Monday, June 28, 1999
DJIA 10673.51 +120.95 (+1.15%) S&P 500 1329.68 +14.37 (+1.09%) Nasdaq 2566.04 +13.39 (+0.52%) Russell 2000 446.35 +3.24 (+0.73%) 30-Year Bond 88 12/32 +17/32 6.10 Yield

An Investment Opinion
by Warren Gump

French Soak Up Water Companies

Today's announcement that Suez Lyonnaise des Eaux would purchase Nalco Chemical Co. (NYSE: NLC) for $53 per share, or $4.5 billion, continues the French invasion of the U.S. water and water treatment market. On the news, Nalco stock jumped $8 15/16 to $51 7/16 in morning trading. This deal comes on the heels of Suez Lyonnaise's announcement earlier this month that it would acquire Pittsburgh-based Calgon Corp., a water chemicals unit of Imetal SA. In April, Vivendi SA, another French firm, picked up U.S. Filter Corp., the world's largest water treatment company for $7.9 billion.

More interesting than the rapid consolidation in the water treatment business (and the fact that most of this consolidation is being facilitated by non-American companies), I am interested in the currency being used in these acquisitions. The French firms are using cash instead of stock to complete these deals.

When a company issues stock in a transaction, it is spreading the gain and pain of future results among future shareholders. In effect, there is a contingency feature of the deal, where shareholders of the target company receive more compensation if the deal works out and less if the deal falters. For example, shareholders of ITT Corp., which was acquired by Starwood Hotels (NYSE: HOT) in 1998, who accepted only Starwood stock in the takeover now hold shares worth about $45 per old ITT share. That's a far cry from the $85 face value of the deal, since Starwood's stock has plummeted since the consummation of the merger. In this less-than-stellar deal, ITT shareholders taking stock have seen the deal's value almost halved.

With an all cash deal, there is no contingency. An acquirer is boldly stating that they believe a target is worth at least the acquisition price in cash, no ifs, ands, or buts. If enough cash is not on hand to complete the deal, bankers or other shareholders needed to finance the deal must also agree on the transaction's merits. In my mind, a cash acquisition is much more powerful statement about the value of another company than a stock purchase.

To be fair, a major reason that cash currency is being used in these water-related transactions is that neither Suez Lyonnaise nor Vivendi are publicly traded in the U.S. To issue stock here in the U.S., they would need to register shares, which would most likely delay closing on the deals. Nonetheless, they are proceeding with cash acquisitions.

What do I take away from the deals in the water business? It reinforces my belief that there are some great investment opportunities in some of our nation's "old world" industries that have been overlooked by many investors' frenzy to own only technology and Internet-related stocks. While these two sectors are certainly exciting, there are plenty of other sectors to evaluate. Investors seeking some portfolio diversification might want to check industries experiencing cash acquisitions to find promising, potentially undervalued prospects.


Online healthcare information company drkoop.com Inc. (Nasdaq: KOOP) flew $2 5/16 higher to $16 5/16 after setting up a Clinical Trials Information Center on its website with pharmaceutical contract research organization Quintiles Transnational (Nasdaq: QTRN), which will give drkoop.com users access to information about clinical drug trials and trial candidate pre-screening services.

Industrial electronic components distributor Marshall Industries (NYSE: MI) leapt $15 9/16 to $35 11/16 after agreeing to be acquired by value-added components reseller Avnet Inc. (NYSE: AVT) for $39 per share in either cash or Avnet stock. The purchase price is nearly double Marshall's closing price of $20 1/8 per share Friday. Avnet fell $3 1/4 to $44 9/16 this morning.

Drug store chain Walgreen Co. (NYSE: WAG) added $1 3/16 to $28 3/4 after posting fiscal Q3 EPS of $0.16, up from $0.13 a year ago and a penny ahead of the First Call mean estimate. The company said it will launch its full-service Internet pharmacy in September, which will allow customers to submit new or refill old prescriptions for mail delivery or pick-up at any of the firm's brick and mortar stores.

Biopharmaceutical company Enzon Inc. (Nasdaq: ENZN) climbed $1 3/16 to $18 after reworking a nine-year-old licensing agreement for its PEG-Intron product with Schering-Plough (NYSE: SGP), which will entitle Enzon to a higher effective royalty rate. PEG-Intron is a longer-lasting version of Schering-Plough's anticancer/anti-infective Intron A, which is being developed to treat hepatitis C and various cancers.

Electronic payment information processor First Data Corp. (NYSE: FDC) picked up $3 3/16 to $48 5/8 after Credit Suisse First Boston raised its rating on the firm to "strong buy" from "buy" and set a 12-month price target of $60 per share.

Web-based customer support software provider Silknet Software (Nasdaq: SILK) slinked its way $2 5/8 higher to $34 1/8 after signing a sales and marketing agreement with enterprise interaction management products developer Genesys Telecommunications Laboratories (Nasdaq: GCTI). Under the arrangement, Silknet's e-business applications will be combined with Genesys' Internet Suite product to allow customers to conduct business over multiple communication channels.

Specialty pharmaceuticals company Jones Pharma (Nasdaq: JMED) tacked on $2 11/16 to $37 7/16 after BancBoston Robertson Stephens raised its rating to "strong buy" from "buy" on the view that the company's Q2 revenues and margins will "significantly exceed" prior expectations.

Milwaukee-based natural gas and pumping equipment company Wicor Inc. (NYSE: WIC) moved up $1 7/16 to $28 after agreeing to be acquired by electric and gas utility Wisconsin Energy Corp. (NYSE: WEC) for $1.5 billion in cash, stock, and assumed debt. The deal is expected to add to Wisconsin Energy's earnings in 2001. Intimate apparel maker Warnaco Group (NYSE: WAC), which would round out a possible WIC-WEC-WAC combo, was little changed this morning.

Specialty packaging and tissue company Chesapeake Corp. (NYSE: CSK) sailed $3 higher to $37 15/16 after saying it will combine its commercial tissue paper products unit with the similar business unit of paper and lumber company Georgia-Pacific (NYSE: GP). Georgia-Pacific will take a 90% stake in the venture for $730 million, which Chesapeake will use to buy back 4 million to 7 million shares, pay down debt, and make acquisitions.


Plastics company Milacron Inc. (NYSE: MZ) poured out $2 5/16 to $18 3/8 following news that it expects Q2 EPS to be 10% below last year's $0.45 mark. Wall Street was projecting a $0.50 per share profit. Demand has been soft in key markets, said CEO Daniel Meyer, "And while we have begun to see early signs of a pickup in the past few weeks, it hasn't been enough to put our second quarter earnings back on track." The company does expect "gradual improvement" in EPS for the second half.

Web advertising firm DoubleClick (Nasdaq: DCLK) gave up $4 3/8 to $71 9/16 this morning. The stock lost $5 3/4 Friday on worries that the company will lose its biggest client, Compaq's (NYSE: CPQ) Web directory AltaVista, if Compaq's preliminary talks to sell AltaVista to Internet investment firm CMGI (Nasdaq: CMGI) lead to a deal and a decision by CMGI to bring its ad business in-house.

International telecommunications and Internet services company Worldport Communications (Nasdaq: WRDP) unplugged $3 27/32 to $4 1/2 after disclosing a Thursday hearing before the Nasdaq-Amex Market Group's listing qualification panel. The stock may be delisted, according to a company statement.

Online brokerage Ameritrade (Nasdaq: AMTD) slumped $4 to $81 1/2 after filing with the SEC to sell up to $250 million worth of common shares. The company's filing didn't mention the size of the offering. Certain stockholders may sell shares as well.

Financial software company SS&C Technologies (Nasdaq: SSNC) dropped $1 1/4 to $7 1/8 after saying Q2 EPS will be between break-even and $0.03. Two analysts surveyed by First Call were looking for a $0.19 per share profit. The company said it expects license revenue to come in $6.5 million below plan.

Bank holding company Associated Banc-Corp (Nasdaq: ASBC), which Friday night said it approved a 2.8 million-share stock buyback in connection with its planned acquisition of Riverside Bank of Minneapolis, lost $3 3/16 to $39 7/8. The repurchase is for the amount equivalent to the maximum number of shares that could be issued in the Riverside deal, which is the reason for the buyback.

Small appliances company Salton Inc. (NYSE: SFP) gave away $3 1/4 to $45 3/8 after reporting that it filed to sell approximately 2.9 million shares of company stock to the public, about 2 million by the company and the balance by shareholders. Salton also approved a 3-for-2 stock split. The shares to be sold are counted on a pre-split basis.

E-mail direct marketing company MessageMedia (Nasdaq: MESG) slowed $2 5/16 to $15 7/8 this morning. The company said it will provide e-mail management services to interactive health website operator RealAge. Terms were not reported.

Internet networking equipment company Juniper Networks (Nasdaq: JNPR) slid $4 3/4 to $94 1/8 in its second day of trading. The company's shares grabbed $64 7/8 on Friday after selling 4.8 million shares for $34 each in a much-anticipated offering.

Website publisher Internet.com Corp. (Nasdaq: INTM) gave up $1 5/8 to $12 3/8 in the stock's second day of trading. Shares in the company, which sold 3.4 million stubs to the public for $14 each, finished Friday right where they began.


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