Transcript: Monday, September 15, 2014

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

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Is something brewing? Potential big deals in the beer industry may have been rebuffed. But that doesn’t mean the story is over.

Nineteen and counting. The man running General Motors (NYSE:GM) victim compensation fund says the number of ignition switch-related deaths is higher than initial estimates and will go even higher.

And breaking point? The author of a new report explains why the widening wealth gap is starting to take a toll on state government.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Monday, September 15th.

Good evening, everyone. Tyler’s on assignment tonight.

Big and bold — that was the buzzword on Wall Street today on a week that’s expected to end with the biggest initial public stock offering in Wall Street history, Chinese e-commerce giant, Alibaba, there was a flurry of mergers and acquisitions today, the kind of Monday merger mania that investors see as a sign of competence in the markets, and the global economy.

Here’s a rundown of today’s deal making:

Cognizant Technology, this is a health care company, is paying nearly $3 billion in cash for health care technology firm TriZetto.

Another health care company Danaher (NYSE:DHR) is buying Swiss dental implant maker Nobel Biocare for $2 billion in cash.

Microsoft (NASDAQ:MSFT) is buying Mojang. The company confirmed what we reported last week, it’s paying $2.5 million for the Swedish maker of the popular videogame “Minecraft.”

And German auto parts maker ZF is buying Michigan based rival TRW for nearly $12 million in cash.

But the biggest deal of the day around a possible merger in the beer industry did not happen. Brewing giant SABMiller was rejected in a takeover bid of Heineken, but only because it was reportedly defending itself against a rumored takeover attempt by Anheuser-Busch InBev. That could be worth $120 billion.

And that was enough to send shares of some major beer makers higher. Molson Coors was a big winner, surging nearly 6 percent. Anheuser-Busch up 3 percent.

Morgan Brennan has more on the consolidation battle that’s brewing in the beer industry.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A frothy Monday for the beer business. Reports that Anheuser-Busch InBev is moving forward on its long rumored bid for SABMiller were debunked. And Heineken confirmed it rejected SAB’s own buyout bid. One neither seems to be moving forward, it does kick off a new wave of consolidation, something beer experts have been anticipating for years.

BENJ STEINMAN, BEER MARKETER’S INSIGHTS PRES.: The global beer industry has been consolidating for about 15 years. I mean, you now have four global players that are half the beer business and they’re 60 percent of the profit. So, now, you’re getting into the sort of final phase where it’s the dance of the elephants where the giants have to merge with the giants.

BRENNAN: SABMiller, which produces Peroni and Castle Lager, is the world’s second largest brewer behind Anheuser-Busch InBev, which makes Budweiser and Stella Artois. Heineken, with its namesake, Anselm, is number three.

So, an SAB/Heineken merger would have created a company large enough to rival Anheuser-Busch, while an Anheuser/SAB combo would create a beer behemoth responsible for nearly one-third of the world’s beer supply.

MICHAEL ELLAS, BEVERAGE MARKETING CORP CEO: SAB’s attempt to purchase Heineken which was rebuffed by Heineken is an effort for them to look at other areas of the world. It’s also is a way of protecting themselves from the global consolidation going on with ABI now ready or getting very close to looking for other additional acquisitions.

BRENNAN: Each of the biggest brewers is looking to spur global growth. Expanding an emerging market as beer sales continue to slump in developed countries. Euro monitor forecast global beer consumption will increase 14 percent in the five years through 2017, fueled by growth in Asia Pacific, the Middle East and Africa and Latin America.

While Western Europe sees declines and North America remains flat, despite a boom in craft brews.

(on camera): As the consolidation dance moves forward, there’s another name to keep an eye on, Molson Coors. Analysts say it could be a takeover target or a buyer if SABMiller is forced to divest its stakes in the two companies Miller Coors joint venture.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

GHARIB: So, what does one well known business leader think of all that deal-making activity?

James Tisch, CEO of Loews (NYSE:L) Corporation, tells me he’s open to acquisitions but it hasn’t been easy.

(BEGIN VIDEO CLIP)

JAMES TISCH, LOEWS CORPORATION PRES. AND CEO: It’s been difficult to find businesses to buy. We look very carefully. We kick an awful lot of tires. We’ve come close on some. But just luck of the draw, we haven’t completed one yet.

(END VIDEO CLIP)

GHARIB: And we’ll have more of my interview with Tisch and his thoughts on everything, from the Federal Reserve to the economy. That’s coming up a little later in the program.

Meanwhile, on Wall Street today, the major averages ended the day mixed as investors anticipate the start of the Federal Reserve’s policy meeting on interest rates tomorrow. Also, a disappointing economic report today impacted investor confidence. U.S. manufacturing output fell in August for the first time in seven months. By the closing bell, the Dow rose 44 points, but the NASDAQ tumbled almost 50 points, getting stung by a big sell-off in momentum tech stocks like Netflix (NASDAQ:NFLX), Tesla and LinkedIn (NYSE:LNKD), and the S&P lost 1 1/2 points.

Worries about Europe’s struggling economy are causing growth forecasts to get slashed, even here in the U.S. The Organization for Economic Cooperation and Development, this is the OECD, cut its growth outlook for major developed economies for this year and next, and called for more stimulus measures in the eurozone to stave off deflation. The group also lowered its prediction on U.S. economic growth this year to just over 2 percent.

New and startling statistics about the number of people injured or killed because of defective vehicles made by General Motors (NYSE:GM). Today, Kenneth Feinberg, the lawyer hired by G.M. to award payments to crash victims, released his first report showing that claims and fatalities are much higher than the automaker had determined.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): After looking at hundreds of claims and meeting with families of those injured or killed in faulty GM vehicles, Attorney Ken Feinberg is close to awarding millions of dollars to many of the victims.

So far, the fund has received 445 claim applications, including 125 on behalf of those killed in GM models. Of that, 31 have been deemed eligible for payments including 19 involving fatalities.

KENNETH FEINBERG, GM COMPENSATION FUND ADMINISTRATOR: Clearly, the number will go up. It’s speculation as to how high it will go. But clearly, based on the number of claims that have already been found eligible and the number that are in the queue that we’re looking at, the number will continue to rise.

LEBEAU: For months, GM claimed only 13 deaths were linked to accidents involving 2.6 million cars with defective ignition switches. Even as lawyers and safety advocates have warned that there were far more people killed.

BOB HILLIARD, GM VICTIM ATTORNEY: GM simply was flat wrong when they tried to frame the conversation by saying there were 13 deaths. That’s just factually impossible given the amount of years, you know, actually a decade that they covered up the fraud and the amount of accidents that we know occurred as a result of the ignition switch.

LEBEAU: General Motors (NYSE:GM) CEO Mary Barra is hoping that the compensation fund will help her company clear a good chunk of the cases involving defective switches. Beyond that, she’s leaving the process up of Feinberg and his team.

MARY BARRA, GM CEO: Since we’ve announced the protocol, I have not talked to Ken. He’s running a completely independent process. And that’s the way we want it.

LEBEAU (on camera): Ken Feinberg expects the first claim payments to go out in the next 30 to 45 days with many of those payments being for several million dollars. When the GM compensation fund stops taking applications at the end of this year, General Motors (NYSE:GM) could wind up paying more than a half billion dollars to those injured or killed in defective GM cars.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Washington.

(END VIDEOTAPE)

GHARIB: Detroit’s bankruptcy trials resume today after the city reached a settlement with a major creditor last week, putting the case on hold since Wednesday. So far, the costs of the historic bankruptcy has reached $126 million and counting, already surpassing the amount paid by General Motors (NYSE:GM) and Chrysler at their trials. Fees to advisers have totaled $28 million and Detroit’s leading law firm has already billed the city $47 million.

But many states are in a financial squeeze. According to a report released today from Standard & Poor’s, income inequality is taking a toll on state governments. The widening gap between what wealthy Americans earned and people getting lower wages is reducing state revenues.

Joining us the author of that report, Gabriel Petek. He is credit analyst at S&P Ratings.

Gabe, nice to have you with us.

And it’s a very interesting report. Tell us why this is happening now. What happened?

GABRIEL PETEK, S&P RATINGS CREDIT ANALYST: Well, we think when we look at the data, what’s going on is that over time what has happened is the incomes for those at the very top of the distribution have grown very strongly, but those folks don’t need to spend as large a share of their income. And so, they’re able to plow much of their income into savings.

The bottom portion or the remainder of the income distribution, however, has seen stagnant or even declining wages when measured in real terms. And so what it does is it has the effect of reducing overall purchasing power in the economy which then translates directly into state budgets and we’ve seen stagnating revenues for the states.

GHARIB: And you’ve been — your report covered a 30-year period. Do you see this trend continuing?

PETEK: We don’t see — at this present time, we don’t think this trend is going away. And so, this is really going to be a situation that we believe states should be aware of as they plan and budget for upcoming years.

GHARIB: And on your list, the number of states that have been struggling the most with this, California, we’ve been hearing a lot about California’s financial problems for many years, but also states like Connecticut, New Jersey and Florida. California and some of these other states solved the problem by raising income taxes.

Is that really working? Is their financial situation better off?

PETEK: Well, we think the states are in something of a conundrum because when they raise tax rates on the top, like they did in California, sure, it helps speed up the rate of revenue growth, but it comes at a price and the price is revenue stability. And so, it’s perhaps even harder for states to manage unpredictable and volatile revenue streams more than just a gradual slowdown in the rate of revenue collection.

GHARIB: So, you’re in the credit ratings business. When you look at states with these financial problems, are their credit ratings coming down? Are you downgrading them and what does that mean for their economic health?

PETEK: Well, the way I would say it is I think that this issue is probably largely already reflected in the state credit ratings. We did lower the state of New Jersey’s bond rating last week, California’s at a low level. And we think some of this is a reflection of the issue we’re talking about here.

GHARIB: Very interesting information. Thanks a lot, Gabe.

PETEK: Thank you, Susie.

GHARIB: Gabe Petek with S&P Credit Ratings.

And still ahead on the program, investors are focused on the Fed. So are executives in the C suite. And you might be surprised by what James Tisch wants the Central Bank to do.

(MUSIC)

GHARIB: More now on Alibaba, this week’s huge initial public stock offering. Investor demand for a piece of the Chinese online retailer has been so great, executives are raising the IPO’s price range from a range of $60 to $66 a share to a new range of $66 to $68 a share.

But according to a filing, the company will not increase the number of shares it plans to sell.

Apple’s iPhone 6 is flying off the shelves and it’s not even on store shelves yet. The company notched more than 4 million preorders for its new larger iPhone 6 models in just the first 24 hours. That’s a new record and even more than its initial supply. Deliveries will start this Friday at Apple (NASDAQ:AAPL) Stores and some authorized resellers. But Apple (NASDAQ:AAPL) says because of the overwhelming demand, many customers won’t receive their new phones until October.

While Apple (NASDAQ:AAPL) looks to grab a bigger share of the smartphone market, Amazon (NASDAQ:AMZN) is aggressively pushing into the lucrative online gaming business.

Josh Lipton has more on what Amazon (NASDAQ:AMZN) hopes to accomplish.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Amazon’s CEO Jeff Bezos wants his company to dominate a lot of different industries, from e-commerce to Cloud services. He is also very serious about video games.

Amazon (NASDAQ:AMZN) recently agreed to pay nearly $1 billion to buy Twitch, a streaming service where fans watch others play video games.

UNIDENTIFIED FEMALE: It’s so addicting.

LIPTON: Now, the idea of watching others play video games might sound unusual, but it’s becoming a very popular form of entertainment. In fact, Twitch is the fourth largest source of U.S. Internet traffic behind only Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), according to researcher Deep Field. Amazon’s executives are clearly excited about Twitch’s potential.

MIKE FRAZZINI, AMAZON, VICE PRESIDENT OF GAMES: They’ve been growing really fast, obviously. This is just a fantastic place to go and talk — you know, it’s about socializing around games and over types we’ll be working with ways to help them move faster in what they want the accomplish.

LIPTON: But not just Twitch. Amazon (NASDAQ:AMZN) is deploying a lot of capital and resources to the video game industry. The company now runs its own in-house gaming studio and is hiring developers to build games for its Fire TV set-top box, smartphones and tablets.

However, not every analyst is convinced Amazon (NASDAQ:AMZN) will succeed given the number of tech titans now battling for market share in this red-hot industry.

MICHAEL PACHTER, WEDBUSH: At the end of the day, I’m confident they won’t win. They face formidable hurdles. You’ve got really well-capitalized Microsoft (NASDAQ:MSFT) out there who is not going to let you take their business away without a fight. You got less well-capitalized but deeply experienced and successful Sony (NYSE:SNE) out there. You got pretty poorly operated Nintendo out there but they have $910 billion on their balance sheet. None of these guys are giving up their market without a fight.

LIPTON (on camera): Still, research firm IDC says the video game industry is now worth $91 billion. So, even if Bezos controls a small share of that market, it could mean a lot of money for his company and its investors.

Josh Lipton, NIGHTLY BUSINESS REPORT, San Francisco.

(END VIDEOTAPE)

GHARIB: Shares of Avanir soared to an 8-year high, and that’s where we begin tonight’s “Market Focus.”

The company’s new drug to help reduce agitation in patients with Alzheimer’s delivered positive results in a clinical trial. Based on those results, Avanir’s CEO says he plans to meet with regulators.

(BEGIN VIDEO CLIP)

KEITH KATKIN, AVANIR PHARMACEUTICALS CEO: We have a long path before we can get FDA approval for this product. So, our focus right now is to meet with the FDA and other regulatory agencies, understand exactly what it’s going to take to make this drug available. This is really a huge day for patients who have agitation due to Alzheimer’s. And so, we’re focused on how we can make this available to those patients as quickly as possible.

(END VIDEO CLIP)

GHARIB: Shares surged 85 percent to $12.49.

Shares of Gilead Sciences (NASDAQ:GILD) went the other way after news surfaced that it has agreed to license a cheaper version of its hepatitis C drug, Sovaldi, to 91 developing countries. Sovaldi hit the market last year and has been very effective in curing patients with hepatitis C, but the drug costs $1,000 a pill. Shares fell 2 1/2 percent to $100.99.

Netflix (NASDAQ:NFLX) has made its debut in France as it looks to expand in Europe. But according to reports, the video-streaming giant is getting a frosty reception, as French filmmakers accuse Netflix (NASDAQ:NFLX) of avoiding local taxes that subsidize French films. The stock slumped almost 4 percent to $457.75.

And, Terex (NYSE:TEX), the construction maker, lowered its full-year profit outlook citing weakness in the crane business. Its order rate has dropped, especially in developing markets where customers are struggling to secure financing. Shares tumbled almost 6 1/2 percent to $32.47.

As we mentioned earlier, investors are focused on the Fed meeting this week. Economists, market pros and other experts have all been debating on what policymakers will decide. But what do CEOs want to hear? And what’s their take on the economy and the environment for doing business?

Tonight, we hear from Loews (NYSE:L) CEO James Tisch, in a new NBR feature, “For the C-Suite.”

(BEGIN VIDEOTAPE)

TISCH: My father was always taught by his mother, you get along with your brother.

GHARIB (voice-over): James Tisch runs one of the largest family businesses in corporate America. He’s CEO of Loews (NYSE:L), a 15 billion conglomerate headquartered in New York City.

His brother Andrew is co-chairman and his cousin Jonathan is the other co-chair. Tisch family members control more than 30 percent of the stock even though Loews (NYSE:L) is a public company trading on the New York Stock Exchange.

Jim’s father Larry and his uncle Robert started the company in the 1940s when they bought one resort hotel in Lakewood, New Jersey, and then kept on adding properties, building up a hotel empire.

They expanded into movie theaters buying the Loews (NYSE:L) chain, the cigarette business through Lorillard (NYSE:LO) and Bulova watches.

Today, Loews (NYSE:L) owns luxury hotels in the U.S. and Canada, insurer CNA Financial (NYSE:CNA), natural gas pipelines and Diamond Offshore Drilling (NYSE:DO).

Tisch says his businesses are growing even though the economy is, quote, “lukewarm.”

TISCH: I think the economy is doing reasonably well. For the past five years, the economy was growing at 2 percent. And my sense is that going forward now for the next year, my fearless forecast is that it’s good to grow by 3 percent.

That may not sound like a big difference, but it really is. And I think it will make a big difference in corporate earnings. I think it will make a big difference over time about how people feel about the economy. I think it will make some difference.

GHARIB (on camera): As you know, the Federal Reserve is meeting this weekend, the consensus is that policymakers will start raising interest rates in the middle of next year. How do you feel about that? Are they doing the right thing? And will higher rates help or hurt your businesses?

TISCH: Higher rates will help our business. We’ve had zero interest rate policy now for five years. Savers have been unable to earn attractive returns in fixed income securities. And likewise for certain businesses like ours where we — our insurance business has a $45 billion portfolio that’s invested primarily in fixed income, we, too, have been suffering with low interest rates.

So, from my perspective, they can’t go up a minute too soon.

GHARIB: What about your confidence level? As a CEO, are you confident about spending money to expand your businesses or making some acquisitions?

TISCH: I generally have confidence in the overall economy, but there are certain of our businesses are not experiencing the same growth that the economy is experiencing, so we’re just not naturally investing in those businesses at this time.

GHARIB: You certainly have a lot of cash at Loews (NYSE:L). You could be making —

TISCH: Five billion dollars.

GHARIB: You’ve been making a lot of acquisitions. Loews (NYSE:L) history, it has been growing by acquisitions. Is it that you’re not finding the good deals or something else is worrying you?

TISCH: One thing I like to say is we don’t let the cash burn a hole in our pockets. And while $5 billion is a lot of cash for us to have, I’m perfectly comfortable with it.

It’s been actually difficult to find businesses to buy. We look very carefully. We kick an awful lot of tires. We’ve come close on some, but just luck of the draw, we haven’t completed one yet.

GHARIB: Let’s talk a little bit about energy. Recently, you sold one of your big natural gas properties. Are you getting less bullish on energy?

TISCH: I am bullish on the United States energy renaissance. It’s really extraordinary what’s happened. With respect to our own investment in the gas exploration and production business, we’ve decided that now is the time to sell it, that gas prices are up from $2 to $4, that it would take a lot of investment for us to grow the business. And instead, we decided to focus on other things.

GHARIB: What about oil prices? They’ve been coming way down. Is there a point at which you’d say that maybe we just get out of the oil business, too?

TISCH: We are in the business to stay. We’re long-term players. The business is very cyclical. In my mind, the attraction of cyclical businesses is that you can — by leaning against the wind, by leaning against the way things are going, you can really create a lot of value.

GHARIB: What concerns you most as a CEO?

TISCH: One of the biggest worries I have is what’s going on in Washington. The United States has the highest tax rate in the Western world, in the OECD. Our tax rate is 35 percent. Other countries are 15 percent, 20 percent, and 25 percent.

U.S. businesses cannot compete long-term against competitors who have much — such lower tax rates. And it’s incumbent upon the United States’ political establishment to do something about it.

GHARIB: A lot of companies are doing these cross-border deals, so-called inversions. Do you think that that’s a good thing?

TISCH: It’s a good thing to the shareholders of those companies, yes.

Is it a good thing for America? No. What’s the cure for it? Tax reform. It’s that simple.

(END VIDEOTAPE)

GHARIB: Tisch also said that the chances for tax reform this year is zero. Next year? Maybe. If not then, it might not happen until after the 2016 presidential election.

Coming up on the program, remember Watson? The supercomputer made famous on “Jeopardy”? It could revolutionize the classroom and change the way kids learn. The first in our series, “The Future of Education,” is next.

(MUSIC)

GHARIB: “The Future of Education.” Tonight, we kick off this special three-part series. In part one, we look at supercomputers like IBM’s Watson, which is able to process information more like a human than a computer. Right now, Watson contains and processes tons of information including documents, dictionaries and encyclopedias. That’s a lot of information and artificially intelligent tutor could pass on to real life students.

Sharon Epperson has our story.

(BEGIN VIDEOTAPE)

SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Meet Watson, the computer that knows pretty much everything.

MICHAEL RHODIN, IBM WATSON GROUP SVP: Watson is the early stages of a whole new area of computing. Think about it as the ultimate assistant who has time to read everything that’s happening and start to put together hypotheses on what might be going on, or help you answer questions.

EPPERSON: Now, imagine having Watson as your personal tutor. That’s what education could look like in 25 years. Computers with the power of Watson but in the form of wearable technology that will inevitably become smaller, cheaper, faster.

UNIDENTIFIED MALE: So imagine having contact lenses for a fifth grader who has an earpiece which talks to them and gives them audio. This fifth grader can walk down the street, bring into existence a photo of a textbook from the 17th century. They can listen to their tutor, ask them questions about what they’re reading. This technology is quite visible from where we are now.

EPPERSON (on camera): While artificially intelligent technology will be programmed to teach children, the focus of these tutors will be to learn about their pupils.

UNIDENTIFIED MALE: They also know the different pathways that learners take their problems. They know if you’re learning a times table that the really hard multiplications are 7 and 8. They know about it, they can anticipate that. They have a whole battery of questions they can ask you to nudge you farther along.

EPPERSON (voice-over): Imagine that for a fifth grader.

For NIGHTLY BUSINESS REPORT, I’m Sharon Epperson.

GHARIB: And finally, an unhappy anniversary. Today marks the sixth-year anniversary of the collapse of investment firm Lehman Brothers. The bankruptcy sent shivers down Wall Street and was followed by a massive slide in the markets, the housing market crisis and federal bailouts of some of the country’s biggest companies. Six years later, the markets had reportedly reached historic highs. The nation’s banking system is much healthier, housing is light-years ahead of where it was and the job market is getting stronger.

That’s NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Have a great evening, everyone. We’ll see you right back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. 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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