THE MARKET MIDDAY
DJIA 10763.84 -149.48 (-1.37%) S&P 500 1321.81 -15.99 (-1.20%) Nasdaq 2496.35 -31.51 (-1.25%) Russell 2000 437.20 -5.93 (-1.34%) 30-Year Bond 90 28/32 +2/32 5.90 Yield
Amazon Drops Prices on Bestsellers
Internet juggernaut Amazon.com (Nasdaq: AMZN) is raising the stakes in the online bookselling business, increasing its discount on New York Times bestsellers to 50% off of suggested retail price. Starting today, the company will pass this discount to both hardcover and paperback books in the lists of three categories: fiction, nonfiction, and advice/how-to/miscellaneous. The stock fell $10 1/4 to $122 1/8 this morning. Considering that Amazon.com is already losing money before this price cut, it may seem odd to some people that the company is reducing prices further. But in reality, the logic is actually quite reasonable given the current market environment.
Amazon is in much more than the bookselling business. Although a significant portion of sales currently come from books, the company also sells music and video products. It has also started up an auction site and purchased stakes in drugstore.com and pets.com, which benefit from exposure to Amazon's growing 8 million+ customer base. The prosperity of Amazon's business down the road lies not in selling books, but in being the Internet's dominant retailer.
While the absolute level of Internet consumer sales is fairly small today, continued explosive growth seems likely as people become more familiar and comfortable with online transactions. To develop relationships with customers coming online, Amazon is more than willing to give up a little margin on books to draw more people through its door. This strategy has been used for decades by retailers, most commonly grocery stores with their weekly "super specials."
Conventional wisdom holds that the Internet is an equalizer in terms of competition and barriers to entry. Since comparison shopping involves only a few clicks, consumers can easily hop around from site to site to find the best deal. The reality is turning out to be quite different. Almost anyone can easily set up a site and start selling items on the Net, but it is much harder to develop a database of millions of book reviews, create a bond with customers, and provide excellent service. While the theoretical barriers to entry are small, the realistic barriers are quite high. Lowering prices to expand its reach, Amazon is again raising the bar against competitors even higher.
Business jet aircraft manufacturer Gulfstream Aerospace (NYSE: GAC) surged $6 11/16 to $62 5/16 on news it will be acquired by military jet and sub builder General Dynamics (NYSE: GD) for $5.3 billion in stock, or $71.44 per share. General Dynamics, which said the deal will be "immediately -- and handsomely -- accretive to earnings and cash flow," fell $5 7/8 to $65 9/16.
Agricultural machinery maker Case Corp. (NYSE: CSE) harvested a $4 13/16 gain to $49 5/8 after agreeing to merge with fellow farm equipment company New Holland N.V. (NYSE: NH) in a $4.3 billion cash deal valuing Case at $55 per share. The companies expect to realize annual cost savings of $400 to $500 million in three to four years. New Holland dropped $1 5/8 to $15 15/16.
Physician practice management systems developer Medical Manager Corp. (Nasdaq: MMGR) jumped $11 3/8 to $45 1/8 after agreeing to be acquired by healthcare e-commerce services and filtration systems firm Synetic (Nasdaq: SNTC) in a stock swap valued at $1.4 billion. Synetic fell $7 to $88 1/2.
Microwave and cellular tower owner and operator Westower Corp. (AMEX: WTW) climbed $1/8 to $29 7/8 after agreeing to be acquired by privately held communications tower company SpectraSite Holdings. Each Westower share will be converted into 1.81 SpectraSite shares, which will then be registered to trade on the Nasdaq stock market.
Aerospace and industrial forgings and castings maker Wyman-Gordon Co. (NYSE: WYG) moved up $5 1/2 to $18 3/4 after agreeing to be acquired by jet engine and industrial gas turbine castings maker Precision Castparts (NYSE: PCP) for $20 per share in cash, or $825 million including assumed debt. The purchase price represents a 51% premium to Wyman-Gordon's closing price of $13 1/4 per share on Friday.
Toy retailer Toys R Us (NYSE: TOY) skipped ahead $15/16 to $23 3/16 after reporting fiscal Q1 EPS of $0.07, flat with last year's results but ahead of the First Call mean estimate of $0.04. Net sales rose 6% in the quarter to $2.17 billion and are expected to get a boost in the current quarter thanks to sales of Star Wars-related goodies.
Life insurance holding company Life USA Holding (Nasdaq: LUSA) gained $9 3/8 to $19 5/8 after agreeing to be acquired by life and health insurer Allianz Life Insurance Co., a subsidiary of Germany's Allianz A.G., for $20.75 per share in cash, or $540 million.
Telecommunications networking equipment maker Ciena Corp. (Nasdaq: CIEN) rose $2 9/16 to $26 13/16 after BellSouth (NYSE: BLS) said it has already deployed Ciena's MultiWave Sentry dense wavelength division multiplexing (DWDM) system to support its long-haul network in five southeastern states and plans to deploy more Ciena systems later this year.
Multimedia educational products company Harcourt General (NYSE: H) advanced $4 1/8 to $53 3/4 after saying it will spin off most of its 54% stake in high-end retailer Neiman Marcus Group (NYSE: NMG) to shareholders sometime this fall. BT Alex. Brown raised its rating on Harcourt to "buy" from "market perform" on the news.
Competitive local exchange carrier (CLEC) Intermedia Communications (Nasdaq: ICIX) picked up $1 1/8 to $28 7/8 after Merrill Lynch raised its near-term rating on the firm to "accumulate" from "neutral" and its long-term rating to "buy" from "attractive."
Furniture rental company CORT Business Services (NYSE: CBZ) tacked on $1 1/4 to $24 3/8 after privately held Brook Furniture Rental Inc. announced a $28 per share cash offer for the firm, which is higher than the $24 per share in cash and $2.50 per share in preferred stock management-led buyout offer accepted by the company in March. In a federal filing, CORT said it has rejected Brook's bid after its major shareholders stated their opposition.
Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) reported first-quarter earnings before investment gains and goodwill amortization of $405 million, or $267 per Class A share -- a 23% decline from $523 million, or $345 per share, a year ago (Motley Fool estimates of pro-forma performance). Berkshire shares declined $2300 to $72,000 largely because of a $200 million swing in GenRe reinsurance underwriting performance as well as lower rates and higher promotional expenses at the company's GEICO auto insurance unit. The Fool covered Berkshire's annual meeting earlier this month.
International telecommunications carrier Global Crossing (Nasdaq: GBLX) hung up $3 to $58 3/8 on news that it will merge with US WEST (NYSE: USW). The companies announced plans for a complex deal that will create a new entity with a market capitalization of more than $75 billion. For more on the deal, head back to this morning's Breakfast With the Fool. Shares of US West retreated $4 15/16 to $57 5/16 this morning.
Drug developer Immune Response Corp. (Nasdaq: IMNR) was clobbered for a loss of $4 3/16 to $7 5/8 after an independent panel recommended stopping Phase III trials of its Remune anti-HIV treatment. Immune Response's partner, Agouron Pharmaceuticals (Nasdaq: AGPH), will commence two separate trails of Remune in hopes of earning FDA approval for the treatment.
Cancer and AIDS drug developer U.S. Bioscience Inc. (AMEX: UBS), meanwhile, lost $2 7/16 to $9 9/16 despite announcing that Phase III tests of its NeuTrexin appears to help boost the effectiveness of certain therapies for colorectal cancer. "We are... hopeful that the difference in overall survival times will reach statistical significance at the final analysis,'' said Dr. Cornelius Punt of Holland's University Hospital Nijmegen.
Warehouse discount retailer Costco Cos. (Nasdaq: COST) shelved $2 3/16 to $78 15/16 as a story in this week's issue of Barron's suggested that shares of the company are richly valued and may have difficulty appreciating further.
Shares of global satellite communication company Iridium World Communications (Nasdaq: IRID) added a loss of $1 1/2 to Friday's $4 1/16 drop, reaching $8 15/16 at midday. News of trouble with the covenants of its credit facility driven by slow customer growth began the slide last week.
Internet bank Net.B@nk (Nasdaq: NTBK), a recent Foolish Double, earned a "sell" rating from First Security Van Kasper, losing $4 3/16 to $55 1/2 on the news.
Chip yield management products company KLA-Tencor (Nasdaq: KLAC) gave up $1 7/16 to $50 1/16 following a downgrade to "outperform" from "buy" at Salomon Smith Barney. Chemical mechanical planarization equipment company LAM Research (Nasdaq: LRCX), which was similarly downgraded by analyst Milind Bedekar, moved back $1 3/8 to $29 7/16.
Automaker General Motors Corp. (NYSE: GM) slowed $3 7/8 to $79 1/4 after Morgan Stanley Dean Witter cut its rating on the stock to "neutral" from "outperform." Ford Motor Co. (NYSE: F), which received a similar downgrade from analyst Steve Girsky, slipped $2 7/8 to $57 7/8.
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