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Who's In and Who's Out?

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com, and welcome to the Friday Five. It's been a short work week, but a busy week in the corporate world. Here to discuss what's in and what's out is Morningstar's markets editor, Jeremy Glaser.

Jeremy, thanks so much for being here.

Jeremy Glaser: Very welcome, Christine.

Benz: So, Jeremy what do you want to talk about today?

Glaser: Well, this week, we're going to talk about Yahoo, Groupon, Bank of America, International Paper, and finally, something at Disney.

Benz: OK. So, let's start with Yahoo which saw a big shake-up in the executive suite. What's going on there?

Glaser: I can't say, anyone was blown away by surprise, but the CEO of Yahoo, Carol Bartz, was unceremoniously fired this week, apparently via phone. She was told that she was no longer needed and that her services were no longer needed.

Yahoo has been having a lot of problems lately. The firm has a lot of money tied up in its Asian stakes, both in Yahoo Japan and with the Chinese Internet-search company, and there has just been a lot of tension between the Asian partners and with Yahoo. The firm really had trouble getting its ad business to get back up to snuff to be able to really compete against Google.

Yahoo has yet to really prove that, since it rebuffed that offer from Microsoft a few years ago, the firm really makes sense as a stand-alone business.

After this firing there's a lot of talk about if Microsoft is going to come back to the table or if others (suitors) possibly want Yahoo's business. It's still a big company; it's still doing OK. But certainly, Bartz wasn't able to turn things around, and it could be a long road back for Yahoo. Even without her at the helm, the firm still has some large structural problems that it's going to have to solve or that any potential acquirer would have to solve. And I think it's a story we're going to be watching for a long time.

Benz: That's one of those firms that's one of the oldest names in the tech world, but maybe kind of betwixt and between with so many new firms encroaching on what had been Yahoo's territory. A lot of Internet users I know say that they just don't visit Yahoo sites that often.

Glaser: Exactly, and it's very difficult to monetize a lot of the content through display advertising and through some of the firm's search advertising. Yahoo is just losing a lot of that traffic.

Benz: Now, in terms of monetizing, another big firm that everyone been watching has been Groupon, which is now shelving its plans to go public. What do you think is going on there?

Glaser: Well, Groupon has been an interesting story for a while. I think a lot of people, me included, were surprised when the financials came out, when the firm released its first S1 which showed just how little profit Groupon was really raking in. The firm was spending a lot more on marketing, and it was costing a lot more than I think a lot of people had initially expected, when they looked at the business model without being able to examine the specific numbers.

Groupon was still on track to price the IPO and to go public, either this week or next week or sometime in the very near future. It decided to put those plans on hold. The official reason is that, with the volatility in the market, the firm thought it could get better pricing maybe by waiting a little bit. But I think it could be possible that investor appetite just isn't as strong as the firm had initially expected. With Groupon putting out financial results that might not be incredible--and there were a lot of questions about the sustainability of the firm's business model and their competitive advantages--the company is now kind of rethinking maybe where it will be able price. And it now might go back to the drawing board and think about the business a little bit more before it goes public. Groupon will have to, again, think about other offers, such as the one from Google just from a few months ago. With the that huge offer Groupon got, it might be looking at that in hindsight and realizing that maybe the firm should have taken the money and ran back then.

Benz: Now, shifting gears from the tech world, Jeremy, Bank of America also is a highly controversial stock at the moment. The Company did some shaking up in its corporate suite, as well?

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Glaser: Yeah, some of the top management is out at Bank of America. Some of the top executives who ran different parts of the business are out and are being replaced with chief operating officer positions who will obviously report directly to CEO Brian Moynihan. This is an attempt to try to get even more investor confidence into Bank of America. The firm has been shaken pretty recently with some lawsuits about some of its mortgage practices. Things just keep coming back from the Countrywide acquisition that continue to haunt BofA, even as other firms have kind of moved past it. The stock has really taken some big hits.

Even Warren Buffet's large investment in the company which was seen as a vote of confidence in the company still really hasn't completely turned the perception around that Bank of America is really past the financial crisis, that it is going to be able to get back to this great core earnings power and really be able to use its giant retail branch to make a lot of money. I don't think that these changes are going to really change that fundamental fact.

Brian Moynihan, is still really in charge. I don't think we are going to see a lot of huge strategic shifts. It shows that BofA is willing to make the changes. But it's a big company; it's not going to turn on a dime. And I think that even with these moves, investors are still going to be a little bit suspicious of Bank of America's prospects.

Benz: So, I guess, a related question, Jeremy, is can a company like this get too big? So, now we are hearing rumors that there might be some attempts to kind of skinny down the business after growing it so large. We have been hearing that Merrill Lynch could be spun-off at some point. Do you think that that would help?

Glaser: Certainly, Bank of America under Ken Lewis was there to get bigger. It was the acquisition king, and it would go in and buy an MBNA, or whoever it might be, and really integrate it well, be able to expand the reach, and get those economies of scale.

That model hasn't been working for the firm so great recently, as we just talked about, particularly with Countrywide, which was a merger that really hasn't particularly worked very favorably for BofA. But, again, I don't know if I have any special insight and if a breakup is going to happen or is not going to happen. I think that the firm might want to consider it, but the question is: Can you get the right price; can you really get the terms that are attractive enough to make it worthwhile and that you are not just kind of selling your future earnings power and selling your future growth just for some quick cash now or to satiate some investor appetite now? You really have to think long-term. I think those are the decisions management is talking about right now, and that's probably why they're looking at what the potential value could be. But I'm not sure if they'll actually pull the trigger on some of these dispositions.

Benz: Now, one firm that has been getting larger, or plans to, is International Paper, which sealed a deal to acquire Temple-Inland. What's your take on that deal?

Glaser: Yeah, this acquisition is finally coming to fruition. It started in June when IP made an offer. It had to sweeten it a little bit but just really a tad in order to get the management of Temple-Inland to agree. In the meantime the market uncertainty, the economic uncertainty, and certainly some lawsuits at Temple-Inland have made the deal seem lot more attractive to be part of larger corporation.

Analysts think that IP is getting a pretty good price for the deal, that the firm is not radically overpaying, which is nice to see. We've talked before about how some acquisitions can be value-destroying if you pay too much for a firm.

So, I think, that's always a nice sign at International Paper that there still are some corporations that can do acquisitions, can do them at the right price, can do them in the way that really makes sense for them, and can be patient instead of just quickly raising the price to a point where the other company acquiesces. So we think that over the long term, this could be a good deal for International Paper shareholders.

Benz: Any impediment to getting the deal through that you know of?

Glaser: It's very unlikely. Certainly, it will have to go through regulatory scrutiny. But unlike deals like, let's say, AT&T/T-Mobile, which are hugely contentious, the paper and the paper goods industry, even after this merger, should be fragmented enough that the regulators won't give it too much of a second look.

Benz: Last but not least, and a little bit of frivolity, we heard who the host for the next Academy Awards Ceremony is; it's Eddie Murphy, so…

Glaser: Yeah, I guess, Eddie Murphy is in for the Oscars, which will be on ABC, which is owned Disney. I guess, Disney saw this volatility in the market. It maybe reminded management of the '80s, so they decided to bring back a favorite '80s star in order to host the Oscars. It's kind of an out-of-left-field choice for them, but we'll see if they are able to rekindle those ratings and rekindle some interest in that telecast which the company paid dearly for the rights to broadcast. And we'll see if Disney has a winner on its hands with this one.

Benz: Always a late night, but always fun to watch. Thanks, Jeremy, for being here.

Glaser: You're quite welcome, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.