Monday, May 4, 1998
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Rockville, Maryland-based EntreMed Inc. (Nasdaq: ENMD) shot up $39 3/4 to $51 13/16 from Friday's close of $12 1/16 after going as high as $85 earlier today on optimism that the company may have found a cure for cancer. The New York Times reported yesterday that the biopharmaceutical company's two new drugs, angiostatin and endostatin, have been shown to shrink and eradicate tumors in mice by cutting off the blood flow to the tumors. The National Cancer Institute has called the drugs the "single most exciting thing on the horizon," according to The Times. Although these two drugs are still under pre-clinical investigation and require extensive clinical trials before seeking FDA approval, EntreMed, which focuses on developing technologies to fight cancer, blindness, and chronic heart diseases, has another drug, thalidomide, already being tested in collaboration with the National Cancer Institute in Phase II clinical trials in Kaposi's sarcoma and in prostate, breast, and brain cancers.

Philip Morris (NYSE: MO) gained $1 1/2 to $39 1/8 and RJR Nabisco (NYSE: RN) climbed $7/8 to $28 7/8 as the tobacco industry looks as though it will try to engineer a settlement with the Minnesota Attorney General rather than going in front of a jury, as is scheduled for later this week. Although the industry has done quite well in jury trials, the atmosphere in Minnesota has been virulently anti-tobacco and the companies don't want to push their luck. In addition, over the weekend the New York Times reported on biopharmaceutical company EntreMed Inc.'s studies of a combination of its drugs that showed that they were "effective in treating cancerous tumors in mice." If a cancer cure is found, consumer smoking habits could change -- to the benefit of tobacco companies.

Bristol-Myers Squibb (NYSE: BMY) gained $3 1/4 to $109 1/4 on the positive cancer busting buzz today, thanks to its exclusive worldwide licensing rights to EntreMed's thalidomide and angiostatin. Boston Life Sciences (Nasdaq: BLSI) rocketed up $5 15/32 to $7 19/32 on reports that it, too, is working on a similar cancer drug. Magainin Pharmaceuticals (Nasdaq: MAGN), which is also developing a cancer drug, rose $2 1/4 to $8 3/16. Separately, pharmaceutical company SuperGen Inc. (Nasdaq: SUPG) leapt $2 3/4 to $15 5/8 after announcing that the FDA has approved its application to market mitomycin, an injectable cancer drug approved to treat adenocarcinoma of the stomach and pancreas together with other chemotherapeutics. The drug is expected to go on sale by June.

QUICK TAKES: Union Carbide (NYSE: UK) added $3 5/16 to $51 1/2 after the U.K.'s Sunday Business newspaper reported that British Petroleum (NYSE: BP) considered and then abandoned a bid for the chemicals company. The proposed takeover would have involved BP injecting its chemicals division into Union Carbide in return for a shareholding as well as buying of shares... America Online (NYSE: AOL) rose $5 1/8 to $88 5/8 after Barron's reported that the online services company's CFO said the combined value of its subscribers, advertising revenues, international operations, and cash make the company worth $149.50 a share... Eastman Kodak (NYSE: EK) snapped up $2 5/8 to $76 after Lehman Brothers raised its rating on the photographic film company to "buy" from "neutral" following an investor meeting that boosted confidence in the company's ability to meet analysts' 1998 earnings estimates. Lehman set the one-year price target at $95.

Lycos Inc. (Nasdaq: LCOS) was lifted $5 1/4 to $68 5/8 after announcing a three-year agreement with AT&T (NYSE: T) to develop and offer new Internet-based consumer communications services. The companies plan to offer services on each other's websites. AT&T was up $1 5/16 to $62 1/16... R.P. Scherer Corp. (NYSE: SHR) gained $4 7/8 to $78 7/16 on news that it is working with Pfizer (NYSE: PFE) to develop a faster-acting version of Pfizer's new impotence drug Viagra that would be taken a few minutes before sex instead of an hour before... Apple Computer (Nasdaq: AAPL) added $1 1/16 to $29 1/16 after Bear Stearns raised its rating on "the Mac" to "buy" from "attractive." Analyst Andrew Neff, who expects new products to boost the company's revenue, increased his 1999 EPS to $1.80 per share from $1.60.

Consumer services company Cendant (NYSE: CD) moved up $13/16 to $25 1/2 after Friday announcing it plans to acquire the Royal Automobile Club's Motoring Services business in Britain, which provides roadside assistance and driving instruction services, for $750 million... Dell (Nasdaq: DELL) jumped $3 3/4 to $88 after a quarterly study showed that the PC direct seller was again ranked first in customer satisfaction with particular strength in on-time reliable delivery, out of box quality, technical support response, overall hardware reliability, and volume discounts... Internet content aggregator and software company Netscape Communications (Nasdaq: NSCP) added $1 7/8 to $29 9/16 after BT Alex. Brown raised its rating on the company to "buy" in advance of the company's announcing after the close a strategic partnership with Excite Inc. (Nasdaq: XCIT) to develop content and search services and sell advertising.

Computer storage company Quantum Corp. (Nasdaq: QNTM) and Digital Equipment (NYSE: DEC) announced that Digital will offer Quantum's new Rushmore Ultra solid-state disk (SSD) technology. Quantum was up $1 5/16 to $24 3/4 and Digital Equipment gained $3/4 to $57 5/8 on the news... Union Texas Petroleum (NYSE: UTH) surged $8 to $28 1/2 after announcing that it has agreed to be acquired by ARCO (NYSE: ARC) in a deal valued at about $3.3 billion, including debt and Union Texas preferred stock. ARCO will buy Union Texas common shares for $29 per share in cash... Business software solutions company PeopleSoft (Nasdaq: PSFT) rose $1 13/16 to $46 3/16 after announcing that it has amended its stockholder rights plan and increased the exercise price of the rights to $190 per right from $22.50, and the redemption price to $0.01 per right from $0.000125.

CyberMedia Inc. (Nasdaq: CYBR) jumped $5/8 to $8 3/8 after announcing that Microsoft will use the automatic technical support software company's file cleaning technology in its Plus! 98 software, a companion package for Windows 98... Entertainment and sporting event organizer The Marquee Group (AMEX: MRT) charged up $1 5/8 to $6 3/16 after announcing it has received a merger offer from SFX Entertainment (Nasdaq: SFXAV) and has formed a special committee to evaluate the proposal and examine other strategic alternatives... Apparel marketer and manufacturer Farah Inc. (NYSE: FRA) shot up $2 1/16 to $8 13/16 after announcing it has agreed to be acquired by Tropical Sportswear International (Nasdaq: TSIC) for $9.00 per share.

Banyan System (Nasdaq: BNYN) jumped $2 to $10 1/16 after BT Alex. Brown raised its rating on the computer network directory and messaging products company to "buy"... Computer security software developer Check Point Software Technologies (Nasdaq: CHKPF) leapt $4 9/16 to $33 after Prudential Securities raised its rating on the company to "buy" from "attractive."


Telco Systems (Nasdaq: TELC) slumped $1 1/2 to $10 1/4 after Robinson-Humphrey analyst Greg Mesniaeff lowered his short-term rating on Friday to "market perform" from "buy," citing the stock's valuation. However, Mr. Mesniaeff kept his long-term "buy" rating on the maker of telecommunications network equipment. So far this year, the company's share price had risen 19% to close at $11 3/4 on Friday. Interestingly, a large portion of that gain (about 12 percentage points of the 19%) has occurred since March 18, when the company reported that delays in customer orders resulted in sequentially lower Q2 revenues and net income of $0.04 per share (excluding acquisition charges).

Grocery and drug retailer Albertson's Inc. (NYSE: ABS) slid $3 to $47 3/4 after reporting that comparable store sales increased by 0.1% in April while total sales increased 7%. For the first quarter, the company said total sales were up 6.7%, but comparable store sales were down 0.3% compared to the same period a year ago. The company operates 878 stores in 20 states in the western and southern U.S., including 768 combination supermarkets/drugstores ranging in size from 35,000 to 82,000 square feet. By operating in both segments, though, the company faces competition not only from large supermarkets such as Kroger (NYSE: KR) and Safeway (NYSE: SWY), but also from drug retailers Rite Aid (NYSE: RAD) and CVS Corp. (NYSE: CVS), which have been aggressively expanding into Albertson's core markets in Texas, California, and Florida.

QUICK CUTS: Boston-based bank Fleet Financial Group (NYSE: FLT) lost $2 11/16 to $87. The Wall Street Journal reported that the firm is considering partnerships with Mellon Bank (NYSE: MEL), PNC Bank (NYSE: PNC), Bank of New York (NYSE: BNY), and KeyCorp (NYSE: KEY) after merger talks with BankBoston (NYSE: BKB) fell apart last week... Software giant Microsoft (Nasdaq: MSFT) fell $1 9/16 to $88 1/16 after telling The Wall Street Journal that any attempts by the Justice Department to delay the launch of its Windows 98 operating system would result in "broad, negative consequences" for the PC industry. Computer retailer CompUSA (NYSE: CPU) shed $11/16 to $17 15/16 on the news.

Oil tanker, barge, and tugboat operator Maritrans Inc. (NYSE: TUG) ran aground today, falling $1 1/16 to $9 after reporting Q1 EPS of $0.06, missing the Street estimate by $0.02. The company blamed the shortfall on "severe weather patterns" in the period but added that it still expects to increase fiscal 1998 revenues by 10% from a year ago... Horizon Health Corp. (Nasdaq: HORC) lost $1 7/8 to $22 1/8 after the contract manager of hospital mental health programs agreed to buy the FPM Behavioral Health unit of Ramsay Health Care (Nasdaq: RHCI) for $20 million in cash. Stephens Inc. reduced its rating on the company to "market outperform" from "buy"... Generic and branded pharmaceutical developer Ivax Corp. (AMEX: IVX) lost $7/8 to $9 7/8 after reporting a Q1 loss of $0.03 per share, which was in line with the loss forecast by the sole analyst surveyed by First Call. Net revenues in the quarter fell 12% to $149.1 million compared to a year ago.

JLM Industries (Nasdaq: JLMI), a maker of specialty chemicals such as acetone and phenol, fell $3/4 to $10 1/2 after reporting pro forma Q1 EPS of $0.27, which was short of the First Call mean estimate of $0.31... Vitamin and nutritional supplement provider 4Health Inc. (Nasdaq: HHHH) slid $3/4 to $6 1/16 after the company told the Wall Street Journal that rumors regarding a takeover offer from Twinlab Corp. (Nasdaq: TWLB), a marketing agreement with America Online (NYSE: AOL), and interest from investment gooroo George Soros in the company are all unfounded... Cardiac diagnostic systems maker Endocardial Solutions (Nasdaq: ECSI) slid $1 3/8 to $10 3/4 after reporting a Q1 loss of $0.69 per share, which was wider than the $0.57 per share loss expected by the Street.

International Telecommunications Data Systems (Nasdaq: ITDS) lost $1 7/8 to $28 1/8 after the provider of billing services to wireless phone companies filed a 4.3 million share public offering, including 550,000 shares to be sold by certain selling shareholders... Bisys Group (Nasdaq: BSYS) slipped $2 3/16 to $35 13/16 after the outsourcer of financial information and investment solutions was downgraded to "accumulate" from "long-term buy" by Merrill Lynch... PharMerica Inc. (Nasdaq: DOSE), a provider pharmacy services to assisted living facilities, dropped $9/16 to $13 5/16 after reporting Q1 EPS of $0.13, which was in line with the Street estimate.

An Investment Opinion
by Jim Surowiecki

Echlin's White Knight

The white knight finally arrived. After three months of delaying tactics, court challenges, and legislative maneuvering designed to forestall a hostile takeover by SPX Corp. (NYSE: SPW), auto parts maker Echlin (NYSE: ECH) agreed Monday to be acquired by auto parts giant Dana Corp. (NYSE: DCN) in a stock swap valued at close to $3.6 billion. If the deal, which will give Echlin stockholders 0.92393 shares of Dana for each Echlin share they own and which requires Dana to assume $570 million in Echlin debt, goes through as expected, it will create a $13 billion global powerhouse with a strong presence in markets for both new-car parts and so-called aftermarket parts.

In inimitable deal-announcement fashion, the companies said that the merger would be accretive to earnings in the first year, thanks to "synergies" that will boost income by $200 million annually. Unfortunately, though, those synergies were not enumerated, and while it's safe to assume that the companies plan to enact cost savings by cutting jobs -- they currently have a total of 78,000 employees -- and "redundant" operations, it's not immediately clear how much overlap there really is between the two businesses. One of the potentially valuable consequences of the Echlin deal, in fact, is that it will give Dana a foothold in new markets without moving the company away from its core competence.

In the last two years, Dana has divested itself of a sheet-rubber and conveyor-belt business, its European warehouse operations, and its clutch business in an effort to stay focused on the components industry, which in practical terms means drivetrains, engine parts, and brakes. Echlin will add real value in the latter two categories, while it remains to be seen whether Dana will hold onto Echlin's clutch and marine equipment divisions.

From Echlin's perspective -- or perhaps we should say from the perspective of Echlin's management and board of directors -- the deal seems to be something of a godsend. The company, which shuttered 14 factories in the last year as part of a cost-cutting campaign, had gone to the wall in an effort to avoid being acquired by SPX, for reasons that even now appear somewhat nebulous. Those efforts included an intense lobbying campaign in the Connecticut legislature for what was essentially a company-specific anti-takeover bill and some fancy legal footwork that succeeded in delaying until late June a special shareholders' meeting called for the purpose of replacing the board of directors with a more SPX-friendly slate. After its hostile offer in February, SPX convinced owners of more than 50% of Echlin's shares to call such a meeting, but Echlin responded by filing motions intended to prevent such a meeting, motions that prompted this rather blunt headline on one SPX press release: "SPX responds to Echlin's frivolous lawsuit."

Needless to say, had SPX succeeded in taking over the company after all this, Echlin's current management would probably not have found their new owner all that welcoming a parent, which explains why the Dana deal seems so attractive. More substantively, Dana remains one of the country's most innovative corporations in terms of its corporate culture and organization. It has been a pioneer in decentralizing its operations and in pushing decision-making power down the line, and has also played an instrumental role in the dramatic improvement in the quality of auto parts over the last decade and a half.

For Echlin shareholders, the Dana acquisition represents a premium to the SPX offer, and the response of the market to today's announcement -- bidding Echlin shares up $4 -- suggests its virtues. On the other hand, the SPX deal did include $12 in cash while Dana's offer is entirely in stock, and Dana's stock is trading at a relatively pricey valuation compared to the industry as a whole, with a P/E ratio of 16.

Still, the arrival of Dana on the scene points out that corporate takeovers are among the most complicated and difficult to understand phenomena of American business today. Had the Echlin board simply agreed to the SPX offer, after all, Echlin shareholders would have received $7 a share less than they will receive now, and the possibility certainly exists that SPX will make yet another offer before all this is over. Yet the $48-a-share offer did represent an almost 50% premium to Echlin's February share price, and at the time it seemed to be a real gift to shareholders who had watched their company's earnings actually shrink over the previous year. From a business angle, it seems likely that Dana and Echlin will make better partners than SPX and Echlin would have, particularly given the friendly nature of the deal. And that, of course, means that long-term Echlin investors will reap the benefits. Still, the Echlin's board's tactics remain troubling in the context of a corporate world that remains often disdainful of shareholder rights.

Dana's share price unsurprisingly dropped slightly today as the market reacted as it nearly always does to acquisition news, bidding up the acquired and selling off the acquirer. The company's future is an interesting question mark. It's locked in a cyclical industry, but what makes Echlin such an attractive acquisition is that its business is countercyclical, since tough times make people buy more used cars and drive their current cars longer. Dana has a relatively large long-term debt load, but it's not excessive relative to its assets, and although its operating margins had fallen slightly over the past year, in its most recent quarter earnings were up nearly 25% on a sequential basis and 11% year-over-year. More importantly, perhaps, operating cash flow has soared in the last two quarters, canceled out only by sharp increases in capital expenditures, which could bode well for the future. Dana's P/E is not small for a cyclical company, and its shares have risen more than 60% in the past year. But if you were looking for a stock to buy and forget about over the next twenty years, Dana might be an interesting candidate.


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