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Speaker 1: Broadcasting live to New York, Bloomberg to Washington, d C,

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Speaker 1: Bloomberg N one to Boston, Bloomberg twelve miners to San Francisco,

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Speaker 1: Bloomberg Ninez to the Country series at Channel one nine

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Speaker 1: dot com. This is Bloomberg Surveillance and good morning. I'm

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Speaker 1: John Tucker along with Tom Keene and Michael McKee. The

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Speaker 1: opening Bell Report this morning being brought to you by

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Speaker 1: se I Imagine when investment operations predictively respond to regulatory change.

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Speaker 1: See how seis Global operating platform can be your catalyst

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Speaker 1: for business transformation at se i c dot com slash imagine.

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Speaker 1: And right out of the gate, we're seeing stocks headed

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Speaker 1: lower Bresit seems to be adding fuel to the fire

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Speaker 1: for a risk averse investors. Among the most actively I've

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Speaker 1: traded so far this morning, shares of zimmer BioMed Holdings.

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Speaker 1: They're down about two seven to two point seven the

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Speaker 1: price of secondary share sale at two percent discount to

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Speaker 1: earlier going after cutting its repetive forecast for the second quarter,

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Speaker 1: down Jones Industrial Average right now, extending losses down twenty

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Speaker 1: six points. It's down about two tents at seventeen thousand,

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Speaker 1: two tents at forty eight forty which at the markets

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Speaker 1: for you every fifteen minutes during the trading day right

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Speaker 1: here on Bloomberg Radio. Back to Mike and Tom John,

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Speaker 1: Thanks so much. We take great pride at Bloomberg Surveillance

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Speaker 1: and trying to bring you the smartest and best guests

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Speaker 1: on whatever the topic is. We had Jean Monster on

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Speaker 1: from Piper Jeffrey early this morning, and we are honored

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Speaker 1: now to bring you Mark Mahaney of URBC Capital Markets.

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Speaker 1: He comes on later because he lives on the West

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Speaker 1: coast and you know he just refuses to get up

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Speaker 1: before nine am. We welcome him this morning. Mark. I

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Speaker 1: want to congratulate you with your earned reputation. Andrew Ross

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Speaker 1: Sorkin featuring you today in his deal book article on

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Speaker 1: linked In. My first reaction when I saw this deal,

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Speaker 1: what was like the Tim Armstrong deal? For a o L.

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Speaker 1: This is the greatest bailout of a failed business plan

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Speaker 1: I've ever seen. I know LinkedIn is very positive, but

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Speaker 1: come on, the stock cratered and as you nailed in

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Speaker 1: your research, they had to do this deal or they

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Speaker 1: would have lost their key people. Right. Oh, well, I

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Speaker 1: don't want to overstate it. Look, I we thought that

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Speaker 1: LinkedIn was a good asset. If you want to buy

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Speaker 1: a online recruitment asset, there's no asset better than LinkedIn. Uh.

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Speaker 1: They the question is whether they could run this business

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Speaker 1: consistently profitably on a gap basis. We think they could.

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Speaker 1: The gross margins are high enough here that over time,

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Speaker 1: as you've gotten leverage and you'd been able to reduce

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Speaker 1: costs spending on marketing and R and D, there should

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Speaker 1: have been nice profits getting ready from this business. That

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Speaker 1: not yet proven that yet, but we think that's what

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Speaker 1: was in the future. But Mark, you've lived this. The

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Speaker 1: fact is they played by a different rule book. And

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Speaker 1: I'm gonna call it within a general phrase Silicon Valley.

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Speaker 1: And they answer is the issue stock issue stock. Issue

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Speaker 1: stock is a compensation alternative, which is great if the

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Speaker 1: stock works out, and if it doesn't, the game's over right. Well,

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Speaker 1: I'm not sure I'd be that draconian about it. Look,

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Speaker 1: it's a highly competitive employment market out here in the

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Speaker 1: Valley and other many other areas too, but it's particularly

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Speaker 1: acute in Silicon Valley, and there's a requirement or a

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Speaker 1: belief that one should give out compence to stock based

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Speaker 1: competition broadly to almost all employees. So that's the ethos,

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Speaker 1: that's the way things are run in many of these companies.

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Speaker 1: And some companies are right up front. They all they

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Speaker 1: all disclose how much stock based comp they give out.

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Speaker 1: Whether investors want to treat as a real expense or not,

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Speaker 1: it's up to them. The companies give you the disclosure

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Speaker 1: to go either way. What is the business plan going

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Speaker 1: forward here? How does Microsoft make money out of this?

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Speaker 1: The advantage that Microsoft has is this is an asset

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Speaker 1: with a couple of hundred million, to be specific, four

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Speaker 1: injured million monthly average users that's got a relatively relatively

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Speaker 1: diverse business streams. So they have corporations, they're about forty

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Speaker 1: five thou companies in the world that pay them about

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Speaker 1: three thousand dollars a month to be able to tap

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Speaker 1: into their resume pool, to be able to tap into

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Speaker 1: all of the passive and active job candidates that are

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Speaker 1: on the LinkedIn network, and then addition to that, they

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Speaker 1: sell advertising against that user base. And then finally they

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Speaker 1: have got a couple of subscription products that are particularly

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Speaker 1: good for people in sales. So the question is whether

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Speaker 1: Microsoft can do anything to really accelerate that growth. They

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Speaker 1: both have very large enterprise presences, Microsoft a lot bigger

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Speaker 1: than than than LinkedIn. Go ahead, Well, it sounds like

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Speaker 1: to me basically they bought the the modern day version

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Speaker 1: of a mailing list. You know. The the interesting comment

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Speaker 1: that was made by Microsoft executives on the call yesterday

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Speaker 1: was that there's very little overlap between these businesses in

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Speaker 1: particularly and recruitment business. So the open question we had is,

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Speaker 1: you know what, why would Microsoft really want to get

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Speaker 1: into the recruitment business. But from a LinkedIn shareholder's perspective,

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Speaker 1: this is great. Uh, somebody just brought you back to

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Speaker 1: par where you were at the year you just got

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Speaker 1: at premium mark. I showed that chart this morning where

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Speaker 1: I love how you put that. That's brilliant how it

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Speaker 1: brought them back to part this morning, you know, without

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Speaker 1: getting you into trouble with your sources. Was everybody on

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Speaker 1: board this at Microsoft? Or was this like actually like

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Speaker 1: a Bomber kind of debate where Nadela said, we're gonna

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Speaker 1: do this, let's go. How did that work out at Microsoft?

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Speaker 1: Any idea? No, I'm sorry, we don't have much on that,

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Speaker 1: any particular sources on that, and I don't cover a Microsoft.

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Speaker 1: That's fair. I just trying to get some gossip in

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Speaker 1: here to keep the conversation going. What does this mean

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Speaker 1: for the rest of your world? The mark Many world?

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Speaker 1: Does everybody I mean, I mean Twitter, I can't, I

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Speaker 1: mean Munster was was respectfully derogatory of Twitter on this.

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Speaker 1: What would you suggest that means for Twitter and the others? Well,

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Speaker 1: you know that's the right action question to ask, which

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Speaker 1: is this is one of the largest deals. I think

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Speaker 1: it's the single largest deal, frankly, that we've seen in

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Speaker 1: the uh, the internet space. There's uh, we saw a

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Speaker 1: couple of stocks pop on this news yesterday. Twitter was

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Speaker 1: one some of the smaller cap names like YELP. I

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Speaker 1: don't think there's any doubt there should be any doubt

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Speaker 1: that we're going to see more M and A activity

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Speaker 1: pick up in the Internet space. Why because there's good

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Speaker 1: consistent secular growth. UH. There are some good assets in

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Speaker 1: the space. Clearly, there are some of these business models

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Speaker 1: actually do generate positive free cash flow. Lincoln was one

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Speaker 1: of those. UH. And you've got strategic acquirers that are

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Speaker 1: bigger and bigger and have more cash and market cap.

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Speaker 1: And not just Microsoft, but you've got Google and Facebook,

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Speaker 1: and you've got the Ali Bobs in the ten sense

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Speaker 1: of the world. UH. And the people are also looking

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Speaker 1: for exits like a Yahoo. So M and A has

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Speaker 1: been picking up over the last year or two. Expect

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Speaker 1: even more of it. I don't think that Twitter is

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Speaker 1: a likely take out candidate that are our guests is.

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Speaker 1: I'm not sure it's a it's a it's a mixed

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Speaker 1: asset right now. It's not a stock that we would recommend.

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Speaker 1: There too many people in there trying to buy it

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Speaker 1: for the takeout or trying to buy the stock because

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Speaker 1: on the belief that there's a takeout. I think that's

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Speaker 1: an extremely risky way to invest. I would not recommend

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Speaker 1: doing that. But I do think overall we'll see heightened

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Speaker 1: the M and A speculation, particularly in the ad the

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Speaker 1: advertising space and UH, and then maybe in some of

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Speaker 1: the other verticals, but the advertising vertical, the ad tex

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Speaker 1: space strikes me as the best for consolidation. Is there

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Speaker 1: a possibility of another bitter emerging for LinkedIn if it's

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Speaker 1: such a great property to have. It looks like there

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Speaker 1: was Uh, it looks like there was another bidder in

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Speaker 1: the process, and now all of this will come out

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Speaker 1: in the regulatory filings. I'd find it very surprising that

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Speaker 1: a deal like this wasn't shopped around at least to

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Speaker 1: a few other potential strategic buyers. Maybe that would have

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Speaker 1: been an oracle, Maybe that would have been a salesforce

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Speaker 1: dot com. I'd be surprised if bankers working on behalf

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Speaker 1: of LinkedIn for their produciary responsibilities wouldn't have at least

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Speaker 1: shoped it around. But we'll get those details and filings.

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Speaker 1: I assume that there were other bidders, but nobody is

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Speaker 1: addressed as Microsoft our fiduciary responsibilities to come back with.

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Speaker 1: Mark Mahny of RBC Capital Markets. I can't say enough,

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Speaker 1: folks about the team's surveillance that we have this news

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Speaker 1: breaking yesterday, and I really want to congratulate Rachel Worstman,

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Speaker 1: who did allousy job. Mike, there's somebody's name we gotta

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Speaker 1: leave out. I mean Boden was okay, he had as

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Speaker 1: like a fifty fifty day I think it was. And yeah, well,

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Speaker 1: our team is just awesome. They have We have Mark

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Speaker 1: Mahaney and Jane Munster on on LinkedIn and Microsoft. Shannon

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Speaker 1: Cross joining us yesterday spur of the moment. We greatly

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Speaker 1: appreciate these street experts for their perspective, and we'll come

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Speaker 1: back with Mark Mahaney with more on is most interesting

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Speaker 1: world Lincoln trading like four times even done. I'm kidding,

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Speaker 1: but it's ritually priced, to say the least. The vix

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Speaker 1: point zero nine the tape better this morning, This hour

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Speaker 1: of surveillance brought you by Westchester subar up. Is it

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Speaker 1: Westchester suber out dot com. Here's like a bar with

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Speaker 1: news headlines. My Tom, thank you very much. Today's presidential

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Speaker 1: primary in Washington, d C. Won't have much impact, but

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Speaker 1: the meeting between presumptive nominee Hillary Clinton and Bernie Sanders

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Speaker 1: tonight could mean a lot. The DC primary is the

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Speaker 1: last one of the Democratic season. The face to face

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Speaker 1: meeting marks a transition and the lengthy primary fight between

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Speaker 1: the two rivals. Sanders says his meeting with Clinton will

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Speaker 1: help him determine how committed she'll be to his policy issues.

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Speaker 1: Homeland Security Secretary j Johnson says as of now, there

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Speaker 1: are no known accomplices and Sunday's mass shooting at a

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Speaker 1: gay nightclub in Orlando, Florida. Johnson, speaking to ABC News,

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Speaker 1: wolf terror attack in this environment of homegrown violent extremism,

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Speaker 1: and that's what Orlando is looking more and more like.

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Speaker 1: There's a role for the public to play. There's a

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Speaker 1: role for us to play in building bridges with American

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Speaker 1: Muslim communities. That's what we've been doing and we're gonna

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Speaker 1: keep doing that. US air safety experts have joined the

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Speaker 1: investigation into the crash of egypt Are flight eight oh four.

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Speaker 1: Cruise are trying to find the critical black boxes from

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Speaker 1: the Airbus A three. The flight, with sixty six people

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Speaker 1: on board, was heading from Paris to Cairo when it

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Speaker 1: crashed into the Meta Mediterranean Sea. Global News twenty four

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Speaker 1: hours a day, powered by our twenty four d journalists.

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Speaker 1: I'm Michael Barr, Tom and Michael. Thanks so much. At

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Speaker 1: the end one of six ten, definitely a relief in

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Speaker 1: the market now from where we were at five am

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Speaker 1: and seven a m. This morning. Tomorrow one pm. Scarlet Food,

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Speaker 1: the UK's future and the European Union. Investors also awaiting

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Speaker 1: tomorrow's Februal reserve announcement. We did get some Nonomic data today,

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Speaker 1: report out today showing retail sales rising more than forecast

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Speaker 1: in May. Among the most actively traded right now Zimmer Biometrics.

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Speaker 1: It's down two points seven percent, enterprising a secondary share

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Speaker 1: of sale at two percent, a discount to its previous close.

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Speaker 1: A second most actively traded shares of Twitter or up

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Speaker 1: at two point one percent. That's in sympathy with the

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Speaker 1: linked In, which of course is being brought out by Microsoft.

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Speaker 1: LinkedIn still below the premium share price at one twenty eight,

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Speaker 1: just up fractionally this morning, and the SMP five hundred

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Speaker 1: is up less than a point nine down Jones Industrial

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Speaker 1: I wish still down that down twenty one points at

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Speaker 1: seventeen thousand, seven hundred ten. The NASA Composite Index is

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Speaker 1: up at eight points. That's up two tents of percent

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Speaker 1: at forty eight fifty six. And we check the markets

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Speaker 1: for you every fifteen minutes during the trading day right

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Speaker 1: here on Bloomberg Effective michaelin top, thanks so much, John Tucker.

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Speaker 1: I'm gonna do something I rarely do, Mark Mahaney with us,

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Speaker 1: we've been focused on Microsoft and linked In. Mike, Mark,

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Speaker 1: I'm gonna give you an open question, giving your coverage,

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Speaker 1: which stock is most intriguing right now within the churn

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Speaker 1: of technology, which companies the biggest potential payoff if you will,

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Speaker 1: for investors investors looking for new stocks um to buy

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Speaker 1: in a consumer internet space, we think we've got a

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Speaker 1: couple of options. I think the best one is actually

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Speaker 1: Netflix right now. The truth is that the major Internet

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Speaker 1: stocks are all pretty much at all time highs, whether

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Speaker 1: that's Amazon, Google, and Facebook. Those are the three biggest

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Speaker 1: large cap names, and they're all very close to their

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Speaker 1: all time high. So there's nothing dramatically for sale. Netflix

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Speaker 1: is intriguing because we do view it as something like

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Speaker 1: for sale and this chance of the stock to double

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Speaker 1: over the next three years. I mean, I want to

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Speaker 1: make clear folks. Mr Mahaney had an outperform on Netflix

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Speaker 1: at thirty three zero. I'm sure it went down from there.

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Speaker 1: You know, you've you've you've had your rough and tuble period.

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Speaker 1: How do you sustain and outperform it one? Uh, let's see.

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Speaker 1: We know we try to be relatively um consistent with

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Speaker 1: these names. These can be secular growth winners that can

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Speaker 1: play out for a substantial period of time. Too simple.

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Speaker 1: Data points Toogle has generated online ad revenue growth for

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Speaker 1: seventeen straight quarters. Despite the obvious fact that's gotten bigger

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Speaker 1: and bigger. Amazon's retail growth has been for fourteen straight quarters,

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Speaker 1: despite the fact that it's gotten bigger and bigger, and

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Speaker 1: we see these names that have still got somewhat low

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Speaker 1: penetration rates. Maybe ten percent of retail sales are online

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Speaker 1: for an Amazon, so you can kind of count on

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Speaker 1: if they execute, well, that's the big if. But they've

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Speaker 1: got a pretty good track record now that they can

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Speaker 1: sustain these premium growth rates for longer than most people

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Speaker 1: realize at That's very much the case with Netflix, which

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Speaker 1: is just starting to tap into about half of the

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Speaker 1: global broadband markets, and as those markets build out for Netflix,

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Speaker 1: you're going to have sustained premium growth there for uh

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Speaker 1: for quite a while. There's mere term controversy on the

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Speaker 1: stock that creates the opportunity with this is it's still

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Speaker 1: in correction mode, kind of like Amazon was earlier this year,

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Speaker 1: like Google was last year, UH and frankly like um

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Speaker 1: like LinkedIn was now linked Lincoln got a great you

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Speaker 1: know pull out, you know, bailout was the word you

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Speaker 1: used in terms of the Microsoft deal. Nonetheless, we think

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Speaker 1: fundamentally Lincoln would have worked higher anyway as fundamentals improved

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Speaker 1: by more than the market had feared. What are happened

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Speaker 1: to the story of all the people like Amazon who

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Speaker 1: We're going to go into the conflict, you know, business

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Speaker 1: up against Netflix and produce their own streaming video and

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Speaker 1: Netflix was going to be in trouble. Mike, That's probably

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Speaker 1: the single biggest pushback I get on our Netflix by recommendation.

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Speaker 1: It's competition, particularly from Amazon, maybe a little bit from

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Speaker 1: Hulu HBO. I think what we're finding over time is

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Speaker 1: that there's actually less competition for Netflix, especially if you

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Speaker 1: leave North America. Uh in the in the US market,

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Speaker 1: Netflix has in that we think the most competitive market

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Speaker 1: is about the broadband households are subscribers. Overseas, competition is less,

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Speaker 1: and we think you're gonna see a real dramatic ramp

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Speaker 1: as they've already been able to show in a couple

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Speaker 1: of markets, like the easier ones like the UK and Canada,

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Speaker 1: but even in Latin America, even in countries as diverses

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Speaker 1: Germany and France and southern Europe, you're starting to see

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Speaker 1: a real takeoff in their adoption within broadband households. They're

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Speaker 1: the best playoff of the growth in internet TV, and

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Speaker 1: they've done a phenomenally good job. We think over the

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Speaker 1: last three years, how do you make Amazon go down

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Speaker 1: so people that missed it can possibly clan on board.

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Speaker 1: The answer is it's not, is it? I Mike, I

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Speaker 1: have a long hallway where I live, in the number

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Speaker 1: of Amazon boxes in that all way. It's just stunt

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Speaker 1: I mean, Mark Mahaney, Does it ever retreat? Sure? Absolutely?

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Speaker 1: You know. Um it's easy to look at it now

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Speaker 1: and all time high and say we won't see it

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Speaker 1: correction again. But you and I both know that that

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Speaker 1: will happen. It seems like it happens like clockwork. If

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Speaker 1: your clock is you know, thuring sixty five day clock.

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Speaker 1: So I wouldn't be at all surprised to see another

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Speaker 1: correction in Amazon. Expectations are super high, sentiments very bullish.

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Speaker 1: You know, this is more of a small buy for

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Speaker 1: us here. The biggest weakness is probably this cloud computing

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Speaker 1: business that they have, where there are some very substantial competitors.

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Speaker 1: Google and Microsoft come to mind. And if you had

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Speaker 1: another price war breakout, price cloud war breakout, that would

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Speaker 1: be a negative catalyst for Amazon. We don't see it,

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Speaker 1: but that would be the factor that could most easily

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Speaker 1: take it down. And I'm glad you mentioned this and

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Speaker 1: let me bring it up today. What is the thing

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Speaker 1: we most get wrong when we talk about the cloud?

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Speaker 1: You talk about it with authority. Munster talks about it

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Speaker 1: with authority. Jennifer Morgan was on from s A P.

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Speaker 1: North America. She's her angle on it. I feel like

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Speaker 1: an ignoramus when I talk about it. What's the number

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Speaker 1: one thing I get wrong? I think the single biggest

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Speaker 1: miss misperception on the cloud is just how early stage

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Speaker 1: or how early days we are. We think that perhaps

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Speaker 1: ten of work processes that could be migrated to the

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Speaker 1: cloud are there, which tells you that, um, even though

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Speaker 1: the combined industry maybe if you look at Amazon, Google

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Speaker 1: and Microsoft is kind of ten the fifteen billion mas

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Speaker 1: that and it's growing. Uh you know amongst those three

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Speaker 1: players year over year, that growth rate could sustain for

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Speaker 1: five to even ten years given how low the penetration

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Speaker 1: of the cloud is. That that's the single biggest mistake

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Speaker 1: we think investors are making. Is there anybody out there

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Speaker 1: that you have your eye on now that maybe Wall

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Speaker 1: Street doesn't that is going to be the next linked

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Speaker 1: In or Uh, Netflix is a little farther ahead and

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Speaker 1: linked in, but is going to be a target And

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Speaker 1: I don't you know, there's a lot of small companies

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Speaker 1: get swallowed up by the big companies, but somebody who's

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Speaker 1: going to become a household name and then maybe look

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Speaker 1: to be acquired. So uh, you know, again, there's a

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Speaker 1: lot of risk in um in trying to make any

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Speaker 1: investment decision on the hope that they be the stock

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Speaker 1: that you are buying gets acquired. One company that we

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Speaker 1: think that's part that should be part of the investment thesis,

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Speaker 1: but only one part is Yelp. We thought, we've always

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Speaker 1: thought that that a two to three billion market cap

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Speaker 1: that would be a bite sizeable acquisition for anybody looking

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Speaker 1: to tap in the local advertising dollars, with a relatively

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Speaker 1: well established brand name and with a very large customer

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Speaker 1: base that's almost entirely in the US. So therefore somebody

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Speaker 1: with a global exposure could perhaps help translate that in

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Speaker 1: overseas market. Mark Mahoney, thank you so much, very generous

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Speaker 1: of you to be with us for this half hour.

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Speaker 1: Mr Mohan, He's with RBC Capital Markets of course on LinkedIn.

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Speaker 1: Note the comments again he was in the and Sorkin

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Speaker 1: article this morning on stock based compensation. I thought that

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Speaker 1: Mr Sorkin Mike did a great job of with clarity

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Speaker 1: showing the currency known as stock within the Silicon Valley.

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Speaker 1: Ethos this in from Atlanta. The Atlanta feds wage growth

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Speaker 1: track moves up three and a half percent. Now that's

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Speaker 1: a big number. That's getting well. Three was the number

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Speaker 1: that people have fed said should be a normal rate

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Speaker 1: of you know, reasonably normal rate of wage growth. Now

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Speaker 1: the Atlanta Fed tracks this differently than the hourly wages

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Speaker 1: that we see in the payroll report, so it's not

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Speaker 1: quite comproment, but it does it does show we are

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Speaker 1: seeing gains. We do charts on radio that always works,

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Speaker 1: and one of them, Mike, is my lollypop chart, which

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Speaker 1: will feature tomorrow. I can say without hesitation, if you

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Speaker 1: go back a year in three months and you establish

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Speaker 1: a trend in the two year that we are now

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Speaker 1: two standard deviations low yield in that trend at zero

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Speaker 1: point seven. That's that's not an approximation, that's a fact too.

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Speaker 1: Standard deviations. Well, we've been there once twice, three, four, five, six, seven,

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Speaker 1: eight times in the sire and now a ninth time. Well,

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Speaker 1: it is going to be an interesting ten days ahead.

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Speaker 1: What will you look for the minutes tomorrow We've talked

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Speaker 1: about the press conference. The minutes they'll be like what

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Speaker 1: seven words that will change three weeks from now? No year?

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Speaker 1: Talking about the statements statement, it's not it's not what

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Speaker 1: they do, it's why they do what they do. What

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Speaker 1: is it because the economy is weak? Or is it

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Speaker 1: because they're just uncertain? The former means no rate increases

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Speaker 1: for the near future. Of the latter, maybe we come

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Speaker 1: back in July and do this depressing well, let us

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Speaker 1: bring you forward to good coverage and good conversation from

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Speaker 1: a cross section of people. Tomorrow one PM. Richard Clarida

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Speaker 1: of Pimco, Alan Blinder of Princeton. We are thrilled that

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Speaker 1: Ms Zentner of Morgan Stanley will join us to begin

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Speaker 1: our coverage. We are produced by y U and Ken

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Speaker 1: folio Are, Global Technical Director of Bloomberg Surveillance