<THE EVENING NEWS>
Friday, July 9, 1999
MARKET CLOSE
DJIA 11193.70 +66.81 (+0.60%) S&P 500 1403.28 +8.86 (+0.64%) Nasdaq 2793.07 +21.21 (+0.77%) Russell 2000 457.98 +3.23 (+0.71%) 30-Year Bond 89 18/32 -7/32 6.01 Yield
Shares of Lakewood, Colorado-based natural gas pipeline company KN Energy (NYSE: KNE) ignited for a $6 11/16 gain to $18 7/8 after agreeing to merge with privately held pipeline owner Kinder Morgan Inc. in a stock deal worth about $505 million. Since KN has the publicly traded stock, it will do the "buying" by issuing about 41.5 million shares for all of Kinder Morgan, which will then cancel an initial public offering it had in the hopper. But Kinder Morgan will call the shots after the deal goes through, with the new company taking the Kinder Morgan name and former Enron (NYSE: ENE) executive Rich Kinder assuming the chairman and CEO titles. The deal, which forms a 30,000 mile U.S. pipeline giant, is great news for KN, whose shares were trading at roughly one-third of last July's high as recently as yesterday. Not only will KN's future earnings be enhanced and more stable with Kinder Morgan on board, but the deal will also reduce its debt-to-total-capitalization ratio to 65% from 72%.
Cardiovascular surgical products company Perclose (Nasdaq: PERC) popped up $9 3/4 to $49 1/4 after agreeing to be acquired by diversified healthcare products company Abbott Laboratories (NYSE: ABT) for $680 million in stock, or $54 per share. The purchase price works out to a nifty 37% premium to Perclose's closing price of $39 1/2 per share yesterday. Unlike Abbott's planned $7.1 billion acquisition of Alza (NYSE: AZA), which is expected to dilute earnings next year but add to them thereafter, the Perclose deal will have no effect on Abbott's profits until 2003. The keys to the deal are Perclose's Techstar and Prostar closure systems, which allow vascular surgeons to reseal arteries after minimally invasive cardiovascular procedures such as stenting and angioplasty. Those products will fit in nicely with Abbott's other hospital product offerings, which have been selling at a brisk pace through the first half of this year. For more details on the deal, see today's Fool Plate Special.
QUICK TAKES: Chemical giant DuPont (NYSE: DD) moved up $3 3/16 to $71 11/16 after saying shareholders can exchange each DuPont share they own for 2.95 Class B shares of integrated oil company and former subsidiary Conoco (NYSE: COC), if they want to. The higher-than-expected exchange ratio will end up decreasing DuPont's share count by more than originally forecasted... Fast food restaurant company McDonald's Corp. (NYSE: MCD) served up a $3 15/16 gain to $44 9/16 after Schroder & Co. boosted its rating to "outperform" from "perform in line" based on strong June sales... Online music technologies company Liquid Audio (Nasdaq: LQID) streamed ahead $21 9/16 to $36 9/16 after selling 4.2 million shares in an initial public offering at a price of $15 per share.
Office imaging equipment supplier Danka Business Systems PLC (Nasdaq: DANKY) advanced $31/32 to $8 3/32 after saying the company expects fiscal Q1 earnings per share to be "substantially in excess" of last year's $0.09. Four analysts surveyed by First Call were looking for a $0.16 per share loss... Life, health, and accident insurance company American Heritage Life Investment Corp. (NYSE: AHL) moved up $4 1/8 to $31 1/16 after Allstate (NYSE: ALL) agreed to buy the company for $1.1 billion in stock or cash... Online reference services provider Infonautics Inc. (Nasdaq: INFO) rose $1 5/16 to $7 5/16 after saying it will combine its Electric Library K-12 business with Bell & Howell Co.'s (NYSE: BHW) ProQuest K-12 Internet business, creating a new company majority owned by Bell & Howell. Financial terms of the deal weren't disclosed.
Automated call center products designer Periphonics Corp. (Nasdaq: PERI) dialed up gains of $1 13/16 to $18 3/4 after turning in fiscal Q4 EPS of $0.36, up from $0.08 a year ago and beating First Call's three-analyst $0.24 estimate... In-transition networking products maker Cabletron Systems (NYSE: CS) snagged $11/16 to $13 3/4 after Business Week's "Inside Wall Street" column said "takeover buzz is running high." The column also gave shares of online advertising services firm 24/7 Media (Nasdaq: TFSM) a boost of $4 9/16 to $45 7/8 with talk of interest from DoubleClick (Nasdaq: DCLK)... Shares of Qualcomm (Nasdaq: QCOM) jumped $6 1/2 to $148 3/4 after Standard & Poor's announced it will add the wireless communications company to the S&P 500 Index. Compass Bancshares (Nasdaq: CBSS), which will take Qualcomm's spot in the S&P MidCap 400 Index, advanced $1 11/16 to $27 13/16.
Among other companies rising on index-related news, staffing services firm StaffMark Inc. (Nasdaq: STAF) gained $2 1/16 to $12 1/8 and food distributor Performance Food Group (Nasdaq: PFGC) ascended $1 1/4 to $27 5/8 on word they will be added to the S&P SmallCap 600 index... DNA sequencing system and gene analysis kit maker Visible Genetics (Nasdaq: VGIN) rose $2 1/16 to $12 1/2 on news that private equity investment firm E.M. Warburg, Pincus & Co. agreed to invest $30 million in the company... Helix Technology Corp. (Nasdaq: HELX), which develops cryogenic and vacuum technologies used in semiconductor manufacturing, added $3 3/4 to $26 5/8 after CIBC World Markets started coverage of the stock with a "strong buy" rating.
Biotechnology company Amgen (Nasdaq: AMGN) jumped $3 11/16 to $69 5/16. Before the bell, the company said it will announce its Q2 earnings on Monday -- 10 days ahead of schedule -- due to "unusual" trading that has sent its share price up 14% this week... Hotel operator Marriott International (NYSE: MAR) rose $3 3/16 to $37 11/16 after Schroder & Co. raised its rating on the firm to "outperform" from "perform in line." Morgan Stanley Dean Witter boosted its opinion to "strong buy" from "outperform"... Food and drug retailer Seaway Food Town (Nasdaq: SEWY) sailed $3 3/8 higher to $26 5/8 after reporting fiscal Q3 EPS of $0.28, up from $0.26 a year ago. The company also said it will hire an investment banker to evaluate "strategic alternatives."
Website hosting and management services company Interliant Inc. (Nasdaq: INIT) tacked on another $1 9/16 to $18 3/8 after gaining 68% yesterday on the heels of its initial public offering of 7 million shares at a price of $10 per stub... Visual Networks (Nasdaq: VNWK) eyed a $10 9/16 gain to $44 1/2 after the maker of wide area network (WAN) troubleshooting products reported Q2 EPS of $0.16, up from $0.04 a year ago and $0.02 ahead of the Zacks mean estimate. At least three brokerage firms raised their ratings on the stock today... Computer-aided design and manufacturing software developer Parametric Technology (Nasdaq: PMTC) rose $1 to $14 1/4 despite saying its fiscal Q3 EPS (excluding charges) will fall $0.01 to $0.03 short of the First Call mean estimate of $0.18. However, the company also announced a total of $13.5 million in new orders for its Windchill product from the likes of Lockheed Martin (NYSE: LMT) and Dana Corp. (NYSE: DCN).
One useful thing to do when a company -- particularly a software company -- says earnings will be off because orders didn't close is to clarify whether they were delayed or completely lost. That knowledge might help soften the blow taken by stockholders of business diagramming and technical drawing software maker Visio Corp. (Nasdaq: VSIO), whose shares lost $9 3/8 to $29 9/16 today on last night's news that it expects to disappoint investors in both Q3 and Q4. Visio Treasurer Leslie Dietz told Bloomberg the lost deals are expected to close in the next quarter. But there are other problems: sales were also hurt because of changing distribution trends that are expected to continue. Q4 revenues are expected to be at the low end of analyst estimates, at $61 million or $62 million. "Our outlook for fiscal 2000 remains unchanged," said CEO Jeremy Jaech, who noted that the company's Visio 2000 upgrade will be available in the September quarter. Q3 EPS is seen coming in at $0.29 or $0.30, while Wall Street was looking for $0.35.
Shareholders of real estate services and investment management company Jones Lang LaSalle (NYSE: JLL) can't be too happy right now. The shares were battered early in yesterday's session before being halted. Today, on news that the company anticipates a second-quarter loss and full-year earnings that "will not be below $1.00 per share," the shares dumped $5 1/16 to $17. Two analysts surveyed by First Call were looking for per share profits of $0.19 for the quarter and $1.90 for the year. The reversal of fortune was, the company said, in large part caused by "distractions" in connection with the company's more than $750 million worth of acquisitions since October -- including LaSalle Partners' March pickup of London's Jones Lang Wootton that formed the company. "Clearly we did not fully anticipate the distraction that our mergers would have caused the organization as a whole," said CEO Stuart Scott, who now calls 1999 a "transitional year." Now he tells us.
QUICK CUTS: The shareholder suits began to mount today as reports spread that executives made millions selling shares of Waste Management (NYSE: WMI) in Q2, the same quarter for which the company recently issued an earnings warning. The company lost $1 3/8 to 32 9/16... Shopping center owner, developer and manager General Growth Properties (NYSE: GGP), which sold 10 million shares to Lehman Brothers -- reportedly for $33.75 per share, about a 3% discount to yesterday's close -- fell $1 7/8 to $33... Swisscom's (NYSE: SCM) American depositary shares shed $2 3/8 to $35 1/2 today as the company agreed to buy DaimlerChrysler's (NYSE: DCX) 32% stake in European telecommunications company debitel, plus the holdings of two other companies for a total stake of 58%.
Paper machine clothing and high performance doors maker Albany International (NYSE: AIN) was slammed for a loss of $2 to $21 following the announcement that Q2 earnings are seen at about $0.30 per share, $0.04 below last year's mark and missing First Call's six-analyst consensus of $0.39... Telecommunications software firm Catapult Communications (Nasdaq: CATT) gave back $1 7/8 to $23 13/16 after grabbing $8 1/16 yesterday on news that it will provide voice over Internet protocol testing products to Cisco Systems (Nasdaq: CSCO)... E-business network services company Digital Island (Nasdaq: ISLD) lost $3 3/4 to $26 1/4 today. The company announced the opening of a new, expanded San Francisco headquarters building.
Casino operator Trump Hotels & Casinos Resorts (NYSE: DJT) lost $9/16 to $6 1/16. Today's issue of The Wall Street Journal said the company plans to close its World's Fair casino in Atlantic City, N.J., on Oct. 1 and seek a partner to build a $750 million replacement... Biopharmaceutical company Biogen Inc. (Nasdaq: BGEN) posted second-quarter earnings of $0.34 a share before charges, up from $0.20 a year ago and beating the analysts' mean estimate of $0.32. The stock fell $1 13/16 to $64 7/8; head back to this morning's Breakfast With the Fool for more... Property and casualty insurance claims administration firm INSpire Insurance Solutions (Nasdaq: NSPR) shed $1 7/8 to $10 1/8 on news that it expects Q2 EPS of between $0.13 and $0.15, short of Wall Street's six-analyst $0.17 mean projection.
E-commerce software company Optika Inc. (Nasdaq: OPTK), which reported Q2 losses of $0.06 per share, lost $1 1/4 to $4 1/2. "Our North American direct sales organization has not yet met our expectations in closing larger enterprise opportunities," said CEO Mark Ruport... Video teleconferencing equipment maker PictureTel Corp. (Nasdaq: PCTL) blurred $5/8 to $6 3/4 on news that Q2 losses are seen between $0.60 and $0.62, lower than First Call's four-analyst projected loss of $0.46... Flat panel video displays maker Kopin Corp. (Nasdaq: KOPN) lost $1 5/8 to $23 1/2 after Credit Suisse First Boston cut its full-year 1999 EPS estimates in half to $0.22, citing aggressive pricing. The market's mean estimate was $0.36.
Digital broadcast satellite (DBS) television system operator EchoStar Communications Corp. (Nasdaq: DISH) dropped $7 5/8 to $151 5/8 as Morgan Stanley Dean Witter lowered its rating on the company to "outperform" from "strong buy"... Digital video computer boards and video conferencing boards maker Hauppauge Digital (Nasdaq: HAUP) cooled $4 1/4 to $26 1/4 after hopping up $8 1/2 yesterday after financial author Gene Walter made optimistic comments about the company's prospects on CNBC... Drug development company Human Genome Sciences (Nasdaq: HGSI) gave up $7 9/16 to $47 15/16 after a Salomon Smith Barney analyst cut her rating on the stock to "venture 3" from "venture 2," citing concerns that the financial impact of a promising gene discovery could be a ways off.
FOOL
ON THE HILL
An Investment Opinion
by
Warren Gump
Learn from Merrill Lynch!
I'm watching with keen interest the changes wrought on businesses by the Internet. Having never lived through a technological revolution, I really don't know what outcome to expect. Who will emerge as the ultimate dominant force in the Internet field? Will today's young leaders remain on top of the heap or will new upstarts come in with even better solutions than those offered today? Could it be possible that some of the old-line companies will find a way to combat the upstarts?
The Internet has influenced few industries more significantly than the stock brokerage business. Due to the tremendous and rapid changes the new communication medium has created, we are seeing old-line firms move fairly aggressively to incorporate the Internet into their business plans. As this happens and competition intensifies over the next 12-18 months, we will gain a clearer picture of whether slower-moving firms with tremendous marketing and financial strength have a chance to compete against firms that quickly embraced the Internet.
Just a few years ago, trading stocks over the Internet was a novelty offered by only a few firms. Seeing the potential to reduce costs and increase efficiencies (not to mention the fear of competitive threats from other deep-discount brokerages), Charles Schwab & Co. (NYSE: SCH) and TD Waterhouse (NYSE: TWE) embraced the new technology and began offering lower-priced online trading. Although the commission reduction from these services risked reducing revenue if the move didn't result in increased volume, these firms recognized the important of price to their offerings. One of the primary reasons customers had selected a discount broker was, not surprisingly, the fact that they offered low-priced trades. Customer loyalty would likely be weakened significantly if cheaper options were available elsewhere.
As discount brokers embraced the Internet, full service brokerage firms pretty much ignored what was happening. They didn't feel they were really competing on price. Instead, they felt their differentiating factors were research recommendations and a relationship with a broker. They didn't believe their customers were very concerned about price. In addition, it was tough for them to figure out how to incorporate low-priced Internet services into their business models. Most full service brokers are paid commissions out of the fat transaction fees charged to customers. If they were to provide low-cost trading, how could they provide their brokers with hefty compensation? (Discounters didn't have this conflict since their brokers were usually paid a salary.)
Not surprisingly, investors have been running from full service brokers into the hands of firms offering cheap Internet trades. After denying or ignoring this influence for a long time, the full service firms have finally started to prepare to fight. (Do you think it had anything to do with the fact that the market capitalization of Schwab surpassed that of Merrill Lynch?) Prudential Securities, a large full service firm, has already introduced a product that charges a flat $24.95 per trade, in addition to an annual account service fee based on account assets.
A bigger threat may come from Merrill Lynch (NYSE: MER), the nation's largest full service brokerage firm, which announced plans for two different options that might appeal to investors. The first is a "wrap account," which provides all services to clients for a flat annual fee based on assets. Investors will incur no charges for individual trades. The second is an account that doesn't have an annual fee but charges $29.95 per trade. This later option, which is expected to be available in December, is a direct threat to Schwab, which also charges $29.95 per trade, but doesn't offer advice or proprietary research. As far as I can recall, this will really be one of the first instances where an old-line company competes head-to-head against a profitable Internet competitor.
The market seems to have concluded that Merrill Lynch and the other traditional brokerage firms have lost the race. Schwab is valued at $44 billion, yet Merrill Lynch, which in addition to its brokerage operations has a very profitable worldwide investment banking group, is valued at only $29 billion. E*Group (Nasdaq: EGRP) and TD Waterhouse each trade for more than big old-line firms like Lehman Brothers Holdings (NYSE: LEH), Donaldson, Lufkin, & Jenrette (NYSE: DLJ), and Paine Webber Group (NYSE: PWJ). Ameritrade Holding Corp. (Nasdaq: AMTD) is worth more than A.G. Edwards (NYSE: AGE), Legg Mason (NYSE: LM), and Raymond James Financial (NYSE: RJF) combined.
Given their slow response over the past few years, it is understandable that many people foresee traditional firms not adapting to Internet competition. Now, as these companies finally wake up to this competitive threat, it will be interesting to see how well they fare. Can Merrill Lynch's strong brand and army of over 14,000 brokers compete in the online world against Schwab? What about the other companies in the industry? Will they let their customers continue migrating to Internet firms or will they find strategies that allow them to maintain, or even gain market share?
Results from the impending broker battle might help investors determine what will happen in other industries being hit by E*competition. We will finally see if a company like Merrill Lynch can use its resources to effectively fight a firm like Schwab, which embraced the Internet early on. Billions of investment dollars are at stake in answering that question. For the first time in a long time, we might actually learn something from the actions of Merrill Lynch.
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