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TECHNOLOGY

Vonage Jumps 123% On Sprint Patent Suit Settlement

Shares of internet telephony provider Vonage jumped 123% Monday on news the company had settled its patent lawsuit with Sprint, agreeing to pay the company $80 million in past and forward licensing fees. It marked the largest single-day gain for shares of the struggling telecom company since its IPO last year. Through the deal, Vonage will license 100 internet patents from Sprint, allowing it to connect internet and standard calls. Two weeks a go, a U.S. district court ruled in favor of Sprint (full story). Vonage still faces what is considered to be a more dangerous patent infringement suit from Verizon. Its shares are down 80% since its IPO in June of 2006.
Sources: Press Release, Bloomberg, Wall Street Journal, MarketWatch
Commentary: Vonage Rises From The Dead on Sprint DealVonage Loses Another Patent Case, This Time To SprintVonage Loses Patent Case to Sprint; Shares Tank
Stocks/ETFs to watch: VG, S. Competitors: VZ, T. ETFs: WMH, VOX

Sprint CEO Out; Guidance Lowered

Sprint Nextel announced Monday Gary Forsee is stepping down as chairman, president and CEO, effective immediately. Sprint's Board of Directors is already searching for his replacement. CFO Paul Saleh will fill the position in the meantime. A source cited in the Wall Street Journal says former Sprint officials Andrew Sukawaty (CEO of Inmarsat PLC) and Dan Hesse (CEO of Embarq, a Sprint spin-off) are among the top contenders. "The Board's search for selecting its next chief executive will focus on candidates outside the company," said Board member Irvine Hockaday in statement. "Sprint Nextel has the assets, spectrum, customer base and technology to be the leader in wireless mobility services," commented Hockaday. Sprint also announced it expects to report a net loss of 337,000 post-paid subscribers in Q3, and warned operating income before depreciation and amortization, as well as consolidated operating revenue, are expected to be "slightly below the range" of prior guidance of $11B to $11.5B and $41B to $42B, respectively. Sprint is scheduled to report Q3 earnings Nov. 1. Shares of Sprint Nextel lost 2.7% to $18.50 on Monday and fell another 0.4% to $18.42 in extended trading.
Sources: Press release, MarketWatch, Wall Street Journal
Commentary: Related: Sprint May Find Replacing Forsee Won't Be Enough to Beat AT&T (Bloomberg) • Sprint Nextel Spells Out WiMax TargetsNo Easy Way Out For Sprint In Rising Costs, Customer Churn
Stocks/ETFs to watch: S. Competitors: T, Q, VZ. ETFs: WMH, IYZ, TTH
Earnings call transcript: Sprint Nextel Q2 2007

WSB Sponsor

Gateway to buy Packard Bell

Gateway Inc. has agreed to buy Packard Bell B.V., snatching the company from China's Lenovo Group Ltd., which had also expressed interest in buying the Paris-based PC seller. The deal will be funded by Taiwanese computer maker Acer Inc., which has agreed to acquire Gateway for $710M. Financial terms were not disclosed, but the cost was estimated at less than $100M by a source close to Acer, who also claimed that the agreement aimed to prevent a bidding war by not allowing for a renewed bid should Lenovo present a rival offer. According to research firm Gartner, Acer and Gateway will have a combined 8.8% of the PC market, and Lenovo 7.9%, behind global market leaders Hewlett-Packard and Dell. The deal will be accomplished through the purchase of Packard Bell's parent, PB Holding Co., from Lap Shun (John) Hui, who controls 75% of PB Holding, and Clifford Holdings Ltd., which is controlled by Hui. Gateway, in August, said it would exercise a right of first refusal to buy Hui's indirect stake in Packard Bell. The acquisition is expected to close by the first quarter of 2008, subject to regulatory approvals.
Sources: Press release, Financial Times, Reuters, Bloomberg
Commentary: Acer Sees Opening As Dell's Trouble's DeepenBattle of the Agressive Chinese Computer Brand Buyers
Stocks/ETFs to watch: GTW, OTCPK:LNVGY. Competitors: DELL, HPQ, AAPL. ETFs: XLK, IGM, IYW
Earnings call transcript: Gateway Inc. Q2 2007

LCD Maker AU Optronics Boosted By Strong Sales

Liquid-crystal display maker AU Optronics jumped its daily limit of 6.9% on Taiwan's stock exchange after reporting record monthly sales. The company reported sales increased 92.6% over last year's September figures. The news was bullish for LCD makers, which have taken market share from plasma and glass-tube display makers. LG Philips LCD Co., which reports earnings tomorrow, surged 7.1% in Seoul, and other LCD producers finished higher in Tapei. "The revenue number came in much better than I expected," said Robyn Hsu at Truswell Securities Investment Trust Co. in Taipei. "That suggests the panel prices are rising, and that is definitely good news for profitability." Hsu's trust already owns shares of AU Optronics, and said he was considering buying more after the sales numbers was released. Also, according to a Lehman Brothers analyst, sales of LCD televisions are estimated to increase 86% to 78 million units this year, while plasma sales will rise 22% to 13 million. Sales of glass-tube TVs are projected to fall 18%. Shares of AU Optronic's ADR closed up 7.7% to $19.21 Monday.
Sources: Bloomberg, RTT News
Commentary: AU Optronics Forecasts Profitability in Q2 on Rising LCD Panel PricesLCD Market Update: Channel Inventories a Concern?
Stocks/ETFs to watch: AUO, LPL. Competitors: PHG, MC. ETFs: EWT
Earnings call transcript: AU Optronics Q2 2007

INTERNET

Google to Display YouTube Ads; Shares Top $600

Google announced Tuesday it will begin displaying ad-supported videos on thousands of websites, in its most aggressive attempt yet to monetize its $1.75 billion purchase of YouTube last year. The ads will not be in video format and instead will be displayed as banners and as text. Google says AdSense publishers and YouTube content partners will receive a share of the ad revenue. Current select partners include TV Guide Broadband, Expert Village, Mondo Media, lonelygirl15, Extreme Elements, and Ford Models. MarketWatch reports over 100 video providers, mostly professional, have reached distribution agreements with Google. The video units are only available in the U.S. for English language sites, but the program will be expanded over the coming months. Shares of Google topped $600 for the first time on Monday, closing 2.6% higher to $609.62. Bulls have high expectations for Google's Q3 results, scheduled for release on Oct. 18. Analysts' average share price target is $614. Google is now the 11th largest S&P 500 constituent.
Sources: Press release, MarketWatch, Reuters
Commentary: A Look At U.S. Mega Caps In Light of Google Hitting $600Google-Doubleclick Deal Faces Congressional ScrutinyMicrosoft vs. Google: The New Battle for Your Network
Stocks/ETFs to watch: GOOG. Competitors: YHOO, MSFT, IACI. ETFs: QQQQ, XLK, FDN, FPX
Earnings call transcript: Google Q2 2007

MEDIA

EU Takes Closer Look at Pending Thomson-Reuters Deal

The European Union said Monday that the proposed £8.7 billion ($17.7 billion) purchase by Thomson Corp. of Reuters Group plc could have anti-competitive implications, and is placing the deal under closer scrutiny. The European Commission, which investigates antitrust issues for the EU, said it requires more time to evaluate the acquisition because it has "serious doubts as regards adverse effects on competition in several markets of the financial information sector." The Commission will issue a ruling on the transaction by February 25, 2008. The U.S. Justice Department will make its own decision on the deal by January 15. The purchase of Reuters would triple Thomson's share of the financial data market to 34% and would leave privately owned Bloomberg LP as the combined company's sole competitor. Thomson also owns the Westlaw legal database and TradeWeb bond-trading network. "Today's developments bring clarity and transparency to the regulatory timetables on both sides of the Atlantic," said Reuters CEO Tom Glocer.
Sources: Bloomberg, MarketWatch, AP
Commentary: Reuters Agrees To Merge With Thomson; Regulatory Scrutiny To FollowDeutsche Bank: Thomson-Reuters Combo Would Have Leakage, Be Anti-Trust Risk
Stocks/ETFs to watch: TOC, RTRSY. Competitors: NWS, FDS, NYT

RETAIL

Yum Posts 17% Q3 Profit Rise; Bumps Up Guidance

Shares of fast-food chain operator Yum! Brands jumped 5.65% to $36.29 in regular trading and added 4% to $37.73 in AH trading Monday after the company reported a 17% rise in Q3 profit and boosted its full-year guidance. The company posted net income of $270 million ($0.50/share) versus $230 million ($0.42) in the year-ago period. Sales were $2.56 billion against $2.28 billion last year. Analysts were expecting EPS of $0.45 on $2.44 billion in revenue. Same-store sales were up 4% worldwide. Comparable sales grew 11% in China and 7% in the overall international portfolio, but only 1% in the U.S., where Taco Bell is still recovering from an E.coli outbreak last year and KFC was affected by a rat infestation at a New York location in February. "Our U.S. business performance improved versus the first half of the year; however, sales and profit growth remains below our target level due to results at Taco Bell," said Chairman and CEO David C. Novak. "For the fourth quarter, we expect improved Taco Bell results, solid U.S. profit growth and strong overall profit growth from the Yum global portfolio." Yum revised its full-year EPS forecast to $1.65 from $1.63. Analysts had been estimating $1.64. The company also said it plans to buy back $4 billion in stock over the next two years.
Sources: Reuters, Forbes, Bloomberg, MarketWatch, Wall Street Journal
Commentary: Eleven Fast Food Stocks To Take A Bite Out OfDigesting Gains In Yum! Brands
Stocks/ETFs to watch: YUM. Competitors: BKC, MCD. ETFs: PEJ, PBJ, IWP

Analysts Lower Smithfield’s Outlook

Shares of hog and beef producer Smithfield Food Inc. were down Monday after analyst slashed the company's projected earnings based on weak hog prices and growing hog supply. BB&T downgraded Smithfield from a buy to a hold, and cut its current quarter earnings target to $0.17/share from $0.48/share. "Hog-production profitability has deteriorated dramatically into loss-making territory, and we do not foresee a quick recovery," said BB&T analyst Heather Jones. In addition, Davenport Equity Research cut its quarterly forecast from $0.40 to $0.30 and Bank of America lowered its estimates to $0.41 from $0.56. The U.S. Agriculture Department reported last month inventories for hogs and pigs increased 3% from last year. Live hog prices are down 20% since August. China could change the demand concerns if it chooses to purchase more U.S.-made pork, analysts added. Shares of Smithfield dropped 4% to $30.27 Monday.
Sources: MarketWatch
Commentary: Smithfield Foods: King Pig Among Pork ProducersMore on Pork, China and Smithfield Foods
Stocks/ETFs to watch: SFD. Competitors: HRL, TSN. ETFs: FXG
Earnings call transcript: Smithfield Foods F1Q08 (Qtr End 7/29/07)

FINANCIAL

Sallie Mae Sues for Original Deal or Breakup Fee

SLM Corp. has sued to force the investor group including J.C. Flowers & Co., Bank of America Corp. and JPMorgan Chase to proceed with its original $25.3B buyout of the student loan provider better known as Sallie Mae, or pay a $900M breakup fee. Last week, the group submitted a revised bid consisting of $50 in cash and $7-$10 in warrants contingent upon SLM's financial results, rather than the $60/share in cash agreed upon in April, claiming a materially adverse effect had occurred and that the original price was unacceptable given weaker economic conditions and recently signed student loan legislation. Sallie Mae says the law would cut net income by 1.8-2.1% over each of the next five years, but the buyers estimate profit cuts of 14.4% in 2009 and 20.1% in 2012. SLM's lawsuit claims there has been no material adverse effect that would allow the group to back out of the deal without paying the breakup fee. SLM said it regretted bringing the suit, but said it had honored its obligations under the deal. "We ask only that the buyer group do the same. We are prepared to close under the contract the parties signed in April," said Sallie Mae Chairman Albert L. Lord. J.C. Flowers said the suit was without merit and rested on a "fundamental misunderstanding" of the terms of the contract"
Sources: Press release, AP, Bloomberg
Commentary: How The New Student Lending Bill Affects Sallie MaeHarman Buyout Shelved: Bleak Outlook for SLM Corp and First Data Deals
Stocks/ETFs to watch: SLM, BAC, JPM. Competitors: KEY, STU

BofA and JPM to Write Down Total of $3 Billion - Analyst

Bank of America and JPMorgan Chase are set to write-down and disclose losses totaling about $3 billion in their earnings report this month, analysts from Sanford C. Bernstein told investors. JPMorgan, the third-largest U.S. bank, is expected to write-down about $2 billion. Bank of America, the second-largest bank and largest arranger of leveraged loans, is forecasted to write-down $1 billion. Together, the two banks make up 30% of the market for U.S. leveraged buyouts in 2007, according to Bloomberg. At least nine banks have warned or announced write-downs, taking charges or setting aside money for future losses totaling $21.8 billion. On Friday, Merrill Lynch announced it would take $5.5 billion in write-downs in the third-quarter(full story).
Sources: Bloomberg, MarketWatch, Reuters
Commentary: Merrill Should Have Taken Its Own AdviceBank of America: Volatile Markets Will Hurt Q3 Results
Stocks/ETFs to watch: JPM, BAC, MER. ETFs: RKH, XLF.
Earnings call transcript: JPMorgan Chase Q2 2007, Bank of America Q2 2007

INTERNATIONAL

RBS Must Now Justify ABN Amro Purchase - Bloomberg

The Royal Bank of Scotland, leader of a three-bank consortium that just bought Dutch bank ABN Amro, must now convince its shareholders that the €71.9 billion, 93%-cash pricetag was worth it. "They've got it, they wanted it, they paid a big price for it," said Colin Morton, a fund manager at Rensburg Sheppards. "The market will be looking over the next 12 to 18 months for them to deliver on the deal." RBS shares have lost 13% of their value since the consortium began its pursuit of ABN. The consortium beat out a €63.2 billion, mostly stock bid by Barclays, which withdrew from the race on October 5. To make the deal make sense, the consortium plans to cut 19,000 jobs and achieve €4.3 billion in savings and revenue gains by 2010. Some observers question the determination of RBS CEO Fred Goodwin to proceed with his pursuit of ABN even after ABN sold its U.S. asset, LaSalle Bank -- an asset RBS particularly desired -- to Bank of America. "It was a tricky deal to start with, and then they didn't get LaSalle and then came the liquidity crisis," said Mike Trippitt, an analyst at Oriel Securities Ltd. "Nobody would have been surprised if they had walked away." The consortium is paying triple ABN's book value in the biggest-ever takeover in the finance sector. "The Royal Bank-led offer is a very expensive transaction," said Robert Talbut of Royal London Asset Management. "The risk-reward doesn't add up."
Sources: Bloomberg
Commentary: ABN Amro Shareholders Expected to Approve Consortium Takeover On Friday - WSJRBS Consortium Doubles Stake in ABN AmroABN Amro Board Calls RBS Bid Superior, But Won't Back It
Stocks/ETFs to watch: RBSPY, FORSY, ABN. Competitors: HBC, DB, UBS. ETFs: RKH, KBE

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