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Barbarians At The Gate II


Private-equity outfits have been snapping up companies like there's no tomorrow. Now, a trio of investment firms, including storied Kohlberg Kravis Roberts, has topped all others. With a record $33 billion bid, including $11.7 billion of debt, the firms said on July 24 that they would take over HCA (HCA), the nation's largest hospital chain. The price tag surpasses the record holder, KKR's $31.4 billion buyout of RJR Nabisco, a 1989 deal described in the book and film Barbarians at the Gate. KKR's partners in the HCA deal are Bain Capital and Merrill Lynch (MER), as well as the family of Senate Majority Leader William Frist (R-Tenn.), whose father and brother founded HCA in 1968. In another sign of the buyout frenzy, Blackstone Group was reported to be mulling a higher bid. This is HCA's second attempt at going private. The Nashville-based chain of 176 hospitals and 92 surgery centers was acquired in a 1988 leveraged buyout. It reemerged in 1992.

Feeling flush itself, Hewlett-Packard (HPQ) agreed on July 25 to pay $4.5 billion for Mercury Interactive (MERQ), a business software company. It was Mark Hurd's first major purchase since he became HP's CEO 16 months ago. A day earlier, Advanced Micro Devices (AMD), which has been gaining ground on its larger rival, Intel (INTC), said it would take over computer chipmaker ATI Technologies (ATYT) for $5.4 billion.

See ``AMD + ATI: Imperfect Together?'' Hoping to shut the barn door before all the cows have run loose, the Securities & Exchange Commission voted unanimously to toughen rules on options grants. Starting next year, companies will have to explain how they value stock options and why they choose the award dates they do. The July 26 get-tough vote comes a week after two former executives at Brocade Communications Systems (BRCD) were charged criminally with backdating options to inflate their value to employees. Dozens more companies have acknowledged they are under investigation for similar practices.

"Between intensive care and the crematorium." That's Indian Commerce Minister Kamel Nath's take on the global free-trade talks that were suspended by the World Trade Organization on July 24. The Doha Round of talks began with high hopes in 2001, but political pressures from back home prevented negotiators from cutting a deal. Europe and the U.S. balked at reductions in farm tariffs and subsidies, while Brazil and India kept their own markets closed. If Doha can't be resuscitated -- and no one sees a Lazarus act here -- the world could fragment into regional trading blocs.

See ``Why Doha's Derailment Matters'' Big-name drugs don't just help patients; they've taken the pharmaceutical sector off its sickbed, too. Merck (MRK) and Schering-Plough (SGP) emerged on July 24 as two of the most prominent winners. Both enjoyed soaring demand for cholesterol-lowering drugs, including Zetia and Vytorin, which they market through a joint venture. Glaxo (GSK), Eli Lilly (LLY), and Wyeth (WYE) also posted higher earnings. Big Pharma is profiting from the new Medicare Part D drug benefit, which has fueled an increase in prescriptions.

Detroit's Big Two are like cars passing in the night. General Motors (GM) wowed investors on July 26 with impressively strong operating profits and a 12% jump in revenue, to $54.4 billion. Although GM posted a net loss of $3.18 billion, its global auto operations had their first profit since 2004, excluding one-time expenses. Its GMAC finance unit also set an earnings record on better returns from mortgage lending. Meantime, Ford Motor (F) smacked investors with a second-quarter loss of $123 million; analysts were predicting a $230 million profit. Ford is now hastening job cuts and plant closingsto bring operations in line with its shrinking market share.

See ``GM's Wagoner Gets Some Breathing Room'' The world's largest PC maker disappoints again. In the latest in a string of quarterly warnings, Dell (DELL) said on July 21 that its second-quarter sales would come in at $14 billion, shy of the projected $14.2 billion, and earnings would total 21 cents to 23 cents a share, well short of the expected 32 cents. The culprit this time: falling prices in the commercial market, which accounts for 85% of Dell's overall revenue, as well as heavy spending to improve its oft-slammed customer service and tech support.

See "What Dell Should Do"

Two of the Internet's hottest hotties aren't anymore. Amazon.com (AMZN) said on July 25 that its second-quarter net plunged 58% on a 22% rise in sales. Revenue was hurt by an end to its linkup with Toys 'R' Us. The breakup plus bigger tech investments for new digital media offerings were to blame for tanking profits. Shares lost 22% of their value. Earlier, Yahoo! (YHOO) sank after saying it would delay the launch of a long-awaited project, code-named Panama, to make its search business more competitive with market leader Google (GOOG). The news, disclosed on July 18 as Yahoo reported a big drop in earnings, triggered a 22% plunge in its shares to a two-year low. They have yet to recover. Panama, essentially a rebuilt online ad system, now will be released in early 2007.

See "Amazon Investors Feel The Sting"

Better trim the grass around that for-sale sign out front -- it might be there a while. On July 25 the National Association of Realtors said the supply of unsold existing homes was the biggest since July, 1997: a 6.8-month supply at the current sales pace. Prices were up just 0.9% from a year earlier, the smallest gain in 11 years. Things are worse for owners of co-ops and condos, the market where speculative fever ran the hottest. Median prices fell 2.1% in June from the year before, while the volume of sales was off 10.9%.

BP's (BP) John Browne is stepping down. While reporting record profits on July 25, the long-standing chief executive announced he'll retire at the end of 2008, 10 months after turning 60. What a run he's had. Since taking over in 1995, he has transformed BP from a big oil company into a really, really, big oil company with his takeovers of Amoco and Arco in the U.S. He also led the industry into Russia by paying $8 billion in 2003 for half of what is now called TNK-BP. Browne has had his woes, of course. A 2005 blast at BP's Texas City (Tex.) refinery killed 15 workers and injured 170. A BP pipelne also sprung a leak in Alaska this year. As a result, he just upped spending on safety. He also tried to reposition the company as an environmentalist, with ads proclaiming that BP was Beyond Petroleum. But BP's second-quarter results showed its initials might better stand for Billions of Petrodollars. The London-based company earned $7.27 billion -- $80 million a day -- on sales of $73.47 billion, second only to really, really, really big ExxonMobil (XOM).


Toyota's Hydrogen Man
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