Transcript: Monday, June 16, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

TYLER MATHISEN, CO-HOST: Greener pastures — Medtronic becomes the latest American company to spend a lot of money for a better corporate tax rate, buying the Irish medical device maker, Covidien.

SUSIE GHARIB, CO-HOST: Global hot spots — as investors watch what’s happening in Iraq, there are a number of high risk areas where American energy companies operate, keeping oil prices high.

MATHISEN: And another recall — General Motors calls back more than three million cars, again related to an ignition switch problem.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, June 16.

GHARIB: Good evening, everyone.

Three big issues dominated trading on Wall Street today. A flurry of mergers and acquisitions, more violence and political turmoil in Iraq, and also positive data on the economy ahead of the Federal Reserve meeting this week.

Stocks notched up slightly and helped by all those mergers and the fact that oil prices held steady at $106 a barrel, despite concerns about fighting in Iraq.

Here’s how things looked by the closing bell.

The Dow rose 5 points, the NASDAQ was up by 10 and the S&P added 1 point.

But it was Medtronic’s nearly $43 billion cash and stock buyout of rival medical device maker, Covidien, that had Wall Street buzzing today.

Shares of Covidien shot up more than 20 percent on the takeover news, while Medtronic’s shares were down 1 percent.

Meg Tirrell takes a look at what’s behind the deal and whether there will be more.


MEG TIRRELL, NBR CORRESPONDENT (voice-over): Medtronic’s acquisition of Covidien is part of two trends sweeping the health care industry, deals that lower corporate tax rates and consolidation in the face of pricing pressure.

Medtronic is based in Minneapolis. Covidien in Dublin, Ireland.

The deal will enable Medtronic to reincorporate on the Emerald Isle and benefit from the lower corporate tax rate there — 12.5 percent compared with the U.S. rate of 35 percent.

It’s a strategy employed by many health care companies over recent years, from Pergo (ph) and Activa in 2013, to Pfizer this year, in its failed attempt to by British drug maker, AstraZeneca, for almost $120 billion.

JOSH JENNINGS, M.D. MEDICAL DEVICE EQUITY RESEARCH ANALYST: The rationale here is, one, I mean just simply to secure a lower corporate tax rate, you can generate a higher level of earnings power. And any future deals with a lower tax rate, if you’re domiciled in a tax advantaged region, looking back into U.S. companies that have higher tax rates, those deals become much more creative.

TIRRELL: The deal will also enable Medtronic to use cash stored overseas. Analysts say that’s a majority of its $43 billion, on which it would have to pay taxes if it was returned to the United States.

(on camera): Today’s deal may signal more to come for medical device makers, as they respond to increasing pricing pressure at their biggest customers — hospitals. Already this year, Zimmer bought device maker BioMed, while Johnson & Johnson bought Cynthie’s (ph) in 2011.

JENNINGS: Further consolidation in the medical device industry is formally in play. There is going to be a lot of speculation. I think that what this transaction does is it — it basically says that no deal is too big to be executed if there’s both a strategic rationale from a fundamental business perspective versus a financially strategic rationale from an inversion strategy play.

TIRRELL: One potential target, analysts say, is Smith & Nephew, already rumored to be of interest. And with its headquarters in London, it takes many of the boxes for potential acquirers.



MATHISEN: Ireland may be cool and green, but its low tax rate and business friendly climate makes it red hot these days. So it doesn’t take a leprechaun’s magic to figure that Shire, the Ireland based biopharmaceutical, could be a suitor’s target. Shire has reportedly hired Citigroup now as a strategic adviser as it braces for likely takeover offers. And that sent shares of Shire rising 6.5 percent today.

GHARIB: And we have another big acquisition to tell you about, this one in the technology industry. A $5.5 billion deal between Level 3 Communications — this is the Internet service carrier — and business Ethernet provider, TW Telecom.

Shares of Level 3 fell 4 percent. But TW rose more than 7 percent.

MATHISEN: And yet another big acquisition now facing a big hurdle. A few weeks ago, General Electric bid $17 billion for the energy business of the French engineering, giant Alstom. That offer ran into a lot of resistance from the French government on concerns about non-European ownership and possibly lost jobs in France.

Now, the German engineering giant, Siemens, teaming up with Japan’s Mitsubishi, has bid more than $5 billion to buy Alstom’s gas turbine unit, breaking up its energy unit and becoming the first real competitor now to that G.E. bid.

GHARIB: So let’s break down some of today’s deal news with David Faber — David, we don’t know where to begin. So many deals. You’ve been following all of them. And it seems like there’s this theme of some are being done for tax reasons, like Medtronic. Some are done for strategic reasons. And they’re all bulls and transformational.

Why are we seeing all of these right now?

DAVID FABER, NBR CORRESPONDENT: Yes, I mean first of all, we’re seeing an incredibly robust merger and acquisition market, in contrast of what we’ve seen really, for the last, I don’t know, five years, since the crisis, even though we expected it might get going, it finally has.

That’s, broadly speaking, because of things like CEO confidence, rising stock prices, the ability to negotiate a merger agreement because you do have a relatively — not that much volatility in the stock market.

Then you get to things that are driving them, as you say, tax inversions. That’s what we call it when a U.S. company says, OK, we’re buying an Irish company, in the case of Medtronic and we’re then going to become an Irish taxpayer. It will lower our rate and also, perhaps even more importantly, generate a lot of cash outside the U.S. that we can then bring back without having to pay taxes on it.

The inversions have taken place, Susie, most prominently in the pharmaceutical sector, in health care a la Medtronic and Covidien. By the way, Covidien an Irish company?

Not really.

It’s the old U.S. surgical from Tyco.

Remember that name?


GHARIB: Right.

MATHISEN: I mean it’s — they’re Irish like all these companies are Irish.


FABER: They’ve got an address in Ireland, but they’re not Irish companies, they’re U.S. companies but they are doing that because they maintain that the U.S. tax regime right now, especially as it treats foreign profits, is not competitive. And they’re looking to get out when they can.

Pfizer and AstraZeneca, the largest example. That deal did not happen.

GHARIB: Right.

MATHISEN: But they were looking at it, as well, because it would lower the rate and also, importantly, allow them to bring money back without having to pay taxes on it.

MATHISEN: What’s the motivation with the Level 3 TW Telecom?

FABER: Well, Not that strategy doesn’t play a role in all of these, Tyler. I mean Medtronic will tell you we’re doing this deal for strategic reasons, you know, the Affordable Care Act and what that means for buying.

But In the case of a Level 3, it’s not for taxes, obviously. It’s not an inversion. There it’s, in some ways, another one of these deals where you’re kind of responding, to a certain extent, to Comcast’s plan to buy Time Warner Cable. Now that is largely about consumers, but there are also business customers there.

This tie-up is about the business customer, about 36,000 buildings that they’ll now be wired into and offer service to, for example, to business customers, and what they can do in terms of synergy — there’s that word — and accretion and helping them raise the top line, meaning revenue growth, as well.

GHARIB: You know, you just talked about Time Warner Cable. And today, New York State, at least, started hearings to get public comment on the Time Warner/Comcast $70 billion deal.

Give us an update on where you think that whole thing is going.

FABER: I mean it’s going to take a while. They originally, when — when they — and Comcast, of course, is our parent company. When they announced the deal, they had hoped they would close it before the end of this year. Many people were immediately, including myself, somewhat dubious on that. These things can take a long time. My guess is it probably doesn’t close. They don’t get all the approvals they need until early next year.

That being said, there are very few people who don’t think the deal will still get approval.

But we see these kinds of regulatory concerns or in country concerns in the case of G.E. and Alstom, where you just don’t know, including, by the way, the Chinese antitrust authorities. That’s called MacFam. That plays a big role, as well. It certainly stretches these deals out for a long time. And you just don’t know if you’re going to get the antitrust approvals you always need.

GHARIB: One thing we do know, we’re going to see a lot more of these deals coming up.

FABER: Yes, there are more coming.

GHARIB: David, thank you so much for coming by and talking to us.

Appreciate it.

FABER: You’re welcome.

MATHISEN: Good to see you, David.

All right, more now on the crisis in Iraq. Another city in the western part of that nation has been seized by Islamic fighters, just as Baghdad works to increase oil production and the U.S. flexes some military muscle on behalf of Iraq.

Despite the continued threat of supply disruptions, oil futures were essentially flat today, with the price of West Texas intermediate down a penny. Brent crude rose a fraction.

Michelle Caruso-Cabrera is on the ground in Irbil, Iraq.


MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The Islamic state in Iraq and Alstom, or ISIS, taking another major town in Northern Iraq today. This time, Tal Afar. The town was the scene of heavy fighting when the U.S. invaded in 2003, and now it belongs to the al Qaeda inspired group.

In response to these militants, Iraqis from the Shia sect have been rallying for days now, recruited by clerics to fight against the militants, who are among the Sunni sect. It appears for now these ad hoc militias have blunted the jihadist march toward Baghdad. Also, the Iraqi Air Force joining in in the fight from above. This video was released by Iraq’s Defense Ministry this morning. It reportedly shows an Iraqi Air Force jet successfully attacking a building. This video shows an Iraqi helicopter firing a missile at its target and scoring a direct hit.

It’s difficult to say exactly what these targets are and how they’re related to the Sunni fighters, but Northern Iraq appears to have been transformed into a killing field.

Sources on the ground say despite the attacks from the air, Iraqi forces have not been able to turn the tide of fighting, one of the reasons the price of oil hovers near highs for the year, for fear that it will become more widespread.

This, even though there haven’t been major disruptions to production, because most of Iraq’s oil is in the south and far away from the fighting.

Ben Lando is the editor-in-chief of “The Iraq Oil Report.”

(on camera): Production in the south untouched at this point, still going full tilt?



Lando thinks it’s quite possible, in fact, that Iraq’s production actually increases by the end of the year because of major new investments.

LANDO: Iraq has hired the largest oil companies in the world to work with their own Iraqi engineers and the oil companies to produce more and more oil from some of the biggest oilfields in the world. These massive 20 year contracts are — are you know, having results.

CARUSO-CABRERA: While the U.S. is less dependent on Mideast petroleum, the free flow of Iraq’s oil is still in the interests of the United States. American ships arrived in the Persian Gulf near Iraq over the weekend, just in case they’re called in to provide air support. The aircraft carrier George H.W. Bush, along with a guided missile cruiser, are now within striking distance, if needed. Secretary of State John Kerry, in an interview today, said the president is still evaluating options. He also wouldn’t rule out dealing with Iran.

JOHN KERRY, SECRETARY OF STATE: But we’re open to discussions if there’s something constructive that can be contributed by Iran, if Iran is prepared to do something that is going to disrespect the integrity and sovereignty of Iraq.

CARUSO-CABRERA: Just a few months, even weeks ago, it would have been inconceivable for the United States to be working with Iran, one of its long time enemies. But it just goes to show how the situation in Iraq has turned geopolitics on its head.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera, Northern Iraq.


GHARIB: Well, while the turmoil in Iraq has boosted global oil prices over the past week, worries about supply disruptions, the Middle East isn’t the only global hot spot that energy experts are keeping a close watch over.

Morgan Brennan explains.


MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The escalating crisis in Iraq comes at a time when other major energy producers are suffering setbacks of their own, as several African countries struggle with local security threats and tensions mount in Eastern Europe. Industry experts say it’s not surprising these regions rich with resources also foster conflict.

JOHN BROWNE: They are prone to very rapid changes because of regional power struggles. And so we see the consequences of Arab Springs. We see the consequences of vacuums being opened up in Syria, other forces to regroup and take interest in Iraq — a bad interest in Iraq.

BRENNAN (on camera): By itself, a potential production disruption in Iraq, at least right now, wouldn’t steeply impact global supplies. But analysts say it would add to a larger decline already taking place, as demand continues to rise.

(voice-over): Libya’s energy output tumbled 35 percent in 2013 from the year before. And this year, production has ground to a near halt.

Nigeria, which had problems in 2008 and 2009, is experiencing a massive crime wave that’s caused several companies, including ExxonMobil and chevron, to close wells.

Then there’s Eastern Europe, where Russia is cutting off natural gas supplies to Ukraine after two countries failed to strike agreement on payment.

NANSEN SALERI, PRESIDENT & CEO, QUANTUM RESERVOIR IMPACT: If the crisis between Ukraine and Russia escalates, there’s going to be another anxiety premium on the world’s energy markets.

BRENNAN: But there’s one country that could help diversify and stabilize the global energy market — the United States.

SALERI: The U.S. is the number one energy producer in the world. It just exceeded Russia. It produces 22 million barrels oil equivalent on a daily basis.

BRENNAN: Experts say the U.S. will become increasingly important to global supplies, a factor sure to fuel debates about whether to lift the ban on oil and natural gas exports.



MATHISEN: Our market pro tonight says Iraq doesn’t seem to be excessively rattling the markets. But she says a sustainable surge in oil prices or a major escalation of military action could shake investors, even if it’s only a short-lived reaction.

Liz Ann Sonders is chief strategist for Charles Schwab.

Liz Ann, welcome, as always.

Good to see you.


MATHISEN: I assume that based on that sort of prefacing remark, you think that now is not the time for investors to be doing anything in particular with respect to — with — in reaction to world events?

SONDERS: Probably not in reaction to geopolitical events. However, we’ve been a little bit cautious in the near term for a variety of reasons, not least being that sentiment has gotten a little bit frothy, which sets the market up to be vulnerable to things like geopolitical shocks. And as you noted in the intro, so far, the market is handling this. Brent crude is only up a few bucks beyond what the average really has been since the Arab spring back in 2011.

So a sustainable impact on oil prices is the kind of thing that could potentially tip the economy into a recession. And then you’re talking about a very different animal than what I think we’re facing now.

But when you have sentiment elevated, it doesn’t take a heck of a lot. At least today, anyway, the markets seemed to be handling it pretty well.

GHARIB: So, Liz Ann, from your perspective of the market today, as you heard at the top of the program, we talked about three issues — Iraq, all this merger activity, the U.S. economy and the Fed meeting that’s coming up this week.

Which is really most crucial for American investors?

SONDERS: You know, Fed policy, I think, is extremely crucial. However, I’m not so sure we’re going to get much out of the meeting this week that could move the needle in either direction. I would expect the Fed to taper another $10 billion, as they’ve been doing at every meeting. And I don’t expect much to change in terms of their statement.

So I think it’s probably the economy in the near term that matters more. Clearly, we’re seeing an acceleration off the first quarter, a weak pace of growth. And the numbers out today universally were quite strong. Industrial production, the housing market index.

So I think you’re lifting back into a pretty significant pace of growth relative to what we’ve seen in the last quarter or two. And that’s probably enough to keep earnings growth accelerating, which is enough to keep the bull market alive.

MATHISEN: We just spoke with David Faber about the flurry of M&A activity both across border and domestically.

What, if anything, does that tell you about the health of the market, the froth in the market?

SONDERS: It tells you that animal spirits, I think, are reviving. And you’re seeing that in a lot of the lending numbers, too. Commercial and industrial lending is picking up, a lot of other leading indicators of capital spending.

So I think that’s good news for the economy. The debate, of course, is whether we’re getting to some level of froth in M&A activity that might suggest the end is near. And I think it’s a little bit too soon to say that. Often bit spikes in M&A activity can mark the beginning of the end, but oftentimes the span between those two can be quite long.

For instance, 1998 was a boom year for M&A activity and the market didn’t peak until 2000. And in dollar terms, from a nominal sense, or relative to market cap, we are not looking at the kind of peaks that we saw in either 2007 or heading into 2000.

So I don’t think we’re there yet. At this stage, think it’s a good sign of animal spirits.

GHARIB: All right, given that good sign of animal spirits, any advice you have for our individual investors in terms of stocks, bonds or sectors that they should be focusing on as we go through this next phase?

SONDERS: Yes, again, we’re a little cautious in the near term. We’re in a seasonally difficult period, not to mention a midterm election year, tendencies to give a bit of a pullback.

So you may want to just kind of keep your cards close to the vest. But we do still believe that we’re going to come out of this fine and that cyclical exposure — industrials, technology, consumer discretionary — is the place to be, that you don’t — at least not beyond the short-term, you don’t want to hunker down in the defensive areas. We think cyclicals will be the winners in the latter part of the year.

MATHISEN: Liz Ann, great, as always, to see you.

SONDERS: Thanks, Tyler.

Thanks, Susie.

MATHISEN: Liz Ann Sonders of Charles Schwab.


GHARIB: Still ahead on the program, yet another big recall from General Motors related to its ignition switches. Details ahead.


GHARIB: General Motors announced another round of recalls today. More than three million vehicles are being called back to fix an ignition — a key ignition problem. The engineer that designed these switches and also designed the switches on the six million cars recalled earlier this year, he has since been fired.

With this latest expense, the automaker has been forced to increase the charge it will take in the current quarter, now, $700 million. That’s up from $400 million previously.

For a full list of the cars affected in the latest recall, go to our Web site,

MATHISEN: A real setback for Argentina and it’s got nothing to do with the World Cup soccer tournament.

The U.S. Supreme Court rejected Argentina’s appeal in a high stakes fight with hedge funds that refused to accept the country’s debt restructuring efforts after its 2001 default.

The ruling means Argentina has to pay back more than a billion dollars to creditors. And the news sent Argentine stocks down about 10 percent today alone. But over the past year, the index has more than doubled.

GHARIB: Alibaba, which is getting ready to begin selling stock in the U.S. later this summer, offered potential investors some new details about itself. In an updated filing ahead of its IPO, the Chinese Internet retailer released sales figures for two of its main shopping sites, showing that growth has slowed and profit margins have declined.

Well, that wasn’t good for Yahoo! investors. Yahoo! owns about a quarter of Alibaba and its shares fell nearly 6 percent today.

MATHISEN: Wells Fargo might be on its way to become the biggest bank ever. And that is where we begin tonight’s market focus.

Shares of Wells Fargo are up almost 13 percent this year. And that surge has given it a greater market value than such rivals as JPMorgan Chase, Bank of America and Citi.
in fact, its market value is now just $10 billion less, says “The Wall Street Journal,” than Citi’s all time valuation record of $282 billion, set back in 2001.

Today, shares of Wells were off 1.5 percent, to 51.09.

Some AT&T wireless accounts have been breached in what the company says was an inside job. Employees of one of AT&T’s service providers allegedly stole personal information from customers, including Social Security numbers and call records.

The number of customers affected has not been disclosed. Shares were off a fraction today, to $34.98.

GHARIB: A glitch in Target’s checkout system caused lines and delays at its stores. But the company says it wasn’t due to a security issue.

The technical problem comes as the retailer continues to deal with the fallout from a massive pre-Christmas security breach that was compromising the personal information of millions of customers.

Despite that, Target shares were up slightly today, to $57.74.

And Hillshire says its board is no longer recommending the company’s purchase of Pinnacle Foods. It will back away from the pending merger, saying that the offer from Tyson Foods to take over Hillshire is a much better deal for its investors. Hillshire and Pinnacle both rose slightly. Hillshire closed at $61.97, Pinnacle at $33.34.

MATHISEN: And coming up, what the International Monetary Fund is doing that it’s never done before.


GHARIB: The International Monetary Fund cut its growth forecast for the U.S. economy for the rest of this year to a rate of just 2 percent. That’s down from 2.8 percent.

But in a real surprise, it also suggested that the U.S. start paying its lowest earning workers higher wages.

Steve Liesman has the story.

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The International Monetary Fund taking an unusual step today and wading into a heated American political debate. In its annual review of the U.S. economy, the IMF outright supported raising the U.S. minimum wage, saying it would have a significant impact on reducing poverty.

CHRISTINE LAGARDE, MANAGING DIRECTOR, IMF: We’re talking about significant numbers. You know, when you have 15 million people living below poverty level, many of whom are actually working people, not people who are just not doing anything. That’s why we are recommending it.

Now, as to give you a number, is it 10.10?

This is something that needs to be decided by the legislators, clearly.

LIESMAN (on camera): The IMF office steers clear of such contentious economic issues, especially in the U.S., which is the fund’s biggest shareholder. But the IMF says the U.S. has the third lowest minimum wage among industrialized countries. Hiking it along with expanding the Earned Income Tax Credit, which the IMF also recommended, could help lift millions of Americans out of poverty, even though it could reduce total jobs.

NIGEL CHALK, U.S. MISSION CHIEF, IMF: Certainly there’s an employment tradeoff. This Congressional Budget Office recently has done a report that estimates the loss of jobs around half a million.

But at the same time, they also know that 16 million people who are currently in low income status would have higher incomes as a result of a higher minimum wage.

LIESMAN (on camera): On overall growth, the IMS slashed its outlook for GDP for this year to 2 percent, from 2.8 percent, because of the week’s first quarter and severe winter weather.

But it continued to forecast a second half rebound and strong growth of 3 percent next year.

It also expressed concern about significant market trends because there’s too much certainty about interest rates on the Fed and the market. The fund sees the outlook as more uncertain than the market.

Still, the IMF said inflation will remain calm for years to come and the Fed could even keep its 0 interest rate policy in place beyond 2015.

Full employment in the U.S.?

Not until 2017, says the IMF.



MATHISEN: Starbucks may be better known for its high energy drinks than for higher education. But the world’s largest coffee chain is teaming up with Arizona State University to build a better educated workforce at its stores.

Jane Wells has this.


JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There are jokes about baristas with bachelor’s degrees — people who went to college only to work at Starbucks. But Starbucks says most of its employees don’t have bachelor’s degrees. And now the company plans to help them get one.

HOWARD SCHULTZ, CHAIRMAN & CEO, STARBUCKS: This is perhaps one of the most, if not the most important announcement we’ve made in our history about.

WELLS: Chairman and CEO Howard Schultz announced a partnership with Arizona State’s online program, which offers 40 different bachelor’s degrees. Starbucks employees who work at least 20 hours a week can get full tuition reimbursement for junior and senior year studying online. Underclassmen can qualify for partial aid.

Tammy Lopez wants a business degree.

TAMMY LOPEZ, STARBUCKS BARISTA: I’ve always seen myself finishing school and but the sad thing is I just didn’t know when. You know, it was just financially difficult.

WELLS (on camera): How much is this costing Starbucks?

The company isn’t saying. But the average unit at ASU online is about $500. So a full year’s load might be about $16,000 a student. You multiply that by, say, 10,000 employees, that’s $160 million, if Starbucks is paying full retail.

UNIDENTIFIED FEMALE: I accumulated more than $10,000 in debt.

WELLS (voice-over): Starbucks produced a slick video explaining how many workers have had to put education on hold due to personal financial reasons. And Schultz told them this new program is no P.R. stunt.

SCHULTZ: We have been taught constantly as businesspeople that the primary role for a public company is to make money. And I’m here to tell you, I don’t believe that’s true.

WELLS: Employee reaction bordered on the sort of adoration Steve Jobs used to engender.

UNIDENTIFIED FEMALE: I can tell you, I’ve always been committed to only one man in my life, and that’s you, Rick (ph).

WELLS: The program will only be open to those who qualify for ASU’s online admission and who don’t already have bachelor’s degrees.

But what do employees owe Starbucks after graduating?

Apparently, nothing.

SCHULTZ: You can leave. We don’t want you to leave.

WELLS: Schultz says the program is good for his company, good for the country. And he hopes others will follow.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.


GHARIB: Well, a great corporate citizen. And let’s hope other companies do follow.

MATHISEN: Interesting fellow.


I’m Susie Gharib.

Thanks for watching.

MATHISEN: And I’m Tyler Mathisen.

Have a great evening.

We’ll see you tomorrow.


Nightly Business Report transcripts and video are available on-line post broadcast at The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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