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Nokia, Alcatel-Lucent post strong results as merger approaches

PARIS/HELSINKI Shares in telecom network gear makers Nokia (NOK1V.HE) and Alcatel-Lucent (ALUA.PA) jumped on Thursday after both posted strong second-quarter results, giving a positive signal ahead of their pending merger.

Nokia’s 15.6 billion euro ($17 billion) acquisition of Alcatel-Lucent announced in mid-April aims to position the company to better compete with market leader Ericsson (ERICb.ST) and low-cost Chinese powerhouse Huawei [HWT.UL], by forging a strong number two in mobile with a more complete product line.

But with competition in the sector remaining intense and demand from telecom operators soft, some investors still have concerns about the marriage.

Analysts warn competitors may exploit any uncertainty among customers created by the merger. The deal is supposed to be completed by mid-2016, although Alcatel-Lucent hinted that closing could come earlier since some key regulatory approvals had already been secured.

Shares of Nokia surged 7.8 percent while Alcatel gained 5.7 percent, having slumped 20 percent and 27 percent respectively in the past three months against a 20 percent fall for Ericsson.

Analyst Alexander Peterc at Exane BNP Paribas, with a “buy” rating on both, said the results boded well for the takeover.

“Nokia’s quarter was much better than expected on the operating margin and Alcatel’s performance was good as well,” Peterc said. “There are no signs that the financial results of the companies are diverging in Alcatel-Lucent’s favor, so there is little chance that the terms of the deal are renegotiated.”

A handful of Alcatel-Lucent investors including third-largest holder Odey Asset Management had called for better terms after its first-quarter results were markedly better than Nokia.

But few expect this to succeed since the deal is structured as a tender offer, requiring only a majority of Alcatel shareholders to be willing to sell.


Alcatel-Lucent holders will get 0.55 shares in Nokia for every Alcatel-Lucent, ending up with 33.5 percent of the enlarged group.

In the second quarter, Nokia, the world’s No. 3 telecom network equipment maker, posted a surprise rise in profits and margins, helped by lucrative software sales and a refusal to chase lower-margin contracts.

Alcatel-Lucent’s second-quarter sales were slightly lower than expectations but operating profit and margins topped consensus, as a focus on cost cuts offset weaker U.S. demand.

Also encouraging was double-digit growth in products that help telecom operators direct internet traffic, as well as the fact that Alcatel-Lucent generated more cash than it consumed for the first time since 2006.

Gartner analyst Sylvain Fabre said the results boded well for the marriage. “The consolidation of their two product lines will be long and painful, but at least they will be beginning the effort with both companies in a relatively healthy place.”

Much will hinge on how the telecom gear market performs for the rest of the year. Nokia chief Rajeev Suri said demand in emerging markets was strong, especially India, the Middle East and Africa, while Japan, Europe and North America were weaker. The lucrative U.S. market, a major driver of Alcatel-Lucent sales and profits, had got off to a slow start this year as operators like Verizon and ATT curtail spending. But Alcatel-Lucent saw an uplift in sales there in the second half.

(Additional reporting by Eric Auchard; Editing by David Holmes)

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Dollar, bond yields rise on U.S. rate hike bets

NEW YORK The dollar traded near weekly highs and U.S. Treasury yields rose on Thursday as U.S. gross domestic product data showed a pick-up in consumer spending and encouraged bets that hikes in U.S. interest rates will start as soon as September.

Wall Street was off on disappointment that GDP data was slightly below forecasts, while oil prices shrugged off an earlier drag from the dollar’s gains and edged ahead on an unexpectedly big drop in U.S. oil inventories.

The euro fell 0.55 percent against the dollar to $1.0924, which helped the dollar index .DXY rise 0.55 percent at 97.511 after touching 97.591, its highest so far this week.

“The latest GDP report confirms the Fed’s narrative that the first-quarter weakness was transitory. The bar for them to hiking rates is not very high,” said Ian Gordon, G10 currency strategist at Bank of America Merrill Lynch in New York

Data on Thursday showed economic growth in the United States accelerated in the second quarter, backed by solid consumer demand, to a 2.3 percent annual rate. While slightly below economists’ expectations for 2.6 percent growth, the data still pointed to firming domestic fundamentals.

The U.S. Federal Reserve on Wednesday described the economy as expanding “moderately,” with improvements in housing and the labor market. That left the door open for a possible hike in interest rates in September, which would be the first rise since 2006.

Treasury prices, which move in the opposite direction of yields, were mostly off. Benchmark 10-year Treasuries US10YT=RR were down 2/32 of a point in price, pushing the yield to 2.2679 percent.

The Dow Jones industrial average .DJI fell 74.99 points, or 0.42 percent, to 17,676.4, the SP 500 .SPX declined 8.97 points, or 0.43 percent, to 2,099.6 and the Nasdaq Composite .IXIC eased 25.61 points, or 0.5 percent, to 5,086.12.

Nine of the 10 major SP sectors fell, with the consumer staples index’s .SPLRCS 0.61 percent fall leading decliners.

Europe’s main stock markets 0#.INDEXE held on to a third day of modest gains as results from Siemens (SIEGn.DE), Nokia (NOK1V.HE) and Deutsche Bank (DBKGn.DE) and a rise in euro zone-wide sentiment data boosted the mood. ECONG7 [.EU]

With the dollar flexing its muscles again, commodity markets were back under pressure, with copper CMCU3, considered a bellwether for global economic activity, trading near a six-year low at $5,268 a tonne. MET/L

The broad Thomson Reuters CRB commodities index .TRJCRB hit a fresh six-year low before recovering some ground. Gold was flirting with a 5-1/2-year low at $1,093 an ounce as its appeal ahead of potentially higher global interest rates remained in question.

Oil prices, smarting from rising U.S. shale oil output and an easing of sanctions on Iran, were faring slightly better, having bounced on Wednesday following an unexpectedly large weekly drawdown in U.S. crude inventories. O/R

Front-month Brent crude futures LCOc1 were pegged up 1 percent at $53.90 a barrel, and U.S. crude was up to $49.18 having pulled away from Tuesday’s 4-1/2-month low. They have both lost more than 15 percent in July.

(Reporting by Michael Connor in New York; Editing by Bernadette Baum)

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Asian shares, dollar up on Fed’s optimism; earnings in focus

HONG KONG Asian stocks tiptoed higher on Thursday and the dollar consolidated recent gains after the U.S. Federal Reserve painted a relatively bright picture of the world’s biggest economy, but a deepening sell-off in commodities kept gains in check.

Prospects of stronger U.S. growth in coming months lifted Asian stocks in early trade, with Japan’s Nikkei .N225 up 1.2 percent and Australian shares adding 0.7 percent. But South Korean shares .KS11 fell 0.7 percent.

A dollar-denominated index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.4 percent after Chinese stocks had a quiet opening.

Gains were muted before the earnings season kicks off in full throttle next week, when companies are broadly expected to post disappointing results on the back of weak economic data in recent months, particularly for trade.

Gavekal strategists noted that Asia’s trade performance had been disappointing in recent months. After a two-year post-crisis rebound in 2010-2011, export growth in the region has slowed to an annual average of 7.5 percent in U.S. dollar terms and 6 percent in volume terms this year compared to U.S. dollar growth rates of 30 percent in the years before the crisis.

“The markets still think that the world’s economy remains fragile, given a fall in Chinese shares and commodity prices. The Fed surely doesn’t want to screw up its exit from zero rates by hastily moving and hitting already fragile commodities market and the world economy,” said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.

Subdued external demand is expected to weigh on corporate earnings, with CLSA strategists expecting first-half earnings growth at Hong Kong and Chinese companies to be weak and guidance for the third quarter unlikely to be better.

Chinese equities are already a third lower than their June highs.

On Wall Street, U.S. stocks rose broadly on the Fed’s optimism and strong corporate earnings, with the SP 500 .SPX rising 0.7 percent to 2,108.57.

After a two-day policy meeting, Fed officials said they felt the economy had overcome a first-quarter slowdown and was “expanding moderately”, leaving the door open for an interest rate increase in coming months.

Commodities extended their decline, with copper CMCU3, considered a bellwether for global economic activity, trading near a six-year low at $5,322 a tonne.

The broad Thomson Reuters CRB commodities index .TRJCRB also hit a six-year low.

Oil prices, smarting from supply concerns due to rising U.S. shale oil output and an easing of sanction on Iran, rose after weekly data showed an unexpectedly large drawdown in U.S. crude inventories.

Front-month Brent crude futures LCOc1 rose overnight to settle at $53.38 a barrel, recovering from Tuesday’s six-month low of $52.28.

In the currency market, the dollar index rose to 97.160 .DXY =USD, having rebounded from Monday’s two-week low of 96.288.

The euro fell 0.2 percent to $1.0964 EUR=, near its lowest level of the week. In recent weeks, the euro has tended to fall when risk appetite is strong as it is used as a funding currency for investment in risk assets.

The dollar rose about 0.1 percent in early Asian trade to 124.075 yen JPY=, hitting its highest level so far this week.

(Additional reporting by Hideyuki Sano in TOKYO; Editing by Alan Raybould)

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Boeing may move work abroad with Ex-Im future uncertain: chairman

WASHINGTON Boeing Co (BA.N) Chairman Jim McNerney on Wednesday said the aircraft maker is actively looking at moving “key pieces” of its operations to other countries given uncertainty about the future of the Export-Import Bank, whose charter expired on June 30.

“We are now forced to think about this differently,” McNerney told hundreds of executives and diplomats during an interview hosted by the Economic Club of Washington.

McNerney, who retired as the company’s chief executive on July 1, said Boeing might consider sites in countries that offer export credits, but gave no details about which operations could be affected or when the company had launched its review.

The International Association of Machinists District 751, which represents more than 30,000 Boeing workers, blasted McNerney’s threat to move jobs overseas. “The only Boeing job that should leave this country is his,” said Jon Holden, who heads Boeing’s largest union.

America’s largest exporter, Boeing employs 165,000 people.

“Boeing’s fear mongering undermines the company’s remarkable products and it won’t win converts in Congress,” said Dan Holler, spokesman for Heritage Action for America, a sister organization of the Heritage Foundation that promotes conservative policy and is one of the most vocal critics of the bank.

The Ex-Im Bank was created during the Great Depression to lend money to U.S. exporters and their foreign customers. Its charter lapsed after conservatives in the U.S. Congress cast it as a promoter of “crony capitalism” for multinationals such as Boeing and General Electric Co (GE.N).

Hopes of reviving the trade bank were dashed on Tuesday as Congress moved toward a short-term extension of highway funding without a provision to renew the bank’s charter. That means the bank’s fate hangs in the balance through September or October, McNerney said.

Uncertainty about the availability of export credits is already weighing on sales of a range of Boeing products, including commercial satellites, according to sources familiar with the situation who requested anonymity because of the sensitivity of the business negotiations.

McNerney’s comments reflect U.S. industry’s growing frustration about deep partisan divides that have paralyzed Congress since the rise of the right-wing Tea Party in 2010 and the imposition of mandatory spending cuts that have hit revenues at the defense division of Boeing and other arms makers.

GE’s chief executive, Jeff Immelt, last month told the Economic Club his company would move manufacturing jobs to Canada and Europe if the Ex-Im bank closed.

McNerney said he was more worried than ever that Congress could fail to reauthorize the bank, given what he called the “very, very frustrating” refusal of a small minority of lawmakers to accept majority congressional support for the bank.

“People just playing politics – they’re not connected to the real world anymore,” McNerney said at the event, which was attended by the Russian, Dutch and Malaysian ambassadors.

McNerney, who led an effort to bring more manufacturing in-house after problems linked to the company’s strategy of outsourcing work on the 787 Dreamliner, said he was rethinking his efforts to keep manufacturing jobs in the United States.

“I’m beginning to think that maybe I made the wrong decision,” said McNerney, who led the company for 10 years.

Boeing recently signed a deal with major Japanese suppliers, giving them 21 percent of the 777X content, down from 35 percent for the 787.

Boeing’s main rival, Europe’s Airbus (AIR.PA), has opened manufacturing facilities in China and the United States in recent years.

(Additional reporting by Alwyn Scott and Lewis Krauskopf in New York; Editing by Richard Chang and Leslie Adler)

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House Speaker Boehner supports ending U.S. oil export ban

WASHINGTON U.S. House of Representatives Speaker John Boehner on Wednesday expressed for the first time his support for repealing the 40-year-old ban on domestic crude oil exports, a move that could breathe new life into a bill in his chamber.

“Until recently our nation’s energy policy was rooted in a scarcity mindset that went back to the 1970s,” Boehner, a Republican, told reporters. “But now America is experiencing an energy boom and our policy needs to follow suit.”

Boehner said if Iran can return to exporting crude under the deal the United States and other world powers struck with Tehran this month over its nuclear program, the United States should not be the last developed country in the world with a self-imposed ban on oil exports.

Repealing the U.S. ban would create 1 million jobs, help bring down gasoline prices for consumers and be good for allies, Boehner said.

Supporters of lifting the ban say it could help Eastern Europe diversify beyond Russia for crude supplies. But some experts have said doing so would take time, as many European refineries have made investments to run on Russian oil and as capacity to import U.S. crude would need to be built.

U.S. oil producers hope Congress will repeal the trade restriction, which they say has led to an oil glut that threatens to choke the drilling boom. A bill introduced this year by Representative Joe Barton, a Texas Republican, has 110 co-sponsors in the 435-member chamber.

Boehner said the House would work on wider energy legislation when it returns after the August recess. It was unclear whether the House would take up Barton’s bill in the fall or perhaps later in the year.

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Facebook profit falls 9 percent as costs soar

Facebook Inc reported quarterly revenue that beat forecasts but its profit fell 9 percent as the social media company sharply increased spending to boost mobile revenue and future growth.

Expenses will grow 55 to 60 percent in 2015 from last year, including an 82 percent jump in the second quarter to $2.77 billion, it added.

“We’re investing in the next set of services and what will be future investments like Messenger, WhatsApp and Oculus,” Chief Operating Officer Sheryl Sandberg said in an interview on Wednesday after the earnings report. She was referring to Facebook’s two messaging services and virtual reality headset maker Oculus Rift, whose first product for consumers has yet to be launched.

Messenger has more than 700 million users, and the app has been downloaded more than 1 billion times on Android, Google Inc’s mobile operating system, Facebook said.

Over the coming months, Facebook will add new advertising formats to photo-sharing app Instagram, which was launched in Brazil, Germany and Japan in the second quarter, Sandberg added on a conference call.

Macquarie Research analyst Ben Schachter said the costs and spending met expectations. “We think the company has a lot of opportunities ahead of it so we want to see them investing quite heavily in those investments,” he said.

Facebook shares fell more than 3 percent in after-hours trading. As of Wednesday’s close of $96.99, the stock has risen 24.3 percent this year, valuing the company at $276.4 billion.

Facebook, the world’s largest social network, continued to expand its reach, hitting 1.49 billion monthly active users as of June 30, up 13 percent from a year earlier. Of these, 1.31 billion accessed the service through mobile devices, a rise of 23 percent.

Daily active users increased to 968 million in June, up 17 percent from the same month last year.

Market research firm FactSet StreetAccount had predicted 1.48 billion monthly active users, with 1.29 billion on mobile, and 960 million daily active users.

“It’s particularly impressive that users are more engaged than ever before – that the percentage of monthly users who visit every day continues to grow,” said Nate Elliott, an analyst with Forrester Research.

For the quarter, revenue jumped to $4.04 billion from $2.91 billion.

Net income attributable to stockholders fell to $715 million, or 25 cents per share, from $788 million, or 30 cents per share, a year earlier.

Excluding items, the Menlo Park, California-based company earned 50 cents per share. Analysts on average had expected earnings of 47 cents per share on revenue of $3.99 billion, according to Thomson Reuters I/B/E/S.

Excluding the impact of the stronger dollar, revenue would have been about $33 million higher.

Advertising revenue grew 43 percent to $3.83 billion. Mobile ads accounted for 76 percent of that, up from 62 percent in the same quarter last year. The average price paid per ad rose 220 percent while total ad impressions, a measure of the number of times an ad is viewed, fell 55 percent.

(Reporting by Devika Krishna Kumar in Bengaluru; Editing by Stephen R. Trousdale and Richard Chang)

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ITG sets aside $20.3 million related to dark pool investigation

NEW YORK Broker dealer Investment Technology Group said on Wednesday it set aside $20.3 million for a probable settlement with the U.S. Securities and Exchange Commission over rule violations related to its private stock trading venue.

The settlement would be a record amount handed out by the SEC related to the operation of a private stock trading platform, or “dark pool.”

ITG said the SEC was investigating a test program one of the firm’s subsidiaries ran from 2010 until mid-2011 that involved proprietary trading inside of ITG’s POSIT dark pool against some of its broker clients that the firm did not disclose.

ITG also said the employee who ran the program in question, who is no longer with the firm, used information from customer stock orders within ITG’s dark pool, as well as information from ITG clients that used the firm’s algorithms to execute trades on other trading platforms, that should not have been available.

ITG disclosed the information in an earnings pre-announcement after the market closed on Wednesday and also in letter to its clients.

“In hindsight, I recognize that our client disclosures about the pilot were insufficient,” ITG Chief Executive Officer Bob Gasser said in the letter to clients. “I take full responsibility for these historical mistakes.”

There are around 40 U.S. dark pools and regulatory scrutiny of the broker-run electronic trading venues, which only make trading data available after a trade has taken place, reducing the chance of others in the market moving the price against it, has been on the rise. In January, UBS said it would pay 14.4 million over regulatory failures in its dark pool.

Based on the terms of the potential settlement with the SEC, ITG would pay a fine of $18 million, disgorgement of around $2.1 million in trading revenues, and prejudgment interest of around $250,000.

The firm also said that on July 23, Kevin J.P. O’Hara resigned from ITG’s board of directors effective immediately, but did not state a reason.

(Reporting by John McCrank; Editing by Bernard Orr)

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Toshiba scandal puts focus on Japan’s cut-price company audits

HONG KONG Toshiba Corp’s years-long practice of inflating its profits has raised questions among accounting experts about whether low fees paid by Japan-listed companies to their auditors mean they do not spend enough time scrutinizing company accounts.

Toshiba chief executive Hisao Tanaka and a string of other senior officials resigned last week after an independent inquiry found the company had padded its profits by $1.2 billion over several years, in one of Japan’s biggest corporate scandals in years.

The committee of external lawyers and accountants probing the computers-to-nuclear conglomerate found “most of the accounting treatment issues that were the scope of this investigation were not noted” by the auditor Ernst Young (EY) ShinNihon.

It added though that the involvement of top management in the accounting irregularities may have made it harder for auditors to detect problems, noting that the quality of the audit could only be determined by a separate investigation.

EY ShinNihon declined to comment for this article. Tanaka has said he never had any intention of encouraging accounting irregularities but did not dispute the report’s findings.

Some accounting experts say the scandal highlights the low audit fees paid by Japanese companies, which they believe are caused by historical caps, stiff competition and a corporate culture that does not value the audit function or shareholder transparency.

“One of the ongoing problems in Japan is that the fees paid by listed companies to auditors are very low compared to the international average,” said Robert Medd, a partner at GMT Research in Hong Kong.

Because accountants typically charge by the hour in Japan and elsewhere, fees can provide a rough proxy for the time spent on an audit, and can offer a comparable benchmark when measured as a proportion of a company’s overall revenues.

An analysis by GMT of more than 2330 listed companies with $500 million or more in sales found Japanese firms pay their auditors on average 3.2 basis points of turnover, compared with 5.3 in the United Kingdom and 11.8 in the United States, the lowest among the major developed markets. The overall international average was 5.6 basis points.

Toshiba paid EY ShinNihon and other EY entities 1.5 basis points of turnover, or 982 million yen ($8 million), to audit its books for financial year ended March 2014, according to its financial statements.

The six-year average at Toshiba was 1.8, a Reuters analysis of the company’s financial statements shows.

In a statement, Toshiba said EY’s remuneration was “appropriate” and noted that audit fees vary each year due to one-off events. “As a listed company, we recognize that it is not whether the fees are large or small, but that it is important to receive the necessary and sufficient audit.”

A London-based spokeswoman for EY and the two audit oversight divisions of Japan’s main regulator the Financial Services Agency all declined to comment.

A spokesman for the Japan Institute of Certified Public Accountants, the self-regulatory body for accountants, said it will investigate EY ShinNihon’s involvement in the case.


To be sure, fees are not a water-tight gauge of audit rigor or competence given some companies can receive discounts, some sectors are less complicated to audit than others, labor costs vary across markets, and accounting rules in some countries can be less onerous.

Audit fees in Japan were low due to historical regulatory caps and although these limits were removed more than a decade ago, fees have struggled to reach developed-market norms, which accountants say can impinge on quality.

“In these highly competitive fee environments, it is always a battle to keep up the consistency of detailed service,” said Chris Devonshire-Ellis, chairman of accountancy firm Dezan Shira Associates.

Japan’s government has tightened audit regulation, but low fees and overwork make it tough for firms to attract and retain quality staff, said Yoshinori Kawamura, professor in the Faculty of Commerce, Waseda University, specializing in accounting.

“The number of experienced certified public accountants is limited. Each senior auditor signs the auditor’s reports for a good number of companies,” he said.

(Additional reporting by Thomas Wilson in Tokyo; Editing by Rachel Armstrong)

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Yelp needs help, and buyout may be the answer

Selling itself could be one of the few options left for Yelp Inc (YELP.N), which is struggling to win advertising dollars in an increasingly crowded market that already includes Google Inc (GOOGL.O), TripAdvisor Inc (TRIP.O) and GrubHub Inc (GRUB.N).

Yelp, owner of consumer review website, reported a second-quarter loss on Tuesday and forecast revenue for the current quarter that was far below expectations.

The news pushed down the company’s shares almost 30 percent on Wednesday to their lowest in more than two years, wiping out more than $735 million in market value.

As of Tuesday’s close, Yelp – now valued at about $1.8 billion – had already lost 39 percent of its value this year.

Unless Yelp can come up with a strategy to boost its financial performance, the San Francisco-based company should consider selling itself, several analysts said.

Yelp put itself up for sale in May but then decided not to proceed, Bloomberg reported this month.

Yahoo Inc (YHOO.O), Inc (AMZN.O) and Priceline Group Inc PLCN.O would be possible buyers, analysts said.

Yelp declined to comment. Yahoo, Amazon and Google did not respond to request for comment, while Priceline said it did not comment on acquisition rumors.

“… A Google competitor interested in an advanced local position could view Yelp as an attractive strategic alternative,” Evercore analyst Ken Sena said in a client note.


Yahoo in particular would be a good fit, according to Brean Capital’s Tom Forte and Piper Jaffray’s Gene Munster.

“When I think about Yahoo … I think Yelp checks a handful of boxes,” Forte told Reuters, noting Yahoo’s push into local markets and mobile advertising – an area where Yelp is strong.

Barclays analyst Christopher Merwin was skeptical, though, saying Yelp would be “an awfully big acquisition” for Yahoo.

Yelp’s website and mobile app allow users to rate a variety of local businesses, including restaurants and home services.

“The content that they have is very valuable and it would be attractive to a lot of players in the advertising space,” said an investor in the company, who declined to be named.

Yelp, which has been profitable in only three of 13 quarters since it went public in March 2012, could also attract activist shareholders, the investor said.

“I would say that holding management accountable for financial performance … is something that the entire Street would welcome. It’s not okay just to grow, you have to grow and deliver profits,” the investor said.

Analysts had expected Yelp to post a small profit in the second quarter. Instead, it posted a small loss.

(Reporting By Arathy S Nair in Bengaluru; Editing by Ted Kerr)

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