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Markets News Thursday: Hewlett-Packard challenges Cisco with 3Com acquisition; Australia adds 24,500 jobs in October
By Finfacts Team
Nov 12, 2009 - 8:03:18 AM
Hewlett-Packard challenges Cisco with 3Com acquisition
Hewlett-Packard, the PC, printer and computer services giant, on Wednesday said that it had reached an agreement to acquire 3Com, a provider of computer network equipment, for $2.7 billion in a deal that HP plans as a platform to move into the business space of the leader in networking systems and infrastructure - -Cisco Systems.
3Com is reported to have about 30 per cent of the growing Chinese market for switches and routers for moving data around corporate networks, arising from a previous joint venture in the country with China’s Huawei, and HP said it intended to use its larger sales force to distribute 3Com gear more broadly.
While 3Com has more than 2,400 engineers in China, its revenue has grown slowly in the past three years, to $1.3bn in the last full year.
Ann Livermore, an executive vice president of HP, said computer networking is a $40 billion-a-year market with high profit margins that as so far, it has faced little head-to-head competition.
“HP is eager and now positioned to disrupt the networking industry,”Livermore said.
The offer price, $7.90 a share, is at a premium of about 39% to 3Com’s closing price on Wednesday. The deal was announced after the market closed.
In recent years, Hewlett-Packard has been expanding its network equipment business but has concentrated on systems used in office networks, both wired and wireless.
“What we’ve been missing is networking for the core of the data center,” Livermore said. “That’s where Cisco is strong, and before, HP couldn’t attack that.”
Cisco took the battle to HP this year by entering the market for server computers used in data centers. Cisco also recently partnered with EMC, to sell data center equipment to businesses.
Also on Wednesday, HP provided an early look at its earnings for its fiscal fourth quarter, which ended in October, and raised its estimates for 2010.
The company reported a profit, excluding some items, of $1.14 a share in the fourth quarter.
US foreclosure rate slows
Foreclosure rates fell for the third consecutive month in October, but remained sharply higher than a year ago, according to a report issued on Wednesday.
Foreclosure filings - - default notices, scheduled foreclosure auctions and bank repossessions - - were reported on 332,292 US properties during the month, a decrease of 3 percent from the previous month but still up nearly 19 percent from October 2008. The report also shows one in every 385 US housing units received a foreclosure filing in October.
“Three consecutive monthly declines is unprecedented for our report, and on first blush an indication that the foreclosure tide may be turning,”said James J. Saccacio, chief executive officer of RealtyTrac.“However, the fundamental forces driving foreclosure activity in this housing downturn - - high-risk mortgages, negative equity, and unemployment - - continue to loom over any nascent recovery. And despite all the efforts and resources directed at helping homeowners avoid foreclosure, we continue to see foreclosure activity levels that are substantially higher than a year ago in most states.”
Some sates have introduced measures to slow the rate of foreclosures. In Nevada, foreclosures dropped 26 percent from the previous month because of new legislation requiring mediation before initiating foreclosure proceedings.
However, one in every 80 housing units there received a foreclosure filing in October. A total of 13,842 Nevada properties received a foreclosure filing during the month, a 4 percent decrease from October 2008
Earlier this week, the Treasury Department said that more than 650,000 homeowners have taken trial loan modifications under the Making Home Affordable program, which was announced last February. About one-third of those modifications have been in California and Florida, which also happen to have some of the highest foreclosure rates in the country.
The ten states with the highest foreclosure rates were little changed from the previous month. According to the RealtyTrac report, Nevada remains No. 1. California ranked second, followed by Florida, Arizona and Idaho.
Vermont had the lowest rate, with one in every 20,762 properties receiving a foreclosure notice.
RealtyTrac forecasts that 3.2 to 3.4 million properties will go into foreclosure in 2009, up from 2.3 million in 2008.
UK labour market data suggest that Q3 GDP estimate probably not too far off
Davy chief economist comments:"The UK labour market has stabilised. Employment actually increased, albeit only marginally, in Q3. In addition, the unemployment rate looks to have peaked at 7.8%. Although significant slack has built up, the labour market deterioration has not been as bad as in the early 1990s recession. Moreover, yesterday's Q3 estimates tally with the first GDP release when the fall in average hours worked is noted.
It was encouraging that UK employment grew again, according to the official labour force survey (standard ILO basis). Employment increased by 6,000 quarter-on-quarter (qoq) seasonally adjusted in Q3. Yesterday's data do not tell us how individual sectors are doing: that information is released with a lag in the workforce survey of firms. But it is notable that male employment fell again (-50,000 qoq) whereas female employment rose (+56,000 qoq). That suggests public sector employment is still rising (the proportion of females employed in the public sector is higher than in the private sector).
In the aftermath of the 1990-1991 recession, UK unemployment surged by four percentage points from 6.9% in June 1990 to 10.7% in January 1993. This time around, unemployment started at a lower base. It rose from 5.2% in April 2008 to 7.9% by June of this year. But that was probably the peak: the rate is now 7.8%. So the deterioration has not been as bad in terms of the proportion of the labour force unemployed, nor from the respect of the percentage point rise in this recession. With regard to the recent estimate of Q3 GDP, it is worth looking at labour input implied by these data. Economy-wide man hours worked (accounting for employment and average hours worked) fell 0.8% qoq in Q3 compared with a GDP drop of 0.4%. Accounting for trend productivity growth of about 0.5%, the provisional estimate of GDP can't be too far from the mark."
The US business community is urging the Obama administration to come out with a strong trade policy with Asia. Kristin Paulson, chair of the Asia Pacific council at the American Chambers of Commerce, discusses US trade ties with Asia, with CNBC's Chloe Cho.
US markets
The Dow Jones Industrial Average rose for a sixth straight trading session Wednesday, boosted by good news from leading home builder Toll Brothers. Gold hit another record.
The Dow rose 44.29 points, or 0.4%, to 10291.26, another new high for 2009 and up 5.3% over its six-day period.
The S&P 500 was up 0.5% and the Nasdaq gained 0.7%.
Asia
Australia added workers in October, leading to speculation that the central bank will raise interest rates for a record third straight month.
The number of people employed rose 24,500 from September, the statistics bureau said in Sydney today. The jobless rate rose to 5.8% from 5.7%.
The Nikkei 225 dipped 0.68%; the Shanghai Composite slipped 0.07% and Australia's S&P/ASX 200 slid 0.19%.
Expect the yuan to appreciate over the next 6-12 months, says Olivier Desbarres, director of FX strategy at Credit Suisse. He tells CNBC's Chloe Cho that the pace of appreciation is likely to be gradual:
Dow Jones & Co is poised to sell its interest in the Stoxx Ltd. stock-indexing business for $309 million, according to the Wall Street Journal.
Stoxx Ltd. is a three-way joint venture between Dow Jones, Germany's Deutsche Börse AG and Switzerland's SIX Group AG. Launched in 1998, Stoxx calculates and licenses stock-market indexes for use in European-focused investment products such as exchange-traded funds and futures and options.
Stoxx estimates that about 30% of the assets under management in Europe are based on one of its indexes.
In Europe, the Dow Jones Stoxx 600 is up 0.08% Thursday.
The ISEQ is up 0.58% in Dublin.
CRH has risen 2%; Elan is up 2.4%.
Paddy Power has jumped 5.5% after positive trading update today and entry to French market - - see link to story, in Box above .
Bloomberg reports the biggest financial gamble in modern Irish history is about to exit the realms of theory and enter the real world.
Lawmakers will today pass a bill creating a so-called bad bank that will pay the country’s biggest banks 54 billion euros ($81 billion), or about a third of gross domestic product, for property loans to free up lending. The agency plans to start buying loans by the end of the year, according to a plan published last month.
Finance Minister Brian Lenihan is seeking to end a crisis that’s wiped 70 percent from the country’s benchmark stock index, sent bond spreads soaring to the highest in at least a decade and destroyed Ireland’s status as Europe’s most dynamic economy. Real-estate prices have on average dropped 50 percent since peaking in 2007, and bad debts at lenders led by Bank of Ireland Plc and Allied Irish Banks Plc are surging.
The New York Times says today that European banks with large ping industry portfolios - - among them Royal Bank of Scotland and Lloyds, and HSH Nordbank and Commerzbank in Germany - - could face meaningful write-downs as ship owners confront plummeting charter rates from a 25 percent drop in global trade.
“Peak of defaults is generally one year after the trough of the economy,” said Scott Bugie, a European bank analyst at Standard & Poor’s. “In the U.S., the debt workouts have been faster and the economy also bottomed out before Europe.”
HSH Nordbank, a leading lender to the shipping industry, set aside close to $800 million in provisions for its shipping-related loans this spring, and it has already received 13 billion euros ($19.4 billion) in support from its owners, the regional German states of Hamburg and Schleswig-Holstein.
And while global trade appears to be gradually on the mend, a glut of previously ordered ships due in the coming years is expected to limit the extent of a meaningful price recovery.
“The problem is that there will be more bankruptcies and foreclosures if the ship owner can’t operate his ship,” said Anthony B. Zolotas, a shipping industry banker at Eurofin in Athens. “At that point he will give the keys to the bank and say, ‘Sorry, mate, I just can’t do this anymore.’ ”
Discussing where the markets and gold are headed, with Jeffrey Kleintop, LPL Financial; Andrew Kanaly, Kanaly Trust Company and James Di Georgia, GoldandEnergyAdvisor.com:
Goodbody economist Deirdre Ryan comments: Economic View; Accommodative policies to remain in the UK - -"Following the lead of the ECB and the Fed last week, the Bank of England also appear set to leave in place the ultra accommodative policy conditions for some time to come. Interest rate increases were firmly pushed off the near term radar after yesterday’s Inflation Report release which outlined the downside risks that lie around reaching the inflation target of 2% over the 2 year forecast horizon. Notwithstanding the fact that inflation is set to rise sharply in the opening months of 2010, as the reversal of last year’s VAT decrease comes into effect along with higher energy prices, the extent of spare capacity in the economy is set to weigh heavily on the pace of inflation thereafter.
Governor King was explicit in warning that inflation was more likely to be below the target than above for most of the forecast period. This is despite an upwardly revised GDP growth profile and a further depreciation of sterling relative to the previous Inflation Report in August (GDP of 2% is expected for 2010 and 4% for 2011). Indeed, were interest rates maintained at the current level of 0.5%, the 2% inflation target would not be exceeded until mid 2011 (on their central forecast), highlighting the extent of excess capacity in the economy given that output has fallen c5% from peak levels. While the Fed last week laid out the conditions that must be in place over and above an improvement in GDP growth in order to see interest rate increases, and the ECB took the very first steps towards bringing to a close its exceptional measures relating to money auctions and tenders, the Bank of England, in increasing the size of its quantitative easing programme was already one step behind. Yesterday’s report indicates that it may also be the laggard when it comes to lifting interest rates off their current floor."
Goodbody analyst comments: AIB Group; BZWBK Q3 results show improving credit trends - - "BZWBK, of which AIB owns 70.5%, has reported its Q309 numbers this morning. Net profit rose by 7% yoy as 13% higher pre-provision profit offset a doubling of the credit charge yoy. Although net interest income fell 4% yoy, total income was 1% higher due to a 0.4% rise in net fee and commission income (possibly as the equity market in Poland improves) and net trading & revaluation income doubled. Pre-provision profitability was also enhanced by a 10% fall in operating costs, despite the expansion that has taken place in the business over the last year and a half, with the cost income falling to 47% from 53% a year earlier. Trends on the credit quality side remain encouraging, with the annualised credit charge to average loans at 109bps, compared to 59bps in Q308, but 135bps in Q209, 179bps in Q109 and a peak of 364bps in Q408.
Although loans and deposits are up 14% and 15% yoy, respectively, annualised growth in the last two quarters has been negative with loans down 5% annualised in Q2 and -9% in Q3 and deposits up 5% in Q2 and down 4% in Q3. The relatively better outturn on the deposit side has led to a modest yoy improvement in the loan to deposit ratio (which had risen in recent quarters to a peak of 89% in Q109) from 86% in Q308 to 85% in Q309. The healthy performance of BZWBK is a continued positive for AIB and provides diversification from the more difficult operating performance in the Irish and UK businesses. However, with the key issues currently for AIB being NAMA, the European Commission decision and raising a suitable level of capital (preferably from internal and private sources), these results are unlikely to have a significant impact on sentiment towards the stock."
Anna Lalor also says:
Irish Financials; Government reiterates comfort with NAMA valuation methodology - - "Press reports highlight some comments by the Department of Finance yesterday that were in response to a statement by an opposition Senator on NAMA. It reiterated that it is in regular contact with the European Commission (EC) and that the NAMA long-term economic value methodology is “in accordance” with EU guidance on dealing with impaired assets. The Minister and Department have highlighted this a number of times previously in response to criticism on NAMA and market jitters following the ING/RBS/LBG EC related actions. In addition, the Department said that it does not expect a “lengthy delay” in its approval of NAMA, which would make sense seeing as the Government has been in contact with the EC regularly through-out the NAMA process. It also highlighted comments from Commissioner Alumnia recently that he wanted to see the NAMA legislation passed as soon as possible. Our view would be that there is nothing new in these comments. The NAMA legislation is expected to return to the Dáil today, following its passing by the Seanad, to be voted on again before it is sent to the President to sign.
The Irish Times today also carries some comments from the EU competition commissioner’s head of cabinet. He made a number of comments in relation to banks needing to be incentivised to “get themselves off the drip of State support”, while making sure that they can be viable (that is sustainable in the medium term without state support, while not too risky). He also pointed to the commissions’ aim of addressing the moral hazard (which has been demonstrated elsewhere in its actions in relation to banks in receipt of state aid already) that has been created by the state support provided to banks in the current crisis. However, his comments on Ireland are of particular interest. He highlights that Ireland’s situation is “a bit special”, with most domestic banks eligible for NAMA, which should mean less competitive advantage to individual domestic players (we wonder where this leaves IL&P, although it has been a beneficiary of the liquidity support provided by the ECB). In addition, he notes that foreign players are not particularly interested in entering the Irish market, which may allude to a difficulty on selling on assets to non-domestic parties if the EC wanted to break-up the larger banks. On the valuation of NAMA assets, the difficulty in valuing a significant number of non-cash-flow producing assets was highlighted. In a sense it appears that the options available to the EC in dealing with the Irish banks in receipt of state aid are probably more limited than those it has in dealing with UK and continental Europe."
Irish Financials; Gross new mortgage lending declines easing in Q309 - -"The IBF-PwC gross mortgage lending statistics for Q309 were released yesterday. They show that, although the yoy declines in new lending remain high, the pace of decline is easing, while the value of new lending quarter on quarter appears to have stabilised. The value of new mortgages issued in the quarter declined 62% yoy, compared with a 71% fall in Q2. Year to date mortgage drawdowns by value are 68% lower yoy, but the pace of decline is easing with only a 1% fall qoq. In addition, the yoy comparatives get even easier from Q4 on, with a sharp acceleration in the pace of decline in Q408.
The falls in Q3 were driven by a 56% yoy fall in the number of mortgages drawn down (-64% in Q2), though showing a 4% qoq decline. Surprisingly, there was a qoq increase in the value per mortgage drawn down of 2.7%, driven by top-up amounts and first-time buyers, and it is unclear if this is as a result of easing LTV requirements or mix affects due to the value of properties on which mortgages are being attained (average mortgage values have also been quite lumpy historically). On a yoy basis, the average value per mortgage drawn down is still 13% lower (-20% in Q2) and is 17% behind the comparable 3 quarters in 2008.
We are forecasting a 66% fall in the value of gross new mortgage lending this year and with lending in the 4 quarters to Q309 65% lower yoy (vs 57% in Q2), we are unlikely to change our estimates at this stage (although the main risk to this number is another quarter with more robust average loan values). A low rate of redemptions on existing mortgages means that, despite the sharp decline in gross new lending, we have yet to see a yoy fall in the net book of mortgages outstanding, although it has been falling modestly mom for the last six months."
