Transcript: Wednesday, March 26, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Citi sinks. As the Federal Reserve rejects the bank’s capital plans and shares slide after the closing bell.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Short-term gain, long-term pain. Blackrock CEO Larry Fink tells every CEO in the S&P 500 to think twice before buying back stock and issuing dividends. Why and is he right?

GHARIB: Odd couple? Facebook (NASDAQ:FB) shares tumble after a supplies acquisition of virtual reality headset maker Oculus. And now, many investors are asking, is it the right fit?

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Wednesday, March 26th.

MATHISEN: Good evening, everyone, and welcome.

It is a big evening for banking news. The Federal Reserve coming down hard on a number of financial institutions, barring them from increasing their dividends or buying back their own stocks until they have enough cash on hand to withstand another big financial shock.

Citigroup (NYSE:C) is the biggest bank that got its capital return plans rejected by the Feds, sending shares lower initially in late trading today. The decision is a blow to the bank and marks the second time in three years that Citigroup (NYSE:C) has failed to win the Fed’s approval for its plan to return money to shareholders.

Kayla Tausche who follows the banks for us joins us now.

Kayla, I would think that an awful lot of Citigroup (NYSE:C) shareholders, not to mention shareholders in other banks, are disappointed tonight that the capital return plans that they might have been expecting on five years after the crisis are now up in the air.

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: They’re saying fool me once, shame on you. Fool me twice, shame on me.

A lot of these investors believed former CEO, Vikram Pandit, in 2012 when the Fed rejected that plan, and he said this won’t happen again. We don’t understand what happened. And they had to keep the dividend at 1 cent per share.

The dividend is still there and it’s 2014. Investors are saying, we should be far past this by now.

GHARIB: Now, you know, Citi’s CEO Mike Corbat, right?

TAUSCHE: Yes.

GHARIB: Gets a lot of high marks for all the good things he’s done post-Pandit. But, I mean, why — it looks like Citi keeps getting targeted by the Feds. Is Citi doing the right thing?

TAUSCHE: It’s unclear. The reason why the Fed objected to the plan at this stage was because they said on a qualitative basis, Citi just wouldn’t be ready for another crisis. The Fed didn’t like the way that Citi had prepared its own models for another crisis.

So, it has a big exposure in emerging markets. What if Asia say drops 20 percent? What if Mexico drops 50 percent? Modeling for certain scenarios like that just wasn’t up to snuff for the fed at Citigroup (NYSE:C). Even though Corbat has gotten high marks, that was priority number one when he took the helm. And you have to think investors are going to be questioning where his priorities stand right now.

MATHISEN: Other banks affected, too, many of them the U.S. subsidiaries of foreign banks. But back to Citi now, they had wanted to increase their dividend to what, a nickel a share per quarter? And raise the buy back?

Is that now up in the air? That’s not going to happen?

TAUSCHE: That will not happen. They have 90 days to resubmit to the Fed. But for now, it’s status quo, $1.2 billion in share buybacks. They wanted $6.4 billion. High expectations, they overpromised. No doubt they’re under-delivering.

MATHISEN: All right. Kayla Tausche, thank you very much for being with us tonight.

GHARIB: And now to Bank of America (NYSE:BAC), which will pay $9.5 billion to settle all litigation with the top federal regulator over mortgage securities that were sold to Fannie Mae and Freddie Mac between 2005 and 2007.

But the settlements don’t end there. Ken Lewis, the one-time chief executive at Bank of America (NYSE:BAC), will pay $10 million to settle claims by New York state’s attorney general that he misled shareholders and the government in order to complete his bank’s acquisition of struggling investment firm Merrill Lynch back in 2009.

MATHISEN: Well, there’s a lot to like on Facebook (NASDAQ:FB), just maybe not today. As we reported yesterday, the social networking giant announced its first ever acquisition of a hardware company, paying $2 billion for the privately held Oculus VR, which makes virtual reality goggles.

The trouble is, Oculus has no real revenue just yet and its technology is largely untested. And it comes a month after Facebook (NASDAQ:FB) paid an astonishing $19 billion for the mobile messaging app WhatsApp.

Investors will ask questions later. Today, they sent shares of Facebook (NASDAQ:FB) tumbling 7 percent. That’s their worst day in four months.

Josh Lipton has more on Facebook’s takeover of Oculus and the company’s plans to move into a virtual world.

(BEGIN VIDEOTAPE)

MARK ZUCKERBERG, FACEBOOK: The social networks are going to be —

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The computing platform of today is mobile. The computing platform of tomorrow could be virtual reality.

That’s the big bet Facebook’s Mark Zuckerberg just made with his $2 billion acquisition of Oculus, which develops virtual reality technology. Users put on a headset and feel like they’re inside and part of a video game. It’s a totally immersive gaming experience which Facebook (NASDAQ:FB) sees as the next big opportunity.

SCOTT KESSLER, S&P CAPITAL IQ: It seems like they’ve done a pretty good job of securing market share and opportunities when it comes to mobile. And they’re thinking about what’s next. And to them, seemingly virtual reality is one of those areas where you could see some new paradigm.

LIPTON: Zuckerberg says virtual reality has all kinds of applications. Imagine feeling like you’re courtside at a game, talking one-on-one with your doctor, or studying in a classroom halfway around the world.

UNIDENTIFIED MALE: Is that is clear?

LIPTON: This isn’t just sci-fi fantasy. Sony (NYSE:SNE) last week let me try out its virtual reality headset. I was virtually transported underwater in a cage surrounded by sharks. It was so real that after a few minutes, I was ready to throw off the headset.

So what’s the business model Zuckerberg imagines? He says Facebook (NASDAQ:FB) isn’t looking to make money off the hardware. Instead, he sees virtual reality as a new social network and new way of communicating where users can come together and also buy goods and services.

Analysts say the acquisition is also about perception, making sure Facebook (NASDAQ:FB) is thought of as a dynamic company pursuing cutting-edge technology.

KESSLER: There’s clearly a kind of land grab that seems to be going on in Silicon Valley when it comes to not only acquiring technologies and talent but also perceived innovation.

LIPTON: It’s impossible to know whether Zuckerberg is right and virtual reality will become the next major communications platform. But $2 billion bet analysts say doesn’t seem crazy for a company of Facebook (NASDAQ:FB) size.

Josh Lipton, NIGHTLY BUSINESS REPORT, Menlo Park, California.

(END VIDEOTAPE)

GHARIB: Let’s turn now to Victor Anthony for his thoughts on Facebook (NASDAQ:FB). He’s managing director and analyst at Topeka Capital Markets.

So, victor is this a crazy move or does this make sense in terms of a big grand plan that Mark Zuckerberg has in mind?

VICTOR ANTHONY, TOPEKA CAPITAL MARKETS MANAGING DIRECTOR: Listen, I’m a strong believer in Facebook’s core platform. I’ve been a bull since day one. You know, I do — I get the logic behind his acquisition that virtual reality could be the next generation platform. And with Facebook’s ownership of virtual reality plus social, they’re able to leverage the platform outside of gaming into new communications and social and enterprise use cases.

So, I get that. However, I am somewhat cautious. I’m taking a wait and see approach on his acquisition for two reasons. Number one, you know, they talked about lots of opportunities last night on the call. However, they weren’t exactly clear what those are.

So, the financial payout for this particular acquisition is unknown, as well as the timing of this future payout is unknown. Number two, there’s an element of risk in Facebook’s business model that did not exist two months ago, and that they’re currently digesting two acquisitions. Any sort of hiccups through the integration process, I fear that that could distract the management team from the core platform which is performing extraordinarily well today based on my checks.

MATHISEN: You know, Victor, not too many software companies have done all that well — notably Apple (NASDAQ:AAPL), a different one, but it began as a hardware company. Not too many software companies have done well when they bought, gone into hardware. What’s the history tell you?

ANTHONY: Well, listen, I think what Facebook (NASDAQ:FB) is trying to do is trying to expand outside of the core platform and attract a new base of users and create an address any sort of new platform that exists in the future. So, I get what they’re doing. You know, like I said last night, they’re not really looking to be a hardware company. They’re just really looking to use the software and expand the software.

GHARIB: Victor, if you had to describe Facebook (NASDAQ:FB) two to three years from now, give us a short description of what the company’s going to be known for.

ANTHONY: Well, I think it’s still going to be known as a social platform where everyone essentially around the globe really just coalesces and gets together and communicates. So, it becomes I think what is a communications platform. It becomes a search platform as well. And I think it becomes a platform, a knowledge-based platform essentially to find whatever you’re looking for.

MATHISEN: You do have a buy rating on this stock, Victor?

ANTHONY: Yes, I do have a buy rating. I do have $75 price tack on the stock.

MATHISEN: Do you feel good about that buy rating today as you did on Monday?

ANTHONY: Well, like I said, my buy rating is predicated on the core platform which I think is performing extraordinarily well. I do think there’s some sort of risk now in the business model that didn’t exist two months ago because of the two acquisitions. So, you know, I’m taking a wait and see approach. I’m somewhat cautious but I’m still at a buy I think the core platform which is what my estimates are based on is still performing extraordinarily well. I will take advantage of the weakness.

GHARIB: All right. Victor, thanks for coming by and talking with us. Victor Anthony, managing director with Topeka Capital Markets.

ANTHONY: Thank you.

MATHISEN: Well, this was not the initial public stock offering debut that King Digital had hoped for. The game-maker best known for the mobile game “Candy Crush” saw its shares gets crushed on their first day of trading, sliding more than 15 percent.

But King Digital CEO Riccardo Zacconi doesn’t sound crushed about the inauspicious debut for the stock or about prospects for new video games and players.

(BEGIN VIDEO CLIP)

RICCARDO ZACCONI, KING ENTERTAINMEMENT CO-FOUNDER & CEO: What we want to see is not to find another “Candy Crush”. That’s not what we are here for. What we’re here for is to build a portfolio of games. We want to build a network of players, of loyal players who play our portfolio games. And you can see that we have now three games in the top 10 grossing on all key platforms.

(END VIDEO CLIP)

MATHISEN: With today’s IPO, King Digital is now valued at about $6 billion. “Candy Crush” counts 97 million players.

GHARIB: Well, the slide in Facebook (NASDAQ:FB) and other tech stocks dragged down the major averages today. Also weighing on the markets, renewed concerns about Russia on reports that it has 30,000 military troops stationed along its eastern border with Ukraine.

Speaking of Brussels, President Obama urged European allies and NATO members to condemn Russia’s annexation of Crimea.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: That’s why Russia’s violation of international law, its assault on Ukraine’s sovereignty and territorial integrity, must be met with condemnation.

(END VIDEO CLIP)

GHARIB: On Wall Street, stocks sold off sharply despite one upbeat economic report. Orders for long-lasting durable goods in February were more than twice as high as forecasted. The Dow fell nearly 99 points, the tech-heavy NASDAQ lost 60, the S&P was down 13 points.

MATHISEN: Well, even those markets are still near historic highs and home prices are higher, the outlook on the economy for many Americans is still not close to where it was before the financial crisis.

Steve Liesman takes a look at a new survey that shows how many of us are feeling about the economy right now.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: America’s views on the economy little changed in this quarter despite stronger growth in jobs numbers to end the year. The CNBC survey finds that 81 percent of the public still view the economy as just fair or poor. And only 7 percent think the economy is good or excellent. That has barely changed from the December numbers, although it is an improvement from the depths of the recession.

Still, economic views remain depressed compared with how America’s felt before the financial crisis.

Now, economic expectations were a touch better with a third of the public seeing the economy improving in the next year. But an equal share says it will likely get worse. Behind this muted economic outlook, Americans see their wages and housing prices growing only around 2 percent next year. Both are down for the December survey.

Attitudes on stock investing were also largely unchanged, 39 percent say it’s a good time to invest in the market. Now, the public’s views on the stock market have really yet to recover their pre-crisis levels, even though most major stock indexes have recovered and are actually higher than those levels.

And in a sign of changing times, 56 percent of Americans said it would be acceptable to have a business selling marijuana in their city or their town but support drops to 48 percent, under half, when asked if it’s acceptable to have such a business in their neighborhood. Only a third of Americans would invest in a business that grew or sold pot, and a little more than a quarter would work at such an establishment.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: And read more about Americans’ views on the economy and the stock market, head to our Web site, NBR.com.

GHARIB: Still ahead on NIGHTLY BUSINESS REPORT, Blackrock CEO sounds the alarm, warning corporate America to think twice when it comes to stock buybacks and dividends. Is that a risk to long-term growth? That’s coming up.

(MUSIC)

MATHISEN: The battle heating up between an activist shareholder and Darden Restaurants (NYSE:DRI (NASDAQ:TBUS)). Barrington Capital Group isn’t just calling for a restructuring of the company but now also for a new CEO. Darden says it’s doing what’s in the best interests of shareholders.

GHARIB: What is in the best interests of shareholders? Well, that question was the hot topic of debate today thanks to a strong warning from Larry Fink, the CEO of Blackrock. That’s the giant investment firm. He sent a letter to all the CEOs of the S&P 500, warning that the recent trend of issuing dividends and stock buybacks under pressure from activist investors jeopardizes a company’s long-term growth.

Here’s what he wrote: “Many commentators lament the short-term demands of the capital markets. We share those concerns and believe it is part of our collective role as actors in the global capital markets to challenge that trend.”

Fink did not mention any specific activist hedge fund but pointed out big companies have become vulnerable to short-term thinking.

MATHISEN: So, does focusing on short-term gains jeopardize the company’s long-term growth?

We have two different views on the topic. Don Steinbrugge is managing director at Agecroft Partners, a hedge fund consulting firm.

And Bill George is the former CEO of Medtronic (NYSE:MDT) and professor of management practice at Harvard Business School. He’s been on many — most — including many of the most prestigious boards in the country.

Bill, with that in mind, let me — let me begin with you. Mr. Icahn, among other activists, is very critical of corporate boards, says they misuse shareholder capital and that the managements in the boards aren’t acting in the best interests of shareholders. I assume you would say that has not been your experience at all.

BILL GEORGE, FORMER MEDTRONIC CEO: Not at all. In fact, Carl Icahn is going after eBay (NASDAQ:EBAY) right now, and eBay’s had a 465 percent return to shareholders in the last five years, Tyler. And, you know, he’s attacking some of America’s best companies.

Yes, corporations need to make sound capital decisions. They need to decide how much for growth, how much for acquisitions, how much are they going to return to shareholders and dividends. These are capital structure questions. I think they’re sound.

We got too far that way back in 2008 and that led to the financial crisis. Banks didn’t have enough capital to keep them going.

So I think the Carl Icahns of the world, you see Nelson Peltz trying to do the same thing, with a great company like PepsiCo, break ’em up, try to get a short-term hit. Carl is just looking for a short hit. He’s not concerned about the long term growth of eBay (NASDAQ:EBAY).

I’ll tell you with the moves that Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) are making, unless eBay (NASDAQ:EBAY) continues under John Donahoe, continues to invest and build their platform with PayPal and other aspects, they’re not going to be as competitive in the global market.

That’s what we in America need — great global companies going after the global markets, like PepsiCo is doing, like Coca-Cola (NYSE:KO) is doing. I think that’s really critical that we’re investing in a long-term future growth. And yes, we want to give fair dividends back to our shareholders. If we have excess cash, in the word of Exxon, Exxon generates a lot of cash and they have good shareholder return policies.

But unless you have a lot of excess cash, I don’t think you should be giving it all back to shareholders. I think you should be investing for the growth of the company.

GHARIB: All right. So, let’s get Don into this conversation.

I know you’re on the other side of this debate. Make a case why people like activist investors like Carl Icahn or Nelson Peltz or Dan Loeb, are working on behalf of shareholders and for the best interests of the company.

DON STEINBRUGGE, AGECROFT PARTNERS MANAGING DIRECTOR: Well, first of all, I do disagree. I think in general, corporate management are more focused on doing what’s good for the corporation as a whole than shareholders as a whole. And I think activists are checks and balances on corporate management.

You know, if they return money to stockholders, who’s benefitting? It’s benefitting the economy because that money is then redeployed into private equity, venture capital, new businesses and so forth. So, if a company isn’t efficiently utilizing their assets, someone else should more efficiently invest those. And without activists, that there’s no checks and balances on corporate management to do that.

MATHISEN: So, Don, do you think — the real criticism here is that the activists act for short-term purposes, i.e. to return capital in some cases to their own pockets in the form of stock buybacks or dividends, and that it might not be in the best long-term interest of the shareholders. And that’s what Larry Fink was driving at. Address that specifically if you would.

STEINBRUGGE: Well, I — you know, Larry Fink is — a lot of his assets are in an S&P 500 index fund. And he’s looking at it very long-term oriented from an individual company. What he’s not thinking about is from an investor’s standpoint.

An investor wants to allocate his money into securities that are going to generate the highest return possible. Our economy benefits from that. You want money coming out of less efficient companies and going into more efficient companies.

So, the overall economy benefits when money leaves inefficient companies and goes into more efficient companies.

Larry’s opinion was, I’m an S&P 500 investor. I have to hold this company long term.

GHARIB: Right.

STEINBRUGGE: Long term maybe this doesn’t benefit the company.

GHARIB: OK. Bill, half a minute.

GEORGE: May I comment on that, Tyler?

I think that if they are inefficient and they’re not managing capital well, I think the point is very well taken. I think they should be challenged. But when you go after America’s best companies —

MATHISEN: Right.

GEORGE: — that are looking for long-term growth and you ask them to play the short-term game, that doesn’t help anyone.

MATHISEN: Right.

GEORGE: I like Warren Buffett’s statement. He says, I think that management and this board ought to run the company and the shareholders are going to stay and those that are going to leave.

MATHISEN: We have to end it there, Bill George —

GEORGE: It takes into account the best long-term interests of the corporation —

MATHISEN: And, Bill George, we have to end it there. We lost the satellite.

Don Steinbrugge, thank you very much at Agecroft Partners.

Bill is with Harvard Business School.

GHARIB: Shares of DirecTV and Dish surged on reports that the two companies could merge. And that’s where we begin tonight’s market focus.

Dish Network chairman Charlie Ergen reportedly contacted DirecTV’s CEO to discuss a merger of the two largest satellite TV operators in the country. Shares of both companies jumped about 6 percent today. DirecTV closing at $77.34. Dish ending the day at $62.09.

Toyota (NYSE:TM) will buy back nearly 2 percent of its shares worth about $3.5 billion. This is the automaker’s biggest buyback in more than a decade. The stock rose nearly 2 percent on the news to $110.53.

MATHISEN: Baxter is reportedly exploring a sale of its vaccine unit in an effort to focus on its key businesses. Separately, there are also reports of a shortage of injectable nitroglycerin, which is the go-to treatment used on patients suffering from heart attacks. Baxter is the country’s only manufacturer of that drug. The stock rose nearly 3 percent to $70.08.

General Electric (NYSE:GE) will build a $100 million jet engine plant in Indiana later this year to meet demand for its new engines. The turbines to be used by Airbus and the Boeing (NYSE:BA) passenger jets across the world. Shares fell slightly to $25.62.

And coming up, “The New York Times (NYSE:NYT)” has an aggressive strategy to compete in this new digital world. But will it work?

(MUSIC)

MATHISEN: Another big auto recall to tell you about. Nissan is recalling nearly 1 million cars in the U.S. to fix faulty air bags that may not deploy in a crash. The recall involves 2013 and 2014 Altimas, Pathfinders, Sentras and all electric Leafs and three of Nissan’s high end Infinity models.

GHARIB: Another extension in the deadline to sign up for the new health care plan under the Affordable Care Act. The Obama administration now says that enrollees who have started to sign up for a new plan but have not yet completed their applications will now be able to finalize their coverages after the Monday, March 31st deadline. This could impact millions of Americans and it’s not clear yet how long the extension will last.

MATHISEN: Leaders in the House and Senate have finally found something they can agree on. House Speaker John Boehner says he and top Senate Democrat Harry Reid reached a deal on legislation that would stop a looming 24 percent cut in Medicare payments to doctors that is scheduled to go into effect on Monday. The House will vote on the measure tomorrow, and that gave a boost to a number of hospital operators and other health care-related stocks. As you can see there, some of the biggest had some very sizeable gains today.

GHARIB: “The New York Times (NYSE:NYT)” is going mobile. The newspaper just unveiled a pair of digital apps for smartphones and tablets, as it tries to attract readers willing to pay for news stories. But will today’s consumers so used to getting Internet content for free really pay for the Grey Lady’s stories?

Morgan Brennan reports.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: “The New York Times (NYSE:NYT)” is launching a new app called NYT Now. For $8 a month, users will get selective content from across the paper’s Web site that editors have deemed the most compelling. But the new app is coming with something else as well, what the company calls paid posts. Better known as Native Ads, it’s a new kind of advertisement, and one that publishers like “The Times” hope will turn around declining ad revenues.

MEREDITH LEVIEN, NEW YORK TIMES ADVERTISING EVP: Native will be in many cases the primary form of advertising in digital and in mobile. And I think a lot of digital publishers are moving to that, are embracing native because of that.

BRENNAN: Native Ads have been a source of controversy. They’re the Web’s version of magazine advertorials, format is like an article and giving an advertiser a platform for brand storytelling. And while they typically show up in editorial content streams carefully labeled as ads, it can sometimes be easy for readers to overlook those disclosures.

Still, publishers like “The New York Times (NYSE:NYT)” are adopting them because they command a premium over other kind of advertising. And while one critic isn’t too concerned about an established news source like “The Times”, there are potential problems.

MERRILL BROWN, MONTCLAIR STATE UNIV. SCHOOL OF COMM. AND MEDIA: The journalism world is full of start-ups, full of new enterprises, full of people who are not steeped in the history of the split between advertising and editorial as “The Times” spoke of (ph).

BRENNAN: “The Times” first rolled out Native Ads on its Web site in January, joining a growing list of Native Ad adopters. Still, analysts say the bigger hope for “The Times” today is that its new apps will bring in more subscribers.

That’s because circulation has been driving revenues for the paper. It’s also the reason that the company is launching a second offering. A new subscription called Times Premiere, at a cost of $45 a month, the times hopes to pull in additional revenue from its most affluent subscribers.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Finally tonight, as the boys of summer gear up for the start of a new season, for the first time in 15 years, the Yankees no longer have the sports highest payroll. The Bronx Bombers are now number two at $203 million, and the team paying out the most in salaries, the L.A. Dodgers, 235 million bucks. Lowest payroll the Astros, $45 million.

GHARIB: And let’s play ball, right?

That’s NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks so much for joining us.

MATHISEN: I’m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. We’ll hope to see you 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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