Barron's : Interpublic's Michael Roth

Interpublic's Michael Roth

Michael Roth steered Interpublic Group out of near collapse. Now he faces another challenge: A possible takeover bid from Omnicom or Publicis.

Michael Roth is not your standard-issue Mad Man, but when it comes to drama, he has seen his share. A tax lawyer by training, he joined the board of advertising powerhouse Interpublic Group of Cos. in 2002, just in time to learn that some of the company's farflung agencies had been cooking their books. When he took the full reins in 2005, he was the third chief in four years. Soon after, Interpublic restated five years of financials, and big clients, like Bank of America and parts of General Motors, walked out the door.

"He saved IPG from chaos," says Joseph Califano, former secretary of the Department of Health, Education, and Welfare, who has known Roth for more than a decade.

Roth wasted no time in shaking up the company, changing the chiefs of all of its operating companies and unloading 51 businesses, including stakes in agencies in Uzbekistan and Kazakhstan. "I look at advertising from a pure business perspective, as opposed to a cultural, inbred view of an industry," he told Barron's in an interview at his light-filled office near Times Square.

Today Interpublic (ticker: IPG) is the world's fourth-largest advertising holding company, overseeing 95 agencies, including McCann Worldgroup, Lowe & Partners, FCB, and Weber Shandwick, with billings of $36 billion last year. Among its largest clients are Unilever, Johnson & Johnson, and Coca-Cola.

"We are the poster child for Sarbanes-Oxley," says Roth proudly of the act that mandated stronger reporting oversight. The new transparency reassured clients, and the company started winning new business from the likes of Kmart, Verizon Communications, and Nestlé. Creatively speaking, IPG agencies won more Cannes Grand Prix awards than any other holding company in 2013, after a lengthy absence from meaningful prizes.

"The stereotype of the flaky creative hustler is the opposite of what he represents," says Kathy Wylde, president of Partnership for New York City, on whose board Roth serves. "He's a listener, rather than a talker."

The drama continues, however. Many, including Barron's, have speculated that Interpublic could be a takeover candidate. Following the collapse last month of the $35 billion proposed merger between Omnicom Group (OMC) and Publicis Groupe (PUB.France), the No. 2 and No. 3 firms worldwide, Interpublic could now be in the sights of its big competitors ("How to Play M&A," May 26). Barron's Roundtable member Mario Gabelli, who is a big fan of Roth and Interpublic, makes the same conjecture in this week's cover story.

For his part, Roth says he sees no reason for a deal: "We're the strongest we've ever been. We do not have gaps in our offering, either geographically or by marketing discipline."

Interpublic has a market value of $8.3 billion. Its rivals are substantially larger, with Publicis at $18.2 billion; Omnicom, at $18.4 billion; and WPP (WPP.UK), $29.1 billion.

ROTH AND A SISTER grew up in Brooklyn with a lawyer father and a bookkeeper mom. The apple fell close to both trees. "I grew up wanting to be a tax lawyer," says Roth, who still carries a touch of Brooklyn in his voice. He became a certified public accountant, received a juris doctor law degree and a masters of law degree from Boston University Law School and New York University Law School, respectively.

Even as a newly minted grad, the tax lawyer stood out, and not because of his youth and prematurely gray hair. Roth discovered a tax benefit for clients making acquisitions. Plus, he says, "I could explain it in English."

Coopers & Lybrand made Roth a partner at age 30, and he formed close relationships with clients. One of these was the conglomerate American Can, which made Roth a lucrative offer to join as chief financial officer. "I moved from being a tax guy to a financial businessperson," he says. His father didn't understand why he'd want to leave the accounting firm. "Why are you doing this?" Roth recalls him asking.

American Can was transforming itself into a financial-service company under legendary investor and deal maker Gerry Tsai, and was later renamed Primerica. But Roth left when the company was sold to Sanford Weill's Commercial Credit in 1988. "I wanted to invest with Sandy, but I didn't necessarily want to work for him," Roth says, referring diplomatically to Weill's often difficult temperament.

Roth made enough money from Primerica's stock to take his time finding a new job. One afternoon in 1989, his golf game was interrupted by a phone call from a friend of a friend of Jim Farley, the CEO of life insurer Mutual of New York, who was looking to bring in a successor. "My response was, 'I know nothing about insurance,' " he recalls. He took the job just in time for the savings-and-loan crisis. Roth "demutualized" Mutual of New York—converting it from being owned by policy owners to being publicly owned. The 1998 deal valued the company at $1 billion.

Four years later, he sold the company to AXA for $1.5 billion.

The same year, 2004, Interpublic's board asked Roth to become co-CEO, along with ad executive David Bell. "I told them I didn't know anything about advertising," he says. Both he and the board quickly realized that having two CEOs was confusing. "Nobody knew who was doing what," he recalls. Six months later, the board decided it was Roth who had the skills to right the ship, and Bell left the company. John Dooner Jr., the prior chief executive, returned to run McCann Worldgroup, its largest agency.

Interpublic created the first agency holding company in 1961, at the dawn of the Mad Men era, when McCann Erickson split itself up into a group of boutique firms under a single umbrella. But over the years, rivals have leapt ahead, as the industry consolidated. WPP's $17.2 billion in 2013 revenue and Omnicom Group's $14.6 billion dwarf Interpublic's $7.2 billion. Most painfully for Roth, the company's operating profit margins, at 9.3%, trail competitors', and have fallen short of promised improvement, due to client losses and weakness in Europe. WPP has 15% operating margins; Omnicom, 13%. Roth insists that IPG will attain 10.3% margins this year, helped by a restructuring last year that reduced annual operating costs by $40 million.

This year, analysts expect the company to earn $423 million, or $1 a share, rising to $1.20 next year. Earnings per share have been helped by stock buybacks. In the past two years, the company has reduced its total of shares outstanding by 20%. The stock hit an all-time high of $19.77 last week, in part because investors believe that a buyer will emerge.

But even without a deal, John Rogers, CEO of Ariel Investments, sees upside in the shares. If IPG gains another percentage point in its operating margins, which he believes it can do this year, the stock would be fairly valued at $23 or $24, says Rogers. Ariel owns about eight million Interpublic shares, or about 2% of the firm. "He doesn't duck the issues," Rogers says of Roth. "He is very clear about getting the numbers where they need to be."

WITH INTERPUBLIC'S FINANCES IN better shape, Roth can spend more time focusing on the future, as monumental change sweeps the industry. A good parallel of what's happening in advertising sits on Roth's wrist: He collects fancy watches, but rather than sporting a Patek Philippe that simply tells time, he prefers the personalized information from his Pebble smartwatch, which sells for around $250 and from his $150 Nike FuelBand—Nike is a client—which monitors physical activity. Similarly, advertising messages are now more often than not digital and becoming increasingly personal, immediate, and mobile—and will continue in that direction, says Roth, a big fan of wearable technology and gadgets in general.

A glance at his Pebble alerts him that a phone call that he's been waiting for has just come in, as well as an industry news alert from Crain's. "I just glance. I don't want to be rude," he says. And his FuelBand tells him he has burned only 165 calories, taking 1,900 steps so far that morning. To meet his goal, he'll need to hit 5,000 by the end of the day.

IPG has a media lab—a combination think tank and proving ground for futuristic advertising solutions—located a few blocks away from its headquarters. Roth is a regular visitor and keeps tabs on the latest advances and tests. On a wall of flat screens, a visitor might be sizing up an ad while the screen, equipped with a camera and a processor, sizes up the people watching it—their number and gender—and extrapolates which ad to deliver next. Roth talks about the future of content with consumers instantly having what they want, where and when they want it. This means that the ads, using market-driven intelligence, must come together ideally in real time as audiences form.

Cadillac, for example, might know that single professional women in their 40s are likely buyers of an ATS or CTS. So as soon as a woman matching that profile types a query about a car into a search engine, IPG has prearranged and programmed an ad to display for her.

Roth estimates that such programmatic ad buying amounts to less than 10% of the $36 billion of media that his clients are buying now, but it is the future. He is committed to automating half of the company's media purchasing by the end of 2015. To accomplish this, Interpublic has formed partnerships with Facebook (FB) and Google (GOOG), which collect market-intelligence data on millions of consumers.

"A good part of it will be mobile," he says, taking a second glance at his smartwatch. Global mobile-ad sales will jump 75% in 2014, to $31.45 billion, after growing 105% last year, according to eMarketer, a market-research firm. Inevitably, says Roth, that means a consumer walking into Target will receive a text, saying, "You're out of detergent, James. Here's a coupon for Unilever's Surf."

Some clients, however, go directly to Google and Facebook to create and place ads, bypassing traditional agencies altogether, so big ad companies like Interpublic are under pressure to deliver more value to customers.

One solution: Instead of separate agencies within the firm pitching, say, TV, print, online, and mobile to a big client like Microsoft, Interpublic created integrated campaigns using a broad spectrum of its agencies, including McCann, Erwin Penland, the Martin Agency, MRM, and Craft, among others. "Open architecture means our clients are entitled to the best we have, notwithstanding what agency it's with," he says.

How much of that integrated business is Interpublic getting? "Not enough," the boss quips. A good response for a non-ad guy.

Barron's : Goodyear: Time to Pump Up Your Holdings

-->Shares of the rubber giant could gain more than 50%, to $40, within two years as more cars need a tire change as they near 40,000 miles.

Goodyear: Time to Pump Up Your Holdings
Top hedge-fund managers like David Tepper and Richard McGuire have a lot riding on the U.S. tire maker.

No matter how many blimps it flies at prestigious sporting events, Goodyear Tire & Rubber will never be a glamorous company. Undisguised by a flashy acronym, its name says exactly what the company's prosaic product line is. Its headquarters remain in Akron, Ohio, the one-time global rubber center that has seen much of the tire industry move away.

Yet appearances could be deceiving.

Goodyear (ticker: GT) is one of the largest stock holdings of celebrated hedge-fund manager David Tepper's high-performing Appaloosa fund, with a 4.5% position. And just last month, Marcato Capital Management bought a 4.25% stake of 10.5 million shares. Richard "Mick" McGuire, Marcato's founder, shared with Barron's his thesis for his substantial commitment of about $270 million for a fund with under $3 billion in assets. He's looking for a better than 50% jump in the stock over the next two years, from about $26 to over $40, based on earnings growth for the next three years that Goodyear projects at 10% to 15%, compounded annually, on sales increases of 2% to 3% per year.

For one thing, auto production is snapping back in Goodyear's two biggest markets: North America, which accounts for 42% of company revenue, and Europe, the Middle East, and Africa, which chip in 38%. And, of course, tire-sale revenue will also be bolstered by expanding auto fleets in the developing world, particularly Asia, where Goodyear gets 11% of its revenue. Although growing less rapidly, Latin America kicks in 10% of revenue.

In 2009, North American light-truck and car volume bottomed out at about 10 million units; it's now tracking close to 16 million units on a seasonally adjusted annual rate. After six years of decline, European light-truck and car volume is expected to rise 3% to 14 million in 2014, according to Deutsche Bank. In China, sales should gain 10% to 23.8 million, says the bank.

Likewise, product mix figures to boost Goodyear's results, according to McGuire. The world's third-largest tire company—like No. 2 Bridgestone (5108.Japan) and No. 1 Michelin (ML.France)—is exploiting its technological edge to move away from commodity-type tires into so-called high-value-added tires. HVA tires, which cost consumers about $25 to $50 more apiece, use advanced materials and offer better performance. The higher prices translate into better margins. They now account for the preponderance of tires that auto makers put on new cars.

Of course, original-equipment makers drive hard bargains with tire companies that want to showcase their wares on new cars and trucks. But, says McGuire, the tire makers cash in on the sale of replacement HVA tires, where margins are fatter. Replacement sales account for about 70% of Goodyear's unit sales.

And the tire-replacement market figures to be strong over the next few years, claims McGuire. The replacement cycle heats up about three years after the purchase of a new car, when the vehicle has traveled roughly 30,000 to 40,000 miles. Motorists tend to stick with HVA products on that first tire change because the higher price is more than compensated for over nonbrand tires by superior mileage, less noise, and better grip on wet roads.

"And we see a big surge coming in replacement sales for Goodyear, due to the jump in U.S. new-auto sales since the Great Recession, along with a rise in annual miles driven," avers McGuire.

CHINA ALSO OFFERS VAST potential, particularly for replacement business, says McGuire. In the U.S. and Europe, the replacement market is three to four times the size of the original-equipment one. Because the car market is so much newer in China, the replacement market is about 1.3 times the new-car tire market. Any expansion would be great for Goodyear and its two main rivals, McGuire says.

Beyond the growing demand for replacement tires, Goodyear has other positives, says McGuire. In restructuring over the past five years, it not only improved its product mix, but also renegotiated labor contracts and closed unproductive facilities, like one in Amiens, France.

Goodyear CFO Laura Thompson, in a May 29 conference call with analysts, said the company could make its 10%-to-15% earnings-growth objective in each of the next three years by selling three million to five million more tires a year and continuing its cost-cutting.

Another positive for Goodyear was prefunding some $1.15 billion of its unfunded pension-fund obligations this year, drawing mostly from working-capital reserves. Its unfunded pension liabilities—$3.5 billion two years ago—are a more manageable $700 million. The reduction will be accretive to earnings.

Lastly, the stock is dirt cheap, based on the tire maker's expected earnings power over the next three years. McGuire estimates that 2016 earnings before interest, taxes, depreciation, amortization, and pension (Ebitdap) contributions will clock in at $2.69 billion. Ebitdap is certainly a mouthful, but at six times the company's total enterprise value (which captures net debt, stock-market capitalization, minority interests in its European operation, projected free-cash flow for most of 2014 and all of 2015, and unfunded pensions) would imply a share price of $38.50. At a still-reasonable 6.5 times enterprise value, Goodyear's Ebitdap would mean $43.25 a share.

McGuire is similarly looking for Goodyear's 2016 GAAP earnings before special charges to be about $4.12 a share. Using Goodyear's historic average price/earnings ratio of 10, that would produce a stock price of $40 or more by his reckoning. And the company recently initiated a quarterly dividend of five cents a share.

Clearly, Goodyear shares are underinflated. Low tire pressure can be a hazard to drivers. But, in this case, it offers investors the prospect of a smooth ride.

Barron's : Buy Swatch, Not Apple

Buy Swatch, Not Apple

The best way to play the launch of Apple’s “smart watch,” expected in October, might not be to buy the tech behemoth’s shares. Analysts at Credit Suisse think the stock of Swatch Group (ticker: UHR.Switzerland), the world’s largest watchmaker, has been unfairly punished by the perceived disruption of Apple’s iWatch. These concerns are overblown, they say, and Swatch shares look cheap. Its drubbing of late, down 10% this year, could provide “an attractive entry point” for investors.

In Credit Suisse’s 8th watch survey, analysts checked-in with 20 luxury watch retailers and distributors in the U.S., Europe, and Asia to take the pulse of the Swiss watch industry. Over the past five years, Credit Suisse claims the survey was a “reliable leading indicator” for predicting the direction of watch sales. The key finding was that 18 of the 20 watch dealers were optimistic or very optimistic about global demand in the next six months.


Twelve of the twenty respondents think brands retailing between $1,000 and $5,000 would outperform in the second half. Until now, Swiss watch companies have been universally hurt by the strength of the Swiss Franc and the slowdown in China and peripheral countries, which accounts for 26% of overall exports. But Swatch’s mid-priced brands like Tissot, Longines and flagship Omega are likely to benefit from the improving picture in Asia. The analysts think average growth in exports, for all Swiss watch companies, are expected to end up 4% for the second half of the year.

Credit Suisse notes positive manufacturing data and business sentiment suggests China’s economy is bottoming out, while the Swiss franc’s strength and subsequent earnings downgrades are already priced into the company’s shares. Swatch is “one of the cheapest luxury stocks” Credit Suisse covers, the analysts write, with a forward P/E of 15.2 versus the sector average of 17.2 and competitor Compagnie Financiere Richemont (CFR.Switzerland) at 17.7. The analysts see 25% upside.

As for the expected launch of Apple’s iWatch, and a similar watch from Google, investors might be overstating the impact on the Swiss watch industry, which is dominated by high-end mechanical watchmakers. So far Swiss execs have largely dismissed any impact to their bottom line. “People buy [Swiss] watches not because of features but because of emotions,” Swatch CEO Nick Hayek said at its year-end conference. Hayek, echoing his peers, believes smart watches will be most appealing to millennial Apple or Google brand devotees, purchased for functionality with other products which is precisely the same audience of the Swatch brand. The low-to-mid price brands Swatch and Tissot make-up 20% of watch revenue, “a manageable risk,” Credit Suisse says. Meanwhile, silver-haired baby boomers buy premium priced Swiss watches for the craftsmanship, history and pleasing aesthetics.

Swatch’s exposure might also be overstated for other reasons. Credit Suisse points out that the Swiss watch industry accounts for 2.5% of watches produced globally but it is the biggest exporter in terms of value, proof of the Swiss’ pricing power. Analysts suggest that the other 97.5% of the low-priced watch business, particularly in China, “should be more at risk.” So the impact to Swatch, with is its diversified portfolio of premium priced brands like haute horlogerie Breguet and Harry Winston generally exceeding $10,000, and mid-range ballasts like Omega, should be relatively free of the expected volatility.

Also note this: Only seven out of twenty of the responding luxury watch retailers saw a potential negative impact for the Swiss watch industry; five thought it would have no impact at all; and, interestingly, eight believed it would be positive, serving as an entrée for young consumers, building interest in watches more broadly.

Plus, it’s unclear if there is any incremental benefit of having a smart watch and a smartphone. On this the jury is still out. The Samsung Galaxy Gear and Sony SmartWatch, both priced around $170 and $200, have received mixed reviews. A CNET review gave the Samsung Galaxy Gear 2 ½ stars, the bottom line concluding, “the smart watch has some potential, and it does get some things right, but its inability to perform truly ‘smart’ functions means it falls far short of expectations.” Some boutique smart watch makers – such as Pebble Smartwatch and I’m Watch – have garnered better critical marks.

In an effort to hedge their bets at bit, Credit Suisse points to Swatch’s sizable cash, which is 12% of its market capitalization, and “leading R&D” platform. So if the smart watch turned into a consumer rage, Swatch would eventually be “well-placed to join the category.”

It’s also important to recognize that Swatch has experience grappling with disruptive technological change, most notable the Quartz Crisis of the 1970s, when two-thirds of Swiss watchmakers closed shop. Swatch was formed out of the carcasses of the dead, and in 1983, turned the clock back on Japanese makers Seiko and Citizen with their cheap and colorful timepieces.

Credit Suisse is probably right about the short term impact of smart watches on Swatch’s stock, but we suspect the Swiss are still being willfully blind about the future of watchmaking. For more, check out our story on Devon, an upstart American watch company quietly rattling the Swiss with its smart watch and hybrid digital-mechanical concepts.

FT : Financial markets: Hurrah before the storm

Financial markets: Hurrah before the storm

Low volatility risks lulling investors into false sense of security
NEW YORK, UNITED STATES: Traders cheer on the floor of the New York Stock Exchange 18 March, 1999, as the Dow Jones industrial average hit the 10,000 point mark at the closing bell. When the final transactions were tallied up after the closing bell the market finished at a record 9,997.62, up 118.21 points for the day. The market hit the 10,000 level twice during the day before dropping back. AFP PHOTO/Stan HONDA (Photo credit should read STAN HONDA/AFP/Getty Images)©AFP
After Lehman Brothers collapsed in late 2008, financial markets around the world panicked. Almost six years later, the world may feel as vulnerable to geopolitical and economic shocks but serenity has broken out.
World stock prices have surged to historic highs, with the FTSE All-World and S&P 500 setting records this week. Yet volatility appears to have disappeared. By one measure, the Vix index – known as the “Wall Street fear gauge” – is near seven-year lows.

Life would appear blissful for investors, with markets high and calm, and the upsets of the post-2007 crises over. Geopolitical shocks, such as the tensions over Ukraine, have only briefly interrupted the upward march, although volatility gauges have risen on the latest violence in Iraq.
But like sailors sensing a lull before the next storm, some industry veterans warn of possible trouble ahead in global markets. “One of the lessons that we should have learnt is that long periods of low volatility are good in real time, but breed something more pernicious – and nobody knows when they will blow up,” warns George Magnus, senior economic adviser to UBS.
Central banks led by the US Federal Reserve have averted catastrophe and are attempting to stimulate moribund economies. But Mohamed El-Erian, former chief executive of Pimco, cautions that the artificial calm risks leading to “excessive risk-taking, over-leveraging, resource misallocation, and crowded trades that end up having surprisingly limited liquidity when conditions turn”.
The lessons of economic history appear ominous: the 2007 crisis, which started in the US subprime mortgage market and led to Lehman’s collapse, was preceded by a slump in volatility. So too was the 1997 Asian financial crisis. Data reconstructed by Société Générale suggest the 1929 Wall Street crash followed similar calm.
So is low volatility creating a false sense of security, while emergency actions by central banks have hidden inherent instabilities which might again cause trouble ahead?
Low volatility has spread globally. Falls in the Vix index have been mirrored in gauges of European and Asian share price fluctuations. A similar index for global currency has fallen to the lowest since records began in 2001. Oil volatility was the lowest since 2007 – at least until the conflict in Iraq sent oil prices higher. Bond market movements have also become less intense – whether for US Treasuries or those issued by crisis-hit eurozone governments.
“Low volatility is the most important topic in markets right now,” says Salman Ahmed, global bond strategist at Lombard Odier Investment Managers. The problem is nobody agrees just how much investors and policy makers should worry. “On the one side you have those who think this is the ‘new normal’, on the other are people like me who think it cannot last. This is a very divisive subject.”
Too much volatility is clearly bad. When the Vix index hit a record high in November 2008, investors were forced out. Fund managers could not afford the losses being notched up daily. Some volatility is needed to make markets work and deter excessive risk taking.
Maybe the central bankers can keep control, but if people stop believing in them, all hell will break loose
But current low levels of volatility are not necessarily a bad sign. “Investors may be complacent, but there is much for them to be complacent about,” says Stephanie Flanders, strategist at JPMorgan Asset Management. “Low volatility is a reflection of less volatile real economies. For that reason it can be a good thing, but if extremely low volatility is sustained for a significant period, it would make you worry about all the artificial central bank support for markets.”
Even though the Vix index has fallen, fears have not waned. The index, calculated by the Chicago Board Options Exchange, is based on options which give investors the right to buy or sell an asset at a fixed price at a fixed time in the future. If economies are on sluggish growth paths, there is less risk of price-changing news, and the Vix falls. “Vix is not a fear indicator at all. It is more an ‘information flow’ measure,” says Ramin Nakisa, volatility expert at UBS. “When Ronald Reagan got into the White House, the market melted up. But it wasn’t fear, it was joy.”
What is more, market volatility has fallen as a result of regulators’ efforts to make the financial system safer, making it harder to make comparisons with previous periods of calm. Reforms since the financial crisis have increased the cost to banks of providing dealing services and reduced trading on their own books. In currency markets, regulatory probes into the alleged manipulation of benchmarks have almost certainly also hit trading volumes.
There are other important differences with the past, argues Marc Chandler, strategist at Brown Brothers Harriman. “While efforts to deter another one may contribute to a decline in volatility, the excesses that are associated with the financial crisis, such as extreme leveraging and opaque off-balance sheet exposures do not appear present now.”
What worries others, however, is that markets have become dangerously distorted. Large-scale asset purchase “quantitative easing” programmes by central banks sought to stimulate economic growth by driving investors into riskier assets. Since early 2009, the S&P 500 has risen by 190 per cent, and the FTSE All-World index is up 150 per cent.

Just because money managers have a much harder time making profits by trading does not mean economies suffer. But markets are not functioning normally, warns Sir Michael Hintze, founder of CQS, one of Europe’s largest hedge funds. “The problem is that we’re not there [in a low volatility environment] because markets have decided this, but because central banks have told us . . . There is no room for dissenting voices. My fear is that when everyone is in the same place is when a change in sentiment causes the maximum disruption.”
Sir Michael adds: “The beauty of capital markets is that they are voting systems, people vote every day with their wallets. Now voting is finished. We’re being told what to do by central bankers – and you lose money if you don’t follow their lead.”
One sign that markets are out-of-kilter is the conflicting stories of equity and bond markets. Soaring stock prices point to stronger economic growth. But yields on US Treasuries, which move inversely to prices, have fallen this year, normally a signal of expectations of lower growth and inflation. At the same time, overall low levels of market volatility seem at odds with evident geopolitical risks – whether in the East China Sea, over Ukraine or the Middle East.
“Elevated stock levels, elevated bonds and low volatility that ostensibly conveys confidence – that trinity is fundamentally flawed. Something will give. The issue is what and when,” says Mr Magnus. “Central banks are trying to stop bad things happening in markets. By doing so, they are encouraging people to stay in when perhaps they should not.”
The prevailing calm may soon be tested – and not just by events in Iraq. Divergences in central bank policies may start to create volatility. The European Central Bank last week announced further cuts in interest rates and fresh injections of liquidity into the eurozone financial system. The Bank of Japan also remains on the offensive: Credit Suisse calculates that if it keeps buying at the current pace, it will hold nearly 40 per cent of outstanding five- to 10-year Japanese government bonds by next March.
Now central banks have created this calm environment, they are worrying about it being a sign of complacency
- Stephanie Flanders, JPMorgan Asset Management
In contrast, the UK’s fast-recovering economy led Mark Carney, Bank of England governor, to warn on Thursday that an increase in interest rates “could happen sooner than markets currently expect”. The US Federal Reserve is also “exiting” from crisis-era policy measures by gradually “tapering,” or scaling back, its monthly asset purchases.
“Now central banks have created this calm environment, they are worrying about it being a sign of complacency,” says Ms Flanders. “They want to put more volatility back into the market, so they are not one-way bets, but can’t work out how to do it without putting the recovery at risk.”
Early last year, market volatility resurfaced temporarily when the Fed first hinted at plans to “taper” quantitative easing. Yet even if the Vix and other measures of market volatility rise in the coming weeks and months, global stock and bond market rallies may not be blown off course.
“Many people sold in 2008 and have since sat on cash, which has been very expensive,” says Greg Davies, head of behavioural finance at Barclays Wealth and Investment Management. “An asteroid hitting earth or an alien invasion would be difficult for investors to ride through, but putting such ultra catastrophes aside, when volatility increases . . . the best thing to do is to sit tight.”
Investors are rarely completely rational, however. “Unfortunately, most people’s response is to try to do something about it, thinking, against the evidence, that they can out predict the market,” warns Mr Davies.
A lot also hangs on the world’s monetary policy makers. “The central bankers very much believe they can control the exit,” says Sir Michael at CQS. “But remember, their balance sheets have never been as large. They also believe that their pronouncements will be listened to forever . . . Maybe they can keep control, but if people stop believing in them, all hell will break loose.” Serenity could become a much scarcer asset.

(BFW) *CGG SAYS IT’S NOT AWARE OF ANY POTENTIAL TAKEOVER BID

BFW 06/13 20:31 *CGG SAYS IT’S NOT AWARE OF ANY POTENTIAL TAKEOVER BID
 BN 06/13 20:30 *CGG: CGG NOT AWARE OF ANY POTENTIAL TAKEOVER BID       :CGG FP
 BN 06/13 20:30 *CGG: CGG NOT AWARE OF ANY POTENTIAL TAKEOVER BID
CGG: CGG not aware of any potential takeover bid
2014-06-13 20:30:39.846 GMT

               CGG: CGG not aware of any potential takeover bid

Paris, France - 13 June, 2014

Following the significant volumes of CGG shares which have been traded today,
the CGG Group states that it is not aware of any potential takeover bid that
would be initiated by a third party.

About CGG

CGG (www.cgg.com) is a fully integrated Geoscience company providing leading
geological, geophysical and reservoir capabilities to its broad base of
customers primarily from the global oil and gas industry. Through its three
complementary business divisions of Equipment, Acquisition and Geology,
Geophysics & Reservoir (GGR), CGG brings value across all aspects of natural
resource exploration and exploitation.
CGG employs over 9,500 people around the world, all with a Passion for
Geoscience and working together to deliver the best solutions to its
customers.
CGG is listed on the Euronext Paris SA (ISIN: 0000120164) and the New York
Stock Exchange (in the form of American Depositary Shares. NYSE: CGG).

Communications Contact
Christophe Barnini
Tel: +33 1 64 47 38 11
E-Mail: invrelparis@cgg.com
  
Investors Relations Contact
Catherine Leveau
Tel: +33 1 64 47 34 89
E-Mail: invrelparis@cgg.com

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>>> Weekly Market Update: Iraq Upsets Global Markets

Weekly Market Update: Iraq Upsets Global Markets

- Global equity markets retreated from recent highs this week as a risk-off tone of consolidation dictated sentiment. On Tuesday, the World Bank cut its 2014 global growth forecast from 3.2% to 2.8%, citing weaker performance in the BRIC nations, and cut US 2014 GDP outlook to 2.1% from 2.8%. That same day, Iraq displaced Ukraine as the world's number one geopolitical flashpoint as an Islamist militia deeply involved in the Syrian civil war struck a destabilizing blow against Iraq, seizing its second largest city and raising the prospect of a wider conflict in the Middle East. On a more minor note of political turmoil, House Majority Leader Eric Cantor was upset in a primary race against a no-name Tea Party candidate, promising more dysfunction in Washington, DC. No amount of positive economic news offset these developments: China's May numbers were largely flat or positive, and Japan's final Q1 GDP was excellent. The BoE chief Carney hinted at early tightening thanks to strong UK performance. For the week, the DJIA dropped 0.9%, the S&P500 declined 0.7% and the Nasdaq fell 0.3%.

- Events in Iraq stunned the world this week, as the militia Islamic State in Iraq and the Levant (ISIS), which has been fighting in the Syria conflict and in northern Iraq for years, rapidly advanced on and seized Mosul, Iraq's second largest city. Tens of thousands of Iraqi army soldiers dropped their weapons and fled without firing a shot, casting doubt on the morale and loyalty of the entire armed forces. After taking Mosul, ISIS advanced rapidly toward Bagdad, overrunning several more cities along the way. The Kurds in northern Iraq secured Kirkuk and its surrounding oil infrastructure after Iraqi army units abandoned the city. With the army failing to put up any resistance, Grand Ayatollah Sistani issued a fatwa calling on Shiites to join the armed forces en masse to fight ISIS, ratcheting up the prospect of an all-out sectarian war. President Obama said his national security team would prepare a range of options to assist Iraq, but would not consider sending ground troops. Obama's unhurried tone left little question that the Administration would prefer to see Iraq solve its own problems. WTI crude came into the week around $102.70 and surged to $106.70 by Friday.

- BoE Governor Carney began positioning the BoE to join the Fed in the policy exit club this week. Just as the World Cup was kicking off, Carney gave a speech in which he warned that rate hikes might come sooner than expected. Carney said the bank had no preset course for raising rates and clarified that the timing of hikes would be entirely data dependent. The UK has already seen a string of improving economic data and the BoE has been ahead of the curve on normalizing policy, but Carney's remarks still came as something of a surprise. Following the speech analysts suggested that expectations for the first rate hike have moved to late 2014 from the first quarter of 2015. The BoE June meeting is next week.

- Two big Fed doves made comments this week that could be seen as conceding the time was drawing near to start tightening policy. Bullard said the Fed was closer to achieving its policy objectives than it has been in most times since 1960 and observed that the economy is more normal than it has been for five years. The potential for GDP grow in excess of 3% in the final three quarters of the year would "adjust rate-liftoff timetable." He also warned that the last tightening cycle, in 2004-06, was too methodical and failed to respond to economic developments. Rosengren said he would be in favor of raising reverse repos and interest on excess reserves when the time came for tightening. Interestingly, he also said he would favor a seamless continuation of tapering to reduce the Fed's balance sheet. And while attention was focused elsewhere, one of Janet Yellen's favorite economic indicators blew out expectations. The April JOLTs job openings report was +4.5M v +4.0Me, providing more evidence that the labor market is truly healing. The pre-recession high was +4.7M in March 2007. The prior month's number was revised up to +4.2M from +4.0M.

- Airlines had a very turbulent week after the World Bank cut global growth forecasts, the Iraq situation sent oil higher and Lufthansa and Aer Lingus cut guidance. Lufthansa cuts its FY14 profit forecast to €1.0B from the €1.3-1.5B outlook offered at the beginning of May, warning that it had negative pricing in May due to stiff competition from low-cost carriers. Price weakness and overcapacity on North Atlantic routes impacted the airline's cash cow premium seats. Aer Lingus's problems stem from ongoing cabin crew strikes, which have impeded operations. Aer Lingus warned that profits would fall 10-20% y/y in 2014. At one point, shares of American Airlines were down as much as 14% on the week before recovering a bit. Delta dropped 7% on the week and United was down 12%, with domestic-focused carriers Southwest and JetBlue down 5% a piece.

- Tech had some brighter news thanks to Intel raising Q2 and FY14 guidance on higher PC unit volume, perhaps indicating an IT refresh is taking hold. Meanwhile, Tesla made the bold move of opening its electric motor patents to other firms in an effort to springboard wider adoption of its clean energy vehicle standards.

- Allergan rejected Valeant's latest offer and provided a comprehensive rebuttal of not just the logic behind Valeant's offer but also the company's entire business model. Valeant raised the cash component by $13.70 to $72 and left the stock component at 0.83 shares of Valeant stock. The revised offer valued the deal around $180/share or about $54B in total. Allergan responded with a scathing presentation that questioned the sustainability of Valeant's entire business model. According to Allergan, Valeant's unsustainable model relies on serial acquisitions and R&D cost reductions, as opposed to top-line revenue growth and operational excellence.

- In other deal news, Tyson Foods won the contest for Hillshire Brands with its $63/share cash offer, making a total deal valued at $8.55B, including Hillshire's outstanding debt. Pilgrim's Pride refrained from raising its $55/share offer over the weekend, and the company later said it was still on the hunt for a big processed food acquisition. Merck has a deal in hand to buy biotech name Idenix Pharmaceuticals for $24.50/share, in a total deal valued at $3.9 billion. The deal gives Merck a good position in the hepatitis C area, where Idenix has promising portfolio of drug candidates. CNBC reported that Merck paid a huge premium for the company, following a bidding war with Johnson & Johnson and AbbVie. Priceline agreed to buy dining reservation site OpenTable for $2.6 billion in cash. Priceline has been looking to extend its business beyond travel, and OpenTable has 15 million customers who book reservations across 31K restaurants a month.

- In FX trading, major pairs were in consolidation mode after last week's ECB rate cut and US May payrolls. The greenback tried to hold onto its slight gains with dealers noting that yield spread between two-year yields on USTs and German bunds were at their widest since 2007 at one point, EUR/USD saw strong resistance ahead of big option barriers at 1.3500 which could prove tough to break. The level corresponded to last week's post-ECB decision low. EUR/JPY closed out the week below its 200-day moving average around 138.70. The key level was tested in late May but sustained moves below the level on a closing basis have not held since just before Japan PM Abe's electoral victory in summer 2012. This time the break could be for real. GBP/USD was approaching the 1.70 handle following Carney hawkish message. With rate hikes coming even sooner, sterling should strengthen further. Note that the 1.7050 level has been a pivotal trading point over the past eight years.

- Japan put out final Q1 GDP figures that were stronger than expected. The capital investment component stood out with a 7.6% q/q rise, above the 4.9% prelim and 4.6% estimate, bringing the overall figure to 1.6% and 6.7% annualized. Later in the week, the BOJ policy statement maintained its economic assessment for the 11th consecutive meeting but raised its view on overseas economies. BOJ Governor Kuroda's press conference reflected the recent upbeat GDP and CPI data, noting the impact of the sales tax hike has been within expectations and forecasting a summer recovery following the Q2 contraction. The Nikkei225 ended the week flat after an early selloff.

- China released the bulk of its economic data for May to little fanfare despite the generally robust set of numbers. Retail sales growth hit a four-month high of 12.5%, new loans of CNY870B beat estimates by a large margin, M2 money supply reached a 5-month high, while the CPI recovered from multi-month lows amid a large increase in food prices. Markets also overlooked the surprising drop in imports component of the trade figures out early in the week, with the overall trade balance hitting a 5-year high of $35.9B. Much of the focus fell on the details of the 50bp RRR cut by the PBoC on Monday as part of a "targeted stimulus" aimed at reviving credit for smaller enterprises and the rural segment of the economy.

- Down under, Australia saw its first negative net employment change in four months with all of the losses coming in the part-time sector. In fact, total hours worked in May saw the biggest monthly increase in over a year, which largely made up for participation rate falling to an eight-year low of 64.6%. The New Zealand central bank raised its benchmark rates by another 25bps to 3.25%, and the accompanying statement was much more hawkish than expected. Governor Wheeler did not see the recent strength in NZD and dairy price declines as sufficiently detrimental, generally maintaining the bank's outlook for 90-day bill rates through 2016. Fixed income markets repriced the probability for a July decision in favor of another rate hike, while NZD/USD hit a 4-week high near the $0.87 handle.

>>> US Close Dow+0,25% S&P+0,30% Nasdaq+0,30%

Closing Market Summary: Stocks End Down Week on Higher Note

The major averages posted modest Friday gains, but the advance was not strong enough to pull the key indices back into the green for the week. The S&P 500 added 0.3%, narrowing its weekly loss to 0.7%, while the Nasdaq (+0.3%) ended the week lower by 0.3%.

The tech-heavy Nasdaq outperformed in the morning thanks to early strength among chipmakers and high-beta listings. The strength in microchip manufacturers resulted from upbeat sales and gross margin guidance issued by Intel (INTC 29.87, +1.91). The largest chipmaker soared 6.8%, while the 30-stock PHLX Semiconductor Index added 1.0%.

In addition, the index was also boosted by high-growth stocks after Priceline.com (PCLN 1189.30, -36.70) agreed to acquire OpenTable (OPEN 104.48, +34.05) for $103/share, representing a 46.2% premium. The news also stirred takeover speculation around the likes of GrubHub (GRUB 36.00, +2.35) and Yelp (YELP 74.92, +9.08). The two names surged 7.0% and 13.8%, respectively.

Accordingly, the technology sector (+0.7%) finished in a position of relative strength, but the largest S&P 500 group ceded its top spot to the energy space (+1.0%) during afternoon action. Meanwhile, other heavily-weighted sectors like consumer discretionary (unch), financials (unch), and health care (unch) could not keep up.

The energy sector was underpinned by top components Chevron (CVX 127.26, +1.15) and ExxonMobil (XOM 102.65, +0.99), while crude oil added 0.3% ($106.86/bbl). The sector was the only group that ended the week on a higher note (+1.7%) with the advance supported by a 4.1% gain in crude oil amid continued tensions in Iraq.

During the early afternoon, President Obama addressed the volatile situation in Iraq where a breakaway militant group of Al-Qaeda has taken control of parts of the country. Mr. Obama said that he will review his options over the coming days, but any potential U.S. action will have to be supported by the leaders of Iraq.

The sharp rise in oil prices over this week weighed on transport stocks, but the Dow Jones Transportation Average (+0.8%) bounced today after falling nearly 3.0% between Monday's close and today's opening bell. In turn, the strength underpinned the industrial sector (+0.4%).

Like the six cyclical sectors, countercyclical groups ended on a mixed note. Consumer staples (unch) and health care (unch) underperformed, while telecom services (+0.5%) and utilities (+0.7%) posted gains.

Treasuries registered slim losses with the 10-yr yield climbing one basis point to 2.60%.

Light participation continued plaguing the market with just over 560 million shares changing hands at the NYSE.

Economic data was limited to May PPI and the latest Michigan Consumer Sentiment survey:
  • The Producer Price Index for May declined 0.2%. That was lower than the consensus estimate, which called for an increase of 0.6%. The downturn in May was attributed to a 0.2% decline in the indexes for final demand services and final demand goods. Excluding food and energy, core PPI declined 0.1%, which was also lower than the 0.1% increase projected by the consensus estimate. Notably, there weren't any strong indications of pipeline pricing pressures. Within intermediate demand, prices for processed goods fell by 0.1%, the index for unprocessed goods was unchanged, and prices for services declined by 0.4%. 
  • The preliminary reading for the University of Michigan Consumer Sentiment report for June dipped to 81.2 from the final reading of 81.9 for May. The June figure was the lowest reading since March and it fell short of the consensus estimate, which was pegged at 82.9. The shortfall was not a major deviation, yet it still qualifies as a disappointment when taking into account that stock markets were generally behaving well and employment conditions were improving during the survey period. 
On Monday, the Empire Manufacturing survey for June (consensus 12.8) will be released at 8:30 ET, while April Net Long-Term TIC Flows will cross the wires at 9:00 ET. In addition, May Industrial Production (consensus 0.5%) and Capacity Utilization (consensus 78.9%) will be announced at 9:15 ET, while the NAHB Housing Market Index for June (consensus 46) will be reported at 10:00 ET.
  • S&P 500 +4.8% YTD 
  • Nasdaq Composite +3.2% YTD 
  • Dow Jones Industrial Average +1.2% YTD 
  • Russell 2000 -0.2% YTD 

WSJ : Pilgrim's Pride May Look to Buy Other Processed-Meat Brands

Pilgrim's Pride May Look to Buy Other Processed-Meat Brands
CEO Says Winning Deal Price for Hillshire 'Inconsistent' With Pilgrim's Approach

Pilgrim's Pride Corp. PPC -1.23% remains interested in acquisitions to expand its chicken-processing and prepared-foods businesses after losing a bidding war this week for Hillshire Brands Co. HSH -0.05% , Pilgrim's top executive said.

Pilgrim's, the second-largest U.S. chicken processor by sales, showed its willingness and ability to take on major deals in pursuing an acquisition of Hillshire, said Pilgrim's Chief Executive Bill Lovette.

The $63-per-share winning bid, offered by rival Tyson Foods Inc., TSN +0.54% was "inconsistent with our disciplined approach" to acquisitions, he said.

"We will continue to pursue more attractive options that add value to our shareholders and strengthen our strategic position in the market," Mr. Lovette said in an emailed statement to The Wall Street Journal.

Tyson, where Mr. Lovette worked for years, on Monday confirmed a $7.7 billion bid for Hillshire, the maker of Jimmy Dean sausages and Ball Park hot dogs.

Pilgrim's, a unit of Brazilian meatpacking giant JBS SA, JBSS3.BR -2.29% kicked off the bidding frenzy in late May by making an unsolicited $5.5 billion offer. It later increased its offer to $55 a share, valuing Hillshire at about $6.8 billion. Pilgrim's decided not to raise its bid on Sunday, when Hillshire set a deadline for proposals, while Tyson, the largest U.S. meat processor by sales, raised its offer, according to people familiar with the matter.

Hillshire hasn't formally rescinded its standing deal to acquire Pinnacle Foods Inc., PF +2.68% the maker of Wish-Bone salad dressing, Vlasic pickles and other grocery products. Hillshire privately notified Pinnacle this week that it doesn't plan to recommend the Pinnacle deal to its shareholders, according to people familiar with the matter.

Pilgrim's will instead look to expand its poultry operations by acquiring chicken operations in regions where it has little or no presence, and look at other processed-meat businesses, Mr. Lovette said Friday.

Tyson, Pilgrim's and other large U.S. meat processors are trying to expand sales of branded packaged foods because they carry higher profit margins than the fresh meat products that account for a large portion of their sales.

Mr. Lovette made no secret of his deal-making ambitions even before the approach to Hillshire last month. Pilgrim's net debt at the end of the first quarter fell to $155 million from $1.1 billion a year earlier. As of late May, Pilgrim's had paid down nearly all of its debt, executives said at that time, giving it more capacity to tap cheap credit markets.

Analysts in recent months have speculated that Pilgrim's, which has a market value of about $6.4 billion, could absorb a smaller chicken player. Sanderson Farms Inc., SAFM +1.02% based in Laurel, Miss. and valued at $2.2 billion, has been seen as one potential partner for Pilgrim's. A spokesman for Sanderson declined to comment.

Analysts also have viewed closely held chicken processors Perdue Farms Inc. and Fieldale Farms Corp. as other potential acquisition targets. A representative for Fieldale declined to comment, and officials for Perdue didn't immediately respond to a request for comment.

Bob Evans Farms Inc., BOBE +1.33% a restaurant and packaged-meats company, has been seen as another potential acquisition candidate for a larger meat processor. A Bob Evans spokesman didn't immediately respond to a request for comment.

Pilgrim's shares recently were down 0.8% at $24.50. The stock has gained 51% so far this year, versus a 4.8% increase in the S&P 500 stock index.

>>> Closing Commodities: Crude Rises 0.3%, But 4.1% On The Week

Closing Commodities: Crude Rises 0.3%, But 4.1% On The Week

- Aug gold chopped around near the break-even line today, trading in a tight range between $1272.20 per ounce and $1275.70 per ounce.
- Unable to gain traction, it settled unchanged at $1274.10 per ounce, booking a gain of 1.7% for the week.
- July silver lifted from its session low of $19.50 per ounce set moments after floor trade opened and trended higher to a session high of $19.67 per ounce. It settled 0.6% higher at $19.65 per ounce, bringing gains for the week to 3.4%.
- July crude oil brushed a session low of $106.37 per barrel in early morning action and rose to a session high of $107.22 per barrel in afternoon pit trade. It eventually settled 0.3% higher at $106.85 per barrel, booking a gain of 4.1% for the week.
- July natural gas spent most of today's floor session in the red. It dipped to a session low of $4.72 per MMBtu and eventually settled with a 0.4% loss at $4.74 per MMBtu, cutting gains for the week to 0.6%