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Moneyline News Hour

Dow Rises 113.08 to 10,535.35; Nasdaq Climbs 106.06 to 3,270.61; UAL Announces Plan to Buy US Airways; House Passes China Trade Bill

Aired May 24, 2000 - 6:30 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

STUART VARNEY, CNN ANCHOR: Tonight on MONEYLINE, friendly skies indeed: United unveils its bid to buy US Airways with smiles and handshakes. But will it really fly? We'll hear from both chief executives and US Air's biggest shareholder.

WILLOW BAY, CNN ANCHOR: Just minutes ago, the House passed a landmark bill to open trade with China, and getting it through was easier than big business thought it would be.

VARNEY: In federal court, the penalty round in the U.S. versus Microsoft: Does Judge Jackson want to see Microsoft split not just into two, but into three?

BAY: And on Wall Street, the Dow jumps and the Nasdaq snaps a five session losing streak after coming perilously close to dipping below 3,000. Is the trouble now behind us?

ANNOUNCER: This is the MONEYLINE NEWS HOUR. Reporting tonight from New York, Willow Bay and Stuart Varney.

VARNEY: Good evening, everyone. Well, you heard it here first last night. And today, United and US Airways made their $4.3 billion deal official. The announcement came midday at the Waldorf Astoria in New York: United offering to buy US Airways for $60 a share. The combined carrier would be nothing short of an airborne blockbuster, and it took no time for the deal to hit turbulence.

United pilots expressed concern about the combination, and antitrust experts questioned whether it would survive regulator scrutiny. Investors seemed skittish as well. Stock in UAL, United's parent, it plunged nearly seven. US Airways, that rocketed more than 22 3/4 to 48 3/4. Still, that is well below the offer price.

We begin our coverage tonight with Ceci Rodgers. She is reporting in United's home base of Chicago.

(BEGIN VIDEO CLIP)

CECI RODGERS, CNN CORRESPONDENT (voice-over): The CEOs of United Airlines and US Airways touted their megamerger as a milestone in commercial aviation history. With nearly $27 billion in combined revenue, 140,000 employees, and nearly 9,000 flights every day, the combined airline would be twice as large as its nearest competitor.

JAMES GOODWIN, CHAIRMAN & CEO, UAL CORPORATION: You've got a strong United and a very strong and vibrant US Air. We're a company that is in need of a strategic network position on the East Coast, in the north-south markets. US Air clearly fills that void.

RODGERS: United's strength is in the longer east-west routes, with hubs in San Francisco, L.A., Denver, Chicago, and Washington's Dulles Airport. US airways has hubs in Charlotte, Philadelphia, Pittsburgh, New York, Boston, and Washington's Reagan National Airport. US airways would sell more than 200 landing slots at Reagan National to media mogul Robert Johnson in just one of many concessions in the deal aimed at mollifying antitrust regulators and consumer groups.

United also promises to freeze airfares for two years, except for increases tied to the Consumer Price Index and fuel costs.

After the failure of a similar merger attempt in 1995, the stakes are higher now for this deal to be completed.

STEPHEN WOLF, CHAIRMAN, US AIRWAYS: This is not a (UNINTELLIGIBLE) effort. This is a "we're going to get it done and we're going to get it done with the Justice Department of the United States of America."

RODGERS (on camera): Despite the obstacles, both carriers optimistically predict the deal will go through by early next year, although many analysts only give the deal a 50-50 chance of arriving on time.

Ceci Rodgers, CNN Financial News, Chicago.

(END VIDEOTAPE)

VARNEY: Ah, but is that optimism warranted? One analyst who downgraded UAL's stock today, Jim Higgins at DLJ, tells MONEYLINE that integrating the companies could be a logistical nightmare. And beyond the logistics, United will have to pacify nervous workers and hard- nosed regulators.

Louise Schiavone reports from Washington.

(BEGIN VIDEOTAPE)

LOUISE SCHIAVONE, CNN CORRESPONDENT (voice-over): United Airlines is due to cut a broader swathe through the "friendly skies" with its acquisition of US Airways, but as so often happens with airlines, there could be delays and turbulence, beginning with federal antitrust regulators.

ROBERT LITAN, BROOKINGS INSTITUTION: And they're going to see whether or not there's too much concentration as a result of the merger, and if there is, then they're going to tell United that they have to get rid of some or some gates. SCHIAVONE: Foreseeing potential problems with their overlapping routes in and out of Washington's Reagan National Airport, the airlines would sell the US Airways operation there to Robert Johnson, a US Air director and chairman of BET holdings.

ROBERT JOHNSON, BET HOLDINGS: It was for me an exciting opportunity, a chance to do something no one's ever done before as an African-American, and I said, hey, I'll do it.

SCHIAVONE: Johnson plans to call his new airline DC Air.

United would keep US Airways lucrative Northeast corridor shuttle, but the two airlines overlap in many other Northeast airports other than Reagan National, including Washington's Dulles Airport, Baltimore, New York's LaGuardia Airport, and Logan in Boston. Opponents of the deal suggest that could make customers suffer with fewer options and potentially higher fares.

On Capital Hill, House Judiciary Committee Chairman Henry Hyde issued a statement announcing that he'll hold hearings in June on the deal.

"I'm deeply concerned that this merger may further lessen competition in the airline industry. At a minimum, the proposed merger requires very close antitrust and regulatory scrutiny."

The antitrust division of the Justice Department indicated it will -- quote -- closely review UAL's proposed acquisition of US Airways, but regulators aren't the only potential obstacles here. United pilots are currently negotiating a new contract and fear a loss in seniority to US Air pilots if the two merge.

UNIDENTIFIED MALE: In a merger, there's always individual people who win and individuals who lose. We want our pilot group to be on the winning side.

SCHIAVONE: Pilots meet next week. Meanwhile, the flight attendants seem more favorably inclined. But like the pilots, the regulators and the general public, they want to know more about the deal.

Louise Schiavone, for CNN Financial News, Washington.

(END VIDEOTAPE)

BAY: Coming up later on MONEYLINE, the deal-makers behind this airline buyout: James Goodwin, CEO at UAL, and Stephen Wolf of US Airways will tell us how the takeover will affect frequent flyers and investors.

VARNEY: As for Wall Street today, well, it was a mixed bag for competitors to United and US Airways. Shares of AMR and Delta lost ground today, though smaller carriers, including Continental and Northwest, were up sharply, as was the rest of the market.

Stocks rose all across the board today with the Dow and Nasdaq ending with their first solid rally in more than a week. Blue chip stocks were in the black most of the session, except for a brief setback at midday.

The Dow, up 113 points. A huge surge in Intel accounted for nearly 40 percent of that gain. Intel also propelled the Nasdaq, where the real drama played out today. At its low, the index was within 50 points of touching 3,000. But then, it staged a powerful rebound, closing with a gain of 106 points.

Well, the index could use every point of that rebound: Over the previous five sessions, the Nasdaq had lost more than 550 points. That is nearly 15 percent.

All right, another facet of the comeback that should be encouraging to investors: a rebound in volume: up more than 50 percent today over yesterday for the Nasdaq.

And joining us now is Bob Stovall. He is the strategist at Prudential Securities.

Bob, welcome back.

BOB STOVALL, PRUDENTIAL SECURITIES: Thank you, Stuart.

VARNEY: Nice bounce today, decent volume, but have we yet seen the bottom of this downside move for the Nasdaq?

STOVALL: I don't think so. The Nasdaq still has to cope with one or perhaps more increases in the cost of renting money on the part of the Fed, and also there's more focus on real earnings rather than just expected earnings.

BAY: Of course the question everybody wants answered all the time: Where is the bottom? Where will we see the bottom?

STOVALL: We look to -- we look to think there is support around 2,900 in the Nasdaq. I don't think it'll get there.

VARNEY: But after that?

BAY: You don't think it'll get there?

STOVALL: I don't think so. If it pokes through that on the downside, that would be pretty discouraging.

VARNEY: OK. So we get a little bit more selling...

STOVALL: Yes.

VARNEY: ... what's going to create a healthy bounce for the Nasdaq that everybody is wishing for certainly?

STOVALL: I think just looking at the seasonality and the history of these things, Stuart, the Fed has never raised interest rates two months prior to an election since 1932. The market usually starts going up at the end of May in an election year. And the shrinkage of prices on the Nasdaq is such that some of the valuations aren't as extreme as they were.

VARNEY: So will the best bounce be on the Nasdaq or will it be on those blue chip stocks, the old-line stocks on the big board?

STOVALL: I think it will be in the better quality names on the Nasdaq, because most of us feel that in the fall and later on, the earnings will begin coming through in a big way for the established Nasdaq-type stocks. And...

BAY: (UNINTELLIGIBLE)

STOVALL: Yes?

BAY: We saw a bit of a cautious return to the big names: the Ciscos, the Intels, the Microsofts today. Is that a strategy you'd recommend?

STOVALL: I think so. They'll be up against third- and fourth- quarter earnings of the last season when the earnings were down because of preparations for Y2K. So the comparisons ought to be pretty good beginning in the fall, and that's where the money wants to flow. Most strategists and investors want technology and telecommunications in their portfolios.

VARNEY: How about food stocks, very briefly, Bob, because I noticed them really doing well recently?

STOVALL: Yes, I think that Bestfoods being in play as a takeover, being bid for by more than one has focused attention on this laggard group. It hasn't done much for a long time, and one of my strategies, Stuart, is that you can't hurt yourself very much jumping out a basement window. And these stocks are way down. And...

(LAUGHTER)

VARNEY: That's a terrific line. I'm laughing.

STOVALL: You may use it after I'm gone.

VARNEY: Thank you very much. I'll rent it from you.

STOVALL: Thank you.

VARNEY: Bob Stovall, thank you.

BAY: Still to come MONEYLINE, the House passes a landmark bill to open trade to China. A look at what it means to American business and to Beijing.

VARNEY: Things may have just gotten a lot worse for Microsoft. Why Judge Thomas Penfield Jackson is considering not just a two-way split of the software giant, how about three-way.

BAY: And less than two months after Julian Robertson closed down his Tiger Management, his biggest bet takes off: the windfall for the biggest shareholder in US Airways, when MONEYLINE returns. (COMMERCIAL BREAK)

BAY: A serious new twist in the Microsoft case today. District Court Judge Thomas Penfield Jackson questioned whether the government's proposal to split the company in two might just entrench two monopolies. He praised a friend-of-the-court brief submitted by two industry groups that calls for Microsoft to be broken up into three different companies: one for its Windows operating system, another for its software business, and a third for its Internet browser. The government has until Friday to resubmit its remedy proposal.

Despite the news, shares of Microsoft rose more than 2 1/2 today. Steve Young will join us from Washington with more on this story later in the program.

VARNEY: Also in Washington today, a landmark vote in the House with the approval of permanent normal trade relations for China. The legislation was passed 237-197 after more than five hours of bitter debate.

Bob Beard joins us live from Capitol Hill with more -- Bob.

BOB BEARD, CNN CORRESPONDENT: Yes. Hi, Stuart. This was a big win, a big, big win for a powerful coalition of U.S. corporations, a Democratic White House and a Republican-controlled Congress.

Just about an hour ago, the full House of Representatives voted, as you said, 237-197 to normalize trade relations with China. The administration says this now clears the way for U.S. corporations to take advantage of a market-opening agreement it signed with Beijing in November.

A bit of a surprise. It was 19 votes that needed -- that supporters needed for passage. It happened after months of expensive lobbying by business groups like the Business Roundtable and the Chamber of Commerce, and months of lobbying by the Clinton White House.

The president just a short time ago talked about how the trade vote is important to maintain peace in Asia for the next generations. And he also talked about how it's a boon to U.S. businesses.

(BEGIN VIDEO CLIP)

WILLIAM J. CLINTON, PRESIDENT OF THE UNITED STATES: Our administration has negotiated an agreement which will open China's markets to American products made on American soil: everything from corn to chemicals to computers. Today, the House has affirmed that agreement.

(END VIDEO CLIP)

BEARD: But again, the debate was -- was very, very -- was not easy. Not an easy debate for the White House or House Republicans today. As a matter of fact, in many places today, the debate was very, very heated.

(BEGIN VIDEO CLIP)

REP. RICHARD GEPHARDT (D-MO), MINORITY LEADER: Let's not reward them before we get them to comply. China's leaders show contempt for the rule of law. People are persecuted for their religious beliefs. People are imprisoned and tortured for speaking out politically.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

REP. DENNIS HASTERT (R-IL), SPEAKER OF THE HOUSE: It is in fact a one-sided agreement. China gets nothing from us they don't already have and we get lower tariffs and easier access for our exports going to China. And who makes those exports? American workers do.

(END VIDEO CLIP)

BEARD: So it's really a debate about U.S. jobs and U.S. workers versus human rights and labor rights in China. But again, this is not a done deal. This is not the end. The Senate still has to vote on permanent normal trade relations with China. That's expected to happen about next month, we believe, and the Senate is expected to vote to approve it.

Stuart, back to you.

VARNEY: Bob, how do you see this huge margin of victory in this vote when a much, much narrower vote was expected just yesterday, in fact?

BEARD: Yes, it could have been some behind-the-scenes posturing by members of Congress saying, well, I don't know how I'm going to vote. They might want to -- want to protect themselves from an onslaught by organized labor in the fall elections. Of course, labor has been -- has been opposed to this all along.

But 19 votes more than they needed. Everybody here was surprised. One House Republican said, "It just proves that it's a global economy and the United States has to recognize that."

VARNEY: All right, Bob Beard on Capitol Hill. Thanks very much, Bob.

BAY: Coming up on MONEYLINE, a stunning decision by prosecutors in the wiretapping case against Linda Tripp.

VARNEY: We'll tell you about that and some of the day's other top stories outside the world of business coming up next.

(COMMERCIAL BREAK)

BAY: A warning from Israel as its occupation of South Lebanon comes to an end. Let's get more on that now from Wolf Blitzer in the "MONEYLINE News Digest" -- Wolf. WOLF BLITZER, CNN ANCHOR: Thanks, Willow.

Israeli Prime Minister Ehud Barak is warning that any attacks on his country from Lebanon will be considered, in his words, "an act of war." Syrian-backed Hezbollah fighters moved forward today as Israel completed its pullout from South Lebanon, ending 22 years of occupation.

In Washington, Defense Secretary William Cohen cautioned Syria not to wait for a new U.S. president to take office before pursuing peace with Israel.

Also today, federal aviation officials released a tape of radio traffic from the January crash of an Alaska Airlines MD-83. It captures the sound of the pilots fighting to control the jet and other flight crews reporting its final plunge.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: The plane has just started to do a big, huge plunge.

UNIDENTIFIED MALE: A big, huge plunge. Thank you, Sky West.

(END VIDEO CLIP)

BLITZER: Investigators are focusing on stabilizer problems as a possible cause of that crash, which killed 88. And congressional investigators say they've used fake New York police ID cards to enter 19 high-security federal buildings: among them, FBI and CIA headquarters and the State Department. The House Crime Subcommittee is due to hold a hearing tomorrow on the claims.

Maryland prosecutors have dropped their wiretapping case against Linda Tripp. They say they couldn't proceed after the judge barred nearly all testimony from their key witness, Monica Lewinsky.

And this just in: 16 Los Angeles Dodgers players and three coaches have been suspended by Major League Baseball's commissioner's office just today for going into the stands during a fight with fans last week at Chicago's Wrigley Field.

We'll have more on that story and the rest of the day's news coming up on "THE WORLD TODAY." That starts at 8:00 p.m. Eastern, 5:00 p.m. Pacific -- Willow.

BAY: Wolf Blitzer, thank you.

VARNEY: In our "Tech Watch" tonight, Congress boots up a debate on one of the hottest disputes in the music business: free music on the Web. The House Small Business Committee today heard from musicians and industry executives. The industry and some artists argue that some Internet companies, like the music-sharing service Napster, are pirating copyrighted work. But others, including rap star Chuck D, like the system because it cuts out the middle-man.

(BEGIN VIDEO CLIP)

CHUCK D, MUSICIAN: If it ain't about the artists, the industry damn sure ain't caring about the fans either. Because why would they charge them $17 for something that they make for 79 cents.

So I think this organizers and creates a new infrastructure. New templates will be created. Yes, 95 percent of all music will be free.

(END VIDEO CLIP)

VARNEY: Well, for now, Congress seems to be letting the courts handle these Internet music squabbles.

One programming note: We had planned to bring you a special look at the downloading controversy tonight, but such other news intervened, and so we'll have that for you on MONEYLINE tomorrow.

We'll be right back.

(COMMERCIAL BREAK)

BAY: In tonight's corporate briefs, WorldCom and America Online are teaming up in a multiyear deal to market AOL to WorldCom's residential and long-distance customers: WorldCom offering customers an hour of free calls every month if they join AOL. WorldCom, meanwhile, is still waiting for word from Washington about its merger with Sprint.

SBC Communications today accusing Time Warner, parent of this network, of unlawful and anti-competitive practices. Time Warner offered Houston employees free Internet service and the chance to win cash for ordering, then canceling SBC's digital subscriber lines. SBC claims the ploy could have cost the company $370 per canceled customer.

Time Warner, which has ended the practice, says the situation was a mistake made by a midlevel manager.

And Merrill Lynch will pay $275 million in a settlement dispute with Sumitomo. The Japanese trading company says it lost more than $2 billion from a rogue commodities trader who rocked the copper market with unauthorized trades in 1996.

VARNEY: There is a special program tonight on CNN which will take a look at the new economy and small businesses. Here's Jan Hopkins from the Alexander Hamilton Customs House in downtown New York City with a preview for us.

Jan, what do you have for us tonight?

JAN HOPKINS, CNN ANCHOR: Well, Stuart, At 10 o'clock Eastern, we will have a town-hall meeting here at the Alexander Hamilton U.S. Customs House. We'll hear from a panel of experts. We'll have an audience with about 100 people, including a lot of small-business owners from around the country.

And we'd like to hear from all of you out there online. We'll have a chat room starting at 9:30. It will go until 11:30.

The logon is CNN.com/neweconomy. You can give us your comments and your questions.

It's interesting, this building -- the Alexander Hamilton U.S. Customs House -- was built at the end -- actually the beginning of the last century as a monument to prosperity in the country. And you might be interested to know that at that time, before income tax in this country, customs was the major source of revenue for the U.S. government.

So we'll be having a town meeting here on small business and the new economy starting at 10:00 p.m. Eastern -- Stuart.

VARNEY: Jan, are you going to be giving advice tonight to small- business owners on how they can get into this new economy or use it at least?

HOPKINS: Not me, but the panel members will.

VARNEY: OK. We'll be watching, 10:00 p.m. Eastern tonight for the town-hall meeting.

Thanks very much, Jan.

Still to come in the second half hour of MONEYLINE, we'll take a closer look at the UAL/US Airways merger with the companies' deal- makers and ask why UAL paid so much for the privilege.

BAY: Software giant Microsoft could be a giant no more as the judge in the case hints that breaking the company in two may not be enough. We'll have that story.

VARNEY: And investors dump shares of Costco in a wholesale sell- off: all of that coming on MONEYLINE.

(COMMERCIAL BREAK)

BAY: In tonight's headlines, the House votes for free trade with China. We'll check out why U.S. businesses think the deal might not open all doors to the world's most populous country. And a federal judge hints it may be splitsville for Microsoft, but the big shocker: the judge signals that the software giant may be broken in three. And back on Wall Street, investors leave the market's malaise behind and send stocks for a surprising U-turn.

VARNEY: But first, more on our top story: the blockbuster deal that brings together UAL and U.S. airways. This merger will give UAL, parent of United and the country's top carrier, an even bigger piece of the passenger pie. UAL is paying more than $4 billion, about $60 a share, for U.S. Airways. It's an all-cash deal and includes the assumption of more than $7 billion in debt. Based on preliminary projections, the company would own close to 1,000 planes, run nearly 9,000 flights per day, and carry 140 million passengers a year. Now what's the reaction on Wall Street to this? Check it out. UAL sank nearly. That's 11 1/2 percent. U.S. Airways surged more than 22 3/4, but remains far below the $60-a-share deal price.

The boards of UAL and U.S. Airways have enthusiastically signed off on the deal, but a number of other parties want to have their say.

And as Susan Lisovicz reports, their potential opposition could pose some serious stumbling blocks to the deal.

(BEGIN VIDEOTAPE)

SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): The chairman of United Airlines and U.S. Airways say their merger agreement came after the careful consideration of many others.

STEPHEN WOLF, CHAIRMAN, U.S. AIRWAYS: This is the right combination, the right partner, the right time and the right step for our customers, communities, shareholders and our employees. But employees represent one of the biggest stumbling blocks.

(on camera): United Airlines and U.S. Air tried to merge five years ago, but failed under pressure from United's pilot union. Winning union approval is just one of the hurdles both airlines must clear in getting the deal done this time around.

(voice-over): United's pilots say seniority issues are just one of their concerns, but management says they are working together at the moment.

GOODWIN: I know that Albert put out a press release this morning stating their support from a strategic perspective. They view this acquisition as a very key asset to building the strength of United Airlines.

LISOVICZ: The merger must also pass muster with the government. United's major hubs are concentrated in the West, while U.S. airways strength is the Northeast. Both overlap in Washington, so the airlines plan to sell some assets to Robert Johnson, who would create new airline: D.C. Air.

ROBERT JOHNSON, BET HOLDINGS: They realized that they had divest of some routes that the Justice Department or the Department of Transportation would consider to be anti-competitive.

LISOVICZ: On Capitol Hill, several lawmakers expressed concern about the potential anti-competitive aspects of the UAL-U.S. Airways deal.

And investors, while acknowledging the benefits to U.S. Airways, are concerned about UAL.

PHILLIP BAGGALEY, STANDARD & POOR'S: They'd be taking on a increase in their debt load. At the end of the last year, they had about $16.5 billion in debt in leases. This would add another 11.5, so there's a heavy debt load.

(END VIDEOTAPE) LISOVICZ: And yet another potential deal-breaker, a second bidder for U.S. Airways. Analysts say the most likely contender in such a scenario would to be parent of American Airlines, long viewed as United's archnemesis. One analyst said it is incumbent on AMR to respond to this -- Willow, Stuart.

VARNEY: I take it there's been no firm suggestion of anybody actually making a bid at this point?

LISOVICZ: No. And American's silence is deafening. But American, because of the history, and its scale and the fact that it was one of the biggest critics five years ago is considered by far the most likely candidate.

VARNEY: Susan Lisovicz, thanks very much.

BAY: The investor who may stand to gain the most from this deal is U.S. Airways' biggest: Julian Robertson. Terry Keenan had a rare opportunity to speak to the former giant of the hedge fund business in tonight's "Behind the Numbers" -- Terry.

TERRY KEENAN, CNN CORRESPONDENT: Willow, less than two months after famed money manager Julian Robertson closed down his tiger management, Robertson's biggest stock bet is coming up roses. Robertson is the largest shareholder in U.S. Airways, with 16.5 million shares, a position he began accumulating at prices between $15 and $17 a share back in 1996. For awhile, it looked like a good bet, as U.S. airways sailed past $80 in July of 1998. But since then, the stock has been a big loser, closing just under $26 yesterday ahead of the merger announcement.

Through it all, Robertson stood by the airline, keeping his stake when he folded the rest of his Tiger Funds in late March. Behind the scenes he's been orchestrating his exit strategy: the buyout by UAL.

(BEGIN VIDEO CLIP)

JULIAN ROBERTSON, TIGER MANAGEMENT: I'm probably flattering myself, but I thought I was quite involved. The managements of both U.S. Air and United have met with me and others of the Tiger organization for the last four months about this particular combination. So we have been involved in talks for the last four months.

(END VIDEO CLIP)

KEENAN: While Robertson says he would have liked to get $100 a share for his stock, at $60, he is still looking at about a 122 percent gain, $540 million.

As for the rest of the market, Robertson says he does see some value out there, particularly in light of the market sell-off in the seven weeks since he closed up shop. And he told me this morning about another airline stock he is buying.

(BEGIN VIDEO CLIP) ROBERTSON: Frankly, I love being in my new status where we can buy small amount of shares and have it meaning -- mean something. And we checked with our lawyers and I bought some United this morning strictly because it is down like this. And because it's down when there's an enormous opportunity in front of it.

(END VIDEO CLIP)

KEENAN: Robertson didn't say how much UAL stock he's buying, but he's definitely back in the driver's seat and feeling at least partially vindicated by a market that he said earlier this year was irrational -- Willow.

BAY: Terry Keenan, thank you.

Julian Robertson is not the first high-profile investor to have ups and downs with U.S. Airways. Other ones include Warren Buffett, Michael Steinhardt, who tried and failed to take over the airline in 1989, and corporate raider Carl Icahn. Buffett once called his investment in U.S. airways a "mistake," but in the end, he cashed out with a hefty profit of more than $400 million.

VARNEY: All right. The two architects of this deal: the top guns at United and U.S. Airways. Earlier today, I spoke with them, and began by asking Stephen Wolf of U.S. airways about what Wall Street considers a very generous offer from united, at a 130 percent premium.

(BEGIN VIDEOTAPE)

STEPHEN WOLF, CHAIRMAN, U.S. AIRWAYS: We think it's a fair deal. I think interestingly, our board looked at the transaction from the perspective of its three constituencies. Our shareholders, they certainly received a fair price. Our employees, this is a tremendous opportunity for our employers with the no-furlough provision, and there are career opportunities that go beyond that. And quite frankly, the communities and customers we serve. This is a network that they don't have access to today that's going to be the most profound and significant network in the world. It just works for our three constituencies, and our board was quite pleased about improving the transaction.

VARNEY: Why did you off such a huge premium? And also, you're taking on $7 billion worth of debt.

GOODWIN: We believe, as Stephen said, that this is a fair-value transaction. And we clearly have a need to foster growth on the East Coast by building our presence. U.S. Air brings that to the table. The revenue synergies that we've talked about out of this transaction are strong. We're going to create 560 more connections for customers on a daily basis that today they don't have access to. We believe that the price we've paid is full value and a very fair one.

VARNEY: What will you do to placate the unions in this case?

GOODWIN: The transaction that's contemplated has some very straightforward integration proposals with respect to our unions. Putting the U.S. Air employees together with our own. There is some very guidelines that we all follow, and we recognize that in combining any work force, you're always going to create some degree of concern and certainty, which is why we were very emphatic about stating the fact that we weren't going to lay off anyone, no furloughs for the employees in both companies. We believe we're going to be able to develop an integration strategy that's very satisfactory to all.

VARNEY: Any comment on labor relations from U.S. Air.

WOLF: We met with all of our union leaders last evening in Washington D.C. It was a serious conversation, maybe even a tiny bit emotional. One of our labor leaders said, characterized it as being bittersweet. I think that's fair. I mean, great affection for the company. But when the transaction closes, U.S. Airways will disappear. But sweet because they know they're joining an organization of immense opportunity.

VARNEY: Would you be averse to divesting further routes or airline slots if you had to do it to get this deal through?

GOODWIN: United and U.S. Air in combination have very few overlapping routes. They fly in markets that's we don't fly in, so we're not flying side by side, and that's one of the great advantages that we see in putting these two companies together.

The one area that we did identify, which was Washington D.C., the total presence in the city is significant, and that's what led us to look at the divestiture of assets at Washington National. We think that addresses the antitrust issues in this case, and we're confident that that's going to help us deal done.

VARNEY: It's not going to add to United's profitability until two years after the closure of the deal. My calculations put that at around 2003. That really doesn't sound like a great deal for investors.

GOODWIN: Now, what we've said is the accretion value of this transaction will occur two years after the closing and the reason for that is pretty simple. I mean, combining two large companies creates a need for a lot of transition expenses.

So consequently, the up-front cost of completing the transaction in year one will preclude the revenue synergies from producing any value for our shareholders until the second year. But clearly in the second year, after the closing of this transaction, it is a solidly accretive transaction to our shareholders.

VARNEY: Gentlemen, we thank you very much indeed for joining us tonight on MONEYLINE.

WOLF: Thank you.

GOODWIN: Thank you.

(END VIDEOTAPE) VARNEY: Still to come on MONEYLINE, a new development in the Microsoft antitrust trial, a proposal that at least the judge calls excellent.

BAY: As the penalty phase of the case wraps up, we'll have a full report from Washington.

(COMMERCIAL BREAK)

VARNEY: The two sides in the Microsoft antitrust trial returned to the courtroom today to debate the merits of breaking up the software maker. The judge in the case made it very clear which way he's leaning. In fact, he suggested that splitting the company in a two-way split, that might not go, he says, far enough.

Steve Young has -- was in court -- in the courtroom today and has more from Washington.

(BEGIN VIDEOTAPE)

STEVE YOUNG, CNN CORRESPONDENT (voice-over): Judge Thomas Penfield Jackson delivered Microsoft, the Windows monopolist, a double whammy. He implied a three-way carve up of the company, as advocated by two trade associations, might be better than a two-way split.

And instead of granting the six months the company requested to prepare an anti-break-up defense, the judge suddenly said he wouldn't grant one more day. When a Microsoft lawyer started to protest, the judge shot back, "This case has been pending two years." Microsoft's lawyers say they were denied due process.

WILLIAM NEUKOM, MICROSOFT GENERAL COUNSEL: We did not know until the judge indicated in his answer to Mr. Warden's (ph) question that he contemplated no further proceedings. At that point, it was incumbent upon us to inform the court and the record that there was a good deal of evidence that we thought was pertinent to the subject of appropriate relief and to make that a part of the record.

YOUNG: Microsoft argued again that any kind of divestiture would be disastrous for the company, technology, and the economy. But one of the trade groups that advocates a three-way split -- one company for the operating system, another for software applications, and the third to sell the Internet browser -- disagrees.

ED BLACK, COMPUTER & COMMUNICATIONS INDUSTRY ASSOCIATION: Not only will the world not end if there is a break up of Microsoft, but it will be a much better world for the industry, for consumers and for innovations.

YOUNG: The judge has given the government a 48-hour deadline.

DAVID BOIES, LEAD GOVERNMENT ATTORNEY: What he asked was that we file a clean copy of the proposed remedy that reflected the proceedings that had taken place in court today. We will do that on Friday.

(END VIDEOTAPE)

YOUNG: Microsoft will have until Tuesday to draft a reply, so it's conceivable that Jackson could enter his final judgment in this landmark case as soon as next week -- Stuart.

VARNEY: All right, Steve Young reporting, thank you, Steve.

Microsoft shares actually gained some ground today after falling for five straight days and hitting a new 52-week low yesterday. The stock is the worst Dow performer of the year, it's down 44 percent.

BAY: Still to come on MONEYLINE, an about face on Wall Street. Stocks finally come back to life after a week of relentless selling.

VARNEY: But no relief for the retail sector after a bulk sale on Costco. We'll tell you why investors dumped that stock in a moment.

(COMMERCIAL BREAK)

BAY: Wall Street witnessed a surprising reversal of fortune today, as a week-long slide turned around. For the first time in a long time, enthusiasm over a mega-merger helped push aside fears of higher interest rates.

Kitty Pilgrim has more.

(BEGIN VIDEOTAPE)

KITTY PILGRIM, CNN CORRESPONDENT (voice-over): It was a rally of triple-digit proportions for both the Dow and the Nasdaq. A sigh of relief nearly audible in the trading rooms. Over on the big board, airline stocks were the center of attention as many reacted to the news of the proposed United-U.S. Air deal.

Delta and American were down on the news as the prospect of increased competition clouded the picture. But Northwest, America West, and Continental, the smaller carriers, rallied as investors decided they may be potential takeover targets.

THOMAS SCHREIER, U.S. BANCORP PIPER JAFFRAY: I think a deal- driven marketplace is likely to be where we're going to be. People look to mergers and acquisitions and other ways to continue to grow their business, and for those companies that are capital hungry, they look to companies that are capital rich to move ahead.

PILGRIM: The Dow had a choppy session, as did the Nasdaq, but about 1:00, the Dow rallied strongly to close up 113 points, or more than 1 percent. But more significantly, the Nasdaq broke the back of a five-day losing streak to gain 106 points, or more than 3 percent.

Some say the long-term view on interest rates finally prevailed.

WALT CZAICKI, BANC OF AMERICA CAPITAL MGMT.: What we expect is likely a one quarter of 1 percent raise in the federal funds rate at the June meeting by the Federal Reserve and possibly a similar move in August. By that time, we think that the Fed should be close to finished, or if not, completely finished with its tightening bias, which should lead for better equity returns in the second half of this year.

PILGRIM: Some large-cap tech stocks rallied after being beaten into submission in the last few weeks. Among the gainers: Intel gained more than 7 after releasing its Pentium III microprocessor, Motorola, Sun, Cisco, and IBM also moved higher on the day.

(END VIDEOTAPE)

PILGRIM: Now, the real test will be tomorrow when economic numbers again gain the focus of the market. The government releases its revised numbers for the first-quarter growth and existing home sales for the month of April. And as the focus continues to be economic, the fear of interest rate hikes will probably persist -- Willow, Stuart.

BAY: Kitty Pilgrim, thank you.

VARNEY: Tonight's other movers: ATI Technologies plunged 6 3/4, its worst one-day point loss ever. The computer graphics maker said it expects to earn only 6 or 7 cents a share in the third quarter due to declining sales. Analysts were forecasting profits of 14 cents. Intuit jumped 8. Several brokerages raised their earnings forecasts after the maker of Quicken and Turbo Tax software beat the street by three cents late yesterday.

MicroStrategy plunged nearly 2 1/2 to close at just over 18 3/4. "The Wall Street Journal" reports the Securities and Exchange Commission has widened its investigation of the software firm to include its auditor, Pricewaterhousecoopers.

Shares of the one-time high-flyer, which traded as high as $333 in March, are now off more than 90 percent since the company said it would restate revenue and profits for the past three years.

BAY: Shares of wholesale club retailer COSTCO plunged more than 21 percent on lower-than-expected earnings and a bleak outlook for the future. Costco reporting third-quarter results of 26 cents a share, a penny shy of Wall Street estimates. But the real damage came from warnings that fourth-quarter results would also miss estimates.

(BEGIN VIDEO CLIP)

DANIEL BARRY, MERRILL LYNCH: It wasn't missing the quarter that was the problem. It was that steered us down going forward. And I think that's why the stock is down so very much, even though they're only a penny off the number.

(END VIDEO CLIP)

BAY: There was also a discrepancy in the reporting of Costco's numbers. In what the company is calling a "human error," earnings were released to analysts four hours before hitting newswires.

Costco dragged on other retailers, our "Sector Focus" tonight. Best Buy shed almost six; Home Depot lost more than 2 1/4; Circuit City gave back more than three; and Kohl's dropped nearly 4 1/2.

Coming up next on MONEYLINE, a landmark vote in the House tonight.

VARNEY: Members grant permanent normal trade relations status to China. What this means for American businesses and much more, when MONEYLINE continues.

(COMMERCIAL BREAK)

BAY: A historic free trade bill with China was approved in the House today as House members granted permanent normal trade relations to Beijing, ending 20 years of difficult annual reviews and giving China the same trading status as all but six other nations. The legislation was passed on a 237-to-197 vote. That was 19 more votes than were needed, a far more comfortable margin than either side had predicted.

Now that the legislation has passed, what does it actually mean for U.S. businesses?

Bill Dorman joins us now with a look at whether the measure will actually open up trade.

Bill, welcome.

Who are the clear winners? Let's start with that.

BILL DORMAN, CNN CORRESPONDENT: Right now at the start, you're going to see farmers. First of all, we should point, it's still got to get through the Senate. Probably next month. Not expected to be a problem. But after that happens and China joins the WTO, probably later this year.

U.S. farmers are going to benefit. Farm companies, the big exporters of grain and things, are going to benefit quickly.

It's going to be a longer haul for financial services and some of the technical companies.

BAY: What businesses, what kinds of companies should be skeptical that they'll actually see benefits from this?

DORMAN: Well, it's interesting: China has a credibility problem right now, and this is part of -- one of the main issues, one of the things that businesses are looking at in terms of the tariffs are coming down, the taxes, if you will, are coming down. What is a little less clear, some of what they call the nontariff barriers, government rules: Is China going to open those up quickly? That's what remains to be seen.

VARNEY: What's happening here is really this makes permanent the current trading status of China vis-a-vis the United States.

Would I be going too far if I said really it's all politics and all symbolism? DORMAN: Well, politics and symbolism go with international trade with any country, certainly with China, though. What this does do, though, from a business strategic point of view is it takes away the uncertainty of every year having to deal with this vote. That makes it permanent. It makes it easier.

VARNEY: Bill, thanks very much -- Willow.

BAY: A couple of stocks moving higher in after-hours trading: companies that stand to gain from warmer trade relations between the U.S. and china. Qualcomm is up more than $6: The company has made a big bet on China and has been trying to crack the Chinese wireless market for years.

ChinaDotCom jumped more than $4 1/2 in after-hours trading on strong volume. The company operates AOL Hong Kong and several other Chinese language Web sites across Asia.

Up next, "Ahead of the Curve": some of what you need to know tonight before the markets open tomorrow.

VARNEY: You're watching MONEYLINE.

(COMMERCIAL BREAK)

VARNEY: A tumultuous week for the markets so far. Here's more on what could make news on Wall Street tomorrow. On the economic front, revised first-quarter gross domestic product numbers, and they're expected, they're expected out. And estimates are for a downward revision. Also, the latest reading on the housing market for April, existing home sales. Wall Street is looking for a small increase compared to March.

And keep an eye on shares of eBay and Sony tomorrow. The companies split their shares 2-for-one after today's closing bell. Since Sony announced the split on December -- or rather December 27th, the stock has fallen 28 percent.

Also tomorrow, Alan Greenspan will deliver a speech before the National Association of Urban Bankers at its annual meeting in San Francisco.

BAY: That is MONEYLINE for this Wednesday. I'm Willow Bay.

VARNEY: And I'm Stuart Varney. Thanks for joining us. Good night from New York.

"CROSSFIRE" is next.

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