Tuesday, June 22, 1999
DJIA 10764.38 -51.60 (-0.48%) S&P 500 1345.38 -3.62 (-0.27%) Nasdaq 2623.93 -6.35 (-0.24%) Russell 2000 449.01 -0.43 (-0.10%) 30-Year Bond 89 -12/32 6.05 Yield

An Investment Opinion
by Rick Aristotle Munarriz

Salon.com Open For Business

With a clip here and a snip there, Salon.com (Nasdaq: SALN) completes its makeover into a publicly traded company today. While this could have been just another obscure Net stock offering -- a hair Net if you will -- this was no ordinary do. This is W.R. Hambrecht & Co.'s second shot at its OpenIPO underwriting.

The process, with a slogan of "Level the Playing Field," is simple. Rather than allocate shares through full-service brokers who then dole out lots to their fattest accounts, Hambrecht lets all of its accountholders bid for a stake in the upcoming IPOs. Other discount brokers like Lombard and Investrade also have access to Hambrecht's OpenIPO deals. Dutch auction rules apply, with interested parties submitting offers in a set range and the price of the lowest winning bid serving as the buying price for all successful bidders.

Yet this seemingly utopian method of offering universal access to pre-public stocks is imperfect. In April, Hambrecht rolled out its first IPO, Ravenswood Winery (Nasdaq: RVWD). Despite offering just one million shares, the profitable Californian winemaker had to settle for $10 1/2 a share -- the bottom rung of the offering range. Over the past two months the stock has traded in a tight range giving flippers nothing to flip about. It has not closed below the offering price but it has also failed to trade above $11. A Ravenswood cork may pop but the stock certainly hasn't. Volume is also as dry as a vintage Chablis. Yesterday just 4,700 shares of Ravenswood changed hands.

Like Ravenswood, Salon.com was also priced at the low end of its $10 1/2 - $13 1/2 range. Bill Hambrecht, once half of the Hambrecht & Quist (NYSE: HQ) team, is not off to a blazing start. Is anyone surprised? While Bill and others like Wit Capital may be quick to grab headlines, they are not grabbing headliners. It's like that ominously grim corner in a high school dance where partners who can't find anybody else eventually pair up. Will it take Hambrecht going public ala OpenIPO to justify the venture?

While Salon.com's website offers an interesting attempt at community by subdividing itself into 10 different areas like Travel, Health, and the condescendingly cute Mothers Who Think, it amounts to little more than an iVillage (Nasdaq: IVIL) knockoff. Salon.com lost $3.8 million in fiscal 1998 and lost $4.3 million over the first nine months of fiscal 1999. Losses are expected to widen. A pedicure sans pedigree perhaps? Then again, with 10.7 million shares outstanding after today's 2.5 million share offering, its market capitalization is also a ninth of iVillage's billion-dollar price tag. But a lot is riding on today's deal since next month's Hambrecht offering of gourmet edible gift e-tailer GreatFood.com seems to offer even less promise.

Like I argued in last month's Merrill Lynch (NYSE: MER) Dueling Fools, "an IPO accessible to everyone will be bid up by no one." The open market approach appears idealistically sound but is flawed in application. While Hambrecht charges as low as half the fee of mainstream underwriters, the companies taking this route to public life are paying an even dearer price. From the lack of an opening day pop (since everyone who wanted in probably got in already) to the lack of institutional price support early on and the absence of predictably glowing yet effective underwriter reports later on, the short-term upside is clearly limited. While Hambrecht will put out its own research reports, it's hard to imagine any other brokerage house initiating coverage. After all, it is in their best investment banking interest to see Hambrecht fail.

Right now, Salon.com is critical to Hambrecht's future success. As the first true Internet company being offered by the upstart firm with the familiar name, if Salon.com bucks the trend and fares favorably, even more credible entities might choose the OpenIPO way. So, for now, if Salon.com doesn't look good, Hambrecht doesn't look good.


Vitamin and nutritional supplements retailer General Nutrition Centers (Nasdaq: GNCI) bulked up with a $11/16 gain to $20 11/16 after forming a 10-year partnership with online pharmacy drugstore.com along with drugstore chain Rite Aid (NYSE: RAD). Under the deal, GNC will acquire an 8% stake in drugstore.com and Rite Aid will get a 25.3% stake. In return, Rite Aid and GNC's co-branded website will be folded into drugstore.com. Rite Aid gained $1/2 to $25 9/16 this morning.

Internet protocol and Web hosting services provider Concentrix Network Corp. (Nasdaq: CNCX) gained $1 3/4 to $34 1/4 after software giant Microsoft (Nasdaq: MSFT) agreed to make a $50 million investment in the company and extend its network supply service contract for WebTV for two more years. In return, Concentrix will develop and co-market Windows NT Server-based application hosting services and a co-branded MSN portal for dial-up and digital subscriber line (DSL) users. The company also announced a 10-year deal whereby top shareholder Williams (NYSE: WMB) will buy $35 million of Concentrix services in exchange for Concentrix's purchase of $175 million in Williams network capacity.

Online software retailer Digital River (Nasdaq: DRIV) swam up $1 13/16 to $26 5/8 following a Dain Rauscher Wessels upgrade to "strong buy" from "buy."

Carbonated beverage maker Coca-Cola (NYSE: KO) advanced $2 1/2 to $64 1/16 on indications that the recent European health scare involving its products is all but over. Today, CEO Douglas Ivester publicly apologized for the company's handling of the scare in advertisements in Belgian newspapers.

Phone.com (Nasdaq: PHCM), which delivers Internet-based services to wireless telephones, rang up a $7 5/8 gain to $53 5/8 after Italian wireless services provider Omnitel Pronto Italia agreed to license the company's wireless application protocol (WAP)-compatible UP.Link Server Suite product for its new Internet portal.

Office furniture maker Knoll Inc. (NYSE: KNL) moved up $1 13/16 to $26 5/8 after accepting a sweetened offer from a group including investment firm Warburg, Pincus and members of Knoll's management team to acquire the 40% stake in the company they do not already own for a price of $28 per share in cash. The bid is an improvement from the $25 per share the group had originally offered in March.

Irish pharmaceutical company Elan Corp. (NYSE: ELN) rose $1 7/8 to $30 11/16 amid takeover speculation, much of which centers on a possible buyout by British drug maker Glaxo Wellcome (NYSE: GLX).

Property and casualty insurer and reinsurer Chartwell Re Corp. (NYSE: CWL) picked up $4 3/8 to $19 1/2 after agreeing to be acquired by fellow reinsurer Trenwick Group (Nasdaq: TREN) for $368 million in stock, assumed debt, and reserve protection to be purchased by Chartwell. The deal values Chartwell at $23.82 per share, a 57% premium to the company's closing price of $15 1/8 per share yesterday.


Abbott Park, Illinois-based diversified health care company Abbott Laboratories (NYSE: ABT) dropped $1 5/16 to $42 7/8 after agreeing to buy Alza Corp. (NYSE: AZA), a Palo Alto, California-based drug maker focused on research, in a stock swap valued at about $7.3 billion, or $53.025 a share. That's a 14.6% premium to Alza's close yesterday of $46.25. For more on the news, head back to today's edition of Breakfast With the Fool.

Textiles designer, maker, and marketer Dan River Inc. (NYSE: DRF) flowed down $1 1/8 to $8 1/4 after reporting that it expects Q2 EPS of between $0.13 and $0.15, missing First Call's four-analyst $0.18 consensus. "We expected to see a pickup in order activity for our apparel fabrics business by now but it just hasn't happened," said Chairman and CEO Joseph Lanier, Jr. "We now expect our apparel fabrics business to remain under pressure for the remainder of the year.''

Auto towing, impounding, and storage firm United Road Services (Nasdaq: URSI) gave up $2 1/4 to $4 11/16 after saying it expects Q2 EPS of between $0.05 and $0.08, missing First Call's six-analyst $0.16 consensus projection, because of disappointing performance with the company's towing line business. In further news, CEO and Chairman Edward Sheehan will step down; director Donald Moorehead, Jr., become chairman. The CEO seat is not yet filled.

Staffing services company Romac International (Nasdaq: ROMC) let go $2 3/16 to $7 7/16 after late yesterday afternoon saying it expects Q3 and Q4 revenue growth to underperform market expectations by about 5%. The company also expects break-even earnings for the balance of 1999. First Call's analyst survey reported projected EPS in excess of $0.20 in each of the next three quarters.

Shares of chemicals giant DuPont (NYSE: DD) faded $1 7/8 to $68 5/16 this morning. Late yesterday afternoon, the company said the European Commission okayed the company's planned $40 per share cash-and-stock buyout of seed producer Pioneer Hi-Bred International (NYSE: PHB).

Networking products maker Cabletron Systems (NYSE: CS), which reported fiscal Q1 EPS of $0.04 before charges, lost $1 3/8 to $14 3/8 this morning. The company reported break-even earnings last year, while Wall Street was looking for a penny's profit. The company's progress and the changeover to new CEO Piyush Patel was chronicled in a Foolish (NYSE: SYX) fell $1 1/8 to $10 3/4 after saying it expects to report Q2 EPS of between $0.18 and $0.20, well off First Call's $0.31 three-analyst estimate. Sales of the company's higher-margin products were slower than expected, overpowering better-than-anticipated PC, Internet, and relationship marketing sales. "It is clear we are moving in the right direction," said Chairman and CEO Richard Leeds, "but it will take additional time for our impressive sales growth to reach the bottom line."

Paper maker Consolidated Papers (NYSE: CDP) lost $3/4 to $25 13/16 after saying it expects second-quarter earnings to fall short of analysts' estimates due to pressure on sales from lower-priced imports of coated printing papers. Wall Street's consensus estimate is $0.19 per share. Company executives said pressure on sales from lower-priced imports of coated printing papers was the primary culprit.

Title insurance and real estate services firm First American Financial (NYSE: FAF) fell $15/16 to $16 3/8 after Advest Inc. downgraded the stock to "buy" from "strong buy." The brokerage set a 12-month share price target of $25.


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