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Five Things You Need to Know for Monday

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What you need to know (and what it means).

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Five things you need to know to stay ahead of the pack on Wall Street.

1. All About That Ca$h... Still

Last week, Five Things You Need to Know... took a look at corporate cash levels and stock buybacks, which in 2005 surged 77%. Now, at least according to some optimists, companies are poised to begin re-investing cash in opportunities other than shares of their own company.

  • According to JP Morgan, companies saved about $560 billion over the past four years, investing little in their businesses.
  • Some economists suggest this is because executives are cautious and believe the business environment is unfavorable, preferring to shore up balance sheets and reduce debt over spend money on new ventures.
  • Recently, hedge funds and activist shareholders have begun pressuring companies spend some of their cash piles.
  • The Wall Street Journal today cites the example of Carl Icahn's recent public battle against Time Warner, which prompted the company to buy back more shares.
  • While buybacks is one way to spend corporate cash, as noted last week, record corporate share buybacks in the context of the highest level of insider selling since February 2000 is not exactly... how you say? Ah yes, confidence inspiring.
  • Instead, what bulls would like to see are companies investing cash on people, plants and equipment.
  • According to the Wall Street Journal, a recent survey by Duke University's Fuqua School of Business, more than 300 corporate executives said they plan to increase capital spending by an average 6.5% in the coming year.


2. Et Voila, ALA LU!

French communications-equipment maker Alcatel (ALA) said yesterday it would buy Lucent Technologies (LU) for $13.4 billion.

  • The merger pact forms a Paris-based telecom giant, creating a company with annual revenue of about $25 billion.
  • LU tried to merge with Alcatel in 2001 but that deal collapsed because the two companies could not agree on control issues.
  • This time Lucent Chief Executive Patricia Russo will serve as CEO of the combined company and work out of the Paris office.
  • The companies plan to cut about 10 percent of their combined work force, or about 8,800 jobs.
  • Keyword search: Integration Risks, Merger Wave, ADR, Homeland Security
  • Integration Risks - Will the new company integrate easily and successfully?
  • Merger Wave - Analysts expect a wave of mergers to occupy the Telecom Equipment space.
  • ADR - Under the merger deal, each share of Lucent would be exchanged for 0.1952 of an Alcatel American depositary share.
  • Homeland Security - Lucent said it would create an independent unit that would run some U.S. government work. It is expected the composition of that unit will draw scrutiny from the Committee on Foreign Investment in the United States, which clears foreign acquisitions of U.S. companies.


3. Grab a Plate at the $14 Billion All-You-Can-Hedge Buffet(t)!

Warren Buffett is making a $14 billion bet that at least four global stock indexes won't collapse.

  • Buffett's Berkshire Hathaway disclosed in an SEC filing that the firm sold a form of insurance to buyers who wanted protection from a drop in `four major equity indexes over the next 15 to 20 years.
  • The stock-index contracts, derivatives that function like put options, would increase Berkshire's risks from market losses.
  • A 30 percent decline in each of the indexes last year would have led to a $900 million pretax loss for the company, according to the March 7 SEC filing, Bloomberg said.
  • Berkshire didn't disclose which stock indexes are covered under the contracts.
  • In order for the company to lose all $14 billion, the four indexes would have to go to zero.
  • Berkshire also disclosed in the SEC filing that it sold a similar type of insurance on bonds. In those contracts, called credit default swaps, the firm is betting that bond issuers won't default.


4. GM Faces the Gates of Hell, Herculean Twelfth Labor

General Motors today said it agreed to sell a 51 percent stake in its financing arm, General Motors Acceptance Corp., to a consortium led by hedge fund Cerberus Capital Management LP for $14 billion.

  • GM said it agreed to sell a 51% stake in GMAC to the investor group for about $14 billion, payable over three years.
  • The company said it will take a pretax charge of $1.1 billion to $1.3 billion against its second-quarter earnings related to the sale.
  • GM said GMAC will continue to be managed by its existing executive management following the deal, which is expected to close in the fourth quarter of 2006.
  • Importantly, Citigroup agreed to provide $25 billion in a syndicated loan to support GMAC's continuing business.
  • GMAC was GM's most profitable unit, generating about $3 billion in profit last year.
  • Since 2001, most of GM's profits have come not from selling cars, but from the auto financing and mortgage and insurance sales of GMAC.
  • While the move is a short-term positive for the company, it will also put considerably more pressure on GM to actually sell cars.
  • Cerberus is a New York-based private-investment vehicle with some $18 billion under management.
  • Although presumably not related to the firm by the same name (but important on a number of levels of irony), in Greek mythology Cerberus was a vicious beast charged with guarding the entrance to Hades, AKA Hell.
  • The Greek historian, Hesiod, says Cerberus had 50 heads and devoured raw flesh.
  • Hercules wrestled Cerberus into submission in his twelfth and final labor.
  • Do you see the parallels? Do you?



5. Five Meta Things You Need to Know About Five Things You Need to Know Mentioned in Barron's Over the Weekend.

Over the weekend Barron's Kathy Yakal noted Five Things you Need to Know... in her Electronic Investor column causing us to look deep inside ourselves in a bit of bizarre meta musing.

  • "We like the "Five Things You Need to Know About..." daily feature, which explains notable news," Yakal wrote.
  • About the Buzz & Banter, Yakal noted: "This is a running stream-of-consciousness guide to breaking, global-market news, links to articles posted on the site and elsewhere, reports on stocks to watch, and insightful commentary on all of it (with a little humor mixed in)."
  • Meta is a Greek word meaning both about and beyond.
  • It is frequently used to denote a concept that is an abstraction from another concept being simultaneously used to analyze the second concept. Like this.
  • This self-referential topic crunching is a bit like looking at a mirror of oneself looking in a mirror being held up by a friend wearing mirrored sunglasses.

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No positions in stocks mentioned.

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