Monday, February 2, 1998
DJIA:           8107.78  +201.78     (+2.55%) 
 S&P 500:        1001.27   +20.99     (+2.14%) REC 
 Nasdaq:         1652.89   +33.53     (+2.07%) 
 Value Line ndx   881.98   +12.95     (+1.49%) 
 30-Year Bond  103 14/32  -1 4/32  5.88% Yield 


SmithKline Beecham (NYSE: SBH) gained $4 3/8 to $67 1/2 and Glaxo Wellcome (NYSE: GLX) jumped $8 15/16 to $62 3/4 after the two companies announced that they are discussing a merger under which Glaxo shareholders would own 59.5% of the new combined company. The companies have a pro forma equity value of nearly $200 billion, which means the company would have the most clout in the industry in doing acquisitions and attracting scientific talent, both of which would give the company a competitive edge. That news drove up the stocks of almost every company in the sector, including:

Novartis up 2.25% in Swiss trading
Johnson & Johnson (NYSE: JNJ) up $1 7/8 to $68 13/16
Bristol Myers Squibb (NYSE: BMY) up $2 3/4 to $102 7/16
Pfizer (NYSE: PFE) up $7/8 to $82 5/8
Merck (NYSE: MRK) up $3/8 to $117 3/4
Warner Lambert (NYSE: WLA) up $5 7/16 to $155 15/16
Eli Lilly (NYSE: LLY) up $1 3/4 to $69 3/8
Zeneca Group (NYSE: ZEN) up $8 3/16 to $127 1/4
Schering Plough (NYSE: SGP) up $2 7/16 to $74 13/16
Hoechst AG (NYSE: HOE) up $3 1/4 to $38 1/2

Health and annuities insurance company Aetna (NYSE: AET) rose $3 3/16 to $76 11/16 after the Wall Street Journal reported that the company is contemplating the sale of its individual life insurance unit, which currently has written coverage of $50 billion. That would leave the company free to concentrate on the tough business of health insurance with its U.S. Healthcare unit. Some think the rumored sale is a prelude to buying Oxford Health Plans (Nasdaq: OXHP), since Aetna followed the same pattern of divesting businesses before buying U.S. Healthcare. That Oxford rumor surfaced on Friday afternoon and has sent Oxford up another $1/4 to $17 3/4 today. In a story that appeared on Friday, Bloomberg News quoted Oxford Chair Stephen Wiggins from a December interview: "We are not actively shopping the company. But obviously at these prices, you'd have to be retarded not to see it's an unbelievably attractive opportunity for somebody." We'll let the comment speak for the value of the assets with a new Chair.

QUICK TAKES: Design house Tommy Hilfiger Corp. (NYSE: TOM) gained $7 11/16 to $51 1/4 after reporting Q3 EPS of $0.96, up 33% from last year on a 31% increase in revenues to $246 million. The company also announced a "meaningfully accretive" acquisition of two licensees, Pepe Jeans and Tommy Hilfiger Canada, for a total value of $1.15 billion in cash and Tommy stock... Polo Ralph Lauren (NYSE: RL) hitched onto the Tommy Hilfiger move for a $1 7/8 gain to $27 5/8... Telecom billing software and services company Billing Information Systems (Nasdaq: BILL) jumped $3 1/2 to $25 1/2 after the company on Friday refuted an analyst's report that the quarter was not going according to plan.

Cap Cod banking company Sandwich Bancorp (SWCB) gained $6 3/4 to $50 1/4 on agreeing to be acquired for $53 per share in cash by Compassbank, a unit of 1855 Bancorp... Yurie Systems (Nasdaq: YURI) rose $2 5/8 to $22 1/2 after the ATM (asynchronous transfer mode) access and ATM concentrator device company announced a three-year original equipment manufacturer agreement with Swedish telecom equipment company LM Ericcson (Nasdaq: ERICY)... Firstbank of Illinois (Nasdaq: FBIC) jumped $3 5/8 to $41 5/8 on agreeing to merge with St. Louis-based Mercantile Bancorp. (NYSE: MTL). Each share of Firstbank is valued at a 10% premium, equal to 0.8308 shares of Mercantile, or $41.96 as of Friday's close.

Lake Tahoe casino operator Harvey's Casino Resorts (NYSE: HVY) hit the jackpot for $4 5/16 to $27 after the company agreed to be purchased for $28 per share in cash by a private buyer, which includes the company's Chair and CEO, Chuck Scharer... Nabisco Holdings (NYSE: NA) rose $2 5/8 to $44 after the cookie, cracker, and foods unit of RJR Nabisco Holdings (NYSE: RN) announced the resignation of its Nabisco Biscuit Co. president and the appointment of a new president. The new biscuit guy comes from Diageo, the successor company to the merged Grand Metropolitan and Guinness... BGS Systems (Nasdaq: BGSS) blasted ahead $7 1/8 to $43 5/8 after the software performance tools company agreed to be acquired by software tools developer BMC Software (Nasdaq: BMCS) for $45 per share in BMC stock.

Industrial controls and safety products company Pacific Scientific (NYSE: PSX) rose $4 3/4 to $29 7/8 after agreeing to be acquired by Washington, D.C. holding company Danaher Corp. (NYSE: DHR) for $30.25 per share in cash. Kollmorgen Corp. (NYSE: KOL) withdrew its $23.75 hostile bid to take over Pacific after being bested by Danaher... Swedish drug company Astra AB (NYSE: A) was bid up $1 3/8 to $19 1/2 in today's drug merger-induced European trading frenzy.

Long-term healthcare company Vencor Health (NYSE: VC) gained $2 1/4 to $26 3/4 after announcing that it will split off its real estate operations into a real estate investment trust, spin that off to shareholders, and continue as an operating healthcare management company.


LCS Industries (Nasdaq: LCSI) up $2 1/8 to $16 3/4; Q1 EPS: $0.50; Estimate: $0.43

Veritas Software (Nasdaq: VRTS) up $1 3/8 to $50 1/2; Q4 EPS before charges: $0.20; Net EPS: $0.09; Estimate: $0.25


National Semiconductor (NYSE: NSM) was bounced for a $4 5/8 loss to $23 1/2 after the company said shipments to South Korean customers have slowed and that shipments of chips for wireless telecom equipment have slowed due to macroeconomic factors in East Asia. The company also said in its press release that Q3 EPS may fall below the mean estimate of $0.39 and that it expects revenues for the third quarter to fall below Q2 results. In a conference call, National told analysts that it expects an 8%-10% sequential decline in revenues. In addition, the company expects a sequential decline in Cyrix sales due to process difficulties, although one could say the difficulty lies in the fact that chief PC CPU competitor Intel (Nasdaq: INTC) is driving prices to the point where ramping efficiently and profitably, not just ramping, is the problem. Investors interested in listening to National Semi's conference call can hear it at (800) 633-8284, code 3819731, until 10 a.m. tomorrow.

The only pharmaceutical company not included in today's fun-fest following the announcement that Glaxo Wellcome and SmithKline Beecham are in merger talks was American Home Products (NYSE: AHP). That company's stock fell $3 13/16 to $91 5/8 as merger talks between it and SmithKline have obviously broken off. When word came out two weeks ago that the two were in talks, American Home jumped $13 in one day. Apparently SmithKline didn't like what it found in its due diligence on American Home. The possibility for liabilities from lawsuits arising from the "phen-fen" diet drug debacle was very likely a large factor in the breaking off the merger talks.

QUICK CUTS: Coffee packager Farmer Brothers (Nasdaq: FARM) was roasted for a $23 1/2 loss to $163 after reporting Q2 EPS of $5.08, up from $3.55 last year... Polymer components manufacturer Furon Co. (NYSE: FCY) fell $2 9/16 to $16 7/8 after announcing it has sold its Felsted Cable operation and has purchased beverage tubing maker Premier Python Products Ltd.

An Investment Opinion
by Jim Surowieck

IPO Market Heats Up

January was one of the worst months in recent history for the market in initial public offerings (IPOs). Analysts have been arguing that the previously huge market for new public companies, which warmly welcomed firms ranging from Rambus (Nasdaq: RMBS) to AMF Bowling (NYSE: PIN) in 1997, has dried up, and that investors were becoming more picky. The amount of capital raised by companies going public was $954 million, which was a third less than the $1.42 billion raised in January 1997. In addition, only half as many companies went public last month as had gone public the year before. Today's Wall Street Journal, in fact, contains an article suggesting that "fears that a slowdown in Asia will cool the U.S. economy and crimp corporate profits have cast a pall over the market for IPOs." The piece suggested that investors in search of high yields were flocking instead to corporate junk bonds.

How quickly the worm does turn. At least that's the case for readers of today's Reuters news wire, who learned instead that "the IPO market is poised to boom," and that "the reward-risk ratio is greatly improving." Dow Jones -- which publishes the Journal -- echoed these sentiments, pointing to an IPO market that is now heating up. Apparently those picky investors disappeared at some point between the time Monday's Journal went to press and the time the exchanges opened.

Apart from serving as yet another demonstration of the futility of gauging market sentiment in the short term, this sudden turnabout in the financial press' attitude toward the prospects for IPOs in 1998 seems to have been the product of two successful offerings last week. The first was for Keebler Foods (NYSE: KBL), which opened at $24 a share and had risen to $27 1/2 by Friday's close. The second was Verisign's (Nasdaq: VRSN) resoundingly successful debut. The Mountain View, California, company, which makes digital certification technology that is used to protect access to communications and transactions sent over the Internet, intranets, and extranets, went public at $14 a share (up 40% from its initial price range of $9 to $11 a share), and jumped 11 points on its first day of trading. The stock boomed again today, reaching an intraday high of $37 1/4 -- a gain of more than $250% from its opening price -- before settling back to close at $31 a share.

Though Keebler's business (the elves notwithstanding) is a thoroughly undramatic one, the success of its IPO has suggested to many that the relationship between name recognition and willing buyers is still a strong one. That, in turn, has raised expectations for this week's IPO of drugstore chain Duane Reade (NYSE: DRC), which will be going public at $14-$16 a share. Apparently, Duane Reade's name recognition is relatively high as well. Verisign's unexpected, and overwhelming, success, on the other hand, is an indication that the market for Internet stocks is still booming, and that predictions of its imminent demise have been misplaced.

Verisign is certainly an interesting Internet play, in the sense that it is providing one of the crucial elements of the infrastructure that will be necessary if the Internet is to become a site for safe and effective commerce. (And if the Internet doesn't become a site for such commerce, its future is, unfortunately, limited indeed.) Verisign's connections are all the right ones. After being spun off from electronic security firm RSA Data Security in 1995, it got funding from Ameritech and Mitsubishi and it signed an important deal with Netscape (Nasdaq: NSCP) very soon after its founding. Its current investors include Kleiner, Perkins, the central Silicon Valley venture capital firm, Intel, and Visa, all of which give the company credibility it might otherwise not have. More concretely, Verisign has signed deals with Microsoft (Nasdaq: MSFT) and Cisco (Nasdaq: CSCO), and it derives a fifth of its revenue from Visa. If you use either the Explorer or Navigator browsers, then you've at least brushed up against Verisign technology.

The big question marks for Verisign's business are whether its brand name is powerful enough to hold off its competitors, who include GTE (NYSE: GTE) and IBM (NYSE: IBM), and whether the revenue stream from e-commerce is large enough to ensure years of solid growth. Currently, Verisign is growing sales at a rate of 250% a year, and the attention garnered by the IPO will only strengthen its brand identity. Its brand is its major asset, since although its technology appears to be superior to that of GTE or IBM, the differences are not striking enough to give Verisign free rein in the digital certification market. This is a company with a potentially bright future, but one that is even more uncertain than those of other Internet success stories like Yahoo! (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN). In addition, Verisign's float of 3.45 million shares (assuming the greenshoe, or overallotment option, is exercised) is very small, which will only contribute to the stock's volatility, both in the short and long term.

Unsurprisingly, that means that investors who jumped in late today expecting another ride to the top probably got burned. The painful truth of the IPO market, after all, is that its fundamental impulse seems to be speculative. Half again as many shares of Verisign were traded on Friday, for instance, as were available. The ease with which investors who are able to get in on the ground floor of IPOs can turn around and flip their shares for quick profits -- often to individual investors coming in after the elevator has already risen to the top floor -- and the distribution by investment banks of IPO shares to present and future clients as a way of winning business combine to make the market a sea in which the water is very choppy for individual investors.


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