Transcript: Nightly Business Report — May 12, 2015

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: You`ve got deal.
Verizon (NYSE:VZ) buys the company that introduced America to the Internet, AOL (NYSE:AOL). But will it create a new powerhouse in the business of content and connections?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Sharp and swift. Bond yields hit a six-month high. So what should have an investor do?

MATHISEN: Crash test tummies. The results of new tests that have some drivers concerned.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 12th.

MATHISEN: Good evening, everyone, and welcome.

A surprise marriage on Wall Street. Verizon (NYSE:VZ) is buying AOL
(NYSE:AOL) for more than $4 billion in cash. While the two companies don`t seem like a likely match, the Verizon (NYSE:VZ), the biggest telecom company in the country, is hoping that AOL (NYSE:AOL), the original digital disrupter,. can make it a more powerful player in an industry undergoing tremendous change.

AOL (NYSE:AOL) shares shot higher, rising 18 percent, while Verizon
(NYSE:VZ) shares fell slightly.

Morgan Brennan has more on the deal and why now.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
The world`s king of mobile is buying the one time kind of media, in a deal that`s all about mobile. Verizon (NYSE:VZ) claims 1.5 billion connected devices in the U.S., and touches about 70 percent of Internet traffic. By acquiring AOL (NYSE:AOL), the telecom giant will get access to better technology for selling ads and for delivering high quality web video via mobile, a fast growing market.

AOL (NYSE:AOL) says it decided itself to better compete in a better market place that will increasingly be dominated by large players.

TIM ARMSTRONG, AOL (NYSE:AOL) CHAIRMAN & CEO: If you look forward in five years, you`re going to be in a space where there are going to be massive global scale, you know, networks and there`s no better partner for us to go forward with than Verizon (NYSE:VZ). So, it`s really not about selling the company today. It`s really about setting up, you know, for the next five to 10 years.

BRENNAN: Verizon (NYSE:VZ) will also get content, since AOL
(NYSE:AOL) owned sites like Tech Crunch and Engadget. Though some reports say “The Huffington Post” could be spun off.

The deal highlights the rapid convergence of content and distribution. The fact that the companies providing Internet connections are now producing the media people are going online for.

(on camera): And not just content creation but new consumption, models particularly over the top video, which let users stream content over the Internet without a TV. And many companies including Verizon (NYSE:VZ) are developing this kind of service to cater to cord cutters. Analysts say the driving force behind this deal is the advertising technology.

CRAIG MOFFETT: They are trying to put together a package of advertising assets and mobile assets for advertisers that I think are really differentiated. So, if you are trying to reach millennials and you want to reach them on a mobile platform, Verizon (NYSE:VZ) will be able to offer advertisers something that other people won`t.

BRENNAN (voice-over): Pending regulatory approval, the acquisition is expected to close this summer. The AOL (NYSE:AOL) CEO Tim Armstrong will stay on with Verizon (NYSE:VZ) to help build its content business.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Before there was status updates, text messages and 140 character tweets, there was AOL (NYSE:AOL). It was the company that launched the modern era for many of us. It was the original disruptor that brought America online, on to something called the World Wide Web and into the digital age.

But along the way, the disruptor got disrupted.

(BEGIN VIDEOTAPE)

AUTOMATED VOICE: Welcome. You`ve got mail.

MATHISEN (voice-over): Quantum (NYSE:QTM) Computer used a messaging service back in 1989 which literally changed the world. Their young market whiz, Steve Case, saw the power of giving everyone access to the Internet.
So, it was no accident that Quantum (NYSE:QTM) took the name American Online in 1991 because it literally got America online.

Before there was something called social media, before Twitter and Snapchat and Facebook (NASDAQ:FB), there was AOL (NYSE:AOL), with the IM`s and early chat rooms.

Former AOL (NYSE:AOL) executives like Regina Lewis still marvel at what they accomplished, minting tech millionaires along the way.

REGINA LEWIS, FORMER AOL (NYSE:AOL) EXECUTIVE: It was really precedent-setting. So, they had the patent, they had the invention. And it`s a company very much ahead of its time.

MATHISEN: By the late `90s, with those 10 million subscribers, AOL
(NYSE:AOL) was a rising power in computing, in media, in communications, and it was hungry for more, buying up companies like Netscape, the browser service, and Movie Fone. A history making merger with Time Warner (NYSE:TWX), at more than $164 billion, the richest U.S. deal of all time was finalized in early 2001.

But synergies with the media conglomerate were choked when the dot- com bubble burst later that year. There were also accounting troubles. In 2002, AOL (NYSE:AOL) Time Warner (NYSE:TWX) reported a loss of $99 billion, at the time, the largest loss ever reported by any company. The market value of AOL (NYSE:AOL) stock dropped from $226 billion to about $20 billion.

By 2003, Time Warner (NYSE:TWX) dropped AOL (NYSE:AOL) from its name.
Two years later, Case resigned from the Time Warner (NYSE:TWX) board and the AOL (NYSE:AOL) future was in doubt.

LEWIS: Sometimes, you might just be too far out in front. And AOL
(NYSE:AOL) is a classic example. A right concept, arguably wrong timing.

MATHISEN: And some would say a wrong business model. For too long, AOL (NYSE:AOL) remained a dial up dinosaur in a broadband world.

In 2009, Time Warner (NYSE:TWX) spun AOL (NYSE:AOL) off into a separate company.

Now, AOL (NYSE:AOL) is listening to Verizon`s siren song. But this is a new AOL (NYSE:AOL), reimagined under CEO Tim Armstrong. There`s content like “The Huffington Post”, Tech Crunch and Engadget. But its real value seems to lie in using math, algorithms, to give advertisers a bigger bang for their buck, especially when it comes to mobile video.

LEWIS: Executives are savvier. They`re asking smarter questions.
They`re not just willing to write a check and say, hey, put that on the Internet, I hear that`s great. Now, they want measurable results, and that`s what AOL (NYSE:AOL) can offer.

(END VIDEOTAPE)

MATHISEN: And in AOL`s last earnings report, it said that more than
2 million Americans still use its dialup Internet service, the service that made the funny sounds to get online. My old AOL (NYSE:AOL) screen name:
Time Moneyman. There you have it.

HERERA: AT&T`s $49 billion bid for DirecTV is unlikely to be blocked by regulators. According to “The Wall Street Journal”, the Justice Department and the Federal Communications Commission are nearing a decision to clear the deal with some conditions. Negotiations with AT&T (NYSE:T) are expected to begin within days.

MATHISEN: On Wall Street, stocks close slightly lower after a steep selloff earlier in the day. By the close, the Dow Jones Industrial Average lost 36 points to 18,068. It had been down as much as 180 points. The NASDAQ dropped 17. The S&P 500 lower by six.

The volatility in the stock market was really all because of the bond market, which saw the yield on the 10-year note hit a six month high before pulling back, and it is the speed at which rates are rising now that has some investors cautious.

Dominic Chu has more.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you hadn`t notice, borrowing costs are on the rise. And many of those rates that consumers pay for access to credit are tied to the rates on U.S. government bonds known as treasuries. The strong demand for owning those bonds have forced prices higher and thus, interest rates lower.

But that sentiment has reversed course over the past few weeks.

DANIEL MORRIS, TIAA-CREF: Venture rates have gone up recently, probably primary because there are concerns about U.S. economic growth going away. We had a poor result in the first quarter. Things are looking better. So, interest rates reflect that.

The other thing to keep in mind is oil prices are going up and that also feeds through to interest rates. So, that combination pushed interest up recently.

CHU: Bond prices fall and interest rates rise when there are better prospects for economic growth and higher inflation. That economic scenario makes bonds, which make mixed payments to investors a less attractive investment. And some experts are advising their clients to look at certain parts of the stock market.

BURNS MCKINNEY, ALLIANZ: Going over the last seven interest rate tightening cycles, dividend-paying stocks as a whole do tend to lag a little bit, going into the period you might describe as Fed liftoff, but over the subsequent 12 and 24 months, a diversified portfolio of dividend- paying stocks actually has outperformed the broader market.

CHU: The sharp move higher in interest rates maybe due for a bit of a breather, but there is a sense that it will intend its upward momentum.

MORRIS: We do think the trend is higher through the rest of year, but probably not as big of a jump as we`ve seen recently.

CHU: The U.S. treasury bond market has a big influence on everything, from credit card rates, all the way to home mortgage rates.
So, even if the bond market isn`t it all that interesting to you, it may be worth it to keep at least one eye on it for the foreseeable future.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

HERERA: Well, that recent rise in bond yields might be spooking some investors, but our guest tonight has three seasons why you should keep calm and hold on to bonds. He is Bill Irving, bond portfolio manager at Fidelity Investments, with $34 billion under management.

Good to see you, Bill. Welcome.

BILL IRVING, FIDELITY: Sue, Tyler, thanks for having me.

HERERA: You know, it strikes me that perhaps this month in race may be a longer term trend that we`re seeing established. But it`s the trajectory, the speed with which the bond yields have been moving. Does that tend to pull back a little bit, self-correct I think is one of the words that you used, or not?

IRVING: Yes. I mean, I would just preface my comments by saying I`m certainly sympathetic to investors who are alarmed by the route in the bond market as it has been called, or the fact that the Fed is going to start raising interest rate soon.

But as you point, I can think of at least three reasons why investors should stay calm and maintain a balanced approach towards fixed income.
First of all, many are sensitive to the market. Like the housing market and if interest rates rise too hard too fast, that will tend to be a depressing effect on the economy, which will tend to put downward pressure on interest rates and limit the rise. So, yes, that`s an important limiting factor that I think will contain the rise in rates.

MATHISEN: So, the rates tend to self-correct. Another point you make is that just like with stocks, you cannot time when rates are going to swing, though this rate move has been all but telegraphed, Bill, forever.

IRVING: Well, if you look at, for instance, the Philadelphia Fed does a quarterly survey of professional forecasters. And those guys have an abysmal track record at predicting where the ten-year treasury yield is going to have, you can look at the time history back to 2012, and consistently, quarter after quarter, they call for a higher interest rate on the treasury and they have been consistently too bearish on bonds.

So, I think that one has to be humble about the ability to forecast the direction of interest rates.

HERERA: Speak to me about your third point, which is diversification. Do you mean diversification along the yield curve? And if so, how would you allocate funds?

IRVING: What I mean more specifically is that if investors pull back from the bond market and hideout for instance in cash, then they are sacrificing one of the key diversifying benefits that a core bond fund offers, in particular, in a flight to quality if there is a bout of volatility in the equity market, bonds tend to provide a diversifier. They tend to go up in price when stocks are going down and can smooth out the bumps in an overall diversified portfolio.

HERERA: All right. Bill —

IRVING: And if you hideout and sacrifice bonds, that can lose that diversification benefits.

HERERA: Bill, thank you so much for those points. We really appreciate it.

Bill Irving with Fidelity Investments.

MATHISEN: And in other news, Secretary of State John Kerry made his first visit to Russia since the Ukraine crisis begun early last year. He met with President Putin there. While investors look for any signs of easing tensions between the two nations, it`s unclear if any progress was made.

Geoff Cutmore has more now from Moscow.

(BEGIN VIDEOTAPE)

GEOFF CUTMORE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Expectations running into these meetings were relatively low. It is, after all, two years since the secretary of state has met with any senior Russian leader.

Now, there are a number of joint topics on the table that need
progress: one, Syria, one, Iran and the ongoing negotiations over denuclearization and, of course, getting progress in Ukraine toward a political solution.

The day began with a replaying ceremony involving Lavrov and Kerry.
They then went into four hours of talks. Those talks were followed by discussions between President Putin and the secretary of state.

At this point, it`s difficult to tell whether any significant break- through has been made in thawing this chilly relationship.

What we do know, as far as the Russians are concerned, any cooperation that is constructive can only be achieved, if as they say, Americans treat them as equals.

This is Geoff Cutmore for NIGHTLY BUSINESS REPORT from Moscow.

(END VIDEOTAPE)

MATHISEN: Still ahead, why a key legislative priority of the president was blocked today by his own party.

(MUSIC)

MATHISEN: President Obama`s big trade bill was blocked in the Senate by Democrats. The failure of the bill to pass a procedural hurdle puts one of the president`s biggest legislative priorities into doubt.

John Harwood has been following the developments in Washington.

John, what happened today and what happens next?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Tyler, Democrats in the Senate are concerned that the trade deal that the president is trying to negotiate would be bad for workers, bad for the environment.

The president, like Democratic President Bill Clinton before him, thinks they would be good for the country as a whole. Those Democrats held up consideration here. It`s a temporary setback, the White House hopes.
They are going to go back and negotiate and see what can satisfy enough Democrats to allow the debate to go forward but this is one where Mitch McConnell is his friend and Harry Reid and Elizabeth Warren are his enemies.

HERERA: You know, John, a lot of this had to do with China and the perception that the administration was not being hard enough on China.
That was the discussion coming up to this. How much of that factored into today`s events or has that been put by the wayside?

HARWOOD: It`s very important. Democrats say that the trade deal ought to include provisions that crack down on currency manipulation.
China is who they have in mind there. Of course, the trade promotion deal that they are seeking to pursue doesn`t involve China at the moment. But nevertheless, they want to try to make that part of this law.

The administration`s argument is China has already allowed the value of the yuan to rise and has been responsive to U.S. pressure. But this is something that`s going to be part of the negotiations over the next few days. The administration is going to try to see if they can figure out something that will not put the administration in a bad position but will satisfy enough of those members.

MATHISEN: Very quickly, best guess. Will he get enough votes or not?

HARWOOD: Yes, he will.

MATHISEN: All right. John Harwood, that was simple and quick. John Harwood in Washington, thanks very much.

HERERA: The Insurance Institute for Highway Safety conducted some new crash tests that are raising questions about the safety of some of the most popular midsize SUVs. In fact, about half of the models put through a common collision did not farewell well at all.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
It`s one of the most common and dangerous accidents, small overlap collisions, where a vehicle`s front corner slammed into another car or object at 40 miles per hour. They cause almost a quarter of the injuries and deaths linked to front end crashes. These tests show some popular midsize SUVs may struggle to protect passengers in this type of accident.

DAVID ZUBY, INSURANCE INSTITUTE FOR HIGHWAY SAFETY: What our test shows, specifically the current set of tests is that some midsize SUVs offer better protection than others.

LEBEAU: The Insurance Institute for Highway Safety says three models, the Ford Flex, Nissan Murano and the four-door Jeep Wrangler had acceptable or good performances in collisions. Meanwhile, the Hyundai Sante Fe, Dodge Durango and Jeep Cherokee (NASDAQ:CHKE) were rated as marginal.

But SUV, the Dodge Journey, got a poor rating, the lowest grade given by IIHS.

ZUBY: What we`re seeing for Dodge-Chrysler brands is that when they are bringing out new designs, they are performing pretty well in our tests.
But these older designs that have been around for a few years aren`t offering the highest level of safety in this type of crash.

LEBEAU: Despite this safety report, the Jeep brand is red hot.
Sales are soaring, thanks to fresh designs, and low gas prices making SUVs more attractive. When asked about the latest crash test, a spokesperson for Jeeps parent FAC USA said, “No single test determines overall real- world vehicle safety. Every FCA U.S. vehicle meets or exceeds all applicable federal motor vehicle safety standards.”

LEBEAU (on camera): Will these tests hurt Jeep`s renewed popularity?
Probably not. In recent years, there had been other quality and reliability reports that have ranked Jeep near the bottom of all auto brands, and yet, Jeep is coming off the best year ever for sales.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: And to read more about the crash tests in midsize SUVs, head to our Web site, NBR.com.

MATHISEN: Sale rumors sent shares of Pall (NYSE:PLL) Corp surging and that is where we begin tonight`s “Market Focus”.

According to reports, the maker of the filtration systems is near the end of an auction, which could see it sold for more than $10 billion. The potential buyers could include Danaher (NYSE:DHR) and Thermo Fisher Scientific (NYSE:TMO). Shares of Paul Corp up $19 a share. That`s about
19 percent, to $118.62.

More troubles for Lumber Liquidators. The flooring retailer is already facing lawsuits and investigations over allegations of high levels of formaldehyde in some of its laminated wood products. Now, the company`s insurance carriers are balking at paying coverage for the debacle. Shares fell 5 percent to $26.60.

HERERA: The Securities and Exchange Commission has announced fraud charges against the CEO and CFO of ITT educational services. The SEC says those two heads for the for-profit college concealed a poor performance of some student loans which were guaranteed financially by the company from investors. Shared plummet 43 percent, finished to $2.27.

And investors were getting a chance to react today`s news that the Gap`s same-store sales tumbled in April. The retailer saying the stronger dollar is hurting its revenue. Shares fell almost 4 percent to $38.36.

MATHISEN: This week is a big one for retailers and the consumers.
Tomorrow, Macy`s (NYSE:M) and J.C. Penney report earnings. The government will release retail sales for April and while just a slight increase is expected, retailers are working hard to get consumer spending. To do that, many are making a big bet on a new technology.

Courtney Reagan has more.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Shoppers may never even know what a beacon is. But retailers are betting big on the $5 hardware, hoping the technology will ultimately increase in store sales and traffic. Macy`s (NYSE:M), Walmart, Marsh supermarkets, and mall operator Simon Properties are among those experimenting with beacons and the integration into smartphone apps.

So, what is a beacon?

MIKAEL THYGESSEN, CMO OF SIMON: It enables apps to be woken up.
Think about an app you might have on your phone and you download it, but you forget about it, because it`s on page six of your phone. This will allow brands, marketers, to wake up their app and deliver a relevant, personalized message to you.

REAGAN: The beacon can send a welcome message, reward consumers for points for shopping, send a reminder about something on a shopping list or even coupons and promotions.

And timing is everything. Beacon delivers messages with more geographic precision than another technology, with the ability to send you a customized promotion for your favorite food while you`re browsing the freezer aisle.

TODD DIPAOLA, INMARKET: So, the same tactic we used digitally for years. Finally, offline retailers, brick and mortar retailers, can use that same sorts of insight and big data to optimize it real time.

REAGAN: A big balance retailers have to strike, is pushing a personalized message to a shopper without pushing the privacy boundaries.

UNIDENTIFIED MALE: I don`t typically use coupons, but if it was in my phone, because I don`t like carrying all the paper. I`d be more likely to use something relevant to my shopping behaviors. If it was electronic than (INAUDIBLE) again.

UNIDENTIFIED FEMALE: As long as you have option, whether you want to do it or you can opt out of it, I think that`s definitely something that`s interesting, because it kind of will bring you to the mall, and, you know, allow you to know what deals are going on.

REAGAN: Simon Property Group (NYSE:SPG) has nearly 5,000 beacons across 192 properties. The mall operator is still testing the technology and calls it potentially transformational.

While the forecast for Beacon influence sales is $4 billion this year, a report from B.I. Intelligence expects it to grow by a factor of ten to $44 billion in 2016, potentially making a $5 beacon a game-changer for brick and mortar retail.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

HERERA: Coming up, the industry that is really feeling the heat as California`s devastating drought rages on.

(MUSIC)

MATHISEN: Here is what to watch tomorrow. The government releases retail sales for April and Macy`s (NYSE:M) and JCPenney will tell us what they made and lost in the most recent quarter. Dow component Cisco
(NASDAQ:CSCO) also posts its quarterly results. And Dupont (NYSE:DD), which has been engaged in a very public battle with an activist investor holds its annual meeting tomorrow and that is what is on the agenda for Wednesday the 13th.

HERERA: Water and the lack of it is California`s biggest challenge right now. And it`s not just farmers that are being scrutinized for their use of that resource. The bottled water business is also feeling the heat.

Jane Wells has more from Los Angeles.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): At a time when lawns are going brown and Californians are being told there`s only a year`s worth of water leave in reservoirs, inside plants like this one, water is being put in millions of bottles every day to be sold sometimes to consumers in other states.

BOB SAUNDERS: The governor, for example, created a plan 3 1/2 weeks ago but nothing was said about water bottling. Nothing was said about fracking.

WELLS: Natural springs and other sources all over California provide water for the bottling industry, though no one really knows how much water is being used.

Now, a lot of people want to know and water bottlers are facing a flood of criticism. Starbucks (NASDAQ:SBUX) has been bottling its Ethos water in California, but the company announced it will find a new source outside of the state in the next six months. But Nestle, the largest player with several levels, including Arrowhead sourced in California for over a century, says changing sources creates its own environmental concerns.

(on camera): So, with shutting down the industry and facilities like this make a difference? Even though no one really knows how much water is bottled in California, it`s a proverbial drop in the bucket. The U.S.
Geological Survey says only 1 percent of the state`s water goes for industrial purposes, and only a small fraction of that is bottled water.

(voice-over): But every drop is now under scrutiny. And even though some bottlers have water rights to sources, there is very little oversight.
That could change. And while Nestle points out that making bottled water uses less water than many other industries, protesters plan to stay outside the governor`s residence next month and demand a moratorium on bottling water in the Golden State until the drought is over.

SAUNDERS: I just think the whole thing of bottling water for profit is absurd.

WELLS: Public opinion polls suggest that idea is starting to hold water.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

MATHISEN: And finally tonight, a world record was set in the art world. Pablo Picasso`s Women of Algiers sold for $179 million. That`s the highest on record for a work of art sold at action. As we told you last night, many expected the piece to sell for $140 million. The buyer chose to remain anonymous.

HERERA: Wow. A lot of cash.

That will do it for NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for watching.

MATHISEN: And thanks from me as well. I`m Tyler Mathisen. Have a great everybody, everybody. And we hope to 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) 2015 CNBC, Inc.

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