Was put on bloomberg television. Im Erik Schatzker. It, awill get right into big morning. Excited about our guest host, lets get started. President and ceo of sprint. You were the man responsible last year for getting a deal with softbank come how is it going . It is going well. The week ago we announced results and stock was up 11 on the day and 18 over the last week. We had our best Net Operating Income number in the last seven years. 11 quarters in a row of beating on ebitda. Our subscriber numbers could be better, we are reengineering our network. What has the softbank do thatp allowed you to you could not have done before. What is it going to enable you to do in the future that you were not able to do . Longterm. Re on the this big network, sprint spark, it will take time and money to do it right. We can take a longerterm perspective. You have an 80 investor who was talking about a 300 year plan 300. Whenever going to get sprint spark in your . In new york . You have it now. It is taking three frequencies, Different Networks used in different frequencies and basically we had to rip out everything. This is why our subscriber numbers have not been as strong. Remove the old equipment there have been service disruptions, that has affected churn. It is going to be a phenomenal network. Is that there get is a palpable frustration it has taken this long to get the Spark Networks worhere it is. You see it with the churn. I perceive in the investment community, do you share that question mark it is never fast enough. No company has ever had to build something this large. The nextel network, the sprint network, the clearwire network, you have a great spectrum resource you are buying from clearwire, it is a large project and it is taking longer. Our investors, that is why it hasin the stock performed well, they are taking a longerterm view. , youre talking about speeds of 150 megabits per second to the phone. Does that mean that sprint spark is going to be considered for the customer, by the regulator, by the investor, a viable alternative to landbased broadband . It depends upon your applications with landmine. With landline. For High Definition television, people will still want landlinebased service. When you are talking about speeds for a large segment of the market it will be an alternative. We should not look at sprint as a competitor to comcast, for example, in the delivery of 4k video, which we are starting to get. The kind of data that is required for 4k video, landline will be the preferable way to get there. For youtube and video applications and surfing and what have you, for a large segment of the market who is not going to 4k, it will be you do not see Cable Operators becoming competitors to you as they get bigger . Or even partners. They could be either or both. Competitors or partners. Number three and four, what could have combined. What could sprint and tmobile look like . How much could they infringe on number one and number two . The issue you have in the u. S. Wireless industry is it is a duopoly, 84 of the ebitda and basically 100 of Free Cash Flow out of to large companies. The industry would have healthier competition with a stronger number three. I cannot comment specifically on speculation with respect to m a, i think a stronger number three would be better for consumers. There might be some consumers who want to believe that or who believe that already. How do you get regulars to believe that . We will have to see. Papers and what have you, there are a lot of regulars who are skeptical. If a transaction or to occur, we would have convincing to do. It feels great to be a consumer, mobile price wars are a win for me. How do you, that . How do you combat that . There are a lot of emotions that consumers see as positive, but how sustainable is that . Looking at the profit performance of the big four. How sustainable is it . You had to cut prices on prepaid last night. That is a question. Particularly in the ability to invest in networks. Tmobile and sprint have to invest more per customer and their networks. Think of a nationwide network, it largely affects costs. It is like a jumbo jet. At t and verizon, because of their size, can put more customers on that, can divide it among more customers and can spend more money in advertising. What happens lets entertain some hypotheticals for a moment. Lets say you do not think you can make a persuasive case to regulators that consolidation is in everybodys best interest. If tmobile continues with this race to the bottom on pricing, what happens to sprint . Were going to have to compete in the market. Sprint spark is going to give us a good foundation. It is why you see other rate plans that are wellsuited to the market. How much less viable do you a Profit Center forget about profits, on a net income basis, you are not even there yet. How much less viable do you become financially . Forhe real issue is consumers. A strong number three will get one and two to react more aggressively so everybody benefits. If you are smaller, the big to do not react as aggressively. That is the benefit. Is john legere your peer . Or Worst Nightmare . John used to work for me. He is doing a fine job. I just want to look at the most recent tweet. sprint, what else do you need tmobile to launch so you can copy it . Do you feel like he is taking you on, the media loves it. I dont think john is ever going to stop egging me on. [laughter] moment, onek for a could say he is a walking advertisement for tmobile. The ad spend mobile operators have right now is huge. Are you ever looking at this and saying we are spending too much on advertising, doesnt really affect who is signing on . Is like an arms race, if your competitors spend more you need to. You cannot afford to go silent relative to your competition. It is the nature of our industry. Does the data back that up. Itre are ads everywhere, does not affect me, maybe it does subconsciously. What data tells you you have to have another ad . It does cost a lot, we are being more effective in advertising and we have moved more to digital and social media that arems of media more persuasive, particularly with millenials. Hence a john tweets. And framily. What is changing are demographics, family plans only work for traditional household of three people are more. Framily opens it up to the majority of households, 60 of households are two or fewer people. Media, in terms of the 18 to 33 demographic, 75 use social media, the people they are close to those beyond their immediate family and allows us to provide great offers to a broader audience. Part of the problem with high recurring expenses like marketing and advertising, you are incurring them at a time when your product is becoming, midsized to a degree. Voice is becoming co mmoditized. How do you fight that . And spark we have superior data speeds, we are going to launch how traditional voice, taking a traditional voice cell phone call which is four octaves up to seven octaves. Areas like music. Comcast gets this, that is nbccomcast bought universal. At t and verizon are waking up to the idea that content is the way to fend off commoditization. Is that something softbank would entertain . If you think about it as a carrier. We announced a partnership with spotify. I am thinkingic, video. Content, television, digital video. That is what steve burke is thinking about. That is what the folks at verizon and at t and elsewhere are thinking about. At a time when you are spending so much money to build out your network, you have the challenge of consolidation, is that a conversation you can participate in . Absolutely. How . I will not disclose that the content is important part of the future. Video content. I am not saying. Staying with us through the hour. We will ask Dan Weissberg is getting into the music business, about the companys new deal with spotify. David einhorn and his bubble basket very. Theory. Some stocks to watch out for later in the show. Market makers on bloomberg television. Streaming on your smart phone, your tablet, bloomberg. Com, and on fire tv and apple tv. To marketback makers, sprint offering its customers spotify access at a discount. A new phone is says is perfect for music lovers. Sprint ceo dan hesse is with us, why are you making a push into music . I have been in wireless for 17 years, everything has gotten better except music. In the old days, memory was limited and networks were slow. Music was greatly compressed in mp3s. What has happened in the music world is music has moved digital, but very High Resolution digital. The community has been showing great music. The best to create portable, one of the best portable music digital players in the world which also happens to be a smartphone. This device, available may 9, m8. Htc one sorry for bit the technology. Erik loves it. Res musicur high and played beautifully. Lossless audio. Youike you go to hd tracks, download it to this advice. Most peoples Music Libraries are mp3s. Music is nott available yet, it is likely early days of luray. It is like the early days of the bluray. We have an algorithm that takes what was compressed, a High Resolution file has about six times the information as a compact disc. And at the three has about an 1 10 of the information of a compact disc. You have a really good mp3, good speakers, a special headphone amp and 150 earbuds. Also a weak link is storage, this is the st card slot is this for music groupies . Go crazy, ig erik can play music on my iphone. I thought television was great until i saw High Definition. I think when people are exposed to this, i have two teenage boys , totally sold. One reason spotify was so interested is the clarify Technology Takes spotify and makes it sound so much better than it has ever sounded. It can basically decompress the music that is streaming into higherquality sound. It enhances it. Is sophisticated algorithms. Technically speaking you cannot decompress, that has been lost. Get some engineers, hearing is believing. Generally what they would do to make it sound better is increase the base of the travel the bass and the treble. How do you make it cool . That is cool. Likeat is cool for a nerd you, i still like the iphone. You have got to attract people. One of the reasons we are doing this promotion was framily, if you are a member, six months of free spotify premium, which is 10 a month. Songs on spotify. Spotify has 24 million active users, 6 million paying users come in to get people to experience how good. I cant believe it took me this long to get an iphone, are you saying the iphone is not cool . No. They sell iphones. I think this will usher in a new world in terms of smartphones. There is no reason smartphones cannot be highdefinition and music. A question, is a device like that, the one that breaks the cycle whereby carriers like yours have subsidized the purchase of a phone . Will people pay for that . 800 for that phone . They can get it for 679. It is still a big number. Customers are beginning one of the changes in the industry, we are bifurcating the rate plan from the device. That comes at a cost, youre having to finance the purchase. It has changed from subsidy to financing. The latter is better. What you would love is for somebody to step up with 675 and walk alone with a phone and begun. And be done. That is true and we have a number of consumers doing that. Largely they will have 24 payment are you finding it any easier, do you have leverage to push back against apples of whenworld, against samsung it comes to subsidizing the cost of the phone . The two we are getting out of subsidy and into financing, that is a big step forward. Ultimately a good thing or a bad thing . I think it is a very good thing. Why . It gets us out of subsidizing. It gets you into lending. Comparatively lending has taken a lot of companies down a dangerous road. Credit is a reason we do checks and the prepaid business is so important. For zero down you have to have time credit. Sorry, erik. You will have to buy it with cash. Why not pandora . We were looking for a great streaming service, especially a premium service. Spotify is the secondlargest largest source of revenue for the Music Industry and artists behind itunes. 24 million active users, 6 million paying customers. Daniel, theas i met ceo of spotify. We met at the San Francisco airport. It was the largest and the quickest deal they have ever done. We talked about music quality, we wanted to bring the best experience. You ran into this guy at the airport and this is how it started . We did have a meeting in an airport. We were both moving. Two weeks later, we had a big deal. Universalbank buys music, that is a possibility, what does that do for you . Preferredlearly a access to content is Something Like that periodically were to happen. Because of the relationship between softbank and sprint, you would expect the benefits to flow down . Is very well could. Assuming Something Like that could happen and pass regulatory muster. It would be there could be a benefit. We will have a lot more with dan hesse when we come back. The ceo of sprint with us for the full hour. Coming up on Market Makers emco m a madness. Bayer will buy a chunk of merck. Details after the break. Welcome back to Market Makers. This show needs a webcam during commercials, we just had an incredible conversation. 26 minutes past the hour, time for on the markets. Twitter getting hammered again today. Down 9. 3 . This is all about supply and demand. 480 million twitter shares just became available for trading, quadrupling the size of the public flow, because the lockup from the ipo expire. Insiders selling their stock. Millioners holding 205 of those 480 million pledged not to sell. Still down 9 . Live from bloomberg headquarters in new york, this is Market Makers, with Erik Schatzker and Stephanie Ruhle. You are watching Market Makers on bloomberg television. I am Erik Schatzker. I am Stephanie Ruhle. 10 for the top business stories from around the world. Credit suisse close to settling a tax evasion investigation with u. S. Authorities. Adeal with a guilty plea and penalty of more than 1 billion. Cracking down on foreign banks that help americans even a taxes. A big payday for angela ahrendts, she started last october. Ahrendts. Thengela has been given stock is worth 68 million, she came to apple after being ceo at the rate at burberry. Ukraine casualties are rising. Rebels have seized more than 30 government buildings in the eastern part of the country. They are trying to take control of odessa in southern ukraine. Another day, another multibilliondollar pharmacy deal. Mercbayer spending 14 million o acquire mercks consumer unit. s ceo explained. Has a stronger u. S. Position, stronger than bayer. Bayer has a strong position across the globe and in emerging markets and in europe. Our intention is to take the merck brands and bring them to other geographies and create a lot of revenue synergy. Bayerh more on this merc acquisition of bayemercks consr unit, Cristina Alesci. Bayer being aggressive, trying to reshape the industry. Or reacting to everything going on. Heres the thing, you start with merck. What Pharma Companies in the u. S. Are dealing with is the fact that they have to reconfigure their whole model. They have to survive in a postblockbuster world with a long horizon on the development front. S standpoint, you can do a big transformative deal we sell pfizer do or dump what you are not good at, focus what you are good at, that is what i was geared up for the beginning of the year. These kinds of deals. Companies are shedding non core assets and doubling down on what they think is a promising way to go. Like what we saw a couple weeks ago with glaxo at novartis. Exactly. To 10ill get 8 billion billion of proceeds, some of it d, it will mostly be used to buy promising medications and hepatitis b or cancer. They can charge an extreme amount of money for specialized products, that will be the future of the company. Do you get a sense that that will continue to be the way the industry is going . Or are we going to see more shakeout. Another vision that maybe reflects the kind of thing we saw before, the megamergers. Like what we might see happen with pfizer and astrazeneca. I think you will see i want to focus on merck. I think we will see more on this. A retooling of the business. Increasingly specialized Pharma Companies. From 2013 to 2018, pharma largest inthe 13th the u. S. And europe will lose about 15 billion in sales over patent laws. The cliff. Thisis is what a striving activity. They want to get out of the lower margin businesses. Even merck has said that its older pipeline, it is going to shed. We will see merck and possibly sanofi shed drugs that are not producing margins. But it does not solve the patent cliff problem. Rcktever pattern cliffs me is facing become someone elses problem. These drugs are still, the older drugs, they are still spouting off a bunch of cash. If you are just interested in the cash and not in innovating g, you are allru right with the cash. You can basically run it off and take the benefit of it. Is part of the problem that Biopharmaceutical Companies that could provide too expensive. Too expensive. We have seen such a runup in biotech stocks. That could be an additional source of activity but it will take some time. All the people in the market have analyzed it as you have, are notma Companies Developing blockbuster drugs so they have to go to biotech stocks, that has led to a runup in biotech stocks, putting a damper on the activity. We could see a reversal. A self filling prophecy, Cristina Alesci covers deals and she is all over bayer and merck. Their boards, the relationship is different than it used to be. With the sprint ceo, dan hesse. Welcome back to a special Market Makers. Sprint ceo dan hesse is with us. What is it like right now . What is the climate for u. S. Businesses . The climate is pretty good, there is a lot of link with the theres a lot of liquidity. When i talk to my fellow ceos, we continue to focus on becoming more efficient, there are some mild optimism in terms of the overall economy. I am worried long term. When i look at jobs and where jobs are committee. 15 of the 20 hot jobs require stem education, 80 require some kind of stem degree, only 16 of bachelors degrees. 80 of jobs and 60 of the graduates that have a match. And 16 of graduates that have a match. Do americans look at companies as good corporate citizens . We are working on it, it has improved and become more important. It makes a big difference on campus. Out. Ow it helps more from a customer perspective, a number of customers really . After a close bid, they have chosen us. Campuses,u go to students really care about social responsibility . I was in college a thousand years ago. I do not think it was part of the conversation. Im hearing that from my recruiters and personally. Do i have statistics, no. Anecdotally a lot of input and feedback that it is making a difference. Years, almostt 40 40 years since a landmark paper in 1976, is also burdened the sole burden on Public Companies has been to increase shareholder value. Is that changing . Looking more broadly in terms of constituents. Shareholders are important but you have your communities, your employees, and you have the environment. If you go too far with that, i know it sounds absurd. In theory, shareholders could on the for not focusing one thing that might matter more than anything else. Everything we do is in the shareholder interest, is it shortterm or longterm . To shareholders allow you to be longterm . A benefit with the softbank transaction, a company with a 300 year plan has moved shorttermers out of our stock. It was an issue. Before the softbank transaction in 5. 5 years, i never got a question about corporate responsibility. Less energy, 27 less water, 60 five percent less paper. The fastestgrowing minority groups, people with disabilities. Is focused on people who are hard of hearing, deaf, who have visual impairments or are blind. At a time of global price wars, do you think there are wireless customers that choose sprint over someone else because of their Corporate Social Responsibility . Not enough of them but it is a small number now. It is growing over time. How often do you find yourself confronting a decision where, on the one hand, you could spend some money and achieve something that you or your colleagues might believe to be really good. On the other hand, you worry about justifying that expense. It happens all the time. Give me an example. Inrecently we were mentioned obamas state of the union because of our donation to connected, a Government Program to wired 99 of schools and libraries in the u. S. Over the next four years. In underprivileged areas, kids go home and there is no internet at home. Donated free Wireless Services to 50,000 students. It is an amazing idea. At the end of the day, do your shareholders care . Believe many of them care. But i think over time if we review this with the board, we believe we are building the brand. There are hard dollars in cost savings and there is brand building. We are beginning to get recognized more and more as a company that does good things. You cannot take a short term view. If you take a longterm view, you build credibility and it helps you attract and retain talent. Attract and retain customers and that will grow. What is your biggest worry . Potential activist investors, the global economy, what is keeping you up . Just how fast our industry is moving and changing. How the Competitive Landscape is changing. Who are your competitors, who are your friends, enemies, how are you going to stay relevant . The issuesciting that keep you up, what can i create, whens the next disruptive thing i can create . What do you think things are going to look like 10 years from now . I remember covering telecom in the late 1990s and seeing prediction for Live Streaming video. The predictions have proven to be accurate. The expectations for spending for a period of time were woefully inaccurate and put companies out of business. Where are we going to be . The biggest change in our industry is it is going to move beyond smartphones. Everything is connected wirelessly. The internet of things, you believe that . I do. People are going to be willing to pay for that . People or suppliers or companies. Car companies, power companies, whoever you buy your apparel from will put sensors in to test how your heartbeat is. Between businesses and consumers i do believe. If ford makes my car connected and i am on a sprint plan already, that does not make you incremental revenue . It is making somebody we will like to have ford. Chrysler. Some chrysler customers might have an at t phone, but it is more revenue for the industry. I want to talk about activism. Are you thinking about it . When you sit down with your board, are you looking for lds where activists could not on your door . Before the softbank investment. When you have an 80 shareholder it is difficult for an activist, you can never get the majority. It was an issue for us. We did focus on that issue. Timet through one tough when i decided to carry the andne, our stock went down i took a lot of criticism for the activist community. Shortterm, we talked about subsidies earlier, you pay a lot of subsidy. Back then, it was also supplies phones. It was also supplies it was also sub sidized. It would have a longterm impact, the brand was better and customers would stay. We had activist activity. Is there any way activists could help hasten consolidation in the wireless business . I would not want to speculate on that. I think basically the speculation is you have a number, at t and verizon that are going to control. You have other Companies Like sprint with an 80 shareholder. Is unlikely to have an impact on consolidation in the u. S. How much is softbank involved in your daytoday business . We meet for 1. 5 days every month. And then we have a video call once a week. They are checking in or directing you . Mainly it is communicating back and forth. They have opinions and ideas, they have a well performing wireless operator in japan. We do not always agree. We generally do. Is their friction between the independent directors. Hownt has made efforts, much friction is there between what son whens you to do and what your directors want . What you look for in a board is diversity of opinions and the discussion. Active discussion at the board level, there is not always agreement but it was not always that way before Masayoshi Son was there. Dan hesse will have his final thoughts in a moment. You are watching bloomberg television, this is Market Makers. Welcome back. Stephanie and i are here with the ceo of sprint, dan hesse, it has been a great power. Final thoughts with you, dan. I know you have been asked this before. It is important for obvious reasons. If there were consolidation in the Wireless Industry and we sell sprint combining with another carrier, the likelihood is they can only be one, who is going to run the show . That remains to be seen. What do you want to do . Youre putting me on the spot. It really depends. The scenario under which you would not want to be the ceo . That is tough to contemplate. It depends upon what i wanted to. I am 60 years old. I have a lot of things i still want to do in life. I see some fire left in your belly. There is a lot less than it can go in a lot of directions. Look at all the Companies Involved in wireless, it could be a wireless carrier. Creating this is a device was creating this music device was four ceos coming together. There are a lot of great ways to stay involved in this business. One of the things about sprint, any ceo talks about the ideal is around seven years, i am coming up around 6. 5 years. I could continue but it might also be a Good Opportunity for something else. Is sounds as though we would not bother you if you did not run the merged company. It would not. Over the course of the last seven years, sprint has continued to lose customers. When you think you will be able to turn this around . Second half of this year. What i described at the beginning, the Spark Network where we have to replace everything. The real issue is having to replace the voice and the three g network, that is what customers noticed. We will continue to add speed. But the voice rip and replace has been tough on customers. We will generally be finished with that at the end of this quarter, the second quarter. With the network performing better, beginning in quarter three, the second half of 2014, we expect subscriber growth. To do all this ripping and a dding, it costs a lot. Your cash burn rate is high. Analysts say you need to raise money in the market, would you do that . And the action as possible. Is possible. It does take a lot of cash and as we build out a network, we are at the height of that, a lot of capital. He talked about financing devices. From an expense point of view, customers are bearing more of that. Less subsidies but more financing, there could be cash requirements. What with the timing be on needing to raise cash . Cant say. You are confident that the second half is going to demonstrate a reversal in subscriber losses. Where are we going to see that happen . Wheres the Network Going to be running extensively enough . We Just Announced six new markets and we are up to 24, that will increase over time. The Biggest Issue for subscribers has been the ripping out of the 3g and voice networks. When that is finished. Why . There has been disruption. Dropped calls. Service quality. Exactly, they will see an improvement in that. That will be the key to driving subscriber growth. When this happens are we going to see a huge Advertising Campaign from sprint question mark dropped calls are over. You are beginning to see that in selected markets. I am giving you a u. S. Average, in a lot of markets, like chicago, the network is performing terrifically. You will see Network Related ads in those markets. As we complete markets and large voice finish with the upgrades you will see Network Related advertising. Best case scenario, this htc phone, how many subscribers can it add . Got you, brother. Too early to tell, it is a unique product. Like High Definition television. Subscribers were not yelling for it. Now they cannot live without it. We hope it will take off. Dan hesse, ceo of sprint. Market makers is back in a couple minutes with David Einhorn of Greenlight Capital talking about tech bubbles. Welcome back to a great morning here on Market Makers. With danazing our hesse he, ceo of sprint. We will get us give straight tour secondbiggest guests this morning. David einhorn is here. As usual, the media never seems to get it right. In the letter we wrote that we thought there was another tech bubble. I would like to emphasize the echo, meaning it is a smarter bubble. We are massively long tech. Our biggest position is apple, micron, marvel. We think there is a subsegment that is high momentum stocks that have gotten completely out of control in terms of their valuation and we think that reach a bubbled proportion. They have gotten out of control why . There is a difference between the right price for a Good Business and where the stocks have gotten. This is what happens with bubbles and what happens with momentum. Good news, if it is better than he thought it was, the stock has a gap that is 15 higher in response. You do that 4, 5, six quarters in a row, before you know at the stock has doubled or tripled. But the stocks might only be four percent better than you thought they were and valuation is out of control. He wrote in your letter to investors for the First Quarter that you see some of these stocks dropping by 90 . So, Good Businesses that are overvalued by that much . Let me clarify. I was saying that in the previous bubble, 1999, 2000, even the best stocks fell. Like amazon. Those with the best. The worst ones fell more, they practically went out of business. I am saying that when stocks become disconnected, they are difficult to short because when they are at a price that is a silly price, they can just keep going. Twice the silly price is not twice as silly. Right . The float is tiny, that, too, but it doesnt matter. Company or a big small company. But twice silly is just silly. Once they disconnect and decide to come back the other way and people say they are growth investors, what would i be willing to pay for this . I am now looking at multiples. When you look at multiples, those are a long way for these stocks to fall. When a Value Investor gets interested . When do multiples matter the most . Call it pe for now. Some of these businesses not only have earnings, they dont have serious plans to make earnings. This kind of do thing, my attempt at it is far less sophisticated and comprehensive than yours, but i look at a stock that was 50 billion in market cap, trading at 10 times sales here in the United States. There are 89 of them. The first nine that came up dont have any hits at all and are not expected to have earnings in the next 12 months. We are talking about stocks trading at as much as 2900 times sales. That is a lot. Now, 89. That does not even include the one that i know you shorted, Athena Health. Right. Look, i dont think we have a generalized stockmarket bubble, but i do think we have a certain number of stocks that caught everyones fancy. There are good stories behind a lot of these stocks and companies tom a but i think the valuation has gotten out of control. You have taken a different approach than, perhaps, the convention, which might be pinpointing or identifying overvalued, single name stocks and you have instead gone for the basket approach. What is in the basket . A number of stocks. Probably many of the ones on your list. We identified many. I dont want to get into all the different ones in the basket, but i think that people can more or less peace things out. Callingertainly not apple or micron of short, we are long and those things. Twitter, for example. A company that people, as you know, have raised many valuation concerns about. It showed up on my list. Heres the thing, half the people were upset that we thought we were talking book. The other half of the people were upset that we were not telling them all the names. We could not please anybody. But why do you have to please anyone . You are a hedge fund investor, the only people you need to satisfy are your investors. You dont owe anyone anything. Be clear, the letter is to our investors. It gets out there. We have a lot of investors, we have to send it to a lot of people and as a result, it gets out there. Isnt that what everyone does every day . I think that adding information to the markets so that people can sort these things out is constructive and why we tend to sometimes share. You started to come to these ideas not just in the First Quarter, but several quarters ago. In the thirdquarter you wrote to your investors that the market in general was getting increasingly creative in its behavior. What did you mean by that . Is it more creative now . If so, how . The best that we can do as Value Investors we will never belong on these. We are not going to be long on Athena Health. Are disciplined value guys. The best that we can do is hope to not be short into much of them wrong time. We did a good job in hindsight last year not being short on much of these. Seemed like the environment was beginning to turn and things were headed towards a peek. We shortened a whole bunch of them. Want to talk about athena . Walk us through the idea behind it. Look, athena is a very good example of this. A Good Business with a good strategy, a good product and Good Management doing good things for the world, but the stock is just at the wrong price. It is as simple as that. What happened was a few weeks ago Morgan Stanley came out with conventional valuation where they projected out the results to 2030 and we just look at that and said wow, how are you going to get from a 10 margin to a 30 margin . We thought about the business. We just dont think that the assumptions they are using are plausible. You said in your presentation that there were not any cloud companies. What would constitute a cloud company, then . The way i look at it, there are two types of these Internet Companies. One that has sort of a network effect. There are others that dont have network effects. To me that means having more users on the Network Makes the site more valuable to each user. You may is a great example of that. Everyone likes auctions. If you want to auction something off, you go to ebay. The buyers know where the sellers are going to be. It is hard for a new entrant to penetrate that. Ebay is able to extract value from that network by charging fees and commissions and so forth. But there are other types of Internet Companies where your relationship is with the provider. Having lots of customers might help the provider be more efficient and run their business better, but it does not really present them with a Competitive Position that allows them to earn huge profits over a long. Of time. I think that athena falls into that latter category. If i understand it correctly, you have raised the concern that athena may not be able to compete with other large members. Yes. The case really requires them to make a huge entrant. I can understand how investors might have duped themselves into thinking that Athena Health can do that. But what about customers . Become a health has client of athena. You know, that is a pretty big company. Are they sue are they similarly duping themselves . No, no, athena has a good product with real customers. I would not tell anyone not to use their product, i think it is a fine product. I think the Market Opportunity is smaller than people think. They are already up to 3700 doctors, which is a lot, and they concentrate in the ambulatory business. As hospitals by a doctor practices, available tools shrink, plus there has been a huge move towards Electronic Health records. The stimulus provided reasons for doctors to take this on. Athena has captured part of that, but there has been the huge penetration of Electronic Health records. I think they will run into a saturation and their growth will slow down. I know you said you wanted to make it clear, this is not the case the way you are looking at it, you say it is a good company. These are much different scenarios . About price . S is correct. When does the market wake up and revalue these overvalued stocks . Aba arty have. Its possible the top was in a few weeks ago and we wont now and in the year it will be very clear what was at the top. Did they rally backwards . Certainly, there will be sharp rallies if they continue to go down and in hindsight we will know if this was the top or a correction, and so forth. Our strategy is to have relatively small positions in a large number of these things with time on our side. Talk to us about the warning signs. What they were back in 1999, 2000. Every night in new york city and other party for another tech company where you didnt know what they did. Eyeballs with ratios at over 1000 or more. What are they today . I dont know about the multiples, but we have seen a lot from the addressable markets. Like blue sky and. You mentioned it, price to sale with no earnings. There is no forecast for earnings over the intermediate. Of time. Just a hope that you will achieve critical mass. Amazon. Amazon generates profit with an incredibly skinny margin and it seems focused on building a Customer Base with revenue, more than anything else. The stock has done terrific. It has done terrifically, absolutely. They can continue to do terrific window they dont, but the truth of the matter is that with Something Like this, you are still looking at a rather fancy piece. Back to the warning signs. What else . There are things that happened. In 1999 andgh this 2000. Some of the things that happened were that shorts could not stay involved. The daily pain was simply too much. You saw these parabolic or whatever kind of moves. You saw that in a lot of those stocks. Toena certainly did that up 200. It was very hard, you could see shortsellers being carried out of these things, even if they thought they were right. Shortou also see the interest going way down. A lot of these stocks, there is much lower Short Interest now than before. Another thing that you saw became digital ipo. People were buying these ipos without thinking too much about them because they were going up 40 , 30 the next day. Like candy crushed. Not that one, but the other ones that came out in the previous few weeks. When there are huge pops in the ipos, everyone calls their underwriters and they do not think about it. They just want the money on the first day of trading. The stocks hold those prices and bring out the next ipo. With king you saw that they priced it not so well and the price traded down. At the same time the secondary , the ticker that they did, they priced that on the whole and it did not do well, which told me to be were beginning to get towards maybe the end of the cycle. About another one . I am not mentioning any more names. 100 names . Dozens. Bigger than a bread box . Than a smaller Volkswagen Beetle . Does it make it hard to know how to be a Value Investor right now . Fundamentally no one will disagree with you, but when we look at the ipo market, hedge tods, every day they need return and these deals look great when they know that they can get a big allocation, it is attractive to buy. How do you keep that discipline at a time when momentum seems to be on your side . Sometimes it is a struggle. We like to time arbitrage. We like to get our analysis right and sometimes wait longer than other people. That is one of the other things. Our horizon for investments is not usually one day or even one month. It could be one to four years, ancient on wall street these days. Activistsnfair that are getting this brand right now . That they are goodtime charlies in it for a short. When bill ackman just said yesterday that he is on a six to seven year time horizon . Do activists have the wrong brand right now . Out thenot sort differences between me and bill. I think they are considerable. I think that for us, we are doing the same thing we have always done. We are not suddenly more activist. In fact we are not very activists. We did a thing with apple year ago. Before that it was four or five years prior to our prior activism thing. That does not mean it could not turn around tomorrow. Are veryngs infrequent, but i will not argue with people who want to characterize us. I do not see myself that way. Quick break, great morning to have you here. Coming up we will talk with david about his dinner with ben bernanke. Wouldnt it have been great to be there . Oh, to be a fly on the wall. Also, we will be talking about the guys who really cashed in last year. The best they best paid Hedge Fund Managers of 2013, one of them might be sitting right next to us. This is Market Makers on bloomberg television. Now on amazon fire. Welcome back, everyone. You are watching Market Makers, right here on bloomberg television. Schatzker, with Stephanie Ruhle and David Einhorn. Terrific conversation so far. David, i want to turn attention away from individual stocks. We might go back there at the moment. Lets talk about quantitative easing and the things that you have raised concerns about for a long time. You were at the conference yesterday presenting. One of your biggest ideas, shorting Athena Health. Another Hedge Fund Manager was there and he said this what we desperately need is a macro doctor to prescribe centralbank viagra, because otherwise it will continue to be somewhat low. Now, paul may share your concerns about quantitative easing, but quantitative easing has been awfully good for people long in the stock market at the very least. Do you share that view . I adore paul. We do robin hood together. He is one of my favorite managers around. Smart guy. Lly i dont really think that they should set my set macro policy to create volatility. That does not strike me. So, i think he is going to have to live with the environment he gets from that. That being said, as you know i have been very critical of Monetary Policy over the past two years. A jelly doughnuts and all. He recently had dinner with ben bernanke. What went down . We couldnt be there. I have watched him for years in front of congress, speaking, watched him on television, 60 minutes. What was your opinion of him before hand . I have been critical. I have been critical for a long time. In one way, the dinner was cathartic. I got to ask him all these questions that had been on my mind for a long. Of time, right . Was sorther side, it of frightening, because the answers were not better than i thought they would be. What did you ask . Several things. He started out by explaining that he was 100 sure that there would not be hyperinflation. Not that i think that there will be hyperinflation, but how do you get to 100 certainty on anything . Why cant you be 99 certain . How do you manage that risk . Well, hyperinflation generally occurs after a war. One thatsnot have not here. There is no sign of inflation now. Japan has done a lot more wanted native easing than we have done and they dont have it. If there is a big inflation, the fed will know what to do. That was kind of the answer. What did you say . That was it. We went to the next question. A few minutes later we came back and i got to ask him about the jelly doughnuts. My thesis was that it was like too much of a good thing. Lowering rates, quantitative easing, these things help with a diminishing return and eventually you go too far and it is like eating the 35th jelly doughnut. It does not actually help you, it slows you down and makes you feel bad. My feeling has been that by having rates at zero for a long time, what we are doing for favors outweighs the benefit it might be seen elsewhere in the economy. I asked him about this. What did he say . He said first of all, you are wrong. That was good. He said the reason is that if you raise Interest Rates for favors, someone has to pay that interest. So, you dont create any value in the economy, because for every favor there has to be a borrower. I came back to him and said wait a minute, you said for a long time we had not had enough fiscal stimulus. Who is on the other side of the low interest trade . The government. If the government raise the rates, the government would have to pay more in favors. You would have the bigger deficits and create the fiscal stimulus that you are complaining congress would not give to you, right . From theuld benefit higher rates and savings is at a very high rate in terms of a hight income spent at percentage. You have a real slow through the economy. One of the questions that you raise about quantitative easing in one of your letters to investors was about equality. Did you get any satisfaction from ben bernanke on the question of whether quantitative easing exacerbates inequality . That did come up and i dont dont remember exactly what he said. Notion that this Warren Buffett has put forward, that it has become this great Balance Sheet for the Hedge Fund Industry . Im not sure that that is meant as a compliment. But did that issue come up . There were people saying yes, if the fed can manage their way out of this. When the time comes. In a persuasive way . Did he convince you . Or did he say that it is her problem now, not mine. He was very supportive of janet. Are you . I want to keep an open mind. I saw her speak at the Economics Club a couple of weeks ago and i was impressed. She said look, we have a base expectation and things change. When things change, we change the policy. I thought that was good. She said i dont look at one economic factor, i look at all the factors. I thought that was good. I thought that the way she was approaching these problems conceptually was good. I would love to see if she had a better reason for rates to remain at zero in this stage of the economy, but you take these things and see where they go. She has just gotten started. A few months ago you wrote that no one is really for no one is really sure what the fed is focused on. Between your dinner and congressional statements to the press, do you have any better ideas . I am not sure where you are quoting me from, exactly. To investors. Ter thank you. I could use a letter on either side. Fairpoint. I will not bother looking it up. I apologize. You you feel any more confidence about the feds ability to manage that Balance Sheet . Do you worry, for example, that if we run into greater economic headwinds at some point in the next few years and the fed still has trillions of dollars, they will not be able . If you start at a zero rate and a huge amount with a huge Balance Sheet and the economy turns down, there will be tools that they will have that are limited. There is a risk that they will have to choose a tradeoff between doing something exceedingly aggressive, right . As opposed to allowing a crisis situation to fester. They may choose to do something extremely aggressive. David, i only like to see you on bloomberg television. We had a chance to see you on 60 minutes a few weeks ago. When i first saw it, i thought i get it, David Einhorn is behind this. And then Michael Lewis sitting here said that david i and horn David Einhorn is a young tourist in this. Where do you stand . Youre not a dumb tourist. Thank you. Look, i think that what we saw was a bit of a structural problem in the market. Market has gotten better and better over the years, but there is inefficiency in the Market Structure with fragmentation. We ran across these fellows who had an idea as to how to make a better platform for investors. We said here is a bit of a problem, we can help you to be part of that solution. We encouraged our friends to invest. David, we have to go to a quick commercial. We will be back with more in a minute. Stay here. Live, from bloomberg headquarters in new york, this is Market Makers. With Erik Schatzker and Stephanie Ruhle. Welcome back to Market Makers. I am Stephanie Ruhle. David, we almost did something very unfair to you and stephanie and i are not about that. Me withu are filling anxiety. I am stressing. We asked you a really important question. Then it got worse. You were nice not to give me stuff like that. Lets do it again. Stephanie was asking you about highfrequency trading. This exchange, the new kind of marketplace. He has praised it and you supported it. In our interview with Michael Lewis in which he referred to you are most ironically in the context of a poker game, something you have to be something that you are pretty good at, as a dumb tourist in the casino. I was a before that we were educated about some of the problems in the market. Getathered our friends to that platform going. I should really actually call out my head trader, who did an amazing job talking to other traders and the investment banks, trying to help them build their network. We have been big supporters, because we think that this is one of several things that probably need to be done to help level the playing field. Ok, so how do you go from being a supporter, bakker, or manager, affectively, with bruce, to a dumb tourist . I dont get it. I didnt get it. Why would he single you out as this single you out as the schmo . You asked him about his fact checking. Wanted probably what he to tell, that story. He wanted to tell his story a certain way. I think he is providing a good service, because it is based on a true story and he is identifying some problems in the market that can be improved upon. I am not going to quibble much about how he tells it. Would you call the stock market rig, the way that he does . I would not go there at all, but there are opportunities for it to get better for investors and i are hoping that ibx will be part of that. David, thank you. Absolute pleasure. David einhorn, cofounder and president of Greenlight Capital. Right now, folks, time for the newsfeed the top business stories from around the world. They are is solidifying its position as one of the leaders in overthecounter health products. They are buying mercks consumer unit. Among their brands, claritin, you might know that one, as well as coppertone. Delta airlines will be returning more money to shareholders as they boost their dividend by 50 and authorize a stock buyback of the shares that have more than doubled in the past year. A rare online win for walmart against amazon. Their online sales grew 30 last amazonmpared to 20 for according to the trade publication internet retailer, but amazon fell sold seven times more online than walmart, just to put it into perspective. Coming up, the top Hedge Fund Managers. Wait until you hear how much david pepper made. We will be back with more. Stay with us. Back to Market Makers. Credit suisse is close to solving an investigation determining whether they help americans evade taxes. A guilty plea could bring a penalty of more than one billion bucks. Yesterday eric holder said the Justice Department would show that banks are not too big to prosecute. I want to bring in our Bloomberg Finance reporter. Help us to make sense of this. The market is trying to make sense of this. One year ago the Defense Department said that they might be too big to go after, criminally. Too big to jail. Now we have a reversal on that process. He might actually go after him we might see a criminal indictment of Credit Suisse. Now, the allegations are not the same. For the Justice Department, their comments about too big to jail were about hsbc, which accused the government of the very prosecution agreements that they had over violations on antimoney laundering and terrorism. What is the deal with Credit Suisse . Credit suisse is a tax issue. Helping, aiding, and abetting the avoiding of taxes. Eve ate. Not avoid. Avoid is a good thing. That is what they are coming down hard on. As we know, the Senate Committee had a big hearing on this a couple of months ago. They came down very hard on the Justice Department over this, so they are catching a lot of heat over this. The interesting thing about these cases, neither are u. S. Banks, which might be a factor. Lots of people in the market say that this is a factor for why they are going after these cases and they are not related to the financial crisis, which as you know people are really clamoring for accountability on. Is it that people just want to see banks go down and they dont care why . That could be the case. A lot of people in the market are thinking that. However, these two cases are interesting and very different. It will be interesting to see what results and what happens if they do go down this path. Do you have any sense for how strong the case is . Credit suisse has been under investigation for a long time. The stuff that hsbc was accused of was really, really bad, but the point that everyone has made concerning jpmorgans negotiations with the Justice Department, for example, is that they have no leverage when it comes to criminal indictment. If the government wants to charge you with a crime, you kind of have to say ok, how much do i pay to make this go away . And we have seen that time and again with hsbc, jpmorgan, and other banks. You really are up against a brick wall. Right now there are negotiations going on in washington. People are visiting. Talks between people trying to figure out the best case scenario. Banks are really backed into a corner on this issue. No good scenario for them. Kerry, thank you for giving us the latest. And now, folks . A number that you may find to staggering. Not the number that banks are paying in fines. Not quite that much. But lets put it into perspective. The number is three point 5 billion to connect the dots between the conversation we were having a moment ago . Jpmorgan pays about 20 million to settle allegations of wrongdoing with a Justice Department. Pay onet suisse might billion. That is how much money david Single Person tepper is estimated to have earned last year, making him the highestpaid Hedge Fund Manager in the world and, perhaps, the highestpaid individual on the planet. This is coming to us from an Institutional Investor today with a list, and also on that list . You know some of them very well already. Steve cohen, john paulson, making more than 2 billion. Griffin missed the billion dollar club by a hair, rounding out the topfive. What makes me more insane about this . These are the numbers Institutional Investors came up with. If you actually think those are the numbers, were slowly i believe the numbers have to be higher than that. Knowing how much does these guys make if you factor in their investments . The numbers are even bigger. The 3. 5 billion is extraordinary if you think about appaloosa. Not even a huge fund in terms of management. Under 20 is just billion. David has said he is not looking to take more money. He does not even have that many people employed there. The office is in new jersey. We are not talking about the early 2000s. Significantly smaller than that. They put on concentrated bets and in davids case it was all about airlines and boy, they won. The thing you have to remember, the thing that distinguishes a Hedge Fund Manager or private equity guy from a bank ceo is that the investors are ok with this. They have invested with these managers knowing that if they deliver performance like appaloosa did last year, returning 42 to investors, that these guys would be paid an awful lot of money. The argument in favor of numbers like 3. 5 billion is that the incentives for the managers is that they only do well if the investors do well. People talk about two and 20, steve is one of the steve few wherene of the their investors were comfortable paying those sums, some say they are exorbitant fees, because he delivered results. Like him or hate him, year in and year out he did. Except in next year he will probably not be on that list. Because he will be running a family office. For different reasons. Which means he will not have outside clients. I will say that one of the unintended consequences today, when you look at this report, this has to be kind of a dark warning for banks. Every warning. Warning is a dark warning. The fact that there are no longer distressed debts, acting as competitors, proper gaps for banks were the biggest competitors. They no longer exist. That is crazy for these pe firms and hedge funds. So, those numbers might even get bigger. Coming up, everybody, the proposed merger between sprint and tmobile. Dan hesse he was with us earlier in the show, and he had some surprising things to say. We will revisit our conversation with him in just a moment and revisit what the news was. Stick around. Back, everybody. I am Erik Schatzker, here with Stephanie Ruhle. In case you missed it, we broke some news earlier with dan hesse he. We were talking about sprints potential merger with rival tmobile. Number three combining with number four. He would not tip his hand as to how close it might be to a deal, but he did have something very interesting to say about whether he would wind up running the combined company. Have a look at this. One of the things about we areor any cio is that coming up on six and a half years. I still have the underbelly, i could continue, but it might be a Good Opportunity to go do something else. Alex sherman is here with me and stephanie. Say,esse he went on to when i asked him, if it would bother him not to be the ceo of the combined companies, he said no it would not bother him. I could scarcely believe what i was hearing. I just dont think that john leger whatever say that. Particularly as john leger continues to prod sprint in interviews and on twitter. He is more or less saying to dan has see that your strategy is table terrible, yet dan hesse he comes out and says that it would not bother me to run this new company, which you would have to say, reading between the lines, means that the plan is in place. There was a lot of reading between the lines to be done in that conversation. He talked about other roles that he would play in the industry. The four different ceos involved in the project. And again, for Different Companies that play in this proposed deal. Deutsche telekom affectively owns sprint and tmobile. Those companies needing to come together for a deal. The interesting thing about this is that no deal has been put on the table yet, there is so much open conversation with him saying he does not need to run a combined company when the idea of a combined company is not even formally out there. That is why it is so important to talk to a guy like him about this, there is so much speculation and so much of it is misplaced, misinformed, or even constitutes disinformation. Alex, what do we know right now about where these ago she nations stand and where the planning is concerning a potential merger between sprint and tmobile . That the ceo of softbank is targeting 80 owners on sprint, he is targeting june or july to put together an actual bid where he would come together with Deutsche Telekom, work out the details, figure out who will run the company and with a termination fee termination fee in cash and assets, the numbers would go a long way towards convincing Deutsche Telekom to giving them another shot. That is sort of a window at this point, but we also know the regulators have not really softened on their stance that they are not all that in favor of a deal like this. Really, the tension here is can they put together a proposal and a rationale for regulators to eventually say ok, you are right, we need to combine these companies to be competitive. He gave us some of the rationale that they will put forth. The number one and number two carriers, at t and verizon, will not be motivated to cut rices like sprint is doing unless there is a bigger competitor. That is one rationale. The other rationale that he has been out there selling is that if you bring us together, we can really push for mobile broadband and make that available to everyone at cheaper prices. Lets say that the combined deal doesnt happen, regulators say no way. What is the future really going to hold for them . Are they ever going to be far from one and two . Sprint is in trouble at the combined company doesnt come together. They are losing money right now. I think part of the idea when he bought into sprint is that he would put it together. If the deal does not come together, i would imagine that they would need to figure out Strategic Alternatives longterm. Maybe that is dish network or some other company out there. Or some kind of content provider. Which might be possible. You ask people that are following this, you should go watch the entire interview. Shameless plug. I know, tom keenes favorite. We have to go. Alex, thank you so much. For what i would call something super awesome. One of my favorites, in fact. Talking about, among other things, the possibility of a merger with tmobile. You need to go and find that video on bloomberg. Com. David einhorn, once upon a time shareholder, thank you. Tomorrow, everybody, fed chair janet yellen. With David Einhorn. We knowanet yellen, more about that than ben bernanke. Temps testifying before the joint Economic Committee here, live on Market Makers, beginning at 10 a. M. Eastern time. Looking for hints about further tapering, among other things, from the chair of the fed. Right now it is 56 minutes past the hour, bloomberg on theion is taking you markets. Eric and i are signing off. Scarlet fu has more. Stocks in the u. S. Falling for a third time in four days. Dragged lower by aig, they reported disappointing earnings with twitter selling off at the locked up for inside shareholders expiring. Joining me for todays options and a look at where the markets are headed from here . The option strategist at trading block joining us from the cboe. Tim, when you look at the action in the markets today, what kind of signals are options giving us right now . There is a lot of kind of waiting here. We are just off the alltime high of the s p 500, off the lows of the victory of the trade here behind me is very quiet today. Traders are waiting to see if we do break out and, certainly, given where stocks are at, it may be time to put some hedges in place. Speaking of the vic, if you look at how it has performed over the last three months, it got to 28 in early february, 18 in midmarch, 17 in april, 14 last monday. There is a distinct pattern in place here. What is going to be the next low point . Somewhere around 11, 1150 level is a natural floor. Obviously, it cant go to zero like some bankrupt companies, but the high side is the further it coils in words, the more the market breaks at that low it will explode even more. That complacency that you alluded to with lower highs on the vic, no one is rushing in. Ok, gotcha. I mentioned aig, the largest commercial insurer in the United States and canada, reporting a drop in firstquarter results. How is the Options Market reacting . Seeing big, big volume in the regular may options, the 49, 50, 52 and a half calls. 15,000 have traded so far. I think you are seeing a little bit of online post earnings involving 32 to 23, but i think you are seeing some further hedging as these guys get nervous on the downside, they prefer to sell calls rather than by puts and pay up premiums. Are these shortterm positions . Do you see anyone building positions here . This is really for next week. Strangely everything is really up front here. They are looking to take advantage of shortterm premiums that tend to be richer and may be repositioned those if they expire off. Gotcha. I also wanted to bring in tesla. Ahead of earnings which are due out after earnings tomorrow, if you look at how they performed over the last three months they have come down from their high as part of that selloff of momentum stocks. Absolutely. Were looking maybe for a further move down to the 190 level, which would be supported here. Like the term structure in volatility, options this week are trading at 110. Naturally creating in the mid 80s, from that positioning it is slightly bearish with the trade this morning at around 215. The 190 foot for next week, selling it for this week, just looking for the stock to come in one little, paying only one buck 10, looking for risks to position for what i said they told be, a slightly nonevent a week event. The event being the results due out tomorrow after the close. Thank you so much for joining us, tim bickham, joining us from the cboe. We are on the markets once again. Lunch money is up next. Actually, i should say money clip is up next. Moneyclip. I am adam johnson. A power couple with bold investment calls. How this can turn the wheel. Up in space, elon musk has a finally, our stars pop dish