Financial Market

In September 2007 Microsoft lost its appeal against a £343 million fine imposed by the European commission after a long running competition dispute. According to the European court Microsoft had abused it market position and froze out rivals in server software and products such as media player.

After the ruling Microsoft was ordered to ensure its products could operate with other computer systems by sharing information with rival software companies. It was also ordered to provide a version of its Windows operating system that would be available without Microsoft’s Media Player software.

In the latest development in the case the European Commission this week further fined the software giant for not adhering to the sanctions imposed by the original court ruling for its anti-competitive behaviour.

As part of the development Microsoft must now pay a record £680.9 million because of its failure to comply with the 2004 ruling. The fine for Microsoft comes on top the 2004 and 2006 fines of 280m and 497m euros that were issued respectively.

“Microsoft was the first company in 50 years of EU competition policy that the Commission has had to fine for failure to comply with an antitrust decision,” - Competition Commissioner Neelie Kroes

It was only last week that the Microsoft announced to open up some of its leading software, agreeing to publish several APIs for Vista and Office 2007 and provide free access to them, helping non-Microsoft developers interact with Microsoft products.

“Open access to this documentation will ensure that third-party developers can connect to Microsoft s high-volume products just as Microsoft s other products do” – Microsoft

In addition to this Microsoft will free up the protocols around its client and server software, amounting to 30,000 pages of documentation. With this announcement Microsoft has also pledged not to sue open-source non commercial versions of those protocols.

Microsoft isn’t however out of the woods just yet, and with two similar anti-trust cases recently launched against it regarding similar issues more fines could well be on there way.

The first of these cases examines whether Microsoft is abusing its dominance of the PC market to secure market share of the internet, the second will investigate Microsoft’s continued incompatibility with rival products.

Toady China has reported an ii year high inflation high increasing pressure on Beijing to increase interest rates.

After an unusually severe winter and freezing temperatures destroying crop yields, food prices have been pushed up 18.2% in January, leading to an overall inflation rise of 7.1%. The price of pork alone has risen 58.8% in the last twelve months.

Non-food inflation rose only slowly, hitting an annual rate of 1.5%, the figures showed.

In the last three weeks China has had one of the coldest winters on record, and coupled with expected price rises in the run up to the Lunar new year, inflation has risen to its highest level since September 1996, when it was at 7.4%.

The weather that has been experienced in China has also affected power supplies and transport networks.

“The CPI was mainly driven up by factors including the severe snow disaster that ravaged more than half of the country,” the official Xinhua news quoted Yao Jingyuan, the chief economist of the statistics bureau, as saying.

At the same time the country experiences record high inflation Beijing has also been taking steps to slow the growth of China economy which expanded at a 13 year high of 11.4% in January, also increasing prices.

Over the past thirteen months Beijing has raised interest rates six times and told reserve banks to put eleven times more money into reserves. Similar actions are also expected over the next year to control spiralling prices.

“This is not the peak. The peak will probably be in February because China suffered more in February from ice and snow storms,” Chen Xingdong, a senior economist at BNP Paribas in Beijing, said.

For communist China inflation is a particular concern, sparking fears of social unrest, and with the general consensus saying the worst is not over, Beijing is no doubt got radical plans up its sleeves.

Another key sign that the inflation problem is worsening was data released Monday showing China’s producer or wholesale prices were up 6.1% last month from a year earlier, the fastest increase in over three years.

“Energy costs, raw materials, mineral products are all shooting up. Labour costs are also increasing. These have to translate into inflation in one way or another,” said BNP Paribas’s Chen.

With costs of raw materials rising as well as food and energy prices, the countries vast export industries are also in danger of becoming more expensive to international markets. If this happens we could very well see China contributing more towards world inflation.

On the back of the Commodities outlook for 2008 article at the end of January Financial Market predicted “mergers in (base metal) industry related firms could be the trend of 2008 with rising costs, labour shortages and generation of cashflow fostering the perfect conditions for mergers.”

It seems this has been demonstrated two weeks into February with mining firm Rio Tinto being unveiled as a potential hostile takeover target for rival BHP Billiton.

With £3.8billion profit for 2007, a 1% growth on 2006 profits, Rio Tinto has certainly benefited from surging commodity prices, leaving it in a good potion to fend off the hostile bid.

With demand for raw metals such as copper and coal from nations such as China driving consolidation in the sector, Anglio-Australian giant Rio Tinto rejected a £78.8billion takeover offer from its rival.

With commodity prices remaining high and production reaching record levels Rio’s chairman Paul Skinner said BHP Billiton needed to raise its offer “considerably” before the firm would enter talks.

“For us to become persuaded by the arguments for the combination we would need to see an offer for our shareholders that offers higher value than we could achieve ourselves” - Paul Skinner

BHP Billion’s bid offered 3.4 shares for each Rio Tinto share, already an increase from the unofficial 3 to 1 offer in December 2007, however BHP Billiton has warned it will not sweeten its offer.

With the news this week that Virgin are the front runners in the bid to take over troubled bank Northern Rock, Financial Market looks at how the group will have to alter its tabled bid in order to cement any proposed deal.

The government has told the Virgin Group, spear headed by Richard Branson, that if it is to take over the Northern Rock the terms of its existing deal will have to be improved. The current terms are said to be more geared towards new investors than the long term standing of the mortgage specialist..

With the news that the Virgin consortiums terms are not to the liking of the government, the management-led bid to salvage the bank could still fall through. Nationalisation of the bank is still very much on the table without a better deal for taxpayers according to the treasury.

The government has stated that in return for its risk in helping the troubled bank out it wants increased exposure to any upside.

Northern Rock still owes the Bank of England £24 billion. If a successful take over offer is not made, an alternative course of action that has also been proposed involves the splitting of Northern Rocks debt into government guaranteed bonds and selling them off to investors.

Investors were further concerned when shares in Northern Rock fell as much as 8% upon news that the rescue packages tabled were not meeting government expectations, but this is a far cry from the disappointment of the zero return investors are expected to get should the bank be taken into public ownership.

Northern Rocks biggest single share holder SRM Global has also increased their stake in the company to 11.5%. As an opponent to the take over bid by Virgin, SRM would see Virgin take a majority shareholding in Northern Rock should the take over proposal be successful.

A sixteen year high, that’s the level of inflation the UK is currently experiencing for goods leaving UK factories according to January’s report released by the Office for National Statistics.

Annual output inflation reached 5.7% in January up from 5% in December, with the price of goods leaving factories up 1% and prices paid by factories for raw materials also continuing to rise, now up 18.7% over the past 12 months.

According to ONS data the surge recorded in January is due to the further increasing prices of crude oil which is up 70.3% on the year, and the spiralling costs of home grown food up 36% - a record high.

Core output inflation which strips out the effects of both rising fuel and food prices, has also risen faster than expected, up 0.8% this month and 3.2% on the year.

The report will certainly be of concern to the monetary policy committee at the Bank of England, and could prevent any further planned rate cuts being made in a bid to stave off UK recession.

“We had been expecting a further increase in output price inflation, but these figures are unequivocally awful,” said Philip Shaw, economist at Investec. “The scale of worsening of factory gate inflation highlights the MPC’s dilemma with monetary policy over the remainder of the year. It is having to grapple simultaneously with a slowing economy and a worsening inflation background.”

This news comes at a time when comparable housing market data also show continued slowdown throughout January, a sign that the once lucrative property market is beginning to loose momentum. House prices rose 9.1% in January down from 9.7% in December.

Amid growing recession concern the ONS also released figures showing Britain’s trade deficit gap in December was £7.574bn, higher than the predicted figure of £7.35bn.

On Thursday the Bank of England cut interest rates by a quarter of a percentage point to 5.25%, the second cut that the BoE has made in three months.

The monetary policy committee that votes on interest rate changes, voted to reduce the BoE’s interest rate in the face of the countries economic slowdown. The quarter point reduction was widely tipped following the decision of the FED to cut rates by three quarters of a percent in January in an attempt to stave of economic recession.

The quarter point cut did not however match that of the FED due to increasing food and fuel prices pushing inflation above the two percent target the BoE sets.

According to David Kern, “Global and domestic conditions have worsened since the MPC met last month.”

Since the last meeting of MPC members the situation had changed to a point where a rate cut was now urgently needed, and a further cut to five percent may be planned as part of a two tier rate reduction. A half point cut in one meeting may well have looked like a panic move.

With the rate reduction made yesterday cost for consumers and businesses who rely on credit will be cut, boosting confidence and act as a catalyst for economic growth. At the same time however the cut will hit savers.

Following the quarter point rate cut the BoE rejected calls from a group of influential MP’s to publish a breakdown of the voting of the MPC with each meeting.

The Treasury Select Committee recommended on the ten year anniversary of the MPC that financial markets would benefit if they could see the support for any one decision.

The BoE rejected this idea saying rate setters publish the logic behind any particular vote two weeks after the decision on interest rate changes.

‘Releasing the vote at the time of the decision runs the risk of encouraging media speculation on the reasons for an individual’s vote and increases the simple-minded tendency to portray members as ‘hawks’ or ‘doves’,’ the BoE said.

On Friday news broke that Microsoft have tabled a bid to buy rival search company Yahoo for a figure of $44.6bn in cash and shares, 62% above Yahoo’s closing market share price on Thursday.

The offer was presented in a letter to the Yahoo board and came only days after revenue forecasts had been cut, and the company had subsequently committed $300m to try and revive the business in 2008.

The two competitors have found it increasingly difficult in the field of internet search and online advertising in recent years with the increasing dominance of third rival and market leader Google. Microsoft’s take over would merge the two rivals and create an entity that then could better compete with the market leader.

A statement from yahoo upon confirmation of the bid from Microsoft read that yahoo would evaluate the proposal “Carefully and promptly in the context of Yahoo’s strategic plans and pursue the best course of action to maximize long-term value for shareholders.”

With the increasing belief by many that Microsoft’s existing business model becoming more unfeasible in the internet age, this offer indicates a radical shift in how Microsoft perceives the internet and its own future within it.
Over the last twelve months major search rival Google has began to offer free online software alternatives for much of Microsoft’s offerings, challenging the enterprise business model the software giant in built upon.

Currently Microsoft makes the majority of its money by selling license fees to its impressive software packages installed on PCs and servers. Google’s services available freely over the internet severely threaten this.

Coupled with the increasing threat to its core industry, the change in thinking demonstrated by Microsoft is undoubtedly due to the gems in Yahoo’s online advertising empire, a sector that Microsoft has thus far struggled to move into with any great success. Yahoo also offers a range of online applications that could bolster Microsoft’s existing Windows Live online services for both businesses and consumers.

There is the chance of a rival bid for Yahoo still being lodged, possibly from a media organisation, but there are few could offer a similar price to that of which Microsoft is offering. Rupert Murdoch’s News Corp. is one media conglomerate that could potentially do so, and a rival bid from Google is not off the table quite yet.

If Google do not launch a counter bid to Microsoft’s offer the search market leader will certainly delay proceedings by filing anti-competitive legal action against Microsoft in the hope of derailing any deal taking place, much in the same way Microsoft did to Google over DoubleClick last year.

It is already understood that Google executives have asked for a political strategy to challenge the acquisition of Yahoo which could threaten Google’s own dominance of online advertising. How far Google will go with any challenge is as yet unknown.

If the deal was to go through despite a challenge from Google, it would certainly consolidate the market and make two clear rivals, setting up a credible competitor to market leader Google. We would then be left with a true Microsoft versus Google scenario.