Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

TECHNOLOGY

Google Phone in Prototype -- Boston Globe

Speculation is mounting that Google is soon to release a mobile phone. Last week, Engadget reported that Google has developed a Linux-based mobile device OS and is "shopping [it] around to handset makers and carriers on the premise of providing a flexible, customizable system." Engadget's "very trustworthy sources" did not indicate that Google is building a handset, but the company is believed to be "working with OEMs and ODMs to get them to put the Gphone OS on upcoming devices." Engadget expects Google to announce its mobile plans some time after Labor Day. On Sunday, the Boston Globe reported that Google does in fact have a mobile phone prototype, and that several people have seen it. Google executive Rich Miner, a co-founder of mobile software company Android (which was bought by Google two years ago), has not confirmed that he is working on a phone, but he is reported to have shown the alleged prototype to "a handful of Boston entrepreneurs and venture capitalists." Dan Roth, president of VoiceSignal, and Mike Phillips, founder of speech-recognition firm Vlingo Inc., are both believed to have seen the phone, but neither will cop to working with Google. One unnamed source who saw the prototype called it "simpler" and less flashy than Apple's iPhone. Google's phone supposedly allows horizontal scrolling and has three-dimensional, animated buttons on the screen as well as a small QWERTY keyboard.
Sources: Boston Globe, Engadget, GigaOM
Commentary: Google Phone Is Now A RealityGoogle Getting Serious About Mobile
Stocks/ETFs to watch: GOOG. Competitors: NOK, AAPL, MSFT. ETFs: FDN, FPX, FVI, IAH
Earnings call transcript: Google Q2 2007

Microsoft's Office Open XML Set to Become International Standard

Microsoft is expected to win a vote this week to have its Office Open XML document format accepted as an international standard, according to people tracking the vote. The move would help Microsoft sustain its advantage in the growing field of open document formats. Pieter Hintjens, president of a Brussels-based opposition group, commented, "After what basically has amounted to unprecedented lobbying, I think that Microsoft's standard is going to get the necessary amount of support." This comes despite countries such as Japan, Canada, India, China, Brazil, France and Britain voting against Microsoft, according to a tally by Hintjens' group. Countries voting in favor of Microsoft include the U.S., Switzerland, Portugal and Germany. Microsoft needs two-thirds of the votes from 37-countries representing a joint committee of two international standards bodies, the International Organization for Standardization [ISO] and the International Electrotechnical Commission [IEC]. Also, Office Open XML cannot be opposed by more than 25% of all voting countries. Electronic voting closed Sunday and results are expected Tuesday or Wednesday. The OpenDocument Format, developed by an IBM-led group, was the first to become an international standard in May 2006. Shares of Microsoft gained 1% last Friday to $28.73.
Sources: New York Times
Commentary: Dismissing RIM/Microsoft Merger Rumors On Technical GroundsSafety in Tech? You Betcha -- Barron'sVista Service Pack 1: Damned If You Do...
Stocks/ETFs to watch: MSFT. Competitors: ADBE, IBM, RHT. ETFs: IGV, SWH, PSJ, QQQQ
Earnings call transcript: Microsoft F4Q07

INTERNET

Rising Ad Blocker Use Poses Risk to Web Content/Ad Stocks

Adblock Plus, a free browser plug-in which blocks website ads, now boasts 2.5 million users, according to its developer Wladimir Palant. Palant estimates that 300,000 to 400,000 new users download the ad blocker each month. Adblock Plus is the second most popular plug-in for Firefox. While ad blockers are also available for Internet Explorer, they aren't necessarily free or as effective. Adblock Plus blocks ads delivered by most commercial ad servers and large advertisers, and poses a threat to the revenue of Internet advertising companies such as Google, and Internet content companies such as Yahoo!, CNET, Microsoft, the New York Times, Time Warner and TheStreet.com. Some small web sites have retaliated by preventing access via the Firefox browser. One advocacy site, whyfirefoxisblocked.com, argues that "Accessing the content [of ad-supported web sites] while blocking the ads... would be no less than stealing." Web publishers haven't commented or responded, but that would likely change if adoption of ad blockers becomes significant. University of Chicago law professor Randal Picker predicts that the first response of web publishers would be technological rather than legal.
Sources: New York Times, whyfirefoxisblocked.com, Adblock Plus blog
Commentary: Firefox good or bad for ad click rates?Key quotes from the Fastclick S-1How big a problem is click-fraud?
Stocks/ETFs to watch: NYT, DJ, TSCM, TWX, MSFT, GOOG, YHOO, CNET
Related: Randal Picker's commentary

MEDIA

Sony to Take On Apple in Video Downloads -- WSJ

The Wall Street Journal reports sources say Sony chief Howard Stringer is quietly developing a video-downloading service, which involves the company's PS3 and PSP game consoles and Bravia HD TVs, to challenge rival Apple's iTunes service. Unlike Apple's dominance in music devices and downloads, analysts say the video-downloading market is up for grabs. Sony has already released a module for its TVs sold in the U.S. that allows for downloading of Internet content. For Europe, Sony recently announced a feature for HD TV recording to PS3s and an ability to transfer content to PSPs. Sony faces competition from Microsoft, which has been positioning its Xbox 360 console for video downloading. Apple's sales of video downloads have reportedly been declining this year. The Journal notes Sony may hold an advantage over Apple, given general wariness of Apple's dominance in music downloads, not to mention Sony owns a movie studio, seemingly sharing content producers' concerns. Separately, Sony plans to list a 34.5% stake of its financial unit (Sony Financial Holdings) valued at up to ¥361 billion ($3B), on the Tokyo Stock Exchange. Pricing will be set on Oct. 1, with trading expected to start Oct. 11. Ordinary shares of Sony gained 0.1% to ¥5,610 ($48.55 ADR equiv. at ¥115.55/$1) on Tuesday. Sony's ADRs gained 4.1% to $47.78 on Friday.
Sources: Bloomberg, Reuters, Wall Street Journal
Commentary: Sony Announces HD TV Recording Device for PS3Video Game Companies Extend Bullish TrendMemo To Microsoft and Sony: Game Consoles Are For Playing Games
Stocks/ETFs to watch: SNE. Competitors: AAPL, MSFT. ETFs: ADRA, EWJ, ITF
Earnings call transcript: Sony F1Q07, Apple F3Q07, Microsoft F4Q07

RETAIL

Starbucks to Sell Coffee Through Kraft's Tassimo Line

Starbucks has inked a deal to sell its branded coffee in supermarkets as part of Kraft's Tassimo product lineup. Starbucks is finding it harder to lure customers to its stores in the face of competition from machines on the market that allow people to brew espresso and cappuccino at home. Sales of these machines, which include Kraft's Tassimo, rose to $99 million in 2006 from $8 million in 2001, according to Datamonitor and the National Coffee Association. With the deal in place, Tassimo owners will now be able to brew Starbucks' House Blend, Breakfast Blend, Caffe Verona and Africa Kitamu at home. Starbucks is opening 2,400 stores around the world this year, but the U.S. market is slowing. For its part, Kraft has been seeking ways to counter falling sales of ground coffee in the U.S. and Europe. In addition to the branding deal, Kraft and Starbucks are constructing special coffee sections in grocery stores that offer the atmosphere of a cafe. The "virtual cafes" have been placed in about 2,000 supermarkets and Kraft is aiming to have them in 4,000 by year-end 2008. In related news, Kraft announced that Bosch will launch a new Tassimo brewer in mid-2008. Kraft is ending its partnership with Braun, the current distributor of the Tassimo.
Sources: Financial Times, 24/7 Wall Street, Reuters, MarketWatch
Commentary: Considering Starbucks as a Long-Term HoldKraft Beats Street, Raises Sales Guidance, But Margins Under Pressure
Starbucks to Raise Beverage Prices
Stocks/ETFs to watch: SBUX, KFT. Competitors: PG, THI, CAG, SLE. ETFs: PRFG, FXG
Earnings call transcripts: Starbucks F3Q07, Kraft Foods Q2 2007

ENERGY AND MATERIALS

General Electric to Buy U.K.'s Sondex

General Electric said Monday it will expand its oil services businesses with the purchase of U.K. oil-drilling inspection group Sondex plc for £288.7M ($583 million), or 460 pence per share. The price is 36% above Sondex's closing price on August 30 before the company said it was in "advanced talks" to be bought out. Sondex shares rose 7% to 453 pence on the news Monday. Based in Hampshire, Sondex specializes in the design, manufacture and sale of electro-mechanical downhole tools and surface equipment to oilfield service companies that run well-site operations on behalf of oil and gas production companies. It had revenue of £68.5M in the year ended February 28. "Sondex will be an important addition to GE Energy's portfolio of businesses, complementing our existing Tensor product line," said Brian Palmer, VP of GE Energy's Optimization and Control business. "We expect the combination to form a substantial growth business for GE going forward." The move is the Optimization business's first venture outside the U.S. Sondex Finance Director Chris Wilks and CEO Martin Perry plan to stay with the company and Wilks told Reuters the company would look to expand its presence in China given GE's resources there. GE, which will get a £2.9M break-up fee if the deal falls through, was advised by Credit Suisse. Investec advised Sondex, which also received another approach and sounded out other buyers before agreeing to the GE deal. Sondex's largest customer is Halliburton, with about 7% of its turnover. Other customers include Schlumberger and Baker Hughes.
Sources: Press release, Reuters, MarketWatch, Bloomberg
Commentary: GE Gets It: Slimming Down, Buying Back SharesGE: Bringing Good Things Back to Life
Stocks/ETFs to watch: GE, HAL, BHI

FINANCIAL

RBS Consortium Could Lower Bid for ABN -- Times of London

The three-bank consortium led by the Royal Bank of Scotland might invoke a material adverse change [MAC] clause and lower its offer for Dutch bank ABN Amro, the Times of London reported Tuesday. The consortium has a €70 billion offer on the table for the bank. The paper noted that the consortium partners have not yet discussed invoking the clause, and the U.K. Takeover Panel has a history of ruling against it. Still, the credit crunch has made deals of this magnitude less appetizing, and the MAC clause is one means by which the consortium could attempt to back away from its bid. The clause allows a buyer to scale back an agreed price for a target or walk away completely if it can prove that there has been a material change in the value of the target. According to the Times, many companies and "virtually all the top investment banks" are discussing "invoking the MAC as a way of wriggling out of overpriced deals." Home Depot recently had to lower the price for its wholesale distribution business to $8.5 billion after agreeing to sell it for $10.3 billion. The MAC clause was invoked by both the underwriting banks and the private equity buyers to show that Home Depot had been materially adversely affected by the implosion of the sub-prime sector.
Sources: Times of London, MarketWatch
Commentary: RBS Consortium Adds to ABN Amro StakeABN Amro Plunges on Rumors Buyout May Fall ThroughABN Amro Acquisition: Too Many Chefs Wearing the I-Bank Advisor Hat
Stocks/ETFs to watch: ABN, RBSPY.PK, BCS, FORSY. Competitors: HBC, DB, UBS. ETFs: RKH, MOT

Franklin Resources Buys Stake in Dubai Manager

Franklin Resources has purchased a 25% holding in Dubai-based asset manager Algebra Capital Ltd. and will take two seats on the company's board in an effort to grow its Arab business. Franklin, which manages $621B in assets as manager of the Franklin and Templeton mutual funds, will work with Algebra to jointly develop and distribute investment products, and Franklin's Darby Overseas private equity arm also will work with Algebra on investments in the region. Algebra, which is led by Ziad Makkawi, expects the value of professionally managed fund-assets in the Middle East and North Africa to triple over the next five years to more than $200B. The value of the deal wasn't disclosed.
Sources: Reuters, Bloomberg
Commentary: Analyst Targets for Many Financial Stocks Now Well Above Trading PriceFinancial Sector Opportunities: A Mid-Year Evaluation
Stocks/ETFs to watch: BEN, XLF, IAI. Competitors: BLK

HEALTHCARE/BIOTECH

Drug-Coated Stents Safer Than Thought -- Study

The results of a follow-up Swedish study presented Sunday in Vienna indicate that drug-coated stents do not increase death risk. The only companies that sell such stents in the U.S. are Boston Scientific (the Taxus) and Johnson & Johnson, which sells the Cypher through its Cordis unit. The new data contradict a study completed last year that indicated drug-coated stents increase the likelihood of fatal blood clots by 18%. That result precipitated a sharp drop in sales of the stents around the world. In the new study, the Uppsala Clinical Research Centre concluded that the stents are no more dangerous than bare-metal stents, but that patients should be monitored to evaluate their ability to tolerate the anti-blood-clotting drugs used after the surgery. The study was the largest ever to compare stents, involving 13,786 patients with drug-coated stents and 21,480 patients with bare-metal stents. The better result might be attributable to more sophisticated stents, longer use of Plavix (made by sanofi-aventis and Bristol-Myers Squibb), and better surgical techniques. "These data don't change substantially the evidence we've had in the past year," said Mayo Clinic cardiologist Raymond Gibbons. "I don't think we can place too much emphasis on these data until we understand why it happened."
Sources: Forbes, Bloomberg, Dow Jones
Commentary: Boston Scientific: A Buyout Waiting to HappenThe Long Case for Boston ScientificJudge Limits J&J's Claims Against Boston Scientific
Stocks/ETFs to watch: BSX, JNJ, SNY, BMY. Competitors: MDT, STJ, PG, NVS. ETFs: IHE, PPH, IHI
Earnings call transcript: Boston Scientific Q2 2007, Johnson & Johnson Q2 2007

Merck's Cordaptive Reduces Side Effect -- Study

Results of a six-month study presented this weekend in Vienna show that Merck's experimental drug Cordaptive improves cholesterol levels while limiting a problematic side effect. Abbott Laboratories' Niaspan, the market leader in cholesterol control, causes facial flushing in many patients. This side effect is associated with the B vitamin niacin, which is used to increase "good" cholesterol. Cordaptive releases both niacin and the experimental drug laropiprant into the body; the latter drug reduces redness and warming of the face and neck. Merck hopes to gain approval for Cordaptive as a complement to its drugs Vytorin and Zetia, which lower "bad" cholesterol. "This drug was developed to specifically inhibit the flushing that is induced by niacin," said Richard Pasternak, Merck's vice president of clinical research for cardiovascular disease. "We're thrilled with the results of this study." If Cordaptive is approved, it could hit the market by mid-2008. Abbott acquired Niaspan when it bought Kos Pharmaceuticals last year for $3.7 billion. The drug has generated $170 million in Q2 sales.
Sources: Wall Street Journal, Reuters, Bloomberg
Commentary: Merck Raises and Beats on Strong Vaccine, Medicine SalesMerck: Making a Big Pharma ComebackKos Bought By Abbott Labs
Stocks/ETFs to watch: MRK. Competitors: ABT, PFE. ETFs: PPH, PRFH, IHE
Earnings call transcript: Merck & Co. Q2 2007

Lilly's New Schizophrenia Drug May Be Safer Than Zyprexa

A new experimental Eli Lilly & Co. schizophrenia drug appeared to work safely without some of the annoying and dangerous side-effects of the company's top-selling Zyprexa drug, according to a study published in the journal Nature. In a double-blind study of 196 patients, the drug, LY2140023, did not relieve the schizophrenia symptoms as well as Zyprexa; about 32% said they had fewer hallucinations, delusions and instances of thought disorder as compared with 41% who took Zyprexa. But while users of the new drug exhibited side effects such as insomnia or sleepiness, nausea and headache, it did not cause weight gain, cholesterol and hormonal changes. Diabetes is also a known side-effect of Zyprexa. Current anti-psychotic drugs blunt a neurotransmitter called dopamine. The new class of drugs, including LY2140023, work on a different brain chemical known as glutamate. "These data suggest that mGlu2/3 receptor agonists have anti-psychotic properties and may provide a new alternative for the treatment of schizophrenia," the researchers wrote. Lilly's patent on Zyprexa, which had 2006 sales of $4.3B, expires in 2011. Some 1% of adults, or 2.5M people in the U.S. suffer from schizophrenia. Medicines for the illness and bipolar disorder had U.S. sales of $12B and global sales of $18B in 2006. The new drug is still at least three to four years away from completing the regulatory process, but the findings may help Lilly gain ground on Wyeth's experimental schizophrenia drug bifeprunox, which also doesn't cause weight gain, and was shot down by U.S. regulators last month because it wasn't effective.
Sources: Bloomberg, Reuters, New York Times
Commentary: Serious Contradictions in Eli Lilly Zyprexa Data -- NY TimesAriad Pharmaceuticals vs. Eli Lilly: When Will the Insanity End?
Stocks/ETFs to watch: LLY, PPH, IHE. Competitors: GSK, NVO, PFE, WYE
Earnings call transcript: Eli Lilly Q2 2007 Earnings Call Transcript

INTERNATIONAL

HSBC Enhances Korean Presence With $6.3 Billion Acquisition

HSBC continued its strategy of high-growth, international investing by adding a 51% stake in Korean Exchange Bank to its portfolio. Europe's largest bank will pay $6.3 billion to Dallas-based Lone Star for the stake. The deal is far from definite because Korean officials are investigating the possibility that Lone Star's lawyers colluded with Korean officials and KEB execs to artificially lower KEB's value when Lone Star purchased the bank in 2003. A Korean Financial Supervisory Commission spokesman commented that the deal will not be approved until the "legal uncertainties" are explored. Chang In Hwan, CEO KBT Asset Management, however said "there's a high possibility that the government will conditionally approve the deal." If the deal drags on past January 31st, 2008, HSBC will have to pay an extra $133 million to complete the transaction. HSBC has long been interested in growing its exposure in South Korea. The country's economy expanded at its quickest pace in four years last quarter and is the third-largest in Asia. HSBC does not plan on any job cuts or closings of KEB's 350 branches. HSBC's Finance Director Douglas Flint noted the deal "is not about cost; it is about attracting revenue. We have a modest presence in Korea and this will make it a sizeable and scaleable one." The bid included an 18% premium over KEB's closing price on Monday.
Sources: Bloomberg, Reuters, MarketWatch
Commentary: HSBC's Net Jumps 25%; Shares Gain In LondonHSBC: Shake It Up, But Don't Break It Up - Barron's
Stocks/ETFs to watch: HBC. Competitors: BCS, C. ETFs: PID, NYC
Earnings call transcript: HSBC Holdings PLC Q2 2007

ACTIONABLE BARRON'S CALLS

Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries

• European drug manufacturer Bayer (BAY) seems likely to continue its upward momentum with a stocked pipeline boasting 20 projects in Phase III testing, 17 in Phase II, and 14 in Phase I. "We've undergone a complete restructuring, and our portfolio is concentrated on growing markets in which we have a good market share," says CEO Werner Wenning. Citigroup has a price target of $88 for the stock, nearly 15% higher than its current price. (Full summary)

• Technology may be the market's new safe haven, with stocks like Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO) and Oracle (NYSE:ORCL) trading around 52-week highs while Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), IBM (NYSE:IBM) and Research in Motion (RIMM) sport attractive gains. Through Thursday, the average tech stock fund is up more than 10%, vs. under 3% for the S&P 500. Duds include AMD (NASDAQ:AMD), Motorola (MOT), Yahoo! (NASDAQ:YHOO). Companies with financial services exposure, like Cognizant (NASDAQ:CTSH), Wipro (NYSE:WIT) Infosys (NYSE:INFY), BEA Systems (BEAS), Tibco (NASDAQ:TIBX), Chordiant Software (CHRD), Callidus Software (NASDAQ:CALD), Advent Software (NASDAQ:ADVS) and BearingPoint (BE), may be cause for concern. (Full summary)

HP (NYSE:HPQ) is up 52% since Barron's last plug in April 2006. It had a phenomenal FQ3. Analysts predict a 13% EPS rise to $2.87, on $103.3 billion in revenues -- 32% higher than 2006. HP has a diverse corporate/government/consumer client base, and a wide variety of products. CEO Mark Hurd fears the subprime media frenzy could baselessly discourage consumers, but with 65% of its revenues coming from overseas, the global conglomerate is relatively immune. HP also plans to unveil new PCs, laptops and games this Wednesday. Hurd says HP's innovation is ingrained, and its "best days are ahead of it." (Full summary)

• "Our (June 25) bullish feature on State Street didn't anticipate the depth of Wall Street's credit squeeze or grasp State Street's off-balance-sheet commitments," Barron's says, referring to last week's news that the company might have to step in to support some $29B in four special investment vehicles, and a report that a State Street fund with subprime holdings had lost more than one-third of its value (full story). Shares have dipped from $68 then to a present $61. Barron's says it still sees no reason to sell, noting State Street (NYSE:STT) denies the rumors and ratings agencies have reaffirmed their investment-grade ratings. (Full summary)

• Surging aircraft orders over the past two years have put Goodrich (NYSE:GR) in a good place, Barron's says. More than 12,000 commercial-airline and business aircraft will be delivered, mostly to Goodrich customers, over the next five years. Goodrich provides about $3 million in components for new Boeing (NYSE:BA) 787 Dreamliner; Boeing's 683 announced orders would translate into more than $2B for Goodrich. One analyst says "the upcycle in aircraft orders and deliveries is nowhere near its peak." Despite a 50% rise in the share price over the past year, bulls say its prospects aren't fully reflected. (Full summary)

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: 20 Observations On This Market
Housing: Home Depot/Lowe's Pair Trade
Long Idea: Radvision and Metalink: Great Potential
Short Idea: Sell Blue Nile Despite Its Soaring Stock
Internet: WebMD Has Tremendous Growth Ahead
Telecom: Vodafone UK: No Niche Left Unturned
Chips: International Rectifier Sneaks In Fraud Disclosure
Software: Apple's Leopard to Use Bandwidth as Currency?
Gadgets: Dismissing RIM/Microsoft Merger Rumors
Media: Apple Calls NBC's Digital Download Bluff
Transport: Southwest Airlines Should Put LUV in Its Logo
Energy: Marathon Buys Up Rising Oil Sands
Financial: Lehman Brothers: Hair of the Credit Crisis That Bit You
Asia: Bullish On The Ma Bell of the Philippines
ETFs: Why VWO Is the Better Emerging Market ETF
Hedge Funds: DWS Dreman Value Income Edge Fund
Sound Money: Don't Buy the iPhone Yet
Jim Cramer: Latest stock picks
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