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Merrill's Bombshell


Well, give Merrill Lynch (MER) CEO Stanley O'Neal credit for plain talk. "We made a mistake," he said during an Oct. 24 conference call. And how. The firm posted its first quarterly loss in six years, stemming from a $7.9 billion write-down on subprime securities. The $2.3 billion net loss led to a cut in Merrill's credit rating. On Oct. 5 the firm had predicted a write-down of only $5 billion. Outraged investors dumped Merrill shares, which fell 5.8%. O'Neal said the ugly numbers stemmed from a more conservative valuation of its subprime assets, but many on Wall Street are fretting about future losses and O'Neal's leadership. Anyone hoping the third quarter would bring an end to Wall Street's subprime woes may be sadly mistaken.

It may not be a lifeline, but at least it's a vote of confidence. On Oct. 23, state-owned Chinese brokerage Citic Securities agreed to invest $1 billion in beleaguered investment bank Bear Stearns (BSC). Citic will buy 40-year convertible trust preferred securities equal to 6% of Bear's shares, with the option to boost the stake to 9.9%. In return, Bear will pay $1 billion for six-year convertible debt representing a 2% stake in Citic, with an option to go to 5%. Citic isn't the only cash-flush foreign institution taking advantage of U.S. bank stocks that have been whacked by the subprime crisis and stagnant earnings. Expect more deals in the months ahead.

"Firing on all processors" doesn't do justice to what Apple (AAPL) is pulling off these days. On Oct. 22 the company obliterated Street projections with yet another blow-away quarter. It wasn't just that revenues hit $6 billion, up 28% from the previous year, or that profits jumped 67%, to $901 million. It's that there's so much room for growth. Mac sales climbed by a torrid 34% in the quarter, even though many shoppers may be waiting for the new Leopard operating system. Apple shares rose 9% by the next day.

See "Apple Blasts Past the Forecasts"

Porsche may finally get its hands on Volkswagen (VLKAY). A German law designed to shield VW from takeovers was zapped on Oct. 23 by the European Court of Justice. The 1960 law gave effective control over the automaker to the state of Lower Saxony, perpetuating what some dubbed Europe's last communist enclave. Porsche, which owns 31%, is expected to buy up to 51% and accelerate VW's drive for better quality and efficiency.

See "VW Wheels, Porsche Driver?"

The vote on the Chrysler-United Auto Workers deal closed on Oct. 24 and went down to the wire. At press time, at least eight locals had voted against ratifying. If a majority of members vote yes, the union would take over a health-care trust that manages retiree medical benefits, endorse a lower wage for new hires, and accept weaker layoff benefits, among other concessions. But dissident workers hate the two-tiered wage scale and want more job guarantees.

While the chip behemoth may be in hot water in Europe and Asia for alleged anticompetitive behavior, U.S. regulators appear to be shrugging their shoulders. Japan, South Korea, and the European Commission have accused Intel (INTC) of coercing PC makers to lock archrival Advanced Micro Devices (AMD) out. But the Federal Trade Commission has declined to elevate its own inquiry into a more formal investigation, The New York Times said on Oct. 21. Intel still faces a civil lawsuit by AMD.

Now that the easy money for private equity firms has dried up, the CEOs who work for LBO bosses are under extreme pressure to squeeze profits out of acquired companies. That means soon you'll be hearing tales of quick and brutal corporate breakups, rollups, and reorgs. The storm could rival the downsizing binge of the early 1990s—and millions of employees will face survival of the fittest.

After losing so many battles to Google (GOOG), Microsoft (MSFT) finally won one. On Oct. 24 the software giant snagged a stake in social networking star Facebook. In a deal that values the Web company at an astonishing $15 billion, Microsoft will buy a chunk for $240 million. It will also provide international ad sales for Facebook, having contracted last year to sell U.S. ads. Whether that revenue will justify the investment remains to be seen, but the deal is a sign that Microsoft may be making progress on the Web. Meanwhile, over in Europe, the company agreed to drop its right to appeal and to abide by the European Commission's ruling in a nine-year antitrust case.

See "Microsoft and Facebook Hook Up" and "Endgame for Europe's Microsoft Case"

After seven long days of speeches came the big moment at the 17th Chinese Communist Party Congress: On Oct. 22 the nine members of the Politburo Standing Committee marched before flashing cameras. As expected, among them were 54-year-old Shanghai Party Secretary Xi Jinping, who's seen as the likely heir to President Hu Jintao, and 52-year-old Liaoning Party Secretary Li Keqiang, who may take over from Premier Wen Jiabao. Xi and Li are expected to follow the current leadership's path of shifting to an economy more reliant on domestic consumption and services and less on highly polluting and inefficient manufacturing operations and trade.

See "China: New Leaders, Old Problems"

Italy's state-run train system, of late sued by passengers for harboring lice, is set to get a jolt of competition from Fiat (FIA) and Ferrari Chairman Luca di Montezemolo. He and four partners, including shoe tycoon Diego Della Valle, the founder of Tod's, are planning to launch the first high-speed train service in Europe backed entirely by private investors. Their company, NTV, aims to start service in 2010 when Italy's rail system is deregulated. It'll pamper riders with innovative service—and speed from Rome to Milan faster than a Ferrari.

Foreign asset managers are flocking to where the money is: China. Growth in that market has averaged more than 60% over the past three years and will run above 20% for the next decade, says a report from McKinsey. So it's no surprise that more than 27 companies have set up shop in the past five years. But low fees and the tendency of Chinese customers to churn accounts make it tough for anyone to turn a profit. (mckinseyquarterly.com)

Doing a spot for Victoria's Secret at least seemed appropriately weird. Now grizzled music legend Bob Dylan is appearing in a campaign for the Cadillac Escalade that co-promotes his XM Satellite Radio (XMSR) show Theme Time Radio Hour. It's true that many of Dylan's fans are graying themselves, but are they really ready to accept him as a Caddy spokesman? (adage.com)

With the U.S. auto industry gagging on too many pickup trucks and SUVs, it seems goofy that Indian conglomerate Mahindra & Mahindra should be entering the market. But the company has an ace under the hood: clean diesel engines that better Detroit and Asian rivals in fuel economy by 25% to 40%. Mahindra expects to introduce three vehicles under its own brand in mid-2009.

Photograph: PAGE 61 "Baseball, apple pie...and Mahindra?"

It's the age-old petro-state problem: what to do with tens of billions burning a hole in your pocket. Russia is looking to pump some of its windfall into foreign stocks. At a meeting on Oct. 19 in Washington, Finance Minister Alexei Kudrin said the Kremlin has earmarked $20 billion for purchases of foreign stocks. The move worries some in Washington and Europe, who suspect the Kremlin will use the money to further its strategic goals. (moscowtimes.ru)

Sometimes the best strategy is to double your bet. Wal-Mart's (WMT) big play in Japan, its ownership of the Seiyu department store chain, has been a disaster thus far as Seiyu continues to bleed money. So Wal-Mart said on Oct. 22 it would buy the 49% of the 400-store chain it doesn't already own for about $900 million. Wal-Mart says it will have more freedom to make changes. It also underscores the importance of Japan to Wal-Mart, which fled Germany and South Korea last year. At home, Wal-Mart announced on Oct. 23 that it will build fewer supercenters.

Chances are, you'll get at least one prepaid gift card this holiday season. Visa wants a piece of that action. Looking to capitalize on the trend toward personalization, the company on Nov. 15 will launch a site to let users upload photos and personal greetings that would be printed on gift cards and mailed to recipients. That sets up a tussle with retailers such as Wal-Mart and Apple.

Just when things were looking up for the Net phone upstart, it's squaring off with its most formidable foe. After settling patent litigation with Sprint Nextel (S), Vonage disclosed on Oct. 19 that it has been sued for patent violations by AT&T (T). Tiny Vonage faces an uphill battle against AT&T, which is on a roll after announcing a 41.5% rise in third-quarter net income, to $3.1 billion.

Dell (DELL) keeps tweaking its business in hopes of stopping its market-share swoon. On Oct. 22 it said it will offer PCs and printers in all 1,400 Staples (SPLS) office-supply stores. Dell, now No. 2 to Hewlett-Packard (HPQ), for years sold to consumers only over the phone and the Web. Realizing that customers like to see what they're buying, it began selling at Wal-Mart earlier this year.

With crude prices soaring, it's the best of times to be an oil company—but BP (BP) remains the odd major out. A day after the British giant announced a 29% drop in third-quarter profits, The Wall Street Journal reported on Oct. 24 that BP will pay $303 million to settle civil charges that traders manipulated U.S. propane prices and a $50 million fine stemming from a refinery explosion in 2005.

Infernos in California had scorched 300,000 acres and destoyed or damaged 1,600 homes at press time. It could have been worse: Saying they had learned the lessons of a 2003 firestorm, fire teams responded quickly with help from the feds and neighboring states. But on Oct. 24 estimated losses stood at $1 billion, with industry experts saying they expect paying more than $500 million in claims from homeowners and small businesses. State Farm and Farmers blanketed Southern California with radio ads offering claims assistance.

See "California: Fire Costs Flare"

Kohlberg Kravis Roberts and Goldman Sachs (GS) saved face by making peace with audio equipment maker Harman International (HAR). The firms agreed to take the company private in April, but sour notes in its business caused them to back away. On Oct. 21 they said they'd buy $400 million of convertible bonds from Harman instead of fighting it out in court.

Diabetics don't want to breathe in their insulin. That's what Pfizer (PFE) CEO Jeffrey Kindler has been hearing from patients and doctors in the year since the drugmaker introduced Exubera, the first inhalable insulin. The company figured Exubera would be a $2 billion-a-year smash, but it has brought in only $12 million in 2007. So on Oct. 18, Pfizer pulled the plug, inhaling a $2.8 billion write-down.

See "Pfizer's Exubera Flop"

Is the real estate bubble about to burst? That's the question many in the Gulf states are asking themselves these days, according to the cover story of the October issue of BusinessWeek Al Arabiya. From Saudi Arabia to Qatar, petrodollars have financed a massive building boom. In Dubai alone the number of housing units has tripled in the past 12 years. Prices, meanwhile, are soaring, thanks in part to the growing availability of home mortgages, which were virtually nonexistent across the region a few years ago.


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