Transcript: Monday, April 28, 2014

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

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Blockbuster deal. Pfizer (NYSE:PFE) offers to buy Britain’s AstraZeneca for about $100 billion — a price tag that puts the deal near the top all-time.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: But the deal raises tax questions. Will America’s largest drugmaker move the base of its operation to U.K. to take advantage of lower taxes? And is our tax code driving American companies away?

MATHISEN: News drove the Dow today, but big swings in everything from blue chips to technology stocks grabbed investors’ attention.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, April 28th.

GHARIB: Good evening, everyone.

One hundred billion dollars, that’s what Pfizer (NYSE:PFE) is offering to pay for AstraZeneca. This is the second time around Pfizer (NYSE:PFE) is pushing for a deal with its British rival. Investors were cheering, the blockbuster mega merger listing stocks in the health care sector and sending the Dow soaring.

Shares of Pfizer (NYSE:PFE) shot up more than 4 percent, by far, the biggest gainer in the Dow and AstraZeneca jumped to 12 percent. While this pharmaceutical deal may be huge, it’s not a done deal yet. AstraZeneca has already rejected the offer and an earlier approach from Pfizer (NYSE:PFE) saying the $100 billion cash and stock offer is too low and that it undervalues the company.

We took a look at what combining these two companies mean to the pharmaceutical industry and what’s at stake for Pfizer (NYSE:PFE) and AstraZeneca.

(BEGIN VIDEOTAPE)

GHARIB (voice-over): It’s the kind of deal that doesn’t come around too often. Fourteen years ago, Pfizer (NYSE:PFE) paid $85 billion to buy Warner Lambert. That was the biggest health care combination ever. And since the recession, there’s been only one other deal this big. Verizon’s $130 billion buy out of Vodafone stake in Verizon (NYSE:VZ) Wireless.

But, right now, health care is where the action is — $150 billion in deals so far this year and almost 90 billion last week alone when activist investor Bill Ackman engineered Valeant’s $45 billion offer to Botox maker Allergan (NYSE:AGN).

DAMIEN CONOVER, MORNINGSTAR: I think more of it will happen. I don’t see a lot stopping now. We’ve seen a huge wave of consolidation over the last 12 months.

GHARIB: So, why is this all happening now? Pfizer (NYSE:PFE) and AstraZeneca are looking for growth. Revenues at both companies dropped 6 percent last year.

Patent expirations are leaving them vulnerable to competition from generic drugs and a merger could help them cut costs while Pfizer (NYSE:PFE) would add AstraZeneca’s huge portfolio of cancer drugs to its roster.

AstraZeneca has also been developing a drug to fight cancer using the body’s immune system. But both AstraZeneca and Pfizer (NYSE:PFE) are familiar with the risks of new drugs. There’s the hope they will deliver huge profits, but the reality in recent years has been weak sales.

CONOVER: I think it’s amazing what drives us and makes sense is the cost-cutting. And there isn’t a lot of overlap in the pipeline so there’s some synergy in the pipeline and there is some potential here to get better growth despite bringing together two entities with relatively slow growth outlooks.

GHARIB: As with all mergers, there’s tax issues. This one let’s Pfizer (NYSE:PFE) put some of its billions of dollars in overseas cash to work, bringing that money to the U.S. would result in a giant tax bill.

(END VIDEOTAPE)

MATHISEN: Pfizer’s proposed take over of AstraZeneca and its plans to base itself in the United Kingdom is once again raising questions about whether the U.S. tax rates are too high, and maybe pushing American businesses to move overseas.

Eamon Javers has more.

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EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s an iconic American company and been headquartered in New York since its founding in a red brick building in Brooklyn in 1849. But under a potential $100 billion deal announced today, Pfizer (NYSE:PFE) could become a subsidiary of the U.K. based holding company. The deal would be capital tax experts call an inversion in which Pfizer (NYSE:PFE) acquires U.K.-based AstraZeneca and then incorporates the combined company in the U.K. even though it will keep Pfizer’s headquarters in New York.

Pfizer (NYSE:PFE) which reported an effective tax rate of 27.6 percent in 2013 will be able to take some advantage of the U.K.’s 21 percent rate, and as an added bonus Pfizer (NYSE:PFE) will likely be able to shield its $69 billion offshore cash from U.S. repatriation taxes.

The move could save the company millions in taxes but critics say it’s simply not right.

JARED BERNSTEIN, CENTER ON BUDGET AND POLICY PRIORITIES: I think like probably the average American who hears about this sort of deal looks at this as a company that at some level is renouncing its American citizenship in order to engage in tax avoidance to boost their bottom line. It smells bad because it is bad.

JAVERS: Others say companies have no choice but to play the global tax game because U.S. taxes are punitively high.

DOUGLAS HOLTZ-EIKEN, AMERICAN ACTION FORUM: This is an embarrassment to the U.S. Congress and U.S. administration. We’ve had a corporate tax code that’s been out of step with our competitors for decades now. We’re losing Pfizer (NYSE:PFE). We’ve lost Anheuser-Busch. We’ve lost the New York Stock Exchange at some point. It’s time to wake up and get an internationally competitive tax system.

JAVERS: The company said it has to take advantage of the most efficient tax structure it can and a spokesman emphasizes it will still pay taxes on its corporate activities inside the United States.

These inversions are becoming more and more common. In December, Michigan-based pharmaceutical company Perrigo (NASDAQ:PRGO) bought Irish company Elan and redomiciled in low tax Ireland.

And in May, activists bought Warner Chilcott (NASDAQ:WCRX) in another Irish inversion deal. The company saved hundreds of millions of dollars at the time the U.S. government is struggling with significant deficit.

(on camera): Tax inversions are under fire here in Washington where the Obama administration has proposed in its latest budget to do away with most of those transactions. Well, it’s not clear whether that could pass up on Capitol Hill, but it is a sign that politicians here are paying attention.

For NIGHTLY BUSINESS REPORT, I’m Eamon Javers in Washington.

(END VIDEOTAPE)

GHARIB: For more analysis, we turn now to James Hines. He’s professor of law at the University of Michigan.

Professor Hines, where do you stand on this issue? Are high U.S. taxes forcing companies turning American companies away?

JAMES HINES, UNIVERSITY OF MICHIGAN PROFESSOR OF LAW: No doubt about it. Our taxes are much higher than those in Britain and most of our competitor countries. So, this is the inevitable consequence.

MATHISEN: Could this, professor, be the kind of deal that the Travelers merger with Citi Corps was back in the 1990s. In other words, the deal that causes laws to change.

HINES: There’s agreement for a while we need to change our laws. The issue is timing. At what point is the United States going to kind of wake up and adopt a tax system more like that of Britain or Germany or places like that.

GHARIB: But, professor, there seems to also be a debate even if they change the taxes, even if they make it desirable for the American companies to bring their overseas money back to the U.S., it doesn’t necessarily mean that they are going to invest it here to boost our economy and hire more people. Do you agree with that?

HINES: It may not happen immediately. Look, when profits come home from abroad, companies will use them for all sorts of purposes but in the long run, allowing a more efficient reallocation of resources within the companies can only be good from the standpoint of productivity that leads to economic opportunity.

MATHISEN: What, professor, is at the heart of this technique? Is it — is it the repatriation in one of the pieces $69 billion of Pfizer’s cash that’s sort of domiciled overseas, or is it just year to year being able to take advantage of a lower corporate tax rate? Or is it that we double tax corporate profits in the United States? What is it?

HINES: There are three things that Britain offers that the United States does not. The first is as your segment noted a lower tax rate. Much lower. Theirs is 21 percent. Ours is 35 percent.

The second thing is that British companies do not have to pay tax to the United Kingdom on their foreign profits. But American companies have to pay tax to the U.S. on their foreign profits.

The third thing is that British companies get a very special, in the future going to get a very special treatment of the income that they earn from patents and other intellectual property, and in the United States we don’t do that either.

We really get — in three ways, it’s a much less attractive tax environment in the U.S. than it is elsewhere.

GHARIB: It makes so much sense the way that you’re outlining all of this. How do you think — do you think it will make sense in Washington? How do you think this will play out on Capitol Hill?

HINES: People on Capitol Hill are aware that we need to make some changes. There’s even some agreement among Republicans and Democrats on this. Of course, they differ on the details. And they have to iron out compromises on that.

But, basically, people agree we don’t want this sort of thing to keep on happening as it has been. And in order to do that, we have legislation that’s already been much discussed that probably would make some good steps in that direction. We just have to get out paralysis in order to do it.

MATHISEN: Very quickly, are these kind of deals unique to the pharmaceutical business and also out of the example seem to come out of the drug business, is there something about pharmaceuticals that make them more likely?

HINES: There is in that they make a lot of profits and they make them — a lot of profits overseas in low tax jurisdictions and have a lot of intellectual property. But, you know, you have other hi-tech firms like applied materials did the same sort of deal.

GHARIB: All right. Interesting conversation. Thank you so much. James Hines professor of law at the University of Michigan.

HINES: Thanks.

MATHISEN: And tax rates are also playing a role in Apple’s big bond deal. The company with more than a $150 billion in cash is gearing up to sell $17 billion in corporate bonds to fund its increased share buy back plan. Apple’s chief financial officer explained why Apple (NASDAQ:AAPL) is issuing a debt sale despite having so much money stock piled overseas.

It would cost too much in U.S. taxes to bring the $17 billion of cash back into this country from offshore accounts.

GHARIB: An update for you on a $46 billion buy out offer in the pharmaceutical industry that we told you about last week. Botox maker Allergan (NYSE:AGN) has approached drug maker Shire (NASDAQ:SHPGY) about a potential take over.

If they agree, it could undermine last week’s offer to acquire Allergan (NYSE:AGN) by activist investor Bill Ackman and his partner Valeant Pharmaceuticals of Canada.

MATHISEN: And a couple of other pharma deals confirmed today. Merck (NYSE:MRK) is in talks to sell its consumer health business which includes the Coppertone and Claritin brands to Britain’s Reckitt Benckiser, the group there, for about $14 billion. And Forest Labs is buying Furiex Pharmaceuticals (NASDAQ:FURX) for about $1.5 billion, getting access to Furiex’s promising treatment for irritable bowel syndrome.

Shares of Merck (NYSE:MRK) ended 1 percent lower. Forest Labs a bit lower, too. But look at shares of Furiex, up 28 percent.

GHARIB: Another proposed acquisition, General Electric’s $12 billion offer to buy Alstom may have hit a snag. Officials in France said they would protect French jobs and their national interest by working with Siemens Group of Germany to make a counteroffer.

The partnership would stop G.E.’s buyout of the French high speed train and power plant maker, keeping the company base in Europe.

MATHSEN: Closer to home, Comcast (NASDAQ:CMCSA) (NYSE:CCS) massive proposed takeover of rival Time Warner (NYSE:TWX) Cable may be a step closer to happening, after the big Philadelphia media company struck a deal that eases federal antitrust concerns. Over the weekend, Comcast (NASDAQ:CMCSA) (NYSE:CCS) confirmed a $20 billion deal with another cable provider, Charter Communications (NASDAQ:CHTR), to swap or sell the companying thing right to serve nearly 4 million cable subscribers. Comcast (NASDAQ:CMCSA) (NYSE:CCS) is the parent company of CNBC, which produces this broadcast.

GHARIB: Stocks ended this Monday mostly higher, thanks to all that merger and acquisition activity we just told you about. Investors were also encouraged by a healthy report on pending home sales in March the first increase in nine months. By the close bell, the Dow was up 87 points, the NASDAQ slipped one point and S&P added six points.

MATHISEN: Another development on Wall Street keeping a close eye on today, relations between the United States and Russia, after the White House ramped up economic sanctions against individuals and entities licensed to export to Russia.

John Harwood joins us now from Washington with more on the sanctions and Russia’s response.

John, welcome.

Are these new sanctions, the big sanctions on whole sectors of the Russian economy that some have expected or more of a little slap here and a nuggy from?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it’s an increasing number of nuggies before they get to the large scale transactions. Treasury Secretary Jack Lew explained to an interview with NBC’s Andrea Mitchell today what the rationale is behind the administration’s approach.

(BEGIN VIDEO CLIP)

JACK LEW, TREASURY SECRETARY: These are very important sanctions. They are sanctions that will get their attention. I think that our goal is to move in a systematic way, in a careful way, in a way that also gives them a chance to change their policy and take a different course. Our goal here is obviously not to hurt the Russian people, it’s to get them to change their policy.

(END VIDEO CLIP)

HARWOOD: Give them a chance to change the policy. That’s the off-ramp that President Obama and Secretary of State John Kerry have been emphasizing from the beginning. They haven’t taken it yet. And if they don’t take it, then we may get to those broader sanctions.

GHARIB: And, John, I was just wondering how much support does the U.S. have for these policies. Does it look as if Europe is united with the United States on this?

HARWOOD: That’s been the delicate balance the administration is trying to strike. They were set to announce sanctions late last week but they wanted to work European allies more fully than they had previously. Clearly, Europe is more reluctant than the United States because their economies are more intertwined with Russia than the United States economy is.

But the administration is trying to bring them along and they say that if we get to those big sectoral sanctions, the consultation process will enable them to bring Europe along.

MATHISEN: John, whatever happened to standstill, the cool down agreement, diplomatic between all the parties announced, I believe it was weekend before last? It seemed like such a distant memory.

HARWOOD: Turned out, Tyler, to be worthless because the Russians had not shown much interest in deescalating.

MATHISEN: John Harwood, thanks very much.

John will be following that story for us as it unfolds.

All right. Still ahead, has Coach (NYSE:COH) lost its cool? Shares are falling as rivals soar and now, investors will be looking to its earnings tomorrow to see if businesses starting to turn.

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MATHISEN: Some big problems for Bank of America (NYSE:BAC) today. Shares tumbled more than 6 percent after the Federal Reserve ordered the lender to suspend its previously announced $4 billion stock buyback plan, along with a planned dividend increase. B of A said it miscalculated the value of some securities in its take over of its 2009 takeover of Merrill Lynch. Based on the new valuations, the Fed ordered Bank of America (NYSE:BAC) to resubmit its capital plan for the Fed’s annual stress test after it corrects the mistake.

GHARIB: Some good news for the bankrupt city of Detroit. City officials reached a tentative five-year deal with 14 municipal worker unions covering 3,500 employees. The agreement comes as Detroit is close to completing its bankruptcy reorganization plan.

MATHISEN: Newmont Mining (NYSE:NEM) ends merger talks with Barrick Gold (NYSE:ABX), and that’s where we begin tonight’s “Market Focus.”

Last week, we told you that the world’s two largest gold producers were talking about combing. Well, the potential deal fell through. Newmont ended talks, saying the two companies did not have a constructive and mutually respectful relationship. Shares of both companies tumbled. Newmont down almost 7 percent, $24.67. Barrick down more than 3 percent at $17.33.

The Swedish drugmaker Meta says it rejected an increased takeover offer from Mylan (NASDAQ:MYL). Meta says its largest shareholder just doesn’t support the bid and it prefers to remain a standalone company. That sent shares of Mylan (NASDAQ:MYL) down about 3 percent to $50.67.

Corning’s first quarter earnings slid nearly 40 percent as higher expenses must arise in revenue. The maker of Gorilla Glass, which is used in smartphone screens, did post earnings to beat estimates, but revenue came in a little shy. The company also said it expects LCD glass prices to decline more moderately. And that sent shares higher by 1 percent to $20.97.

GHARIB: Shares of GoGo, which promotes Internet service on airlines tumbled on news that AT&T (NYSE:T) is now planning to launch its own high-speed in-flight connectivity service. GoGo rose a bit to $18.38, during the regular trading session. But with that announcement came out after the market close. GoGo plunged more than 20 percent.

Some positive news about Herbalife (NYSE:HLF) for a change. The controversial nutrition and supplement maker posted earnings that came in better than expected and its full year guidance exceeded expectations as well. But Herbalife (NYSE:HLF) also said it’s suspending its dividend and will use cash instead to buy back stock. Shares rose initially after hours, shares were up about 2 percent to $58.85 in the regular session.

And Buffalo Wild Wings (NASDAQ:BWLD) posted earnings that beat on both the top and bottom lines. The restaurant chain also raised its earnings growth estimates for the year. Shares initially popped after the market closed, but during the regular session, the stock was down more than 2 percent to $133.39.

MATHISEN: And about half of the S&P 500 has now reported earnings, while the first of the big retailers began reporting this week. Among the first, luxury accessories maker Coach (NYSE:COH). But expectations here are mixed as many on Wall Street wonder if the venerable brand has lost its cool factor to up and coming rivals.

Courtney Reagan has more.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): While higher end retail has held up better than the rest sector not every player is expected to knock results out of park this earnings season. But because accessory maker coach is undergoing a bit of a makeover, it may get a pass from analysts when it reports tomorrow morning.

Sales of stores that opened at least a year are expected to drop 15 percent and profit is anticipated to come in 27 percent below last year.

Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) analyst Kimberly Greenberger forecast weather really hurt Coach (NYSE:COH) in the third quarter, estimating the high end accessory maker derives as much as 70 percent of North American sales from outlets, many of which are outdoors.

But perhaps a bigger problem is the cool factor. While Coach (NYSE:COH) still holds the top spot for North American handbag market share, rivals are pecking at its leadership. Greenberger says Michael Kors is the top Google (NASDAQ:GOOG) search handbag brand while Kate Spade is inching higher as Coach (NYSE:COH) searches dropped.

ED YRUMA, KEYBANC ANALYST: The brands that are hot right now really are more of Tori Berches and Kate Spades of the world. You know, Coach (NYSE:COH) was clearly dominant in their era and I think much of what they are doing changing design direction, changing some of the product focus will help to rejuvenate this once storied brand.

REAGAN (on camera): The legacy handbag maker is reinvigorating the brand under a new creative director and CEO upgrading its stores, adjusting pricing and introducing new products. All of which will take time, though, so far, Wall Street is offering a degree of patience.

(voice-over): Many expect creative director Stuart Vevers first collection this fall to help usher in a new era for Coach (NYSE:COH).

YRUMA: I think Stuart is trying to take that classic Coach (NYSE:COH) iconic items and reinterpret it and modernize it. So, you know, anecdotally, you know, we’re hopeful that his design direction will lead to better results for the company.

REAGAN: Some, however, are worried the new product may be fashion right but too pricey for Coach’s core consumer. The question remains whether investors will wait until September to find out.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

GHARIB: Coming up, Xbox is going Hollywood. Microsoft (NASDAQ:MSFT) is creating original programs that can be viewed through its gaming console. But will they stand out in an already crowded field?

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MATHISEN: Several big name advertisers are pulling sponsorship deals with the Los Angeles Clipper following the release of racist comments allegedly made by team’s owner Donald Sterling. Virgin America Airlines, insurance giant State Farm, Sprint and automakers Mercedes Benz and Kia are among those suspending deals with the team.

GHARIB: AOL (NYSE:AOL) is investigating a cyber attack on its servers. The Internet giant is work with government authorities on a hack attack in which e-mail addresses, postal address, encrypted passwords and answers to security questions were stolen. AOL (NYSE:AOL) is now urging tens of millions of email account holders to change their passwords and security questions immediately.

MATHISEN: Microsoft (NASDAQ:MSFT) is also warning users about cyber attacks after a security flaw was found in its Internet browser. The company acknowledged that a flaw was discovered in its Internet explorer browser which could let hackers get inside and actually take over control of users computers. In a statement, Microsoft (NASDAQ:MSFT) says at this time we’re aware of limited targeted attacks. We encourage customers to follow the suggested mitigations outlined in the security advisory while an update is finalized.

GHARIB: While Microsoft (NASDAQ:MSFT) is fighting off hackers, it’s also talking about plans to get into original TV programming. It’s offering content through its Xbox gaming console.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Steven Spielberg’s hotly anticipated series “Halo” will start production this fall. But when the live action show based on one of the most successful video games of all time finally does debut, it won’t be on TV. Viewers will have to have an Xbox.

“Halo” is one of 12 original programs that Microsoft (NASDAQ:MSFT) Xbox Entertainment Studios is currently developing. Premium content that puts it up against Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and, of course, the traditional content providers.

But Xbox Studio had Nancy Tellem says Microsoft (NASDAQ:MSFT) is trying to build a social community around its content, a strategy that makes it different from competitors.

NANCY TELLEM, MICROSOFT: We’re adding an additional element of offering up premium content but also allowing a new TV experience with interactive features.

BRENNAN: So, Xbox Live’s 48 million subscribers will be able to actively engage with the content and with each other. Take the Bonnaroo Music Festival, which will be live-streamed in June.

TELLEM: It essentially creates a virtual festival in your own living room, where you can choose which stage you want to watch. You’ll know the entire schedule and you can actually identify and click to a specific performances.

BRENNAN: Other projects include a street soccer documentary launching in June with the FIFA World Cup, a comedy collective starring Sarah Silverman and Michael Sera and a documentary about Atari fabled video game burial, being excavated in the New Mexico desert right now.

(on camera): Microsoft (NASDAQ:MSFT) is experimenting with revenue models for its new programming, but the immediate goal is growing the Xbox Live subscriber base. And with it, sales of new gaming consoles.

MICHAEL PACHTER, WEDBUSH SECURITIES ANALYST: They don’t have to win over very many customers to be a success. They have about 30 million paying Xbox live members. If they win over a million of them, you know, 3 percent I think it’s a huge success.

BRENNAN (voice-over): But challenges remain. Competitors Sony (NYSE:SNE) PlayStation 4 has been outselling Microsoft’s newest console Xbox One and at a cost of $100 more, the question now will be whether original programming can justify Xbox One’s higher price tag.

Also, getting Microsoft (NASDAQ:MSFT) largely millennial male base to discover these shows on a platform that’s been so widely associated with gaming.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Los Angeles.

(END VIDEOTAPE)

MATHISEN: Finally, tonight, engineers at Google (NASDAQ:GOOG) say the technology in itself-driving cars is entering a new stage, mastering the challenges of driving on city streets. Have they been to New York yet?

Google (NASDAQ:GOOG) says the SUV, it outfitted with lasers, radar and camera, has learned how to read direction signs, and traffic lights and how to negotiate blind corners, construction sites, cyclist, pedestrians, even potholes. Google (NASDAQ:GOOG) says its self-driving cars have already driven 700,000 accident free miles on highways, so it’s been focusing on city driving for the past year. Looks like they may have started to figure it out but I welcome them to the Bronx.

GHARIB: I’m scared to death to know that those are on the road.

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

MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody. We’ll 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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