WSJ : Activist Investor Pushes EMC to Break Up

Activist Investor Pushes EMC to Break Up Elliott Management Says Spin-Off of VMware Would Boost Stock Price

VMware is a publicly traded company, but it is 80%-owned by EMC. Bloomberg Elliott Management Corp. has taken a stake of more than $1 billion in EMC Corp. EMC +0.94% and plans to push the data-storage giant to break itself apart, according to people familiar with the matter.

The investment, which hasn't been previously disclosed, amounts to about 2% of the Hopkinton, Mass., company's $55 billion equity value, and would make the hedge fund its fifth-largest shareholder, according to the most recent data available from FactSet. It is one of the largest positions Elliott, a 37-year-old firm with $25 billion under management, has ever taken.

Elliott will seek to convince EMC that the company's lagging stock would receive a substantial boost if it were to spin off VMware Inc., VMW +2.34% a pioneer in computer-server software, these people said. EMC owns a roughly 80% stake in VMware, which is publicly traded.

Elliott is expected to argue that the company's present structure has hampered the performance of EMC's stock.

"We're always happy to meet with our shareholders," an EMC spokesman said. He declined to comment further.

With $23.2 billion in revenue last year, EMC is made up of three businesses strung together in what the company refers to as its "federation strategy." They are: EMC Information Infrastructure—its traditional center of gravity, which dominates the data-storage-systems business—as well as VMware and software-development company Pivotal, which are both faster-growing. VMware trades publicly and has a market value of $41 billion, or 75% of EMC's market capitalization.

Should EMC move to split off VMware, potential buyers of part or all of the company could emerge, according to people who could ultimately be involved in such deals. Industry players who could be interested in part or all of EMC include Oracle Corp. ORCL +0.23% , Cisco Systems Inc. CSCO +1.09% and Hewlett-Packard Co. HPQ +1.10% , analysts have said.

Oracle and H-P declined to comment on the possibility of their companies' interest in purchasing all or parts of EMC. A spokesman for Cisco didn't immediately respond to a request for comment.

If Elliott is successful, a breakup or sale could cause ripples through the roughly $2 trillion annual market for hardware, software, and technology services sold to companies, given what a significant player EMC is in server and storage systems. Elliott's investment in EMC also spotlights how size is increasingly not a barrier for activist investors, who have lately set their sights on some of the world's largest companies.

EMC is facing a number of headwinds. An emerging technology for saving digital data, known as "flash" storage, is giving upstarts a chance to dislodge EMC, which for years has been the dominant seller of hardware companies use to save data troves. Some companies, rather than buying gear from EMC, are storing data outside their computing centers with "cloud" services from providers such as Amazon.com Inc.

In the first quarter, EMC's sales rose by less than 2% from the same period a year earlier, while its net income dropped by roughly 30%. The company is set to report second-quarter results Wednesday.

EMC shares, which more than a decade ago soared above $100, now change hands for less than $27. They have risen 163% in the past 10 years, compared with a more than 309% gain for the Dow Jones U.S. Computer Hardware Index, even as VMware's value has soared. The Nasdaq is up 135% over the past 10 years.

Some analysts have argued that EMC's stock price doesn't reflect the full value of its traditional storage business and a separation of VMware could address that.

Elliott is expected to argue that VMware and the storage business are held back by the present structure, in which in some cases they compete with each other.

EMC said in a recent filing that its federation strategy "allows each of the three businesses to individually build products … they need to succeed in their respective markets while sharing the same ultimate goal of helping customers manage information."

Elliott in the past week called EMC to inform it of the investment, and fund officials plan to meet with EMC Chairman and Chief Executive Joe Tucci, the people said.

Elliott has owned EMC shares on-and-off for a decade. Its current investment comes as Mr. Tucci, who has been CEO since 2001, is expected to retire around February 2015. The 66-year-old Mr. Tucci has put off previous retirement dates, however.

Shareholder activists like Elliott have become an increasingly potent force in corporate America in recent years, often successfully pushing companies to spin off divisions or sell themselves in whole or part.

Technology companies used to be seen as too large and complex to find themselves in activists' crosshairs, but that is changing too.

ValueAct Capital recently secured a seat on Microsoft Corp.'s board, and Carl Icahn pushed eBay Inc. to spin off its PayPal unit, before making peace with the company when it agreed to appoint a director he favored.

Elliott has made a slew of technology investments over the years, in many cases successfully pushing the companies to make changes. It has for example taken stakes in BMC Software Inc., Juniper Networks Inc. and NetApp Inc., an EMC competitor.

>>> Asian Update

Asian Market Update: Geopolitical jitters persist with Gaza ground war, Ukraine crash site tensions at the forefront

***Economic Data*** - (NZ) NEW ZEALAND JUN CREDIT CARD SPENDING M/M: 0.7% V 3.2% PRIOR; Y/Y: 7.0% V 7.6% PRIOR - (NZ) NEW ZEALAND JUN NET MIGRATION: 4.3K V 4.0K PRIOR (highest since Feb 2003) - (UK) UK JUL RIGHTMOVE HOUSE PRICES M/M: -0.8% (first decline in 7 months) V 0.1% PRIOR; Y/Y: 6.5% V 7.7% PRIOR

***Index Snapshot (as of 02:30 GMT)*** - Nikkei225 closed, S&P/ASX +0.2%, Kospi +0.2%, Shanghai Composite -0.1%, Hang Seng flat, Sept S&P500 -0.1% at 1,970

***Commodities/Fixed Income/Currencies*** - Aug gold +0.2% at $1,313, Aug crude oil -0.2% at $102.88/brl, Sept Copper flat at $3.18/lb - (KR) South Korea sells KRW1.91T in 10-yr govt Bonds; bid-to-cover: 4.01x; avg yield: 2.995% - USD/CNY: (CN) PBoC sets yuan mid point at 6.1547 v 6.1568 prior setting (1st firmer setting in 7 sessions) - GLD: SPDR Gold Trust ETF daily holdings rise 1.8 tonnes to 805.1 tonnes (first rise since Jul 14th)

***Market Focal Points/Key Themes*** - UN Security Council convened an emergency session Sunday night after the bloodiest day in the 2-week long Israel IDF incursion into Gaza. 13 Israeli soldiers and over 100 Palestinians have reportedly been killed on the day dubbed as "Black Sunday", and there are few signs that violence will abate. Amid the loss of life and reports of a kidnapping of an Israeli soldier by Hamas, PM Netanyahu defended the IDF assault on rocket launch sites alleged to be operating from densely populated locations. Attempts at a humanitarian ceasefire between the two sides were also reported to have broken down.

- Dollar majors are flat from Friday close levels with the exception of NZD/USD which is up about 20pips above the $0.87 handle. Outside of 2nd-tier economic data today, traders are also expected to adjust positioning going into the RBNZ rate decision on Wednesday. Local press report citing a survey of economists sees about a 75% chance of RBNZ raising interest rates again this week to 3.5%, but all respondents expect the central bank to pause until at least December.

- East Ukraine conflict between Kiev troops and pro-Russian separatists remains complicated by the tragic downing of Malaysian airlines flight which brought further condemnation on alleged Russian involvement from Western leaders. France's Hollande, Germany's Merkel, and UK's Cameron warned of more consequences against Russia if it remains uncooperative in securing crash site access for international inspectors. Earlier reports indicated a Swiss team of inspectors was only given crash site access to about 200 square meters and for about 75 minutes. US State Sec Kerry presented a set of "extraordinary circumstantial evidence" to implicate pro-Russian rebels in the crash, including an alleged video that the missile launcher was transported back into Russia after the crash, with "at least one missing missile." Late on Sunday, Russian Pres Putin said his govt will do everything possible to end the Ukraine conflict and endorsed the presence of international inspectors on the ground, while the rebels had reportedly agreed to hand over the discovered black boxes to investigators.

- Among notable speakers out of China, State Council Development & Research Department official Liu said the housing market poses a significant uncertainty factor for economy in next two years. Liu added the cooling investment could reduce China's annual GDP to around 6% from the current 7-8%.

***Equities*** US markets: - GSJK: Announces Transformational $825M Acquisition of Compressor Systems, Inc. From Warren Equipment Company - RAI: Florida jury awards $23.6B in punitive damages in a case against RJ Reynolds brought by the widow of a longtime smoker who died in 1996 - press - MCD: China Food and Drug Administration (CFDA) Shanghai Branch launches investigations and orders McDonald's, KFC, and other fast food restaurants to take off meat supply from local supplier Husi Food - Chinese press

Notable movers by sector: - Materials: Arrium Ltd ARI.AU -2.5% (production results) - Energy: Shanghai Tongji Science & Technology Industrial 600846.CN +5.7%, Jiangsu Huachang Chemical 002274.CN +10.1%, Beijing Dynamic Power 600405.CN +4.7% (China state council on new energy vehicles); China Coal Energy 1898.HK -1.5% (H1 guidance); Caltex Australia Limited CTX.AU +3.9% (provides refining update) - Technology: Semiconductor Manufacturing International Corp 981.HK +4.0% (Q2 guidance); Xi'An Longi Silicon Materials 601012.CN +2.8% (H1 guidance)

>>> What to look at this Week End

US Market closed higher, even the 2 major events of this were not able to oush market lower, eco data below expecttions neither, Russel jumped 1,6%...the risk aversion trade that dominated on Thursday was supplanted by a risk-on trade on Friday. That was evident in the recognition that every S&P 500 economic sector ended the day higher while gold prices ($1311.30, -5.60) and the 10-yr note (-9/32, 2.48%) ended the day lower. The clearest sign, however, was seen in the VIX, which plummeted 16% after surging 32% on Thu. Volumes were a bit more improtant @ 744mil shares...Weekly Perf Dow +0,92% S&P +0,54% Nasdaq +0,38% Russel -0,72%

Macro
- Iran Sees Nuclear-Talks Extension as Good Sign for Deal: IRNA

Keep an eye on :
- ACS SM : ACS Says Escal Gives Up Concession to Run Castor Natgas Storage
- ALO FP : Alstom plays down added layer of complexity in deal with GE - FT
- BAS GY : Saudi Basic Industries, or Sabic, said on Sunday that the outlook for global petrochemical demand is positive and there is scope for an uptick in prices. SABIC -0,79% on numbers
- BATS LN : Reynolds American Ordered to Pay $23 Billion to Smoker’s Widow
- BBVA SM : Santander, BBVA, CaixaBank Make Bids For Catalunya Banc: Europa
- BC IM : Cucinelli Sees Net Debt at EU34m-EU35m at Year-End, Sole Says
- BMW GY : BMW Recalls 573,935 Cars in North America on Air Bag: NHTSA
- BULL FP : Bull CEO Says Atos Takeover Will Speed Savings, Investir Reports
- EN FP : Bouygues won't book contribution from Alstom in Q2
- BN FP : America's Move to Soy Hobbles Dairy
- IAG LN : British Airways Cancels Some Heathrow Flights on Severe Weather
- DE NA : D.E Master Blenders, Mondelez weigh sale, options for two brands
- ELB BB : Electrabel threatens to divest Belgian nuclear plants - Het Laatste Nieuws
- HOLN VX : Holcim CEO: Have Begun Formally Notifying Antitrust Bodies on Lafarge Merger
- NOK1V FH : Nokia to purchase Panasonic's mobile telecommunication base station business
- ROG VX : Not interested in Large acquisitions, focus on smaller company
- SAB LN : SABMiller CEO Clark Faces Criticism Over Pay, Telegraph Reports
- SAP GY : Marketo (MKTO ) May Be Next Cloud Purchase for SAP, JMP Says
- SAP GY : SAP interested in acquisitions but does not rate Software AG a good fit
- SHP LN : AbbVie Becomes Inversion Target, Now Top Pick: Jefferies
- SOW GY : SAP interested in acquisitions but does not rate Software AG a good fit
- GLE FP : Societe Generale Won’t Bid for Catalunya Banc, Confidencial Says
- TEF SM : Telefonica Appeals Cade Decision in Brazil Court: Folha Link
- UHR VX : Said to have applied to set up stores in India,Indian watch market is forecast to rise to $2.7B by 2020 from $898M now.
- VOLVB SS : Volvo Sees 3Q Op. Income Impact of About SEK440m From Court Fine
- ZIGGO NA : Liberty May Shed Premium TV Overlap for Ziggo: Mlex

FT : Europe’s carmakers put the champagne on ice as sales inch forward

Europe’s carmakers put the champagne on ice as sales inch forward

An employee inspects the engine of a Dacia Duster automobile, manufactured by Renault SA, at the company's factory in Pitesti, Romania, on Thursday, July 3, 2014. European car sales rose 4.3 percent in May, the ninth consecutive monthly gain, as growing consumer confidence encouraged purchases of new models from Renault SA, Volkswagen AG and General Motors Co. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg
Car sales rose 6.5% in Europe in the first half of 2014, but demand in Brazil and Russia has 'fallen off a cliff'
The financial charts on Jérôme Stoll’s desk painted a perplexing picture.
The green numbers all over Europe’s battered, sagging car market, and the red ink across his treasured emerging-market charts, were not what the chief performance officer at Renault was expecting to see at this month’s midyear review.

For so many years, it had been the reverse, as the rest of the world subsidised the industry’s travails in Europe.
“Last year . . . we announced a decrease of our volumes in Europe by 7.3 per cent,” explains Mr Stoll. “Back then, we could show that our international development strategy enabled us to compensate for the hazards related to the European market. This year it’s the opposite.”
The French carmaker is not alone in taking the counter-intuitive news with a pinch of salt.
Europe’s car market, which has dragged half of the world’s biggest carmakers into billions of dollars’ worth of losses over the past few years, is now stumbling into patchy, stuttering, but undeniable growth.
But in the boardrooms of carmakers across the continent, the champagne is still firmly on ice.
The overall growth of 6.5 per cent in European car sales over the first six months of the year masks large peaks and troughs in major markets. Carmakers are still spending vast amounts on discounts to tempt wavering buyers. And most importantly, the rise in demand is nowhere near enough to fill idle, inefficient, factories that are bleeding cash.

“The market in Europe is not really growing,” says Karl-Thomas Neumann, chief executive of Opel, Europe’s third-largest car brand by sales. “The year started off pretty bullish. We are all a bit more cautious now.”
“There are areas with growth,” says Mr Neumann, “[but] it is certainly worse than we thought at the start of the year.”
Adding to the gloom is the state of car demand in emerging markets: countries that European carmakers were banking on for revenue growth.
While sales in China, the world’s largest car market, continue to motor on, countries such as India, Brazil and Russia have swung from being industry darlings to devils in just a couple of years.
Demand in Brazil and Russia has “fallen off a cliff and should continue to disappoint,” according to Exane BNP Paribas, which expects sales in the countries to fall 6 per cent and 12 per cent respectively this year.
This month, for the first time in years, PSA Peugeot Citroën was able to cheer European growth at the top of its half-year performance press release. News of a 22 per cent fall in Brazilian sales and a 26 per cent fall in Russian sales was buried lower down in the statement.
The year started off pretty bullish. We are all a bit more cautious now. There are areas with growth, [but] it is certainly worse than we thought at the start of the year.
- Karl-Thomas Neumann, chief executive of Opel
There is certainly something to celebrate in the momentum in Europe. Having hit a historical annual low last year, European car sales rose for a 10th consecutive month in June. Over the same period, the Stoxx 600 index of European automotive shares went up 14 per cent.
But the recovery in demand is as unevenly spread as it is minuscule.
Of Europe’s five largest markets, which together account for three-quarters of the continent’s sales, only the UK and Germany buy as many cars as they did in 2007, up a measly 0.7 per cent and 0.4 per cent respectively.
In France, sales are 11 per cent lower than they were in 2007, while in Spain and Italy, sales are down a staggering 47 per cent.

Over the past six years, global light vehicle sales have risen 20 per cent. In the same period, Europe’s car sales have fallen by the same margin, according to research by AlixPartners, a consultancy, as austerity-hit consumers struggling with high unemployment and meagre economic growth eschew new vehicles.
That equates to 5m fewer vehicles being sold each year across the continent, and has left factory foremen with a shortage of orders.
“The European car market is not likely to recover soon; thus near-term growth is unlikely to cure the underutilisation issue in Europe,” says Stefano Aversa, European president at AlixPartners. “Those waiting for the tide to rise enough to lift their boat may be waiting forever.”
Despite a handful of factory closures by a few carmakers, 30 per cent of Europe’s car production capacity is sitting idle, according to Mr Aversa. That not only increases production costs per vehicle, but has also forced desperate manufacturers into a margin-savaging discount war.
“Overcapacity is a problem for us, and that is why we are trying to fix it . . . My job is to fill all my factories,” says Mr Neumann. Opel’s factory in Bochum, Germany, will fall silent at the end of this year, and the company, owned by General Motors, is exploring possible export opportunities.

“In the market, the capacity has to come down. We at least did something. Some others have also. Most others do not,” he adds.
The average discount offered by car manufacturers is more than €2,700 per vehicle, eroding or inverting profit margins, especially for mass-market players.
Opel, which has racked up losses of $2.75bn over the past two years, has pledged to break even by “the middle of the decade”, but has refused to give an exact date.
Ford, the continent’s second-biggest car brand, lost $1.6bn in 2013 but has promised to turn a profit at the end of next year. Peugeot, the carmaker most reliant on the European market, has lost €7.3bn since 2012 but targets 2 per cent operating margins by 2018.

>>> Formula One shareholder Bernie Ecclestone denies reports of possible bid

Formula One shareholder Bernie Ecclestone denies reports of possible bid

Formula One (F1) shareholder Bernie Ecclestone has denied reports of his interest in a possible bid for the motor racing company, The Sunday Telegraph reported. Ecclestone, quoted in a longer article about the prospects of F1’s largest shareholder CVC Capital Partners selling its stake next year, did not completely rule out bidding for F1 but said there is currently “no point” to him making an offer.

Reports had suggested that Ecclestone was thinking about making an offer and increasing his stake in F1’s holding company Delta Topco, the newspaper said.

Ecclestone noted that CVC Capital has valued its 35% stake in Delta Topco at USD 10bn (EUR 7.39bn).

Separately, the report said the memorandum for CVC’s Fund IV, which part-financed the buyout group’s acquisition of its Delta Topco stake in 2006, stipulates a term of ten years, which can be extended only with the consent of the majority of its shareholders. Ecclestone said CVC’s structure dictates that it will eventually have to exit its investment in F1, according to the newspaper.

It is understood that CVC is in discussions with Discovery Communications and Liberty Global about the two US-based media companies’ bid for a 49% stake in Delta Topco, the item said. John Malone, a Colorado-based media entrepreneur, is the controlling shareholder in Discovery and Liberty, the article noted.


Source Sunday Telegraph

Barron's : The Opportunity in Russia

The Opportunity in Russia
The country's stocks plummeted Thursday and revived Friday—a sign the market thinks the worst is almost over.

Buffeted by another round of U.S. sanctions, as well as questions about Russia's role in the horrific downing of a jetliner, Russian shares initially tumbled before regaining some of their footing on Friday.

The Obama administration had said on Wednesday that it would hit Russian energy, banking, and defense industries with sanctions to make financial transactions more difficult and otherwise discourage Russian hegemony in eastern Ukraine. Within hours, a Malaysian airliner was shot down near the border of Ukraine and Russia. A surface-to-air missile is to blame, according to U.S. officials, but whether it was fired by Ukrainians, members of a pro-Russian separatist group within Ukraine, or the Russians was unclear at press time.

The result for Russia's stock market was a drop of about 3.5% on Thursday, before the pace slowed to 1.5% in Friday's trading. Year to date, the MSCI Russia index is down 12%, compared with a 6% rise in emerging markets.

But the relatively small losses were an indication of the embattled market's resilience, a sign that some investors, at least, think sanctions won't escalate further, or that the missile tragedy may bring the two sides to the bargaining table. The long term is about the economic spine that connects Russia, through Ukraine, to Europe, supported by natural gas. Russia has the world's largest known reserves of natural gas, which is transported on pipelines that partly traverse Ukraine and help keep Europe's lights on.

U.S.-traded shares of state-controlled natural-gas giant Gazprom (ticker: OGZPY) fell about 6% on Thursday, but rose 2% on Friday. And it's on dips like these that investing in Russia has paid off, sometimes spectacularly, over time, studies show.

"At Russia's market level today, it is reasonable to expect double-digit annual returns over the next three to seven years—based on valuations," says Meb Faber. He manages the Cambria Global Value ETF (GVAL), which invests in large, cheap names in Russia, Greece, and other crisis-torn countries.

Russian stocks trade at just 4.8 times forward earnings, and 0.7 times book value. That's nearly half of their historical price/earnings multiple, and near the bottom of their P/E range over the past decade, says Safa Muhtaseb, a Wilmington, Del.-based portfolio manager at Legg Mason unit ClearBridge Investments. And Russian stocks yield roughly 4%.

Given low valuations, Muhtaseb has been buying the London-listed shares of Gazprom and is looking at Sberbank Rossia (SBRCY), whose American depositary receipts plummeted 7% on Thursday. Gazprom, with a yield of 5.35%, trades at 2.8 times estimated 2014 earnings, well below its mean historic multiple of 4.5. If the stock reverts to its mean multiple, "that is a 75% return just from multiple expansion," he notes.

Muhtaseb is sure the worst isn't over in Russia. But he thinks there's a much higher probability of another leg up than a leg down. "This would seem like a good time to buy. Cooler heads and rational decision makers will prevail. Gazprom has real assets, highly important assets, production capacity, and a transport system that is unparalleled and unsubstitutable. The probability of life normalizing, not overnight but over time—two or three years—is pretty high," he says.

Muhtaseb recommends that investors buy a basket of distressed, contrarian, deep-value stocks that doesn't exceed 20% of their equity portfolio. In other words, don't think of Gazprom in isolation. Also worth considering are the most liquid Russian exchange-traded funds, such as the Market Vectors Russia ETF (RSX) and the iShares MSCI Russia Capped ETF (ERUS).

Barron's : Juniper Networks: Why the Stock Could Climb 30% or More

Juniper Networks: Why the Stock Could Climb 30% or More
With a big hedge fund pushing for change, the former dot-com darling may have big upside.

It's not easy being an activist investor, when some of your best efforts produce only middling responses. Case in point, the trading in Juniper Networks, which in January attracted the attention of Elliott Management, a $25 billion multi-strategy hedge fund.

The stock (ticker: JNPR) is up a mere 6% this year, at a recent $24, less than the Standard & Poor's 500's return thus far -- this despite the fact that Elliott, and the many investors it has canvassed in the last year or so, believe they have set in motion substantial change for the better.

After Elliott got involved with Juniper on Jan. 13, the firm continued to buy and now owns 8.3% of Juniper, worth $1 billion.

Staffed by ex-employees of Cisco Systems (CSCO) at its launch in 1996, Juniper was supposed to give the networking giant a serious run for its money. It managed to grab some market share in "core routing," the fastest, most powerful equipment running telecom carrier networks.

However, growth started to slow after the company reached about $2 billion in revenue in 2005. Growth fell to 9% in 2011 from 23%, the year before, as its expansion into other lines of business, such as corporate switching gear, didn't pay off.

In January, CEO Kevin Johnson stepped down after 5½ years at the helm. He was replaced with Shaygan Kheradpir, formerly chief technical officer at Barclays.

Revenue actually declined in 2012, by 2%, before reboundingto a measly 7% growth last year, with the same estimated for this year.

Juniper will report second-quarter results on Tuesday, and investors will have a chance to scrutinize progress on its so-called integrated operating plan -- the restructuring plan that was unveiled in February, after Elliott got involved.

The plan includes pursuing an accelerated stock repurchase plan that is expected to reach $3 billion, or more than a quarter of its market cap; its operating profit margin is to hit the mid-20% level, from 12.1% last year. Elliott believes revenue growth could rise from 7% last year.

Add in the promised 10 cent-per-share quarterly dividend -- for a 1.6% yield -- and it would seem to the folks at Elliott to be worth more than 12 times forward earnings.

THAT PIDDLY 6% STOCK appreciation causes a bit of consternation to Elliott, and specifically to Jesse Cohn, a portfolio manager at Elliott in charge of activism in U.S. stocks. With 30 different campaigns under his belt, Cohn's reputation should be enough for investors.

In 2012, Elliott took a stake in BMC Software, a maker of mainframe computer software tools, when it was trading in the mid-$30s. Elliott coaxed the company into putting itself up for sale. The end result was a buyout by Bain Capital and Golden Gate Capital a year later at $46.25 per share.

Cohn says Juniper's numbers should speak for themselves. The stock multiple is lower now in inverse proportion to a brightened financial outlook.

A year ago at this time, he notes, the estimate for 2015 earnings was not the current $2 a share but $1.42. The stock had a higher forward multiple of 15.

"With the stock today at $24, it trades at 10 times earnings, excluding net cash, and it's cheaper than it's ever been," Cohn observes.

"This is despite the fact that it is a better company than it has been for years, with superior revenue diversity, significant strategic relevance and a clear operating plan," he adds.

Cohn sees upside to $32, based on that $2 per share, assuming the stock gets back to its favored multiple.

The problem, however, may be convincing anyone that real change has or will ever happen.

One Juniper investor I spoke to who endorses Cohn's view observes a lot of momentum traders have moved on. "The initial excitement has faded after the whole thing caught the Street by surprise," meaning, Elliott's appearance on the scene, he says.

"The people who were on the sidelines or who were skeptical to begin with about Juniper, a lot of them said, 'That's all fine and dandy, but now that the restructuring plan's out, what is the next catalyst?' "

THIS MAY BE A PROBLEM in general for activist efforts.

I noted in this column back in May, a study by S&P Capital IQ looking at hundreds of firms that were the target of activist investors found lots of evidence shares rose, but in general no improvement to those firm's financial operations. ("Quarterly Results Giveth, but Mostly Taketh Away," May 5.)

Many investors, then, may not really believe change is possible, they're simply betting on stock movements.

There is reason for skepticism: The whole world of networking is being thrown upside down by cloud computing, with software in some cases replacing networking equipment.

Cohn and others make the argument there are plenty of good things that can happen. The investor I talked with opines that revenue growth can be better than the published estimate this year, perhaps as high as 10%, as Juniper rides a rising tide of telco spending on routing.

In fact, Juniper's own technology for cloud computing, called "QFabric," is catching on with some very large customers, including UBS, the investor says.

What's more, the company's $900 million in annual revenue from security products is in a hot area.

FireEye (FEYE), the security tech firm that came public last September, fetches almost 12 times projected revenue despite being expected to lose money for years to come.

"A separation of security makes sense," says Cohn. "We have received a number of inbound calls from strategic and financial buyers who would be interested in talking to Juniper about the asset."

Then, too, value investors are calling, Cohn says, suggesting that the stock buybacks and the dividend may be able to attract a new crowd beyond just the growth and momentum folks.

It remains to be seen if real change can happen at Juniper, a former darling that now gropes for relevance. Certainly, as Cohn notes, the valuation makes it an intriguing bet.

>>> The 2 Charts That Have BofA Worried About A "Greater Correction" In Stoc


The 2 Charts That Have BofA Worried About A "Greater Correction" In Stocks

While the S&P500 rebounded sharply on Friday, BofAML's Macneil Curry warns evidence continues to say that this is a very late stage advance from which a greater correction is forthcoming. The recent deterioration in breadth (52wk highs failing to keep track with price), the negative seasonal period and divergences between the broader indexes say that risk/reward is skewing to the downside. Bottom Line: "The S&P 500 is vulnerable."

 

Via BofAML's Macneil Curry,
The S&P500 is vulnerable
While the trend in the S&P500 is still higher, with potential for a near term push towards 2000; this is a very late stage advance from which we look for a medium term correction. 1944 (the June-26 low) is key. Below here confirms a top and turn...

 

The 2 charts he is most concerned about...
Breadth...

 

The bearish divergence for new 52-week highs from last May points to fewer and fewer new 52-week highs as the S&P 500 has continued to rally to new all-time highs. This suggests weaker internals.
The divergence in new 52-week highs from last May is a sign of a maturing rally from late 2012.

 

and Seasonals... 

With President Obama in his second
term, 2014 is an incumbent mid-term.2014 is following the incumbent midterm year YTD through June. The pattern calls for a June/July peak ahead of a pullback into September. This has the potential to support large and mega caps relative to small caps.

 

Going back to 1928, July is the strongest month of the year with an average return of 1.52% and is up 57% of the time.
However, June was up 1.9% and July returns tend to fizzle, not sizzle, after an up June. When the month of June is up, July is up only 51% of the time and has an average return of 0.48%. This is well below average for July and a below the average monthly return for all months of 0.59%.

FT : Takeover deals highlight bets on equities outperforming bonds

Takeover deals highlight bets on equities outperforming bonds

Hedge funds betting on the £32bn AbbVie bid for London-listed pharmaceutical company Shire, which wrapped up on Friday, tracked the US drugmaker’s private jet to and fro across the Atlantic to measure the progress of the talks.
American politicians are now paying close attention to transatlantic takeovers too, although their focus is on the tax revenues the US is losing as AbbVie becomes the largest company to shift its tax base from the US to Britain.

Investors should be focusing on how the deal is financed. AbbVie is borrowing £13.5bn from JPMorgan to help supply the cash it is offering, planning to repay the bridge loan later by issuing bonds.
In doing so, AbbVie is joining what is becoming the biggest corporate bet worldwide: that equities will outperform bonds.
Bond issuance has soared on both sides of the Atlantic as companies race to satisfy investor demand for a return above depressed government bond yields. In the eurozone corporate bonds yield an average of just 1.5 per cent, the lowest to date, according to the Barclays benchmark index, while in the US they are higher but not far above last year’s record lows.
If companies were investing this money in new factories and expanding output, this would be a sign they expect a bright future. Sadly, it is not the case. Compared to profits, investment remains depressed. In aggregate companies are borrowing money in order to buy shares, both their own and those of other companies.
The logic of this change in the capital structure is obvious for AbbVie. Its bridge finance costs it base rate plus zero to 0.5 per cent – a maximum of 1 per cent. If Shire cannot earn 1 per cent of the deal cost, it has no business being in business.
A broader justification applies for other companies: if profit as a percentage of the share price (the earnings yield, a measure of how much accrues to shareholders) is higher than the bond yield – and, crucially, expected to stay higher – it makes financial sense to issue bonds and buy shares. If a company does not do so itself, it can expect an acquirer to make the same calculation and launch a bid.
This equity-for-debt swap has been under way since 2010, with buybacks and debt issuance booming (although the near-perfect match between the two in the US since the late 1990s has broken down, with debt issuance soaring above buybacks in the past 18 months, BlackRock points out).
The economy may be miserable in the US, but takeovers are at boomtime levels. If this year’s trend continues, there will be $1.9tn of deals in the US in 2014, passing the $1.6tn peaks of 1999 and 2007. The world total would reach $3.9tn, trailing only 2006 and 2007, Dealogic data show.
Selling bonds looks like a no-brainer at these yields. Even central bankers, who were trying to encourage markets in the hope some of the gains would trickle into the real economy, have begun warning about froth in junk bonds and leveraged loans. For equity investors it should ring alarm bells too, as it is a modern version of the flawed “Fed model”. This approach, mentioned by the Federal Reserve in 1997, compares bond yields and the earnings yield, the inverse of the PE ratio.
The idea is that investors have a choice between bonds and shares, and the two yields measure what shareholders or bondholders can expect to make.
It is a good predictor of corporate financing. When shares were outrageously expensive in the dotcom bubble, finance directors naturally chose to sell them, racing to float, and financing deals by issuing equity. When the model showed bonds overpriced relative to equity in 2006 and 2007, companies sold debt to fund buybacks and takeovers.
Today it suggests debt is cheaper relative to equity even than during the credit bubble, so it should be no surprise to see buybacks and debt-funded acquisitions taking off.
Yet, the Fed model is deeply flawed. Theoretically, it makes no sense to compare fixed nominal bond yields to variable profits, which are broadly linked to inflation. Practically it has been a poor indicator, too. It worked from 1982 to the early 2000s, shortly after it was identified.
But investors who stuck with the modern version, comparing the forecast earnings yield to corporate bond yields, saw the strongest-ever buy signal in July 2008. After losing horribly in the crash, hardy souls still using the model received the strongest sell signal in five years in May 2009 – just as a raging bull market began.
Yet, if companies keep using the model to arbitrage bonds and equities, it matters. Companies have been the biggest buyers of US shares for years, supporting the market. If they gear up further to buy shares, they can levitate prices for a while, even as the long-term profit outlook is hurt by low investment. As in 2006-7, this is likely to prove temporary.

FT : Smiths’ chief still has ‘unfinished business’

Smiths’ chief still has ‘unfinished business’

The chief executive of Smiths Group has admitted he is frustrated by the FTSE 100 engineering conglomerate’s inability to sell non-core divisions, as part of his attempt to turnround the 163-year-old company.
Philip Bowman, who took up his role at the end of 2007 with what many analysts and investors believed was a mandate to break up the group, said he still regards Smiths as “unfinished business” and has no imminent plans to leave.

“When I came in it was about improving performance, it was about focusing the portfolio and the portfolio bit has been elusive,” he said in an interview with the Financial Times. “Did I expect to still be here when I came in? I think the answer would have to be no, I didn’t.”
Mr Bowman, who has a record of selling companies including Allied Domecq and Scottish Power, has faced two significant hurdles in his plan to simplify the group: a big UK pension deficit and asbestos liabilities. Estimates suggest Smiths’ pension fund could cost around £1bn on a buyout basis.
“There is certainly a degree of frustration that I haven’t been able to do those things but you have to at the end say there are external factors and you have to watch those and operate within those constraints,” he said.
Smiths, which on Monday celebrates a centenary on the UK stock exchange, started life as a watchmaker in 1851 but now makes industrial seals, medical devices and security detectors. It is one of Britain’s last remaining engineering conglomerates.
Its share price has lagged behind the FTSE 350 Industrial Engineering over the past five years, up about 70 per cent compared to 300 per cent, prompting regular calls for a break-up of what many view as a disparate portfolio of businesses.
But Mr Bowman said this siren call from analysts ignores the problem the group faces. “If you are in a corporate structure where you have those sort of drains on your cash flow and liabilities, you are not going to be able to resolve them by shrinking,” he said. “You need to grow the core before you actually try and sell anything off.”
The group’s struggling medical devices business is viewed as one of the most likely divisions to be offloaded. Flex-Tek, which produces heating elements and ducting for housing, is another likely candidate.
Smiths has already received two approaches in the past three years for the medical unit – the latest was last July by US group CareFusion – but both have come to nothing. However, Mr Bowman insisted the group would have sold if the price had been right.
Smiths in the meantime is focusing on improving performance by growing its share of commercial business – diversifying away from falling western government spending in divisions such as security detection and medical – and increasing its exposure to emerging markets.
“Much of what Smiths are doing already makes sense but there’s a sense of frustration that these actions fail to manifest in the underlying performance and we suspect many observers would hope for more radical action,” said Matthew Spurr, analyst at Espírito Santo.