Week in Review

August 16, 2013 7:34 pm

Week in Review, August 17

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Week in Review

A round-up of some of the week’s most significant corporate events and news stories.

Corporate person in the news: Tim Armstrong

It was the firing heard around the world, writes Emily Steel.

“Abel, put that camera down right now. Abel, you’re fired. Out,” Tim Armstrong, chief executive of AOL, snapped two minutes into a confidential meeting last week with more than 1,000 employees to discuss the future of its Patch local sites

A recording of the outburst posted online was listened to more than a million times. Mr Armstrong later apologised, calling “the mistake” an “emotional response at the start of a difficult discussion dealing with many people’s careers and livelihoods”. He said the employee had been told not to record the meeting.

AOL said it would close, consolidate or find partners for about 300 of its 900 Patch sites. About 500 people, or roughly half of Patch employees, ultimately will lose their jobs.

Mr Armstrong, 42, left, is four years into his tenure at the internet company. The 6ft 3in former captain of his college lacrosse team, who has a penchant for speaking in sports metaphors, was previously the top ad executive at Google. One friend says he aspires to be the Rupert Murdoch of the digital age, as he transforms AOL from a subscription-based, internet-access business into an ad-supported digital media company.

In interviews, about a dozen current and former colleagues and employees said Mr Armstrong’s suave public persona could differ from a more forceful demeanour behind the scenes. They said he did not typically shout but was known to frequently change his mind and call “Code Red” emergency meetings.

Tunnel vision

In a classic case of ‘take my idea and run with it’, Elon Musk – the billionaire, above, behind PayPal, Tesla and SpaceX – has issued designs for Hyperloop, a futuristic tunnel that would carry passengers the 350 miles from San Francisco to Los Angeles in 30 minutes. He has no plans, however, to build or finance the project.

His tenure has been marked by constant reshuffling of top executives, including the chief financial officer, head of communications and advertising. John Reid-Dodick, AOL’s human relations head left the company in the past week, according to people familiar with AOL. Mr Reid-Dodick declined to comment.

Shares in AOL have increased about 20 per cent year to date. Some analysts have applauded Mr Armstrong’s efforts. Those include selling assets such as a $1.1bn patent deal with Microsoft, and acquisitions such as paying $315m for the Huffington Post.

People close to AOL and some analysts note that despite the executive turnover, AOL employs a strong line-up of leaders.

Some analysts, however, question whether it can sustain its growth. While it has steadily increased advertising revenues, its subscription group provides nearly all of AOL’s profits.

“The clock is ticking as far as ultimately still trying to turn AOL around,” said Robert Peck, managing director at SunTrust. The public dismissal “reflects that Tim and AOL are facing many challenges right now”, he added.

Mr Armstrong was a co-founder of Patch and has faced criticism for pouring hundreds of millions of dollars into it. He promised investors Patch would be profitable by the end of 2013.

Executives close to Mr Armstrong cautioned against reading the public firing as a referendum on his ability as chief executive. “In moments of stress or moments when you are tired, you do dumb things,” said Richard Edelman, chief executive of public relations firm Edelman, which works with AOL. “I am sure he was touchy because Patch has been his baby. It has come down to some pretty hard decisions.”

Two ex-JPMorgan Chase traders charged with fraud

US authorities charged two former JPMorgan Chase traders with fraud for allegedly hiding hundreds of millions of dollars in losses stemming from the “London whale” trade that tarnished the bank’s reputation and may cost it much more in fines and penalties, writes Kara Scannell.

The US attorney’s office in Manhattan charged Javier Martin-Artajo, a supervisor in the bank’s chief investment office, and Julien Grout, a trader who allegedly marked credit derivative positions at favourable values to hide mounting losses. The Securities and Exchange Commission also filed civil fraud charges against the men.

The authorities described “massive shortcomings” in JPMorgan’s compliance, which the FBI called “little more than a rubber stamp”. JPMorgan had to restate its earnings for the first quarter of 2012, and unwound the trades at a loss of $6bn. Lawyers for both men, who are not US citizens, could not be reached for comment but previously said their clients were not fleeing the charges.

Bruno Iksil, the Frenchman nicknamed the London whale, reached an unusual nonprosecution agreement with authorities in exchange for his testimony and co-operation against his former colleagues. JPMorgan is expected to pay a fine and admit failures in its compliance system as part of settlements with the SEC and US attorney’s office. The settlements, still being negotiated, could be finalised in the coming weeks.

Jamie Dimon, JPMorgan’s chief, initially called the losses a “tempest in a teapot” but later publicly acknowledged mistakes.

US Airways and AMR face long haul in antitrust case

US Airways and AMR Corporation, the bankrupt parent of American Airlines, had expected this week to mark the start of the final countdown to their merger, writes Robert Wright.

Instead, on Tuesday, the US Department of Justice announced it was asking the federal courts to block the merger, which its antitrust division said would force passengers to pay higher fares and other fees, in return for worse service.

The DoJ’s language suggested that it not only opposed the US-AMR deal but had doubts about whether other recent airline mergers – including those of United and Continental in 2010 and Delta and Northwest in 2008 – had proved in consumers’ best interests.

“As we look at the market as it’s functioning today, it’s not functioning as competitively as it ought to be,” Bill Baer, head of the DoJ’s antitrust division, said.

All the right notes

And for his next performance ... John Paulson, the US hedge fund manager who made a mint betting against securities backed by US mortgages in the financial crisis, now has the upper hand in the takeover battle for Steinway Musical Instruments . He is set to pay $512m to add the piano maker to his repertoire.

Sean Lane, the bankruptcy judge who has been overseeing AMR’s affairs since November 2011, when it sought protection from its creditors, had been due on Thursday to give final approval for the plan of reorganisation that would bring AMR out of bankruptcy by way of an $11bn merger.

The deal, expected to complete before the end of September, would have given shareholders of US Airways, the US’s fifth-largest airline by revenues, 28 per cent of the new company, while creditors of AMR, market number three by revenues, were to have received the remainder.

The deal has international implications for the future of the merging airlines’ transatlantic routes – US has a strong position between London and Philadelphia, while American operates between several eastern US locations and Europe. However, the European Commission had given its permission for the deal with only minor adjustments.

Rich Parker, an attorney working for US Airways, on Wednesday said the DoJ had got its decision “very wrong” and that he looked forward to fighting it in court. Mr Baer said he thought the best outcome was a complete block of the merger, rather than changes to alleviate the DoJ’s concerns.

Judge Lane continued with the hearing on Thursday but was unable as a result of the DoJ’s action to give a firm date when AMR would leave bankruptcy.

It now looks set to be subject of a prolonged legal battle between the DoJ and the airlines.

WeChat app’s rise points to China network shake-up

The fast rise of China’s free messaging app WeChat is pressuring the nation’s more established internet companies, a potential indicator of how new forms of social networks and ecommerce could shake up the tech industry elsewhere, writes Sarah Mishkin.

The rivalry in China intensified in recent days, when ecommerce group Alibaba blocked sellers on its popular marketplace from using WeChat.

Alibaba said it was to stop aggressive sellers using the app inappropriately. But analysts point out that WeChat is an increasingly formidable competitor to Sina Weibo, a Twitter-like service in which Alibaba recently took an 18 per cent stake.

The problem for Alibaba and Sina is that WeChat’s diversification from its core messaging service means it is edging into their home turfs of social networking and ecommerce.

As a smartphone app, it has also been better poised to ride the boom in mobile internet usage, which Alibaba and Sina have been slower to adapt their services to.

WeChat, operated by Tencent, started out as a free way for users to send messages to friends on their smartphones, but has since grown into a more comprehensive service. A version introduced this month makes it easier for users of the app to do everything from online shopping to mobile banking and gaming.

While Sina Weibo remains a popular forum for discussing everything from pop culture to politics, analysts say netizens have been increasingly taking to Tencent’s WeChat because they prefer the intimacy of sharing information with a small circle of friends.

New York-listed Sina and Hong Kong-listed Tencent both reported earnings this week. Sina said its partnership with Alibaba has helped it boost ad sales. Analysts said Tencent’s work towards monetising WeChat was promising, but the company warned of the cost of investing in WeChat, particularly to market it outside of China.

Carlos Slim struggles to prevail in battle for KPN

As the owner of several works by Vincent Van Gogh, Carlos Slim should know all about troubled Dutch masters, writes Henry Mance.

Yet the Mexican billionaire is struggling to maintain the initiative in the battle for KPN, the Netherlands’ former telecoms monopoly whose shares have nearly halved in the past year.

KPN’s independent foundation said this week that it is “concerned” that Mr Slim’s América Móvil group has only “briefly clarified” its €7.2bn offer to buy the 70 per cent of the company that it does not already own. Some Dutch politicians have also muttered gravely about foreign ownership.

Mr Slim made his move after deciding that a bid by Telefónica for KPN’s German operations was too low. However, it’s unclear whether he wants a higher price or has a business plan for KPN, whose management he is understood to find underwhelming. Analysts doubt that América Móvil, which is saddled with debt, can make much of KPN’s small Germany business.

Several outcomes remain possible, including a scenario in which América Móvil takes a stake in Telefónica (even though the two will soon be competing more fiercely in Mexico). An offer document is expected from América Móvil within the next three weeks.

For Liberty Global, meanwhile, the hurdle is not the investors, but the regulators. The US telecoms group, a serial acquirer, has seen its €3.2bn purchase of cable company Kabel Baden-Württemberg blocked by a German court on competition grounds.

The deal was agreed back in 2011, but challenged by Deutsche Telekom, Germany’s biggest telecoms group. An appeal to Germany’s supreme court awaits.

RWE and Eon face having to pull the plug on conventional energy plants

Germany’s largest utilities by sales this week warned they would be forced to shut more conventional power plants in response to a boom in renewable energy and a recession-induced drop in European wholesale power prices, writes Chris Bryant.

RWE and Eon said they were unable to profitably operate several gas and coal power stations due to regulations that prioritise the use of solar and wind power in the German grid.

The utilities are forced to continue operating conventional power plants as back up for windless or cloudy days but capacity utilisation is in decline.

Operating profit at RWE’s conventional power generation business fell 62 per cent in the first half compared to the same period in the prior year, while at Eon underlying group net income declined 42 per cent over the same period.

“Many of our power stations are now in the red,” Bernhard Guenther, RWE’s chief financial officer, said. “This is the greatest crisis our industry has faced for many decades.”

Analysts suggested that with federal elections due in September, the utilities want to raise pressure on the German government to reform the country’s renewable energy laws.

“We believe this could be as much as a message towards politicians as it is towards the market,” Citi Research told clients.

But with RWE and Eon shares near decade-lows, investors recognise that both companies also face some genuinely intractable problems.

In addition to the issues in conventional power generation, both companies are also grappling with Germany’s decision to exit nuclear power and weak power demand caused by the recession.

Both companies are cutting costs and divesting assets to help offset the decline, yet worse may be in store.

RWE has been protected so far by power price hedges but their impact will start to fade in the next couple of years. “Sooner or later, the crisis will hit us with full force,” Peter Terium, chief executive, warned.

Johannes Teyssen, Eon’s chief executive, was similarly gloomy. “A sober view of the situation indicates that, at least for 2013 and 2014, no recovery is in sight,” he said.

In brief

Anyone who has seen a Microsoft product launch would say there is no better company to back the remake of a TV programme famous for its shaky sets and bad costumes. The US software group has agreed to finance the resurrection of Blake’s 7, the cult sci-fi drama that ran in the 1970s and 1980s, for its Xbox Live digital network.

UK Asset Resolution is hardly the most high street-friendly name, but it’s better than ‘Bad Bank’. The state-owned zombie lender, which is running down the £66bn of loans issued by Northern Rock and Bradford & Bingley, is looking to rebrand and lift its profile as it oversees the Help to Buy mortgage guarantee scheme.

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