Thursday, May 28, 1998
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An Investment Opinion
by Louis Corrigan

Gateway Wins One Against Gates

Direct-seller Gateway Computer (NYSE: GTW), the fourth-largest U.S. manufacturer of personal computers, launched two interesting new initiatives yesterday in its efforts to distinguish itself in the increasingly competitive PC market. Gateway's plan to offer some of its customers a simple choice between Microsoft's (Nasdaq: MSFT) Explorer Web browser or Netscape's (Nasdaq: NSCP) Navigator is making headlines because it depends on concessions squeezed out of Microsoft just two weeks ago in the midst of its negotiations with the Justice Department. Also of interest, though, is the PC maker's new purchase program designed to spark sales and customer loyalty among Gateway's core market of home users by lowering the up-front cost of buying a PC and providing a novel trade-in option.

Customers who decide to use the PC maker's own Gateway.net Internet access service (which claims 100,000 customers) will now be given a chance to choose the browser they prefer. That's important because while PC users can use Navigator today, Microsoft generally prevents manufacturers who license the Windows operating system from offering the rival browser. The software giant also contractually prevents these manufacturers from altering the computer's start-up screen beyond minor co-branding icons. Yet just a few years ago, before Microsoft became hyper-paranoid about Netscape's threat to its dominance of the desktop, PC makers were actually free to create their own opening screens. They also were free to pocket revenues from directing customers to a variety of Internet service providers. Today, Microsoft collects those fees since customers looking to set up Internet access must click on a front-screen icon that takes them to a Microsoft server.

The U.S. government wants to loosen Microsoft's grip on the opening screen, and Gateway's action shows that at least one PC manufacturer wants more freedom. "Microsoft allowed us to do this, but we don't think we should have to ask permission every time we want to make some minor software modification," Gateway chair Ted Waitt told the New York Times. "Windows is an operating system, not a religion." Though some commentators read Microsoft's concession as a sign that the software maker is prepared to compromise, what it really shows is that the government is at least partly right: Microsoft's Bill Gates won't give even minor ground unless pressed by a bigger gorilla to do so.

While Gateway's move on the desktop is partly an attempt to improve service to its customers, it's also designed to foster greater customer loyalty by connecting more users to its Gateway.net services. The company's new "Your:)Ware" pseudo-leasing program represents a similar gambit. Under this program, customers can buy a new PC and attain unlimited Internet access for no money down. They just need to pay at least $49.95 per month over a 48-month term. After two years, they will then have the option of keeping the computer or trading it in for its wholesale value to buy a new model. Financing starts at a 14.9% annual rate. Though the program isn't much of a bargain, it could spur some sales on the margins by folks who can't manage to scrape together $1,000 upfront. More important, both this and the browser initiative show that Gateway is willing to broaden its marketing arsenal in the PC wars, where price had come to seem like the only weapon.


Louisville, Kentucky-based health maintenance organization Humana Inc. (NYSE: HUM) climbed $2 5/8 to $28 7/8 after agreeing to merge with rival United HealthCare Corp. (NYSE: UNH) in a stock swap valued at $5.5 billion. The deal, which values Humana at $32.10 per share, will be neutral to fiscal 1998 per-share earnings but accretive in fiscal 1999. In a conference call with analysts, United CEO Dr. William McGuire said $100 million in cost savings from the merger "is in our sights in 1999." A replay of the conference call is available until Friday at (800) 475-6701. The access code is 392034.

USWeb Corp.
(Nasdaq: USWB), which provides Internet services to businesses, rose $2 1/8 to $22 3/4 after signing a multiyear, multimillion dollar contract with General Electric's (NYSE: GE) NBC Interactive unit. USWeb will provide production and technical services to NBC Interactive's Internet-based programming and assist NBC affiliates with their online projects. As part of the deal, GE will receive a warrant to acquire up to 3.8% of USWeb's common stock.

Gen-X women's apparel retailer The Wet Seal (Nasdaq: WTSLA) tacked on $2 5/8 to $28 7/8 after reporting Q1 EPS of $0.25, which was unchanged from a year ago and in line with the Street estimate. Analysts revised their earnings estimates downward in April after the company said cool weather in California had hurt March sales. Sales during the period came in 9.7% higher than a year ago at $104.8 million.

Information management services provider Donnelley Enterprise Solutions (Nasdaq: DEZI) jumped $7 5/16 to $20 3/8 after agreeing to be acquired by financial information firm Bowne & Co. (AMEX: BNE) for about $105 million, or $21 per share in cash. The purchase price represents a 61% premium to Donnelley's closing price of $13 1/16 per share yesterday.

Advanced Micro Devices (NYSE: AMD) added $1 7/16 to $21 3/8 as the chip maker is scheduled to introduce an updated version of its K6 microprocessor with more multimedia features at the E3 Expo video game conference in Atlanta today.

Healthcare supply management firm McKesson Corp. (NYSE: MCK) rose $2 7/16 to $76 1/2 after signing a five-year comprehensive supply management agreement with managed care provider Columbia/HCA Healthcare Corp. (NYSE: COL). The deal is expected to contribute $1 billion in annual revenues to McKesson once fully implemented.

Spanish language TV programmer Univision Communications (NYSE: UVN) was lifted $2 1/4 to $33 1/4 after Morgan Stanley Dean Witter upgraded the company to "outperform" from "neutral."

Silicon wafer fabrication systems maker Novellus Systems (Nasdaq: NVLS) gained $2 5/16 to $39 1/2 after Merrill Lynch reinstated coverage of the company with a "near-term accumulate" rating.

Online retailer CyberShop International (Nasdaq: CYSP) rose $3 3/8 to $13 1/2 after signing advertising and marketing agreements ranging from 8 months to 18 months with Microsoft's (Nasdaq: MSFT) Microsoft Plaza online shopping channel, high-speed Internet services provider @Home Network (Nasdaq: ATHM), and privately held Internet news provider PointCast Network.

First Palm Beach Bancorp (Nasdaq: FFPB) gained $7 11/16 to $44 3/16 after agreeing to merge with West Palm Beach, Florida-based Republic Security Financial Corp. (Nasdaq: RSFC) in a stock swap valued at about $279 million. The deal is expected to yield cost savings of $9.1 million in fiscal 1999 and will create the largest independent commercial bank in Florida.


Owens & Minor (NYSE: OMI) plunged $3 1/8 to $12 3/8 after announcing after yesterday's close that Columbia/HCA (NYSE: COL) has cancelled its medical and surgical supply distribution contract with the Richmond, Va.-based company. Columbia/HCA's business represents 11%, or $360 million, of revenues for Owens & Minor. The company expects to feel most of the impact of the cancellation next year.

Irvine, Calif.-based consumer finance company First Alliance Corp. (Nasdaq: FACO) tanked $3 11/16 to $9 3/4 after warning that it expects second quarter earnings will fall short of analysts' expectations due to a 10% to 20% drop in retail loan production and a significant increase in the level of prepayments.

Juvenile detention facilities operator Youth Services International (Nasdaq: YSII) plummeted $6 3/8 to $10 5/8 after announcing that it expects to report second quarter earnings that are "substantially less" than expectations. The company anticipates improved results in the third and fourth quarters, but expects that the remaining quarters and full-year 1998 revenues and earnings will fall "substantially below expectations."

Chemical and refining company Lyondell Petrochemical (NYSE: LYO) lost $1 1/2 to $30 1/4 after announcing that it anticipates second quarter results for Lyondell-Citgo Refining Co. will be hurt by unplanned downtime at the older of the refinery's two coking units as well as by previously announced planned maintenance at other units at the refinery. Lyondell Petrochemical expects Q2 EPS to be cut by about $0.10, but still believes it can achieve the earnings target for the year.

DUSA Pharmaceuticals (Nasdaq: DUSA) sank $2 1/4 to $7 9/16 after announcing that the previously announced agreement in principle with a major multinational company cannot be closed at this time. The drug company said it is restarting talks with other potential dermatology alliance partners.

Pfizer (NYSE: PFE) fell another $1 1/2 to $106 1/2 in the aftermath of reporting to the Food Drug Administration six deaths by patients who took its newly approved impotence drug Viagra, which the drug company has warned should not be taken with nitrates, such as nitroglycerin. In what could become good news for the company, The New York Times reported that the Clinton administration has informed state officials that it intends to require Medicaid programs to pay for medically approved uses of Viagra.

Homecare company Apria Healthcare Group (NYSE: AHG) slid $1 1/16 to $7 15/16 after announcing that it will no longer actively seek acquisition offers or a major third-party investment. Instead, the company is restructuring its board of directors. As a result, five directors have resigned to facilitate the process of recruiting new directors.

Movie theater company Carmike Cinemas (NYSE: CKE) was given two thumbs down this morning, falling $1 13/16 to $25 1/2 after warning that it expects second quarter earnings to be "significantly lower" than analysts' estimates, which ranged from $0.48 to $0.62 per share. The company blamed the shortfall on the "disappointing" opening of Godzilla as well as the poor performance of movies in April.


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

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