Monday, December 15, 1997
DJIA:         7922.59   +84.29       (+1.08%)
S&P 500:       963.39   +10.00       (+1.05%)
Nasdaq:       1536.56    -0.02        (0.00%)
S&P Utilities  224.41    +3.20       (+1.45%)
30-Year Bond 102 5/32   -19/32   5.97% Yield


Bethlehem Steel Corp. (NYSE: BS), the nation's second largest steel company, helped boost the shares of steelmaker Lukens Inc. (NYSE: LUC) $6 3/8 to $23 7/8 after announcing an offer to acquire the company for $650 million, including $250 million of assumed debt. Bethlehem will issue common stock for 38% of the total equity value, with the balance paid in cash. Due to another development today, the specialty metals and steel industry might start to show up in momentum-driven screens, so watch out. Specialty alloys and metals products manufacturer Handy & Harman (NYSE: HNH) jumped $10 3/16 to $32 7/16 on receiving what looks like a surprise $30 per share cash takeover offer from steel producer WHX Corp. (NYSE: WHX). Whether or not WHX gets an answer from Handy & Harman, WHX has wanted a specialty metals operation since it was thwarted in its bid to take over Teledyne a couple years back. To that end, WHX will commence its tender offer tomorrow, which is planned to run through mid-January.

In other merger news, U.S. Bancorp (NYSE: USB) announced that it will acquire Minneapolis neighbor Piper Jaffray Companies (NYSE: PJC), a full-service securities brokerage and investment banking company, in a cash transaction valued at $730 million, or $37.25 per Piper Jaffray common share. Piper jumped $6 5/8 to $36 3/8 and U.S. Bancorp finished up $1 3/4 at $115 today, reflecting a positive market reaction to the acquisition. At four times book value, the possibility to add product offerings, increase ways to retain customers, and add another source of earnings and funding make the acquisition a more compelling value than just gathering another bank into the fold at two times book value. Assuming a price-to-book multiple of 4 for a brokerage earning a 25% return on relatively unleveraged shareholders' equity versus a price-to-book multiple of 2 for a run-of-the-mill bank earning 15% on highly leveraged equity, the "more expensive" brokerage's cumulative earnings yield on the original purchase price crosses over that of the bank at year six, assuming a 100% earnings payout ratio to keep things simple. Better to pay 4 times book for a business that can generate excellent returns on unleveraged equity as well as complimenting your base business rather than buying a bank that will run more modest rates of return on highly leveraged equity.

Diversified gaming company Anchor Gaming (Nasdaq: SLOT) gained $8 7/16 to $51 15/16 after announcing that second quarter EPS will be between $1.10 to $1.20, which puts earnings squarely within the range of analysts' estimates for the quarter. Anchor shares have declined in the last three weeks from a peak near $100 as rumors surfaced that the company's results wouldn't meet estimates. On the Dec. 3 the company confirmed that results would be hurt somewhat by Colorado snows early in the quarter, but that its analysis was preliminary. After some shareholder wailing and the launch of a lawsuit, Anchor's earnings may actually increase sequentially, which would be a feat in a seasonally slow quarter. Anchor added that it has authorized the repurchase of an additional 514,000 shares, bringing the current outstanding buyback authorization level to 1 million shares of common stock.

QUICK TAKES: Sano Corp. (Nasdaq: SANO), a developer of proprietary transdermal drug delivery systems, gained $9 9/16 to $32 9/16 after drug delivery and biopharmaceutical company Elan Corp. (NYSE: ELN) announced that it intended to acquire Sano in a tax-free all-stock transaction that values Sano at $35.50 per share, or approximately $375 million... Mobile communications company SK Telecom (NYSE: SKM) rose $1 1/8 to $6 1/8 after the company announced that it had gained an additional 340,000 new CDMA (Code Division Multiple Access) subscribers in the month of November. This is a 40% increase over the 243,000 new subscribers reported in October... Morgan Stanley raised its rating on networking programmable processors company MMC Networks (Nasdaq: MMCN) to "strong buy" from "outperform," which boosted the stock $2 1/8 to $15.

After being smashed last week, medical device maker Gliatech Inc. (Nasdaq: GLIA) gained $3 3/4 to $11 7/8 after announcing on Friday that it had received FDA advisory panel approval for its application to market an anti-adhesion gel in the U.S... European telecom company Esprit Telecom Group (Nasdaq: ESPRY) rose $2 3/8 to $11 3/8 after successfully placing $300 million in 11.5% ten-year notes in the U.S. and Europe... Gaining a respite from merciless selling over the last month, semiconductor fabrication equipment concerns gained some ground today, with Applied Materials (Nasdaq: AMAT) rising $1 15/16 to $28 1/16, wafer handling company Brooks Automation (Nasdaq: BRKS) gaining $1 1/2 to $14 3/8, and wafer stepper firm Ultratech Stepper (Nasdaq: UTEK) picking up $2 1/2 to $21 1/4... On the eve of tomorrow's first quarter earnings report, electronics contract manufacturer Jabil Circuit (Nasdaq: JBIL) climbed $2 3/8 to $34 7/8. Analysts are expecting Q1 EPS of $0.48... Specialty semiconductor design firm Integrated Circuit Systems (Nasdaq: ICST) gained $2 9/16 to $22 7/8 after advising investors that it has a high level of confidence in its ability to meet Q2 EPS estimates of $0.42 to $0.44, due in part to the company's shift toward higher value-added, non-PC semiconductor devices.

UST Corp. (Nasdaq: USTB) and Affiliated Community Bancorp (Nasdaq: AFCB) jointly announced today that UST will acquire the Massachusetts bank and financial services company in a stock swap in which each share of Affiliated will be exchanged for 1.41 shares of UST common stock. The $259 million deal raised Affiliated's shares $4 to $36 5/8... Childcare company Bright Horizons (Nasdaq: BRHZ) moved up $1 3/4 to $16 1/2 after Everen Securities last week raised its rating on the company to "outperform" from "market perform"... Cordiant (NYSE: CDA) gained $2 15/16 to $8 15/16 after the parent company of advertising and marketing agency Bates Worldwide "demerged" with ad agency Saatchi & Saatchi (NYSE: SSA)... Specialty steel company Lone Star Technologies (NYSE: LSS) gained $4 to $28 1/2 after the company announced that it has bought back more of its stock under a standing repurchase authorization. Reuters also reported today that the Bass family might be looking at acquiring the company or participating in a recapitalization of the company.

Mexican construction company Empresas ICA (NYSE: ICA) rose $1 5/16 to $15 15/16 on signing a strategic alliance to participate in energy contracts with a company affiliated with Gaz de France, according to Reuters... Cox Communications (NYSE: COX) gained $3 to $39 15/16 after updating investors on its whiz-bang broadband services at a company-sponsored gathering of investors and analysts... Olympic Steel (Nasdaq: ZEUS) picked up $1 1/4 to $13 7/8 after the company announced a joint venture with Trumark Inc. to produce flat-rolled steel products for the auto industry. Goldman Sachs raised its rating on the company today to "trading buy" from "market outperform"... Clinical research organization Quintiles Transnational (Nasdaq: QTRN) rose $3 1/8 to $34 3/8 after Salomon Smith Barney raised its rating on the company to "buy" from "outperform."


Cypress Semiconductor Corp. (NYSE: CY) fell $11/16 to $7 7/8 after announcing that it would fail to meet analysts' expectations for the fourth quarter. The company makes static RAM, EPROM, and other specialty memory products, programmable logic devices (PLDs), and data communications products as well as timing devices and USB microcontrollers. Cypress was expected to take in $152-155 million in revenues and post EPS between $0.09 and $0.10. The company now states that it expects revenues in the range of $140-143 million and EPS of breakeven to $0.01. Cypress attributed the decline to a $5 million shortfall in wafer-foundry revenue and a $10 million shortfall in static RAM (SRAM) revenue, due to a "timing problem in shipping by the quarter-end cutoff." Assuming that $0.04 per share will eventually flow to the bottom line, the company now trades at 28 times the low end of its expected 1997 EPS. Morgan Stanley and Gruntal and Co. both lowered their ratings on Cypress today.

Enamelon (Nasdaq: ENML) got drilled for $1 13/16 to $14 3/8 today after an article in Barron's this weekend questioned the medical support that undergirds the company's claims that its over-the-counter products actually "stop cavities before they begin." Robert Sherman, a biologist in the FDA's division of over-the-counter drugs told Barron's that his "agency does not have any evidence to support the combination of the active ingredients of calcium and phosphate and fluoride as safe and effective for the prevention of cavities." Enamelon, in order to distinguish itself from other fluoride toothpastes, maintains that its toothpaste makes fluoride work better by adding increased quantities of calcium and phosphate to saliva, which gives the re-mineralization process a boost. Enamelon stated that human trials are under way, and each study involves 30-40 people at 17 dental schools around the country. Results may be years away, so Enamelon plans a national rollout of its products in early 1998. It has to -- the company doesn't expect to be profitable until the year 2000 and has amassed a trailing 12-month loss of $1.17 per share.

Legal woes continue to plague electronic design automation software company Avant! (Nasdaq: AVNT), which may have an injunction placed against its main software product line called "Aquarius." The company has been engaged in one of the most virulent intellectual property disputes in the software industry with antagonist Cadence Design Systems (NYSE: CDN), which has charged Avant! with outright theft of computer code. During a U.S. district court hearing last Friday, judge Ronald Whyte said he would decide this Friday whether to allow Avant! the opportunity to submit arguments on why Aquarius should not be enjoined (prompting further investigation). If this doesn't happen, Avant! may see a major source of revenue disappear. Back in March, Judge Whyte decided not to enjoin any Avant! products, but the the Ninth Circuit federal appeals court overturned that ruling and ordered Whyte to cut-off Avant!'s "ArcCell" product group. Since ArcCell has been replaced by Aquarius, it was next on the chopping block.

QUICK CUTS: Abercrombie & Fitch (NYSE: ANF) took a $2 3/8 dive to $30 3/8 after Claire Young of the Olympus Fund dissed the company in Barron's over the weekend, questioning whether revenue growth could continue... Semiconductor capital equipment vendor ATMI Inc. (Nasdaq: ATMI) dropped $2 3/4 to $21 3/8 after Byron Walker of BT Alex. Brown downgraded the shares to "market perform" from "buy"... Keith Benjamin of BA Robertson Stephens nailed software distributor GT Interactive (Nasdaq: GTIS) for $1 3/8 to $6 9/16 when he downgraded it to "long-term attractive"... Green Tree Financial (NYSE: GNT) continues to look for a bottom as it slipped another $2 to $20 1/2 after Standard & Poor's revised its outlook to "negative" on the company's commercial debt even though it "affirmed" the actual ratings.

Concerns over mass mortgage refinancing are still hurting some lenders, with Thornburg Mortgage Asset Corp. (NYSE: TMA) off $13/16 to $17 1/16 after a bad week last week. More analysts cut ratings and earnings estimates today, although estimates were only shaved by a few pennies... Jennifer Smith of BA Robertson Stephens downgraded two electronic data automation (EDA) software companies today, putting Summit Design (Nasdaq: SMMT) down $1 3/4 to $10 and Synopsys (Nasdaq: SNPS) down $1 1/4 to $35 3/4 with "long-term attractive" ratings... Rock Bottom Restaurants (Nasdaq: BREW) sank $1 1/2 to $7 1/8 after the microbrewry/restaurant operator said financial results to-date in the fourth quarter were below company projections due to bad weather and poor performance at some of its restaurants As a result, the company will write down some of its underperforming restaurant assets and fourth quarter profitability levels will be affected by company expenditures for "exploration of strategic alternatives"... Pomeroy Computer Resources (Nasdaq: PMRY) was cut $1 7/8 to $18 3/8 after the computer integration firm announced that it will not be the 1998 computer product supplier for Columbia/HCA's Nashville, Tennessee headquarters.

Correction: In Friday's Evening News, we incorrectly identified Consolidated Edison (NYSE: ED) as a New Jersey utility. While we might have been thinking of Menlo Park when we wrote that, the namesake of Thomas Alva Edison is headquartered not in the Garden State but in New York, the Empire State.

An Investment Opinion by Randy Befumo

Shame on Shareholder Relations

Shareholder relations hit a new low last week. Those who live within the happy time continuum where individuals and institutions have equal access to information got a quick double jolt of reality from the likes of Bay Networks (NYSE: BAY) and Fine Host (Nasdaq: FINE). Whether it was carefully crafted management doublespeak to the press accompanied by obvious plain talking to the institutional contacts or no speaking at all, rebuffed individual investors were confused, stupified, or otherwise just plain stunned by the information, disinformation, and just plain lack of information while the two stocks wilted under intense selling.

Going in alphabetical order, we have the all-to-common story of Bay Networks last week informing Donaldson, Lufkin & Jenrette analyst Stephen Koffler during a company visit that revenue growth would not meet expectations. Specifically, Koffler stated in a research note published Wednesday morning that the company's line of routers would turn in flat quarter-over-quarter growth in the fiscal second quarter ending December 31. Koffler concluded in the note that Bay's router growth was "slowing considerably" and would not deliver the kind of results in fiscal 1999 that the company had originally planned on. Although Koffler only cut earnings estimates for the full year by two cents to $1.08 per share, the implications for next year were still undetermined.

Bay Networks management responded to this looming crisis with one of most skilled examples of press release doublespeak ever witnessed. A company official told Dow Jones late Wednesday that it stands by its second-quarter earnings per share estimates of $0.26 and anticipates that revenue overall will grow sequentially. Conspicuous in its absence was any confirmation or denial by Bay that router growth was de minimus and whether or not the company's estimates for the rest of the fiscal year would be impacted by new assumptions about how much the router business could grow. The company also carefully avoided saying whether or not it would make its revenue estimates, indicating that more than likely revenue would be off as Koffler had confided to his institutional clients.

Although for "competitive reasons" Bay does not offer individual investors a breakdown of where its revenues come from in its federal filings with the SEC, Nutmeg Securities Ltd. analyst Andy Schopick stated in the same Dow Jones wire story detailing Koffler's note that routers and shared media hubs account for "most of Bay's revenues." With routers not panning out and shared media products suffering "an industry wide decline in demand" for Bay in fiscal 1996 that has continued until today, the picture hardly looked good for the company. However, by skillfully handling the media and affirming earnings estimates for the quarter (without confirming revenue estimates), the company got the mass of individual investors to stay put. (In fact, Bay investors got very defensive when the potential that Bay would miss its revenue estimates was mentioned in this column Friday.)

As much as one can rag on Bay Networks for sending a different message to institutional analysts during company tours than it did to individual investors, at least it was talking to somebody. As horrible as it is to give institutional analysts a sense of the revenue breakdown without disclosing this same info to individuals in spite of 18 filings made to the SEC over the last twelve months, at least it was saying something. By comparison, management at Fine Host is not even keeping their analysts informed about what was going on until late Friday when the stock closed at $10 -- down $18 in the past four trading days. The food service contract manager admitted on Friday that it would have to restate the last three fiscal quarters because of how it capitalized certain contract rights. Although Fine Host has not said anything about the magnitude of the error, it did fire its Chairman and Chief Executive Richard Kerley as well as the Treasurer Nelson Barber -- never a good sign.

Currently halted at $10 1/8 for news dissemination, anyone unfortunate enough to own Fine Host will probably lose a substantial chunk of his money by the time this debacle is through. The fact that all the while someone at Fine Host was communicating that something bad was going on to someone is a classic example of how the institutional analyst can get the shaft right alongside the lil' guy. The company's recent $175 million bond offering convertible into stock at $44 1/2 was purchased by institutions, not individual investors. The analysts and investment bankers on the deal are feeling just as bad (if not worse) as the individual investors holding the stock. In a classic example of just how inefficient information dissemination can be, someone trading knew on Monday or Tuesday that something was wrong and initiated a sell-off, triggering a five-day extravaganza that saw more than two-thirds of all of the shares outstanding trade.

What can individual investors (or even the occasional institutional investor) do about information inefficiencies of this scale? Events like this should remind investors that the company that informs the most and the quickest is often the best, even if a peer company might be a little cheaper on a pure numbers basis. Berkshire Hathaway Chairman Warren Buffett has reminded investors time and time again since 1977 in his revered Letters to the Shareholders that the quality and caliber of the management team is one of his key investment criteria. Straight and forthcoming reports that give detailed revenue breakdowns and fully notate how the accounting for amortization and depreciation is done is the ideal. Investors who settle for nothing less will rarely be disappointed. Investors who simply do some quick math or take a glance at a chart will unfortunately be disappointed quite a bit.


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