U.S. prosecutors' letter spurred orders in self-driving car lawsuit

SAN FRANCISCO (Reuters) – The judge overseeing a lawsuit between Uber Technologies Inc [UBER.UL] and Alphabet Inc’s (GOOGL.O) Waymo self-driving car unit issued a series of orders this week, prompted by information shared with him by the U.S. Department of Justice.

FILE PHOTO: The Uber logo is seen on a screen in Singapore August 4, 2017. REUTERS/Thomas White/File Picture

U.S. District Judge William Alsup in San Francisco disclosed on Wednesday that he had received a letter from Justice Department attorneys about the case, which is set for trial in December. The judge did not reveal the letter’s contents.

However, Alsup issued two subsequent orders, including one on Saturday, that discussed some details. He ordered Uber to make three witnesses, including a former Uber security analyst and a company attorney, available to testify on Tuesday at a final pretrial hearing. Trial is scheduled to begin on Dec. 4.

It is unusual for the Justice Department to share information with a judge days before a civil case is set to begin.

Earlier this year Alsup, who is hearing the civil action brought by Waymo, asked federal prosecutors to investigate whether criminal theft of trade secrets had occurred. That probe is being handled by the intellectual property unit of the Northern California U.S. Attorney’s office, sources familiar with the situation said. No charges have been filed.

Representatives for Waymo, Uber and the Justice Department declined to comment. The former Uber security analyst could not be reached for comment.

FILE PHOTO: The Waymo logo is displayed during the North American International Auto Show in Detroit, Michigan, U.S., January 8, 2017. REUTERS/Brendan McDermid/File Picture

Waymo sued Uber in February, claiming that former Waymo executive Anthony Levandowski downloaded more than 14,000 confidential files before leaving to set up a self-driving truck company, called Otto, which Uber acquired soon after.

Uber denied using any of Waymo’s trade secrets. Levandowski has declined to answer questions about the allegations, citing constitutional protections against self-incrimination.

Since the case began, Uber said its personnel have spent thousands of hours scouring its servers and other communications devices but have not found Waymo trade secrets.

In an order on Friday, Alsup referred to a former Uber security analyst in connection with the letter from the U.S. Attorney’s office and to certain “devices” the former employee said were maintained by Uber.

Alsup asked Uber to disclose whether it had searched those devices for relevant evidence in the case.

Reuters is part of a media coalition seeking to maintain public access to the trial.

Reporting by Dan Levine; Editing by Sue Horton and Marguerita Choy

Our Standards:The Thomson Reuters Trust Principles.

Black Friday, Thanksgiving online sales climb to record high

CHICAGO (Reuters) – Black Friday and Thanksgiving online sales in the United States surged to record highs as shoppers bagged deep discounts and bought more on their mobile devices, heralding a promising start to the key holiday season, according to retail analytics firms.

Customers push their shopping carts after making a purchase at Target in Chicago, Illinois. REUTERS/Kamil Krzaczynski

U.S. retailers raked in a record $7.9 billion in online sales on Black Friday and Thanksgiving, up 17.9 percent from a year ago, according to Adobe Analytics, which measures transactions at the largest 100 U.S. web retailers, on Saturday.

Adobe said Cyber Monday is expected to drive $6.6 billion in internet sales, which would make it the largest U.S. online shopping day in history.

In the run-up to the holiday weekend, traditional retailers invested heavily in improving their websites and bulking up delivery options, preempting a decline in visits to brick-and-mortar stores. Several chains tightened store inventories as well, to ward off any post-holiday liquidation that would weigh on profits.

TVs, laptops, toys and gaming consoles – particularly the PlayStation 4 – were among the most heavily discounted and the biggest sellers, according to retail analysts and consultants.

Commerce marketing firm Criteo said 40 percent of Black Friday online purchases were made on mobile phones, up from 29 percent last year.

No brick-and-mortar sales data for Thanksgiving or Black Friday was immediately available, but Reuters reporters and industry analysts noted anecdotal signs of muted activity – fewer cars in mall parking lots, shoppers leaving stores without purchases in hand.

People shop for items in Macy’s Herald Square in Manhattan, New York. REUTERS/Andrew Kelly

Stores offered heavy discounts, creative gimmicks and free gifts to draw bargain hunters out of their homes, but some shoppers said they were just browsing the merchandise, reserving their cash for internet purchases. There was little evidence of the delirious shopper frenzy customary of Black Fridays from past years.

However, retail research firm ShopperTrak said store traffic fell less than 1 percent on Black Friday, bucking industry predictions of a sharper decline.

A cashier handles money in Macy’s Herald Square in Manhattan, New York. REUTERS/Andrew Kelly

“There has been a significant amount of debate surrounding the shifting importance of brick-and-mortar retail,” Brian Field, ShopperTrak’s senior director of advisory services, said.

“The fact that shopper visits remained intact on Black Friday illustrates that physical retail is still highly relevant and when done right, it is profitable.”

The National Retail Federation (NRF), which had predicted strong holiday sales helped by rising consumer confidence, said on Friday that fair weather across much of the nation had also helped draw shoppers into stores.

The NRF, whose overall industry sales data is closely watched each year, is scheduled to release Thanksgiving, Black Friday and Cyber Monday sales numbers on Tuesday.

U.S. consumer confidence has been strengthening over this past year, due to a labor market that is churning out jobs, rising home prices and stock markets that are hovering at record highs.

Reporting by Richa NaiduEditing by Marguerita Choy

Our Standards:The Thomson Reuters Trust Principles.

O Tidings Of Comfort And Joy For Realty Income Investors

Last week I noticed a Realty Income (NYSE:O) press release announcing that they were redeeming $550 million of 6.75% notes that were not due until August 15, 2019 and that they were going to pay a substantial amount of unearned interest to the note holders:

Realty Income To Redeem All Outstanding 6.75% Notes Due 2019

Nov 15, 2017

SAN DIEGO, Nov. 15, 2017 /PRNewswire/ — Realty Income Corporation (Realty Income, NYSE: O), The Monthly Dividend Company®, today announced that it intends to redeem all $550 million in principal amount of its outstanding 6.75% notes due August 15, 2019 (CUSIP No. 756109AK0) (the “Notes”). The redemption date for the Notes will be December 15, 2017 (the “Redemption Date”).

The estimated redemption price for the Notes will be $1,101.62 per $1,000 principal amount of the Notes, representing 100% of the principal amount of the Notes being redeemed, accrued and unpaid interest thereon to the Redemption Date and a “make-whole” amount calculated in accordance with the indenture governing the Notes. [More…]

I wondered why Realty Income would redeem these notes at this time and pay a significant amount of interest not due until 2019? One thought I had was that it would make sense if they were doing it as part of a strategy to earn a credit rating upgrade.

Well on November 21, 2017, Moody’s upgraded Realty Income:

Moodys

Rating Action: Moody’s upgrades Realty Income to A3; stable outlook

Global Credit Research – 21 Nov 2017

New York, November 21, 2017 — Moody’s Investors Service (“Moody’s”) upgraded the senior unsecured rating of Realty Income Corporation [NYSE: O] to A3 from Baa1. The outlook is stable.

The upgrade to A3 reflects the REIT’s long track record in maintaining conservative balance sheet metrics, exceptionally strong ability to obtain long-term financing at low costs, and a geographically diverse net-lease retail portfolio with steady operating performance throughout real estate cycles. The A3 rating also recognizes the depth and experience of Realty Income’s management team. [more…]

This is very good holiday news for investors in Realty Income. The new higher investment grade rating will enable the company to lower its cost of capital, which will increase profit margins and support increased distributions to shareholders going forward.

About The Company

Realty Income was “Founded in 1969 to provide investors with monthly dividends that increase over time.”

The company acquires commercial real estate leased to selected high quality tenants on long-term lease agreements, typically 10–20 years, with built in rent escalation terms. The leases are structured so that the tenant is responsible for the operating expense for the property (taxes, insurance, and maintenance), an arrangement called Triple-net. The lease payments received each month are used to support predictable monthly dividend payments to our investors.

The stock was listed on the New York Stock Exchange for public trading in 1994 with the trading symbol “O.” The company is a member of the S&P 500 index and the S&P High Yield Dividend Aristocrats index. As of November 22, 2017, the company’s stock closed at $58.56 and the yield is 4.5% paid monthly. The company headquarters is located in San Diego, California.

Portfolio

Realty Income seeks tenants with proven success operating businesses that provide non-discretionary goods and services at low price points. The company now owns over 5000 free standing commercial properties in prime locations with good visibility, evenly distributed among 49 states roughly in proportion to population, and leased to tenants engaged in Retail 79.9%, Industrial 12.8%, Office 5.1%, and Agriculture 2.2%.

The average remaining lease term is about ten years with staggered lease expirations. Current occupancy is 98.3%; the lowest occupancy the company experienced was 96.6% during 2010.

Most tenants operate commercial retail businesses that provide non-discretionary goods and services at low price points. 46% of revenue comes from tenants with investment grade credit ratings.

Top 20 Tenants

Company management is well aware of the risks posed to the retailer by expanding e-commerce development and has responded by seeking tenants with limited risk. 20% of total portfolio rent revenue now comes from tenants with no exposure to e-commerce risk. 77% of rent comes from retail tenants with at least one of four risk-controlling characteristics: service industry, non-discretionary product, low price point, or an investment grade rating.

eCommerce Defense Strategies
Performance

The company has been an extremely reliable investment since going public in 1994, outperforming almost every alternative public investment opportunity.

Realty Income Historical Performance versus IndicesThe portfolio of high-quality tenants with long-term leases with built-in rent escalators allowed the company to raise its dividend every year right through the great recession. What a great place to have your retirement savings during times of economic uncertainty and stress.

Uninterrupted Annual Dividend ncreases 1994 - 2017Quality Of Management

When I review the list of the top 20 tenants above, I see a few businesses that give me a little concern. I think Walgreens (NASDAQ:WBA) may be challenged as more prescriptions are filled remotely and delivered to the customer through the mail, which may reduce traffic in the stores. I am not 100% confident about the viability of the cinema business as it now exists. But if I see these risk factors, I have 100% confidence that Realty Income management have already considered them and have a plan to monitor and manage these risks just as effectively as they have managed tenant risks over the past 48 years.

Valuation

I am not a trader or a market timer. I only recommend investors consider this company as a long-term investment.

Realty Income stock closed at $56.35 on November 22, 2017. Based on the most recent monthly dividend of $0.212, the annualized yield is 4.52%. The price earnings ratio is 48.20 and the price/FFO ratio is 18.3 based on the third quarter FFO per share annualized. Realty Income is not cheap at this price but it is selling below its highest historical valuation.

I expect that as news of the credit upgrade is considered by the investment community, it will have a significantly positive impact on the value of Realty Income stock.

Happy Holidays!

Disclosure: I am/we are long O.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

GE Investor Update Review

This is a follow-up to my October 24 article about General Electric (GE). My basic decision stated in that article was that I like the initial comments and actions by new CEO John Flannery, and I’m not inclined to close the GE position. However, I would view GE as CAFD (cash available for deployment) if an unusual opportunity came along and I didn’t want to use existing cash for the purchase.

I decided to take no action until the November 13 GE Investor Update. I’ll provide more details about my portfolio action at the end of the article.

Key takeaways

GE’s November 13 Investor Update packed an abundance of information in the 2-hour, 50-minute presentation (including the question-and-answer segment). Here are my key takeaways, with elaboration to follow later in the article:

  • Flannery is in charge. He has charted a new direction for the company, has built his own leadership team, and is re-shaping the Board.
  • Miller is making a significant contribution. New chief financial officer, Jamie Miller, will be a key part of GE’s turnaround story.
  • Joyce leads “GE at its best.” Vice Chairman David Joyce since 2008 has been the CEO of GE Aviation, the company’s most profitable division.
  • Stokes is the one to watch. Russell Stokes, the CEO of GE Power, has the tough job of turning around GE’s largest and most challenged division.
  • “Complexity hurts us.” Flannery is designing a simpler and more focused GE, putting priority on units with cash flows that grow the bottom line.
  • Collaborative, competitive rigor. Flannery expects pushback and thrives in fluid situations where options are open-ended and vigorously debated.
  • Growing cash flow, operating earnings, and dividends. 2018 will be the base from which growth will be measured. Flannery expects growth.

John Flannery’s stock purchases

CEO John L. Flannery maintains that GE is a good holding for someone with at least a 3-5 year time horizon. Translation: “This won’t be a quick turnaround.”

On November 15, Flannery purchased 60,000 GE shares at $18.27, or $1.096 million.

In August, shortly after becoming CEO, Flannery bought 104,000 shares at $25.56 per share, or $2.7 million worth of GE shares, bringing his total at that time to 615,000 shares, worth (at that time) $15.6 million. He also owns 101,000 restricted stock units and options to purchase 2.6 million shares at a $11.95-38.75 price range (SA Aug. 10).

So, since becoming CEO, Flannery has purchased 164,000 GE shares at an average cost of $23.15 for an investment of $3,796,000. GE shares closed at $18.21 on November 17, so the 164,000 shares recently purchased are now worth $2,986,440. Flannery has a paper loss of $809,560, or 21.3% on those two purchases.

This brings his total stake (not counting restricted stock units and options) to 675,000 shares, worth $12,291,750 as of November 17.

Quotations below are from the November 13 Investor Update held in Atlanta, Georgia. You can access a replay of the webcast at the GE website, and you can also access an edited version of the transcript from the GE website.

Basic direction

I like the basic direction charted by Flannery. At the beginning of the Investor Update, Flannery affirmed GE’s long history of innovation in “light, flight and health,” which are “the absolute underpinnings of the modern world.” Flannery is a 30-year veteran of GE and he affirms the company’s long history and the culture that he believes made GE a great “iconic” company:

“…the 125-year history of the company… . is just an incessant stream of technology breakthroughs going back to the first light bulb, the first X-ray, the first jet engine, the first CT, the LEAP, the H turbine.”

“…I’ve been in the company for 30 years … I love the company and I’ve always loved the culture. … It’s always been a culture of meritocracy… compliance and integrity.”

(Logo graphic from underconsideration.com)

While affirming GE’s heritage, Flannery is forthright about GE’s problems and the need for new direction:

“So it’s a heavy lift. But I think for our teams, what we’re motivated by, this is the opportunity, really, of a lifetime to reinvent an iconic company.”

Flannery concluded his prepared remarks at the Investor Update with this statement to his GE colleagues:

“…to the GE team, my colleagues at GE team. This is our time. This is our time to reinvent the company. This is our time to show our passion and our fury, and our resolve and our grit. This is an incredible opportunity for all of us. It’s game on. And I just want to say I couldn’t be more secure or more confident in fighting this fight with all of you.”

The following excerpt provides an excellent summary of the pivot that Flannery is leading. It expresses the cultural shift he is driving:

“There are things, though, that I think we can sharpen in the culture, with things that are going to change the performance of the businesses, the performance of the team, and that’s really what I’m focused on when I’m talking culture. … Accountability, outcomes matter. Effort’s good, outcomes matter. Transparency, more candor, more debate, more pushback. Rigor, intense analytics, use data, probe, verify, revisit. And then lastly, consistency, making sure that we have compensation schemes, goals and metrics that drive us to perform on a consistent basis over an extended period of time for investors. So I have spent a ton of time on the culture with our officers, with the rest of the company. And I don’t think there’s any confusion inside the company about what I expect here in terms of behaviors and motivations.”

“So that’s it… strong franchises; 2018, a reset year; capital allocation, critical; portfolio simplification, critical. We know what we need to do, and it’s show-me time. We have to perform and execute, and that’s what we owe all of you.”

An insider’s outsider

Former CEO was widely disparaged, and some GE shareholders hoped for a clear break with the Immelt years. As CEO of GE Healthcare, John Flannery was viewed by some as an “accomplice” who bears some responsibility for GE’s recent past.

Although Flannery has been at GE for three decades, he is not a “me, too” person. He thinks for himself and he has moved thoughtfully yet quickly to implement strategic change. I consider him an “insider’s outsider.” He has demonstrated the ability to view familiar territory objectively and analytically. He knows how to “orbit the giant hairball” without becoming entangled in it. He is an insider who is leading from the outside.

GE announced Flannery’s appointment as CEO on June 12, 2017, effective August 1. The four presenters at the November 13 Investor Update represent the heart of Flannery’s new team. Like Flannery, the team combines years of experience at GE with fresh perspectives:

“I’m just a believer that there’s a lot of power and benefit in melding fresh eyes with people that have institutional memory. And this is something that worked extremely well for me in Healthcare, and we’re going to do the same thing again here with the company.”

Flannery, GE’s new CEO, previously was CEO of GE Healthcare. Jamie Miller, the new CFO, previously was CEO of GE Transportation. Russell Stokes, the new CEO of GE’s most challenged division, GE Power, was previously CEO of GE Energy and he is tasked with merging GE Energy with GE Power. The announcement of Stokes’ appointment came two days after the announcement that Flannery would be the new GE CEO. David Joyce, the CEO of GE’s most successful division, GE Aviation, has been in that role since 2008 and he serves as GE’s Vice Chairman. The common thread is that each of these key leaders has had experience running a GE division.

Other key team members

Senior Vice President and Chief Financial Officer Jamie S. Miller was prominent in the Investor Update presentations. She fielded questions along with CEO Flannery. She is new to the CFO position, moving a few weeks ago from her role as President and CEO of GE Transportation.

Miller joined GE in 2008 as VP, Controller and Chief Accounting Officer. She served in that role for two and a half years before leading GE Transportation. She announced two changes in the way GE will report:

“…on earnings per share, we’ll be moving … to an adjusted earnings per share measure. … it starts with continuing operations EPS. … back out gains and restructuring, and … back out non-operating pension expense.”

“…On cash reporting, we’re moving from CFOA (cash from operating activities) to industrial free cash flow … just like our peers… CFOA, less deal taxes, less gross P&E additions and capitalized software.”

Miller said management has identified some $3 billion in cost reductions over the next two years. Corporate headcount will be down 25% as the company moves into 2018. She reiterated management’s view that 2018 will be “a reset and stabilization year for the company. And we see adjusted EPS of $1 to $1.07, with industrial free cash flow at $6 billion to $7 billion.”

Miller said:

“I think the one thing that I’m most excited about benefiting free cash flow is the fact that our incentive comp programs are going to be mostly aligned with free cash flow as a primary metric.”

GE Aviation’s revenue was $6.816 billion, or 22.7% of the $30.046 billion Industrial Segment revenue in 2017 Q3. GE Aviation’s profit for Q3 was $1.680 billion, or 46.3% of GE Industrial Segment’s profit of $3.630 billion for Q3. Flannery said this division is “GE at its best.” David L. Joyce, Vice Chairman of GE and President and CEO of GE Aviation, made this statement:

“Our projections for op profit growth this year, about 5% to 6% on revenue of 2% to 4%, with a free cash flow conversion which will be a little north of 90%. In 2018, you should expect us to be at about 7% to 10% growth on op profit on the same growth in organic revenue. As John said, our goal is to hold op profit rate as we move forward with this big LEAP ramp as well as the Passport ramp, which is new engine in the business and general aviation space. We have to continue to focus on structural reduction in cost to do that. Our SG&A will be below 6% of sales in 2018.”

GE Power’s revenue was $8.679 billion, or 28.9% of the Industrial Segment revenue in 2017 Q3. GE Power’s profit for Q3 was $0.611 billion, or 16.8% of GE Industrial Segment’s profit for Q3. Russell T. Stokes, Senior VP and since June 2017 President and CEO of GE Power, described some of the challenges facing GE Power:

“… We are going to right-size the business for the realities of the market… Structural cost… could be better. …investments … focused on the right things. … a more holistic view of our service franchise. … Better performance on outages for our customers, better cost execution out in the field. We can broadly execute better. Improving on working capital, higher say/do ratio, … delivering on an objective and very transparent environment… Cash as important as returns, system transparency, so everybody sees what goes on.”

Transparency, tone and temperament

I like the new management’s transparency. There’s been a consistency of content and style in Flannery’s public interviews, the 2017 Q3 earnings call and the Investor Update. I’m convinced his message is the same to the public and to individuals inside and outside the company.

It’s not uncommon for a CEO to be guarded in his or her public assessment of a company’s situation. However, Flannery has demonstrated a refreshing openness about GE’s weaknesses as well as strengths. He is comfortable being the leader of a public company, and he is clearly willing to be evaluated by the marketplace and by his colleagues:

“I expect rigorous debate. I expect rigorous tracking of how things are going. I expect a lot of pushback.”

Flannery was asked in the Q&A session:

“…as CEO, what would you like to see your biggest impact and the biggest change be…?”

He responded:

“I want the team to move forward. I want the team to have confidence. I want the team to be focused… execute with rigor, maximize the value of everything else. And those things will take care of themselves and write their own legacy. I really do not need to be motivated by that.”

I like the new management’s tone. Some CEOs might be tempted to gloss over problems or (on the other extreme) throw the previous CEO under the bus. Flannery has struck a different tone. He has expressed respect for his former boss/CEO, Jeff Immelt. The only mention of Immelt in the Investor Update expresses both an appreciation for Immelt’s focus on digital and Flannery’s new direction:

“Digital continues to be very key to the company. Jeff was very early in his seeing this trend, and I’d say we’ve only had growing validation of what we’re seeing and able to achieve with customers. … We’re still deeply committed to it, but we want a much more focused strategy.”

This respectful tone is extended to Flannery’s colleagues on his leadership team. As one who ran GE’s Healthcare division, he understands the importance of the CEOs and teams of the various segments:

“… businesses run their operations. My job, our job at the center of the company, really is to allocate the financial resources, the financial capital of the company and the human resources, the human capital of the company to the highest and best use.”

Flannery seems to be establishing a tone of collegiality and teamwork while blending GE veterans with fresh blood and setting high expectations:

“…About 40% of the team is new since June. I love the team. … I especially love the team dynamic. This is a team that’s comfortable with debate back and forth. It’s a team that’s competitive as hell, a team that’s fun. And I feel very confident working with this team…”

The tone set by Flannery has the sound of a cash register. He has established a clear focus on cash growth as the measure of success. The management team appears to be united around the effort to grow GE’s cash flow:

“To me, purpose of the business at the end of the day is to generate cash for investment and return to investors.”

“…we’re going to focus on improving the cash flow of the company. … the … free cash flow in 2018 (will be) double what it is in 2017.”

“So growth in cash to me (is) the ultimate litmus test. … the cash is what people consume. The cash is what lets you invest. The cash is what lets you do all the capital allocation things you want to do. … if we’re growing and generating a lot of cash, people are going to like what they see.”

Flannery’s shift in the metrics he and the team will pursue is another illustration of “turning the page” from the Immelt era, and it’s a cultural shift:

“…there was a premium in that universe on top line growth, on operating profit. Nothing wrong, obviously, with either one of those metrics, but we really needed to close the loop more with a focus on cash, cash flow, free cash flow. So … you can see just a growing delta between what our operating earnings were, our operating profit earnings were and our cash earnings. So as we go forward, we’re going to focus on much simpler metrics … a handful, things like revenue and operating profit, free cash flow. Free cash flow is a much more penetrating metric. It incorporates, obviously, capital spending, software spending, et cetera. So cash is going to be a huge focus, and simplification of metrics is going to be a huge focus as we go forward.”

Flannery’s comments about GE’s dividend made it clear that dividend growth is a function of growing cash flow:

“…we are intensely focused…on the cash generation of the company, discipline in the company, taking cost out of the company, restoring the oxygen of cash and earnings to the company. And that’s openly what we’ll be able to use to grow and expand the dividend…”

“…we’re comfortable with the dividend relative to the cash flow of the company… The cash flow of the company will grow … in 2018. Businesses that we focus on will continue to grow cash flow…”

Flannery is taking a new approach to compensation for 190 company officers, focused less on cash and more on equity compensation:

“Much more equity is the biggest point. Today, for its senior executives… equity would be probably about 20% of their compensation. It’s going to be 50%… My compensation, 100% equity compensation, PSUs, equity granted over 3-year time period, simple set of metrics. …an environment … much more aligned and rewarding of our team for and with shareholders.”

The Investor Update slide presentation included an explanation of the new compensation structure for management:

I like the new management team’s temperament. It starts with CEO Flannery. A strong leader is unflappable and does not become defensive when criticized. Here’s a question posed to Flannery during the Investor Update:

“…What … duration … should (we) give you? And what metrics we should be looking at to decide whether this current construct is a success versus something … like a larger breakup?”

Flannery’s response made it clear that he isn’t playing to an audience. He is focused on the performance of the business and on strategic outcomes:

“Listen, that’s for the market to decide. I think we’ve laid out very clearly where we’re going… where we compete, where we have competitive advantage, where we generate cash. I recognize fully it’s show-me time. … And until we produce the results, not going to matter. … we’re focused on what we can control, where we’re allocating the capital, how we’re running the company, how we’re driving the teams. You guys will decide what you like and don’t like.”

Flannery’s style seems to follow Good to Great author Jim Collins’ description of “Level 5” leadership:

“The essential ingredient for taking a company to greatness is having a ‘Level 5’ leader, an executive in whom extreme personal humility blends paradoxically with intense professional will.”

One of the slides from the November 13 Investor Update slide presentation summarizes Flannery’s approach to driving GE’s cultural change:

Holding GE

I plan to continue to hold shares of GE. I’m more impressed with CEO John Flannery after the Investor Update. He has articulated a clear set of values and priorities. He seems to thrive on fluidity and the challenge of a changing landscape.

He announced a plan to raise $20 billion in divestitures. Some people might have expected that he would produce a list of assets to be sold, with an approximate price tag on each. But Flannery is approaching this $20 billion target in a pragmatic and (I believe) appropriate way. The company is continuing to manage and grow each of the segments to maximize profitability as it explores options for how to maximize shareholder value.

As for Baker Hughes (NYSE:BHGE), Flannery said:

“We own 62.5% of this company. We want to maximize the value of that for the shareholders of our company… how we deliver synergies… how we share technology. And part of that might be, is there a different form or structure for the ownership of that asset.”

As for the troubled GE Power unit:

“…our Power business is a challenged business right now. We’ve got a lot of work to do. … It’s a heavy lift to turn around, but it’s a fundamental asset, strong franchise in an essential infrastructure business. We can improve that a lot in the next 1 to 2 years.”

When asked directly why he’s putting GE Transportation on the block:

“… you’ve been in the business 100 years … You make big machines, lots of sensors, lots of digital content, customer service agreements. So it just seems like it fits. So why put it on the block?”

Flannery replied:

“…we’ve talked about is focus and … we’ve talked … which businesses are exposed to cycles. … we foresee a protracted slowdown in the North American market … around coal shipments and other things. So it is an excellent asset. We have a very strong franchise. We have incredible customer relations. But we think it’s going to be an extended slow period in North America, and the international business can pick up some of that, point one. Point two is … we’re exploring the options that we have with these assets. So that may be a sale, it may be a spin … And then the last thing I would say is focus means focus. … Transportation is a great asset (but it’s only) 3%, 4%, 5% of the company. And so we’re concentrating deliberately on the areas where we think we can make the most impact for the owners, and then we’ll maximize the value of the other assets.”

This is a good example of how Flannery charts a course (i.e., “we intend to sell GE Transportation”), but the “when” and “how” of that decision will depend on how well the division executes and how macro market forces unfold.

Conclusion

I have a brokerage account and an IRA. I’ve had some holdings in both accounts. For simplicity, I’m eliminating duplications. I was holding 80% of my GE shares in the IRA and 20% in the brokerage account. I decided to sell the GE shares in the brokerage account (where I’ll realize a tax loss by selling at $18.27). I applied the proceeds toward the purchase of some shares of Magellan Midstream Partners (MMP) at $65.00. It makes more sense to hold MMP in the brokerage account.

The sale of 20% of my GE shares reduced the allocation from 1.96% of the portfolio to 1.61%. I feel better with this somewhat lower allocation for GE. I agree with John Flannery that this is “show me” time. If I continue to view GE’s new management favorably and if the turnaround materializes, I would be willing to add more GE shares. One factor I’m watching is whether Standard & Poor’s maintains its AA- credit rating on GE. S&P has placed GE on negative watch for a possible downgrade.

I expect GE shares to trade in a range of roughly $15.00 to $20.00 over the next 12-14 months. The stock’s price dropped to $5.87 on March 4, 2009, in the depth of the Great Recession’s bear market. The 2010 price range was $13.75 to $19.69. I could see the price of GE stock approximating the 2010 range in 2018. During 2010, GE paid $.46 per share in dividends, which approximates the current $.48. I think GE will hold at the $15 level, although a severe market downturn could knock GE shares down to the 2010 lows.

We’ll have a clearer picture after the 2018 results are reported about 14 months from now.

My target price to consider adding more GE shares is $16.67, which would equal a dividend yield of 2.88%. I might lower the target if S&P lowers GE’s credit rating.

My goal is to write at least one article a week, usually about a company in my retirement portfolio. I’ve been writing recently about REITs in the portfolio. That will continue for the next few weeks, but I wanted to provide this update about GE. I always learn from our Seeking Alpha conversations. I welcome your opinion because your responses enrich our discussion. What’s your take on GE’s new management and the company’s prospects?

You can access a list of previous articles here.

To be notified of future articles on a real-time basis, just click “Follow” at the top of this article, then choose “Follow this author” and “Real-time alerts.”

It’s not my intent to advocate the purchase or sale of any security. I offer articles to provide ideas for stocks to study and to share a journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Disclosure: I am/we are long GE, JNJ, PG, MMM, WMT, MSFT, MRK, PFE, XOM, AAPL, CSCO, TD, SPG, ADP, RY, BCE, O, VTR, DUK, KMB, PPL, SKT, PEP, NNN, WPC, GPC, EPD, MMP, BEP, BIP, TGT, SO, IBM, TXN, VFC, QCOM, KO, HRL, UL, PEGI, MRCC, HASI, APLE, BIF, VTI, VEA, VWO, VYM, VOE, VNQ, VPU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Uber’s Cover-Up of Its Massive Data Breach May Lead to E.U. Investigations

(BRUSSELS) – European Union privacy regulators will discuss ride-hailing app Uber‘s massive data breach cover-up next week and could create a task-force to coordinate investigations.

Uber faces regulatory scrutiny after CEO Dara Khosrowshahi said the company covered up a data breach last year that exposed personal data from around 57 million accounts.

The chair of the group of European data protection authorities – known as the Article 29 Working Party – said on Thursday the data breach would be discussed at its meeting on Nov. 28 and 29.

While EU data protection authorities cannot impose joint sanctions, they can set up task-forces to coordinate national investigations.

When a new EU data protection law comes into force next May, regulators will have the power to impose much higher fines – up to 4 percent of global turnover – and coordinate more closely.

Uber paid hackers $100,000 to keep secret the massive breach.

The stolen information included names, email addresses and mobile phone numbers of Uber users around the world, and the names and license numbers of 600,000 U.S. drivers, Khosrowshahi said. Uber declined to say what other countries may be affected.

For more on the Uber data breach, see Fortune’s video:

“We cannot but voice our strong concern for the breach suffered by Uber, which was reported belatedly by the U.S. company. We initiated our inquiries and are gathering all the information that can help us assess the scope of the data breach and take the appropriate steps to protect any Italian citizens involved,” said Antonello Soro, President of the Italian Data Protection Authority on Wednesday.

The British data protection authority also said the concealment of the breach raised “huge concerns” about Uber‘s data policies and ethics.

Long known for its combative stance with local taxi regulators, Uber has faced a stream of top-level executive departures over issues from sexual harassment to data privacy to driver working conditions, which led its board to remove Travis Kalanick as CEO in June.

Uber's messy data breach collides with launch of SoftBank deal

TORONTO/SAN FRANCISCO (Reuters) – A newspaper advertisement for an Uber Technologies Inc stock sale was juxtaposed on Wednesday with a report that the ride-service provider had covered up a data hack – something of a metaphor for Uber, a company with boundless investor interest, but whose penchant for rule-breaking has led to a series of scandals.

FILE PHOTO: A photo illustration shows the Uber app on a mobile telephone, as it is held up for a posed photograph, in London, Britain November 10, 2017. REUTERS/Simon Dawson/File Photo

The stock sale advertised in the New York Times will enable Uber [UBER.UL] investors to sell their shares to Japanese investor SoftBank, a critical deal for the company whose problems included building software to spy on competitors and to evade regulators and being investigated in Asia for paying bribes.

Uber on Tuesday said that it had paid hackers $100,000 to destroy data on more than 57 million customers and drivers that was stolen from the company – and decided under the previous CEO Travis Kalanick not to report the matter to victims or authorities. Uber was first hacked in October 2016 and discovered the data breach the following month.

Chief Executive Dara Khosrowshahi, who took the helm in August with the mission of turning around the company and overhauling its culture, acknowledged in a blog that Uber had erred in its handling of the breach. (ubr.to/2AmxlQt)

The timing of the disclosure could hardly have been worse.

The company is trying to complete a deal with SoftBank Group Corp (9984.T) in which the Japanese firm would invest as much as $10 billion for at least 14 percent of the company, mostly by buying out existing shareholders. SoftBank is advertising to find shareholders who want to sell.

Uber last month announced a preliminary deal for the SoftBank investment.

One question is whether SoftBank will now try to alter the price of the deal. One source familiar with the matter said SoftBank is planning to stick to its agreement to invest in Uber but may seek better terms. SoftBank has not yet made a final decision on whether to renegotiate, the source said.

Another question is the future of Kalanick, the co-founder who led Uber to becoming a global powerhouse but did so with aggressive and controversial tactics. He was forced out by investors in June who feared his leadership style would damage the company, although he stayed on the board and remains a significant shareholder.

A bitter battle among investors over how to resolve Uber’s problems led to a lawsuit by early investor Benchmark, which sought to oust Kalanick from any role. But a settlement was reached earlier this month to pave the way for the SoftBank deal, with Kalanick retaining his board seat and other rights.

Kalanick was made aware of the hack last November and was aware of the $100,000 payment, according to a person close to the matter. Kalanick has declined to comment. Uber did not respond to questions from Reuters on Wednesday.

MULTIPLE INVESTIGATIONS, LAWSUITS

The scope of the repercussions Uber will face for the October 2016 data breach began to take shape Wednesday with governments around the world opening investigations.

Authorities in Britain, Australia and the Philippines said they would investigate Uber’s response to the data breach. London’s transport regulator, which has been in discussions with Uber after stripping it of its license to operate, said it was pressing Uber for details.

Canada’s privacy watchdog said that it had asked Uber for details on the breach, though it had not launched a formal investigation.

Attorneys general offices in at least six U.S. states along with the Federal Trade Commission (FTC) have announced they are looking into the matter. Some states are likely to go after Uber for breaking laws on data breach notification within a reasonable period of time.

At least two class action lawsuits have been filed against the company in the United States for failing to disclose the data breaches and causing potential harm to consumers.

Uber said that it has been in touch with the FTC and several states to discuss a hack and pledged to cooperate.

Legal experts said the company is likely to face limited financial fallout from data-breach lawsuits. Uber might succeed in squelching them outright because its agreements with both customers and drivers call for mandatory arbitration of disputes.

Uber fired its chief security officer, Joe Sullivan, and a deputy, Craig Clark, over their role in handling the hack.

The board of directors had commissioned an investigation into Sullivan and his team, which is how the breach was discovered. The board committee concluded that neither Kalanick nor Salle Yoo, who was general counsel at the time, had been consulted in the company’s response to the breach, according to a second person familiar with the matter.

It is unclear what the board of directors knew, if anything. Multiple board members did not respond to requests for comment.

“The scope of this breach is something the Uber board should have been briefed about and consulted on at the very least,” said Cynthia Clark, an associate professor of management at Bentley University. “It’s a monitoring issue and one of strategy and reputation.”

Clark said that these sorts of risks could affect Uber’s IPO, which the board has agreed will take place in 2019.

The company has begun overhauling its security practices with help from Matt Olsen, former general counsel of the U.S. National Security Agency and director of the National Counterterrorism Center, CEO Khosrwoshahi said.

Uber in August settled with the FTC after the regulator found the company failed to protect the personal information of passengers and drivers, an agreement that requires 20 years of regular auditing of Uber’s data.

After this week’s disclosures, Uber can expect “more audits and more people inside of the company” from regulators, said cyber security attorney Steven Rubin.

Reporting by Jim Finkle in Toronto and Heather Somerville in San Francisco; Additional reporting by Diane Bartz in Washington, Greg Roumeliotis in New York and Alastair Sharp in Toronto.; Editing by Jonathan Weber and Grant McCool

Our Standards:The Thomson Reuters Trust Principles.

Uber Hid 57-Million User Data Breach For Over a Year

By now, the name Uber has become practically synonymous with scandal. But this time the company has outdone itself, building a Jenga-style tower of scandals on top of scandals that has only now come crashing down. Not only did the ridesharing service lose control of 57 million people’s private information, it also hid that massive breach for more than a year, a cover-up that potentially defied data breach disclosure laws. Uber may have even actively deceived Federal Trade Commission investigators who were already looking into the company for distinct, earlier data breach.

On Tuesday, Uber revealed in a statement from newly installed CEO Dara Khosrowshahi that hackers stole a trover of personal data from the company’s network in October 2016, including the names and driver’s license information of 600,000 drivers, and worse, the names, email addresses, and phone numbers of 57 million Uber users.

As bad as that data debacle sounds, Uber’s response may end up doing the most damage to the company’s relationship with users, and perhaps even exposed it to criminal charges against executives, according to those who have followed the company’s ongoing FTC woes. According to Bloomberg, which originally broke the news of the breach, Uber paid a $100,000 ransom to its hackers to keep the breach quiet and delete the data they’d stolen. It then failed to disclose the attack to the public—potentially violating breach disclosure laws in many of the states where its users reside—and also kept the data theft secret from the FTC.

“If Uber knew and covered it up and didn’t tell the FTC, that leads to all kinds of problems, including even potentially criminal liability,” says Williams McGeveran, a data-privacy focused law professor at the University of Minnesota Law School. “If that’s all true, and that’s a bunch of ifs, that could mean false statements to investigators. You cannot lie to investigators in the process of reaching a settlement with them.”

The Hack

According to Bloomberg, Uber’s 2016 breach occurred when hackers discovered that the company’s developers had published code that included their usernames and passwords on a private account of the software repository Github. Those credentials gave the hackers immediate access to the developers’ privileged accounts on Uber’s network, and with it, access to sensitive Uber servers hosted on Amazon’s servers, including the rider and driver data they stole.

While it’s not clear how the hackers accessed the private Github account, the initial mistake of sharing credentials in Github code is hardly unique, says Jeremiah Grossman, a web security researcher and chief security strategist at security firm SentinelOne. Programmers frequently add credentials to code to allow it automated access to privileged data or services, and then fail to restrict how and where they share that credential-laden software.

“This is all too common on Github. It’s not a forgiving environment,” says Grossman. He’s far more shocked by the reports of Uber’s subsequent coverup. “Everyone makes mistakes. It’s how you respond to those mistakes that gets you in trouble.”

Who’s Affected

Uber’s count of 57 million users covers a significant swath of its total user base, which reached 40 million monthly users last year. The company hasn’t notified affected users, writing in its statement that it’s “seen no evidence of fraud or misuse tied to the incident,” and that it’s flagged the affected accounts for additional protection. As for the 600,000 drivers whose information was included in the breach, Uber says it’s contacting them now, and offering free credit monitoring and identity theft protection.

How Serious Is This?

Mass spills of names, phone numbers, and email addresses represent valuable data for scammers and spammers, who can combine those data points with other data leaks for identity theft, or use them immediately for phishing. The even more sensitive driver data that leaked may offer even more useful private information for fraudsters to exploit. All of it contributes to the dreary, steady erosion of the average person’s control of their personal information.

But it’s Uber, not the average user whose data it spilled, that may face the most severe and immediate consequences. The company has already fired its chief security officer, Joe Sullivan, who previously led security at Facebook, and before that worked as a federal prosecutor. By failing to publicly disclose the breach for over a year, the company has likely violated breach disclosure laws, and should be bracing for hefty fines in many states where its users live, as well as its home state of California, says the University of Minneapolis Law School’s McGeveran. (In statements on Twitter embedded above, former FTC attorney Whitney Merrill echoed that interpretation of those breach disclosure laws.) “I would not be surprised to see states pursuing Uber on that basis,” McGeveran says.

Former FTC attorney Whitney Merrill echoed that interpretation Tuesday on Twitter:

If the cover-up included making false statements to the FTC during its investigation of the 2014 breach—even though it was a separate incident—that could have even more dire consequences. Making false statements to the commission’s investigators, McGeveran points out, is a federal criminal offense. “This is not just a casual chat over a cup of tea. it’s a formalized investigative procedure,” McGeveran says. “They’re already being asked investigative questions by a government official. They not only know about the breach, but they’re allegedly paying hackers to cover it up. They presumably omit this 57 million person breach from their disclosure to the FTC.”

“If all of that is true,” McGeveran reiterates, “that’s huge.”

WIRED's Product Reviews Have a New Look, and a New Mission

Here at WIRED, we approach product reviews a little differently than everyone else. There are literally dozens of places on the web where you can scan all the specs and read about every feature in a new phone or a new speaker. But we try to be more helpful than that. When we write a product review, we tell you what an object is trying to achieve, how it could potentially fit into your life, and whether it’s worth caring about—or buying.

Since this publication’s birth in 1993, we’ve been bringing you coverage not only of the latest mainstream products like smartphones and TVs but also the crazy, boundary-pushing stuff. WIRED is probably the first place you read about 3-D printers and VR headsets. While much has changed over these 25 years, we’re still intent on reviewing the best products (and the gloriously odd ones) with insight, wit, and expertise. Personal technology is always marching off into unfamiliar territory. From autonomous robot vacuums to headphones that do real-time language translation to a smartphone that lets you authenticate your identity using your face, we’re here to help you navigate these new frontiers.

So, we’ve got some good news. We’re expanding our coverage to include even more product reviews. By widening our purview and testing more products across a broader range of categories, we’ll be able to help you make informed buying decisions about more things in your life. We’ve hired a staff of expert product reviewers who will be able to recommend the best cameras, parenting products, headphones, e-readers, computers, and outdoors gear, among other things.

As part of this expansion, we’re also making our product review pages more beautiful. The reviews pages now show more useful information, and they’ll be easier to read and navigate.

What’s New

Most of the changes to the redesigned product review pages are right at the top. We’ve increased the visibility of our rating, the item’s price, and the WIRED/TIRED block where we list the products’ successes and stumbles.

On some reviews, you’ll also see a new badge—something we call WIRED Recommends. This is an award we give to only the best products we’ve tested, the stuff we really love. It’s not just the items that earn the highest numerical rating, either. Only products that excel in design, technology, or value will earn that badge. This makes WIRED Recommends more than just an award; it’s a filter to get right to the gear we think truly rocks.

Also right at the top is a big blue “Buy Now” button that leads you to a storefront where you can purchase whatever amazing thing we’re telling you about. That button often leads to retailers with whom WIRED has an affiliate relationship. This is an important revenue stream for us—and it helps fund the journalism that we do, not just on the product reviews desk but across the whole organization, from our narrative stories in the magazine to our investigative online features.

A few things about the affiliate revenue we earn. First, we’re not shy about it. You can find an “Affiliate Links” disclaimer on the right-hand side of every product review. We think it’s important that publications are forthcoming about how they make money from their content. Second, this isn’t something we just tossed together to keep pace with our competitors. WIRED has had an affiliate revenue program in place for two years, and these changes you’re seeing this week are the result of careful study over that time. We’ve spent 24 months learning how this works and what’s appropriate, and now we feel like we can make these changes to our pages (and our buttons!) with confidence. Lastly, our affiliate relationships are managed by a business team that works separately from our writers and editors, and we will never let those relationships determine what products we review or recommend. We’re always going to prioritize reviewing products that are newsworthy, that add value to your life, and that make an impact in the world of consumer technology. We’ll never recommend something silly just so we can make a buck from Amazon.

You can read our full affiliate policy for more information. There are also instructions on that page that show you how to spot and disable our retail affiliate code if you want.

I think we’ve come a long way in our product coverage. We have more than 3,000 reviews in our database, a body of work that represents over 12 years of effort. I’ve seen us constantly improve our recommendations over that span of time. Our reviews are always getting more informative, more impactful, and more helpful. With this new design, I hope we can continue assisting you in make educated decisions about the beautiful, amazing, crazy things you surround yourself with.

Uber Hit With $8.9 Million Fine in Colorado

Colorado wants Uber to pay a big fine for allegedly letting convicted felons and others with questionable backgrounds drive for the company.

The Colorado Public Utilities Commission said Monday that it had fined the online ride-hailing company $8.9 million for violating the state’s driver qualification laws. The commission found that Uber allowed 57 drivers to work in Colorado over the past year-and-a-half, even though their histories included stains like felony convictions that would have disqualified them.

The commission said it began its investigation into Uber earlier in the year after being notified by local police about an Uber driver alleged to have assaulted a passenger. The commission said it cross-checked driver information given by Uber with information from court records and state criminal databases and discovered a number of Uber drivers with violations.

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From the Colorado Public Utilities Commission:

Among the findings of the investigation were 12 drivers with felony convictions; 17 drivers with major moving vehicle violations; three drivers with interlock driver’s licenses, which are required after recent drunk driving convictions; and 63 drivers with driver’s license issues.

Companies that provide transportation services in Colorado must perform background checks on their drivers and bar those who fail the check from driving, the commission said.

“[Public Utilities Commission[ staff was able to find felony convictions that the company’s background checks failed to find, demonstrating that the company’s background checks are inadequate,” Doug Dean, the commission’s director, said in a statement. “In other cases, we could not confirm criminal background checks were even conducted by Uber.”

Uber said in a statement to Fortune that it “discovered a process error that was inconsistent with Colorado’s ridesharing regulations and proactively notified the Colorado Public Utilities Commission (CPUC).”

“This error affected a small number of drivers and we immediately took corrective action,” an Uber spokesperson said. “Per Uber safety policies and Colorado state regulations, drivers with access to the Uber app must undergo a nationally accredited third party background screening. We will continue to work closely with the CPUC to enable access to safe, reliable transportation options for all Coloradans.”

Why Trump’s CNN Attacks Could Help AT&T and Time Warner Merge

It could end up as the biggest antitrust showdown since the Justice Department tried to break up Microsoft at the height of the Windows era.

Following word on Monday that the federal government had sued to block the $109 billion combination of telecom titan AT&T and entertainment giant Time Warner, the companies said they’d fight what they called a “radical and inexplicable departure from decades of antitrust precedent.”

Usually such angry corporate fusillades consist of more loud attacks than rational arguments, but in this case AT&T and Time Warner may have a strong case. And it no doubt helps the companies that President Trump has made a series of public attacks against the merger, and Time Warner’s CNN unit, that raise the specter of political interference.

AT&T CEO Randall Stephenson made clear it was an issue he planned to raise. “There’s been a lot of reporting and speculation about whether this all about CNN and frankly I don’t know,” Stephenson said on a call with reporters on Monday. “But nobody should be surprised that the question keeps coming up because we witnessed such an abrupt change in the application of antitrust law here.”

Typically, the Justice Department attacks mergers that seek to combine competing companies in the same business, like when regulators shut down AT&T’s effort to buy T-Mobile (tmus) in 2011 or the merger of Staples (spls) and Office Depot (odp) last year. Analysis of those situations seem relatively straight forward: fewer competitors often means higher prices and less consumer choice.

For combinations of companies in related fields, like Comcast’s purchase of NBC Universal, the analysis is more complex and the response from regulators is usually not outright opposition but the crafting of conditions to prevent any funny business in the future. Among other restrictions, for example, Comcast is barred from offering programming only to cable and satellite providers and not Internet-based TV services like Sling TV. That’s because regulators were concerned that the combined companies would use their sway over entertainment content to thwart threats to Comcast’s massive cable service.

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And the concerns about AT&T and Time Warner, at least in theory, are very similar. “AT&T/DirecTV would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers,” the Justice Department said in its lawsuit filed on Monday night. “The proposed merger would result in fewer innovative offerings and higher bills for American families.”

AT&T said the Justice Department hadn’t sued to block such a so-called vertical merger since President Jimmy Carter’s administration. But what’s changed is the antitrust leadership in the Justice Department, not to mention a few tweets from President Trump saying that he would never allow the AT&T Time Warner merger to be approved.

Some former antitrust regulators agreed with AT&T. “The case relies on antiquated antitrust law from a period of time (over 40 years ago) when we received television programming through rabbit ears,” David Balto, an attorney who helped review mergers at the FTC under President Clinton, noted. “Like those rabbit ears the law DOJ relies on belongs in a museum not in a court and the case is likely to receive rabbit ears reception by a skeptical court.”

Makan Delrahim, the new head of the antitrust division and, ironically, a lawyer who worked for Comcast (cmcsa) on the NBCUniversal deal, is said to be opposed to imposing behavioral conditions. Instead, he is reportedly in favor of a cleaner but more drastic remedy that forces the merging companies to jettison some business units.

So instead of negotiating rules to prevent a newly merged company from hurting consumers, Delrahim favors changing the structure of the company from the start to eliminate or reduce the incentives for bad behavior. That would explain why the department apparently rejected proposed conditions AT&T wanted and instead told the companies to either sell AT&T’s huge DirecTV satellite service or much or all of the TV programming units of Time Warner.

Doing so would destroy AT&T CEO Randall Stephenson’s whole rationale for the deal and paying $85 billion plus taking on another $24 billion of net debt to take control of Time Warner’s rich stable of entertainment that includes HBO, Turner Broadcasting, CNN, and the Warner Brothers movie studio. With revenue from telecommunications and traditional pay TV services sliding, the addition of Time Warner (twx) would give AT&T (t) a new revenue stream and the ability to evolve more quickly into an online service.

On a call with reporters on Monday, Stephenson pointed to efforts by Netflix (nflx), Amazon (amzn), and Google (googl), and other tech companies to start making original entertainment and distribute it to tens of millions of customers.

“Massive, large scale Internet companies with market caps in the hundreds of billions of dollars are creating tons of original content and they’re distributing it directly to the consumer,” he said. “This is disrupting both industries, the media as well as communications industry.