The long anticipated initial public offering of RAMBUS INC. (Nasdaq: RMBS) went off today at $12 per share, opened at $23, and finally settled a frantic first day's trading at $30 1/4. Rambus is to the semiconductor memory world as NETSCAPE (Nasdaq: NSCP) was to the software world when it was the hot new company, although Rambus has been around Silicon Valley for much longer as a development-stage company. The company makes a chip-to-chip interface semiconductor that speeds up throughput of dynamic random access memory (DRAM) chips, which is something that INTEL (Nasdaq: INTC) and SILICON GRAPHICS (NYSE: SGI) are happy about, because that speed-up enhances the performance of their processors. Sales of Rambus-enabled semiconductors amounted to $447 million last year, up from $11 million in the prior year, while Rambus revenues are up 125% year-to-date. Whatever the stock does from here, you'll probably be hearing a lot about this company.

Helpdesk software company AURUM SOFTWARE (Nasdaq: AURM) popped up $1 7/8 to $19 after agreeing to be acquired by enterprise management software firm BAAN CO. NV (Nasdaq: BAANF). The deal calls for Baan to issue 0.3559 of its shares for each Aurum share outstanding, valuing Aurum at $21.50 per share as of last night, or between $250 and $300 million. Baan shareholders took that out of Baan's hide today, though, and actually more, as Baan lost a little less than $450 million in market value, dropping $4 7/8 to $55 5/8. Baan has a number of partners in all aspects of enterprise software, from finance to inventory management to product data management, so some investors might be thinking the deal presents a conflict with current alliances. Nevertheless, the move to integrate sales and customer service software with the rest of the Baan suite of products was almost inevitable.

Information technology (IT) consultants and temporary help company REGISTRY INC. (Nasdaq: REGI) gained $2 7/8 to $50 after A.G. Edwards rated the company an "accumulate-aggressive," up from "maintain-aggressive" (whatever that means). The shares have surged from a 52-week low hit last summer. With 3,200 consultants handling the PC, networking, and legacy systems outsourcing needs of mid-sized to Fortune 500 companies, revenues have grown smartly, advancing 50% year-over-year to $86.5 million. This is due to the company's industry consolidation strategy as well as the desire of companies to forget about dealing with IT management in-house. Year 2000 compliance, especially in the banking and financial services sector, will be another revenue driver over the coming three years.

QUICK TAKES: APPLIED MATERIALS (Nasdaq: AMAT) gained $3 5/16 to $63 3/4 on reporting second quarter earnings per share (EPS) of $0.54 and a book-to-bill ratio of 1.1, to which a $182 million order from Taiwan Semiconductor added nicely... Networking products company LARSCOM INC. (Nasdaq: LARS) moved up $2 to $11 on a Cowen & Co. rating upgrade to "strong buy" from "buy"... DRECO ENERGY SERVICES (Nasdaq: DREAF) gained $8 1/4 to $46 3/4 after the Canadian energy equipment manufacturer agreed to merge with NATIONAL OILWELL INC. (NYSE: NOI) in a stock swap valuing each share of Dreco at 1.2 National shares. National gained $2 1/8 to $41 1/4... GOODY'S FAMILY CLOTHING (Nasdaq: GDYS) rose $1 3/4 to $17 5/8 after the company's production and maintenance union members approved a three-year contract after a year's worth of sticky negotiations, according to the Knoxville News-Sentinel... Insurance company CAPMAC HOLDINGS (NYSE: KAP) jumped $3 3/4 to $29 1/2 after its French financial guarantee company received a "Aaa" insurance financial strength rating from Moody's... NIPPON TELEPHONE & TELEGRAPH (NYSE: NTT) lumbered $3 3/4 higher to $46 1/2 after Merrill Lynch named the near-monopoly Japanese telco its "Focus One Stock of the Week"... Recently IPOed wire and cable manufacturer ESSEX INTERNATIONAL (NYSE: SXC) gained another $1 3/4 to $21 1/2 after Lehman Brothers started coverage of the company with a "buy" rating, estimating 1997 EPS at $2.25... ABERCROMBIE & FITCH CO. (NYSE: ANF) rose $1 1/4 to $17 1/4 after reporting Q1 EPS of $0.01 on a 14% increase in quarterly same-store sales... Insurance company USF&G CORP. (NYSE: FG) added $1 1/4 to $21 3/8 on signing a joint-venture real estate deal with teacher's pension fund TIAA-CREF... WHITEHALL CORP. (NYSE: WHT) moved up $1 1/4 to $20 1/8 on announcing Q1 EPS of $0.20, up a penny from last year even though revenues took a major hit in anticipation of an Air Force contract, which it did receive... ENRON GLOBAL POWER & PIPELINES (NYSE: EPP) was pressurized $2 1/8 higher to $32 3/8 on announcing its $0.25 per share dividend... The force was with HASBRO INC. (AMEX: HAS) today as it moved up $1 7/16 to $26 7/8 following its announcement of a contract extension to manufacture Star Wars toys.


As Micron shareholders so presciently called it yesterday with their selling, MICRON ELECTRONICS (Nasdaq: MUEI) did indeed announce last night that third quarter results would be poor. Shares of the electronics contract manufacturer and PC systems maker dropped another $2 3/16 to $16 7/8 today. Although the company did not quantify the degree by which it would miss earnings estimates of $0.31 per share, it did say that sales would fall 10% sequentially and that gross margin would suffer by two to three percentage points. In the worst case scenario, gross profit would be about $69 million, down almost 25% sequentially. Assuming the company holds the line on SG&A expenses and all other income statement items are similar to last quarter, operating EPS would be around $0.14, bringing the full-year estimate down to $1.04 and pricing the company at 16 times earnings, probably a fair multiple at the moment.

Concerns over disk drive magnetoresistive head yields expressed by a Montgomery Securities analyst sent the shares of APPLIED MAGNETICS (NYSE: APM) $3 lower to $26 3/8 today. Elsewhere in the disk drive industry, WESTERN DIGITAL (NYSE: WDC) lost $3 3/4 to $63 7/8 after DMG Technology Group issued a tepid "accumulate" rating on the company while rating QUANTUM CORP. (Nasdaq: QNTM) a "buy." Investors figure that Quantum still has gas left in the engine with easy earnings comparisons, while Western Digital already has been bid up to full value. Forgetting what has happened over the trailing four quarters and just looking ahead, Western Digital was priced at 8.6 times 1998 earnings estimates yesterday and Quantum was priced at 9 times 1998 estimates, where the fiscal year ends three quarters from now. Quantitatively, the values are similar, but qualitatively, there are differences in the favor of Western Digital. Still, though, investors figure there's probably still upside in estimate revisions for Quantum while Western Digital has been efficiently priced.

QUICK CUTS: ARONEX PHARMACEUTICALS (Nasdaq: ARNX) was cut down $1 3/8 to $4 3/4 after the company said the FDA may want additional data for a key drug in Phase III trials, which would push back the company's New Drug Application target date... Voice processing systems maker ACTIVE VOICE (Nasdaq: ACVC) dropped $1 1/4 to $10 1/2 on reporting a 17% increase in Q4 revenues but a loss of $0.24 per share... FOUNTAIN POWERBOAT INDUSTRIES (Nasdaq: FPWR) powered down $2 to $17 1/8 after it reported a Q3 loss of $0.12 per share due to startup and research and development expenses for its new propulsion systems subsidiary... Athletic goods retailer SPORTS AUTHORITY (NYSE: TSA) tripped for a $1 1/8 loss to $17 1/2 after reporting Q1 revenues of $320 million and earnings of $0.08 per share, which missed estimates... Healthcare information systems company MEDIC COMPUTER SYSTEMS (Nasdaq: MCSY) lost $1 to $17 1/8 on an Alex. Brown downgrade to "buy" from "strong buy"... MAXIS INC. (Nasdaq: MXIS) dropped $1 5/16 to $9 15/16 as the edutainment software company continues to bounce around on no apparent news.

An Investment Opinion by Randy Befumo

Enterprise Value Encore

Does the market efficiently price a company's cash and debt in conjunction with the value of its equity? Anyone who uses enterprise value as a way to measure a company's market value rather than simply using market capitalization doesn't think so. Enterprise value is a term coined by securities analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. By adjusting the market capitalization for any debt or cash that a company currently has at its disposal, many believe you get a more precise measure of a company's current market value.

Market capitalization takes the number of outstanding shares of stock and multiplies them by the current share price. For instance, if a company has 10 million shares and each share of stock currently sells for $25 a share, the company has a market capitalization of $250 million. [10,000,000 shares * $25/share = $250,000,000.] When most analysts are discussing the current valuation of a company, they are strictly referring to market capitalization. Market capitalization simply is the current value of all of a company's outstanding shares and is nominally the price that the entire company is selling for at any given moment.

Many further break companies down into four quartiles -- micro, small, medium and large capitalization -- in order to convey an idea of a company's relative size. Micro-cap is normally defined as below $100-$150 million, small-cap as between $100 million and $1 billion, mid-cap as between $1 billion and $5 billion, and large capitalization above $5 billion. The exact sizes change depending on who is doing the defining and how big they want to make each category. With 60% of all companies priced below the $107 million mark according to James O'Shaughnessy's What Works On Wall Street (pg. 39 in the hardback), where you draw the line between micro-cap and small-cap can really affect the relative number of companies in the micro-cap category.

Like most shorthand measures, market capitalization is only an imperfect reflection of a company's current valuation. For instance, if our $250 million company has $150 million in long-term debt, an acquirer would be paying a whole lot more than $250 million if it bought all of the company's stock. Not only would it have to fork over $250 million for the stock, but it would also have to assume $150 million in debt, bringing the acquisition price to $400 million. Long-term debt serves to effectively increase the valuation of a company, making any assessments that take only the stock into account preliminary at best. Every dollar of long-term debt effectively reduces the potential market capitalization of a company by an equal amount as it converts part of the total capitalization of the company from equity to debt. Preferred stock and convertibles that pay interest should be considered debt as well for purposes of calculating the value.

Cash and short-term investments have the opposite effect on the value of a company, decreasing the effective price to an acquirer. If our $250 million company had $50 million of cash in the bank, even though an acquirer would still need to fork over $250 million to get the equity, it would immediately recoup $50 million of those costs, making the effective price only $200 million. It is kind of like buying a wallet for $25 and finding a $10 billion inside. It is this principle that made the leveraged buy-out so popular in the '70s and '80s, when predatory investors would finance the acquisition of a company using the very cash the acquired company had in its bank account. Many companies, including OWENS CORNING (NYSE: OWC), INSILCO (Nasdaq: INSL), AMERCO (Nasdaq: UHAL), have taken on debt to offset their cash position as a way to fend off an acquirer.

Enterprise value takes both debt and cash into account. Simply calculate the market capitalization of the company, add any long-term debt and subtract any cash or short-term investments. [Enterprise value = Market capitalization + long-term debt - cash & equivalents.] Take a company like TRUMP HOTELS & CASINO RESORTS (NYSE: DJT) with a $241.1 million market capitalization and $1.7 billion in debt. To call this company a small-cap would be pushing the boundaries of ludicrous, given the immense amount of debt that it currently holds. An investor who calculates the price-to-sales ratio using market capitalization might be excited by Trump, as the company has a very low 0.17 price-to-sales ratio. Anyone who took into account the debt would quickly see the value here is illusory and that a large part of the potential upside in the shares has been eaten up by the debt the company holds. The company's enterprise value-to-sales ratio is a much less attractive 1.4, in spite of the fact the stock is down more than 66% from its highs.

Simply put, a large debt load is bad. Although it is true that no company ever goes bankrupt due to the debt, by converting potential equity value into debt, a company robs the shareholder long-term to finance current growth. Additionally, when debt gets onerous enough that it gobbles up a good part of cash flow, a company ends up treading water while a similar company without the debt would be growing aggressively. One of the reasons the returns in Owens Corning and other leveraged buyout escapees who took on debt to avoid being acquired have been such terrible performers is because the debt and the need to finance that debt took over the entire focus of the company. By using enterprise value instead of market capitalization to look at the value of a company, investors get a more accurate sense of whether or not a company is truly undervalued relative to the current price an acquirer would have to pay, not the arbitrary capitalization minus any important clarification.


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