Wednesday, May 19, 1999
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Online health and medical information has become the phrase of the week, as shares of Healtheon Corp. (Nasdaq: HLTH) shot up $24 3/8 to $80 1/4 after confirming merger discussions with WebMD. According to The Wall Street Journal, the companies are expected to announce an all-stock merger valued at about $5.5 billion that will create a website linking doctors and patients and promoting health-related e-commerce. The deal would reportedly also include investments of some $500 million from the likes of Microsoft (Nasdaq: MSFT), Excite (Nasdaq: XCIT), and Intel (Nasdaq: INTC). Earlier this week, shares of Medical Manager Corp. (Nasdaq: MMGR) took off sharply on news of plans to be bought by healthcare e-commerce services and filtration systems firm Synetic (Nasdaq: SNTC) in a stock swap valued at $1.4 billion. Medical Manager was up $3 1/8 to $54 1/16 today, while Synetic moved up $4 to $98. Another player, adam.com (Nasdaq: ADAM), picked up $4 3/4 to $23 3/4 today, while IDX Systems Corp. (Nasdaq: IDXC), considered by some the "first mover" in the Internet-based healthcare information systems field, traded up $3 3/16 to $24.

Direct marketer Creative Computers (Nasdaq: MALL) drew a $9 1/16 gain to $39 1/8 after announcing definitive plans to distribute its remaining holdings in Internet auctioneer uBid (Nasdaq: UBID). Creative Computers will spin off its 7,329,883 uBid shares to its own shareholders on June 7. The exact ratio of the dividend can't yet be determined, but would be approximately 0.7 uBid shares per Creative Computers share based on the current number of shares outstanding. Considering that uBid closed up $2 1/16 today at $48 1/16, the implied value of this dividend is roughly $33.64 per Creative Computers share ($48 1/16 x 0.7). That value will of course fluctuate with the price of uBid, which so far this year has changed hands at prices ranging from $43-$138. The move will more than quadruple the number of uBid shares in public hands.

QUICK TAKES: Electronic components maker Raychem Corp. (NYSE: RYC) moved up $5 1/8 to $36 1/4 after diversified manufacturing and services company Tyco International (NYSE: TYC) agreed to buy the company for $37 per share, or $2.87 billion, in cash and stock. The price represents a 19% premium to yesterday's close... Subprime residential home mortgage lender Long Beach Financial Corp. (Nasdaq: LBFC) surfed up $2 1/16 to $14 3/8 after Washington Mutual (NYSE: WM) agreed to buy the company for $15.50 per share in either cash or stock. The offer represents about a 26% premium to yesterday's closing price.

International telecommunications and Internet telephony services firm IDT Corp. (Nasdaq: IDTC) rang up gains of $7/8 to $28 1/8 after its Net2Phone subsidiary filed for an IPO. Net2Phone, which allows customers to make long-distance telephone calls over the Internet, did not mention the number of shares or a price range for the offering... Medical products company Mentor Corp. (Nasdaq: MNTR) picked up $3/8 to $17 3/4 after the company authorized a buyback of up to four million shares of company stock on the open market, about 16% of the total outstanding. Mentor has bought back and retired more than a million shares over the past 12 months.

Semiconductor automatic test equipment manufacturer Teradyne (NYSE: TER) moved up $4 1/4 to $58 1/4 after National Semiconductor (NYSE: NSM) bought test systems for its single-chip scanner and DVD-on-a-chip devices. No terms were mentioned... German enterprise software company SAP AG (NYSE: SAP) rose $2 5/8 to $36 1/4 after Lehman Brothers upgraded its rating on the company's stock to "buy" from "neutral." The brokerage set a 12- to 16-month share price target at about 40% above current levels... Dental managed care company First Commonwealth (Nasdaq: FCWI) added $5 1/8 to $23 3/4 after Guardian Life Insurance Co. agreed to buy the company for $25 per share cash, a 34% premium to yesterday's closing price.

Process manufacturing optimization software developer Aspen Technology (Nasdaq: AZPN) rose $1 17/32 to $10 1/16 after two oil joint ventures selected Aspen software in a "a multimillion dollar" agreement... Enterprise decision support systems (DSS) software developer MicroStrategy Inc. (Nasdaq: MSTR) took on $2 1/4 to $22 1/4 after IBM (NYSE: IBM) agreed to be worldwide reseller of the company's products... Medical devices maker and developer STAAR Surgical Co. (Nasdaq: STAA) shone $1 5/16 to $11 5/16 after the company's first Toric implantable contact lens was placed in a patient's eye in Munich... Broadband Internet access company Redback Networks Inc. (Nasdaq: RBAK) finished up $6 3/8 to $90 1/2, tacking on to yesterday's big IPO gain of $61 1/8. Redback sold 2.5 million shares to the public at $23 each.

Chinese airline China Southern Airlines (NYSE: ZNH) ascended $15/16 to $8 11/16 on news that it was launching a $10 million project in connection with Sabre Group (NYSE: TSG) for a $10 million operations control center... Healthcare specialty finance firm DVI Inc. (NYSE: DVI) improved $1 1/2 to $16 1/2 after its Merchant Funding division announced the arrangement of an $8.5 million loan to an Iowa company for three new assisted living facilities... Payment, convention, and event services company Viad Corp. (NYSE: VVI) rose $2 5/16 to $31 after agreeing to sell its airline catering business to SAirGroup, the operators of Swissair. Terms were not disclosed.

Information technology and systems integration services firm Computer Sciences Corp. (NYSE: CSC) logged on $4 5/16 to $64 after extending its business relationship with Baltimore's Fidelity and Guaranty Life Insurance Co. by 5 years and $425 million to 18 years and $540 million... Specialty chemicals and engineered materials provider Engelhard Corp. (NYSE: EC), which priced a 28 million share secondary offering at $19.50 per share -- last night's closing price -- bubbled up $1 1/8 to $20 5/8... Tupperware Corp. (NYSE: TUP) freshened $1 3/16 to $23 1/8 on news of a pact to air "several" television specials on the Home Shopping Network by the end of the year aimed at boosting awareness of its famous "party-plan" selling system.


Shares of floorcoverings retailer Maxim Group (NYSE: MXG) fell like a kitten on linoleum today as the company delayed the filing of its annual report until May 25 at the latest, something investors generally don't like to hear, since they fear that the auditors are having problems working through the accounting. Another thing investors don't like is the phrase "readjusted earnings," which they also heard from Maxim today: the company said it will revise results for Q2, Q3, and Q4 of 1999 downward because of revenues that should have been deferred. The results of the restatements aren't yet available, and although CEO A. J. Nassar said the changes "will not have a material impact on the Company's operations and financial condition" and guided investors toward improved future results as the revenues are realized in later periods, a skeptical market still pulled the shares down $1 3/8 to $7 11/16.

Shares of telecom equipment maker PairGain Technologies (Nasdaq: PAIR) lost $15/16 to $13 7/8 today, possibly because of news, first reported by Bloomberg last night, that the U.S. Attorney's office views PairGain Chairman Charles Strauch and CFO Charles McBrayer targets of an ongoing criminal investigation into losses by a Beverly Hills money-management firm. Although the government has had its sights on the company for some time, a PairGain filing with the SEC Monday was the first time specific individuals have been named. No final decision has been made whether to pursue charges against the company, Strauch, or McBrayer.

QUICK CUTS: Data network storage device maker Network Appliance (Nasdaq: NTAP) moved back $3 3/8 to $50 1/2 after reporting fiscal Q4 EPS of $0.13, better than last year's $0.09 but flat with market estimates. Operating margins fell slightly to 18.7% from 19.5%... Credit card lender Providian Financial Corp. (NYSE: PVN) lost $17 3/16 to $106 15/16 following reports in the San Francisco Chronicle that the company is under investigation by the city District Attorney's office for potential consumer fraud... Online community operator theglobe.com (Nasdaq: TGLO) spun away $2 1/16 to $20 1/16 on news of its plans to sell six million shares of company stock to the public at $20 each, about a 10.7% discount to yesterday's closing price.

Airline stocks descended broadly today following the late Tuesday release of data by the Air Transport Association that said April per seat revenues posted a steeper loss than expected. United Airlines operator UAL Corp. (NYSE: UAL) gave up $5 7/8 to $74 11/16, while American Airlines parent AMR Corp. (NYSE: AMR) fell $2 1/8 to $69 3/16, Continental (NYSE: CAL) descended $3 1/16 to $42 1/2, Delta (NYSE: DAL) gave up $3 3/16 to $61 1/2, and U.S. Airways (NYSE: U) retreated $2 3/4 to $52 1/8... Janitorial and maintenance services company ABM Industries (NYSE: ABM) moved back $1 9/16 to $28 1/16 after The Wall Street Journal said the company may have to wait until 2001 to reach $2 billion in sales, a year longer than it hoped.

Department store chain Nordstrom (Nasdaq: NOBE) lost $1 3/8 to $32 3/4 today. The company announced plans to list its stock on the New York Stock Exchange beginning in June. Nordstrom will trade with the symbol "JWN," the initials of founder John W. Nordstrom... Health-care and deathcare firm Hillenbrand Industries (NYSE: HB) gave up $3 5/8 to $43 15/16 after the company guided investors toward fiscal Q2 EPS that could be as much as $0.12 below First Call's $0.71 consensus estimate... High-rise heating and cooling systems company Dualstar Technologies (Nasdaq: DSTR) dimmed $1 1/8 to $5 5/16. Fiscal Q3 EPS jumped to $0.10 from $0.01 last year but revenues fell 12.5% to $20.3 million as the company was "more selective in bidding new work in order to meet certain profitability criteria."

Wavelength division multiplexing components maker E-TEK Dynamics (Nasdaq: ETEK) lost $6 3/16 to $36 15/16 after First Albany started coverage of the company with a "neutral" rating... Wide-area network access products company ACT Networks (Nasdaq: ANET) moved back $2 1/2 to $21 after Kaufman Brothers cut its rating on the stock to "accumulate" from "buy."

An Investment Opinion
by Louis Corrigan

Lycos Held Hostage by Speculators

Lycos (Nasdaq: LCOS) shareowners -- if you can call them that -- are singing their happy songs today. Last night, this leading Internet hub reported upbeat third quarter earnings, which pumped its stock up $4 1/16 to $117 today. Balancing out such good news, though, are the implications of the recently nixed deal to merge Lycos with properties controlled by Barry Diller and USA Networks (Nasdaq: USAI). The question raised by that debacle is simple: Are Lycos investors -- and Internet investors in general -- prepared to own actual businesses rather than simply trade stubs?

First the good news. Lycos' revenues hit $35.1 million, up 132% from the year-ago period and 15% versus the second quarter of FY99. Advertising revenues doubled to $23.6 million while revenues from "e-commerce, license and other" more than tripled to $11.5 million from $3.4 million last year. Year-to-date, the company's revenues now stand at $90.4 million, up 144%. Excluding goodwill amortization charges from recent acquisitions, the firm reported a loss of $1.0 million, or $0.02 per share. That improved on the Q2 loss of $1.5 million, or $0.03 per share, while also besting the consensus earnings estimate calling for a loss of $0.03. Including amortization charges, the net loss was $13.3 million or $0.31 per share.

Among the highlights, Lycos signed up $200 million in new commerce business in the quarter, pumping deferred revenue up 138% to $148 million. Along with contracts with Audio Book Club (AMEX: KLB), AutoByTel (Nasdaq: ABTL), and Auto Connect, Lycos inked a $52 million pact that will make WebMD -- in acquisition talks with Healtheon (Nasdaq: HLTH) -- its exclusive provider of healthcare-related content and e-commerce. Traffic to the Lycos Network of sites (which include the Lycos portal, the HotBot search engine, and community sites Tripod and Angelfire -- 4 of the top 20 Web sites), also increased nicely. Daily page views rose 20% during the quarter to 60 million and the Lycos Network grew its base of registered members by 29% versus Q2 to 27 million. Lycos now reaches 31.9 million unique users or about 52% of all Internet users.

Yet, maybe the most enticing news was that the company plans a 2-for-1 stock split in late July. After all, stock splits have become the easiest way to pump up a stock. And like ticket scalpers, Lycos "shareowners" seem to have little interest in the main event -- in this case, building a business. They just want the highest price for their stubs.

Led by David Wetherell, Chair and CEO of Internet venture capital firm CMGI (Nasdaq: CMGI), which owns about an 18% stake in Lycos, this Internet portal's investors examined the merger offer from USA Networks with all the rationality of whining babies that had lost their bottles. These speculators live in a world colored by blind, unthinking greed, a world that's completely divorced from the ugly realities that make capitalism actually work. That's why the collapse of the Lycos-USA deal seems to represent the triumph of speculation over actual e-commerce, the triumph of Internet hype over business reality.

It's important to recall that Lycos CEO Bob Davis and his entire team were enthusiastic supporters of the deal, which would have given Lycos shareholders an initial 30% stake in a new firm consisting of the Lycos properties, Ticketmaster Online-CitySearch (Nasdaq: TMCS), and USA's Home Shopping Network and First Auction site. The new $18 billion entity would have had roughly $1.5 billion in annual revenue, $165 million in cash flow, a profit before goodwill amortization, and a clean balance sheet with about $250 million in cash. Compare these numbers with Lycos' latest earnings report, and it's clear that Diller was bringing a lot to the merger.

Davis saw the deal as a chance to create an e-commerce powerhouse. As he said in February, "I had dialogue with a pretty wide spectrum of different companies. Traditional media companies provided to Lycos and its shareholders one and only one asset: it provided promotion. The USA deal gives Lycos an actual e-commerce infrastructure along with the promotional synergies." Thanks to its Home Shopping assets, USA Networks has an existing credit card database of 20 million customers plus the distribution capacity to process one million transactions and ship 200,000 orders per day. So Diller could have done more than expand Lycos' reach; he could have maximized the financial potential of its current audience by creating a seamless integration of content and commerce all within the same firm. It was a deal that promised genuine business synergies.

As Lycos director, Wetherell initially backed the deal, announced when Lycos shares traded at $127, or 129% above where they began the year. No surprise there given that Wetherell was happy to sell 900,000 Lycos shares (9.4% of CMG's stake) in January for $52 a share. Clearly, this would have been an insane thing to do if Wetherell were convinced that Lycos is worth double or triple that amount. But the negative reaction to the merger announcement quickly cut Lycos to $77 a share.

When it became apparent USA Networks would not sweeten its offer, Wetherell said Diller was stuck in an old-media mindset and just doesn't get the Internet. In one sense, that's right since Wetherell is the patron saint of Internet speculators. The Internet to him is about getting as rich as possible before the party ends. Apparently, Wetherell had himself underestimated the greed that drives speculators into a Lycos at $145 a share looking for greater fools. Now he gets the Internet.

Once Wetherell quit the Lycos board and pledged to vote against the deal, though, Lycos' fate was left in the hands of daytraders. The Wall Street Journal has reported that 65% of the stock was in the hands of such traders. Davis put the figure at no more than 35%. Even so, about 20% of shareholders typically fail to cast their votes in such proxy battles, becoming automatic nays. So with CMGI's 18% stake already in the nay camp, Diller and Davis needed to persuade a substantial contingent of speculators to win a majority. That, they realized, was impossible. As Davis told Reuters recently, "It's the first transaction anywhere that tried to put together new media assets and traditional assets, and I think a lot of people, including myself, misjudged the market reaction to that type of deal."

Ordinarily, when a board signs a merger deal that's contrary to the interests of shareowners and those investors flatly reject it, one chalks it up as a victory, just market capitalism in action. The question, though, is whether Lycos' owners have made the best business decision, the one that actually maximizes their long-term payoff.

Traders bewitched by the idea of e-commerce seem to believe it can be achieved with merely a twitch of the nose. Talk of distribution centers, capital expenses, and all the rest of the real stuff needed to make sales happen elicits groans. And Lycos isn't the only Internet stock to be clocked recently after facing up to the unbearable heaviness of being an e-commerce contender. Amazon.com (Nasdaq: AMZN) shares lost over a third of their value after CEO Jeff Bezos said the firm would invest heavily in building an infrastructure. Amazon's stock was even whacked for a quick 8% loss on Monday after the company reported it would offer 50% discounts on bestsellers, a move that wasn't just predictable but absolutely essential to Amazon's long-term strategy. Amazon follows its plans; investors wince. Go figure.

Charles Conn, CEO of Ticketmaster Online-CitySearch, had it right when he told Bloomberg, "It is short-sighted on the part of Internet investors, including CMGI, not to create the kind of businesses that I think will emerge in the future, that join together traditional broadcast assets... with Internet assets and commerce in a more natural way." True, Lycos and USA walked away with an attractive joint-marketing pact. Yet, Conn is probably right about that as well. "I don't think any of the portal companies have done a good job integrating commerce naturally into people's information-gathering and entertainment experience, and I think it will be harder to do that at arm's length than it would have been in an integrated fashion."

Given the way Internet mania is breeding fantasists at an astonishing rate, I'm not stupid enough to predict that it will all end badly, at least not anytime soon. But the Lycos episode ought to give sensible investors pause because it suggests that a tremendous amount of power currently resides in the hands of folks who, at best, have a farcical sense of how the Internet will develop. It suggests that Internet speculators simply haven't given much thought to what they're buying or why. They just want the stocks to keep going up. What will their reaction be when they're forced to get a clue?


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