Wednesday, June 30, 1999
DJIA          10970.80   +155.45   (+1.44%)
S&P 500        1372.66    +21.21   (+1.57%)
Nasdaq         2686.12    +44.01   (+1.67%)
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30-Year Bond   90 4/32   +1 7/32  5.96 Yield


You can run! You can hide! But you can't escape from the Revenge of the Internet IPO. Despite exaggerated media reports of its demise over the past few weeks, the Internet IPO market appears to be alive and kicking, attracting eager Web investors' money like flies to information highway roadkill. Continuing yesterday's 164% first day gain, online mortgage lender E-Loan Inc. (Nasdaq: EELN) picked up another $1 9/16 to $38 9/16 today. Other IPO high-flyers from yesterday also bounded higher, with Internet banking services company nFront (Nasdaq: NFNT) moving up $1 11/16 to $15 3/16 and online business-targeted network services firm Digital Island (Nasdaq: ISLD) adding $6 1/16 to $17 15/16. Among last week's IPO leftovers, US Search.com (Nasdaq: SRCH) uncovered a $1 1/4 gain to $8 and Stamps.com (Nasdaq: STMP) posted a $3 rise to $17 1/2. Looking ahead, things could get more interesting tomorrow when search service Ask Jeeves (Nasdaq: ASKJ) is set to make its much-awaited debut at $12 to $13 per share, up from a prior expected price range of $9 to $11 per stub.

Wireless communications tower rental company Pinnacle Holdings (Nasdaq: BIGT) climbed $4 7/8 to $24 1/2 after agreeing to acquire Motorola's (NYSE: MOT) North American antenna site business for $255 million. Considering the deal includes 1,850 wireless facilities, Pinnacle is paying a little under $138,000 per tower. Pinnacle's tower acquisition strategy has focused on building density in fast growing, high traffic areas, with 80% of its existing towers located in seven Southeastern states serving population centers such as Orlando and Tampa, Florida, Atlanta, Birmingham, Alabama, and New Orleans. While the company merely stated that Motorola towers are located "throughout the U.S. and Canada," the sheer number of towers involved in the deal virtually ensures Pinnacle a quick and easy springboard into other metro areas where it does not yet have an established presence.

QUICK TAKES: Property and casualty insurer Gainsco Inc. (NYSE: GNA) gained $1 11/16 to $5 7/8 after investment firm Goff Moore Strategic Partners L.P. agreed to take a 23% stake in the company for $31.6 million in exchange for the right to manage the company's investment portfolios. Additionally, the company said its Q2 earnings will "be in the range" of the $0.09 per share Gainsco said analysts are currently expecting... E-mail and advanced messaging services firm Mail.com (Nasdaq: MAIL) delivered a $5 7/8 gain to $18 13/16 after saying 14 regional Internet service providers (ISP) in the Eastern and Midwestern portions of the U.S. have signed on to use the company's Web-based e-mail service.

Discount broker National Discount Brokers (NYSE: NDB) traded up $12 1/2 to $57 3/4 after U.S. Bancorp Piper Jaffray started coverage of the company with a "strong buy" rating and a 12-month price target of $90 per share... Optical fiber maker Corning (NYSE: GLW) climbed $4 15/16 to $70 1/8 after saying it will supply 80% of the fiber for a $1.5 billion, 13,000 route mile network being built by broadband provider Interoute Telecommunications PLC to connect 70 European cities.

Global satellite phone and paging company Iridium World Communications (Nasdaq: IRID) was launched $3/4 to $10 11/16 after securing a waiver until Aug. 11 from its creditors relating to the minimum customer and revenue covenants of an $800 million credit facility... Covad Communications (Nasdaq: COVD) rose $11 15/16 to $53 5/16 after Morgan Stanley Dean Witter started coverage of the digital subscriber line (DSL) services provider with an "outperform" rating and a price target of $60 per share... Logistics services company Circle International Group (Nasdaq: CRCL) tacked on $2 1/4 to $21 7/8 following a Deutsche Banc Alex. Brown upgrade to "strong buy" from buy."

Biopharmaceutical company Gilead Sciences (Nasdaq: GILD) gained $3 1/16 to $52 1/4 after saying its new drug application (NDA) to the FDA for adefovir dipivoxil 60 mg, a once-daily treatment for HIV-infected patients, has received "fast track" designation and is expected to receive a six-month priority review for accelerated approval... Self-service coin-counting machines operator Coinstar Inc. (Nasdaq: CSTR) rang up a $3 3/4 gain to $28 11/16 after Goldman Sachs started coverage of the firm by placing it on its "recommend list"... Small business broadband and telecommunications services firm Network Plus Corp. (Nasdaq: NPLS) jumped $4 7/8 to $20 7/8 in its first day of trading after selling 8 million shares in an initial public offering at a price of $16 per share.


Telecommunications firm MCI WorldCom (Nasdaq: WCOM) slumped $7 9/16 to $86 1/16 after PaineWebber analyst Eric Strumingher said the company's Q2 earnings will be no more than $0.45 per share due to lower-than-expected revenues from its voice business. That doesn't seem to be a big deal, since that estimate is still within the $0.39 to $0.46 per share range expected by the 24 analysts surveyed by Zacks. What caught investors' attention, however, was the fact that the bearish comments came just two days after local and long distance company Frontier (NYSE: FRO) cited "accelerated price erosion in the switched long distance business" for an expected Q2 earnings shortfall. While some analysts were quick to point out that folks were perhaps over-reacting to what the voice slowdown would mean to MCI WorldCom's business, the company does not exactly have a lot of wiggle room for unpleasant surprises while trading at a hefty 44 times this year's estimated earnings.

Information technology consultant and Y2K problem-solver Keane Inc. (AMEX: KEA) was dumped $1 3/8 to $22 5/8 after warning that its revenues and earnings per share will fall short of expectations in Q2 and throughout the rest of fiscal 1999 as well. For Q2, the company is forecasting revenues to grow about 6% year-over-year to $280 million to $282 million, with EPS of $0.37, or $0.04 short of the Zacks mean estimate. Full-year EPS is seen falling within the $1.40 to $1.50 per share range, missing estimates of $1.65. Catching the blame for the shortfall is the Y2K business, which is slumping with exactly six months to go until the magical 01/01/2000 date. Keane was never a Y2K one-trick pony, but its management wasn't exactly complaining about being pigeonholed that way when its stock get swept up in the millennium software hype two years ago. But with IT departments currently reluctant to spend for the firm's other computer services ahead of the big switcheroo, Keane is now experiencing the flip side of the Y2K coin.

QUICK CUTS: Coffee retailer Starbucks (Nasdaq: SBUX) reportedly dropped to as low as $26 7/8 in after-hours trading after gaining $1 1/4 to close the day at $37 9/16 today. After the bell, the company said it is revising its fiscal 1999 EPS guidance to $0.54 from the current $0.60 due to weaker than expected growth in its non-retail businesses... Office imaging equipment supplier Danka Business Systems PLC (Nasdaq: DANKY) was spanked for a $1 5/8 loss to $5 5/8 after saying private investment group Schroder Ventures called off its planned purchase of Danka's outsourcing division after IBM (NYSE: IBM) notified the company that it may terminate an existing agreement with the division "at any time."

Athletic shoe retailer The Finish Line (Nasdaq: FINL) tripped $3/4 to $11 1/4 after posting fiscal Q1 EPS of $0.15, down from last year's $0.22 but a penny ahead of the Zacks mean estimate. The firm said its quarterly net same store sales fell 5% from their levels a year ago... Specialty floral and gift retailer Gerald Stevens (Nasdaq: GIFT) wilted $1 1/16 to $12 after a 5 million share common stock offering by the company was priced at $12 per share, or 8% below the firm's closing price of $13 1/16 per share yesterday.

Online advertising agency Modem Media.Poppe Tyson (Nasdaq: MMPT) dropped $2 5/16 to $22 7/8 after saying it has ended its relationship with AT&T Corp. (NYSE: T) because "our philosophies and strategies are not aligned." However, the company said it remains "confident with our ability to meet current analyst consensus estimates for 1999," which happen to call for a loss of $0.21 per share... Mesaba Airlines parent Mesaba Holdings (Nasdaq: MAIR) descended $1 3/8 to $12 3/4 after President and CEO Bryan Bedford resigned. Current Vice President John Frederickson has been appointed interim CEO... Commercial and mortgage lender Webster Financial Corp. (Nasdaq: WBST) slipped $1 1/4 to $27 1/8 after agreeing to acquire bank holding company and Connecticut neighbor New England Community Bancorp (Nasdaq: NECB) for about $220 million in stock.

Sneaker maker Nike (NYSE: NKE) lost $3/4 to $63 3/8 ahead of its fiscal Q4 earnings report. After the close, the company posted EPS of $0.38 (excluding a restructuring charge), topping the First Call mean estimate by a penny... Speech recognition technologies developer Lernout & Hauspie (Nasdaq: LHSP) slid $3/4 to $35 7/16 after agreeing to buy privately held Brussels Translation Group, a partner in its iTranslator Internet and intranet translation product, for $59 million in cash and assumed debt. The purchase is expected to dilute the firm's 1999 earnings but add to its profits in 2000... NCS HealthCare (Nasdaq: NCSS), which provides pharmacy services to long-term care facilities, fell $5/16 to $5 7/16 after saying its fiscal Q4 EPS will be $0.10 (excluding charges), short of the Zacks mean estimate of $0.27. Schroder & Co. downgraded the firm to "perform in line" from "outperform."

An Investment Opinion
by Louis Corrigan

Thoughts on Success and Succession

In October of 1997, Atlanta's Emory University was preparing to dedicate a new building housing its Goizueta Business School. Sadly, Coca-Cola (NYSE: KO) Chair/CEO Roberto Goizueta, the man for whom the school was named, was in a campus area hospital rapidly losing his battle with lung cancer.

In a dark mood, one might say the moral to the story is never let someone name a business school after you until you're already dead. Yet, Emory had long before claimed the Goizueta appellation. The name had simply become synonymous with business excellence. In a real sense, the man was already an institution.

The Cuban-born Goizueta became Coke's president in May of 1980. After just six weeks on the job, he had a strategy for revitalizing the company's creaky bottling companies. A month later he was elected chairman and CEO. In his book, I'd Like to Buy the World a Coke: The Life and Leadership of Roberto Goizueta, reporter David Greising describes just how decisively Goizueta took charge and instituted new performance criteria. Having seriously schooled himself in financial management only during his first weeks on the job as president, Goizueta was nonetheless "shocked to learn how little Coke's managers knew about the financial end of the business," Greising writes. Many operating execs couldn't read a balance sheet.

Goizueta became one of the first executives of a major U.S. corporation to manage a business with a strict focus on "economic profit," or returns in excess of the cost of capital. Reluctant to take on debt under legendary Chairman Robert Woodruff, Coke had instead issued stock to fund acquisitions even while keeping its dividend payments high. That combination left the company with a pristine balance sheet but an annual cost of capital running at 16%. That wasn't just more expensive than short-term bank debt; it was also well above the 10% annual return generated by many of Coke's non-cola businesses.

Enough, Goizueta said. Future projects had to return more than their cost of capital, or they wouldn't get funded. Long-term strategic decisions would be focused on maximizing economic profit. Such moves sparked a revolution and a renaissance. During Goizueta's tenure, Coca-Cola's sales soared from $4 billion to $18 billion. Its stock did even better, exploding in value from just $4.3 billion to $180 billion as Coke's revenues became much more profitable and its global brand and reach exemplary.

But this is not a column about the firm's success under Goizueta. Rather, it's more about the company's failures over the 21 months since his death and what they might tell us about leadership in general. In the weeks prior to Goizueta's death, Coca-Cola's stock traded around $62 a share -- exactly where it closed today.

Despite recently underperforming the market, Coke clearly remains a great company. One could even argue that years of its future greatness had already been factored into its share price in October of 1997 since the radical transformation of its business had long ago occurred under Goizueta. Though now 30% below its all-time high of $89 hit last summer, the stock still trades at 44 times projected FY99 earnings, still pricey by conventional metrics.

Yet, there's no denying that the company has confronted challenging times of late. Today it announced that its second quarter case volume would drop 1% to 2%, the third straight down quarter. Its plan to acquire Pernod's Orangina brands has been slowed by regulatory headaches in France. Its purchase of Cadbury Schweppes' brands outside the U.S has also antagonized various European governments. Worse, it faces an ugly racial discrimination suit filed by a group of African-American employees who claim that whites get the plum jobs at Coke. Then there's the recent debacle in Europe, where lax quality controls led Coca-Cola to sell contaminated beverages that caused dozens of customers in Belgium and France to get sick. Just when this brand-sullying PR nightmare seemed over, Coke announced it's recalling bottled water sold in Poland because it contains mold.

The global financial crisis has pummeled many of Coca-Cola's important developing markets, where the company derives most of its profits. There's not much any manager can do to prop up short-term results in the face of such macro pressure. The goal is simply to continue to build for the long term. And Coke is likely doing just that. But quality control problems? Racial bias suits? Unacceptable.

Such troubles are surprising given that new Chair/CEO Douglas Ivester was handpicked and groomed by Goizueta, who made him CFO in 1984 and then promoted him to president and COO in 1994. Though Coke's board readily granted Goizueta sweet pay packages to keep him on the job beyond his planned retirement date, no one had serious doubts that Ivester was ready for the job when tragedy struck. Indeed, the financial media hailed Wall Street's lack of anxiety over succession at Coke as the keystone to Goizueta's stunning career. The ultimate mark of managerial greatness, it would seem, is the ability to cultivate such a richly talented and cooperative executive team -- and such a clear heir apparent -- that your legacy lives on even if you are ripped untimely from this world.

I don't dispute that judgment. Moreover, Goizueta himself stumbled plenty as CEO, "diworsifying" into the movie business with Columbia Pictures and then giving us the famous New Coke disaster. Even the smartest CEOs have their miscues, but they also exhibit a talent for deftly extricating themselves from trouble. Still, if a legend's protege can't guarantee smooth sailing, what happens to enterprises where the leader's vision and reputation seems singularly crucial to continued success and no talented understudy is waiting in the wings?

What would happen if, God forbid, Fed Chairman Alan Greenspan dropped dead tomorrow? Frankly, it wouldn't surprise me to see U.S. stock markets plunge 10% or more in one day. That might prove an excessive reaction. But given his masterfully pragmatic handling of increasingly complex economic data and his stature among other Fed members, Greenspan today is irreplaceable. The Fed is a less doctrinaire, better institution today because its members have had a chance to watch an artist at work. Yet, that's not the same as being able to forge his paintings. A Wall Street Journal editorial on Monday even pleaded with Greenspan to try to codify his thinking, which has come to look merely like highly informed intuition. That would be a start, but just a start.

Examples are everywhere. Although Jeff Vinik is arguably a great stock picker, he's a nervous trader better suited to run his own hedge fund than the nation's largest mutual fund. Vinik could not begin to replace Fidelity Magellan's Peter Lynch, and that led to several years of serious troubles at Fidelity. More recently, portfolio manager Ryan Jacob left the Internet Fund, which had delivered a stellar one-year return of 272%, due to a dispute over control. Jacob surely can't yet be compared to a Lynch. But his fund has outperformed others focused on the Web, so his departure has rightly led investors to ask whether it's really the same fund without him.

What about America Online (NYSE: AOL) without Steve Case. Yes, Bob Pittman could step in, but isn't the company much stronger with both of them? Or how about Amazon.com without Jeff Bezos? Yes, Wall Street loves current CFO and future chief strategy officer Joy Covey, but Bezos is the man with the ever-evolving vision and infectious laugh. Commentators talk about Berskshire Hathaway (NYSE: BRK.A) carrying an alleged premium thanks to the fact that all-world investor Warren Buffett runs the show. But what's the Bezos premium on Amazon? The Steve Jobs premium on Apple (Nasdaq: AAPL)? The Bill Gates premium on Microsoft (NYSE: MSFT)?

In its Buffett cover story this week, Business Week raises the important question of succession. The article says he's picked two tentative successors, one to manage Berkshire's stock portfolio and another to manage its operating business. "I hope whoever follows me would behave pretty much as I would if I were to live forever," Buffett says. The article also includes an instructive memo from Buffett in which he asks the folks who run his companies to send him a letter "updating your recommendations as to who should take over tomorrow if you become incapacitated tonight."

That's a typically smart move on Buffett's part. Indeed, it should lead us all to think about who's ready to take over our responsibilities, personal and professional, and whether we're doing enough to prepare them for the challenge. Still, the unpleasant reality is that even the best organizations suffer from what I'd call the Michael Jordan syndrome. They may have a truly great, multi-talented Scottie Pippen available to lead the show when Da Man is gone. But to no one's surprise, Pippen couldn't replace Jordan. Indeed, he's probably less of a player now that he can't riff off of his royal Airness. When the great ones leave the league, it's inevitable that their old teams confront some major pitfalls. Often, the once great organizations even wind up in last place where they're stuck rebuilding, looking for new talent.


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