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Monday, May 18, 1998
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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer

Microsoft, DOJ to Face-Off

Microsoft (Nasdaq: MSFT) was sacked for a $3 3/8 loss to $86 1/16 this morning after the company announced over the weekend that it could not reach an antitrust agreement with federal and state governments over the terms under which Microsoft can market is Windows operating system software. At issue are the features the company can include in its operating system, including the display of its Web browser on the desktop and the Windows user interface when a user turns on their computer for the first time. Having broken off talks with the government on Saturday, Microsoft now expects to face lawsuits from the Department of Justice and attorneys general from 20 states.

There really is no other large company in the world with a share of the market as dominant as Microsoft, so the company is flying solo in its face-off with the increasingly active antitrust forces in Washington. Microsoft argues that the government's demands that it include Netscape's (Nasdaq: NSCP) Web browser in its operating system is akin to the government asking Coca-Cola to distribute competing products from Pepsi. The more relevant comparison that could be made is the government's mandate that Bell operating companies provide collocation to competitive local exchange carriers and that the interface with a consumer's long-distance company be transparent, no matter which long-distance company that is. On this score, the government has ample precedent for dictating that consumers be able to access telecom services under alternative interfaces, which is exactly what is at stake here.

However, Microsoft is not a company that has operated as a regulated monopoly that has been virtually guaranteed a profit by the government, so the comparison breaks down at this point. Microsoft took a wide open market and gained its market position through specializing in software. Apple (Nasdaq: AAPL) wanted it all -- to control the operating system software, to manufacture and market the hardware to work with its OS, and to control the development and marketing of applications software to work with its OS. That didn't work. The various UNIX companies complain that their technology is cheaper to own and operate, is scalable, and is more stable. Tell that to a company with less than 50 employees, or in other words, the majority of American corporations. Companies of that size don't have the resources to keep UNIX tweakers on the payroll. The market has voted on the attractiveness of Windows not just because of Windows itself but because the total package of acquiring the hardware and running a Wintel PC is cheaper and easier under the widest variety of user situations. Free to choose? The market is and has.

UPS

Viking Office Products (Nasdaq: VKNG) shot up $6 9/16 to $30 1/2 after announcing it has agreed to be acquired by Office Depot (NYSE: ODP) in a pooling-of-interest transaction in which Viking shareholders will receive one Office Depot share for each Viking share. That valued Viking at $34 7/16, a 44% premium to its closing price Friday of $23 15/16. The companies expect the merger to be accretive to earnings per share next year. Office Depot fell $2 3/8 to $32 1/16.

Pharmaceutical company Eli Lilly & Co. (NYSE: LLY) gained $1 3/16 to $69 5/8 after announcing that studies indicate that Evista, the company's recently launched drug for preventing osteoporosis in postmenopausal women, reduced the incidence of breast cancer by more than 50%.

San Francisco-based biotechnology company Genentech (NYSE: GNE) jumped $3 1/4 to $73 1/4 after announcing that clinical studies show that when used with chemotherapy, its new drug candidate Herceptin slows the growth of breast cancer and increases tumor shrinkage compared with patients receiving only chemotherapy.

Department store chain Mercantile Stores (NYSE: MST) rang up $5 5/8 to $78 15/16 after announcing it has agreed to be acquired by its bigger competitor Dillard's (NYSE: DDS) for $80 a share in cash in a deal valued at around $2.9 billion.

Music, video, books, and PC software products supplier Handleman Co. (NYSE: HDL) added $3/4 to $11 15/16 after announcing that it will acquire 75% of itsy bitsy Entertainment Co., an entertainment marketing firm with exclusive rights to such children's properties as Teletubbies, Tots TV, Noddy, and Miss Spider.

After falling last week on concerns about the PC and microprocessor markets, Dell Computer (Nasdaq: DELL) gained $2 1/4 to $92 1/4 in anticipation of what are expected to be strong first quarter earnings when the No. 1 computer direct seller reports results tomorrow. Analysts estimate EPS to increase to $0.42 a share, up from a split-adjusted $0.27 per share for the year-earlier period.

EntreMed (Nasdaq: ENMD) rose $3 3/4 to $36 3/4 after The Chicago Tribune reported that the biotechnology company may begin tests of its new cancer drugs on humans as early as December. In a Motley Fool StockTalk interview earlier this month, however, EntreMed CEO John Holaday said the company hopes to begin such tests in 12 to 18 months.

Website developer and operator Telescan Inc. (Nasdaq: TSCN) soared $1 5/16 to $8 11/16 after announcing it has hired NationsBanc Montgomery Securities to advise the company in "exploring strategic alternatives including a potential change in the ownership of the company." In plain English, the company is putting itself up for sale.

Computer printers manufacturer Printronix (Nasdaq: PTNX) was lifted $1 to $15 1/2 after announcing late Friday plans to buy back up to 1 million of its shares. This is on top of the roughly 1 million shares the company has repurchased since late last year at an average price of $15.58 a share.

Drug delivery systems maker R.P. Scherer (NYSE: SHR) jumped $6 13/16 to $84 1/4 after announcing it has agreed to be acquired by healthcare service company Cardinal Health (NYSE: CAH) in a deal valued at about $2.4 billion. Scherer shareholders will receive 0.95 Cardinal Health shares for each Scherer share.

Development-stage biotechnology company Corixa Corp. (Nasdaq: CRXA) surged $2 1/2 to $9 1/2 after announcing that clinical responses in patients with advanced cancer using unconjugated antibodies give "strong credence" to the possibility that Her-2/neu (cancer-related protein) vaccines will be able to play a role in cancer therapy. The company said the vaccine elicited substantial immune responses in the majority of patients vaccinated, though the study did not evaluate its therapeutic effectiveness.

Earnings Movers

AmeriLink (Nasdaq: ALNK) up $1 1/4 to $18; Q4 EPS: $0.18 vs. $0.15 last year; Estimate: $0.22

Boston Acoustics (Nasdaq: BOSA) up $2 3/8 to $33 1/2; Q4 EPS: $0.82 vs. $0.27 last year; Estimate: $0.61 (single analyst)

4 Kids Entertainment (Nasdaq: KIDE) up $1 1/2 to $6 3/4; Q1 EPS: $0.08 vs. loss of $0.19 last year

DOWNS

Firearms Training Systems (Nasdaq: FATS) was taken out and shot this morning, losing $2 3/4 to $5 1/16 after announcing on Friday that it will not receive an Army Engagement Skills Trainer contract. Although the company has requested that the Army reconsider and place it back in the procurement process, the Army has asserted that the company's proposal did not meet the necessary technical requirements.

On Friday, The Bank of Russia raised key interest rates by as much as 10 percentage points to protect the ruble from the burgeoning outflow of funds from Russian debt markets -- which was prompted by emerging market concerns elsewhere in the world. The Russian AT&T, Rostelecom (NYSE: ROS), dropped $1 13/16 to $17 15/16, cellular services provider Vimpel-Communications (NYSE: VIP) disconnected $2 7/8 to $50 1/4, Morgan Stanley Russia & New Europe (NYSE: RNE) fell $1 13/16 to $18 5/8, and Templeton Russia Fund (NYSE: TRF) sank $2 5/16 to $26 7/16.

Video communication products developer C-Phone Corp. (Nasdaq: CFON) fizzled $1 13/16 to $7 9/16 after receiving some negative press in Barron's this past weekend. Barron's noted that the company's set-top Internet box announcement (which inspired a trading frenzy) failed to elaborate on what it will cost, where it can be bought, and how the company will finance its development, manufacturing, and marketing.

Loral Space and Communications (NYSE: LOR) dropped $2 5/8 to $29 after the part owner of the LEO satellite constellation Globalstar reacted to Iridium LLC's (Nasdaq: IRIDF) announcement that it had completed its deployment of a 67 satellite global wireless telecommunications network.

Nutritional supplements pusher Nutrition For Life International (Nasdaq: NFLI) suffered some side effects -- dropping $1 7/8 to $7 1/8 -- from the release of its Q2 financials. The company reported Q2 EPS of $0.10 per share, compared with $0.12 in the second quarter of 1997.

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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

Editing
Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last