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Five Tough Negotiations

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar and welcome to the Friday Five. From Wall Street to Main Street, Washington, D.C., isn't the only place that some tough debate is going down.

Here with me to offer five tales of tough negotiations is Morningstar markets editor, Jeremy Glaser. Jeremy, thanks for joining me.

Jeremy Glaser: Jason, I tried to bargain you down to four this week, but I guess it wasn't successful.

Stipp: It's a tough negotiation, Jeremy.

What do you have for the Friday Five this week?

Glaser: Well, this week we'll look at Bill Ackman's negotiations with Fortune Brands, with the tax bill negotiations on Capitol Hill, with Lululemon's one-sided negotiations, Groupon's negotiations with Google, and finally we'll take a look back at Ideas Week and see some negotiations that have emerged there.

Stipp: So Fortune Brands in the new this week; this is kind of an interesting company with a variety of different brands. What's the story with them, and what's the plan for the company?

Glaser: Activist investor Bill Ackman finally convinced Fortune Brands to split up. Now this is a company that has businesses that range pretty widely. So you start with Titleist golf clubs and you have Moen Faucets and you have Jim Beam and you have Master Lock, and all sorts of fun brands all under one umbrella, but there isn't lot of synergy between them.

A lot of investors have thought for a long time that there is lot of value in breaking those brands up and then selling them off to companies that can handle them better or [to be] just standalone entities that can really focus on plumbing or focus on golf. So they are going to split the company into three, with the golf, plumbing fixtures, and the alcohol. I think that this is a plan that makes a lot of sense. It's a long time coming. It's a negotiation that I think everyone is glad is finally coming to an end.

Stipp: In Washington, D.C., there's some bitter negotiations going on right now over the future of tax policies. It's something there's been a lot of back and forth; it seems like they are coming to an agreement. What's your take on the negotiation?

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Glaser: Jason, we've been talking about the potential for these negotiations for over a year now. As everyone knows, the tax bill, the Bush tax cuts are set to expire at the end of 2010. When that happens, tax rates would go up for everybody. It's something that President Obama campaigned, saying he wasn't going to let it happen, and almost everyone agreed that for the middle class those tax cuts should not go up.

But the real question was for people who make over $250,000. Republicans felt very strongly that those tax cuts should remain in place, while many Democrats felt that those should expire.

They finally came to a deal. The White House and Senate Republicans decided that they would extend the cuts for everyone for two years in exchange for extended unemployment benefits, the extension of some other of President Obama's tax cuts that were passed during the stimulus bill, and a few other odds and ends that were thrown in there.

Now, the problem with this negotiation, the problem with this compromise is nobody seems all that excited about it. You have critics on the Left complaining that they're letting the tax cuts for the very rich continue to be in place. There are critics on the Right, like Jim DeMint, who are upset that there are not permanent extensions to the Bush tax cuts and that things like the unemployment benefits being extended were in there.

I don't know if it's going to pass or not. I think it's going to be hard to get it through both the Senate and the House, given the level of opposition. Maybe there will be enough people in the center who will be able to push it though, but it adds more uncertainty I think to the tax debate, something that we've said that we'd like to see come out of the public discourse so people can make their plans, but I think hopefully we'll get some clarity on it in the coming week, and if not it's something that Congress might have to deal with retroactively next year.

Stipp: Well, some would say that the sign of a good negotiation is when no one walks away happy, but I guess we have to wait and see on that front.

One area where it seems like negotiation is one-sided is in the retail space. There's a company that reported this week, and they're having some pretty good luck with getting customers to pay up for their services even in what is still kind of a tough environment. Give us a little bit of background on that.

Glaser: Lululemon Athletica, which is a purveyor of high-end women's athletic gear, had an outstanding quarter. Record profits, record revenues and one of the big reasons that they are able to do this is that the women who shop there were willing to spend a lot more. They were raising prices and saw no resistance from their customer base.

I think this is a good sign that the luxury customer has stabilized a lot in this environment, that they're willing to splurge on things that they think are important to them. Now the stock is a little expensive as well, so we don't necessarily suggest that investors splurge on it at the moment, but certainly it's a company to keep an eye on. Their stock price is up over 100% over the last year. I think it's a brand that's gaining a lot of traction and certainly a retailer for the future.

Stipp: One negotiation that we only have bits and pieces about, and that we ultimately know it fell through, was Google's bid for Groupon, which we only heard a little bit about. What's your take on that picture there and was this even a good fit for Google to begin with?

Glaser: Last week we talked about how Google was prepared to pay $5.3 billion-plus for Groupon, the social buying site and that deal fell through.

Groupon's board rejected it because they thought they could get even more money or they thought they would better off in an IPO. There is a probably a couple of things at work here; it might have been just a valuation issue--they thought it was worth more. It might have been a culture issue--they thought that they were better off with their independent, quirky culture than being consumed into the monolith that is Google now.

But certainly it shows that they have a lot of faith in the future of Groupon's business--that Groupon's board does. I think that it's going to be there. I think this idea of the social deals--that your friends tell you that, "you should go out and buy this" and then you need to get a certain number of people to buy before the deal is active--is sound business but the problem is with competition. There are a lot of other competitor sites that are out there, that are trying to go after the same customers, players like Yahoo who are out there consolidating these deals that people could see the best ones of the day.

So time will tell if consumers really have an affinity for Groupon itself or an affinity just for saving money. If it turns out they are willing to flee ship if there is a better deal someplace else, Groupon could rue the day that they rejected that almost $6 billion offer.

Stipp: So lastly, Jeremy, on the portfolio front I think one of the toughest negotiations for investors in retirement right now is trying to find a way to get a decent yield on their investments and to be in those fixed income instruments that they normally be in, but it's very cloudy for those instruments right now. How are they negotiating that?

Glaser: You're right. It is extremely difficult, and it's something that we focused on during Ideas Week because people who are in retirement or about to enter retirement have been asking us over and over again, "How do I get these yields? How do I create a paycheck for myself in retirement?" It's difficult.

The fixed-income environment is just not as rosy as it was when people were retiring a decade ago. Instead of a tailwind of lower interest rates and interest rates going down, we are going to have the headwinds of interest rates going up over the next decade, in all likelihood. It's going to make it more difficult to get a good return out of those bonds, and yields right now are at really low levels, which makes it hard to get the current income.

We think the right answer is to create a total return approach. That is, instead of just worrying about what the yield looks like today, it's in finding assets and being in asset classes that will help that pie continue to grow. So even if you have to dip into a little bit of principal to make your payments right now, hopefully over time that yield will continue to improve and the total return will be high enough that you will be able to have a comfortable retirement.

Does this mean going completely into stocks or taking on an incredible amount of risk? Absolutely not. But it might mean taking a little bit more risk than a lot of retirees have been used to doing, or have been told to do in the past.

Stipp: Well, Jeremy, it was nice negotiating The Friday Five with you this week. Thanks for joining me.

Glaser: You are very welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.