% lower than the consensus.
"We think it is a mistake to chase this rally," she wrote. "The risk is much greater that credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends" more than the market expects.
Her thesis, essentially, is that the consumer environment looks pretty lousy. Ms. Graseck said that consumer net worth is likely to fall 11% over the next two years because of the housing bust and that loan losses will continue to rise.
She said current market prices on the large banks imply a return to more normal earnings after the downturn recedes, but she doesn't expect this to happen for another few years. She also expects further dividend cuts from a handful of the largest banks and anticipates the financial-services industry will be raising more capital in time.
In December, Ms. Graseck named Citigroup Inc. the firm's best "short idea" for 2008, which seemed like a catch-up move, as the brokerage had maintained "overweight" ratings long into the bank's selloff. But this idea has worked out well. Citigroup shares are down 9.6% on the year, though the stock has rebounded in recent days along with the rest of the sector.
Buffett Makes His Selection
Buffett Makes His Selection
Financier Invited To Join Candy Deal By Goldman Sachs
By HEIDI N. MOOREApril 29, 2008
Mars Inc.'s planned acquisition of Wm. Wrigley Jr. & Co. carries a familiar script for Warren Buffett, who during a previous market rout said he felt like a kid in a candy store. This time, Mr. Buffett's Berkshire Hathaway Inc. has seized on opportunities in insurance, manufacturing and now is loading up on sweets.
J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Berkshire emerged largely unscathed from the credit crunch that laid low their Wall Street brethren, so their willingness to step up and fund a big deal is a good sign for the financial markets and the economy.
The $23 billion deal will create a company that will reshape the global sweets business and got done because the three strongest financial firms in the U.S. wrote the checks.
It also sends two positive signals to the market: First, bankers are willing to lend, albeit to good clients. Last month, J.P. Morgan Chief Executive James Dimon encouraged clients to seek financing. "Leveraged finance is still there; give us a call," Mr. Dimon urged.
It wasn't just talk. Mr. Dimon himself approved an approximately $11 billion loan package to longtime client Mars to help the candy maker capture Wrigley. And, the approval wasn't accompanied by a lot of hand-wringing; this one took the approval of only about five people and just five days to arrange, according to a person familiar with the deal.
J.P. Morgan's financing alone wouldn't have been enough to get the deal done: the participation of Mr. Buffett, who was invited into the deal by Goldman Sachs, was crucial. Goldman banker Byron Trott, an adviser to Wrigley and a longtime adviser to Mr. Buffett, made the connection, according to two people familiar with the deal.
Second, the financing will let buyers pay the premiums that sellers demand. Wrigley had rebuffed Mars several times because the price wasn't high enough, according to a person familiar with the deal, and Mars needed the financing. "They never would have been able to fund the deal on their own," the person said.
J.P. Morgan even agreed to loan Mars the money to do the deal without selling chunks of the financing to other firms in a syndication -- all in order to keep the deal confidential from the confectioner's rivals. (It worked: Wrigley's stock price didn't budge until the deal was announced).
The deal is also a reminder that to thrive, these banks need to lend and do deals, even if the environment is harsh and if they have their own financial issues. J.P. Morgan, for example, has $22.5 billion in unwanted leveraged loans still sitting on its balance sheet.
The other side of the equation is equally harsh. Global investment banking fees dipped to $12.2 billion in the first quarter, their lowest level since 2003, says Banc of America Securities analyst Michael Hecht.
That isn't to say anyone can get a loan. "There is no question that the financial markets are very challenging right now. Coming up with the capital, basically, to make this deal work was a challenge," said Wrigley executive chairman Bill Wrigley on a conference call.
Banks are willing to lend to established companies, with strong backing, and high credit ratings. "For the right deal, you can find the financing if you go to the right place, and you can find partners to get things done that you otherwise wouldn't," said the person familiar with the Mars deal.
In this case the structure and nature of the deal were comforting factors for the lenders. Mars, which is closely held, was pledging equity, so the lenders were higher up in the capital structure. Mars isn't going to walk away from such a strategic deal the way private-equity firms have recently.
"This is exactly the kind of business banks are pursuing now. If you can't lend to a company like this, you're closed for business," said Chris Donnelly, an analyst with Standard & Poor's Leveraged Commentary & Data, an affiliate of the debt-ratings provider.
Financier Invited To Join Candy Deal By Goldman Sachs
By HEIDI N. MOOREApril 29, 2008
Mars Inc.'s planned acquisition of Wm. Wrigley Jr. & Co. carries a familiar script for Warren Buffett, who during a previous market rout said he felt like a kid in a candy store. This time, Mr. Buffett's Berkshire Hathaway Inc. has seized on opportunities in insurance, manufacturing and now is loading up on sweets.
J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Berkshire emerged largely unscathed from the credit crunch that laid low their Wall Street brethren, so their willingness to step up and fund a big deal is a good sign for the financial markets and the economy.
The $23 billion deal will create a company that will reshape the global sweets business and got done because the three strongest financial firms in the U.S. wrote the checks.
It also sends two positive signals to the market: First, bankers are willing to lend, albeit to good clients. Last month, J.P. Morgan Chief Executive James Dimon encouraged clients to seek financing. "Leveraged finance is still there; give us a call," Mr. Dimon urged.
It wasn't just talk. Mr. Dimon himself approved an approximately $11 billion loan package to longtime client Mars to help the candy maker capture Wrigley. And, the approval wasn't accompanied by a lot of hand-wringing; this one took the approval of only about five people and just five days to arrange, according to a person familiar with the deal.
J.P. Morgan's financing alone wouldn't have been enough to get the deal done: the participation of Mr. Buffett, who was invited into the deal by Goldman Sachs, was crucial. Goldman banker Byron Trott, an adviser to Wrigley and a longtime adviser to Mr. Buffett, made the connection, according to two people familiar with the deal.
Second, the financing will let buyers pay the premiums that sellers demand. Wrigley had rebuffed Mars several times because the price wasn't high enough, according to a person familiar with the deal, and Mars needed the financing. "They never would have been able to fund the deal on their own," the person said.
J.P. Morgan even agreed to loan Mars the money to do the deal without selling chunks of the financing to other firms in a syndication -- all in order to keep the deal confidential from the confectioner's rivals. (It worked: Wrigley's stock price didn't budge until the deal was announced).
The deal is also a reminder that to thrive, these banks need to lend and do deals, even if the environment is harsh and if they have their own financial issues. J.P. Morgan, for example, has $22.5 billion in unwanted leveraged loans still sitting on its balance sheet.
The other side of the equation is equally harsh. Global investment banking fees dipped to $12.2 billion in the first quarter, their lowest level since 2003, says Banc of America Securities analyst Michael Hecht.
That isn't to say anyone can get a loan. "There is no question that the financial markets are very challenging right now. Coming up with the capital, basically, to make this deal work was a challenge," said Wrigley executive chairman Bill Wrigley on a conference call.
Banks are willing to lend to established companies, with strong backing, and high credit ratings. "For the right deal, you can find the financing if you go to the right place, and you can find partners to get things done that you otherwise wouldn't," said the person familiar with the Mars deal.
In this case the structure and nature of the deal were comforting factors for the lenders. Mars, which is closely held, was pledging equity, so the lenders were higher up in the capital structure. Mars isn't going to walk away from such a strategic deal the way private-equity firms have recently.
"This is exactly the kind of business banks are pursuing now. If you can't lend to a company like this, you're closed for business," said Chris Donnelly, an analyst with Standard & Poor's Leveraged Commentary & Data, an affiliate of the debt-ratings provider.
Inside Citi, a Hedge-Fund Push Blows Up
Inside Citi, a Hedge-Fund Push Blows Up
Brokers' Pitch to Investors Was One of Low Risk; Now, a Suit and a Move to Compensate for Big Losses
By DAVID ENRICHApril 29, 2008; Page C1
When Citigroup Inc. was launching a pair of hedge funds last year, it didn't have to look far for investors. Brokers at the firm's Smith Barney unit drummed up hundreds of millions of dollars from retail clients, including some who were told the fixed-income funds were a safe place to stash money.
Since then, the hedge funds, devastated by the credit crunch, have plunged by 75% or more in value. After weeks of internal debate involving Sallie Krawcheck, the global wealth-management head, Citigroup is offering to cover some of the losses. An investor who put $500,000 into one of the hedge funds filed a federal lawsuit against Citigroup earlier this month.
The mess is another black eye for the New York financial conglomerate, which has taken lumps during the past few years for falling short of its potential to cross-sell products to its huge customer base. This time, though, the sales machine shifted into overdrive. The Smith Barney brokers had little trouble attracting retail customers to the funds. Their pitch: The funds were ideal investments for conservative retirees.
At Citigroup's annual shareholder meeting in New York last week, Paul R. Koch, a Smith Barney broker from Wayzata, Minn., complained to Chief Executive Vikram Pandit that the bank seems to be compensating clients "just enough so they don't sue us." At least a few top-producing brokers have quit in frustration, according to Citigroup officials and brokerage recruiters.
Citigroup defends its handling of the hedge funds, saying they were offered only to clients with large, diversified portfolios. "Our disclosure and marketing material sufficiently outlined the inherent risk in the funds and their leveraged strategies," a Citigroup spokesman said in a statement. "These funds suffered from unprecedented market dislocations and Citi made the business decision to support the funds and their investors."
The losses by the two hedge funds at issue, called Falcon and ASTA/MAT, are the latest examples of the credit crunch hammering retail, or individual, investors who believed they were holding low-risk securities.
It is the latest hedge-fund headache for Citigroup. Earlier this year, Citigroup had to inject capital into another hedge fund, hobbled by its purchase of a big book of corporate loans. The company's flagship Old Lane fund, co-founded by Mr. Pandit, has been struggling with weak returns and investor redemptions, prompting Citigroup this month to write down the fund's value by $202 million.
Falcon invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments, while ASTA/MAT emphasized municipal bonds. Each was composed of different funds that were launched periodically. Until turmoil rocked financial markets last summer, the funds racked up strong returns, boosted by heavy doses of leverage.
Last year, as Citigroup was gearing up to launch new Falcon and ASTA/MAT funds, it encouraged brokers at Smith Barney and in Citigroup's private bank to pitch the funds to their best customers. One reason for the push: Initial market tremors caused the Falcon family to decline by more than 10%, and Citigroup hoped to stabilize it with an infusion of cash.
By September, the new Falcon fund had raised about $71 million. A new ASTA/MAT fund raised about $800 million. Both new funds were heavily comprised of retail investors.
Citigroup brokers and fund managers assured prospective investors that the new hedge funds were low-risk, with Falcon likely to post losses of no more than 5% a year in the worst-case scenario, according to people familiar with the situation.
"That's why they bought it," says a Smith Barney broker whose clients, many of them wealthy retirees, invested in the Falcon fund. "These kinds of clients weren't looking for a home run."
Robert Zeff, a retired lawyer in Boca Raton, Fla., invested $500,000 in Falcon at the advice of his Smith Barney broker. "He was a very conservative investor whose main issue was capital preservation," says Joe Osborne, who is representing Mr. Zeff in a lawsuit accusing Citigroup of fraud in its marketing of Falcon. Some individuals invested millions of dollars, according to lawyers and brokers.
As of March 31, the new Falcon fund was worth just 25% of its initial value, according to internal documents. The ASTA/MAT fund had shriveled by Feb. 29 to less than 10% of its original value, the documents show. Even as their performances deteriorated, Reaz Islam, the 41-year-old manager of the funds, reassured uncertain brokers and clients that the funds were likely to rebound, according to people familiar with the matter. Mr. Islam declined to comment.
Ms. Krawcheck lobbied to help investors recover at least some losses, arguing that they were among Smith Barney's best clients. Some executives resisted on the grounds that investors understood the risks they were taking. A "battle royale" raged for several weeks, according to a person involved.
Under a compromise, Citigroup's wealth-management unit has agreed to spend $250 million to allow Falcon investors to exit from their positions without absorbing the fund's full losses, if investors agree to forfeit all legal claims against the funds. Some ASTA/MAT investors will get a similar offer.
In the future, Citigroup will scale back its marketing of hedge funds to retail customers, according to people familiar with the situation. In 4 p.m. New York Stock Exchange composite trading, Citigroup shares rose 21 cents, or 0.8%, to $26.81.
Brokers' Pitch to Investors Was One of Low Risk; Now, a Suit and a Move to Compensate for Big Losses
By DAVID ENRICHApril 29, 2008; Page C1
When Citigroup Inc. was launching a pair of hedge funds last year, it didn't have to look far for investors. Brokers at the firm's Smith Barney unit drummed up hundreds of millions of dollars from retail clients, including some who were told the fixed-income funds were a safe place to stash money.
Since then, the hedge funds, devastated by the credit crunch, have plunged by 75% or more in value. After weeks of internal debate involving Sallie Krawcheck, the global wealth-management head, Citigroup is offering to cover some of the losses. An investor who put $500,000 into one of the hedge funds filed a federal lawsuit against Citigroup earlier this month.
The mess is another black eye for the New York financial conglomerate, which has taken lumps during the past few years for falling short of its potential to cross-sell products to its huge customer base. This time, though, the sales machine shifted into overdrive. The Smith Barney brokers had little trouble attracting retail customers to the funds. Their pitch: The funds were ideal investments for conservative retirees.
At Citigroup's annual shareholder meeting in New York last week, Paul R. Koch, a Smith Barney broker from Wayzata, Minn., complained to Chief Executive Vikram Pandit that the bank seems to be compensating clients "just enough so they don't sue us." At least a few top-producing brokers have quit in frustration, according to Citigroup officials and brokerage recruiters.
Citigroup defends its handling of the hedge funds, saying they were offered only to clients with large, diversified portfolios. "Our disclosure and marketing material sufficiently outlined the inherent risk in the funds and their leveraged strategies," a Citigroup spokesman said in a statement. "These funds suffered from unprecedented market dislocations and Citi made the business decision to support the funds and their investors."
The losses by the two hedge funds at issue, called Falcon and ASTA/MAT, are the latest examples of the credit crunch hammering retail, or individual, investors who believed they were holding low-risk securities.
It is the latest hedge-fund headache for Citigroup. Earlier this year, Citigroup had to inject capital into another hedge fund, hobbled by its purchase of a big book of corporate loans. The company's flagship Old Lane fund, co-founded by Mr. Pandit, has been struggling with weak returns and investor redemptions, prompting Citigroup this month to write down the fund's value by $202 million.
Falcon invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments, while ASTA/MAT emphasized municipal bonds. Each was composed of different funds that were launched periodically. Until turmoil rocked financial markets last summer, the funds racked up strong returns, boosted by heavy doses of leverage.
Last year, as Citigroup was gearing up to launch new Falcon and ASTA/MAT funds, it encouraged brokers at Smith Barney and in Citigroup's private bank to pitch the funds to their best customers. One reason for the push: Initial market tremors caused the Falcon family to decline by more than 10%, and Citigroup hoped to stabilize it with an infusion of cash.
By September, the new Falcon fund had raised about $71 million. A new ASTA/MAT fund raised about $800 million. Both new funds were heavily comprised of retail investors.
Citigroup brokers and fund managers assured prospective investors that the new hedge funds were low-risk, with Falcon likely to post losses of no more than 5% a year in the worst-case scenario, according to people familiar with the situation.
"That's why they bought it," says a Smith Barney broker whose clients, many of them wealthy retirees, invested in the Falcon fund. "These kinds of clients weren't looking for a home run."
Robert Zeff, a retired lawyer in Boca Raton, Fla., invested $500,000 in Falcon at the advice of his Smith Barney broker. "He was a very conservative investor whose main issue was capital preservation," says Joe Osborne, who is representing Mr. Zeff in a lawsuit accusing Citigroup of fraud in its marketing of Falcon. Some individuals invested millions of dollars, according to lawyers and brokers.
As of March 31, the new Falcon fund was worth just 25% of its initial value, according to internal documents. The ASTA/MAT fund had shriveled by Feb. 29 to less than 10% of its original value, the documents show. Even as their performances deteriorated, Reaz Islam, the 41-year-old manager of the funds, reassured uncertain brokers and clients that the funds were likely to rebound, according to people familiar with the matter. Mr. Islam declined to comment.
Ms. Krawcheck lobbied to help investors recover at least some losses, arguing that they were among Smith Barney's best clients. Some executives resisted on the grounds that investors understood the risks they were taking. A "battle royale" raged for several weeks, according to a person involved.
Under a compromise, Citigroup's wealth-management unit has agreed to spend $250 million to allow Falcon investors to exit from their positions without absorbing the fund's full losses, if investors agree to forfeit all legal claims against the funds. Some ASTA/MAT investors will get a similar offer.
In the future, Citigroup will scale back its marketing of hedge funds to retail customers, according to people familiar with the situation. In 4 p.m. New York Stock Exchange composite trading, Citigroup shares rose 21 cents, or 0.8%, to $26.81.
A Credit-Card Crackdown
A Credit-Card Crackdown
Federal Regulators Seek Strict Policies For Financial Firms
By DAMIAN PALETTAApril 29, 2008; Page A3
WASHINGTON -- The Federal Reserve and two other regulators plan to propose strict policies on credit-card issuers after criticism that card companies charge too many hidden fees and unfairly raise interest rates on borrowers.
Banking officials are bracing for the proposal and raising concerns about the plan's breadth. It would mark one of the government's most aggressive efforts to curb credit-card practices in decades and could affect more than 10,000 financial institutions.
• What's New: The Federal Reserve wants to restrict some common moves by credit-card issuers, such as raising interest rates on troubled borrowers.
• Proponents Say: The steps will curb abusive practices.
• Opponents Say: The new rules could unravel innovations that allowed card issuers to price risk accurately.
The agencies, which include the Office of Thrift Supervision and the National Credit Union Administration, would propose labeling several credit-card and banking practices as "unfair or deceptive," according to people familiar with the plan. The Fed has scheduled a public meeting on Friday to issue the plan. The proposal is expected to include curbs on the fees depositors are charged when they overdraw their bank account.
The proposal comes as the Fed is under fire for its record of consumer protection. In December, the Fed proposed new limits on mortgage fees and other mortgage-lending practices. It was criticized for reacting too late to abuses that contributed to the housing boom and bust. Democrats in Congress have been pushing regulators to rein in credit-card companies as well.
House Financial Services Committee Chairman Barney Frank (D., Mass.) last year noted the Fed's power to rein in abusive lending and told the central bank it needed to "use it or lose it."
The Fed has "the authority to deal with deceptive practices, and it's pretty clear now that credit-card issuers are using a number of abusive practices that are not only unfair, but are financially destabilizing," said Travis Plunkett, legislative director at the Consumer Federation of America, a Washington consumer group.
The Fed's move to tighten rules would mark the latest rollback in Washington of the laissez-faire philosophy that governed regulation in recent years.
One part of the proposal would restrict the ability of lenders to raise interest rates on existing credit-card balances. For example, if a borrower was given a 10% interest rate when he or she had a credit score of 750, regulators would propose making it harder for banks to unilaterally raise the rate if the customer's credit score fell to 650. The banking industry would likely push back against such a proposal.
Another part of the plan would create restrictions on how lenders apply payments borrowers make on their credit cards, people familiar with the matter said. If a borrower has a $500 balance at an introductory rate of 0% and another $500 balance at 10%, the lender would be prohibited from allocating payments only to the 0% balance first.
Ed Yingling, chief executive of the American Bankers Association, said his organization has "some concern about just how far this regulation might go." On the question of changing consumers' interest rates, which will likely spark a big fight, he said the rules could unravel innovations made over the past decade that allow companies "to price for individual risks."
Facing congressional pressure for tighter credit-card regulation, Fed Chairman Ben Bernanke announced several months ago that he planned to propose banning certain practices. Since then, the Fed has hosted multiple closed-door meetings with consumer groups and bankers, but the regulators have been careful not to reveal what they might do.
Delinquency rates on credit cards rose on a seasonally adjusted basis to 4.38% in the fourth quarter of 2007 from 4.18% in the third quarter, according to the bankers' association. The Consumer Federation of America has estimated that the average household has $7,430 in credit-card debt. The Government Accountability Office estimated that the top six credit-card issuers charged on average about $1.2 billion each in penalty fees for cardholders in 2005.
House and Senate Democrats are pushing forward with legislation that would create additional curbs on credit-card practices, such as requiring lenders to give borrowers more notice before raising interest rates. Such legislation would be difficult to pass this year, however, as lawmakers are consumed with the mortgage-market turmoil.
The proposal by the Fed and the other two agencies wouldn't require congressional approval. The agencies will solicit comments, and the proposal could be in place this year.
Federal Regulators Seek Strict Policies For Financial Firms
By DAMIAN PALETTAApril 29, 2008; Page A3
WASHINGTON -- The Federal Reserve and two other regulators plan to propose strict policies on credit-card issuers after criticism that card companies charge too many hidden fees and unfairly raise interest rates on borrowers.
Banking officials are bracing for the proposal and raising concerns about the plan's breadth. It would mark one of the government's most aggressive efforts to curb credit-card practices in decades and could affect more than 10,000 financial institutions.
• What's New: The Federal Reserve wants to restrict some common moves by credit-card issuers, such as raising interest rates on troubled borrowers.
• Proponents Say: The steps will curb abusive practices.
• Opponents Say: The new rules could unravel innovations that allowed card issuers to price risk accurately.
The agencies, which include the Office of Thrift Supervision and the National Credit Union Administration, would propose labeling several credit-card and banking practices as "unfair or deceptive," according to people familiar with the plan. The Fed has scheduled a public meeting on Friday to issue the plan. The proposal is expected to include curbs on the fees depositors are charged when they overdraw their bank account.
The proposal comes as the Fed is under fire for its record of consumer protection. In December, the Fed proposed new limits on mortgage fees and other mortgage-lending practices. It was criticized for reacting too late to abuses that contributed to the housing boom and bust. Democrats in Congress have been pushing regulators to rein in credit-card companies as well.
House Financial Services Committee Chairman Barney Frank (D., Mass.) last year noted the Fed's power to rein in abusive lending and told the central bank it needed to "use it or lose it."
The Fed has "the authority to deal with deceptive practices, and it's pretty clear now that credit-card issuers are using a number of abusive practices that are not only unfair, but are financially destabilizing," said Travis Plunkett, legislative director at the Consumer Federation of America, a Washington consumer group.
The Fed's move to tighten rules would mark the latest rollback in Washington of the laissez-faire philosophy that governed regulation in recent years.
One part of the proposal would restrict the ability of lenders to raise interest rates on existing credit-card balances. For example, if a borrower was given a 10% interest rate when he or she had a credit score of 750, regulators would propose making it harder for banks to unilaterally raise the rate if the customer's credit score fell to 650. The banking industry would likely push back against such a proposal.
Another part of the plan would create restrictions on how lenders apply payments borrowers make on their credit cards, people familiar with the matter said. If a borrower has a $500 balance at an introductory rate of 0% and another $500 balance at 10%, the lender would be prohibited from allocating payments only to the 0% balance first.
Ed Yingling, chief executive of the American Bankers Association, said his organization has "some concern about just how far this regulation might go." On the question of changing consumers' interest rates, which will likely spark a big fight, he said the rules could unravel innovations made over the past decade that allow companies "to price for individual risks."
Facing congressional pressure for tighter credit-card regulation, Fed Chairman Ben Bernanke announced several months ago that he planned to propose banning certain practices. Since then, the Fed has hosted multiple closed-door meetings with consumer groups and bankers, but the regulators have been careful not to reveal what they might do.
Delinquency rates on credit cards rose on a seasonally adjusted basis to 4.38% in the fourth quarter of 2007 from 4.18% in the third quarter, according to the bankers' association. The Consumer Federation of America has estimated that the average household has $7,430 in credit-card debt. The Government Accountability Office estimated that the top six credit-card issuers charged on average about $1.2 billion each in penalty fees for cardholders in 2005.
House and Senate Democrats are pushing forward with legislation that would create additional curbs on credit-card practices, such as requiring lenders to give borrowers more notice before raising interest rates. Such legislation would be difficult to pass this year, however, as lawmakers are consumed with the mortgage-market turmoil.
The proposal by the Fed and the other two agencies wouldn't require congressional approval. The agencies will solicit comments, and the proposal could be in place this year.
Mars's Takeover of Wrigley Creates Global Powerhouse
Mars's Takeover of Wrigley Creates Global Powerhouse
Closely Held Firm To Pay $23 Billion; Kitchen-Table Talks
By JANET ADAMY, MATTHEW KARNITSCHNIG and JULIE JARGONApril 29, 2008; Page A1
Discussions between Wm. Wrigley Jr. Co. and Mars Inc. to blend two of the best-known names in sweets into the world's largest candy maker began, like any important family gathering, around the kitchen table.
On April 11, Bill Wrigley Jr., executive chairman of the chewing-gum empire that bears his name and the fourth consecutive Wrigley to lead the company, went to McLean, Va., to meet with Mars Global President Paul Michaels and Chief Financial Officer Olivier Goudet. They had called Mr. Wrigley to request the meeting, and before long the three men were sharing sandwiches over Mr. Michaels's kitchen table.
WSJ's Matthew Karnitschnig and Dennis Berman discuss plans by Mars to acquire Wrigley for about $23 billion.
By the early hours of Monday morning, the two sides had finalized a deal. Mars, together with Warren Buffett's Berkshire Hathaway Inc., agreed to acquire Wrigley for about $23 billion. The transaction, expected to close in six to 12 months, joins two of America's ubiquitous brand names: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.
Under the agreement, Wrigley shareholders will receive $80 in cash for each share held, a 28% premium to Friday's price. On Monday, shares rose 23% to close at $76.91 in 4 p.m. composite trading on the New York Stock Exchange.
The deal was a big surprise across Wall Street late Sunday, but the effects are clear: a colossal candy-and-gum company investing in new markets around the globe, without having to answer to public shareholders. That freedom and market power pose a threat to the other major food companies -- particularly Hershey Co. and Cadbury Schweppes PLC -- that have been weighing merger plans for years. Both Hershey's and Cadbury's shares rose Monday.
While both Mars and Wrigley tout the comfortable fit of products and cultures, Mars has no experience with a deal of this scale. And it's moving into Wrigley at a very high price, paying 32 times Wrigley's expected earnings for 2008. That means that even if Mars is successful in integrating the company, it may be difficult for it to turn a decent profit without substantial revenue growth in the years ahead.
A FAMILY MATTER
• Who: Two of America's leading business families, uniting two of the best-known consumer brands, Wrigley gums and Mars candy bars.
• Why: Wrigley Chairman Bill Wrigley Jr. concluded it wasn't certain the company would be worth $80 a share in the future.
• What Now: Mars has paid a rich price, but with Wrigley becoming a separate unit of a private company, the success or failure of the deal will be harder to measure.
Though the Mars-Wrigley deal was completed in a matter of weeks, it had been contemplated for years. Mars, which is 100% owned by the Mars family, had known for some time that it would one day woo Wrigley, people familiar with the matter say. "It was a matter of when, not if," said one person involved in the deal.
Like many families that own businesses for generations, the Wrigley family, which controls at least two-thirds of Wrigley's supervoting B shares, had become less engaged in the company. Mr. Wrigley -- who controls 45% of the B shares through trusts and is the only member of the family who's deeply involved in the business -- said he didn't have much discussion with relatives during the negotiations.
The move is a bold one for the Mars family, led by brothers John Mars and Forrest Mars Jr., both former presidents of the company. Today some of the Mars brothers' children hold various management positions at the company, according to a Mars spokeswoman. A message left at the Mars family ranch in Wyoming was not returned.
Meeting in the Kitchen
At the meeting in Mr. Michaels's kitchen, Messrs. Michaels and Goudet walked through their rationale for combining the two companies, but they made no offer. One of the keys to the strategy is distribution, pushing more gum and more candy in more spots around the globe, such as India, China and Russia. Joined together, they could reach these markets more effectively. "I basically did a lot of listening at that point," Mr. Wrigley said in an interview Monday.
Mr. Michaels, Mars global president, said plans to buy Wrigley first came together about three months ago. Getting the phone call "was a surprise," Mr. Wrigley said. "I wasn't sure, and they were not very specific even when they called me, what they wanted to meet about. I just came in cold."
After his return to Chicago, Mr. Wrigley briefed his company's board, and it gave the go-ahead to continue talks.
Longtime Mantra
He said he kept in mind his longtime mantra of respecting the past but doing what was right for the future.
DOUBLE THE PLEASURE
WM. WRIGLEY JR. CO.
Founded: 1891
Headquarters: Chicago
Global sales: $5.4 billion
Notable brands: Juicy Fruit, Spearmint, Big Red, Extra, Freedent, Doublemint, Hubba Bubba, Orbit gums; Altoids mints, Life Savers candies
MARS INC.
Established: 1911
Headquarters: McLean, Va.
Global sales: $22 billion
Notable brands: Dove, Milky way, Snickers, Mars candy bars; M&M's chocolates; Uncle Ben's Rice; Pedigree and Whiskas pet-care products.MORE ON WRIGLEY
• More Sweet Deals in the Candy Aisle?
• Iconic Name Would Endure in Chicago
• Deal Journal: The Mythology of 'Classic Buffett'
• Letter From Bill Wrigley to Staff
• Wrigley Names First Nonfamily CEO 10/23/06
• Father, Son and Gum: A Fourth-Generation CEO Shakes Up Wrigley 03/11/06
• Wrigley to Buy Life Savers, Altoids 11/15/04
"When you cling to beliefs of the past too much, you end up making the wrong choices," Mr. Wrigley said. He also felt that the regulatory pressures and disclosure requirements make publicly held companies less competitive, and that going private would relieve many of those pressures. Wrigley, which has annual sales of $5.4 billion and employs about 16,000 people, has been a public company since 1923.
In discussions with Mr. Wrigley, Mr. Michaels argued that the two companies would fit well together because of their similar histories and shared values, according to people familiar with the matter. Mars was willing to pay a hefty premium, while also preserving the Wrigley name and the company's presence in Chicago, but Wrigley pressed for a better offer.
Wrigley's board was concerned about the certainty of the financing for the deal given the tight credit markets, said William Perez, Wrigley's president and CEO. The Mars clan knew early on that it would need a partner to complete the transaction. Mr. Buffett fit the bill, both for his deep pockets and reputation for discretion.
Mr. Wrigley said that part of the reason Mr. Buffett got involved was because "he's one of the few people in the world with access to large sums of capital" and because "he tends to do things very quickly and very efficiently."
A key figure behind the transaction was Goldman Sachs partner Byron Trott. Mr. Trott has worked for Mars and Wrigley and is a favorite of Mr. Buffett, who said of the banker in his most recent investor letter: "I trust him completely." People involved in the transaction say these relationships were crucial to its success.
Mr. Trott, representing Wrigley, approached Mr. Buffett about joining with Mars. A longtime admirer of Mars, Mr. Buffett readily agreed. In an interview with CNBC, Mr. Buffett said he got involved in the deal because the two companies have great brands. "I've been conducting a 70-year taste test...and they met the 70-year taste test," Mr. Buffett said. "The Mars people asked me about participating in this, and we are financing. But we are a very, very junior partner, although we will have about $6.5 billion in it." He said he does not anticipate tying the Mars and Wrigley brands with any of his other investments in sweets, which include See's Candies and Dairy Queen.
As the deal came together, a roughly 12-person team on the Wrigley side was calling each other so frequently that Mr. Perez kept with him a small laminated card with each of their phone numbers.
Last week, Mr. Wrigley went to Wyoming to meet with members of the family that controls Mars to get to know them, he said.
Negotiations got "more active" over the weekend as the two sides pulled together the details. Wrigley got Mars's final offer at 5 p.m. Sunday, and Wrigley's board approved the deal in a phone meeting that concluded an hour later. The two sides were still exchanging documents to finalize the agreement at 2 a.m. Monday.
Mr. Michaels said that speculation of deals involving candy players Hershey and Cadbury did not prompt his company to buy Wrigley.
"What came into play more was, when you look at an offer as a director of a company...you say, 'OK, I could get this amount per share now versus some number, kind of guessing in the future,'" Mr. Wrigley said. "If that number gets big enough now, there's risk in any company of something happening that won't enable you to get to a bigger number in the future."
Mr. Wrigley said he plans to stay involved in the business and will remain its executive chairman.
While Wrigley started in the late 19th century on the strength of chewing gum that Mr. Wrigley's great-grandfather originally gave away to sell baking powder, Mars has its roots in the home-made butter-cream candies Frank C. Mars and his wife, Ethel Healy, made out of their kitchen in Tacoma, Wash.
Mars is now a diversified, global food company that sells everything from pet-food brands such as Whiskas and Pedigree to food and beverage brands such as Uncle Ben's rice and Flavia coffee. The company has $22 billion in annual revenues, about 70% of which is generated outside of the U.S.
The company is 100% owned by the Mars family. In addition to holding management positions, members of the family sit on the company's supervisory board. Mr. Michaels is an outsider who joined Mars more than 10 years ago and has been global president for the past four years.
First Move
The Wrigley company made its first move away from family control in October 2006, when Mr. Wrigley announced he would step down as CEO to become executive chairman. The company named Mr. Perez the first non-Wrigley family CEO in the company's then 115-year history.
Mr. Wrigley has been much more of a risk-taker than his father, who died suddenly in 1999. He has pushed to diversify the company beyond just a gum maker and transform Wrigley into a broader confectionery company. He dabbled in medicinal gum and bought the Altoids and LifeSavers brands from Kraft Foods Inc. while also holding to traditions, like hiring a new pair of Doublemint twins.
His boldest move never saw fruition. In 2002, Wrigley beat out Nestlé SA and Cadbury with its $12.5 billion bid to buy Hershey. But the trust that controls Hershey got cold feet and the deal fell through at the last minute. Some analysts and investors, though, felt Mr. Wrigley was a bit too risky at times and that he and his board realized they needed the expertise of a more seasoned consumer-products executive.
Mr. Perez was brought on at a time when the Wrigley company was struggling to integrate LifeSavers and Altoids -- its biggest acquisition ever. Some analysts felt the company paid too much for the ailing brands. After initially telling investors that the deal would boost earnings in 2006, Mr. Wrigley later admitted that the brands -- acquired for $1.46 billion in 2005 after the deal was announced in 2004 -- needed more investment and would sap 2006 profits.
Though it's public, Wrigley has some operating practices of a private company. It does not hold quarterly earnings calls and only addresses its shareholders once a year at the annual shareholders meeting.
The Federal Trade Commission is expected to review the deal but is unlikely to challenge it on antitrust grounds, lawyers said. While both companies are market leaders in the candy business, investigators are likely to focus on the companies' individual product lines, which are largely complementary.
Closely Held Firm To Pay $23 Billion; Kitchen-Table Talks
By JANET ADAMY, MATTHEW KARNITSCHNIG and JULIE JARGONApril 29, 2008; Page A1
Discussions between Wm. Wrigley Jr. Co. and Mars Inc. to blend two of the best-known names in sweets into the world's largest candy maker began, like any important family gathering, around the kitchen table.
On April 11, Bill Wrigley Jr., executive chairman of the chewing-gum empire that bears his name and the fourth consecutive Wrigley to lead the company, went to McLean, Va., to meet with Mars Global President Paul Michaels and Chief Financial Officer Olivier Goudet. They had called Mr. Wrigley to request the meeting, and before long the three men were sharing sandwiches over Mr. Michaels's kitchen table.
WSJ's Matthew Karnitschnig and Dennis Berman discuss plans by Mars to acquire Wrigley for about $23 billion.
By the early hours of Monday morning, the two sides had finalized a deal. Mars, together with Warren Buffett's Berkshire Hathaway Inc., agreed to acquire Wrigley for about $23 billion. The transaction, expected to close in six to 12 months, joins two of America's ubiquitous brand names: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.
Under the agreement, Wrigley shareholders will receive $80 in cash for each share held, a 28% premium to Friday's price. On Monday, shares rose 23% to close at $76.91 in 4 p.m. composite trading on the New York Stock Exchange.
The deal was a big surprise across Wall Street late Sunday, but the effects are clear: a colossal candy-and-gum company investing in new markets around the globe, without having to answer to public shareholders. That freedom and market power pose a threat to the other major food companies -- particularly Hershey Co. and Cadbury Schweppes PLC -- that have been weighing merger plans for years. Both Hershey's and Cadbury's shares rose Monday.
While both Mars and Wrigley tout the comfortable fit of products and cultures, Mars has no experience with a deal of this scale. And it's moving into Wrigley at a very high price, paying 32 times Wrigley's expected earnings for 2008. That means that even if Mars is successful in integrating the company, it may be difficult for it to turn a decent profit without substantial revenue growth in the years ahead.
A FAMILY MATTER
• Who: Two of America's leading business families, uniting two of the best-known consumer brands, Wrigley gums and Mars candy bars.
• Why: Wrigley Chairman Bill Wrigley Jr. concluded it wasn't certain the company would be worth $80 a share in the future.
• What Now: Mars has paid a rich price, but with Wrigley becoming a separate unit of a private company, the success or failure of the deal will be harder to measure.
Though the Mars-Wrigley deal was completed in a matter of weeks, it had been contemplated for years. Mars, which is 100% owned by the Mars family, had known for some time that it would one day woo Wrigley, people familiar with the matter say. "It was a matter of when, not if," said one person involved in the deal.
Like many families that own businesses for generations, the Wrigley family, which controls at least two-thirds of Wrigley's supervoting B shares, had become less engaged in the company. Mr. Wrigley -- who controls 45% of the B shares through trusts and is the only member of the family who's deeply involved in the business -- said he didn't have much discussion with relatives during the negotiations.
The move is a bold one for the Mars family, led by brothers John Mars and Forrest Mars Jr., both former presidents of the company. Today some of the Mars brothers' children hold various management positions at the company, according to a Mars spokeswoman. A message left at the Mars family ranch in Wyoming was not returned.
Meeting in the Kitchen
At the meeting in Mr. Michaels's kitchen, Messrs. Michaels and Goudet walked through their rationale for combining the two companies, but they made no offer. One of the keys to the strategy is distribution, pushing more gum and more candy in more spots around the globe, such as India, China and Russia. Joined together, they could reach these markets more effectively. "I basically did a lot of listening at that point," Mr. Wrigley said in an interview Monday.
Mr. Michaels, Mars global president, said plans to buy Wrigley first came together about three months ago. Getting the phone call "was a surprise," Mr. Wrigley said. "I wasn't sure, and they were not very specific even when they called me, what they wanted to meet about. I just came in cold."
After his return to Chicago, Mr. Wrigley briefed his company's board, and it gave the go-ahead to continue talks.
Longtime Mantra
He said he kept in mind his longtime mantra of respecting the past but doing what was right for the future.
DOUBLE THE PLEASURE
WM. WRIGLEY JR. CO.
Founded: 1891
Headquarters: Chicago
Global sales: $5.4 billion
Notable brands: Juicy Fruit, Spearmint, Big Red, Extra, Freedent, Doublemint, Hubba Bubba, Orbit gums; Altoids mints, Life Savers candies
MARS INC.
Established: 1911
Headquarters: McLean, Va.
Global sales: $22 billion
Notable brands: Dove, Milky way, Snickers, Mars candy bars; M&M's chocolates; Uncle Ben's Rice; Pedigree and Whiskas pet-care products.MORE ON WRIGLEY
• More Sweet Deals in the Candy Aisle?
• Iconic Name Would Endure in Chicago
• Deal Journal: The Mythology of 'Classic Buffett'
• Letter From Bill Wrigley to Staff
• Wrigley Names First Nonfamily CEO 10/23/06
• Father, Son and Gum: A Fourth-Generation CEO Shakes Up Wrigley 03/11/06
• Wrigley to Buy Life Savers, Altoids 11/15/04
"When you cling to beliefs of the past too much, you end up making the wrong choices," Mr. Wrigley said. He also felt that the regulatory pressures and disclosure requirements make publicly held companies less competitive, and that going private would relieve many of those pressures. Wrigley, which has annual sales of $5.4 billion and employs about 16,000 people, has been a public company since 1923.
In discussions with Mr. Wrigley, Mr. Michaels argued that the two companies would fit well together because of their similar histories and shared values, according to people familiar with the matter. Mars was willing to pay a hefty premium, while also preserving the Wrigley name and the company's presence in Chicago, but Wrigley pressed for a better offer.
Wrigley's board was concerned about the certainty of the financing for the deal given the tight credit markets, said William Perez, Wrigley's president and CEO. The Mars clan knew early on that it would need a partner to complete the transaction. Mr. Buffett fit the bill, both for his deep pockets and reputation for discretion.
Mr. Wrigley said that part of the reason Mr. Buffett got involved was because "he's one of the few people in the world with access to large sums of capital" and because "he tends to do things very quickly and very efficiently."
A key figure behind the transaction was Goldman Sachs partner Byron Trott. Mr. Trott has worked for Mars and Wrigley and is a favorite of Mr. Buffett, who said of the banker in his most recent investor letter: "I trust him completely." People involved in the transaction say these relationships were crucial to its success.
Mr. Trott, representing Wrigley, approached Mr. Buffett about joining with Mars. A longtime admirer of Mars, Mr. Buffett readily agreed. In an interview with CNBC, Mr. Buffett said he got involved in the deal because the two companies have great brands. "I've been conducting a 70-year taste test...and they met the 70-year taste test," Mr. Buffett said. "The Mars people asked me about participating in this, and we are financing. But we are a very, very junior partner, although we will have about $6.5 billion in it." He said he does not anticipate tying the Mars and Wrigley brands with any of his other investments in sweets, which include See's Candies and Dairy Queen.
As the deal came together, a roughly 12-person team on the Wrigley side was calling each other so frequently that Mr. Perez kept with him a small laminated card with each of their phone numbers.
Last week, Mr. Wrigley went to Wyoming to meet with members of the family that controls Mars to get to know them, he said.
Negotiations got "more active" over the weekend as the two sides pulled together the details. Wrigley got Mars's final offer at 5 p.m. Sunday, and Wrigley's board approved the deal in a phone meeting that concluded an hour later. The two sides were still exchanging documents to finalize the agreement at 2 a.m. Monday.
Mr. Michaels said that speculation of deals involving candy players Hershey and Cadbury did not prompt his company to buy Wrigley.
"What came into play more was, when you look at an offer as a director of a company...you say, 'OK, I could get this amount per share now versus some number, kind of guessing in the future,'" Mr. Wrigley said. "If that number gets big enough now, there's risk in any company of something happening that won't enable you to get to a bigger number in the future."
Mr. Wrigley said he plans to stay involved in the business and will remain its executive chairman.
While Wrigley started in the late 19th century on the strength of chewing gum that Mr. Wrigley's great-grandfather originally gave away to sell baking powder, Mars has its roots in the home-made butter-cream candies Frank C. Mars and his wife, Ethel Healy, made out of their kitchen in Tacoma, Wash.
Mars is now a diversified, global food company that sells everything from pet-food brands such as Whiskas and Pedigree to food and beverage brands such as Uncle Ben's rice and Flavia coffee. The company has $22 billion in annual revenues, about 70% of which is generated outside of the U.S.
The company is 100% owned by the Mars family. In addition to holding management positions, members of the family sit on the company's supervisory board. Mr. Michaels is an outsider who joined Mars more than 10 years ago and has been global president for the past four years.
First Move
The Wrigley company made its first move away from family control in October 2006, when Mr. Wrigley announced he would step down as CEO to become executive chairman. The company named Mr. Perez the first non-Wrigley family CEO in the company's then 115-year history.
Mr. Wrigley has been much more of a risk-taker than his father, who died suddenly in 1999. He has pushed to diversify the company beyond just a gum maker and transform Wrigley into a broader confectionery company. He dabbled in medicinal gum and bought the Altoids and LifeSavers brands from Kraft Foods Inc. while also holding to traditions, like hiring a new pair of Doublemint twins.
His boldest move never saw fruition. In 2002, Wrigley beat out Nestlé SA and Cadbury with its $12.5 billion bid to buy Hershey. But the trust that controls Hershey got cold feet and the deal fell through at the last minute. Some analysts and investors, though, felt Mr. Wrigley was a bit too risky at times and that he and his board realized they needed the expertise of a more seasoned consumer-products executive.
Mr. Perez was brought on at a time when the Wrigley company was struggling to integrate LifeSavers and Altoids -- its biggest acquisition ever. Some analysts felt the company paid too much for the ailing brands. After initially telling investors that the deal would boost earnings in 2006, Mr. Wrigley later admitted that the brands -- acquired for $1.46 billion in 2005 after the deal was announced in 2004 -- needed more investment and would sap 2006 profits.
Though it's public, Wrigley has some operating practices of a private company. It does not hold quarterly earnings calls and only addresses its shareholders once a year at the annual shareholders meeting.
The Federal Trade Commission is expected to review the deal but is unlikely to challenge it on antitrust grounds, lawyers said. While both companies are market leaders in the candy business, investigators are likely to focus on the companies' individual product lines, which are largely complementary.
Monday, April 28, 2008
Buffett says recession may be worse than feared
ReutersBuffett says recession may be worse than feared
Monday April 28, 11:09 am ET By Jonathan Stempel
NEW YORK (Reuters) - Warren Buffett, the world's richest person, said on Monday the U.S.
economy is in a recession that will be more severe than most people expect.
Buffett made his comments on CNBC television after his Berkshire Hathaway Inc (NYSE:BRK-A - News; NYSE:BRK-B - News) agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr Co (NYSE:WWY - News) by Mars Inc in a $23 billion transaction.
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."
He was not immediately available for further comment. Known for his frugality, the 77-year-old Buffett has lived in the same 10-room Omaha, Nebraska, house for a half-century, despite being worth an estimated $62 billion.
On Wednesday, the U.S. Commerce Department is expected to say how fast the economy grew in the first quarter. Economists on average have projected that gross domestic product grew at an annualized 0.2 percent rate in the quarter.
Two quarters of declining GDP is a traditional indicator of recession. That last happened in 2001. Economists expect the U.S. Federal Reserve on Wednesday to cut a key lending rate for a seventh time beginning last September.
Berkshire is a $197 billion conglomerate best known for its insurance holdings, such as auto insurer Geico Corp, but it owns more than 70 businesses.
Many of those businesses are tied to the housing market, including Acme Brick Co, insulation maker Johns Manville, and the real estate brokerage HomeServices of America Inc.
Others depend on consumers to spend more on discretionary items, such as Ben Bridge Jeweler and Borsheims Fine Jewelry.
"In the retail businesses ... if anything, they've gotten a little worse," Buffett said. "Of course, things connected with housing, whether it's in brick or whether it's in carpet, those businesses have shown no uptick at all. Jewelry had a bad Christmas ... and it stayed that way."
Buffett sees no respite from the housing slump.
"I think this is going to be fairly long and fairly deep, but who knows," he said.
In March, Forbes magazine pegged Buffett's net worth at $62 billion, ahead of Mexican tycoon Carlos Slim's $60 billion and Microsoft Corp (NasdaqGS:MSFT - News) Chairman Bill Gates's $58 billion. Gates is a friend of Buffett and a Berkshire director.
(Editing by John Wallace)
Monday April 28, 11:09 am ET By Jonathan Stempel
NEW YORK (Reuters) - Warren Buffett, the world's richest person, said on Monday the U.S.
economy is in a recession that will be more severe than most people expect.
Buffett made his comments on CNBC television after his Berkshire Hathaway Inc (NYSE:BRK-A - News; NYSE:BRK-B - News) agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr Co (NYSE:WWY - News) by Mars Inc in a $23 billion transaction.
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."
He was not immediately available for further comment. Known for his frugality, the 77-year-old Buffett has lived in the same 10-room Omaha, Nebraska, house for a half-century, despite being worth an estimated $62 billion.
On Wednesday, the U.S. Commerce Department is expected to say how fast the economy grew in the first quarter. Economists on average have projected that gross domestic product grew at an annualized 0.2 percent rate in the quarter.
Two quarters of declining GDP is a traditional indicator of recession. That last happened in 2001. Economists expect the U.S. Federal Reserve on Wednesday to cut a key lending rate for a seventh time beginning last September.
Berkshire is a $197 billion conglomerate best known for its insurance holdings, such as auto insurer Geico Corp, but it owns more than 70 businesses.
Many of those businesses are tied to the housing market, including Acme Brick Co, insulation maker Johns Manville, and the real estate brokerage HomeServices of America Inc.
Others depend on consumers to spend more on discretionary items, such as Ben Bridge Jeweler and Borsheims Fine Jewelry.
"In the retail businesses ... if anything, they've gotten a little worse," Buffett said. "Of course, things connected with housing, whether it's in brick or whether it's in carpet, those businesses have shown no uptick at all. Jewelry had a bad Christmas ... and it stayed that way."
Buffett sees no respite from the housing slump.
"I think this is going to be fairly long and fairly deep, but who knows," he said.
In March, Forbes magazine pegged Buffett's net worth at $62 billion, ahead of Mexican tycoon Carlos Slim's $60 billion and Microsoft Corp (NasdaqGS:MSFT - News) Chairman Bill Gates's $58 billion. Gates is a friend of Buffett and a Berkshire director.
(Editing by John Wallace)
Mars, Buffett Team Up in Wrigley Bid
Mars, Buffett Team Up in Wrigley Bid
$22 Billion Deal Would Reshape Candy Industry
By MATTHEW KARNITSCHNIG and DENNIS K. BERMAN
April 28, 2008; Page A1
Mars Inc. and Warren Buffett's Berkshire Hathaway Inc. were close to a pact to acquire Wm. Wrigley Jr. Co. for more than $22 billion, according to people familiar with the matter, in a deal that would remake the global confectionery landscape.
A deal would unite two icons of the U.S. candy business: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.
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The transaction was expected to be announced as early as Monday, the people said. Both companies declined to comment.
Terms of the deal weren't immediately clear, but Wrigley has a stock market value of about $17.3 billion and it appeared that the buyers were prepared to offer a rich premium.
Under one scenario under discussion, Berkshire would likely provide financing to Mars for the deal and become a stakeholder in Wrigley, according to people close to the deal.
A deal would expand Mars's already considerable global reach. Wrigley generates the majority of its sales outside of the U.S. In recent years, it has expanded its offerings well beyond chewing gum. Mars is the world's largest maker of chocolate by sales, with a market share of 15%.
A deal could spark further consolidation in the global candy business. Hershey Co. and Cadbury Schweppes PLC, for example, could be forced to merge. The two discussed a deal last year, but talks fell apart. Cadbury in May will split off its beverage unit, which includes Dr Pepper and 7Up, potentially paving the way for a deal. Hershey has been hurt in recent years by competition from Mars, its longtime rival.
In 2005, Wrigley bought Kraft's candy assets, including Altoids and LifeSavers, for about $1.5 billion. Wrigley also recently purchased a Russian chocolate company. The family-controlled company was close to a deal to acquire Hershey Co. in 2002 for about $12.5 billion, but talks fell apart at the last moment.
A weak dollar and strong foreign demand have boosted Wrigley's profit recently. But the company has struggled in the U.S., where it faces intense competition.
Wrigley's products include Extra, Eclipse and Orbit gums.
If successful, a deal for Wrigley would bring together two companies controlled by intensely private dynasties: the Mars of northern Virginia and Wrigleys of Chicago. Following the death of patriarch Forrest Mars Sr. in 1999 at the age of 95, speculation grew that the company would be sold to Nestle SA or another global company, but Mars has held firm.
A sale would end Wrigley's independence. The company was founded in the late 19th century by William Wrigley Jr. As a boy, he ran away from Philadelphia to New York, where he hawked newspapers and slept on the street, according to a 1920 article in American Magazine. Years later he went to Chicago to peddle soap, then baking powder, to shop owners. To entice them, he gave away two packages of chewing gum with each can of baking powder. When the gum became more popular, he started selling that instead.
Soon he was making his own gum. Juicy Fruit hit shelves in 1893. By 1920, he was making nine billion sticks of gum a year and had become the world's largest advertiser of a single product. In 1923, the company went public.
The Wrigley family helped build Chicago and remains one of its best-known dynasties. Wrigley's Michigan Avenue headquarters is one of the city's landmark buildings. The family's name is on everything from the Chicago Cubs baseball stadium to the Wrigleyville neighborhood to part of the new Millennium Park.
Mr. Buffett is famous for confidence in the staying power of iconic consumer brands such as Coca-Cola. Though he normally does deals without a partner, he has long admired Mars.
$22 Billion Deal Would Reshape Candy Industry
By MATTHEW KARNITSCHNIG and DENNIS K. BERMAN
April 28, 2008; Page A1
Mars Inc. and Warren Buffett's Berkshire Hathaway Inc. were close to a pact to acquire Wm. Wrigley Jr. Co. for more than $22 billion, according to people familiar with the matter, in a deal that would remake the global confectionery landscape.
A deal would unite two icons of the U.S. candy business: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.
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The transaction was expected to be announced as early as Monday, the people said. Both companies declined to comment.
Terms of the deal weren't immediately clear, but Wrigley has a stock market value of about $17.3 billion and it appeared that the buyers were prepared to offer a rich premium.
Under one scenario under discussion, Berkshire would likely provide financing to Mars for the deal and become a stakeholder in Wrigley, according to people close to the deal.
A deal would expand Mars's already considerable global reach. Wrigley generates the majority of its sales outside of the U.S. In recent years, it has expanded its offerings well beyond chewing gum. Mars is the world's largest maker of chocolate by sales, with a market share of 15%.
A deal could spark further consolidation in the global candy business. Hershey Co. and Cadbury Schweppes PLC, for example, could be forced to merge. The two discussed a deal last year, but talks fell apart. Cadbury in May will split off its beverage unit, which includes Dr Pepper and 7Up, potentially paving the way for a deal. Hershey has been hurt in recent years by competition from Mars, its longtime rival.
In 2005, Wrigley bought Kraft's candy assets, including Altoids and LifeSavers, for about $1.5 billion. Wrigley also recently purchased a Russian chocolate company. The family-controlled company was close to a deal to acquire Hershey Co. in 2002 for about $12.5 billion, but talks fell apart at the last moment.
A weak dollar and strong foreign demand have boosted Wrigley's profit recently. But the company has struggled in the U.S., where it faces intense competition.
Wrigley's products include Extra, Eclipse and Orbit gums.
If successful, a deal for Wrigley would bring together two companies controlled by intensely private dynasties: the Mars of northern Virginia and Wrigleys of Chicago. Following the death of patriarch Forrest Mars Sr. in 1999 at the age of 95, speculation grew that the company would be sold to Nestle SA or another global company, but Mars has held firm.
A sale would end Wrigley's independence. The company was founded in the late 19th century by William Wrigley Jr. As a boy, he ran away from Philadelphia to New York, where he hawked newspapers and slept on the street, according to a 1920 article in American Magazine. Years later he went to Chicago to peddle soap, then baking powder, to shop owners. To entice them, he gave away two packages of chewing gum with each can of baking powder. When the gum became more popular, he started selling that instead.
Soon he was making his own gum. Juicy Fruit hit shelves in 1893. By 1920, he was making nine billion sticks of gum a year and had become the world's largest advertiser of a single product. In 1923, the company went public.
The Wrigley family helped build Chicago and remains one of its best-known dynasties. Wrigley's Michigan Avenue headquarters is one of the city's landmark buildings. The family's name is on everything from the Chicago Cubs baseball stadium to the Wrigleyville neighborhood to part of the new Millennium Park.
Mr. Buffett is famous for confidence in the staying power of iconic consumer brands such as Coca-Cola. Though he normally does deals without a partner, he has long admired Mars.
Cash Before Chemo: Hospitals Get Tough
Cash Before Chemo: Hospitals Get Tough
Bad Debts Prompt Change in Billing; $45,000 to Come In
By BARBARA MARTINEZApril 28, 2008; Page A1
LAKE JACKSON, Texas -- When Lisa Kelly learned she had leukemia in late 2006, her doctor advised her to seek urgent care at M.D. Anderson Cancer Center in Houston. But the nonprofit hospital refused to accept Mrs. Kelly's limited insurance. It asked for $105,000 in cash before it would admit her.
Sitting in the hospital's business office, Mrs. Kelly says she told M.D. Anderson's representatives that she had some money to pay for treatment, but couldn't get all the cash they asked for that day. "Are they going to send me home?" she recalls thinking. "Am I going to die?"
A growing trend in the hospital industry means cancer patients like Lisa Kelly are being asked to pay cash upfront before receiving treatment.
Hospitals are adopting a policy to improve their finances: making medical care contingent on upfront payments. Typically, hospitals have billed people after they receive care. But now, pointing to their burgeoning bad-debt and charity-care costs, hospitals are asking patients for money before they get treated.
Hospitals say they have turned to the practice because of a spike in patients who don't pay their bills. Uncompensated care cost the hospital industry $31.2 billion in 2006, up 44% from $21.6 billion in 2000, according to the American Hospital Association.
The bad debt is driven by a larger number of Americans who are uninsured or who don't have enough insurance to cover medical costs if catastrophe strikes. Even among those with adequate insurance, deductibles and co-payments are growing so big that insured patients also have trouble paying hospitals.
FINANCIAL HEALTH
• The Issue: Hospitals are asking patients for payment before receiving treatment.
• The Background: Hospitals say the practice is needed because of an increase in the number of people not paying their bills.
• The Bottom Line: While hospitals provide care to the poor, uninsured and underinsured people are likely to be hardest hit.
Letting bad debt balloon unchecked would threaten hospitals' finances and their ability to provide care, says Richard Umbdenstock, president of the American Hospital Association. Hospitals would rather discuss costs with patients upfront, he says. "After, when it's an ugly surprise or becomes contentious, it doesn't work for anybody."
M.D. Anderson says it went to a new upfront-collection system for initial visits in 2005 after its unpaid patient bills jumped by $18 million to $52 million that year. The hospital said its increasing bad-debt load threatened its mission to cure cancer, a goal on which it spends hundreds of millions of dollars a year.
The change had the desired effect: The hospital's bad debt fell to $33 million the following year.
Asking patients to pay after they've received treatment is "like asking someone to pay for the car after they've driven off the lot," says John Tietjen, vice president for patient financial services at M.D. Anderson. "The time that the patient is most receptive is before the care is delivered."
M.D. Anderson says it provides assistance or free care to poor patients who can't afford treatment. It says it acted appropriately in Mrs. Kelly's case because she wasn't indigent, but underinsured. The hospital says it wouldn't accept her insurance because the payout, a maximum of $37,000 a year, would be less than 30% of the estimated costs of her care.
Tenet Healthcare and HCA, two big, for-profit hospital chains, say they have also been asking patients for upfront payments before admitting them. While the practice has received little notice, some patient advocates and health-care experts find it harder to justify at nonprofit hospitals, given their benevolent mission and improving financial fortunes.
In the Black
An Ohio State University study found net income per bed nearly tripled at nonprofit hospitals to $146,273 in 2005 from $50,669 in 2000. According to the American Hospital Directory, 77% of nonprofit hospitals are in the black, compared with 61% of for-profit hospitals. Nonprofit hospitals are exempt from taxes and are supposed to channel the income they generate back into their operations. Many have used their growing surpluses to reward their executives with rich pay packages, build new wings and accumulate large cash reserves.
M.D. Anderson, which is part of the University of Texas, is a nonprofit institution exempt from taxes. In 2007, it recorded net income of $310 million, bringing its cash, investments and endowment to nearly $1.9 billion.
"When you have that much money in the till and that much profit, it's kind of hard to say no" to sick patients by asking for money upfront, says Uwe Reinhardt, a health-care economist at Princeton University, who thinks all hospitals should pay taxes. Nonprofit organizations "shouldn't behave this way," he says.
It isn't clear how many of the nation's 2,033 nonprofit hospitals require upfront payments. A voluntary 2006 survey by the Internal Revenue Service found 14% of 481 nonprofit hospitals required patients to pay or make an arrangement to pay before being admitted. It was the first time the agency asked that question.
Nataline Sarkisyan, a 17-year-old cancer patient who died in December waiting for a liver transplant, drew national attention when former presidential candidate John Edwards lambasted her health insurer for refusing to pay for the operation. But what went largely unnoticed is that Ms. Sarkisyan's hospital, UCLA Medical Center, a nonprofit hospital that is part of the University of California system, refused to do the procedure after the insurance denial unless the family paid it $75,000 upfront, according to the family's lawyer, Tamar Arminak.
The family got that money together, but then the hospital demanded $300,000 to cover costs of caring for Nataline after surgery, Ms. Arminak says.
UCLA says it can't comment on the case because the family hasn't given its consent. A spokeswoman says UCLA doesn't have a specific policy regarding upfront payments, but works with patients on a case-by-case basis.
Federal law requires hospitals to treat emergencies, such as heart attacks or injuries from accidents. But the law doesn't cover conditions that aren't immediately life-threatening.
At the American Cancer Society, which runs call centers to help patients navigate financial problems, more people are saying they're being asked for large upfront payments by hospitals that they can't afford. "My greatest concern is that there are substantial numbers of people who need cancer care" who don't get it, "usually for financial reasons," says Otis Brawley, chief medical officer.
Mrs. Kelly's ordeal began in 2006, when she started bruising easily and was often tired. Her husband, Sam, nagged her to see a doctor.
A specialist in Lake Jackson, a town 50 miles from Houston, diagnosed Mrs. Kelly with acute leukemia, a cancer of the blood that can quickly turn fatal. The small cancer center in Lake Jackson refers acute leukemia patients to M.D. Anderson.
When Mrs. Kelly called M.D. Anderson to make an appointment, the hospital told her it wouldn't accept her insurance, a type called limited-benefit.
"When an insurer is going to pay the small amounts, we don't feel financially able to assume the risk," says M.D. Anderson's Mr. Tietjen.
An estimated one million Americans have limited-benefit plans. Usually less expensive than traditional plans, such insurance is popular among people like Mrs. Kelly who don't have health insurance through an employer.
Mrs. Kelly, 52, signed up for AARP's Medical Advantage plan, underwritten by UnitedHealth Group Inc., three years ago after she quit her job as a school-bus driver to help care for her mother. Her husband was retired after a career as a heavy-equipment operator. She says that at the time, she hardly ever went to the doctor. "I just thought I needed some kind of insurance policy because you never know what's going to happen," says Mrs. Kelly. She paid premiums of $185 a month.
A spokeswoman for UnitedHealth, one of the country's largest marketers of limited-benefit plans, says the plan is "meant to be a bridge or a gap filler." She says UnitedHealth has reimbursed Mrs. Kelly $38,478.36 for her medical costs. Because the hospital wouldn't accept her insurance, Mrs. Kelly paid bills herself, and submitted them to her insurer to get reimbursed.
See documents related to Mrs. Kelly's case.
• Mrs. Kelly's certificate of coverage through the AARP.
• Mrs. Kelly's May 2007 bill from M.D. Anderson.
• One of the letters Ms. Wallack sent on behalf of Mrs. Kelly, questioning some of M.D. Anderson's charges
• The hospital's response
• Letter from M.D. Anderson to Mrs. Kelly, regarding a refund for a misbilled item
• Collection notice sent to Mrs. Kelly
• Letter from M.D. Anderson offering a 10% discount for paying the balance in full by April 30.
M.D. Anderson viewed Mrs. Kelly as uninsured and told her she could get an appointment only if she brought a certified check for $45,000. The Kellys live comfortably, but didn't have that kind of cash on hand. They own an apartment building and a rental house that generate about $11,000 a month before taxes and maintenance costs. They also earn interest income of about $35,000 a year from two retirement accounts funded by inheritances left by Mrs. Kelly's mother and Mr. Kelly's father.
Mr. Kelly arranged to borrow the money from his father's trust, which was in probate proceedings. Mrs. Kelly says she told the hospital she had money for treatment, but didn't realize how high her medical costs would get.
The Kellys arrived at M.D. Anderson with a check for $45,000 on Dec. 6, 2006. After having blood drawn and a bone-marrow biopsy, the hospital oncologist wanted to admit Mrs. Kelly right away.
But the hospital demanded an additional $60,000 on the spot. It told her the $45,000 had paid for the lab tests, and it needed the additional cash as a down payment for her actual treatment.
In the hospital business office, Mrs. Kelly says she was crying, exhausted and confused.
The hospital eventually lowered its demand to $30,000. Mr. Kelly lost his cool. "What part don't you understand?" he recalls saying. "We don't have any more money today. Are you going to admit her or not?" The hospital says it was trying to work with Mrs. Kelly, to find an amount she could pay.
Mrs. Kelly was granted an "override" and admitted at 7 p.m.
Appointment 'Blocked'
After eight days, she emerged from the hospital. Chemotherapy would continue for more than a year, as would requests for upfront payments. At times, she arrived at the hospital and learned her appointment was "blocked." That meant she needed to go to the business office first and make a payment.
Lisa Kelly
One day, Mrs. Kelly says, nurses wouldn't change the chemotherapy bag in her pump until her husband made a new payment. She says she sat for an hour hooked up to a pump that beeped that it was out of medicine, until he returned with proof of payment.
A hospital spokesperson says "it is very difficult to imagine that a nursing staff would allow a patient to sit with a beeping pump until a receipt is presented." The hospital regrets if patients are inconvenienced by blocked appointments, she says, but it "is a necessary process to keep patients informed of their mounting bills and to continue dialog about financial obligations." She says appointments aren't blocked for patients who require urgent care.
Once, Mrs. Kelly says she was on an exam table awaiting her doctor, when he walked in with a representative from the business office. After arguing about money, she says the representative suggested moving her to another facility.
But the cancer center in Lake Jackson wouldn't take her back because it didn't have a blood bank or an infectious-disease specialist. "It risks a person's life by doing that [type of chemotherapy] at a small institution," says Emerardo Falcon Jr., of the Brazosport Cancer Center in Lake Jackson.
Ron Walters, an M.D. Anderson physician who gets involved in financial decisions about patients, says Mrs. Kelly's subsequent chemotherapy could have been handled locally. He says he is sorry if she was offended that the payment representative accompanied the doctor into the exam room, but it was an example of "a coordinated teamwork approach."
On TV one night, Mrs. Kelly saw a news segment about people who try to get patients' bills reduced. She contacted Holly Wallack, who is part of a group that works on contingency to reduce patients' bills; she keeps one-third of what she saves clients.
Ms. Wallack began firing off complaints to M.D. Anderson. She said Mrs. Kelly had been billed more than $360 for blood tests that most insurers pay $20 or less for, and up to $120 for saline pouches that cost less than $2 at retail.
On one bill, Mrs. Kelly was charged $20 for a pair of latex gloves. On another itemized bill, Ms. Wallack found this: CTH SIL 2M 7FX 25CM CLAMP A4356, for $314. It turned out to be a penis clamp, used to control incontinence.
M.D. Anderson's prices are reasonable compared with other hospitals, Mr. Tietjen says. The $20 price for the latex gloves, for example, takes into account the costs of acquiring and storing gloves, ones that are ripped and not used and ones used for patients who don't pay at all, he says. The charge for the penis clamp was a "clerical error" he says; a different type of catheter was used, but the hospital waived the charge. The hospital didn't reduce or waive other charges on Mrs. Kelly's bills.
Continuing Treatment
Mrs. Kelly is continuing her treatment at M.D. Anderson. In February, a new, more comprehensive insurance plan from Blue Cross Blue Shield that she has switched to started paying most of her new M.D. Anderson bills. But she is still personally responsible for $145,155.65 in bills incurred before February. She is paying $2,000 a month toward those. Last week, she learned that after being in remission for more than a year, her leukemia has returned.
M.D. Anderson is giving Blue Cross Blue Shield a 25% discount on the new bills. This month, the hospital offered Mrs. Kelly a 10% discount on her balance, but only if she pays $130,640.08 by this Wednesday, April 30. She is still hoping to get a bigger discount, though numerous requests have been denied. The hospital says it gives commercial insurers a bigger discount because they bring volume and they are less risky than people who pay on their own.
The hospital has urged Mrs. Kelly to sell assets. But she worries about losing her family's income and retirement savings. Mrs. Kelly says she wants to pay, but, suspicious of the charges she's seen, she says, "I want to pay what's fair."
Bad Debts Prompt Change in Billing; $45,000 to Come In
By BARBARA MARTINEZApril 28, 2008; Page A1
LAKE JACKSON, Texas -- When Lisa Kelly learned she had leukemia in late 2006, her doctor advised her to seek urgent care at M.D. Anderson Cancer Center in Houston. But the nonprofit hospital refused to accept Mrs. Kelly's limited insurance. It asked for $105,000 in cash before it would admit her.
Sitting in the hospital's business office, Mrs. Kelly says she told M.D. Anderson's representatives that she had some money to pay for treatment, but couldn't get all the cash they asked for that day. "Are they going to send me home?" she recalls thinking. "Am I going to die?"
A growing trend in the hospital industry means cancer patients like Lisa Kelly are being asked to pay cash upfront before receiving treatment.
Hospitals are adopting a policy to improve their finances: making medical care contingent on upfront payments. Typically, hospitals have billed people after they receive care. But now, pointing to their burgeoning bad-debt and charity-care costs, hospitals are asking patients for money before they get treated.
Hospitals say they have turned to the practice because of a spike in patients who don't pay their bills. Uncompensated care cost the hospital industry $31.2 billion in 2006, up 44% from $21.6 billion in 2000, according to the American Hospital Association.
The bad debt is driven by a larger number of Americans who are uninsured or who don't have enough insurance to cover medical costs if catastrophe strikes. Even among those with adequate insurance, deductibles and co-payments are growing so big that insured patients also have trouble paying hospitals.
FINANCIAL HEALTH
• The Issue: Hospitals are asking patients for payment before receiving treatment.
• The Background: Hospitals say the practice is needed because of an increase in the number of people not paying their bills.
• The Bottom Line: While hospitals provide care to the poor, uninsured and underinsured people are likely to be hardest hit.
Letting bad debt balloon unchecked would threaten hospitals' finances and their ability to provide care, says Richard Umbdenstock, president of the American Hospital Association. Hospitals would rather discuss costs with patients upfront, he says. "After, when it's an ugly surprise or becomes contentious, it doesn't work for anybody."
M.D. Anderson says it went to a new upfront-collection system for initial visits in 2005 after its unpaid patient bills jumped by $18 million to $52 million that year. The hospital said its increasing bad-debt load threatened its mission to cure cancer, a goal on which it spends hundreds of millions of dollars a year.
The change had the desired effect: The hospital's bad debt fell to $33 million the following year.
Asking patients to pay after they've received treatment is "like asking someone to pay for the car after they've driven off the lot," says John Tietjen, vice president for patient financial services at M.D. Anderson. "The time that the patient is most receptive is before the care is delivered."
M.D. Anderson says it provides assistance or free care to poor patients who can't afford treatment. It says it acted appropriately in Mrs. Kelly's case because she wasn't indigent, but underinsured. The hospital says it wouldn't accept her insurance because the payout, a maximum of $37,000 a year, would be less than 30% of the estimated costs of her care.
Tenet Healthcare and HCA, two big, for-profit hospital chains, say they have also been asking patients for upfront payments before admitting them. While the practice has received little notice, some patient advocates and health-care experts find it harder to justify at nonprofit hospitals, given their benevolent mission and improving financial fortunes.
In the Black
An Ohio State University study found net income per bed nearly tripled at nonprofit hospitals to $146,273 in 2005 from $50,669 in 2000. According to the American Hospital Directory, 77% of nonprofit hospitals are in the black, compared with 61% of for-profit hospitals. Nonprofit hospitals are exempt from taxes and are supposed to channel the income they generate back into their operations. Many have used their growing surpluses to reward their executives with rich pay packages, build new wings and accumulate large cash reserves.
M.D. Anderson, which is part of the University of Texas, is a nonprofit institution exempt from taxes. In 2007, it recorded net income of $310 million, bringing its cash, investments and endowment to nearly $1.9 billion.
"When you have that much money in the till and that much profit, it's kind of hard to say no" to sick patients by asking for money upfront, says Uwe Reinhardt, a health-care economist at Princeton University, who thinks all hospitals should pay taxes. Nonprofit organizations "shouldn't behave this way," he says.
It isn't clear how many of the nation's 2,033 nonprofit hospitals require upfront payments. A voluntary 2006 survey by the Internal Revenue Service found 14% of 481 nonprofit hospitals required patients to pay or make an arrangement to pay before being admitted. It was the first time the agency asked that question.
Nataline Sarkisyan, a 17-year-old cancer patient who died in December waiting for a liver transplant, drew national attention when former presidential candidate John Edwards lambasted her health insurer for refusing to pay for the operation. But what went largely unnoticed is that Ms. Sarkisyan's hospital, UCLA Medical Center, a nonprofit hospital that is part of the University of California system, refused to do the procedure after the insurance denial unless the family paid it $75,000 upfront, according to the family's lawyer, Tamar Arminak.
The family got that money together, but then the hospital demanded $300,000 to cover costs of caring for Nataline after surgery, Ms. Arminak says.
UCLA says it can't comment on the case because the family hasn't given its consent. A spokeswoman says UCLA doesn't have a specific policy regarding upfront payments, but works with patients on a case-by-case basis.
Federal law requires hospitals to treat emergencies, such as heart attacks or injuries from accidents. But the law doesn't cover conditions that aren't immediately life-threatening.
At the American Cancer Society, which runs call centers to help patients navigate financial problems, more people are saying they're being asked for large upfront payments by hospitals that they can't afford. "My greatest concern is that there are substantial numbers of people who need cancer care" who don't get it, "usually for financial reasons," says Otis Brawley, chief medical officer.
Mrs. Kelly's ordeal began in 2006, when she started bruising easily and was often tired. Her husband, Sam, nagged her to see a doctor.
A specialist in Lake Jackson, a town 50 miles from Houston, diagnosed Mrs. Kelly with acute leukemia, a cancer of the blood that can quickly turn fatal. The small cancer center in Lake Jackson refers acute leukemia patients to M.D. Anderson.
When Mrs. Kelly called M.D. Anderson to make an appointment, the hospital told her it wouldn't accept her insurance, a type called limited-benefit.
"When an insurer is going to pay the small amounts, we don't feel financially able to assume the risk," says M.D. Anderson's Mr. Tietjen.
An estimated one million Americans have limited-benefit plans. Usually less expensive than traditional plans, such insurance is popular among people like Mrs. Kelly who don't have health insurance through an employer.
Mrs. Kelly, 52, signed up for AARP's Medical Advantage plan, underwritten by UnitedHealth Group Inc., three years ago after she quit her job as a school-bus driver to help care for her mother. Her husband was retired after a career as a heavy-equipment operator. She says that at the time, she hardly ever went to the doctor. "I just thought I needed some kind of insurance policy because you never know what's going to happen," says Mrs. Kelly. She paid premiums of $185 a month.
A spokeswoman for UnitedHealth, one of the country's largest marketers of limited-benefit plans, says the plan is "meant to be a bridge or a gap filler." She says UnitedHealth has reimbursed Mrs. Kelly $38,478.36 for her medical costs. Because the hospital wouldn't accept her insurance, Mrs. Kelly paid bills herself, and submitted them to her insurer to get reimbursed.
See documents related to Mrs. Kelly's case.
• Mrs. Kelly's certificate of coverage through the AARP.
• Mrs. Kelly's May 2007 bill from M.D. Anderson.
• One of the letters Ms. Wallack sent on behalf of Mrs. Kelly, questioning some of M.D. Anderson's charges
• The hospital's response
• Letter from M.D. Anderson to Mrs. Kelly, regarding a refund for a misbilled item
• Collection notice sent to Mrs. Kelly
• Letter from M.D. Anderson offering a 10% discount for paying the balance in full by April 30.
M.D. Anderson viewed Mrs. Kelly as uninsured and told her she could get an appointment only if she brought a certified check for $45,000. The Kellys live comfortably, but didn't have that kind of cash on hand. They own an apartment building and a rental house that generate about $11,000 a month before taxes and maintenance costs. They also earn interest income of about $35,000 a year from two retirement accounts funded by inheritances left by Mrs. Kelly's mother and Mr. Kelly's father.
Mr. Kelly arranged to borrow the money from his father's trust, which was in probate proceedings. Mrs. Kelly says she told the hospital she had money for treatment, but didn't realize how high her medical costs would get.
The Kellys arrived at M.D. Anderson with a check for $45,000 on Dec. 6, 2006. After having blood drawn and a bone-marrow biopsy, the hospital oncologist wanted to admit Mrs. Kelly right away.
But the hospital demanded an additional $60,000 on the spot. It told her the $45,000 had paid for the lab tests, and it needed the additional cash as a down payment for her actual treatment.
In the hospital business office, Mrs. Kelly says she was crying, exhausted and confused.
The hospital eventually lowered its demand to $30,000. Mr. Kelly lost his cool. "What part don't you understand?" he recalls saying. "We don't have any more money today. Are you going to admit her or not?" The hospital says it was trying to work with Mrs. Kelly, to find an amount she could pay.
Mrs. Kelly was granted an "override" and admitted at 7 p.m.
Appointment 'Blocked'
After eight days, she emerged from the hospital. Chemotherapy would continue for more than a year, as would requests for upfront payments. At times, she arrived at the hospital and learned her appointment was "blocked." That meant she needed to go to the business office first and make a payment.
Lisa Kelly
One day, Mrs. Kelly says, nurses wouldn't change the chemotherapy bag in her pump until her husband made a new payment. She says she sat for an hour hooked up to a pump that beeped that it was out of medicine, until he returned with proof of payment.
A hospital spokesperson says "it is very difficult to imagine that a nursing staff would allow a patient to sit with a beeping pump until a receipt is presented." The hospital regrets if patients are inconvenienced by blocked appointments, she says, but it "is a necessary process to keep patients informed of their mounting bills and to continue dialog about financial obligations." She says appointments aren't blocked for patients who require urgent care.
Once, Mrs. Kelly says she was on an exam table awaiting her doctor, when he walked in with a representative from the business office. After arguing about money, she says the representative suggested moving her to another facility.
But the cancer center in Lake Jackson wouldn't take her back because it didn't have a blood bank or an infectious-disease specialist. "It risks a person's life by doing that [type of chemotherapy] at a small institution," says Emerardo Falcon Jr., of the Brazosport Cancer Center in Lake Jackson.
Ron Walters, an M.D. Anderson physician who gets involved in financial decisions about patients, says Mrs. Kelly's subsequent chemotherapy could have been handled locally. He says he is sorry if she was offended that the payment representative accompanied the doctor into the exam room, but it was an example of "a coordinated teamwork approach."
On TV one night, Mrs. Kelly saw a news segment about people who try to get patients' bills reduced. She contacted Holly Wallack, who is part of a group that works on contingency to reduce patients' bills; she keeps one-third of what she saves clients.
Ms. Wallack began firing off complaints to M.D. Anderson. She said Mrs. Kelly had been billed more than $360 for blood tests that most insurers pay $20 or less for, and up to $120 for saline pouches that cost less than $2 at retail.
On one bill, Mrs. Kelly was charged $20 for a pair of latex gloves. On another itemized bill, Ms. Wallack found this: CTH SIL 2M 7FX 25CM CLAMP A4356, for $314. It turned out to be a penis clamp, used to control incontinence.
M.D. Anderson's prices are reasonable compared with other hospitals, Mr. Tietjen says. The $20 price for the latex gloves, for example, takes into account the costs of acquiring and storing gloves, ones that are ripped and not used and ones used for patients who don't pay at all, he says. The charge for the penis clamp was a "clerical error" he says; a different type of catheter was used, but the hospital waived the charge. The hospital didn't reduce or waive other charges on Mrs. Kelly's bills.
Continuing Treatment
Mrs. Kelly is continuing her treatment at M.D. Anderson. In February, a new, more comprehensive insurance plan from Blue Cross Blue Shield that she has switched to started paying most of her new M.D. Anderson bills. But she is still personally responsible for $145,155.65 in bills incurred before February. She is paying $2,000 a month toward those. Last week, she learned that after being in remission for more than a year, her leukemia has returned.
M.D. Anderson is giving Blue Cross Blue Shield a 25% discount on the new bills. This month, the hospital offered Mrs. Kelly a 10% discount on her balance, but only if she pays $130,640.08 by this Wednesday, April 30. She is still hoping to get a bigger discount, though numerous requests have been denied. The hospital says it gives commercial insurers a bigger discount because they bring volume and they are less risky than people who pay on their own.
The hospital has urged Mrs. Kelly to sell assets. But she worries about losing her family's income and retirement savings. Mrs. Kelly says she wants to pay, but, suspicious of the charges she's seen, she says, "I want to pay what's fair."
台幣 在30～30.5元遊走
台幣 在30～30.5元遊走
更新日期:2008/04/28 07:40 記者黃琮淵台北報導
台北股市上周好不容易收復的9,000點大關，一下子又失守，新台幣也是「進一步、退兩步」，由前周收盤時的30.284元，上周五微貶至30.34元。匯銀人士表示，近期能炒作的題材有限，盤面上多是實質買賣需求，新台幣大漲、大跌都不容易，本周新台幣仍將介於30元至30.5元間來回震盪。
匯銀人士表示，外資最近雖然有進有出，但幅度都較選後來得小，雖陸客來台、兩岸直航等議題火紅，但具體成效得等新政府上台後才能見真章。匯市平穩的情況下，外資套利空間有限，預估本周匯市將延續過去三周的格局，區間狹幅波動。
資深匯銀主管表示，要想新台幣升值，好歹台股也要表現一下，不過就目前情況看來，台股難見到大行情，自然就無法奢望匯價有太大的波動，短期內難脫膠著走勢。
匯價不動如山，匯銀人士也提醒出口商，520前都是拋匯的「好時機」。他說，國際油價降不下來，520後油電價格將解除凍漲，到時候物價上漲的壓力就會引爆，央行為了平抑物價，「快又有效率」的作法，就是放手讓新台幣升值，以協助中油壓低購油成本。在這種考量下，新台幣易升難貶，出口商有必要提早因應。
此外，匯銀人士認為，在馬蕭上任後，一些利多措施可能相繼拋出，難免會帶動台股走強，一旦台股率先鳴槍起跑，新台幣匯價「跟上」的可能性也相對升高。加上美國聯邦準備理事會（Fed）可能再度降息1碼（0.25個百分點），如此舉帶動亞幣走強，到時候新台幣不升都不行，預估新台幣可能短空長多，520後爆發的可能性高。
匯銀人士說，外資除非大舉匯入，否則只要規模有限，對匯價的影響都不大，預估30元至30.5元兩端都是「銅牆鐵壁」，若無意外的話，520前大概都是這種盤局。
更新日期:2008/04/28 07:40 記者黃琮淵台北報導
台北股市上周好不容易收復的9,000點大關，一下子又失守，新台幣也是「進一步、退兩步」，由前周收盤時的30.284元，上周五微貶至30.34元。匯銀人士表示，近期能炒作的題材有限，盤面上多是實質買賣需求，新台幣大漲、大跌都不容易，本周新台幣仍將介於30元至30.5元間來回震盪。
匯銀人士表示，外資最近雖然有進有出，但幅度都較選後來得小，雖陸客來台、兩岸直航等議題火紅，但具體成效得等新政府上台後才能見真章。匯市平穩的情況下，外資套利空間有限，預估本周匯市將延續過去三周的格局，區間狹幅波動。
資深匯銀主管表示，要想新台幣升值，好歹台股也要表現一下，不過就目前情況看來，台股難見到大行情，自然就無法奢望匯價有太大的波動，短期內難脫膠著走勢。
匯價不動如山，匯銀人士也提醒出口商，520前都是拋匯的「好時機」。他說，國際油價降不下來，520後油電價格將解除凍漲，到時候物價上漲的壓力就會引爆，央行為了平抑物價，「快又有效率」的作法，就是放手讓新台幣升值，以協助中油壓低購油成本。在這種考量下，新台幣易升難貶，出口商有必要提早因應。
此外，匯銀人士認為，在馬蕭上任後，一些利多措施可能相繼拋出，難免會帶動台股走強，一旦台股率先鳴槍起跑，新台幣匯價「跟上」的可能性也相對升高。加上美國聯邦準備理事會（Fed）可能再度降息1碼（0.25個百分點），如此舉帶動亞幣走強，到時候新台幣不升都不行，預估新台幣可能短空長多，520後爆發的可能性高。
匯銀人士說，外資除非大舉匯入，否則只要規模有限，對匯價的影響都不大，預估30元至30.5元兩端都是「銅牆鐵壁」，若無意外的話，520前大概都是這種盤局。
羅傑斯：陸股觸底了 趕快買進
羅傑斯：陸股觸底了 趕快買進
更新日期:2008/04/28 07:40 編譯陳家齊彭博資訊二十七日電
儘管大陸股市是今年來表現最糟的市場之一，投資大師羅傑斯卻認為陸股已觸底而開始買進，尤其聚焦在農業、旅遊、航空與教育類股。
與索羅斯共同創立量子避險基金、並正確預測到1999年商品大多頭的羅傑斯，26日在北京一場研討會說：「我的新投資全都在商品與中國。」
羅傑斯說：「整個驚慌狀態看來就像是底部。過去四到五周我已經進場。」今年賣出陸股將是大錯特錯，他說：「我從未賣掉任何一張中國股票。」並表示也已買進新加坡、台灣與香港的股票。
羅傑斯說，他買進旅遊與教育類股，因為這兩個產業「在中國將繼續占主要地位」，其他投資標的包括航空、水與農產品業者。他說：「中國農業的問題很大。政府正竭盡所能復興農業。」
羅傑斯也強力看好人民幣，他認為人民幣對美元最終會漲到2比1的價位。「不要賣掉你的人民幣，未來20年內人民幣會更加飆高。」人民幣今年來對美元升值4%，2007年升值7%，25日收在7.01元兌1美元。
陸股規模在全球排名第四，投資人先前樂觀認為經濟成長將快速增加企業獲利，股市在到2007年的兩年內暴漲近500%。但由於市場猜測中共打壓通膨時會傷害企業獲利，指標性的滬深300指數（CSI 300）今年來曾大跌39%，一度成為全球表現第二糟的股市。
陸股大跌促使中共出面救市，24日起調降股票交易稅，當天股市應聲暴漲9.3%，創2001年10月23日以來最大單日漲幅，也使陸股上周寫下16%的漲幅。
然而有些分析師認為，陸股不太能就這樣救起來，摩根士丹利與瑞士信貸公司的分析師都把陸股評為「賣出」。摩根士丹利分析師婁剛與顧艾倫（音譯）在25日報告說：「由於收益正在減速，我們不認為這種漲勢可以持續。政府調降印花稅可能是黔驢技窮的跡象。」
瑞士信貸分析師陳昌華則在一份備忘錄中說，在香港上市的陸企「H股」會比用人民幣計價的「A股」有吸引力。
更新日期:2008/04/28 07:40 編譯陳家齊彭博資訊二十七日電
儘管大陸股市是今年來表現最糟的市場之一，投資大師羅傑斯卻認為陸股已觸底而開始買進，尤其聚焦在農業、旅遊、航空與教育類股。
與索羅斯共同創立量子避險基金、並正確預測到1999年商品大多頭的羅傑斯，26日在北京一場研討會說：「我的新投資全都在商品與中國。」
羅傑斯說：「整個驚慌狀態看來就像是底部。過去四到五周我已經進場。」今年賣出陸股將是大錯特錯，他說：「我從未賣掉任何一張中國股票。」並表示也已買進新加坡、台灣與香港的股票。
羅傑斯說，他買進旅遊與教育類股，因為這兩個產業「在中國將繼續占主要地位」，其他投資標的包括航空、水與農產品業者。他說：「中國農業的問題很大。政府正竭盡所能復興農業。」
羅傑斯也強力看好人民幣，他認為人民幣對美元最終會漲到2比1的價位。「不要賣掉你的人民幣，未來20年內人民幣會更加飆高。」人民幣今年來對美元升值4%，2007年升值7%，25日收在7.01元兌1美元。
陸股規模在全球排名第四，投資人先前樂觀認為經濟成長將快速增加企業獲利，股市在到2007年的兩年內暴漲近500%。但由於市場猜測中共打壓通膨時會傷害企業獲利，指標性的滬深300指數（CSI 300）今年來曾大跌39%，一度成為全球表現第二糟的股市。
陸股大跌促使中共出面救市，24日起調降股票交易稅，當天股市應聲暴漲9.3%，創2001年10月23日以來最大單日漲幅，也使陸股上周寫下16%的漲幅。
然而有些分析師認為，陸股不太能就這樣救起來，摩根士丹利與瑞士信貸公司的分析師都把陸股評為「賣出」。摩根士丹利分析師婁剛與顧艾倫（音譯）在25日報告說：「由於收益正在減速，我們不認為這種漲勢可以持續。政府調降印花稅可能是黔驢技窮的跡象。」
瑞士信貸分析師陳昌華則在一份備忘錄中說，在香港上市的陸企「H股」會比用人民幣計價的「A股」有吸引力。
Mars, Buffett Team Up in Wrigley Bid
Mars, Buffett Team Up in Wrigley Bid
$22 Billion Deal Would Reshape Candy Industry
By MATTHEW KARNITSCHNIG and DENNIS K. BERMANApril 28, 2008;
Page A1
Mars Inc. and Warren Buffett's Berkshire Hathaway Inc. were close to a pact to acquire Wm. Wrigley Jr. Co. for more than $22 billion, according to people familiar with the matter, in a deal that would remake the global confectionery landscape.
A deal would unite two icons of the U.S. candy business: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.
The transaction was expected to be announced as early as Monday, the people said. Both companies declined to comment.
Terms of the deal weren't immediately clear, but Wrigley has a stock market value of about $17.3 billion and it appeared that the buyers were prepared to offer a rich premium.
Under one scenario under discussion, Berkshire would likely provide financing to Mars for the deal and become a stakeholder in Wrigley, according to people close to the deal.
A deal would expand Mars's already considerable global reach. Wrigley generates the majority of its sales outside of the U.S. In recent years, it has expanded its offerings well beyond chewing gum. Mars is the world's largest maker of chocolate by sales, with a market share of 15%.
A deal could spark further consolidation in the global candy business. Hershey Co. and Cadbury Schweppes PLC, for example, could be forced to merge. The two discussed a deal last year, but talks fell apart. Cadbury in May will split off its beverage unit, which includes Dr Pepper and 7Up, potentially paving the way for a deal. Hershey has been hurt in recent years by competition from Mars, its longtime rival.
In 2005, Wrigley bought Kraft's candy assets, including Altoids and LifeSavers, for about $1.5 billion. Wrigley also recently purchased a Russian chocolate company. The family-controlled company was close to a deal to acquire Hershey Co. in 2002 for about $12.5 billion, but talks fell apart at the last moment.
A weak dollar and strong foreign demand have boosted Wrigley's profit recently. But the company has struggled in the U.S., where it faces intense competition.
Wrigley's products include Extra, Eclipse and Orbit gums.
If successful, a deal for Wrigley would bring together two companies controlled by intensely private dynasties: the Mars of northern Virginia and Wrigleys of Chicago. Following the death of patriarch Forrest Mars Sr. in 1999 at the age of 95, speculation grew that the company would be sold to Nestle SA or another global company, but Mars has held firm.
A sale would end Wrigley's independence. The company was founded in the late 19th century by William Wrigley Jr. As a boy, he ran away from Philadelphia to New York, where he hawked newspapers and slept on the street, according to a 1920 article in American Magazine. Years later he went to Chicago to peddle soap, then baking powder, to shop owners. To entice them, he gave away two packages of chewing gum with each can of baking powder. When the gum became more popular, he started selling that instead.
Soon he was making his own gum. Juicy Fruit hit shelves in 1893. By 1920, he was making nine billion sticks of gum a year and had become the world's largest advertiser of a single product. In 1923, the company went public.
The Wrigley family helped build Chicago and remains one of its best-known dynasties. Wrigley's Michigan Avenue headquarters is one of the city's landmark buildings. The family's name is on everything from the Chicago Cubs baseball stadium to the Wrigleyville neighborhood to part of the new Millennium Park.
Mr. Buffett is famous for confidence in the staying power of iconic consumer brands such as Coca-Cola. Though he normally does deals without a partner, he has long admired Mars.
$22 Billion Deal Would Reshape Candy Industry
By MATTHEW KARNITSCHNIG and DENNIS K. BERMANApril 28, 2008;
Page A1
Mars Inc. and Warren Buffett's Berkshire Hathaway Inc. were close to a pact to acquire Wm. Wrigley Jr. Co. for more than $22 billion, according to people familiar with the matter, in a deal that would remake the global confectionery landscape.
A deal would unite two icons of the U.S. candy business: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.
The transaction was expected to be announced as early as Monday, the people said. Both companies declined to comment.
Terms of the deal weren't immediately clear, but Wrigley has a stock market value of about $17.3 billion and it appeared that the buyers were prepared to offer a rich premium.
Under one scenario under discussion, Berkshire would likely provide financing to Mars for the deal and become a stakeholder in Wrigley, according to people close to the deal.
A deal would expand Mars's already considerable global reach. Wrigley generates the majority of its sales outside of the U.S. In recent years, it has expanded its offerings well beyond chewing gum. Mars is the world's largest maker of chocolate by sales, with a market share of 15%.
A deal could spark further consolidation in the global candy business. Hershey Co. and Cadbury Schweppes PLC, for example, could be forced to merge. The two discussed a deal last year, but talks fell apart. Cadbury in May will split off its beverage unit, which includes Dr Pepper and 7Up, potentially paving the way for a deal. Hershey has been hurt in recent years by competition from Mars, its longtime rival.
In 2005, Wrigley bought Kraft's candy assets, including Altoids and LifeSavers, for about $1.5 billion. Wrigley also recently purchased a Russian chocolate company. The family-controlled company was close to a deal to acquire Hershey Co. in 2002 for about $12.5 billion, but talks fell apart at the last moment.
A weak dollar and strong foreign demand have boosted Wrigley's profit recently. But the company has struggled in the U.S., where it faces intense competition.
Wrigley's products include Extra, Eclipse and Orbit gums.
If successful, a deal for Wrigley would bring together two companies controlled by intensely private dynasties: the Mars of northern Virginia and Wrigleys of Chicago. Following the death of patriarch Forrest Mars Sr. in 1999 at the age of 95, speculation grew that the company would be sold to Nestle SA or another global company, but Mars has held firm.
A sale would end Wrigley's independence. The company was founded in the late 19th century by William Wrigley Jr. As a boy, he ran away from Philadelphia to New York, where he hawked newspapers and slept on the street, according to a 1920 article in American Magazine. Years later he went to Chicago to peddle soap, then baking powder, to shop owners. To entice them, he gave away two packages of chewing gum with each can of baking powder. When the gum became more popular, he started selling that instead.
Soon he was making his own gum. Juicy Fruit hit shelves in 1893. By 1920, he was making nine billion sticks of gum a year and had become the world's largest advertiser of a single product. In 1923, the company went public.
The Wrigley family helped build Chicago and remains one of its best-known dynasties. Wrigley's Michigan Avenue headquarters is one of the city's landmark buildings. The family's name is on everything from the Chicago Cubs baseball stadium to the Wrigleyville neighborhood to part of the new Millennium Park.
Mr. Buffett is famous for confidence in the staying power of iconic consumer brands such as Coca-Cola. Though he normally does deals without a partner, he has long admired Mars.
Thursday, April 24, 2008
Economy, Credit Woes Halt Seattle Project
Economy, Credit Woes Foil Cities' Big Projects
By JENNIFER S. FORSYTH April 25, 2008
A proposed $7 billion downtown Seattle project has become the latest major urban development to be scotched or delayed because of the credit crisis and a faltering economy.
Seattle's Clise family is pulling a 13-acre property for sale for at least $600 million off the market, at least temporarily. The property was intended to be the catalyst for a project that would have totaled the square footage of as many as five Empire State Buildings, putting it on the scale of London's Canary Wharf or the former World Trade Center in New York.
The Seattle project joins other projects in New York, Phoenix, Atlanta and Las Vegas that have been shelved, scaled back or beset by financial problems in recent months. Many city officials hoped they would provide jobs and economic activity that could help make up for a housing-market downturn that still hasn't reached bottom.
In Seattle, Alfred M. Clise, the fourth-generation chief executive of Clise Properties Inc., said the family and the remaining potential buyer agreed it would be better to reexamine the possible sale after the credit markets settle. "It was a very positive environment. All the moons were aligned and things were happening all over the world," he said. "And then we lost that environment."
Mr. Clise declined to say with whom he was negotiating. A person familiar with the matter said it was Dubai's Emaar Properties PJSC, one of the largest real-estate developers in the Middle East. Emaar executives couldn't be reached for comment, and a spokeswoman declined to comment.
Office construction plunged 28% in March across the U.S., compared with February, despite the start of the $304 million office portion of a mixed-use project in Boston called Russia Wharf, according to an April report by McGraw-Hill Construction, a trade publication.
Included in the list of scaled back or delayed projects is a $14 billion grand plan to improve the area around Penn Station in Manhattan and build a new Madison Square Garden. Merrill Lynch & Co. backed out of plans to build an office tower at the site of the current Hotel Pennsylvania. Nearby, Cablevision Systems Corp., the owner of the Garden, decided against moving to a new site in the Farley Post Office across the street.
Meanwhile, Related Cos., the closely held development company founded by real-estate billionaire Stephen Ross, pushed back the debut of the second phase of its $1 billion CityNorth project in Phoenix by a year to late 2010. In Las Vegas, Deutsche Bank AG is moving to foreclose on the $3.9 billion Cosmopolitan Resort Casino, although work is continuing on that project.
Beginning Construction
One project being watched closely is Atlantic Yards, a $4 billion development that Forest City Ratner Cos. is building on 22 acres in Brooklyn, N.Y. After a number of court battles, the developer plans to finally begin construction on a new arena for the New Jersey Nets basketball team by the end of this year.
However, the schedule for its planned office tower, called Miss Brooklyn, likely be will pushed back until an anchor tenant is signed given the current market conditions, says Loren Riegelhaupt, a Forest City spokesman. He stresses that the entire project eventually will be built. "It's not a question of if, but when."
To be sure, many major projects continue unabated, particularly those for which the financing is less dependent on the U.S. debt markets.
Lee Polisano, president of Kohn Pedersen Fox, an architectural firm involved in some of the biggest projects across the globe, said there's been little slowdown, if any, on developments in Asia and the Middle East.
'No Shortage of Capital'
"A lot of them are financed already," he said. "Certainly, in the Middle East, in places like Abu Dhabi and Qatar, there's no shortage of capital and there is a big government program and a private-sector program to do buildings."
Canadian developer WAM Development Group announced this week a $3 billion project near the Calgary airport. But WAM is relying entirely on equity financing from its partner, Alberta Investment Management Corp., a Canadian pension fund, and the Calgary area is still booming thanks to its heavy reliance on oil and gas companies.
"The drivers of our economy are a little different than generally what other people are exposed to," says Tim Hogan, a WAM senior vice president.
Developers often begin planning megaprojects towards the tail end of solid real-estate markets. Cheap debt and ample equity help push values to record prices, spurring developers to push grandiose mixed-use projects -- with office skyscrapers, high-rise luxury condominiums, trendy restaurants and chain retailers -- in city after city.
The current downturn is particularly damaging to grandiose plans because so many of them rely heavily on debt financing. That's something difficult to come by these days as major financial institutions struggle with huge losses from the commercial real-estate debt they've been unable to move off of their books.
Even deep-pocketed investors usually plan to borrow heavily to jack up their returns. "When debt is not readily available, even well-capitalized offshore groups, are going to take a step back," says Michel Seifer, managing director for Jones Lang LaSalle, a real-estate brokerage, management and services firm.
It was the prospect of well-funded foreign investors, who perhaps weren't as reliant on Wall Street for funding, that made Mr. Clise and his advisers believe, until recently, that the Seattle transaction might still get done. "We were hopeful that there were players who didn't need to be involved in financing. And there are groups out there like that," says Mr. Clise. "But we learned that in the real-estate world, people look to the credit markets. For a deal of this size, requiring a long period of time and many billions of dollars to build it out, you're going to be dealing in debt."
Perhaps no project had the potential to change the landscape of a city more than the Clise property. Set in a city of 500,000 and coming in at as many as 14 million square feet of office, retail and residential space, it would have had an outsized impact compared with the crowded skylines of New York and London.
The Denny Triangle
The Clise family had assembled the 13 contiguous acres in an area called the Denny Triangle after a fire destroyed much of the Seattle downtown in 1889. After decades of rebuffing any interested buyers, Mr. Clise stunned the city's real-estate market in June by announcing that the family company would sell the land en masse to a developer that had the vision to transform the city center over the next 20 years.
Jones Lang LaSalle, the broker hired by the family to market the project internationally, conducted more than 60 tours from potential bidders and received 15 final submissions to purchase, some of which showed interest in having the Clise family participate in the development. Emaar was selected and both sides began to discuss terms for a possible sale, said the person familiar with the matter.
Debt Markets Shut Down
However, by that time, the subprime-mortgage crisis had crippled Wall Street, forcing large financing institutions to write down billions of dollars in bad debts. Debt markets shut down, not just for large real-estate deals, but for all manner of transactions. Wall Street's merger frenzy skidded to a halt and many potential acquisitions were canceled or limped to the finish line.
Nonetheless, Clise Properties and its brokers continued to negotiate, hoping that a deal could get done. They kept going partly because Seattle's commercial real-estate market remains one of the country's strongest and home prices have held up relatively well, thanks to continued job growth.
But, in the past few weeks, it became apparent to both sides that the situation in the debt markets would not turn around quickly. In this environment, the larger the transaction, the more difficult it is to raise money, says Mr. Seifer, managing director for Jones Lang LaSalle. "And then you add on to that the inherent risk in development, it makes these large-scale projects that much more difficult."
Mr. Clise says he believes the downtown project will happen -- "just not now." He adds that the family remains committed to keeping the property intact. "We're not going to destroy the value of the assemblage as a whole by breaking it up. That would be a mistake."
By JENNIFER S. FORSYTH April 25, 2008
A proposed $7 billion downtown Seattle project has become the latest major urban development to be scotched or delayed because of the credit crisis and a faltering economy.
Seattle's Clise family is pulling a 13-acre property for sale for at least $600 million off the market, at least temporarily. The property was intended to be the catalyst for a project that would have totaled the square footage of as many as five Empire State Buildings, putting it on the scale of London's Canary Wharf or the former World Trade Center in New York.
The Seattle project joins other projects in New York, Phoenix, Atlanta and Las Vegas that have been shelved, scaled back or beset by financial problems in recent months. Many city officials hoped they would provide jobs and economic activity that could help make up for a housing-market downturn that still hasn't reached bottom.
In Seattle, Alfred M. Clise, the fourth-generation chief executive of Clise Properties Inc., said the family and the remaining potential buyer agreed it would be better to reexamine the possible sale after the credit markets settle. "It was a very positive environment. All the moons were aligned and things were happening all over the world," he said. "And then we lost that environment."
Mr. Clise declined to say with whom he was negotiating. A person familiar with the matter said it was Dubai's Emaar Properties PJSC, one of the largest real-estate developers in the Middle East. Emaar executives couldn't be reached for comment, and a spokeswoman declined to comment.
Office construction plunged 28% in March across the U.S., compared with February, despite the start of the $304 million office portion of a mixed-use project in Boston called Russia Wharf, according to an April report by McGraw-Hill Construction, a trade publication.
Included in the list of scaled back or delayed projects is a $14 billion grand plan to improve the area around Penn Station in Manhattan and build a new Madison Square Garden. Merrill Lynch & Co. backed out of plans to build an office tower at the site of the current Hotel Pennsylvania. Nearby, Cablevision Systems Corp., the owner of the Garden, decided against moving to a new site in the Farley Post Office across the street.
Meanwhile, Related Cos., the closely held development company founded by real-estate billionaire Stephen Ross, pushed back the debut of the second phase of its $1 billion CityNorth project in Phoenix by a year to late 2010. In Las Vegas, Deutsche Bank AG is moving to foreclose on the $3.9 billion Cosmopolitan Resort Casino, although work is continuing on that project.
Beginning Construction
One project being watched closely is Atlantic Yards, a $4 billion development that Forest City Ratner Cos. is building on 22 acres in Brooklyn, N.Y. After a number of court battles, the developer plans to finally begin construction on a new arena for the New Jersey Nets basketball team by the end of this year.
However, the schedule for its planned office tower, called Miss Brooklyn, likely be will pushed back until an anchor tenant is signed given the current market conditions, says Loren Riegelhaupt, a Forest City spokesman. He stresses that the entire project eventually will be built. "It's not a question of if, but when."
To be sure, many major projects continue unabated, particularly those for which the financing is less dependent on the U.S. debt markets.
Lee Polisano, president of Kohn Pedersen Fox, an architectural firm involved in some of the biggest projects across the globe, said there's been little slowdown, if any, on developments in Asia and the Middle East.
'No Shortage of Capital'
"A lot of them are financed already," he said. "Certainly, in the Middle East, in places like Abu Dhabi and Qatar, there's no shortage of capital and there is a big government program and a private-sector program to do buildings."
Canadian developer WAM Development Group announced this week a $3 billion project near the Calgary airport. But WAM is relying entirely on equity financing from its partner, Alberta Investment Management Corp., a Canadian pension fund, and the Calgary area is still booming thanks to its heavy reliance on oil and gas companies.
"The drivers of our economy are a little different than generally what other people are exposed to," says Tim Hogan, a WAM senior vice president.
Developers often begin planning megaprojects towards the tail end of solid real-estate markets. Cheap debt and ample equity help push values to record prices, spurring developers to push grandiose mixed-use projects -- with office skyscrapers, high-rise luxury condominiums, trendy restaurants and chain retailers -- in city after city.
The current downturn is particularly damaging to grandiose plans because so many of them rely heavily on debt financing. That's something difficult to come by these days as major financial institutions struggle with huge losses from the commercial real-estate debt they've been unable to move off of their books.
Even deep-pocketed investors usually plan to borrow heavily to jack up their returns. "When debt is not readily available, even well-capitalized offshore groups, are going to take a step back," says Michel Seifer, managing director for Jones Lang LaSalle, a real-estate brokerage, management and services firm.
It was the prospect of well-funded foreign investors, who perhaps weren't as reliant on Wall Street for funding, that made Mr. Clise and his advisers believe, until recently, that the Seattle transaction might still get done. "We were hopeful that there were players who didn't need to be involved in financing. And there are groups out there like that," says Mr. Clise. "But we learned that in the real-estate world, people look to the credit markets. For a deal of this size, requiring a long period of time and many billions of dollars to build it out, you're going to be dealing in debt."
Perhaps no project had the potential to change the landscape of a city more than the Clise property. Set in a city of 500,000 and coming in at as many as 14 million square feet of office, retail and residential space, it would have had an outsized impact compared with the crowded skylines of New York and London.
The Denny Triangle
The Clise family had assembled the 13 contiguous acres in an area called the Denny Triangle after a fire destroyed much of the Seattle downtown in 1889. After decades of rebuffing any interested buyers, Mr. Clise stunned the city's real-estate market in June by announcing that the family company would sell the land en masse to a developer that had the vision to transform the city center over the next 20 years.
Jones Lang LaSalle, the broker hired by the family to market the project internationally, conducted more than 60 tours from potential bidders and received 15 final submissions to purchase, some of which showed interest in having the Clise family participate in the development. Emaar was selected and both sides began to discuss terms for a possible sale, said the person familiar with the matter.
Debt Markets Shut Down
However, by that time, the subprime-mortgage crisis had crippled Wall Street, forcing large financing institutions to write down billions of dollars in bad debts. Debt markets shut down, not just for large real-estate deals, but for all manner of transactions. Wall Street's merger frenzy skidded to a halt and many potential acquisitions were canceled or limped to the finish line.
Nonetheless, Clise Properties and its brokers continued to negotiate, hoping that a deal could get done. They kept going partly because Seattle's commercial real-estate market remains one of the country's strongest and home prices have held up relatively well, thanks to continued job growth.
But, in the past few weeks, it became apparent to both sides that the situation in the debt markets would not turn around quickly. In this environment, the larger the transaction, the more difficult it is to raise money, says Mr. Seifer, managing director for Jones Lang LaSalle. "And then you add on to that the inherent risk in development, it makes these large-scale projects that much more difficult."
Mr. Clise says he believes the downtown project will happen -- "just not now." He adds that the family remains committed to keeping the property intact. "We're not going to destroy the value of the assemblage as a whole by breaking it up. That would be a mistake."
Warren Buffett Going Global: Becky's Video Diary
Warren Buffett Going Global: Becky's Video Diary
http://www.cnbc.com/id/22026138
http://www.cnbc.com/id/22026138
Wednesday, April 23, 2008
Is This a Good Time to Invest in Gold?
Is This a Good Time to Invest in Gold?
By ELEANOR LAISEApril 23, 2008; Page D2
Q: Is this a good time to invest in gold or will I be buying at the peak? Can you name two gold mutual funds with good long-term performance and reasonable fees/expenses?
--Vikas Mehta, Fairfax, Va.
A: Gold has jumped about 35% over the past year, to $922 an ounce, and if U.S. dollar weakness and geopolitical tensions continue, it may well move higher from here. Two exchange-traded funds, iShares Comex Gold and streetTracks Gold Shares, are designed to track the price performance of gold bullion, minus fees, and they both charge reasonable expenses of 0.4%. But the yellow metal is an extremely volatile investment, and it has failed to keep pace with inflation in recent decades. Many advisers recommend a small, long-term allocation to a broad commodities fund that includes gold rather than a stand-alone bet on bullion. One option: The Pimco CommodityRealReturn Strategy Fund. This fund holds inflation-indexed bonds as well as derivatives linked to the Dow Jones-AIG Commodity Index, which gives a roughly 7% weighting to gold.
By ELEANOR LAISEApril 23, 2008; Page D2
Q: Is this a good time to invest in gold or will I be buying at the peak? Can you name two gold mutual funds with good long-term performance and reasonable fees/expenses?
--Vikas Mehta, Fairfax, Va.
A: Gold has jumped about 35% over the past year, to $922 an ounce, and if U.S. dollar weakness and geopolitical tensions continue, it may well move higher from here. Two exchange-traded funds, iShares Comex Gold and streetTracks Gold Shares, are designed to track the price performance of gold bullion, minus fees, and they both charge reasonable expenses of 0.4%. But the yellow metal is an extremely volatile investment, and it has failed to keep pace with inflation in recent decades. Many advisers recommend a small, long-term allocation to a broad commodities fund that includes gold rather than a stand-alone bet on bullion. One option: The Pimco CommodityRealReturn Strategy Fund. This fund holds inflation-indexed bonds as well as derivatives linked to the Dow Jones-AIG Commodity Index, which gives a roughly 7% weighting to gold.
If You Doubt Google, Make Leap of Faith; Stock Is Good Value
If You Doubt Google, Make Leap of Faith; Stock Is Good Value
By JAMES B. STEWARTApril 23, 2008; Page D3
From the day in 2004 they issued their "Owners Manual," Google founders Larry Page and Sergey Brin have been perfectly clear: "Google is not a conventional company. We do not intend to become one."
They pledged to make no efforts to placate Wall Street and its analysts by "smoothing" quarterly results. They offered no quarterly guidance or efforts to reduce earnings surprises by making profit and revenue forecasts. They wrote: "A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour." They were interested in long-term shareholders, not speculators or traders. So what did they get?
Speculators and traders.
After going public in 2004 at just $85 a share in a populist Dutch auction, Google shares nearly hit $750 in November. By mid-March, they were at $412, a stunning drop of $338 a share, or 45%, the steepest in Google's brief history.
The cause of this wave of selling? An Internet-measurement firm, comScore, began issuing estimates that growth in Google's paid clicks was declining, reaching just 2% in the U.S. That's all it took: a mere estimate from a third party most people had never heard of along with vague fears of a looming recession.
Good riddance to those fair-weather shareholders who sold on such flimsy evidence.
The Google faithful never joined the stampede, and I count myself among them. On the contrary, as a long-term shareholder, I used the decline to buy more Google shares, as I exhorted readers to do, most recently in February. Last week, Google reported much better-than-expected earnings and said paid clicks actually increased 20%. As Google Chief Executive Eric Schmidt put it, "paid click growth has been much higher than has been speculated by third parties."
The stock price leapt $90 Friday, Google's biggest one-day gain ever. All too predictably, the Wall Street analysts who had put such store in the comScore reports are now blaming Google for not giving them more guidance -- which is exactly what Google has said it won't do.
I'm not blind to the fact that Google cannot keep growing forever at double-digit rates. But the long-term case for Google isn't based on paid clicks or traditional advertising. Google has created a radical new advertising model in which clicks can be linked directly to purchases. Call this click fulfillment. This is so valuable that I've heard advertisers say they would pay far more for this than they currently do under Google's auction-price system. You could argue that it's especially valuable in a recession, when the yield on advertising spending is even more critical.
Google gained even more market share in Internet search last month. But apart from dominating its core ad-search business, Google has other long-term virtues. The migration of advertising to the Internet is still in its infancy. Google's acquisition of DoubleClick will enhance its capacity in display advertising and offer advertisers a comprehensive, one-stop approach to Internet-ad spending. Google's YouTube video service grows more ubiquitous by the day. Someday Google will find a way to monetize this remarkable asset, just as it did Internet search.
Even after the price run-up last week, Google shares represent good value. They've gained about 10% since I last recommended them, but if you believe in Google's long-term prospects as I do, and are prepared to stay the course, that 10% will eventually seem insignificant.
After this year's experience, perhaps investors will finally begin to take the Google manifesto seriously. Messrs. Brin and Page were ridiculed by cynics on Wall Street and in the media for talking about creativity, challenge, innovation, risk and "making the world a better place." Perhaps this does require a leap of faith. If so, Google deserves shareholders willing to make it.
By JAMES B. STEWARTApril 23, 2008; Page D3
From the day in 2004 they issued their "Owners Manual," Google founders Larry Page and Sergey Brin have been perfectly clear: "Google is not a conventional company. We do not intend to become one."
They pledged to make no efforts to placate Wall Street and its analysts by "smoothing" quarterly results. They offered no quarterly guidance or efforts to reduce earnings surprises by making profit and revenue forecasts. They wrote: "A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour." They were interested in long-term shareholders, not speculators or traders. So what did they get?
Speculators and traders.
After going public in 2004 at just $85 a share in a populist Dutch auction, Google shares nearly hit $750 in November. By mid-March, they were at $412, a stunning drop of $338 a share, or 45%, the steepest in Google's brief history.
The cause of this wave of selling? An Internet-measurement firm, comScore, began issuing estimates that growth in Google's paid clicks was declining, reaching just 2% in the U.S. That's all it took: a mere estimate from a third party most people had never heard of along with vague fears of a looming recession.
Good riddance to those fair-weather shareholders who sold on such flimsy evidence.
The Google faithful never joined the stampede, and I count myself among them. On the contrary, as a long-term shareholder, I used the decline to buy more Google shares, as I exhorted readers to do, most recently in February. Last week, Google reported much better-than-expected earnings and said paid clicks actually increased 20%. As Google Chief Executive Eric Schmidt put it, "paid click growth has been much higher than has been speculated by third parties."
The stock price leapt $90 Friday, Google's biggest one-day gain ever. All too predictably, the Wall Street analysts who had put such store in the comScore reports are now blaming Google for not giving them more guidance -- which is exactly what Google has said it won't do.
I'm not blind to the fact that Google cannot keep growing forever at double-digit rates. But the long-term case for Google isn't based on paid clicks or traditional advertising. Google has created a radical new advertising model in which clicks can be linked directly to purchases. Call this click fulfillment. This is so valuable that I've heard advertisers say they would pay far more for this than they currently do under Google's auction-price system. You could argue that it's especially valuable in a recession, when the yield on advertising spending is even more critical.
Google gained even more market share in Internet search last month. But apart from dominating its core ad-search business, Google has other long-term virtues. The migration of advertising to the Internet is still in its infancy. Google's acquisition of DoubleClick will enhance its capacity in display advertising and offer advertisers a comprehensive, one-stop approach to Internet-ad spending. Google's YouTube video service grows more ubiquitous by the day. Someday Google will find a way to monetize this remarkable asset, just as it did Internet search.
Even after the price run-up last week, Google shares represent good value. They've gained about 10% since I last recommended them, but if you believe in Google's long-term prospects as I do, and are prepared to stay the course, that 10% will eventually seem insignificant.
After this year's experience, perhaps investors will finally begin to take the Google manifesto seriously. Messrs. Brin and Page were ridiculed by cynics on Wall Street and in the media for talking about creativity, challenge, innovation, risk and "making the world a better place." Perhaps this does require a leap of faith. If so, Google deserves shareholders willing to make it.
Street Seeks Credit-Default Safety Net
Street Seeks Credit-Default Safety Net
Banks, Exchanges Speed Effort to Launch Clearinghouse to Back Derivatives Swaps
By SERENA NG and AARON LUCCHETTI
April 24, 2008
Wall Street is trying to tame the Wild West credit-default-swaps market.
More than a dozen firms including investment banks, brokerage firms and futures exchanges are accelerating efforts to create a clearing entity that would function as the middleman between firms on both sides of a credit-default swap. The clearinghouse would guarantee payment on the contracts it handles, reducing the risk of a catastrophic ripple effect if one or more firms were unable to make good on their trades.
CHART
• The current system and proposal
Behind the push is growing worry about the runaway popularity of credit derivatives. The volume of credit-default swaps, which are private financial contracts that act as a form of insurance against bond and loan defaults, has surged to new highs. But last month's near collapse of Bear Stearns Cos. underscored the vulnerability of other firms that had trades with the Wall Street firm.
Plans call for the credit-default-swaps clearinghouse to be operated by Clearing Corp., a Chicago futures-clearing firm that is backed by Goldman Sachs Group Inc., Citigroup Inc., J.P. Morgan Chase & Co., Deutsche Bank AG, German-Swiss futures exchange Eurex AG and other financial-services firms. The project is likely to be launched in the second half of 2008.
Supporters say the operation would back the obligations of credit-default swaps, standing between dealers in such trades, just as clearinghouses now do for a wide variety of other investments. The behind-the-scenes clearing business is a lucrative and fast-growing area of Wall Street, especially for exchange operators.
Regulators also believe that a "central counterparty" could reduce the risk of a financial epidemic triggered by problems at one financial institution. Barclays Capital earlier this year estimated the failure of a major credit-derivatives player could lead to losses of $36 billion to $47 billion across the financial system.
But the inherent lack of transparency in the largely unregulated credit-derivatives market could make the task difficult. Unlike the stock, futures and options markets, where market prices of securities and contracts are widely available, credit-default swaps trade "over the counter" -- or away from exchanges -- and prices can vary from firm to firm.
For years, Wall Street firms preferred that system as a way to foster innovation and profits. But the centralized clearing system will require timely and accurate pricing data to determine how much margin it needs to collect in order to protect itself from a trading firm's default.
"If you can't value an instrument properly over time, you can't intelligently clear these trades," says Michael Greenberger, a professor at the University of Maryland law school and a former senior official at the Commodity Futures Trading Commission.
Collecting Prices
Hoping to overcome the pricing problems, Clearing Corp. is working with Markit Group, which collects credit-default-swap prices from multiple firms. It also plans to initially clear trades for indexes of credit-default swaps, which have terms that are more standardized than swaps on individual bonds.
"We are intent on maintaining a vibrant over-the-counter market for credit-default swaps," says Athanassios Diplas, chief risk officer for global credit trading at Deutsche Bank.
Under the Clearing Corp. plan, participating dealers would each put money in a fund to help cover trading losses if any one firm fails. To protect itself, the clearinghouse will require margin from each firm and could request more collateral based on market moves. Industry participants have been working on the plan for about a year and hope to hammer out details in time to clear trades this year.
For most of its history, Clearing Corp. cleared Treasury and other futures contracts for the Chicago Board of Trade. It lost that business in 2003 when CBOT moved its clearing to the Chicago Mercantile Exchange.
Clearing Corp. has since expanded from exchange-listed futures to the over-the-counter market. Last year, it restructured its shareholder base, adding some holders that specialize in over-the-counter trading.
Meanwhile, CME Group Inc., which now owns the Chicago Merc and the Chicago Board of Trade, also wants to expand into the bigger over-the-counter market. In March, it bought Credit Market Analysis Ltd., a credit-derivatives-data provider. "We view that as an entree" into credit-derivatives trading or clearing, says Craig Donohue, the exchange company's CEO.
Bank Discussions
CME has talked to banks about getting involved in the market, but Mr. Donohue declines to say which ones. The CME could proceed on its own or by collaborating with other market participants, he says.
NYSE Euronext, which owns the New York Stock Exchange, is exploring a new business reporting trades and price data in the over-the-counter derivatives market, but it hasn't yet pushed toward clearing trades.
If Wall Street doesn't take steps to contain the risks created by credit-default swaps, some industry experts are worried that regulators could force more business onto centralized clearing systems, instead of keeping them voluntary.
Banks, Exchanges Speed Effort to Launch Clearinghouse to Back Derivatives Swaps
By SERENA NG and AARON LUCCHETTI
April 24, 2008
Wall Street is trying to tame the Wild West credit-default-swaps market.
More than a dozen firms including investment banks, brokerage firms and futures exchanges are accelerating efforts to create a clearing entity that would function as the middleman between firms on both sides of a credit-default swap. The clearinghouse would guarantee payment on the contracts it handles, reducing the risk of a catastrophic ripple effect if one or more firms were unable to make good on their trades.
CHART
• The current system and proposal
Behind the push is growing worry about the runaway popularity of credit derivatives. The volume of credit-default swaps, which are private financial contracts that act as a form of insurance against bond and loan defaults, has surged to new highs. But last month's near collapse of Bear Stearns Cos. underscored the vulnerability of other firms that had trades with the Wall Street firm.
Plans call for the credit-default-swaps clearinghouse to be operated by Clearing Corp., a Chicago futures-clearing firm that is backed by Goldman Sachs Group Inc., Citigroup Inc., J.P. Morgan Chase & Co., Deutsche Bank AG, German-Swiss futures exchange Eurex AG and other financial-services firms. The project is likely to be launched in the second half of 2008.
Supporters say the operation would back the obligations of credit-default swaps, standing between dealers in such trades, just as clearinghouses now do for a wide variety of other investments. The behind-the-scenes clearing business is a lucrative and fast-growing area of Wall Street, especially for exchange operators.
Regulators also believe that a "central counterparty" could reduce the risk of a financial epidemic triggered by problems at one financial institution. Barclays Capital earlier this year estimated the failure of a major credit-derivatives player could lead to losses of $36 billion to $47 billion across the financial system.
But the inherent lack of transparency in the largely unregulated credit-derivatives market could make the task difficult. Unlike the stock, futures and options markets, where market prices of securities and contracts are widely available, credit-default swaps trade "over the counter" -- or away from exchanges -- and prices can vary from firm to firm.
For years, Wall Street firms preferred that system as a way to foster innovation and profits. But the centralized clearing system will require timely and accurate pricing data to determine how much margin it needs to collect in order to protect itself from a trading firm's default.
"If you can't value an instrument properly over time, you can't intelligently clear these trades," says Michael Greenberger, a professor at the University of Maryland law school and a former senior official at the Commodity Futures Trading Commission.
Collecting Prices
Hoping to overcome the pricing problems, Clearing Corp. is working with Markit Group, which collects credit-default-swap prices from multiple firms. It also plans to initially clear trades for indexes of credit-default swaps, which have terms that are more standardized than swaps on individual bonds.
"We are intent on maintaining a vibrant over-the-counter market for credit-default swaps," says Athanassios Diplas, chief risk officer for global credit trading at Deutsche Bank.
Under the Clearing Corp. plan, participating dealers would each put money in a fund to help cover trading losses if any one firm fails. To protect itself, the clearinghouse will require margin from each firm and could request more collateral based on market moves. Industry participants have been working on the plan for about a year and hope to hammer out details in time to clear trades this year.
For most of its history, Clearing Corp. cleared Treasury and other futures contracts for the Chicago Board of Trade. It lost that business in 2003 when CBOT moved its clearing to the Chicago Mercantile Exchange.
Clearing Corp. has since expanded from exchange-listed futures to the over-the-counter market. Last year, it restructured its shareholder base, adding some holders that specialize in over-the-counter trading.
Meanwhile, CME Group Inc., which now owns the Chicago Merc and the Chicago Board of Trade, also wants to expand into the bigger over-the-counter market. In March, it bought Credit Market Analysis Ltd., a credit-derivatives-data provider. "We view that as an entree" into credit-derivatives trading or clearing, says Craig Donohue, the exchange company's CEO.
Bank Discussions
CME has talked to banks about getting involved in the market, but Mr. Donohue declines to say which ones. The CME could proceed on its own or by collaborating with other market participants, he says.
NYSE Euronext, which owns the New York Stock Exchange, is exploring a new business reporting trades and price data in the over-the-counter derivatives market, but it hasn't yet pushed toward clearing trades.
If Wall Street doesn't take steps to contain the risks created by credit-default swaps, some industry experts are worried that regulators could force more business onto centralized clearing systems, instead of keeping them voluntary.
Inflation Stalks Emerging Markets
Inflation Stalks Emerging Markets
Rising Prices Seen As Greater Threat Than U.S. Ripples
By JOANNA SLATER
April 24, 2008; Page A7
Thanks to years of strong economic growth, emerging markets have conquered many of their old demons. Now one former foe has returned to stalk these countries: inflation.
Rising prices represent a bigger economic and political challenge in these countries than the knock-on effects of the financial crisis emanating from the U.S., say analysts and investors.
GROWTH'S COST
• What's Happening: Inflation, an old foe in emerging markets, is stirring again, thanks to years of strong economic growth.
• The Impact: Anxiety about higher prices -- and efforts to stem them -- is weighing on shares in these markets.
• The Risk: Many residents in these countries are sensitive to price changes. Rising food costs could cause trouble.
Central banks in Brazil and India, seeking to tame inflation, last week took new steps to slow down lending and throttle back growth. India raised the proportion of deposits that banks must hold in reserve, and Brazil boosted its key interest rate for the first time in three years.
On Wednesday, Singapore reported that higher oil and food prices pushed inflation in March to a 26-year high. Although Singapore isn't considered a developing market, it is seen as a bellwether for other parts of Asia, which are also struggling with rising prices. Tuesday, Thailand's central bank said inflation this year could be twice what it was in 2007.
"Even if growth is coming off a bit, it's still pretty high" in most developing countries, says Punita Kumar-Sinha, who manages $2 billion in a mutual fund focused on India at Blackstone Group. "The concern is inflation, and in high-inflation environments, equity markets typically don't do very well."
Anxiety about higher prices -- and government efforts to stem them -- has weighed on shares in these markets this year. Countries where forecasts for inflation have risen sharply since November also have had some of the worst-performing stock markets in that period, according to an analysis by Merrill Lynch. Among them: China, the Philippines and Turkey.
Inflation is a particular challenge for developing-country economies because large swaths of the population are acutely sensitive to shifts in prices. Changes in the cost of food in particular are the stuff of political dynamite.
China and Vietnam are battling their highest price increases in a decade or more. India, Russia, South Africa and much of Latin America also face a growing threat from rising prices.
In a report released earlier this month, the Asian Development Bank said the risk of spiraling inflation in the region is "palpable," and noted that official figures tend to underestimate the phenomenon.
That has many investors uneasy. "Whereas everyone is kind of ready for a global slowdown, I don't think everyone is ready for inflation that is 1[%] to 2% higher in the whole emerging world than before," says Antoine van Agtmael, chief investment officer at Emerging Markets Management, which oversees $19 billion invested in developing countries. "That people haven't quite discounted yet."
Higher interest rates and government moves to put the brakes on economic growth tend to be bad for stock prices. Inflation also hurts stock prices by increasing input costs for companies and putting pressure on profit margins.
Bonds also face problems. As inflation rises, so do bond yields, driving prices lower. "We believe it is not the right time to invest aggressively" in emerging markets, wrote analysts at Barclays Capital in a recent report. There are "downside risks to bond markets from rising inflationary pressures and potential changes in monetary policy."
Edwin Gutierrez, an emerging-market bond manager at Aberdeen Asset Management in London, says he is wagering that Asian currencies will strengthen, as higher interest rates draw investors. Many governments are tacitly encouraging stronger currencies as an inflation-fighting tool, because they make imports less expensive.
The current price pressures are a far cry from the double-digit inflation rates or even hyperinflation that some emerging markets witnessed in the past, which coincided with huge debts and unrestrained spending. Instead, inflation is being stoked by people getting richer and demanding more of everything from cars to television sets to beef. It is also rising on the back of record energy prices.
One question is whether the current inflation pressures in emerging markets -- and especially the surge in the prices of staples such as rice and soybeans -- are a short-lived phenomenon. Some analysts say they expect the stresses to ease as the global economy slows in response to troubles in the U.S.
But others say inflation in many of these countries has deeper roots. "Food prices are just the tip of the iceberg," says Ifzal Ali, chief economist of the Asian Development Bank. He notes that many countries in the region haven't adequately reined in the supply of money to their economies, leading to asset bubbles.
"The age of innocence is over," he says. "The era of high growth and low inflation which we have taken for granted is finished." Mr. Ali thinks governments will have to maintain tighter monetary policy for the next 18 to 24 months to get inflation under control.
Rising Prices Seen As Greater Threat Than U.S. Ripples
By JOANNA SLATER
April 24, 2008; Page A7
Thanks to years of strong economic growth, emerging markets have conquered many of their old demons. Now one former foe has returned to stalk these countries: inflation.
Rising prices represent a bigger economic and political challenge in these countries than the knock-on effects of the financial crisis emanating from the U.S., say analysts and investors.
GROWTH'S COST
• What's Happening: Inflation, an old foe in emerging markets, is stirring again, thanks to years of strong economic growth.
• The Impact: Anxiety about higher prices -- and efforts to stem them -- is weighing on shares in these markets.
• The Risk: Many residents in these countries are sensitive to price changes. Rising food costs could cause trouble.
Central banks in Brazil and India, seeking to tame inflation, last week took new steps to slow down lending and throttle back growth. India raised the proportion of deposits that banks must hold in reserve, and Brazil boosted its key interest rate for the first time in three years.
On Wednesday, Singapore reported that higher oil and food prices pushed inflation in March to a 26-year high. Although Singapore isn't considered a developing market, it is seen as a bellwether for other parts of Asia, which are also struggling with rising prices. Tuesday, Thailand's central bank said inflation this year could be twice what it was in 2007.
"Even if growth is coming off a bit, it's still pretty high" in most developing countries, says Punita Kumar-Sinha, who manages $2 billion in a mutual fund focused on India at Blackstone Group. "The concern is inflation, and in high-inflation environments, equity markets typically don't do very well."
Anxiety about higher prices -- and government efforts to stem them -- has weighed on shares in these markets this year. Countries where forecasts for inflation have risen sharply since November also have had some of the worst-performing stock markets in that period, according to an analysis by Merrill Lynch. Among them: China, the Philippines and Turkey.
Inflation is a particular challenge for developing-country economies because large swaths of the population are acutely sensitive to shifts in prices. Changes in the cost of food in particular are the stuff of political dynamite.
China and Vietnam are battling their highest price increases in a decade or more. India, Russia, South Africa and much of Latin America also face a growing threat from rising prices.
In a report released earlier this month, the Asian Development Bank said the risk of spiraling inflation in the region is "palpable," and noted that official figures tend to underestimate the phenomenon.
That has many investors uneasy. "Whereas everyone is kind of ready for a global slowdown, I don't think everyone is ready for inflation that is 1[%] to 2% higher in the whole emerging world than before," says Antoine van Agtmael, chief investment officer at Emerging Markets Management, which oversees $19 billion invested in developing countries. "That people haven't quite discounted yet."
Higher interest rates and government moves to put the brakes on economic growth tend to be bad for stock prices. Inflation also hurts stock prices by increasing input costs for companies and putting pressure on profit margins.
Bonds also face problems. As inflation rises, so do bond yields, driving prices lower. "We believe it is not the right time to invest aggressively" in emerging markets, wrote analysts at Barclays Capital in a recent report. There are "downside risks to bond markets from rising inflationary pressures and potential changes in monetary policy."
Edwin Gutierrez, an emerging-market bond manager at Aberdeen Asset Management in London, says he is wagering that Asian currencies will strengthen, as higher interest rates draw investors. Many governments are tacitly encouraging stronger currencies as an inflation-fighting tool, because they make imports less expensive.
The current price pressures are a far cry from the double-digit inflation rates or even hyperinflation that some emerging markets witnessed in the past, which coincided with huge debts and unrestrained spending. Instead, inflation is being stoked by people getting richer and demanding more of everything from cars to television sets to beef. It is also rising on the back of record energy prices.
One question is whether the current inflation pressures in emerging markets -- and especially the surge in the prices of staples such as rice and soybeans -- are a short-lived phenomenon. Some analysts say they expect the stresses to ease as the global economy slows in response to troubles in the U.S.
But others say inflation in many of these countries has deeper roots. "Food prices are just the tip of the iceberg," says Ifzal Ali, chief economist of the Asian Development Bank. He notes that many countries in the region haven't adequately reined in the supply of money to their economies, leading to asset bubbles.
"The age of innocence is over," he says. "The era of high growth and low inflation which we have taken for granted is finished." Mr. Ali thinks governments will have to maintain tighter monetary policy for the next 18 to 24 months to get inflation under control.
Sam's Club and Costco Limits Rice Purchases
Sam's Club, Costco Ration Rice Amid Hoarding Worries
By GARY MCWILLIAMS and LAUREN ETTER
April 24, 2008; Page B1
Two large U.S. retailers slapped restrictions on purchases of bulk rice, bringing home shortfalls across the globe.
Costco Wholesale Corp., of Issaquah, Wash., and Sam's Club, a unit of Wal-Mart Stores Inc., of Bentonville, Ark., limited consumer purchases of rice at their U.S. stores this week. Wal-Mart said while Sam's has enough rice for customers, it would limit purchases to four 20-pound bags per visit "due to recent supply and demand trends." Costco limited purchases in select stores.
Some Costco stores limit rice purchases by customer history.
Vietnam and India, two of Asia's largest rice exporters, have placed temporary bans on some rice exports due to soaring food inflation and poor harvests in the region. The bans also triggered a surge in rice purchases by the Philippines and other governments, which are trying to lock in supplies.
U.S. retailers and food suppliers aren't reporting a widespread shortage of rice. But consumers in some areas appear to be stockpiling exotic rice varieties, like basmati and jasmine, and other foodstuffs.
"When somebody says you're limited to so many bags, you call your uncle and your cousin, and they come in. That stimulates buying further," says Milo Hamilton, a rice analyst at Firstgrain.com.
Food hoarding appears to be driven as much by budget worries as concern of shortages. Consumers, feeling pinched by inflation, are loading up before prices rise again. A Queens, N.Y., Costco limited sales of soybean oil several weeks ago. The store had noticed customers buying up flour and placed a brief limit on purchases. The oil limit is still in effect.
Larry Delorenzo, a Costco assistant general manager, said the store limited soybean oil sales to four 35-pound containers per customer to prevent "a scare." He suspects that the rise in grain prices triggered panic buying of oil.
Rice farmers also appear to be holding back inventories in hopes of locking in bigger profits as worries about shortages continue to drive future prices, said Bobby Hanks, president and CEO, Louisiana Rice Mill LLC, based in Mermentau, La. U.S. rice futures set a record high Wednesday of $24.85 per hundredweight, settling at $24.82, up 62 cents, or 2.5%.
Rice buyers are scouring the world market for available supplies, and U.S. rice is increasingly in demand. The U.S. accounts for only about 1.5% to 2% of global rice production, but it is the world's fourth-largest exporter, behind Thailand, Vietnam and India. U.S. rice exports are forecast to increase 20% this year.
Kirk Messick, senior vice president at Farmers Rice Cooperative, a California supplier to Sam's Club, said his company started rationing in part because its surplus is running low as it tries to meet demand from the Middle East.
"Everybody will get what they need," Mr. Messick said. "What we don't want is people hoarding rice and taking it out of somebody else's hands."
By GARY MCWILLIAMS and LAUREN ETTER
April 24, 2008; Page B1
Two large U.S. retailers slapped restrictions on purchases of bulk rice, bringing home shortfalls across the globe.
Costco Wholesale Corp., of Issaquah, Wash., and Sam's Club, a unit of Wal-Mart Stores Inc., of Bentonville, Ark., limited consumer purchases of rice at their U.S. stores this week. Wal-Mart said while Sam's has enough rice for customers, it would limit purchases to four 20-pound bags per visit "due to recent supply and demand trends." Costco limited purchases in select stores.
Some Costco stores limit rice purchases by customer history.
Vietnam and India, two of Asia's largest rice exporters, have placed temporary bans on some rice exports due to soaring food inflation and poor harvests in the region. The bans also triggered a surge in rice purchases by the Philippines and other governments, which are trying to lock in supplies.
U.S. retailers and food suppliers aren't reporting a widespread shortage of rice. But consumers in some areas appear to be stockpiling exotic rice varieties, like basmati and jasmine, and other foodstuffs.
"When somebody says you're limited to so many bags, you call your uncle and your cousin, and they come in. That stimulates buying further," says Milo Hamilton, a rice analyst at Firstgrain.com.
Food hoarding appears to be driven as much by budget worries as concern of shortages. Consumers, feeling pinched by inflation, are loading up before prices rise again. A Queens, N.Y., Costco limited sales of soybean oil several weeks ago. The store had noticed customers buying up flour and placed a brief limit on purchases. The oil limit is still in effect.
Larry Delorenzo, a Costco assistant general manager, said the store limited soybean oil sales to four 35-pound containers per customer to prevent "a scare." He suspects that the rise in grain prices triggered panic buying of oil.
Rice farmers also appear to be holding back inventories in hopes of locking in bigger profits as worries about shortages continue to drive future prices, said Bobby Hanks, president and CEO, Louisiana Rice Mill LLC, based in Mermentau, La. U.S. rice futures set a record high Wednesday of $24.85 per hundredweight, settling at $24.82, up 62 cents, or 2.5%.
Rice buyers are scouring the world market for available supplies, and U.S. rice is increasingly in demand. The U.S. accounts for only about 1.5% to 2% of global rice production, but it is the world's fourth-largest exporter, behind Thailand, Vietnam and India. U.S. rice exports are forecast to increase 20% this year.
Kirk Messick, senior vice president at Farmers Rice Cooperative, a California supplier to Sam's Club, said his company started rationing in part because its surplus is running low as it tries to meet demand from the Middle East.
"Everybody will get what they need," Mr. Messick said. "What we don't want is people hoarding rice and taking it out of somebody else's hands."
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