Banks Using Your Tax Dollars For Mergers, Acquisitions

This post first appeared on Minyanville.

Banks, it appears, may finally be tired of losing money.

The $700 billion bailout plan rushed through Congress was aimed at shoring up the American financial system, providing banks with capital that they could then blithely begin lending again.

The law of unintended consequences -- already familiar to us following the recent spate of unprecedented government intervention -- is once again rearing its unsightly head.

The Wall Street Journal reports that, rather than extending credit to embattled American consumers, banks may use recently allocated taxpayer funds to gobble up competitors. Zions (ZION) and BB&T (BBT) are eager to go shopping for attractively priced banks, and are considering accepting government funds to do so.

Many argue this is a healthy, natural progression as the banking sector consolidates and prepares for its eventual recovery. Others, however, aren’t pleased to see taxpayer funds funneled into takeovers, which will do little to pump credit into the economy in the near term.

Furthermore, as Professor Sedacca noted on this morning's Buzz and Banter, banks like KeyCorp (KEY) are tapping the government for cash - only to turn around and dole it out to shareholders in the form of dividends. Good for equity owners; not so good for taxpayers.

Lending money to consumers in the past 12 months has been a losing bet. Banks -- obligated to make good on credit lines handed out during better times to individuals and businesses alike -- are finding themselves with more bad loans than they know what to do with. American Express (AXP), heretofore the lender of first resort to the world’s wealthiest, saw third-quarter profits tumble 24% on a 51% jump on credit-loss provisions.

Banks, like any responsible economic actor, act in their own best interests. Irrespective of whatever pressure Treasury Secretary Hank Paulson or French President Nicolas Sarkozy puts on financial institutions to start lending again, government officials cannot force money into the real economy.

The massive amount of liquidity being pumped into the financial system may be a short-term fix for the panic gripping world markets, but self-preservation is paramount during hard economic times. If an acquisition makes more financial sense than extending credit to struggling consumers, banks won't think twice.

A few lost customers or a few angry borrowers is a small price to pay for survival - and the chance to emerge on the top of the heap.

This Bid's For You

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Lost in the travails of Wall Street's latest round of executive downsizing, a $46 billion takeover could place one of America's most iconic corporations under foreign control.

Belgium-based Inbev, the world's largest brewer, made an unsolicited bid late yesterday for American beer-maker Anheuser-Busch (BUD). Bloomberg reports Inbev has strong support for its $65 per share bid from a consortium of banks, including Banco Santander, JP Morgan (JPM), Deutsche Bank (DB) and others. The offer will be financed with $40 billion of debt, reducing the amount of stock Inbev would have to sell to raise capital for the deal.

Inbev's stock popped on the news, rare for a suitor in a takeover situation. Typically an acquiring company will see its shares fall on such news, as investors fret about the cash it may have to shell out to complete the deal.

Despite some public statements opposing the sale of his great-great grandfather's firm, Anheuser-Busch CEO August Busch IV may not have much choice in the matter. The family owns less than 4% of the company's stock, a smaller share than Warren Buffet's Berkshire Hathaway (BRK-A). In an email sent to vendors and employees, Busch said the decision on whether to accept Inbev's offer would be made in the shareholders' best interests.

Attempting to assuage concerns about the status of the Budweiser brand in the U.S., Inbev will reportedly adopt the Budweiser name and has promised not to close any domestic breweries. Still, the transaction faces stiff opposition from labor unions (and those who stubbornly refuse to drink beer that doesn't taste like elephant urine).

The takeover would follow recent consolidation in a beer industry hell bent on collapsing competition. According to The Wall Street Journal, SAB Miller is set to combine its U.S. operations with Molson Coors (TAP) and Heineken NV and Carlsberg AS are buying and splitting up the assets of U.K. brewmaster Newcastle PLC.

With shares of Anheuser Busch trading just shy of the $65 offer, investors are voicing their approval for the deal. And with battered banks backing the bid, the deal supports the thesis -- long-proposed on Minyanville -- that consumer staples will be pockets of strength as consumers focus on needs, not wants.

Beer is a classic recession-proof consumer item. Their questionable taste notwithstanding, Budweiser and Bud Light are poised to capitalize on these shifting consumer priorities. The two already account for more than half of the beer consumed nationwide, and with a little help from their Belgian friends, they may someday actually taste like, well, beer.

Microsoft Spends To Make: Cash back incentive central to company's online strategy.

This post first appeared on Minyanville.

As the technology world awaits the next salvo in the battle for Yahoo (YHOO), Microsoft (MSFT) is steadily advancing its online strategy.

Microsoft, Time Warner (TWX), Newscorp (NWS), Google (GOOG) and now Carl Icahn are all squabbling over the rights to Yahoo's audience. The glut of potential deals, kicked off earlier this year by Microsoft's unsolicited bid for the Internet search company, is getting harder to keep straight.

But it's possible the bidding war was all just misdirection; an elaborate ploy by Microsoft CEO Steve Balmer to disguise an assault on Google's dominance in online search. Today, with the announcement of a pay-per click offering of its own, Balmer may be showing a bit more of his hand.

The Wall Street Journal reports Microsoft is expected to announce the launch of a new service dubbed "Live Search cashback." The program offers users cash back for items purchased using the company's search service. Microsoft is also partnering with retailers Home Depot (HD), Circuit City (CC) and Barnes and Noble (BKS) to expand the products available for the kickback.

Microsoft is eager to chip away at rival Google's lead in Internet search. According to the Financial Times, around 50% of online ad revenue comes via online searches - a business Google dominates with 70% market share.

Balmer appears specifically focused on targeting the online search business. In addition to the release of the new cash back service, in recent days Microsoft has approached Yahoo with a slimmed takeover plan. The company is interested in purchasing Yahoo's Asian assets along and search business. Many analysts argue that without those two components, Yahoo is barely worth the electrons it's printed on.

The battle for supremacy in online search highlights a fundamental change in the online landscape. The rate at which American consumers are switching purchases from brick and mortar to click and order has slowed. Meanwhile, international users are increasingly buying online. The quandary then becomes: Grab domestic customers from rivals with new offerings or strategic takeovers, or ditch the flagging American consumer and head abroad.

Microsoft's recent actions indicate its pursuing both courses. Despite the outlook for a slowing global economy and a domestic one that may not recover in the near-term, opportunities abound in parts of the world where online muscles are just starting to be flexed.

According to InternetWorldStats.com, data compiled by Nielson Ratings shows that North America represents just 17.5% of worldwide Internet usage. Asia, meanwhile, accounts for 37.6% and Europe 27.1%. Over the last decade, both regions have seen usage grow at twice the pace of North America. Africa and the Middle East, despite making up a combined 6.6% of all online eyeballs, have seen usage surge over 1000% in the same period. Not to be outdone, Latin American users, which account for almost 7% of the global total, now go online almost 700% more frequently than in 2000.

While Yahoo's suitors vie for headlines and ownership rights, the real battle is taking place overseas. Global growth may wane, assets may deflate and credit will certainly be destroyed in the years to come, but the transformation of real-time consumer to virtual one is a process no credit crunch can halt.

Microsoft, Yahoo Exchange Barbs

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If Yahoo (YHOO) and Microsoft (MSFT) can't kiss and make up, agree on a price and move forward together, it's time to call off the wedding.

After yesterday's closing bell, Yahoo reported strong earnings numbers for the first quarter, but failed to sway Microsoft to up its takeover bid:

• Net income rose to $542 million or $0.37 per share, up from $142 million or $0.10 per share a year ago.
  
  
• Revenue increased to $1.8 billion, up 9% from last year.
  
  
• Ad-related growth jumped 18%, but international revenue grew only 7%.
  

Despite the positive results, The Wall Street Journal reports the war of the words continued between Yahoo CEO Jerry Yang and Microsoft boss Steve Balmer. In defiance of the software giant's offer, Yang said, "The quarter's results underscore the fact that our strategy and investments are beginning to pay off. Our board and management are committed to choosing a path to maximize shareholder value and will not enter into any transaction that does not recognize the full value of this company."

Balmer wasn't impressed. He reiterated that Microsoft will not up its bid. "We know what Yahoo's worth. $44 billion is a lot of money. [We are] prepared to move forward alone without Yahoo."

Many analysts believe if it continues to be rebuffed, Microsoft will take its offer off the table or simply lower the price. Others, perhaps impressed by Yahoo's obstinacy, are convinced Balmer will need to sweeten the deal to get it done. Three weeks ago Microsoft gave Yahoo a deadline for consideration of its takeover bid. Yang and the rest of the board have until Saturday to make their decision.

Tensions have risen to a point where any takeover -- even one at a mutually agreed upon price -- would be effectively hostile. Integrating the two companies would be a massive logistical undertaking; doing so with residual bad blood from a messy takeover battle would be a strategist's nightmare.

Systems, processes and corporate cultures would need to be merged in order for Microsoft to realize a near-term benefit to its investment. Even in the long run, embittered former Yahoo employees may defect or contribute less to their new bosses.

The Internet company has witnessed mild resurgence and newfound unity in the face of being swallowed whole. But if Microsoft calls its bluff and walks away, Yahoo's shareholders may end up wishing they hadn't been so greedy

Reprinted by Permission copy write 2008 Minyanville Publishing and Multimedia