Morgan Stanley posts loss, sells stake to China Wed Dec 19, 2007 6:52pm EST
By Joseph A. Giannone
NEW YORK (Reuters) - China has agreed to pump $5 billion into Morgan Stanley as the U.S. investment bank reported a stunning fourth-quarter loss fueled by $9.4 billion of losses in subprime mortgages and other assets.
China's investment, which could translate into as much as a 9.9 percent stake in Morgan Stanley, marks the latest capital infusion by a sovereign wealth fund into a major investment bank hurt by this year's credit crunch.
Morgan Stanley (MS.N: Quote, Profile, Research) shares rose more than 4 percent as investors hoped the large write-downs and cash injection by China's foreign exchange fund may be signs of the beginning of the end of the subprime mess. But some skeptics said the deal was a sign of weakness.
"This is a painful deal," Sanford Bernstein analyst Brad Hintz said in a research note. "When you leverage a brokerage firm up 31 times and you take a loss, you don't have any choice but to negotiate a nice deal to bring in equity capital."
Unlike his colleagues at Merrill Lynch and Citigroup, Morgan Stanley Chief Executive John Mack did not step down, but said he would forego his bonus this year. Mack, who pocketed $37 million in salary, bonus, restricted stock and other compensation last year, last month ousted protege and co-President Zoe Cruz and shook up the firm's fixed income and risk management leadership.
"The results we announced today are embarrassing for me," Mack said in a conference call of the investment bank's first quarterly loss in its 72-year history.
Last month, Morgan Stanley said traders betting the bank's own capital had incurred $3.7 billion in losses on U.S. subprime mortgages. On Wednesday, the bank disclosed another $5.7 billion in write-downs, reflecting further declines in the mortgage trades and losses on other debt.
To restore its capital, Morgan agreed to sell equity units that pay a 9 percent coupon. China will be a passive investor.
The deal reinforces Morgan Stanley's ties to China's vast, rapidly growing markets. More than a decade ago, Mack, then its president, helped forge the China International Capital Corp banking venture in which Morgan owns a passive 34 percent stake.
Earlier this month, Mack traveled to China to forge a new investment banking venture with Shanghai-based China Fortune Securities. The bank is pursuing licenses that will let it undertake banking and money management operations there.
Morgan Stanley is the latest big bank bailed out by sovereign funds recently.
Citigroup Inc (C.N: Quote, Profile, Research) agreed last month to sell a 4.9 percent stake to Abu Dhabi for $7.5 billion, while UBS accepted a $9.75 billion investment from Singapore's investment arm.
EMBARRASSING
With the write-downs knocking down earnings by $5.80 a share, Morgan Stanley posted a net loss from continuing operations of $3.59 billion, or $3.61 a share, in the quarter ended November 30.
A year earlier, Morgan had income from continuing operations of $1.98 billion, or $1.87 a share. Morgan's results reflect the spin-off of Discover Financial Services (DFS.N: Quote, Profile, Research) in July.
Analysts expected Morgan Stanley to lose 39 cents a share.
Morgan Stanley's results come a day after Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) reported a 2 percent profit increase as its fixed income traders sidestepped the credit problems that snagged the rest of Wall Street. Lehman Brothers Holding Inc (LEH.N: Quote, Profile, Research) said last week that earnings fell 12 percent after $3.5 billion in write-downs.
Morgan said $7.8 billion in write-downs came from subprime trading positions that fell further after the bank's November 7 warning. Morgan also wrote down $1.6 billion of mortgages held by a bank unit, commercial mortgages and other loans.
It is a sizable loss compared with Citigroup, which last month warned it could write off assets worth $8 billion to $11 billion. Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research) wrote off $8.4 billion in the third quarter, with more losses expected.
Morgan said it reduced its exposure to problem assets during the quarter. U.S. subprime mortgage were pared down to $1.8 billion on November 30 from $10.4 billion in August.
"The fact that there's only $1.8 billion left in subprime exposure suggests they are getting to the end," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.
The trading debacle was the first serious setback for Mack since he replaced Philip Purcell as CEO in 2005. Mack directed the bank to take on more risk and expand businesses such as mortgages and leveraged lending to boost profit and growth.
Earlier this year, those efforts were paying off as Morgan reported mortgage gains, even as subprime markets started to falter. But Morgan's proprietary bet against mortgages backfired as the market worsened beyond what traders expected.
Morgan Stanley's institutional securities unit posted a pretax loss of $6.5 billion, compared with $2.2 billion of pretax income last year.
OUTLOOK
Executives at Morgan Stanley said the losses overshadowed strong results from the rest of the company, including record annual revenue in many businesses and rising profit from overseas markets. Within fixed income, foreign exchange and interest rate trading, results were strong.
"This loss was the result of an error in judgment that occurred at one (trading) desk ... and a failure to manage that risk appropriately," Mack said.
Morgan Stanley shares closed up $2.01 at $50.08 on the New York Stock Exchange, even as Morgan Stanley executives offered a sobering outlook and warned that its credit and mortgage business would slow.
Chief Financial Officer Colm Kelleher told Reuters the bank would suspend buybacks as it reviews its capital levels and investment plans. Mergers and leveraged buyout activity also is expected to slow.
"The near-term outlook is challenging," Mack said. "The mortgage business is going to be dramatically reduced. Credit and leveraged lending will be on a lower basis as well."
Oracle Profit Surges 35%; Forecast Beats Estimates Oracle Corp., the largest maker of database software, said profit rose 35 percent and forecast earnings for the current quarter that beat estimates, reassuring investors concerned about a slowdown in technology spending.
Oracle jumped 6.5 percent in late trading after reporting second-quarter net income increased to $1.3 billion, or 25 cents a share. Sales gained 28 percent to $5.31 billion in the period ended Nov. 30, Redwood City, California-based Oracle said today.
Sales advanced more than 20 percent for the seventh straight quarter after Chief Executive Officer Larry Ellison spent $25 billion buying rivals and companies in new markets over three years. Oracle, which competes with SAP AG, said its expanding base of customers and products will help it weather an economic slump.
``A solid result in a challenging environment has to give investors a reason to cheer,'' Morgan Stanley analyst Peter Kuper said in an interview from Boston. He rates the shares overweight and said he doesn't own them. ``Oracle even beat our expectations for top-line revenue growth.''
Oracle gained $1.34 to $22.10 in extended trading. The shares fell 49 cents to $20.76 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has advanced 21 percent this year.
Forecast
Profit, excluding stock-based compensation costs, will rise to 29 cents or 30 cents a share in the current quarter, Chief Financial Officer Safra Catz said today on a conference call. Analysts in a Bloomberg survey estimate 29 cents.
Sales, including maintenance fees from acquired companies, will rise 20 percent to 23 percent, Catz said, suggesting sales of up to $5.47 billion. That compares with $5.2 billion, the average of estimates in a Bloomberg survey.
Oracle, which also competes with International Business Machines Corp. and Microsoft Corp., said it is taking market share from rivals.
Sales of new licenses, the key indicator of future growth among software companies, will advance as much as 25 percent to $1.74 billion, Oracle said. That compares with $1.62 billion estimated by Goldman, Sachs & Co. analyst Sarah Friar.
``With a company of Oracle's size, you feel more confident they are being conservative and not giving themselves some huge bar to trip over,'' Friar said in an interview. She recommends buying Oracle shares and doesn't own any.
Technology Budgets
While technology budgets will rise 8 percent to $3.1 trillion this year, growth will slow to 5.5 percent in 2008, Stamford, Connecticut-based Gartner Inc. said in October. In a survey of 37 companies, 61 percent expected their software budgets to decline or be little changed in 2008, San Francisco- based JMP Securities LLC said this month.
``We read the same newspapers you do and we take those reports into account when we think about the business,'' Catz said today. ``We have a broad, highly diversified customer base.''
Oracle sells database products, middleware software that helps different types of programs share information, and business-management applications for handling such tasks as accounting, merchandising and logistics.
Profit Estimates
Sales that include maintenance fees from acquired companies were $5.36 billion in the second quarter, beating the $5.03 billion average estimate of analysts in a Bloomberg survey. Excluding stock-based compensation costs, profit was 31 cents a share, compared with the 27-cent estimate of analysts.
In the second quarter last year, Oracle reported net income of $967 million, or 18 cents a share.
Sales of new licenses gained 38 percent to $1.67 billion. In September, Oracle forecast that sales of new licenses would rise as much as 25 percent, to $1.51 billion.
The company used its $10.3 billion purchase of PeopleSoft Inc. in January 2005 to become the second-biggest maker of business applications, after SAP. Since then, Oracle has bought 35 more companies, primarily to add business-management applications.
Oracle has expanded beyond financial and human-resources applications, and now offers business-management programs for specific industries, such as telecommunications. That strategy gave Oracle programs for functions such as regulatory compliance and billing, which customers can't delay buying, Ellison said.
`More Resilience'
``That gives us more resilience during a downturn than our friends in Germany,'' Ellison, 63, told analysts. SAP is based in Walldorf, Germany.
Sales of new database licenses, which include databases and middleware-server software, rose 29 percent to $1.12 billion. Application license sales advanced 63 percent to $553 million, Oracle said.
Customers buying new programs must also sign maintenance contracts, the only way they can receive software updates that fix bugs and add features. Revenue from maintenance contracts gained 24 percent to $2.49 billion in the quarter, Oracle said.
Last quarter, the company failed in its $6.7 billion hostile bid for BEA Systems Inc. Buying BEA would help Oracle challenge Armonk, New York-based IBM for the lead in the middleware market.
Oracle said today it had been in contact with BEA again in recent weeks.
Best Buy Posts 52% Higher Profit By REUTERS Published: December 19, 2007
The consumer electronics retailer, Best Buy Company, reported a better-than-expected 52 percent jump in third-quarter profit on Tuesday on strong sales of laptops and video games. The company also raised its earnings forecast for the year.
But shares fell 65 cents, to $50.48, as the company said results in the current quarter would be pressured by calendar changes.
“Next quarter won’t be as sparkling as Wall Street expects,” said Alan Lancz, president of the investment advisory firm Alan B. Lancz & Associates.
Mr. Lancz said that Best Buy was making the right moves longer term, with its international expansion and move into higher-margin products.
Best Buy said its full-year forecast would imply fourth-period profit in a range of $1.70 to $1.80 a share, below the $1.82 a share expected by analysts according to Reuters Estimates.
For the third quarter ended Dec. 1, earnings rose to $228 million, or 53 cents a share, from $150 million, or 31 cents a share, a year earlier.
Analysts’ average expectation was 41 cents a share, according to Reuters Estimates.
Revenue increased 17 percent to $9.9 billion, topping the $9.4 billion analysts expected. Sales at stores open at least 14 months, or same-store sales, rose 6.7 percent.
Best Buy said sales were helped by a calendar shift that added an extra week of sales after the Thanksgiving Day holiday, which typically brings increased customer traffic.
It also cited increased sales of big-ticket items like video gaming consoles, notebook computers, navigation devices and flat-panel televisions.
Revenue in the United States rose 15 percent, while international sales jumped 32 percent.
Best Buy said sales growth in the quarter was expected to moderate from the third quarter. It cited the additional week that increased third-quarter sales, and said the fourth quarter includes 13 weeks versus 14 a year earlier.
In the third quarter, the entertainment software and home office categories posted the highest sales growth, Best Buy said. In the TV segment, double-digit growth in flat-panel sets was offset by lower sales of projection and tube TVs. http://www.nytimes.com/2007/12/19/business/19best.html?ref=business
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