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Saturday, February 28, 2009

Berkshire Hathaway Reports Worst Year Ever

In Letter to Shareholders, Buffett Calls Credit Markets 'Nonfunctional' but Strikes Upbeat Note for Long Term


Warren Buffett's Berkshire Hathaway Inc. reported Saturday morning that 2008 was the legendary investor's worst year ever. It also reported a grim fourth quarter, though it eked out a slight gain. (Berkshire's annual letter to shareholders.)
[Berkshire Hathaway] Associated Press

A common metric Berkshire uses to track performance, book value per share, fell 9.6% in 2008, its biggest decline since Mr. Buffett took over the company in 1965.

It was only the second year in more than 40 years that Berkshire posted negative results. In 2001, Berkshire's book value per share fell 6.2%. The company's performance in 2008 still far outpaced the Standard & Poor's 500-stock index, which fell 37% last year, including dividends.

Berkshire's fourth-quarter net income was $117 million, a whopping 96% decline from last year's $2.9 billion fourth-quarter income. The results mark Berkshire's fifth year-over-year quarterly decline in a row.

Annual net income fell to $4.99 billion in 2008 from $13.21 billion the previous year amid poor results from the firm's insurance holdings and big declines in stock holdings such as Coca-Cola Co. and American Express Co. Berkshire also owns See's Candy, Fruit of the Loom and Benjamin Moore paint, but its insurance businesses generate the bulk of the parent company's results.
Annual Letter

* Berkshire's annual letter to shareholders

In his letter to shareholders, Mr. Buffett said that in the fourth quarter, a "series of life-threatening problems within many of the world's great financial institutions was unveiled." Credit markets turned "nonfunctional," Berkshire's chairman said.

Still, Mr. Buffett struck an upbeat note in his letter that detailed the current woes of the financial system. "[N]ever forget that our country has faced far worse travails in the past. … Without fail, however, we've overcome them."

Amid the turmoil of last year, Mr. Buffett did make some moves that could pay off in the long run. In late September, he agreed to buy $5 billion of perpetual preferred stock with a 10% yield from Goldman Sachs Group Inc., which was reeling after the collapse of Lehman Brothers Holdings Inc.

The deal, concocted in the heat of the moment during the September swoon, was agreed to in a matter of hours as Mr. Buffett swigged Cherry Coke and munched mixed nuts from his office in Omaha.

Berkshire also received warrants to purchase Goldman common stock at $115 a share. While the vote of confidence in Goldman by the savvy investor temporarily helped stabilize the bank's share price at around $120, since then Goldman's stock has wilted to well below $100.

In October, Mr. Buffett agreed to invest $3 billion, and potentially as much as $6 billion, in General Electric Co. preferred shares, which also sport a 10% yield. Friday, GE said it would slash its quarterly stock dividend by more than two-thirds to 10 cents a share, letting the company salt away about $9 billion a year. The move doesn't have an impact on Mr. Buffett's preferred holdings, however.

Berkshire recently has made other high-yielding investments in companies ranging from Swiss Reinsurance Co. to Harley-Davidson Inc.

Sunday, February 22, 2009

The Lure of Sirius: Tax Losses


Some investors are baffled why media titans John Malone and Charles Ergen are competing to throw money at Sirius XM Radio Inc., the money-losing satellite-radio company that was perilously close to bankruptcy.

But in fact, the company's most valuable asset could be precisely all the money it has lost.

Sirius XM has at least $6 billion of tax losses, according to securities filings. That means that the losses it has accumulated over the years can be used as deductions to cut taxes on future profits. As long as those losses stay with Sirius, they have little value, securities filings show, because the company's future prospects for significant profits are still slim.

But in the eventual hands of another company, like Mr. Malone's Liberty Media Corp., those tax losses could become extremely valuable, helping to wipe more than $6 billion in taxable income off of its income tax returns -- thus some day cutting Liberty's corporate income-tax bill by more than $2 billion.

Tax concerns are often a big driver of corporate deal making, but few players maneuver through the tax code as thoroughly as Mr. Malone. In 2006, he acquired the Atlanta Braves in a way that enabled Liberty to effectively cash out its stake in Time Warner without incurring taxes.
Money for Nothing?

* Sirius XM's most valuable asset is the at least $6 billion it holds in "tax losses," which can be used to offset taxes on future profits.
* But those aren't worth much to Sirius, since its prospects for profits are slim.
* However, in the eventual hands of Liberty or EchoStar, they could cut those companies' taxes by more than $2 billion.

Similarly, Sirius's tax losses are considered a key part of the company's appeal to Liberty, according to people familiar with the matter. They were considered less significant to Mr. Ergen, who bought up Sirius debt in hopes of adding Sirius to his strategic arsenal of satellite assets. On Tuesday, Liberty announced it would rescue the company from a bankruptcy filing with a $530 million loan. Liberty will receive a 40% stake in Sirius.

Companies often have tax losses. But experts say it is unusual that they are potentially a firm's most valuable asset, as with Sirius. The only asset that is comparable is the company's collection of radio wave spectrum licenses granted by the Federal Communications Commission valued at $2 billion, according to a Sirius securities filing. "That's uncommon that the [tax loss] would be ... the most valuable asset," said Robert Willens, who runs a corporate tax advisory firm.

However, for Liberty to maximize the use of those tax losses, it must navigate Internal Revenue Service rules intended to prevent companies from acquiring others solely for their losses -- so-called "trafficking in losses."

Indeed, that issue is getting renewed attention: In late September, the Treasury Department lifted those tax-loss restrictions for some companies to encourage a spate of bank mergers. Congress effectively repealed Treasury's move for future bank deals as part of the recent stimulus package.

The IRS curbs already kicked in after the Sirius XM merger was closed in last July and limit how much of the losses can be used as tax deductions each year.

Based on those rules, Mr. Willens estimates that, for the first five years that the tax losses could be used, Sirius is limited to about $580 million a year in deductions stemming from the losses. After that, it drops even lower, to about $250 million a year for the next 15 years. Thus, all the losses would be used, but not immediately, which reduces their effective value. People familiar with the matter confirmed that those estimates are in the range of the company's working projections.

Another complication hangs over these tax losses. If ownership of the company changes again, the use of the tax losses would become even more limited, according to IRS rules. That is because the restrictions are calculated based in part on the market value of the company -- which is roughly 10% of what it was when the Sirius XM merger closed.

Under IRS rules, the restrictions on the use of the tax losses kick in if the company's major shareowners increase their ownership stakes by more than 50 percentage points. Liberty's current 40% investment is restricted to no more than 49.9% for the next three years, which prevents the Liberty deal from triggering another ownership change.

There is an additional wrinkle: If another investor purchased enough stock to give it a stake of 5% or more during the next three years, that could combine with Liberty's stake to trigger those restrictions anew. Sirius can implement trading restrictions to prevent that. At current values, a new restriction on the losses could cause Sirius to lose about 80% of its tax losses over the next 20 years, according to Mr. Willens.

Absent such changes, Liberty would then be free to acquire the rest of Sirius in three years and use all the losses to shelter taxable profits elsewhere.

Wednesday, February 18, 2009

Buffett & Berkshire Hathaway Disclose Holdings

It’s that time again. Warren Buffett and Berkshire Hathaway, Inc. (NYSE: BRK-A) have filed with the SEC showing what the Oracle of Omaha owns in public stocks as of the quarter or as of December 31, 2008 in this case: These are broken out alphabetically by company, along with some color on each stock compared to prior report:

* American Express Co. (NYSE: AXP) over 151.6 million shares, looks same as before.
* Bank of America Corp. (NYSE: BAC) 5,000,000 shares; same as last quarter but lower than the 9.1 million shares reported in June.
* Burlington Northern Santa Fe (NYSE: BNI) 70.089 million shares, higher than the 63,785,418 shares reported previously but we already knew this one was higher from prior transactions.
* Carmax Inc. (NYSE: KMX) 17.63 million, down from 18.444 million last quarter.
* Coca Cola (NYSE: KO) right at 200,000,000 shares, same as before.
* Comcast (NASDAQ: CMCSA) 12 million shares, same as before.
* Comdisco Holdings (NASDAQ: CDCO) just over 1.5 million shares, same as before.
* ConocoPhillips (NYSE: COP) 79.896 million, above the 59.688 million in one unit, but was previously about 83.9 million total. Hard to know if this is a real change or just more reporting or more/less units….
* Constellation Energy Group (NYSE: CEG) 19.897 million shares, but this may have already ended after the last merger.
* Costco Wholesale (NASDAQ: COST) 5.254 million shares, same as before.
* Gannett Co. (NYSE: GCI) 3.447 million shares, same as before.
* General Electric Corp. (NYSE: GE) 7.777 million shares, same as before but that does not include the 10% interest bought last year.
* GlaxoSmithkline (NYSE: GSK) 1.51 million shares, same as before.
* Home Depot Inc. (NYSE: HD) 3.7 Million shares; same as before but down from June.
* Ingersoll-Rand (NYSE: IR) 7.78 million, above the 5.6366 million before.
* Iron Mountain (NYSE: IRM) 3.3722 million shares, same as last quarter.
* Johnson & Johnson (NYSE: JNJ) 28.6 million shares, down by more than half from about 62 million last quarter.
* Kraft Foods (NYSE: KFT) over 138 million. We had 148 million last time but that could have been a carrying difference we didn’t catch.
* Lowes Companies (NYSE: LOW) 6.5 million shares, same as last quarter.
* M&T Bank Corp. (NYSE: MTB) 6.71 million shares, same as last quarter.
* Moody’s (NYSE: MCO) about 48 million shares, same as before but may actually be larger since the 12/31 reporting.
* Nalco Holding (NYSE: NLC) 8.730 million shares; NEW HOLDING from last quarter.
* Nike Inc. (NYSE: NKE) 7.641 million shares, same as last quarter.
* Norfolk Southern (NYSE: NSC) 1.933 million shares, still same.
* NRG Energy (NYSE: NRG) 7.2 million, up from 5 million last quarter.
* Procter & Gamble (NYSE: PG) 96.3 million, down from more than 105.8 million last quarter. * Sanofi Aventis (NYSE: SNY) more than 3.9 million shares, same as before.
* Sun Trust Bank (NYSE: STI) more than 3.2 million shares, same as before.
* Torchmark Corp. (NYSE: TMK) looks roughly the same at 2.82 million.
* US Bancorp (NYSE: USB) about 67.6 million shares, down from over 72.9 million last quarter.
* USG Corp. (NYSE: USG) 17.072 million shares, looks same as last quarter.
* Union Pacific Corp. (NYSE: UNP) 8.9 million shares, same as before.
* United Parcel Service (NYSE: UPS) 1.429 million shares, same as before.
* WABCO Holdings (NYSE: WBC) 2.7 million shares, same as before.
* Wal-Mart Stores Inc. (NYSE: WMT) over 19.9 million shares, same as before.
* Washington Post (NYSE: WPO) over 1.72 million shares, same as before.
* Wells Fargo (NYSE: WFC) roughly 290.4 million shares, looks same as before.
* Wellpoint Inc. (NYSE: WLP) 4.7773 million shares, same as before.
* Wesco Financial Corp. (NYSE: WSC) 5.7 million shares, same as before.

Thursday, February 5, 2009

WSJ NEWS ALERT: News Corp. Posts Loss on $8.4 Billion in Write-Downs


News Corp. posted a $6.42 billion loss for its fiscal second quarter, as it took a stiff charge to write down the value of its assets and as deteriorating advertising spending crimped its broadcast television and newspaper businesses.

The New York media company, which owns The Wall Street Journal, was dragged down by an $8.44 billion impairment charge to reflect the declining value of its TV licenses, acquisitions and other assets. Other media companies, including Time Warner Inc. and CBS Corp., have taken similar charges.

The dour results Thursday – coming on the heels of rocky earnings reports from Walt Disney Co. and Time Warner – underscore the accelerating pace of the ad downturn, particularly for traditional media. News Corp., which relies on ad sales for roughly one-third of its profits, saw earnings decline in all its major divisions except its cable-television networks, which continue to be a bright spot.

"While we anticipated a weakening, the downturn is more severe and likely longer lasting than previously thought," News Corp. Chief Executive Rupert Murdoch said in a statement. Mr. Murdoch said the company was working to cut jobs and restrain costs to withstand the tough operating climate. Among the reductions, The Wall Street Journal said about two dozen newsroom jobs were cut through layoffs, buyouts and elimination of open positions

News Corp.'s loss, which amounted to $2.45 a share for the quarter ended Dec. 31, compared to earnings of 27 cents a share, or $832 million, in the same quarter a year earlier. Excluding the impairment charge, operating income declined 42% as revenue fell 8.4% to $7.87 billion.

The results were released after the market closed. In 4 p.m. Nasdaq trading, News Corp. Class A shares were ahead 5% at $6.94. News Corp.'s stock price has fallen by two-thirds in the last year. Among the major U.S. media conglomerates, only CBS has faded more over the same period.

The biggest deadweight on operating income was a 72% decline at News Corp.'s TV-and-film production division, which produces TV hits such as "24," and "The Unit," and recent movies including "Marley and Me." News Corp. said the decline largely reflects tough comparisons to a year ago, when the company had strong DVD sales of "The Simpsons Movie" and the latest in the "Die Hard" series.

The television division – which includes the Fox broadcast network and local TV stations – posted less than one-tenth of the operating income of a year ago. Local television market has been a particular worry, with spiraling declines in ad spending from auto makers and dealers, and News Corp. said local TV station ad marketing slumped 19% in its second quarter.

Cable networks were a spot of strength, as they were for Time Warner on Wednesday. Operating income rose 27%, helped by higher licensing fees for Fox News Channel and the first profitable quarter for News Corp.'s startup Big Ten sports channel.

Operating income declined 9% at the unit that includes News Corp.'s newspapers, as ad spending dropped 10% at the company's U.K. newspapers and 4% as its Australian titles. News Corp. papers include the Times and News of the World in the U.K., and the Herald Sun in Australia. The downturns more than offset lower depreciation expenses and the inclusion of results from Journal publisher Dow Jones & Co., which News Corp. acquired in December 2007.

Tuesday, February 3, 2009

Once-dark picture improves for TiVo

Once-dark picture improves for TiVo
The pioneer of digital video recording bulked up its services and struck key partnerships. It's expected to have turned its first profit in the just-completed year.
By Alex Pham

February 2, 2009

On Oct. 9, a day the Dow dropped 679 points, TiVo Inc. deposited a check for $104.6 million. The company had just won a hard-fought battle against EchoStar Communications Inc., whose Dish Network digital video recorders were found by a federal jury to infringe TiVo's patents.

"I think we were the only company doing high-fives that day," recalled TiVo Chief Executive Tom Rogers.

TiVo, whose name has become synonymous with digital video recorders, is the comeback kid of technology.

Four years ago, the Alviso, Calif., company was on deathwatch, having lost a crucial partnership to provide recorders for DirecTV Group Inc.'s satellite TV customers. Sales of its TiVo boxes were slipping, and the company was fast running out of money.

Today, TiVo is debt-free, has $200 million in cash and is expected to post its first profitable fiscal year -- the one that ended Saturday.

TiVo's stock price, which dipped as low as $3.51 on Feb. 11, 2005, has rebounded to close at $7.19 on Friday. It hit a 52-week high of $9.43 in February last year.

"Financially, they're in great shape," said Alan S. Gould, senior media analyst at Natixis Bleichroeder Inc., an investment firm in New York. "They've done a good job of turning the company around."

Even though TiVo remains vulnerable because of its declining subscriber base, the company is no longer on the brink of collapse. If anything, the nimble outfit has managed to cheat obsolescence by continuing to innovate and adapt to changing viewing habits.

"TiVo has managed to keep itself in the game by focusing on where the consumer demand is," said James McQuivey, principal analyst at Forrester Research in Cambridge, Mass. "They started the trend a decade ago. Now they're working hard to stay on top of those trends."

During its darkest hours in 2005, the company picked a new chief executive, replacing co-founder Mike Ramsay with Rogers. Though a technology newbie, Rogers had extensive experience in the world of television, having founded financial news network CNBC while president of NBC Cable.

Together with TiVo vice presidents Naveen Chopra and Tara Maitra, Rogers lashed together deals to bolster the foundering company. His strategy was two-pronged: Land services to make the TiVo device more useful, and find cable partners to distribute the TiVo service -- which includes its programming guide, search interface and other well-regarded features -- to subscribers for a licensing fee.

He made headway on both fronts, adding RealNetworks Inc.'s Rhapsody music streaming service, Inc.'s Video on Demand service, Google Inc.'s YouTube videos, Viacom Inc.'s Nickelodeon TV shows and Netflix Inc.'s Instant Watch video streaming service. That meant people who bought the TiVo recorder could listen to music from Rhapsody's library of 6 million songs on their TVs, watch movies or shows on demand and sample videos from the Web.

"Most of what people are watching now is on the major networks and on the Internet," McQuivey said. "Between that and Netflix, people are getting much of what they need."

For now, though, cable and satellite are still king. TiVo struck deals with Comcast Corp. and Cox Communications Inc. to license the TiVo service on their set-top cable boxes.

And the relationship with DirecTV, which is now managed by cable mogul John Malone's Liberty Media Corp., is back on track. TiVo has a contract to provide DVRs for the satellite TV company's subscribers starting in the second half of this year.

Meanwhile, TiVo put its own finances in order, cutting back advertising and promotions. Last year, it laid off 38 people, about 7% of its workforce, to save $6.5 million in annual costs. The windfall from the EchoStar ruling is expected to help TiVo post its first-ever annual profit.

And its litigation against EchoStar could yield more cash. This month, a federal judge in Texas is set to hear TiVo's claim that EchoStar has continued to violate TiVo's patents since the September 2006 verdict that resulted in the $104.6-million award.

Yet TiVo isn't completely out of the woods.

Its subscribers continue to decline. About 3.5 million paid service fees as of Oct. 31, the end of its third quarter, down from 4.1 million a year earlier. Comcast and Cox have been slow to add subscribers for TiVo. And DirecTV won't begin to offer TiVo's device until later this year.

Meanwhile, TiVo is busy trying to convince consumers that its stand-alone device, priced between $150 and $600 (depending on storage capacity and features such as support for high-definition TV and surround-sound audio) with a monthly service fee of $12.95, can help bail them out of the economic doldrums by saving them "millions."

"By that, we mean millions of pieces of content that families can enjoy for free at home," Rogers said.

The irony of a company that's come back from the dead to turn a recession into a marketing opportunity isn't lost on the CEO.

"There were so many people who counted us out strategically and financially," he said. "We've gone from being a technology pioneer to a commodity and back to an innovator again."

Monday, February 2, 2009

Some Fear Google’s Power in Digital Books

Some Fear Google’s Power in Digital Books

IN 2002, Google began to drink the milkshakes of the book world.

Back then, according to the company’s official history, it began a “secret ‘books’ project.” Today, that project is known as Google Book Search and, aided by a recent class-action settlement, it promises to transform the way information is collected: who controls the most books; who gets access to those books; how access will be sold and attained. There will be blood, in other words.

Like the oil barons in the late 19th century, Google is thirsty for a vital raw material — digital content. As Daniel J. Clancy, the engineering director for Google Book Search, put it, “our core business is about search and discovery, and search and discovery improves with more content.”

He can even sound like a prospector when he says Google began its effort to scan millions of books “because there is a ridiculous amount of information out there,” he said, later adding, “and we didn’t see anyone else doing it.”

But there is a crucial difference. Unlike Daniel Plainview, the antihero of “There Will Be Blood,” played by Daniel Day-Lewis, who cackles when describing how his rigs can suck the oil underneath other peoples’ property — drink their milkshakes, if you will — when Google copies a book the original remains.

Instead, the “property” being taken is represented by copyrights and other kinds of ownership. There will be lawsuits.

In the latest issue of The New York Review of Books, Robert Darnton, the head of the Harvard library system, writes about the Google class-action agreement with the passion of a Progressive Era muckraker.

“Google will enjoy what can only be called a monopoly — a monopoly of a new kind, not of railroads or steel but of access to information,” Mr. Darnton writes. “Google has no serious competitors.”

He adds, “Google alone has the wealth to digitize on a massive scale. And having settled with the authors and publishers, it can exploit its financial power from within a protective legal barrier; for the class action suit covers the entire class of authors and publishers.”

Google is certainly solidifying a dominant position in the world of books by digitizing the great collections of the world. It relies on a basic mathematical principle: no matter how many volumes Harvard or Oxford may have, each can’t have more than Oxford plus Harvard plus Michigan, and so on.

The class-action settlement (which a judge must still approve), Mr. Darnton writes, “will give Google control over the digitizing of virtually all books covered by copyright in the United States.”

As long as Google has a set of millions of books that it uniquely can offer to the public, he argues, it has a monopoly it can exploit. You want that 1953 treatise on German state planning? You’ll have to pay. Or, more seriously, your library wants unfettered access to these millions of books? You’ll have to subscribe.

While Harvard has allowed Google to digitize its public domain holdings, it has thus far not agreed to the settlement. “Contrary to many reports, Harvard has not rejected the settlement,” Mr. Darnton wrote in an e-mail message, in which he said his essay was “not meant as an attack on Google.” “It is studying the situation as the proposed accord makes its way through the court.”

To professors who track the fast-changing nature of content on the Internet, not to mention Google officials, the idea of Google as a robber baron is fanciful. Google has no interest in controlling content, Mr. Clancy said, and in the few cases where it does create its own content — maps or financial information, for instance — it tries to make it available free.

Eben Moglen, a law professor at Columbia and a free-culture advocate, puts it this way: if the fight over digitization of books is like horse-and-buggy makers against car manufacturers, Google wants to be the road.

To those who write about the significance of Google Book Search — and a bit of a cottage industry has formed online in a few months — it is not Google’s role as the owner of content that preoccupies them. Rather it is the digitization itself: the centralization — and homogenization — of information.

To Thomas Augst, an English professor at New York University who has studied the history of libraries, including those in the past that were run as businesses, what is significant is that the digitization of books is ending the distinction between circulating libraries, meant for public readers, and research libraries, meant for scholars. It’s not as if anyone from the public can walk into the Harvard library.

“A positive way to look at what Google is doing,” he said, “is that it is advancing the circulating of books and leveling these distinctions.”

In a final twist, however, the digital-rights class-action agreement has the potential to make physical libraries newly relevant. Each public library will have one computer with complete access to Google Book Search, a service that normally would come as part of a paid subscription.

One of Mr. Darnton’s concerns is that a single computer may not be enough to meet public demand. But Mr. Augst already can see a great benefit.

Google is “creating a new reason to go to public libraries, which I think is fantastic,” he said. “Public libraries have a communal function, a symbolic function that can only happen if people are there.”