Global stocks, commodities slip; dollar flat

By Dominic Lau

LONDON (Reuters) - Global stocks and commodity prices pulled back on Tuesday as investors paused to assess the state of the economy after pushing them higher in the past two weeks, while the U.S. dollar was broadly flat.

BNP Paribas (BNPP.PA), France's biggest bank by market value, posted higher second-quarter profit, and expressed some optimism over prospects for financial markets, while there were signs of improvement in Swiss bank UBS's (UBSN.VX) underlying performance.

Better-than-expected second-quarter corporate earnings and improving economic data in major economies have helped push global equities, measured by MSCI, up in 13 out of the past 16 sessions.

The index hit its highest level in nearly 10 months on Monday.

"If you run up so fast and so far, it's quite natural that you have some profit taking," Luc Van Hecka, chief economist at KBC Securities, said.

"But the overall trend is certainly positive and the market is of the opinion that the worst is over. It is responding quite logically to the fact that earnings have generally been better than expected."

The MSCI world equity index was down nearly 0.2 percent. Shares in BNP Paribas advanced 1.2 percent, and those for UBS eased 0.3 percent.

Weaker commodity prices weighed on the pan-European FTSEurofirst 300 .FTEU3 index, which was down 0.4 percent.

The European benchmark, which has rallied 45 percent since its March floor, traded at 12.5 times expected earnings, the index's highest price-to-earnings ratio since August 2007, according to Thomson Reuters data.

OIL DROPS

Oil fell below $71 a barrel, paring some of the previous day's 3 percent gain, as worries about a rise in U.S. crude inventories offset optimism from Monday's positive U.S. and Chinese manufacturing data.

"The strong rally in oil prices over the past few days gave investors an opportunity to take some profits. There are also signs of increasing supplies," said Victor Shum, Singapore-based analyst at Purvin and Gertz.

"And we should remember that we are going to enter a period of slow autumn demand. With supplies rising, it will not be surprising for oil to pull back below $70."

Metal prices also eased, with copper down from a fresh 10-month high.

The U.S. dollar .DXY was flat on a trade-weighted basis against a basket of major currencies but it slipped 0.3 percent to 94.93 yen.

The Australian dollar, meanwhile, pared gains from a near 10-month high against the dollar after the Reserve Bank of Australia kept interest rates unchanged and abandoned its easing bias, supporting expectations of a rate hike by year-end.

Yields on the benchmark 10-year U.S. Treasuries were flat at 3.628 percent, while the 10-year euro zone benchmark bund yield was down 1 basis points at 3.335 percent.

(Additional reporting by Atul Prakash in London and Sambit Mohanty in Singapore, editing by Mike Peacock)

PepsiCo to buy bottlers for $7.8 billion; shares up

By Martinne Geller

NEW YORK (Reuters) - PepsiCo Inc agreed to buy bottlers Pepsi Bottling Group Inc and PepsiAmericas Inc in a sweetened $7.8 billion deal, after a decade of operating as separate companies, as it seeks to cut costs and boost profits in North America.

The second-largest soft drink maker said on Tuesday it will pay $36.50 per share for Pepsi Bottling and $28.50 per share for PepsiAmericas, representing premiums of about 45 percent and 43 percent from the bottlers' closing prices the day before Pepsi launched unsolicited bids in April.

Pepsi first offered $29.50 per share for Pepsi Bottling and $23.27 per share for PepsiAmericas. Those bids, at 17 percent premiums, were worth $6 billion.

The price increase was expected since the bottlers posted better-than-expected profits, said JP Morgan analyst John Faucher. Price increases and lower costs helped offset weak demand for pricier beverages because of the recession.

Still, each bottler's shares jumped to new year-highs and were up more than 8 percent in afternoon trading, with PepsiCo up 5 percent at $59.00.

"We think getting the deal done removes a big overhang on PepsiCo," Faucher said in a research note.

The takeout price for Pepsi Bottling, the much larger bottler, is about 16 times estimated earnings, in line with the stock's average multiple over the last 10 years, said Jim Tierney, analyst and portfolio manager at W.P. Stewart, which owns Pepsi shares among its $1.5 billion in assets.

"I don't think in any way they're overpaying for this," Tierney said. "Nor do I think it's a tremendous deal."

STRATEGY

Buying the bottlers will consolidate 80 percent of Pepsi's North American beverage volume, which Pepsi said will speed decision-making and eliminate friction between the companies.

PepsiCo, whose drink brands include Mountain Dew, Tropicana and Gatorade, is the bottlers' largest shareholder and largest supplier -- a relationship that sometimes puts their interests at odds, especially when it comes to the price of the beverage concentrate they buy from PepsiCo.

Tierney said the deal aligns the companies' interests so they can focus on improving performance in North America, where sales have sagged industrywide as consumers cut back amid expanding waistlines and shrinking budgets.

"You now have one entity focused on one thing -- selling more soda, selling more water, selling more tea, selling more Gatorade," Tierney said. "That's really what's key here."

Pepsi spun off the bottlers in 1999, following a similar move from top rival Coca-Cola Co.

It is buying them back because the current model makes it difficult to achieve sustainable long-term profit growth since there is not enough profit in total to support investment in separate companies, Chief Executive Indra Nooyi said.

Coca-Cola, which has a decentralized system, declined to comment on the deal or Nooyi's assertion. Last month, Coke CEO Muhtar Kent reiterated his commitment to its model.

SAVINGS

The deal, expected to close late this year or early next year, should produce annual savings of $300 million by 2012, Pepsi said. That is above the $200 million it had expected.

Analysts and the bottlers thought that number conservative. Stifel Nicolaus analyst Mark Swartzberg estimates savings of $450 million.

Once those savings are realized, Pepsi said the deal should add about 15 cents per share to its full-year earnings. While Pepsi will incur one-time costs of about $300 million, the deal should add modestly to profit in 2010.

Although PepsiCo and Pepsi Bottling sparred over PepsiCo's initial bid, the ice apparently thawed after Nooyi met Pepsi Bottling director Ira Hall in person, a source familiar with the matter said.

Pepsi Bottling Chief Executive Eric Foss said Pepsi Bottling employees should benefit from greater career opportunities while shareholders will benefit from the deal's cash-and-stock structure, which lets them "participate in the significant upside we see in the combination."

Under the deal's terms, the bottlers' shareholders have the option to choose all cash or all stock, as long as Pepsi pays half cash and half stock in total.

PepsiCo said it will take on about $4 billion of additional debt because of the deal, but is committed to dividends and buying back shares.

Nooyi declined to say what management changes would result from the deal, leaving unspoken the fates of bottling executives Foss and PepsiAmericas CEO Bob Pohlad.

Pepsi Bottling shares jumped $2.74 to $36.36, while PepsiAmericas rose $2.28 to $28.43.

(Additional reporting by Jessica Hall in Philadelphia; editing by John Wallace and Maureen Bavdek)

GE to pay $50 mln to settle SEC fraud charges

By Scott Malone

BOSTON (Reuters) - General Electric Co will pay a $50 million civil penalty to settle charges by the U.S. Securities and Exchange Commission that it misled investors with some fraudulent accounting in 2002 and 2003.

The SEC found that the largest U.S. conglomerate had intentionally wrongly accounted for some commercial paper hedging activity and the sales of railroad locomotives, in an effort to make its financial results look better.

The world's largest maker of jet engines and electricity-producing turbines said on Tuesday it did not admit or deny wrongdoing as part of the settlement.

"GE bent the accounting rules beyond the breaking point," said Robert Khuzami, director of the SEC's Division of Enforcement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

Two other accounting irregularities, regarding how GE accounted for swap derivatives and for how it recorded profit on sales of spare parts for jet engines were negligent, but not intentional violations, the SEC found.

The news comes a day after the SEC, which got a new head in Mary Schapiro in January, reached a multimillion-dollar settlement with another major U.S. company, Bank of America Corp. The bank said it had agreed to pay $33 million to settle SEC charges that it had made false statements to investors about bonuses when it took over Merrill Lynch & Co.

MASSAGING NUMBERS

The SEC said in court papers that GE had met or exceeded analysts' profit targets in every quarter from 1995 through 2004, but said that its top accountants signed off on improper decisions to make its numbers look better.

"On four separate occasions in 2002 and 2003 ... high-level GE accounting executives or other finance personnel approved accounting which was not in compliance with Generally Accepted Accounting Principles ("GAAP") so as to increase earnings or revenues or to avoid reporting negative financial results," the SEC said.

"In one instance, the improper accounting allowed GE to avoid missing analysts' final consensus EPS expectations," the regulator said.

KPMG, GE's auditor, was not named in the court papers.

GE shares were flat at $13.72 on the New York Stock Exchange.

The company has already restated some financial statements from 2005 through 2008 and said no further restatements would be needed.

"We have concluded that it is in the best interests of GE and its shareholders to resolve this matter and put it behind us," GE said in a statement. "The errors at issue fell short of our standards, and we have implemented numerous remedial actions and internal control enhancements to prevent such errors from recurring."

In addition to the $50 million penalty, GE said it had incurred about $200 million in related legal costs.

"It did cost them a quarter of a billion dollars over the years, so it is good to have it behind him," said Edward Jones capital goods analyst Matt Collins.

GE had a long streak of meeting or beating analysts' forecasts, dating back to its prior chief executive, Jack Welch. Its record broke in April 2008 when the company reported an unexpected drop in profit during the early days of the financial crisis.

Since then, GE has stopped giving Wall Street specific per-share profit targets, instead providing a "framework" of how it expects its individual units to perform. Collins said the era of GE's laser focus on hitting Wall Street's targets may have come to an end.

"Those days are fading," Collins said. "With the collapse at GE Capital and the global recession, you just don't have any levers left to pull. I think earnings quality should improve from here on."

(Reporting by Scott Malone, editing by Gerald E. McCormick, Maureen Bavdek, Leslie Gevirtz)

PepsiCo deals a welcome windfall for investors

By Jessica Hall and Doris Frankel

PHILADELPHIA/CHICAGO (Reuters) - PepsiCo Inc won over its two largest bottlers by raising its takeover offers more than 20 percent to $7.8 billion, giving investors a welcomed but not unexpected windfall.

PepsiCo said it will pay $36.50 per share for Pepsi Bottling Group Inc and $28.50 per share for PepsiAmericas Inc. That is up from its April bids of $29.50 per share for Pepsi Bottling and $23.27 per share for PepsiAmericas.

"The market was betting on mid-$30s price for Pepsi Bottling and a mid-to-high-$20s price for PAS, so the final offer is actually at or slightly higher than expectations," said one arbitrageur who declined to be named because he was not authorized to speak to the media.

"PepsiCo had tried to argue that its previous bids were 'full and fair' but now the offers finally are close to that," the arbitrageur said.

PepsiCo, which already owned stakes in the bottlers, said buying the remaining shares it did not already own would consolidate 80 percent of Pepsi's North American beverage volume. That would speed the decision-making process and eliminate friction between the companies, PepsiCo said.

The shares of both Pepsi Bottling Group and PepsiAmericas had been trading above the initial offer price, indicating investors expected a higher offer to emerge.

"The share prices of both Pepsi Bottling Group and PepsiAmericas since the original buyout offer in April reflected that Pepsi would come back with a higher bid," said Paul Foster, an option strategist at Web information site theflyonthewall.com.

"Large share price gains were already built in both Pepsi Bottling and PepsiAmericas after the deal was rejected in May and thus, option traders refrained from participating because the takeout valuations were already built in."

The existing option contracts held by investors in Pepsi Bottling are concentrated on the $30 and $35 call strikes granting investors the right to buy Pepsi Bottling shares at $30 and $35 apiece, respectively, by August expiration.

On the put side, the contracts outstanding lie in the strikes allowing investors to sell PBG shares at $25 and $30 a piece, mainly by September expiration.

The August calls at the higher strikes of $30 and $35 indicate the impasse between the companies, "that the current board (PBG) would not agree to a $29.50/ share price and a premium would be required," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse in Chicago.

The put activity, especially in the September $25 put strikes with 12,354 outstanding contracts, represented the fear Pepsico would walk away and, "the Pepsi Bottling share price would crumple as the company has a ton of debt and its valuation without the deal would likely be much lower," Claussen said.

"Given that today's premium over the prior bid was 20 percent and the PBG stock is up only 8.3 percent on the acceptance of the increased bid, this is not a huge surprise to the market," Claussen said.

The negotiations concluded faster than some investors expected, however.

"We expected this to drag on past Labor Day, so this is a nice surprise. The deals aren't expected to close until late '09 or early 2010, so the time value of money reduces the premium a bit. But it's still a bump from what we expected," said a second arbitrageur, who declined to be named.

The deal is expected to create annual savings of $300 million by 2012 and add about 15 cents per share to its earnings when the savings are fully realized in 2012, PepsiCo said.

"The accretion and synergies are below our expectations, but that may change as they get further along with the consolidation process," the second arbitrageur said.

(Reporting by Jessica Hall and Doris Frankel; editing by Andre Grenon)

U.S. military reviews use of Twitter, other sites

By Adam Entous

WASHINGTON (Reuters) - The Pentagon has ordered a review of its use of social networking sites such as Twitter and Facebook, citing concerns that security could be compromised, officials said on Tuesday.

Many branches of the military use the popular, public-access sites in an effort to connect with young people, as well as to counter the propaganda of the Taliban and al Qaeda in Afghanistan and Iraq.

William Lynn, the deputy defense secretary, ordered the department-wide review in a memo to military commanders and service branch chiefs.

"These tools are proving valuable in areas such as recruitment, public affairs, and quality of life for our military personnel, as well as sharing information with allies, coalition partners and military families," Lynn wrote.

"However, as with any Internet-based capabilities, there are implementation challenges and operational risks that must be understood and mitigated."

Lynn asked the Pentagon's chief information officer to present a threat assessment as well as policy guidelines "to ensure the responsible and effective use of emerging Internet-based capabilities" to Defense Secretary Robert Gates by the end of August.

Lynn said a new policy would be developed by the end of September.

Pentagon spokesman Bryan Whitman said officials would try to strike a balance between benefits and risks arising from the use of social networking.

"It does highlight the tension between recognizing these as important ways to communicate ... and yet, on the other hand, the very real security concerns that the people that maintain our networks have with respect to using these sites," he said.

NO DEPARTMENT-WIDE BAN

Whitman said the risks could be offset through a combination of technology and training.
The Pentagon has not issued a department-wide ban on the use of social networking sites, but at least some services and departments have starting clamping down.

The Marine Corps, which has long prohibited its personnel from using the sites on work computers, issued a formal ban on Monday, said Lieutenant Craig Thomas, a spokesman for the Marines.

The Marines will allow waivers for "operational needs", such as for investigations, the distribution of news releases and for the recruitment of new personnel.

Marines can use the sites on their own personal computers.

Defense Secretary Robert Gates, 65, has said that he wants to utilize social networking to help the Pentagon interact with U.S. military members, many of whom are in their early 20s, and young people worldwide.

The effort has picked up pace in recent months.

When the U.S. commander in Afghanistan issued new rules for avoiding civilian casualties last month, they were published first on the Facebook page of U.S. forces in the country.
The Pentagon's Web site, www.defenselink.mil, features a link to its Facebook page and Twitter feed from its public affairs chief.

But Pentagon experts have been studying possible risks, such as whether posting to Facebook or Twitter from military computers could open a pathway for hackers.

(Additional reporting by Andrew Gray, editing by Philip Barbara)

EA results surpass Street view, shares climb

By Gabriel Madway

SAN FRANCISCO (Reuters) - Electronic Arts Inc (ERTS.O) reported better-than-expected results on strong sales of "The Sims 3" video game and cost-cutting, sending its shares up as high as 4 percent on Tuesday.

The results provided a measure of good news for the video game industry, which has struggled lately as the economic downturn continued to pinch consumer spending and take its toll on sales. [nN29205340]

EA also affirmed its forecast for the fiscal year.

Electronic Arts, which said it was the No. 1 video game publisher in Europe and North America in the June quarter, this year announced plans to cut about 11 percent of its workforce and close facilities, as it winnowed its product portfolio down to focus on fewer titles.

The company's restructuring effort is largely complete, Chief Financial Officer Eric Brown said in an interview.

Electronic Arts posted a net loss of $234 million, or 72 cents a share, in its fiscal first quarter ended June 30, versus a net loss of $95 million, or 30 cents a share, last year.

Excluding items, Electronic Arts reported a loss of 2 cents a share, better than the average analyst estimate of a loss of 12 cents a share, according to Reuters Estimates.

Revenue fell to $644 million, but non-GAAP revenue rose 34 percent to $816 million, ahead of Wall Street's forecast for $735.7 million.

Electronic Arts sold 3.7 million copies of "The Sims 3," and 1.8 million copies of "EA Sports Active," its best-selling title ever for Nintendo's (7974.OS) Wii, the most popular home console.
The company doubled its revenue on Wii titles in the quarter.
Electronic Arts also affirmed its fiscal 2010 forecast for earnings excluding items of $1 a share on non-GAAP revenue of $4.3 billion.

Shares of Redwood City, California-based Electronic Arts are up about 35 percent this year. Its stock closed at $21.89 on the Nasdaq and rose to $22.07 in extended trading.

(Reporting by Gabriel Madway; Editing by Robert MacMillan)

Microsoft deal will pay Yahoo more after 5 years

SAN FRANCISCO (Reuters) - Yahoo Inc will get slightly more revenue from Microsoft Corp during the second half of the companies' recently announced 10-year Internet search partnership.

The share of revenue that Microsoft pays to run search ads on Yahoo's network of sites will increase from 88 percent to 90 percent in the second five years of the partnership, according to regulatory filings by Yahoo on Tuesday.

At least 400 Yahoo employees will join Microsoft as part of the Internet search partnership, and the two companies will select an additional 150 Yahoo employees to help with the transition of powering Yahoo's search and ad search with Microsoft technology.

Yahoo and Microsoft announced the search partnership last week, ending a multiyear courtship between the two companies that at one point entailed Microsoft paying $47.5 billion, $33 a share, to acquire Yahoo outright.

Yahoo shares have declined roughly 16 percent since the deal was announced, on investor disappointment that Microsoft is not paying Yahoo an upfront payment.
Shares of Yahoo were unchanged at $14.51 in extended trading on Tuesday.

Under the terms of the deal, Microsoft will provide the technology to power the search results and the search advertising capabilities on Yahoo's sites. Both companies will maintain separate sales forces for selling display ads on their respective sites, but Yahoo's sales team will handle sales of so-called "premium" search ads that are sold to large, and highly-coveted brand advertisers.

If Microsoft opts to reclaim control of premium ad sales on its own sites after five years, it will have to pay Yahoo a 93 percent share of the search revenue on Yahoo sites. Should Yahoo in turn want to maintain its premium ad sales exclusivity in the face of Microsoft's intentions, then Yahoo's share of search revenue will decline to 83 percent.
If neither company seeks to alter the terms after five years, effectively allowing Yahoo to continue providing premium ads for both sites, Yahoo's will be entitled to a 90 percent share of the revenue.

(Reporting by Alexei Oreskovic; Editing by David Gregorio)

HSBC in talks to form securities JV in China

By Clare Jim

HONG KONG (Reuters) - HSBC Holding Plc (0005.HK) (HSBA.L), Europe's biggest bank, is in talks to set up an investment banking joint venture in China, a senior bank executive said, adding that acquisition prospects in Asia are too expensive and that the bank will focus on organic growth.

The bank is in talks with potential partners to set up an investment banking joint venture, said Vincent Cheng, HSBC executive director and chairman for Asia-Pacific.

The move would allow the bank to expand into China's domestic securities and debt markets.
"We have many networks in Asia, so there is no push for us to buy expensive assets in the region," Cheng told Reuters in an interview on Tuesday.

Cheng said HSBC Hong Kong has enough capital for acquisitions and had looked into some of Royal Bank of Scotland's (RBS.L) Asian assets but found, in general, that Asian assets were too expensive.

Australia and New Zealand Banking Group Ltd (ANZ.AX) said earlier on Tuesday that it had agreed to buy some Asian units from RBS for about $550 million.
On Monday, HSBC said its first-half profit halved from a year ago to $5 billion due to rising bad debts.

Still, its stock jumped 6.6 percent to HK$82.85 on Tuesday as investors reacted to news that its profit was better than an average forecast of $4.9 billion because of cost controls and lower credit charges. It beat the benchmark Hang Seng Index .HSI, which was virtually unchanged.
HSBC Asia will focus on organic growth, said Cheng, who added that business will improve in the second half and that profits from Hong Kong will increase.

The economies of many Asian markets, including Singapore, South Korea and China had bottomed out in the second quarter and should improve for the rest of the year, he said.
"Emerging markets' contribution will account for about 60 percent of the total after the U.S. market returns to profit," Cheng said. "This is our target and, of course, we would not mind if the portion from emerging markets is bigger," he added.

Asia contributed about 90 percent of the group's profit in the first half.
HSBC plans to seek a group listing in China's Shanghai market and has started the process for an IPO. The timing for such a listing will depend on China's regulators, Cheng said.
HSBC has said it aims to be the first foreign bank to be listed in China.

(Editing by Chris Lewis and Ken Wills)

GlaxoSmithKline in talks to buy Stiefel

NEW YORK (Reuters) - British-based pharmaceuticals firm GlaxoSmithKline PLC is in talks to buy privately-owned U.S. skincare specialist Stiefel Laboratories, a source familiar with the situation said on Sunday.
It was unclear whether a deal for the firm would be reached, the source said. The source declined to be identified because the talks are not public.
The Wall Street Journal earlier reported that a $3 billion deal for Stiefel, part-owned by buyout firm Blackstone Group, is expected to be announced on Monday. The Journal also said there is still a chance it could fall apart.
Stiefel is the world's largest independent dermatology company and is viewed as a potentially attractive asset for major drugmakers, industry experts have said.
The Journal said the business had drawn interest from a number of major drug companies, including Johnson & Johnson and Novartis AG.
A possible deal between GlaxoSmithKline and Stiefel would come on the heels of four other deals in the pharmaceuticals sector this year, three of which were massive mergers.
Pfizer Inc paid $65 billion for Wyeth, Merck & Co offered $46 billion for a takeover of Schering Plough, and Roche Holding AG dished out $47 billion for a buyout of Genentech Inc.
Most recently, Express Scripts agreed to buy health insurer WellPoint Inc's prescription business for $4.68 billion.
The deal rush has sparked speculation of a further wave of consolidation in the sector, and investment bankers have said we are now likely to see smaller acquisitions valued from a few hundred million dollars up to about $20 billion.
Another person familiar with the matter told Reuters a month ago that Stiefel was considering selling itself and had asked Blackstone to seek offers for the business.
The source had told Reuters that Blackstone and the company's family owners were seeking a speedy sale.
(Reporting by Megan Davies and Jui Chakravorty Das; Editing by Lincoln Feast)