Credit: Reuters/Charles Platiau

PARIS | Fri Jul 29, 2011 2:49am EDT

PARIS (Reuters) – European aerospace and defense group EADS forecast a significant improvement in operating profit next year after stable earnings this year as a pickup in demand leads to a surge in orders for Airbus planes.

The group posted forecast-beating second-quarter results on Friday and raised its free cash flow target for the year to around 1 billion euros ($1.44 billion), excluding any spending on acquisitions. It now has net cash of 11 billion euros. Quarterly earnings before interest and tax (EBIT) rose 15 percent to 371 million euros in the three months to June 30, EADS said in a statement. Sales rose 6 percent to 12.1 billion.

EADS had been expected to post EBIT of 317 million euros, down from 323 million a year ago, on sales of 11.6 billion in the second quarter, according to a Reuters analyst poll.

“Our results for the first half of 2011 mirror the strong demand in the commercial aviation sector,” Chief Executive Louis Gallois said in a statement.

EADS said it still expected 2011 EBIT before one-offs to remain stable compared with the 2010 level at around 1.3 billion euros. Earnings per share could be above or below last year’s level depending on the euro’s strength against the dollar.

But for 2012, the group expects a “significant improvement” in its EBIT thanks to “higher volume, better pricing and improvement of A380 performance at Airbus,” EADS added.

EADS said planemaker Airbus should deliver 520 to 530 aircraft this year, including around 25 A380 superjumbos, and win more than 1,000 gross orders, helping revenue exceed last year’s level.

Airbus bagged hundreds of fresh orders at the Paris Air Show last month, and recently scored a major goal against rival Boeing as it won part of a key order from U.S. carrier AMR Corp’s American Airlines.

($1=.6963 Euro)

(Reporting by James Regan; Editing by Christian Plumb)

Petrofac Ltd. (PFC), the U.K.-based oilfield services and engineering provider, declined 2.2 percent as Barclays Plc advised selling the shares. Accor SA (AC) slid 1.2 percent as rival Marriott International Inc. forecast earnings that fell below analysts’ estimates for its per-share profit.

The Stoxx Europe 600 Index sank 0.4 percent to 268.86 at 8:35 a.m. in London. Futures contracts on the Standard & Poor’s 500 Index expiring in September rose 0.2 percent to 1,315 and the MSCI Asia Pacific Index retreated 0.3 percent.

“It was hardly a surprise, although the market seems to have acted like it was,” said Ben Potter, a market strategist at IG Markets in Melbourne. “It appears the storm clouds have formed on the horizon once again.”

Moody’s put the U.S. on review for the first time since 1995 as talks to raise the country’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to default. Even a temporary default will probably have “large systemic effects” on the economy and Treasury finances by disrupting money funds, the repurchase-agreement market and foreign investors’ willingness to buy the government’s debt, according to JPMorgan Chase & Co.

Greece’s Debt Rating
Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.”

European stocks had rallied yesterday as Federal Reserve Chairman Ben S. Bernanke said he’s prepared to provide more stimulus if needed and as China’s economic growth beat estimates. The Stoxx 600 has rallied 87 percent including dividend income since March 2009 as governments and central banks from Washington to London enacted emergency stimulus measures to revive the economy.

Italy taps bond markets today as its Senate votes on budget cuts to tame a debt burden that is the second largest in Europe and has prompted investors to drive borrowing costs to a 14-year high. The treasury plans to sell as much as 5 billion euros ($7.1 billion) of four different bonds with maturities ranging from five to 15 years. It’s the first sale of longer-term debt since the country’s 10-year yield reached 6.02 percent on July 12, the highest since 1997. The yield fell from that peak after Italy successfully sold treasury bills the same day.

U.S. Earnings Season

JPMorgan Chase & Co. is among three companies in the S&P 500 that are scheduled to report earnings today.

Reports on retail sales in the U.S. and the government’s weekly claims for jobless benefits will be published before U.S. equity markets open today. Sales at U.S. retailers probably stagnated in June, reflecting declining demand for cars and rising unemployment, economists said before today’s report. Claims for jobless benefits last week dropped to 415,000 from 418,000 the previous week, according to the median forecast of economists surveyed by Bloomberg.

Germany’s Landesbank Hessen-Thueringen snubbed the European Union’s bank stress tests two days before the publication of results, refusing to give the European Banking Authority permission to publish all of its data.

Petrofac dropped 2.2 percent to 1,469 pence after the company was downgraded to “underweight” from “equal weight” at Barclays.

Accor, Intercontinental Hotels
Accor and Intercontinental Hotels Group Plc (IHG) fell 1.2 percent to 29.93 euros and 2.3 percent to 1,253 pence, respectively, after rival Marriott forecast third-quarter earnings of 25 to 29 cents per share. That fell short of analysts’ estimates for earnings per share of 30 cents.

Software AG (SOW) tumbled 13 percent to 36.55 euros for the biggest decline in the Stoxx 600 as Germany’s second-biggest maker of business software said profit in the second quarter will be little changed compared with a year earlier, while revenue declined partly due to lower license sales.

Daily Mail & General Trust Plc (DMGO) fell 2.8 percent to 427.1 pence as advertising sales declined 7 percent in the 13 weeks through July 3.

Mothercare Plc (MTC) decreased 3.6 percent to 396 pence as first- quarter U.K. comparative sales dropped 4.3 percent.

Lafarge SA (LG) gained 1.7 percent to 40.30 euros as it agreed to sell its Gypsum units to Etex Group for 1 billion euros.
source;bloomberg

The price equates to about 530 pence a share, said the person, who declined to be identified because negotiations are still in progress. The proceeds will be split among Cazenove’s 1,500 shareholders and a deal is likely to be announced before the end of this month, the person said.

“This makes sense from a geographic diversity and a revenue diversity perspective,” said Douglas Ciocca, managing director at Renaissance Financial Corp. in Leawood, Kansas, which manages $1.9 billion, including shares of New York-based JPMorgan. Cazenove will help deepen the bank’s international client relationships and provide steady income, he said.

JPMorgan forged its venture with London-based Cazenove, whose clients include Queen Elizabeth II, in November 2004 to improve its relations with corporate clients. JPMorgan Chief Executive Officer Jamie Dimon, 53, led the No. 2 U.S. bank to a $3.6 billion third-quarter profit and has completed deals while rivals including Morgan Stanley and Citigroup Inc. had losses.

In June, JPMorgan bought the majority of the shares of New York-based hedge fund Highbridge Capital Management LLC it didn’t already own after co-founder Henry Swieca announced his departure. The bank completed the purchase ahead of schedule.

JPMorgan Cazenove Holdings has reported profits every year since it began, even as markets crumbled in 2007 and 2008. Cazenove gained this year as European companies raised $108 billion in rights offerings amid a dearth of mergers.

HSBC, Rio Tinto

The firm advised on HSBC Holdings Plc’s record 12.5 billion-pound fundraising in April and mining company Rio Tinto Group’s $15.1 billion-pound offer in June, which propelled JPMorgan to the No. 1 rank among advisers on European rights offers, according to data compiled by Bloomberg. The firm is advising Lloyds Banking Group Plc, Britain’s biggest mortgage lender, on a planned 13.5 billion-pound rights offering.

The firm also worked with insurer Friends Provident Group Plc on its 1.9 billion-pound takeover by Clive Cowdery’s Resolution Ltd. in August and Xstrata Plc on a planned 29.2 billion-pound merger with Anglo American Plc. Xstrata in October ended the deal to create one of the world’s largest mining companies five months after Anglo American rejected the offer.

The joint venture was among the first deals arranged by William Winters after taking over as co-CEO of JPMorgan’s investment bank in early 2004. Dimon ousted Winters, 48, in September.

Under the terms of the joint venture, after five years, JPMorgan had an option to buy the remaining half from Cazenove, and the U.K. broker had the right to sell to JPMorgan. The companies have until February to exercise their options.

Mayhew’s Payout

David Wells, a London-based JPMorgan spokesman, and Cazenove spokeswoman Tessa Murray declined to comment. The pending transaction was reported yesterday by the Sunday Telegraph and the Sunday Times in London.

Eighty Cazenove partners will split about 650 million pounds, the Sunday Times reported, without specifying where it obtained the information. Chairman David Mayhew may earn as much as 20 million pounds in the deal, the Times said.

JPMorgan’s investment bank had third-quarter revenue of $2.86 billion from Europe, the Middle East and Africa, according to a regulatory filing. Total net revenue for the unit was $7.51 billion.

JPMorgan paid 110 million pounds to Cazenove executives and investors and pumped 50 million pounds into the venture when it started. Cazenove also contributed 50 million pounds.

The firm was founded in London by the Cazenove family, who were descendents of French Hugenots in 1819, according to the company’s Web site.

Google, the powerhouse of Silicon Valley, and AT&T, champion for the old-line phone industry, are marshaling political allies, lobbyists and—in AT&T’s case—labor unions for a fight over proposed “net neutrality” rules that could affect tens of billions of dollars in investments needed to upgrade the U.S. broadband network, which lags in speed and affordability compared with some countries.

On Thursday, the Federal Communications Commission made good on its promise to push new rules that would require Internet providers such as AT&T to deliver Web traffic without delay.

Broadly, that means cable and phone companies couldn’t block or slow access to services from Google, Netflix or others that are a drain on their networks or could compete with their businesses.

But as the details of the new rules are hammered out in coming months, AT&T and Google are ramping up efforts to ensure the FCC doesn’t impose rules that could hurt their profits or expansion plans.

Plenty of lobbyists have made their concerns about the FCC’s proposal known to their political allies over the past few weeks. But AT&T lobbyists were particularly active, swarming Capitol Hill and state houses, prompting a bipartisan mix of governors, congressmen and senators to send worried letters to the FCC. Two big labor unions have taken out newspaper ads attacking the new rules.

“Google to date has gotten relatively a free pass that they’re somehow promoting the public good on net neutrality as opposed to, what I see, is that they’re trying to entrench their business model,” said Robert Quinn, AT&T’s senior regulatory lawyer in Washington.

Google responded this week with letters of support from dozens of technology-company CEOs and venture capitalists.

“It’s not too strong to say we were caught off guard” by AT&T’s efforts, says Richard Whitt, Google’s top Washington policy lawyer, who said AT&T was deliberately trying to make the issue about Google, not the Internet itself.

“Part of it is this notion that you find one name and you make it the object of all your scorn and your vilification,” Mr. Whitt added. “What we represent unnerves them.”

As phone and video services have migrated online, the FCC has struggled to stretch its authority over new technologies. The FCC’s net neutrality proposal, driven by Chairman Julius Genachowski, is the strongest move yet by the federal government to assert control over the rules of the road on the Internet.

Mr. Genachowski and his aides have been taken aback by the uproar. “In the run-up to today’s meeting, there has been a deluge of rumors, and no shortage of myths and half-truths,” Mr. Genachowski said during Thursday’s FCC meeting. “We’re addressing a topic of great importance, where parties have strong views based on differing perspective and experiences.”

FCC commissioners voted unanimously to move forward with the rule-making process but the two Republicans on the commission disagreed on the need for them and raised concerns about how the rules might apply to wireless providers and premium services that cable and phone companies want to offer.

AT&T and other Internet-access providers want latitude to manage traffic on congested wireless networks and freedom to devote a chunk of their wired networks to selling more expensive services. Internet providers are worried regulators are assuming veto power over their efforts to develop new revenue streams from their Internet lines.

Google and other Internet companies fret that phone and cable companies will hobble their efforts to offer competing services online or will try charging them more for better connections to consumers.

Google wants phone and cable companies to deliver all traffic equally, so carriers can’t get in the way of it offering consumers high-definition TV shows or movies on YouTube or phone services like Google Voice.

Thus far, there have been only two high-profile instances of blocking or slowing Internet traffic, and both stopped soon after the FCC told the companies to knock it off.

The skirmishing over federal regulation of the Web between AT&T and Google has gone on for several years. But the FCC’s move to put forward stronger open Internet rules has escalated the fight.

AT&T recently accused Google of blocking calls with its Google Voice service, and provided evidence to the FCC that the search giant wasn’t connecting calls to a convent of Benedictine nuns, among others. The FCC launched an inquiry.

Earlier this week, two big labor unions—the Communications Workers of America and the International Brotherhood of Electrical Workers—took out advertisements in the Washington Post raising concerns that the new rules could discourage investments in telecommunications infrastructure, which to the unions means jobs.

Google returned fire late Sunday night, releasing a letter from 24 chief executive officers and tech-company founders, including Facebook Inc.’s Mark Zuckerberg, and IAC/InterActiveCorp.’s Barry Diller, urging the FCC to move ahead with the proposal. A similar letter, from more than two dozen venture capitalists, arrived at the FCC Tuesday morning.

It’s not the first time the two companies have faced off in Washington. AT&T and other wireless carriers were infuriated when Google successfully pushed the FCC to impose conditions on airwaves auctioned in 2008. Google bid enough to trigger the conditions—some $4.6 billion—and promptly dropped out of the auction. The wireless carriers weren’t much happier when Google helped to successfully push the FCC to set aside some valuable airwaves for free, unlicensed use by potential competitors.

Google’s success at getting the FCC to embrace its vision of the Internet hasn’t been matched at other agencies. Last month, the Justice Department urged a federal appeals court to reject a settlement between Google and the Authors Guild and Publishers over its book search service.

A Federal Trade Commission investigation prompted Google CEO Eric Schmidt to leave Apple Inc.’s board and Genentech Inc. CEO Arthur Levinson to leave Google’s board.

Meanwhile, both Congress and the FTC have expressed concerns about current online advertising and privacy practices of Internet companies including Google. Consumer groups have also weighed in, along with advocacy groups such as the Future of Privacy Forum, which is funded by AT&T.

Second-quarter net income of $1.82 billion, or $2.30 a share, compares with a net loss of $5.36 billion, or a split- adjusted $41.13, a year earlier, New York-based AIG said today in a regulatory filing. Operating income, which excludes some investment results, was $2.57 a share, beating the average estimate of five analysts surveyed by Bloomberg by $1.07.

The results may ease pressure on Robert Benmosche, AIG’s fifth chief executive officer since 2005. The former MetLife Inc. head, who replaces Edward Liddy next week, has to dismantle AIG to repay loans within a $182.5 billion bailout. The insurer posted more than $100 billion in net losses driven by failed housing market bets in the six quarters ended March 31.

“This buys him more time because it shows they’re getting some traction,” said Haag Sherman, who helps oversee $7.3 billion as chief investment officer of Houston-based Salient Partners. “He can use the operating profit to show that they have good assets and they just need more time to divest them in an orderly fashion to get the best prices for shareholders and the U.S. government.”

Share Surge

AIG climbed $4.61 to $27.14 at 4:15 p.m. New York Stock Exchange composite trading. The insurer’s shares surged 71 percent this week through yesterday on speculation results would improve. AIG in June gave investors one new share for every 20 they turned in, a so-called reverse split the firm said would help keep the stock above $1 and avoid delisting. The stock plunged more than 90 percent in the past 12 months.

The cost to protect against an AIG default dropped to the lowest in five months today. Swaps on AIG fell 5.2 percentage points to 16.5 percent upfront, according to CMA DataVision. The price, which means it would cost $1.65 million initially and $500,000 annually to protect $10 million of AIG debt from default for five years, is the lowest since Feb. 20. The upfront cost has dropped 12.5 percentage points since Aug. 4.

Shareholders’ equity, a measure of assets minus liabilities, improved 27 percent to about $58 billion from $45.8 billion on March 31. Realized investment losses narrowed to $859 million from about $4 billion a year earlier. Rivals including MetLife, the largest U.S. life insurer, and Aflac Inc., the top seller of supplemental coverage, recorded gains in book value as fixed-income holdings rebounded.

$2.2 Billion Injection

AIG Financial Products, the unit that sold credit-default swaps blamed for the insurer’s near collapse, reported a $132 million operating loss in the quarter, narrowing from a $6.2 billion loss a year earlier. The results included $636 million in unrealized valuation gains on its swap portfolio.

AIG said it has injected $2.2 billion into its U.S. life insurance and retirement services operations to help the units maintain “solid” risk-based capital ratios, a measure of an insurer’s strength. AIG tapped $1.2 billion from a $29.8 billion Treasury facility announced in March to supplement a previous $40 billion capital investment.

“While our insurance companies’ operating results remain challenged, largely driven by weak economic conditions and the lingering effect of negative AIG events earlier in the year, performance trends stabilized from the first quarter,” Liddy said today in a statement.

Property Coverage

The company’s life and retirement division, including U.S. and overseas units, reported a 42 percent decline in operating profit to $1.52 billion on lower assets under management and declining sales of new policies. Sales of investment-linked products had been affected by publicity about the company’s bailout, the insurer said.

In the property and casualty insurance division, earnings excluding some investment results fell 40 percent to $1.02 billion. Sales declined about 19 percent as the economy slowed and clients bought coverage from competitors. For every dollar in premiums collected, the company used 98.2 cents to pay claims and expenses, up from 92.2 cents a year earlier.

Rates charged for U.S. commercial insurance slipped 4.9 percent in the second quarter, according to the Council of Insurance Agents and Brokers. Prices have fallen in every period since 2004 as insurers compete for business. The insurer’s property-casualty unit was renamed Chartis Inc. and may eventually sell a minority stake to a buyer or in a public offering.

Plane Leasing

American General Finance Corp., the consumer lending business, posted an operating loss of $202 million in the quarter, compared with a $40 million loss a year earlier. The Evansville, Indiana-based lender has been selling receivables to improve liquidity after cutting back on lending. American General said last month it would get as much as $975 million selling mortgage-backed certificates to Credit Suisse.

International Lease Finance Corp., the Los Angeles-based plane-leasing unit, posted a 4.8 percent decline in operating profit to $335 million on depreciation expenses. AIG is trying to sell both American General and ILFC.

AIG’s so-called partnership investments, which include private-equity and hedge fund holdings, posted a $227 million loss, the fourth consecutive losing quarter. Buyout funds caused a $348 million loss and hedge funds gained $121 million. AIG had $19 billion in partnership assets as of June 30, compared with $20.4 billion on March 31.

Japanese Tower

Under Liddy, appointed by the government in September, AIG started a plan to shed most businesses excluding property- casualty operations. He was forced to adjust the plan to include placing three major divisions into special purpose vehicles and seek relaxed terms on AIG’s government loans as the credit crisis hobbled potential buyers’ ability to make bids.

The company has struck deals to raise about $7.4 billion by selling assets including a U.S. auto insurer, an equipment guarantor and a Japanese building. That compares with $42.2 billion the company owed on a Federal Reserve credit line as of last week, in addition to the Treasury investment of more than $40 billion.

AIG said it will hand over stakes in two of its biggest non-U.S. life insurance units in exchange for a $25 billion reduction of its Fed debt. The company said today it may take a pretax charge of about $5 billion in connection with the transactions. AIG’s divestiture of its Japanese building doesn’t qualify as a sale under accounting rules because the insurer is a lessee, the company said, and it will book a $1 billion gain after the insurer’s lease expires in 2011.

Benmosche

The insurer will skip the conference call presentation and question-and-answer session that accompanied results in the past, Christina Pretto, an AIG spokeswoman, said this week. Benmosche starts on Aug. 10.

Benmosche, 65, was CEO of MetLife Inc., the largest U.S. life insurer, for eight years through 2006 and oversaw the company’s change to a publicly traded business from a policyholder-owned firm. Before joining MetLife, he was an executive vice president at PaineWebber Inc. where he directed the merger with Kidder Peabody, AIG said. Benmosche has been on the board of Credit Suisse Group AG since 2002.

AIG needed a U.S. rescue in September after handing over more than $18 billion in collateral tied to credit-default swaps sold to banks including Goldman Sachs Group Inc. and Societe Generale SA. The swaps protected against declines on securities backed by U.S. subprime mortgages.

European Swaps

AIG’s maximum risk on a separate book of swaps sold to European banks narrowed to $177.5 billion as of June 30, compared with $192.6 billion at the end of March. The insurer said in June that declines in the value of assets tied to the swaps could have a “material adverse effect” on results and that the risk of losses on the derivatives may last “longer than anticipated.”

The average weighted length of the swaps protecting residential loans is more than 24 years, while the span tied to corporate loans is about 7 years, the company said.

The government’s rescue includes a $60 billion credit line, $52.5 billion to buy mortgage-linked assets owned or insured by the company, and a Treasury investment of as much as $70 billion. AIG agreed to turn over a stake of almost 80 percent as part of the initial bailout, diluting private shareholders.

Net income probably climbed to 2.2 billion pounds ($3.6 billion) from 1.72 billion pounds a year earlier, according to the average estimate of five analysts surveyed by Bloomberg. Profit from investment banking may have doubled to 2 billion pounds. The bank reports earnings at 7 a.m. London time Aug. 3.

Barclays is expanding its securities unit after Chief Executive Officer John Varley avoided a government bailout and the restrictions that would have come with it. In September, the company bought the North American unit of Lehman Brothers Holdings Inc., the biggest U.S. bond trader, boosting earnings from fixed-income trading as credit markets thawed.

“We’re expecting a pretty strong performance from Barclays Capital in particular,” said Ralph Brook-Fox, a fund manager at Glasgow-based Ignis Asset Management, which oversees 4.5 billion pounds of U.K. equities, including Barclays shares. “It’s clear markets such as fixed income, currencies and commodities have been very strong.”

Investment banking boosted second-quarter profit at Goldman Sachs Group Inc., Deutsche Bank AG and Credit Suisse Group AG. Goldman Sachs posted record net income of $3.44 billion as trading and stock underwriting reached all-time highs.

Bond Swap

Barclays also will report a one-time gain from swapping its own bonds for more junior debt. The bank has said it expects to book a pretax profit of 800 million pounds on the transaction.

Barclays may use rising profit to bring its writedowns into line with those of its U.K. peers, easing criticism that the bank didn’t correctly value its assets after markets plunged, Brook-Fox said.

“That would be something taken positively by the market because that area of criticism would be taken off the table,” he said.

Barclays has taken $20 billion of writedowns since the credit crisis began in 2007, less than HSBC Holdings Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.

The bank has valued assets equal to 184 percent of its tangible capital using internal models based on “unobservable” data, according to a June note from Hank Calenti, a London-based credit analyst at Royal Bank of Canada. That compares with 58 percent at Edinburgh-based RBS and 46 percent at HSBC in London.

Barclays Finance Director Chris Lucas said in May that impairment charges and other provisions may rise 50 percent this year after jumping 79 percent to 2.3 billion pounds in the first quarter.

Bad Debt Charges

First-half writedowns will be about 3.3 billion pounds, Deutsche Bank AG analyst Jason Napier said in a July 20 note to clients. Barclays’s risky assets may have increased because of investments tied to bond insurers, or “monolines,” he said.

Earnings from consumer and commercial banking will decline 46 percent as rising unemployment in the U.K. hinders customers’ ability to repay debts, the analyst survey showed.

Sales of bonds worldwide rose 27 percent from a year earlier to $2.5 trillion, the most in at least a decade, as companies sought to shore up balance sheets amid the worst recession in a generation, data compiled by Bloomberg show.

Barclays Capital maintained its position as the world’s biggest underwriter of international bond sales, beating New York-based JPMorgan and HSBC, according to Bloomberg data. The bank backed $211 billion of offerings in the period, compared with $171 billion a year earlier.

“Barclays Capital will have strong gross revenues based on good debt trading and debt origination,” said Mike Trippitt, a London-based analyst at Oriel Securities Ltd., who has a “buy” rating on Barclays.

Rankings Rise

The Lehman purchase helped make Barclays the world’s sixth- biggest mergers and acquisitions adviser this year, up from 65th in 2007, Bloomberg data show. Morgan Stanley, Goldman Sachs and JPMorgan are the top three.

Paul G. Parker, Barclays’s global head of M&A, said in May that Barclays intends to become one of the three leading securities firms across all regions and product lines.

Barclays stock tripled in the past six months, making it the best performer in the 63-member Bloomberg Europe Banks and Financial Services Index. The shares fell 2.7 pence, or 0.9 percent, to 302.3 pence today in London trading.

Barclays rejected a government bailout in October, then opted out of the state asset protection program in March. The company instead sold 5.3 billion pounds of stock and convertible notes to the Qatar and Abu Dhabi sovereign wealth funds.

BGI Sale

The bank agreed in June to sell its fund management unit, Barclays Global Investors, for $13.5 billion to boost capital reserves. Barclays’s Tier 1 capital ratio, a measure of financial strength, will rise to 8.2 percent after the BGI deal, the analysts said. It was 6.7 percent of the end of last year.

The BGI sale will cost Barclays a division that generated 15 percent of the group’s profit while offloading 1 percent of its risky assets, said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has a “sell” rating on the stock.

“Disposals of core or non-core assets can be value dilutive after a one-off gain,” Chen said.

It’s a difficult feat for sure. Google maintains 65% of the U.S. search market, compared to a combined 28% for Microsoft and Yahoo. But the newly partnered tech giants are hoping that one plus one equals more than two.

“This deal is really about scale,” said Yahoo (YHOO, Fortune 500) Chief Executive Carol Bartz on a conference call. “By combining the … technology of both companies, we can create a real, viable alternative for advertisers.”

In other words, size really matters to advertisers in the search market. More data means more relevant searches and ads, which means more money can be charged to advertisers.

It’s a fact that Microsoft (MSFT, Fortune 500) CEO Steve Ballmer said unfairly benefits Google (GOOG, Fortune 500), as many ad companies were less willing to deal with Microsoft or Yahoo because each maintained a tiny fraction of the market compared to the search leader. But Ballmer said a combined effort “provides consumers and advertisers … with a real No. 2 advertiser in search.”

“It’s reasonable logic that two is better than three,” said David Smith, analyst at Gartner. “The big picture is reaching a critical mass — the way advertising works is through a positive feedback loop, where the bigger you get, the better you get.”

Smith said that Google has carved out such a dominant share of the market that there’s nowhere to go but down if competition ramps up from its biggest rivals.

Not No. 1, but strong No. 2. Even if Microhoo doesn’t make a run at the top of the search market, some argue that the deal is good for both firms, advertisers and consumers.

“Overall, the deal makes sense,” said Shar VanBoskirk, search market analyst at Forrester Research. “It potentially creates synergies between the two firms — each had a gap the other one could fill — to create another one-stop-shop and a stronger second-place player.”

VanBoskirk said the consumer experience on Yahoo.com and Bing.com will improve, because data sharing will help Microsoft and Yahoo better customize content for each user. And with more relevant ads, advertisers will get more clicks and a better return on their investment.

Furthermore, VanBoskirk said the partnership will free up development talent to improve Bing’s “decision engine” technology, which provide information on when airline prices will increase, what hotels to book and what to shop for.

“Google is a great search engine, but the next wave of search will be more than just finding Web sites,” she said. “Both Bing and Yahoo try to do that, and the partnership will help them develop the online concierge experience that they offer.”

In the end, VanBoskirk said the combined Microsoft and Yahoo search engine could cut Google’s 37-point market share lead to just 15 points.

Nothing to see here? Some analysts aren’t convinced that the deal will really make a difference.

“The amazing thing about this deal is how little impact it has,” said Carl Howe, analyst at Yankee Group. “Search rankings won’t change, advertising rates will continue in a downward spiral and the regulatory hassles involved will benefit the very beast they’re hoping to bring down: Google.”

Howe argued that Google is so massive, that all a combined deal would do is create a singular, distant No. 2 search company (Microhoo) rather than a distant No. 2 (Yahoo), and an even farther away No. 3 (Microsoft)

Earnings before interest, taxes, depreciation, amortization and exceptionals rose to 656 million euros ($936 million), EADS said today in a statement. Free cash flow advanced 20 percent to 1.17 billion euros in the first half as airline buyers made “limited” demands for financing help.

Airbus, which contributes two-thirds of revenue at Paris- and Munich-based EADS, handed over more planes even as the airline industry suffers billions of dollars in losses because the global recession is sapping travel demand. The planemaker delivered 138 aircraft in the quarter compared with 116 a year earlier and intends to deliver at least as many planes in 2009 as in 2008, when it shipped 483.

“I simply did not expect them to be hanging on to the cash like this,” said Sandy Morris, an analyst at ABN Amro in London who recommends buying EADS shares. “The second-quarter performance is particularly good, and they raised free-cash-flow guidance a bit.”

EADS rose as much as 84 cents, or 6.6 percent, to 13.55 euros and was up 4.9 percent at 10:06 a.m., extending the stock’s gain in the last 12 months to 12 percent. Chicago-based Boeing Co., EADS’s only competitor in making the largest airliners, has declined 30 percent in a year.

A400M Negotiations

Yan Derocles, an analyst at Oddo Securities, said cash generation was better than expected. The Paris-based analyst said he was disappointed not to have more information about negotiations on the A400M, given that defense ministers for the seven countries that ordered the plane met a week ago to discuss the project.

Delays in building the A400M led to 715 million euros in costs in last year’s second quarter, and 191 million euros in the first six months. The model is four years behind schedule.

EADS said today it welcomed the commitment of A400M customers to the program and is “continuing to work hard” to bring the plane back on track. The order from the seven governments is valued at 20 billion euros.

The planemaker said the outlook for airline orders is more fragile.

“There is no clear sign of stabilization since traffic and yield deterioration as well as funding conditions are challenging airlines’ financials,” the manufacturer said.

Plane Financing

Airbus had pledged as much as 1 billion euros in customer financing to help carriers buy planes. EADS said that while the group’s order book still shows overbooking for coming years, it will be prudent in making forecasts given declining traffic at most airlines.

The International Air Transport Association forecast in June that deliveries by Airbus and Boeing may drop by as much as 30 percent in 2010.

The company said today that 2009 handovers will at least match last year’s. Airbus Chief Operating Officer John Leahy said last month that 2009 plane deliveries will be “flat.”

“We’re 18 months into the credit crunch, nine months into the financial crisis, and I might have thought it feasible that deliveries would drop like a stone,” ABN Amro’s Morris said. “It could be that they come down 10, even 20 percent. But for a 13 euro share price that’s not bad news.”

Net income for the second quarter increased 76 percent to 208 million euros from 118 million euros. Sales rose 19 percent to 11.7 billion euros.

A380 Costs

Airbus scaled back its full-year schedule for the 525-seat A380 superjumbo in May, saying it will deliver 14 of the double- decker airliners in 2009 instead of the 18 that were planned. Airbus today said A380 costs are “still higher than expected.”

Governments buying the A400M granted Airbus on July 24 an extension through December to renegotiate. EADS today said it aims to reduce further loss on the program, adding that the full financial consequences won’t be known until negotiations are complete. That’s expected by the end of the year.

The seven countries that placed the order for the A400M turboprop in 2003 had the right to drop the contract in April 2009 if the model hadn’t made its first test flight. Officials granted a three-month moratorium on any decision before extending it to the end of the year.

Airbus now plans the A400M’s first flight for December in Seville, Spain, where the model is being assembled. The manufacturer is spending 100 million euros a month on modifications and testing to fix engineering glitches, including engine-design flaws, that led to delays.

Money Spent

Advance payments of 5.7 billion euros have been spent, EADS Chief Executive Officer Louis Gallois said June 14.

The U.K., France and Germany are among the countries with a combined 180 A400Ms on order.

For the first half, earnings before interest and tax, goodwill impairment and exceptionals, came to 888 million euros, down 23 percent from 1.16 billion euros. Sales in the period rose 2 percent to 20.2 billion euros while net income fell 6 percent to 378 million euros from 403 million euros.

Deutsche Bank fell as much as 7.2 percent in Frankfurt trading as the company set aside 1 billion euros ($1.4 billion) for risky loans, more than the 634 million-euro estimate of analysts surveyed by Bloomberg. Net income rose to 1.09 billion euros, the Frankfurt-based bank said in a statement today.

Chief Executive Officer Josef Ackermann said in a letter to shareholders he remains “cautious” on the economic outlook, and the bank predicted a further increase in private and corporate insolvencies. A fourfold gain in income from debt sales and an improvement in equity trading in the second quarter countered a slump in profit at the consumer banking unit and wider-than-estimated loss in asset management.

“Deutsche Bank had to significantly increase loan-loss provisions because of the worsening economy, and it won’t get better anytime soon,” said Lutz Roehmeyer, who helps manage about $15.5 billion at Landesbank Berlin Investment in Berlin, including Deutsche Bank shares. “The investment bank generated a lot of revenue thanks to the boom in corporate bond sales, but retail banking, asset and wealth management and transaction banking really lost out.”

Deutsche Bank fell 2.68 euros, or 5.2 percent, to 49.35 euros by 9:39 a.m. in Frankfurt, reducing the gain this year to 77 percent. The bank is the sixth-biggest gainer on the index of 63 European financial companies this year.

Debt and Equity

The investment bank, run by Anshu Jain and Michael Cohrs, posted pretax profit of 828 million euros after a loss a year earlier. Analysts estimated earnings of 1.08 billion euros.

The company’s global markets business, run by Jain, had debt trading income of 2.6 billion euros on credit, interest- rate and currency sales, below analysts’ estimates. Equity trading generated 903 million euros in revenue, the most in six quarters and more than analysts predicted.

Credit Suisse Group AG of Zurich and New York-based Goldman Sachs Group Inc. and JPMorgan Chase & Co. also generated higher trading income in the past quarter.

“The bond business is definitely a revenue driver at the moment, and we’ve seen that banks are earning a lot from that,” said Daniel Hupfer, who helps manage about $42 billion, including Deutsche Bank shares, at M.M. Warburg in Hamburg.

The asset and wealth management business reported a pretax loss of 85 million euros, a bigger deficit than analysts estimated, compared with a year-earlier profit. Earnings at the consumer bank fell 83 percent to 55 million euros.

Progress in Economy

The bank posted a second straight quarterly profit after reporting its first annual loss in more than 50 years in 2008 amid the worst financial crisis since the Great Depression. In the second quarter, sales of corporate debt in Europe rose 12 percent from a year earlier to 329 billion euros, data compiled by Bloomberg show.

“The outlook for the remainder of 2009 is strongly influenced by progress in the global economy,” Ackermann, 61, said in the statement. “In an uncertain environment, Deutsche Bank is well prepared,” and can take “full advantage of opportunities, as and when business conditions improve,” he said.

The bank incurred 1.4 billion euros in charges, including provisions for credit losses, legal costs related to the failed buyout of Huntsman Corp. and severance payments. Total loan-loss provisions at the bank rose to 1 billion euros from 135 million euros in the year-earlier period, almost matching the amount set aside for possible defaults in all of 2008.

Capital Ratio Rises

Earnings were boosted by 377 million euros in pretax profit at the corporate investments unit, including gains from derivatives related to the acquisition of Deutsche Postbank AG shares and stake sales in companies such as Daimler AG and Linde AG. The bank paid 242 million euros in income taxes, down from 633 million euros in the first quarter, helped by tax-exempt asset disposals.

Ackermann had his contract extended by three years to 2013 in April after guiding Deutsche Bank through the financial crisis without taking government aid. He boosted the bank’s tier 1 capital ratio, a measure of solvency closely watched by regulators, to 11 percent in the second quarter. He lowered the bank’s leverage ratio — total assets divided by shareholder equity, using U.S. accounting principles for derivatives — to 24 times by the end of June from 38 times a year earlier.

Non-interest expenses rose 21 percent to 5.6 billion euros in the quarter, boosted by a 17 percent jump in compensation and benefits to 3.14 billion euros as the company set aside more money for bonuses.

Earnings at the asset and wealth management business, headed by Kevin Parker and Pierre de Weck, suffered from declining asset values, client withdrawals at the asset management unit and charges related to a property fund. Earnings at the retail bank were hurt by rising loan provisions and severance charges tied to job cuts. Pretax profit from global transaction banking fell 36 percent to 181 million euros.

Ackermann has built up those so-called stable businesses to decrease the company’s reliance on investment banking. The investment bank, known as corporate banking and securities, generated 59 percent of total revenue in the quarter.

All of the cuts, which will hit employees and contractors, will come in its wireline unit, the part of Verizon’s business that offers traditional communications services over copper or fiber cables to businesses and home users. Of the company’s 235,000 employees, 148,000 work in the wireline unit, with the rest in Verizon Wireless, which is 45 percent owned by Vodafone. The cuts are in addition to 8,000 positions it slashed over the last year.

The recession is having a split effect on Verizon’s business. Consumers keep buying wireless phones and its FiOS TV-phone-Internet package. But businesses are cutting back sharply, and laid-off people no longer need their corporate cellphones and laptop data cards.

Verizon reported net income of $1.48 billion, or 52 cents a share, down from $1.88 billion, or 66 cents, a year earlier. Most of that decline was related to costs of the company’s planned sale of some rural phone systems to Frontier Communications. Excluding the one-time charges, Verizon earned 63 cents a share, in line with analysts’ estimates and down 6 percent from a year ago.

Total revenue increased by 11.6 percent, to $26.9 billion, but most of that growth came from its acquisition of Alltel. The company’s core business grew only by 1.9 percent, sharply slower than the 5.3 percent pace of a year ago.

Wireless revenue was $15.5 billion, up 9 percent (excluding the acquisition), driven by increased usage of data plans by cellphone customers. The most profitable group of wireless customers are those that pay bills every month directly to Verizon. The company added 1.1 million of such customers in the quarter, down from 1.5 million in the second quarter of 2008.

Wireline revenue was $11.5 billion, down 5.2 percent. The decline came entirely from business customers. Even though Verizon lost nearly 2 million home phone customers over the last year — leaving it with 17.2 million residential voice customers — the remaining customers spent enough more to keep residential revenue flat from a year ago.

The biggest growth in that spending came from its FiOS service. The company added 300,000 new FiOS TV customers in the quarter and 303,000 FiOS Internet customers.

In total, Verizon’s average home pays the company $72.59 a month, but the average FiOS home pays more than $135 a month.

The company is managing to stay in Wall Street’s good graces, however, by cutting costs fast enough to compensate for the decelerating growth. “Their second-quarter results reveal a tightly run ship,” Craig Moffett, an analyst with Sanford C. Bernstein & Company, wrote in a note to clients.

On a conference call with investors Monday, Dennis F. Strigl, Verizon’s president, was asked about the growing political interest in exclusive deals companies have to offer certain handsets. He pointed to Verizon’s recent move to allow smaller wireless carriers to sell its exclusive handsets after six months. He told investors he was not concerned about the impact of Apple’s popular iPhone. Verizon has many new handsets coming up, including the Palm Pre, which it will start selling early next year. And it is planning to open its own store for smartphone applications by the end of this year.

Mr. Strigl said AT&T’s exclusive deal with Apple helped everybody.

“It accelerated innovation,” he said. “It is very good for our customers. Everyone is coming out with their own iconic devices.”