Monday, March 8, 1999
DJIA           9727.61   -8.47     (-0.09%)
S&P 500        1282.73   +7.26     (+0.57%)
Nasdaq         2397.62  +60.51     (+2.59%)
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30-Year Bond   95 3/32   +2/32  5.59 Yield


Chip giant Intel Corp. (Nasdaq: INTC) rose $5 to $119 5/8 after the Federal Trade Commission said its lawyers reached an agreement with the company over the weekend to settle antitrust-related allegations filed against Intel last summer. The terms and conditions of the settlement will be disclosed if the FTC's four commissioners approve the settlement, eliminating the need for the potentially lengthy federal antitrust trial that was expected to begin this week. Many observers had doubted the validity of the FTC's complaints against the company in the first place, since its allegations mostly concerned patent protection issues and legal disputes between Intel and three of its business partners. Fears that Intel's share price would be depressed by a protracted trial were probably misplaced as well, if Microsoft's (Nasdaq: MSFT) 50% share price appreciation since the start of its own antitrust trial last October is any precedent.

After nearly 15 months on the selling block, specialty insurer American Bankers Insurance (NYSE: ABI) finally agreed to be acquired by European financial services giant Fortis in cash deal worth $2.8 billion, or $55 per share. The news sent the company's shares up $5 5/8 to $52. For American Bankers, the fun started back in December 1997 when American International Group (NYSE: AIG) agreed to buy the company for $47 per share. After that deal was announced, Cendant (NYSE: CD) made a hostile $58 per share bid. AIG matched Cendant's offer, but Cendant came back with a higher $67 bid that AIG did not meet. Cendant, however, eventually ran into accounting problems that knocked its stock down over 50% and prompted it to pay out $400 million last October to terminate the American Bankers acquisition. For more details on today's deal, see the latest Fool Plate Special.

QUICK TAKES: Enterprise software company BMC Software (Nasdaq: BMCS) advanced $2 5/8 to $40 13/16 after agreeing to buy systems management software designer New Dimension Software (Nasdaq: DDDDF) for $650 million in cash, or $52.50 per share. New Dimension gained $2 7/16 to $51 3/8... Network software developer Novell (Nasdaq: NOVL) gained $3 3/16 to $23 5/16 after an analyst told Barron's that the firm's Netware software and the "explosion of Internet business" will help double Novell's fiscal 1998 profits compared to a year ago and boost its share price to $30 per share by the end of theyear... Internet software and online training products provider 7th Street.com (Nasdaq: SEVL) rolled sevens and gained $3 27/32 to $8 27/32 after signing a pair of deals to offer online multimedia training products through its Tutorials.com unit to members of America Online (NYSE: AOL) and GeoCities (Nasdaq: GCTY).

Communications chipsets supplier Conexant Systems (Nasdaq: CNXT) moved ahead $3 5/16 to $22 after saying it will report breakeven fiscal Q2 results and profits in Q3. Analysts surveyed by First Call had been expecting a Q2 loss of $0.03 per share... Group employee benefits provider Delphi Financial Group (NYSE: DFG) bounced back $4 to $32 after falling 31% on Friday due to what it called "serious misconceptions" about potential losses at its Unicover reinsurance pool management subsidiary... Specialty chip maker Broadcom (Nasdaq: BRCM) gained $12 3/4 to $66 1/2 thanks to a Morgan Stanley Dean Witter upgrade to "outperform" from "neutral" and news that Nortel Networks (NYSE: NT) will use the firm's Very high-speed Digital Subscriber Line (VDSL) technology in its broadband network.

Document processing company Xerox Corp. (NYSE: XRX) moved up $3 7/8 to $57 7/8 after announcing five inkjet and laser printer/fax combination products for the home and small office markets, which the company believes "fire(s) up its rivalry with Hewlett-Packard (NYSE: HWP)"... Online auctioneer Onsale (Nasdaq; ONSL) gained $15 3/8 to $47 1/4 as the company said a total of 10 million bids have been placed on its atAuction service since its inception. The website surpassed the 9 million bid mark two months ago, according to the company... Engineering technologies and online training solutions developer Analysis & Technology (Nasdaq: AATI) rose $2 5/8 to $24 1/2 after agreeing to be acquired by privately held Anteon Corp. for $104 million, or $26 per share.

Utility software developer Network Associates (Nasdaq: NETA) added $3 to $50 after saying statistics from PC Data show that its McAfee VirusScan outsold rival Symantec's (Nasdaq: SYMC) Norton AntiVirus product by 185,000 retail units last year... Web content integrator and aggregator InfoSpace.com (Nasdaq: INSP) was launched ahead $2 3/4 to $61 today by an agreement making it the exclusive provider of yellow page directories and mapping services to the Snap portal operated by NBC and CNET (Nasdaq: CNET). Separately, CNET rose $40 1/8 to $208 1/8... Electronics manufacturing services (EMS) company Flextronics (Nasdaq: FLEX) tacked on $5 7/8 to $39 7/8 following a pair of upgrades from Lehman Brothers and Needham & Co.


Communications systems equipment provider Andrew Corp. (Nasdaq: ANDW) slipped $1 to $13 3/8 after announcing that it expects fiscal second quarter (ending March 31) earnings to come in between $0.05 and $0.08 per share, well below Wall Street's $0.22 per share consensus estimate, because of slow January and February revenues. "We expect [second-half] sales to be stronger than the first half due to normal business seasonality and to the higher capital expenditure spending plans announced but not yet implemented by some of our customers," said CEO Floyd English. Even so, Andrew -- which missed Q1 estimates as well -- intends to begin a restructuring aimed at cutting operating expenses by at least $17 million, about 10% based on year-ago figures. As many as 12% of the company's 4,000 employees may be let go. Projected costs of the restructuring weren't available. The revised earnings estimate includes a $0.03 per share loss in connection with the devaluation of Brazil's currency. Andrew plans to report results April 15.

Staffing services company Romac International (Nasdaq: ROMC) lost $15/16 to $7 15/16 after the company said it expects Q1 EPS of between $0.19 and $0.21 when it turns in quarterly results. Wall Street currently expects the $0.21 figure. Romac says that since it closed the acquisition of Source Services (April 20), a focus on integrating the acquisition has meant diminished growth -- indeed, the company's projected revenue range of between $178 and $182 million for the quarter, while better than the $155.4 million the two companies reported (separately) a year ago, represents only about 16% growth, compared with the 34% and 92% sales growth Source and Romac, respectively, posted in 1998. "We believe that these sacrifices have positioned the Company solidly for the future," said CEO David Dunkel, who said the combined companies' new distribution and servicing apparatus has helped Romac win new "national and major" accounts.

QUICK CUTS: Disk drive maker Seagate Technology (NYSE: SEG), which expects a one-time charge of between $50 and $60 million in fiscal Q3 to restructure global operations, dropped $3/4 to $29 1/8 today... Internet portal designer Online Systems Services (Nasdaq: WEBB) fell $1 3/8 to $11 1/2 after Friday night reporting a Q4 loss of $4.16 per share, down from a loss of $1.05 a year before... Rocket propellant manufacturer OEA Inc. (NYSE: OEA) burned off $1 1/2 to $9 after saying it would forego a second-quarter dividend payment "and redirect these funds to support our continuing growth and cost reduction initiatives."

Golden arches erector McDonald's Corp. (NYSE: MCD), downgraded to "perform in line" from "outperform" by Schroder & Co. today, lost $1 7/8 to $45 1/4... Commercial and consumer lender CIT Group (NYSE: CIT), which agreed to buy nonbank financing company Newcourt Credit Group (NYSE: NCT) in a $9 billion stock swap, lost $9/16 to $30 3/16 today... Telecommunications services provider Atlantic Tele-Network (AMEX: ANK) hung up $3/4 to $9 3/4 despite reporting Q4 EPS of $0.51 per share before items, better than last year's penny loss.

Engineering and construction services company Michael Baker Corp. (AMEX: BKR) lost $1/2 to $7 after starting a legal action against a unit of Universal Studios -- a division of Seagram Ltd. (NYSE: VO) -- to recoup funds in connection with the construction of Orlando's CityWalk. The company said Friday the project is expected to hurt 1998 earnings... Gold mining company Homestake Mining Co. (NYSE: HM) dulled $9/16 to $8 7/8 after announcing an agreement to buy Argentina Gold Corp., traded on the Vancouver exchange, for about $200 million in stock... Waste management services holding company Med/Waste Inc. (Nasdaq: MWDS) dumped $1 to $4 following news that the company hired Sutro & Co. to help investigate strategic alternatives, possibly including a sale or merger. The company also said it may restate earnings for the first three quarters of 1998.

Bank holding company Capital One Financial (NYSE: COF), downgraded to "attractive" from "buy" by PaineWebber Securities today, gave up $2 1/2 to end the day at $133 5/16... Healthcare management software firm Eclipsys Corp. (Nasdaq: ECLP) slipped $1 to $24 1/2 after Everen Securities reportedly cut its intermediate-term rating on the stock to "market perform" from "outperform"... Computer telephony products maker Notify Technology Corp. (Nasdaq: NTFY) returned $9/16 to $5 7/16 after adding $1 16/16 on Friday following news that Inktomi Corp. (Nasdaq: INKT) co-founder David Brewer will buy a sizable stake in the company.

An Investment Opinion
by Alex Schay

Trash Talk

When pundits observe that "market share is dead," it's important to note that an essential qualifying comment is missing from the statement. That is, massive unconcentrated bids for market share are dead. In many industries, densely packed service areas maximize the use of operating assets. This phenomenon often results in a proliferation of intra-industry "asset swaps" in order for the respective firms to exploit their core territories more effectively.

Today's merger between third ranked trash hauler Allied Waste (NYSE: AW) and second place Browning-Ferris Industries (NYSE: BFI), highlights the value placed on density and integration strategies in the garbage biz. Allied Waste is set to acquire Browning-Ferris for $45 in cash per share, along with the assumption of about $1.8 billion in debt, which puts the entire transaction in the neighborhood of $9.1 billion.

Allied's deal values Browning-Ferris at roughly 7.8 times 1998 earnings before interest, taxes, depreciation and amortization (EBITDA). The convertible preferred shares issued to help broker the deal ($1 billion) will convert to 55.5 million common shares, and can launch Apollo Group and Blackstone -- Allied's two biggest shareholders -- into the position of owning roughly 30% of the combined firm. The firm's debt-to-capital ratio will rise to 85% as a result of the transaction, with cash flow from year one expected to pay that down by 5-6 percentage points (and possibly more than 10% by year two).

After informal talks of a combination fizzled last summer, Allied and Browning-Ferris ended up exchanging some holdings in nine states near the end of the year, with each firm swapping operations that generated roughly $120 million per year in revenues. That little transaction gave each company the necessary insight into each other's operations to realize the potential inherent in a full asset combination (with overlap in 20-25 markets). Now that an actual merger is in the works, here's the Allied Waste perspective on the various synergies possible in the deal:

"Allied Waste expects it will achieve $290 million of synergies and cost savings in the initial 12 months after the close of the transaction (and $360 million total) by reducing corporate overhead costs, and by enhancing operating efficiencies and internalization. In the first year, Allied Waste anticipates that it will sell certain non-strategic businesses and complete required divestitures. The proceeds of these sales are expected to be more than $900 million, which, together with more than $200 million of free cash flow generated by the company's operations, will be used to reduce debt."

To understand these projections, investors need to get knee-deep in the operational muck. The "collection" side of waste operations involves collecting and transporting all the waste, and ultimately bringing it to a "transfer station" or directly to the site of disposal (landfill). Revenues from collection come in the form of fees charged to commercial and residential accounts -- with residential accounts usually involving municipal governments. A portion of the service fee is obtained in advance and recorded as deferred revenue, and the rest is recorded upon completion of the service contract. Fees for both commercial and industrial services are normally based on the type and frequency of service, as well as the volume of the waste collected. Disposal fees, known as "tipping" fees, are based solely on the volume of dreck disposed of at the various landfill sites (contracted or owned).

Now, transfer stations are strategically located sites used to consolidate waste streams and are becoming increasingly important in the overall trash hauling scheme. For the most part, they are used to collect sufficient amounts of waste and bide time while the company negotiates favorable volume disposal rates with landfill operators. Landfills are the primary method of disposal of solid waste in the U.S., and with the EPA's 1991 adoption of new regulations relating to Subtitle D of the Resource Conservation and Recovery Act of 1976, meeting the operational requirements for running them has gotten more difficult. This has fueled the pace of acquisitions in the nineties, as many operators unable to meet the standards have ended up selling out.

Looking at this brief operational breakdown, its easy to see how a firm can benefit from the ability to leverage labor and fuel costs over a densely packed service area, as well as avoiding tipping fees to third party landfill operators. The name of the game is the ability to achieve density through the collection workforce, and maximize volume through the landfills. As it turns out, roughly 40% of the trash that Browning-Ferris collects is deposited at competitors' landfills. Allied has significant disposal assets, with its transfer and disposal operations accounting for about 40% of revenues (as opposed to 14% at Browning).

Allied Waste is now entering the same position that Browning-Ferris moved into after its enormous growth ramp-up through the 1970s and mid-1980s. Allied is moving away from the revenue model of the last three years, where 80% of its top line came directly from acquisitions, and toward one in which about 5% of revenues will come from acquisitions. In an interview with The Wall Street Journal, Allied's CEO Thomas H. VanWeelden observed, "This isn't a business where you need a big thinker... We're not keeping awake thinking about how to beat the Japanese. We get up in the morning and collect the garbage."

With the acquisition plan now in place, the growth story theme of "local execution" comes to the fore rather prominently. It's like starting an entirely new firm, with all the assets having now fallen into place. The company has guided earnings in its first full year of combination (2001) to $1.60 per share, which represents 34% growth off of current year 2000 numbers. With upside possible in the estimated $2.4 billion worth of cash flow and $200 million in free cash flow that Allied hopes to generate in the first year of the real turn of the century, Allied may still hold some value at today's closing price.


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