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Speaker 1: This is Bloomberg Surveillance. Our basic case remains that chance

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Speaker 1: that remain will win, that Britain will not leave the EU.

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Speaker 1: The head really can't control the pace of potential real

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Speaker 1: GDP growth. They don't have much to do with that.

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Speaker 1: We expect that core inflation in Europe will continue to

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Speaker 1: run below one percent, so well below the ecbings target

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Speaker 1: of just below two percent. Bloomberg Surveillance your link to

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Speaker 1: the world of economics, finance and investment on Bloomberg Radio.

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Speaker 1: Good morning, It is seven o'clock on Wall Street. It

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Speaker 1: is noon in London, where Brexit fears reign supreme. The

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Speaker 1: Sun newspaper, the biggest paper over in the United Kingdom,

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Speaker 1: endorsing leaving the European Union. Paul's show the public moving

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Speaker 1: in that direction depending on which bookmaker you believe. The

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Speaker 1: money that on a leave is now putting the odds

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Speaker 1: at forty or so, and the momentum is definitely with

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Speaker 1: the leave side. The foot Sea down eighty points this morning,

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Speaker 1: one point three percent, the pound down by seven tenths

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Speaker 1: of eight percent one point for one six eight and

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Speaker 1: those concerns have spread pretty much around the world. Nick

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Speaker 1: in Tokyo off one percent on the day, the stock

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Speaker 1: six hundred in Europe down four points one point three percent,

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Speaker 1: the Dacks is down seventy eight points eight tenths of

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Speaker 1: a percent, and of course it's all being reflected here

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Speaker 1: in the United States with SMP futures down five points

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Speaker 1: two tenths dowly, meaning futures are off three uh thirty points.

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Speaker 1: That is a two tents drop, and it's quarter of

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Speaker 1: a percentage point fall for Nasdaq EMNY futures. The concerns

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Speaker 1: have everybody looking for safety, and as a result, as

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Speaker 1: George Goncalvas of Nomura told us on the show earlier today,

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Speaker 1: there is no risk free rate anymore. The German tenure

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Speaker 1: note is negative two basis points, the German two year

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Speaker 1: negative fifty eight. Here in the States, two year note

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Speaker 1: yield sixty nine basis points, the five year one point

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Speaker 1: one percent, and the ten year goes for one point

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Speaker 1: five eight. That reserved. Starts a two day meeting today,

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Speaker 1: decision tomorrow, nothing expected, but it will be interesting to

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Speaker 1: see what they say in light of the idea of

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Speaker 1: a Brexit coming. Bank of England meets on Thursday. Not

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Speaker 1: expected to do anything because they're so close to the election,

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Speaker 1: but the Japanese Central Bank meets on Thursday as well.

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Speaker 1: They may take their cues from the Fed. There is

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Speaker 1: a feeling they need to do more, but will they

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Speaker 1: given the ructions in the market. It is a wild

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Speaker 1: and crazy time tom keen for people in the markets,

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Speaker 1: and it's very hard for people to know what to do.

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Speaker 1: The story of the day yesterday at this time, Microsoft

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Speaker 1: buying linked In came out about this time, big move

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Speaker 1: of course in LinkedIn shares went from about one thirty

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Speaker 1: to one nine. Training for any one right now, it's

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Speaker 1: actually a tenth of a percent decline. But if you

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Speaker 1: owned the stock yesterday, you'll take it Microsoft at fifty

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Speaker 1: fourteen right now down four tense But uh, not a

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Speaker 1: lot of movement in Microsoft shares yesterday. Yeah, I mean

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Speaker 1: that that's all there was to a Gene Munster with

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Speaker 1: us with Piper Jeffrey Uh this morning Bloomberg Surveillance This

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Speaker 1: morning brought you by Investo. Looking for investment views, investcos

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Speaker 1: high conviction portfolio managers are just to click away. Go

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Speaker 1: to investco dot com slash us to subscribe to the

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Speaker 1: investco blog and follow at investco us on Twitter. I

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Speaker 1: n V E s c o U s at investco

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Speaker 1: US on Twitter, Gene Munster with us. We're not going

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Speaker 1: to talk Apple today. That's usually what we talked about.

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Speaker 1: But let's d Apple. I'se maybe a little bit, but

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Speaker 1: d apples Gene. Before this transaction, was linked In a

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Speaker 1: troubled company. Uh, it was. It was not a troubled company.

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Speaker 1: It was a troubled company. The fundamentals were not, but

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Speaker 1: in terms of how investors viewed it, they viewed it

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Speaker 1: as a trouble company. So I think that just to

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Speaker 1: give some context to that, is that LinkedIn management was

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Speaker 1: considered one of the best management teams in in the internet, uh,

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Speaker 1: two or three quarters ago, and then they hit a

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Speaker 1: rough spot and it was shocking how quickly investors thought

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Speaker 1: of them as totally incompetent. And so when you get

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Speaker 1: those massive swings on things like that, I think what

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Speaker 1: it shows is just a loss of confidence. But it

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Speaker 1: isn't necessarily a troubled company. And so I think that

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Speaker 1: they had some very real growth drivers around talent solutions

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Speaker 1: and education and their core business, the recruiting business, was

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Speaker 1: still getting the benefit from annual price increases, which means

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Speaker 1: that it's a very sticky platform. So I think that

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Speaker 1: Microsoft really capitalize on some of that investor fear. Microsoft

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Speaker 1: doesn't need an employment agency, though. What does LinkedIn have

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Speaker 1: that Microsoft can build on and monetize? The core is

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Speaker 1: about sixty percent of LinkedIn's revenue is this recruiting business

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Speaker 1: which they don't have. There's another twenty percent that is

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Speaker 1: a membership business if you pay, for example, to see

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Speaker 1: who's viewed your linked In profile. So what Microsoft essentially

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Speaker 1: got was this this this this high visibility, reoccurring business

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Speaker 1: that has a higher growth potential than their core business.

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Speaker 1: And so I think that's what they were going after,

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Speaker 1: a large addressable market with a recurring revenue base. Yeah,

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Speaker 1: but to do what with what? What I mean? The

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Speaker 1: revenues from LinkedIn are tiny compared to what Microsoft makes. Um,

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Speaker 1: how do they integrate this? What? What is it that?

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Speaker 1: Why would a company like Microsoft buy them? So from

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Speaker 1: you know, I come at it from the LinkedIn perspective.

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Speaker 1: And one of the things that LinkedIn has is this

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Speaker 1: navigator business and that essentially it allows you to use

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Speaker 1: the graph of linked In to make connections for sales purposes.

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Speaker 1: And so that would be an example of something that

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Speaker 1: Microsoft didn't have, and they could use that to compete

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Speaker 1: more with for example, salesforce and to start to build

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Speaker 1: some of those type of applications, and so they have.

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Speaker 1: That's that's an example is that you basically are acquiring

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Speaker 1: this network. Microsoft didn't have that. And when you talk

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Speaker 1: about having eight of the white collar jobs in the

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Speaker 1: US and the UK on this and a fast growing

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Speaker 1: portion of them outside of that, that's something that's valuable

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Speaker 1: to a bigger company. How much of this is about

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Speaker 1: retaining employees? Gene must years ago, I'd look at diversified

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Speaker 1: industrials in a CEO would say to me, look, all

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Speaker 1: we're doing is acquiring or in jeers. Okay, I get

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Speaker 1: that with an industry, but you've got a Silicon valley

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Speaker 1: culture just looking for stock based pop in the capital

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Speaker 1: gains treatment out of the Andre Russ Sorkin writes us

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Speaker 1: up with your colleague and crime Mark Bahney, side of

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Speaker 1: this morning in the New York Times. You and Mark

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Speaker 1: are expert at the mathematics of stock based compensation. Were

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Speaker 1: the employees at linked In so underwater that they have

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Speaker 1: to cheer this transaction? They do? I mean that that's

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Speaker 1: a part to it that must have been in the

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Speaker 1: back of Lincoln's mind is that when you have call it,

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Speaker 1: let's say, forty per cent of your your your your

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Speaker 1: employees that have stock that's underwater. Uh, that's something that

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Speaker 1: that they really need to address, and so you start

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Speaker 1: to lose some talent if that's not the case. Now

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Speaker 1: fast forward to today. Now those those those employees have

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Speaker 1: been made whole. But basically Microsoft inherits a problem then

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Speaker 1: too is now that they've been made whole and their

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Speaker 1: their stock has vested. Now, how does Microsoft take that

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Speaker 1: and start to motivate them? So they have to reissue

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Speaker 1: stock and the cycle continues, the horses out of the barn.

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Speaker 1: But the premium paid by Microsoft is Lincoln worth that?

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Speaker 1: I think it is. If you look at for example,

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Speaker 1: next year, call it, they'll have operating income around a

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Speaker 1: billion and a half dollars and you look at the

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Speaker 1: twenty six billion dollar transaction growing at Obviously, evaluation is

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Speaker 1: very subjective, but I think that that it does make

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Speaker 1: sense for for that kind of valuation based on what

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Speaker 1: the operating income is in the growth rate, How does

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Speaker 1: this real? What's the game strategy here? The game theory

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Speaker 1: almost for Mark Zuckerberg and Mr Dorsey or all the

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Speaker 1: other players and names you know better than that we know.

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Speaker 1: How do they react and respond today? Does everybody dial

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Speaker 1: one eight hunder Morgan Stanley and say let's do something.

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Speaker 1: How does this work? Gene? Well, I think that what

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Speaker 1: it doesn't create a ton of urgency because I think

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Speaker 1: these other companies have their targets already in play. I

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Speaker 1: think the way it impacts them is that the companies

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Speaker 1: that are in play, uh see, their evaluations potentially is

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Speaker 1: higher now, and so I think that there is kind

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Speaker 1: of all these companies kind of essentially got got a

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Speaker 1: higher valuation or a raise, however you want to think

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Speaker 1: about it. Now, when you look at the big behemoths

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Speaker 1: like Facebook and Google and Apple, they've got so much

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Speaker 1: money that in so much stock where they can do things.

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Speaker 1: Even if the evaluations on some of these targets go

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Speaker 1: up by ten or it really doesn't change the game.

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Speaker 1: I think Michael Eisner, Disney and quickly Gene will come

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Speaker 1: back and dinner once with Mr Eiser and his brilliant

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Speaker 1: insight was I have to say no to a lot

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Speaker 1: of things. What does Tim Cook say no to? Given

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Speaker 1: this foolishness? I think he said no to a lot

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Speaker 1: of things, I mean a lot of small acquisition. Yeah.

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Speaker 1: I think that that's that's worked out. I think in

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Speaker 1: Tim Cook's case, I think he's probably going to say

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Speaker 1: yes to more things over over the next several years.

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Speaker 1: And so at least that's the message he's been giving investors.

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Speaker 1: It's just two that they're open to doing bigger deals,

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Speaker 1: and so I think that, uh, you know, uh, what

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Speaker 1: should have be said no to. I guess maybe in hindsight,

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Speaker 1: maybe they paid a little bit too much for Beats

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Speaker 1: because the hardware business definitely dropped off, But that gave

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Speaker 1: him the framework for the music business, which they really

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Speaker 1: played up. Yesterday. Gene Muster will come back with Mr Muster.

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Speaker 1: I guess we have to talk about Apple. He's with

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Speaker 1: Piper Jeffrey looking at Microsoft and LinkedIn as well. Futures

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Speaker 1: are negative seven, they're not negative. For a little better

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Speaker 1: tape in the last two hours, Uh, they yield one

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Speaker 1: point five eight wow, one point five eight percent. This

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Speaker 1: hour of Surveillance brought to you by mont Kisco Volvo.

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Speaker 1: Visit Mount Kisco Volvo dot com. Here's Michael Barr with

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Speaker 1: news headlines. Mike Tom, thank you very much. Authorities are

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Speaker 1: still investigating possible motives in the Florida nightclub shootings. FBI

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Speaker 1: director James Cummy says there is nothing so far to

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Speaker 1: indicate the attack by year old Omar Martine was directed

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Speaker 1: from outside the US. Matine, an American born Muslim, appears

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Speaker 1: to be a home grown extremists, according to Comy. In

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Speaker 1: New York City, thousands of people attend individuals in the

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Speaker 1: honor of the victims of the Orlando nightclub attack. How

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Speaker 1: Speaker Paul Ryan plans to unveil a regulatory overhaul plan

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Speaker 1: that includes scaling back the dot frank financial regulation law

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Speaker 1: and also calus for expanding energy production on federal land

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Speaker 1: and limits lawsuits against businesses. Global News twenty four hours

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Speaker 1: more than a hundred fifty news bureaus around the world.

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Speaker 1: Michael Barr, Mike Tom and Michael thanks so much. As

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Speaker 1: Mike McKee mentioned historic day for yields a German tenure

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Speaker 1: and negative point zero one four percent Well Jane Munster

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Speaker 1: and Microsoft and linked in Bloomberg Surveillance. Bloomberg Surveillance is

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Speaker 1: Business Flash being brought to you by the accountants and

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Speaker 1: advisors at Eisner Emper. Cyber security is on the mind

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Speaker 1: of every business leader. Managing cyber risk should be too.

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Speaker 1: We get started with a cyber risk assessment. Learn more

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Speaker 1: eisenery Emper dot com slash cyber risk risk aversion is

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Speaker 1: the phrase of the day that's prevailing in the markets

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Speaker 1: and that is leading to slides in the Asian and

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Speaker 1: European stocks. This all because the UK's upcoming vote on

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Speaker 1: the European Union membership is a fueling anxiety to the

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Speaker 1: center bank meetings. Here in the U S and Japan,

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Speaker 1: the pounds sterling falling along with oil. Sovereign bonds are rallying.

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Speaker 1: Case in point, the German tenure. They yield negative point

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Speaker 1: zero one percent this morning. As we check the markets

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Speaker 1: right now, SMP futures they're down five points down futures

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Speaker 1: down thirty one. In the nastic futures they are twelve

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Speaker 1: points lower, and the yend Japanese hand strengthened just a bit,

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Speaker 1: up three tents one of the haven currencies at one

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Speaker 1: oh five eight eight. The benchmark tenure in the US

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Speaker 1: one point five eight percent at nimax crew down sixty

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Speaker 1: six cents of barrel at forty eight twenty two. Check

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Speaker 1: the markets for you every fifteen minutes during the tradeing day.

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Speaker 1: Right here on Bloomberd Michael and Tom John Tucker, thank

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Speaker 1: you very much. We're talking with Jean Munster of Hyper Jaffrey,

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Speaker 1: and we were talking about Microsoft buying linked In, and

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Speaker 1: just before the break, Tom uh and Jean touched on

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Speaker 1: the idea of Apple. They're having their Worldwide Developers Conference.

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Speaker 1: I sort of want to link the two gene. Microsoft

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Speaker 1: had a hundred billion dollars from which it uh just

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Speaker 1: or with which it decided to buy linked In, although

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Speaker 1: they're going to issue new debt. Apple has two and

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Speaker 1: thirty three billion. As Tim Cook stands on stage, it

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Speaker 1: talks about improvements to Siri. Is that really going to

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Speaker 1: move the needle for Apple? Or should they put can

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Speaker 1: they put? Will they put that two hundred and thirty

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Speaker 1: three billion dollars to work and buy something else. One

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Speaker 1: small footnote is that that's the net cash. They have

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Speaker 1: some debt too, So if you kind of backed that out,

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Speaker 1: call it a hundred seventy d sixty billion in cash,

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Speaker 1: and then they have their market cap, you know, call

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Speaker 1: that another five billion on top of that. So they've

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Speaker 1: got a lot to work with. Your point, uh, do

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Speaker 1: I think that they need to do? Is the stuff

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Speaker 1: yesterday enough to move the needle, and it's enough to

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Speaker 1: move the needle longer term around the iPhone. Essentially, what

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Speaker 1: it's going to do is allow you to do more

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Speaker 1: with your iPhone because they're opening up parts of the

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Speaker 1: operating system that are going to allow developers to enrich

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Speaker 1: the iPhone experience. And we can go through some examples.

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Speaker 1: But so I think that that's great, but it still

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Speaker 1: doesn't answer one of the biggest questions that investors have

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Speaker 1: is how do you get a company the size of

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Speaker 1: Apple to grow and to try to go after some

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Speaker 1: of these new markets. And that's where their balance sheet

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Speaker 1: and their equity comes into play, is that they can

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Speaker 1: use that to try to get themselves in a better

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Speaker 1: position from some of these other markets longer term. But

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Speaker 1: is there any sign that Mr Cook is interested in that?

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Speaker 1: You know, he's if you take them at his word,

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Speaker 1: which is a good thing to do, because he's I

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Speaker 1: think he's earned that ability. He's he's been been hinting

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Speaker 1: for the past, call it a year and a half,

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Speaker 1: that they're gonna do something bigger. And they're open to

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Speaker 1: doing bigger deals, and they obviously talk a lot about

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Speaker 1: some of the the smaller deals that they do, and

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Speaker 1: they've made some smaller called billion dollar equity investments. But

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Speaker 1: so do I think that he's willing to do it?

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Speaker 1: I think the answer is absolutely, And I think that

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Speaker 1: they're they're just laying the groundwork. They're gonna lay the

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Speaker 1: groundwork for these future growth opportunities. Here's the math, folks.

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Speaker 1: Free cash flow the last five years seventeen billion, thirty

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Speaker 1: three billion, forty three billion, forties six billion, fifty billion,

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Speaker 1: seventy billion, seven zero billion, and then they completely collapse

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Speaker 1: into the gloom of gene muster down to billions. Supposedly,

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Speaker 1: gin there isn't a company on the planet that wouldn't

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Speaker 1: dream of that cash flow dynamic. If you look at

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Speaker 1: price and unit at the revenue line. If they play

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Speaker 1: with price, do they sacrifice units or critically, do they

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Speaker 1: sacrifice gross margin? I don't see it if they if

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Speaker 1: they sell this stuff at a lower price, they don't

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Speaker 1: say acrifice gross margin? Do they? They haven't. They've done

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Speaker 1: a masterful job of of slightly lowering the price and

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Speaker 1: keeping margins at where they're at or slightly raising margins.

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Speaker 1: And the reason why they can do that most companies can.

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Speaker 1: It's just because they have so much economies of scale.

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Speaker 1: When you're producing more than two million iPhones a year

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Speaker 1: and the next biggest single UH hardware phone hardware is

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Speaker 1: closer to twenty million, it just gives you some massive

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Speaker 1: scale and they can leverage that. They lower the price

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Speaker 1: of the iPhone sc that came out in this spring

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Speaker 1: that was about eleven percent lower than a typical entry level.

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Speaker 1: What happened and what the market nothing? The margins were fine?

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Speaker 1: They they they so I think that, you know, if

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Speaker 1: they really dropped the price, that would be something else.

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Speaker 1: But what the way they've balanced this over the last

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Speaker 1: several years, they've been able to slightly lower the price

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Speaker 1: and that's been positive for for units. Is that your

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Speaker 1: bulk call. Then, I mean within all the two typical

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Speaker 1: uproar of a new product cycle, the fact is they're

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Speaker 1: gonna do what every manufacturing company does, which has managed

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Speaker 1: the margins to a good cash flow outcome. Am I wrong?

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Speaker 1: You're You're right, And that's that's part of our call.

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Speaker 1: I think. The other part is that investors are notorious

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Speaker 1: for overreacting the near term. I think LinkedIn is a

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Speaker 1: textbook example of that. It's a good company that investors

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Speaker 1: got frustrated with. Apple. Investors are frustrated about what the

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Speaker 1: potential longer term growth is. But I think what you're

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Speaker 1: gonna see, and this is why we were bullish on

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Speaker 1: the stock, is that the overall growth is going to

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Speaker 1: be down about eight percent in calendar sixteen, but in

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Speaker 1: calendar seventeen, the overall growth is gonna be up about

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Speaker 1: ten or twelve percent. And so that swing back to

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Speaker 1: growth and it doesn't take much to get there. It

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Speaker 1: just takes an average iPhone seven cycle. That swing back

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Speaker 1: to growth should be positive for Apples multiple and that's

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Speaker 1: why we're positive on the stock. Well gena very quickly.

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Speaker 1: Um is this just holding it pattern though until they

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Speaker 1: have to do something different. To drive growth. I think

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Speaker 1: that the stock can take a nice move higher as

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Speaker 1: we get back to growth. So I think that that's

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Speaker 1: the the safer bet and the reason why we're optimistic.

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Speaker 1: I think that as soon as the stock re rates higher,

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Speaker 1: then this is this question about how are we going

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Speaker 1: to get to the next level and what areas of

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Speaker 1: growth is going to re emerge and and that's probably

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Speaker 1: the next phase that we're gonna be talking about in

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Speaker 1: six months. This has been Gene Monster, very generous for

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Speaker 1: your time this morning, particularly on M S F, T, L, N, K,

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Speaker 1: D and L and A Piper Jeffrey just just I

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Speaker 1: can't say enough folks about you know, we get we

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Speaker 1: get a wonderful guest. One block great, two blocks is

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Speaker 1: a real gift, Gene Munster, Thank you so much. Futures

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Speaker 1: were negative seven, they're not negative for a little bit

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Speaker 1: of strength to a very difficult tape. Bloomberg Surveillans. Bloomberg

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