Magazine

The Markets Turn Tail


Higher, higher, higher, then blam! For no obvious reason, Shanghai's pumped-up stock market fainted dead away on Feb. 27. Contagion then circled the globe, infecting bourses from France to Brazil to the U.S. After months in which markets rose at a stately pace, the sell-off reminded investors that stocks sometimes go down, too. Shanghai fell 8.8%, France and Germany 3%, and the Dow 3.3%, or 416 points.

Fed Chairman Ben Bernanke testified on Feb. 28 that he couldn't see any single trigger for the panic, but that didn't stop the pundits. Some blamed a speech by his predecessor, Alan Greenspan, who said he couldn't rule out a 2007 recession in the U.S. Others fingered rumors of a new tax to discourage stock speculation in China. Or rising global interest rates, or U.S. subprime mortgage woes. Others pointed to a much-worse-than-expected durable goods production number. Some markets recovered a bit on Feb. 28, so the pain may be short-lived. But investors won't forget the shock for a while, and may have to get used to greater volatility.

How do you sell the biggest leveraged buyout in history? Give everyone a piece of the pie. Private equity giants Kohlberg Kravis Roberts and Texas Pacific Group on Feb. 26 proposed to buy Dallas utility TXU (TXU) for an electrifying $45 billion. TXU Chairman and CEO C. John Wilder will probably stick around. The company would drop plans to build 8 of the 11 new coal plants that had inflamed greens. Utility customers will get something, too—a 10% cut in their bills through September, 2008. Still, regulators and lawmakers in Washington and Austin may balk, and other bidders could jump in.

This one merits double superlatives: On Feb. 26, WellPoint (WLP) announced that Angela Braly, 45, will take over on June 1. That will make WellPoint, the nation's No. 1 health insurer, also the largest publicly held company to be run by a woman. Braly is general counsel of the $60-billion-a-year Blue Cross & Blue Shield marketer. Outgoing CEO Larry Glasscock, who made acquisitions that built WellPoint into an insurer for 34.1 million Americans, plans to stay on as chairman.

There's little doubt General Motors (GM) is keen to snap up its crosstown rival, Chrysler Group (DCX), from German parent DaimlerChrysler (DCX). The Financial Times reported on Feb. 26 that gm is eager for a deal and would consider giving the Germans an equity stake in return. Neither company will comment, but one gm source says the company would only take Chrysler for next to nothing. Canadian parts maker Magna International (MGA)also seems interested. A source close to the situation says Magna has looked at Chrysler's plants. Expect Chrysler to be sold to someone by late summer.

See "Which Road for Chrysler"

Citigroup (C) CEO Charles Prince made good on his promise to name a cfo within 45 days of replacing Sallie Krawcheck, who returned to her post as head of wealth management on Jan.22. By hiring American Express (AXP) CFO Gary Crittenden, Prince brings on a respected straight-shooter who will better navigate a dicey interest rate environment and manage the balance sheet. Crittenden, however, wasn't an instant hit: Citi stock fell 2% the day the news broke.

Businessweek.com reported on Feb. 26 that federal prosecutors and securities watchdogs would soon file charges against a New York employee of Swiss bank ubs (UBS) for allegedly selling advance notice of changes in analysts' ratings to traders.

In what could be the stiffest patent infringement judgment ever—if it holds—a federal jury in San Diego on Feb. 23 ordered Microsoft (MSFT) to pay $1.5 billion to Alcatel-Lucent (ALU) in a case involving MP3 audio technology. The MP3 compression standard was created by Lucent's Bell Labs (ALU) along with scientists from Fraunhofer, a German think tank. Microsoft had licensed the technology from Fraunhofer, but Alcatel-Lucent argued the license covered different intellectual property. Microsoft says it will ask for a review.

See "Apple's International iTunes Controversy" A candid Valentine's Day note from Starbucks (SBUX) Chairman Howard Schultz sent shares down 2.3% on Feb. 26 after it was leaked and posted on the starbucksgossip.com blog. In the memo, Schultz laments how moves to streamline service led to "what some might call the commoditization of our brand." Among the culprits: automatic espresso machines and vacuum-sealed coffee packs, two innovations that boost efficiency but remove the pleasant sights and smells customers used to expect with their $4 latte.

Providing more evidence that it's trying to win over the red states, Toyota (TM) said on Feb. 27 that it will build a new suv plant near Tupelo, Miss., hiring 2,000 and investing $1.3 billion to make 150,000 vehicles a year. Toyota, which just opened a plant in San Antonio, says strong growth justifies more production. But since Honda (HMC) and Nissan (NSANY) can boast that a greater portion of their sales come from North American factories, and Toyota is paranoid about a backlash in the States, the company also figures it must build, build, build.

See "Toyota's Born in U.S.A.' Blitz Rolls On"

Paring back to its core businesses, Gap (GPS) on Feb. 26 said it will give up on Forth & Towne, its 18-month-old clothing chain aimed at women over 35. The tattered retailer said Forth & Towne, which runs 19 stores and competes with established outfits like Talbots (TLB) and Chico's (CHS), "was not demonstrating enough potential."

The planemaker finally laid out its route to recovery. CEO Louis Gallois on Feb. 28 unveiled a plan that involves laying off 10,000 and divesting six plants in France and Germany to save $2.8 billion over four years. French unions lambasted the proposal as "an act of war."

See "Airbus: Restructuring at Full Throttle"

Specialists, the folks on the floor of the New York Stock Exchange (NYX) who help settle chaotic markets, have long been derided as dinosaurs. Advocates of superfast computerized stock trading have had their way at the Big Board and other markets worldwide in making the floor almost irrelevant. But with computer glitches helping turn the Feb. 27 slide into a 416-point rout, the dinosaurs are getting their revenge. Without them, "the decline would have been far worse," says Robert Fagenson, chairman of one of the biggest specialist firms, Van der Moolen. They were buying as investors were rushing to sell, keeping prices from plunging further. He and other specialists are likely now to get a better hearing as nyse officials and regulators mull more computerization. The nyse recently began implementing a hybrid system that puts computers largely ahead of specialists, and technologists argue it's only a matter of time before the human touch is eliminated. But the meltdown, Fagenson says, amounts to "a very good argument for manual intervention."


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