INDEX:
I. Market News: Technology Stocks Pick Up Steam
II. Heroes: Strawbridge, Fulcrum, Macromedia, Sun Healthcare
III. Goats: Indigo, Mercury Interactive, Ralcorp
IV. Investment News: Software Merger Wars
V. Calendar: Tuesday's Economic Events
MARKET CLOSE
DJIA: 4756.57, up 14.82
S&P 500: 583.22, up 3.52
NASDAQ: 1039.69, up 14.14
MARKET NEWS
Beginning today, our daily news publication will be called THE EVENING NEWS. After months of calling it THE DAILY NEWS, we understand that Cookie's AOL bill has been outrageous because he thought our name meant we were a morning publication. He'd sign on and sit all day, waiting for our news. For all the Cookies out there, we're changing our name to reflect our real publication schedule. (Plus, none of us can get out of bed early enough to write morning news.)
Technology stocks powered ahead today, the result of the strong economic growth numbers last week and positive comments in Barron's this weekend. The rise in the Nasdaq today was the equivalent of some 65 DJIA points.
HEROES
Strawbridge & Clothier <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:STRWA)") else Response.Write("(NASDAQ:STRWA)") end if %> rose $4 1/4 to $19 1/4 today when the company announced that it has engaged an advisor in order to discover the path to maximize shareholder value, which could include selling the chain to another retailer. A venerable Philadelphia-based apparel outlet, Strawbridge has not been immune to the rout retail stocks have seen in the last 12 months. The company was featured in a Barron's article two weekends ago highlighting high-yielding companies whose stocks had the potential to appreciate over the coming months. Still yielding 5.7%, there are worse apparel companies to buy. However, the pop resulting from any potential merger seems to have squeezed a lot out of the stock, now trading at around two times book value.
Fulcrum Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FULCF)") else Response.Write("(NASDAQ:FULCF)") end if %> is one of those stealth Internet stocks that you have to trip over, but once you do, they make a huge dollar move before you can get to reading the financial packet. Or maybe it just seems that way. The stock popped $5 1/4 to $28 1/2 today when it announced that Compaq Computer has licensed its text-searching product, SearchServer, for use in a "comprehensive customer support application." Apparently Compaq will distribute it to OEM customers and partners as well as internal staff to allow everyone access to every manual ever written about a Compaq computer, fully searchable. Cool stuff, eh? Trading at 40 times next year's earnings, it may fully valued.
Macromedia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MACR)") else Response.Write("(NASDAQ:MACR)") end if %> is another one of those Internet related companies with a tendency to sneak up on you. Rising $6 to $36 1/4 today, the company unveiled Shockwave for its Director Internet publishing multimedia product. Just go back and read that sentence---software, Internet, and multimedia in the same phrase. Is it any wonder the stock went up $6 today? Shockwave is a set of authoring and playback technologies which allow standard Director movies, complete with animation, sound and interactivity (another one of those buzzwords), to be played back on the Web. In unrelated internet news, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMER)") else Response.Write("(NASDAQ:AMER)") end if %> also rose $5 1/8 to $79 3/8 on a new product introduction, its GNN Internet service.
Sun Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SHG)") else Response.Write("(NYSE:SHG)") end if %>, covered in Friday's article in Investing News as a potential speculation in the beaten-down long-term care segment, rose $1 1/2 to $10 7/8 in anticipation of tomorrow's earnings. Estimates are for $0.34 per share versus $0.32 a year ago, but apparently some people think that Sun can smash these estimates. Sun has been battered in the last year by an investigation into its billing practices as well as the overall threat of Medicare and Medicaid reform. Trading at 6-7 times next year's earnings, though, it doesn't appear that the stock has much more room to fall unless more bad news is forthcoming.
GOATS
Indigo N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INDGF)") else Response.Write("(NASDAQ:INDGF)") end if %> came out with so much bad news it was impossible to sort through it all before the Evening News deadline. Down $6 5/8 to $9 5/8, the company said that its third-quarter loss would be twice its second-quarter loss and that more losses were coming in the fourth quarter, along with a slew of restructuring charges. The company will reduce equipment shipments in the short term as part of its restructuring, which will only begin to save it money in next year's first quarter. The company said these problems are because expenses continued to rise, but stresses that its financial position is sound. Somewhat of a sister-stock, Presstek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PRST)") else Response.Write("(NASDAQ:PRST)") end if %> was up $3/8 to $48 today, although many believe it will share the same fate as Indigo one day. Bottom-fishers with strong stomachs might want to look at Indigo carefully over the next few days.
Mercury Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MERQ)") else Response.Write("(NASDAQ:MERQ)") end if %> shares fell $3 3/8 to $19 3/8 today as investors became concerned about the costs of its acquisition plan, much in the same way SoftKey got pummeled (see Investing News below). On Friday, Mercury announced it will acquire Irish networking firm EBY Semantica for between $6 million and $8 million. Oppenheimer & Co. analyst Melissa Eisenstat saw these costs as limiting bottom-line growth for the next several quarters, as the company will be spending an additional $1 million a quarter on research and development as it takes on EBY's engineering staff.
One charge is a migraine. The second charge is murder. Ralcorp Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RAH)") else Response.Write("(NYSE:RAH)") end if %> dropped $3 5/8 to $23 1/2 after it reported that it would take a "second, smaller charge" to close its Industrial Oats milling operation in Iowa. Roughly 100 jobs will be affected by this shutdown, translating into a total of $0.41 per share coming out of earnings for the fourth quarter for the previously announced restructuring charge and the additional "smaller charge to be taken next year." Ouch, ouch, ouch.
INVESTING NEWS: SoftKey Shoots From the Hip For The Learning Company
"There is nothing like a software company merger to set a Fool's heart a-pounding," we wrote on August 1st, launching into detailed coverage of the Broderbund Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %> and Learning Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LRNG)") else Response.Write("(NASDAQ:LRNG)") end if %> merger. Little did we know this apparently vanilla merger would turn Neapolitan almost three months later when SoftKey International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKEY)") else Response.Write("(NASDAQ:SKEY)") end if %> decided to launch a hostile bid for The Learning Company. SoftKey evidently has taken a shine to Reader Rabbit. We would now amend our earlier statement to read "There is nothing like a software company merger to set a Fool's heart a-pounding---except when that merger is challenged by a hostile cash bid by a competitor." Now that's edu-tainment!
The merger between Broderbund and the Learning Co. was widely considered a foregone conclusion until SoftKey's hostile $65 cash bid today for 4,642,507 shares of Learning Co. Broderbund is currently offering 0.8125 shares of its common stock for each share of the Learning Company, worth around $56 1/2, but SoftKey has suddenly added a 15% premium and made the majority of their offer cash rather than stock. If it can get the 4.6 million shares, SoftKey intends to scoop up the remainder with a stock-for-stock transaction which would value each share of the Learning Co. at $65 as well, topping Broderbund's bid all around. Broderbund's price for the Learning Co. is around $530 million in stock as of today, whereas SoftKey's offer is around $610 million in cash and stock. It's a better deal all around, isn't it? So the market must be excited about SoftKey, right?
Wrong. The takeover price struck the market as too steep and it took $6 from each share of SoftKey, closing at $32 1/8. Broderbund shares saw the opposite reaction, as they spurted ahead $1 1/4 to $69 1/2 as a wave of short covering from arbitrageurs pushed the shares higher. (An arbitrageur attempts to profit from companies involved in mergers by buying the common shares, preferred shares, or debt of one component of the merger and shorting the common shares, preferred shares, or debt of the other company, playing the spread between the current value and the merger value. This is not for the faint of heart.)
What makes this cash bid so newsworthy and the market so nervous about it has less to do with the premium over Broderbund's offer than the fact that hostile bids for software companies, particularly software companies in the middle of other deals, are rare. Unlike large industrial giants, most of a software company's assets are the people it employs---people who are put off by being pushed around by new companies and have a tendency to jump ship rather than be taken over. There is concern that should SoftKey get what it wants, it might lose the very talent that has turned the Learning Co. from a spry 1980 start-up into the current behemoth on the verge of a distribution deal with Time-Warner---that is, the management and programmers who have made the software happen.
SoftKey, however, is not your typical software company, which might help to explain the aggressive nature of its eleventh-hour ploy. A recent addition to the software landscape, SoftKey is actually the combination of three of the biggest losers in software history----Spinnaker Software, Wordstar Software, and SoftKey Software. Separately, each of these companies had a lineup of cheapo also-rans. Merged together in 1994, however, they found they could leverage their fixed costs, standardize their product packaging, and penetrate the market in a way they had failed to achieve previously, focusing on the low-cost road rather than the brand-name path dominated by industry lime-lights like Microsoft and Broderbund. Being the maverick in the industry already, SoftKey attempting to buying the Learning Co. via a hostile bid does not come entirely as a surprise.
SoftKey International's battle with Broderbund was not the only item on its dance card today. The company also put the wraps on its friendly acquisition of Minnesota Educational Computing Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MECC)") else Response.Write("(NASDAQ:MECC)") end if %> this morning. MECC, creator of "Oregon Trail," is being snapped up for $40 per share in SoftKey International common shares, which pumped the "trail-blazing" company's share price up $10 to $31 1/4. But that isn't even close to $40, you are saying. The reason why the market backed away from the $40 target on Minnesota Educational's merger is because a clause in the deal fixed the buyout price of MECC at $40 a share *only* if the volume-weighted average price for SoftKey's stock for the 20 days three trading days prior to closing is between $35 and $45. When SoftKey fell down to $32 1/8 today, it blew out this clause---barring any recovery in the stock as we approach the merger date.
The two mergers brings the edu-tainment software industry, primarily on CD-ROM, back into focus again after the end of the tech run this summer killed a lot of interest in the stocks. SoftKey's move towards the higher-end by proposing to merge with two makers of branded educational software has sparked a recovery in the shares of other edu-tainment stocks. Edmark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EDMK)") else Response.Write("(NASDAQ:EDMK)") end if %> was up $2 5/8 to $46 1/8 today, Spectrum Holobyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SBYT)") else Response.Write("(NASDAQ:SBYT)") end if %> popped up $3/4 to $10 5/8, Maxis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MXIS)") else Response.Write("(NASDAQ:MXIS)") end if %> *simulating* a $1 3/4 rise to $44, and Microsoft (which has recently cut prices on its line of edu-tainment titles) plodded along $2 3/4 to $102 3/4.
Focusing beyond the News, consumer entertainment software on CD-ROM appears to be the beachhead of the next stage of the software invasion. It is a lucrative market still in its infancy, unlike the mature applications market which already has its dominant players and its sickly hangers-on (illustrated beautifully today by Novell's announcement that it would end its silly experiment as an applications company, selling its doggy WordPerfect unit). In fact, although Microsoft has gained much more press for the Microsoft Network, it will be its incursions into this realm with Encarta and the like that will buffer its balance sheet long before it makes a dime on the disappointing online venture, whose subscribership currently rivals such industry "leaders" as GEnie and e-world.
SoftKey shareholders, however, should be concerned that the company is switching to the brand-name approach. Minnesota Educational has a nice product with Oregon Trail, but valuing that company at more than half of what they are proposing to buy in the much broader and deeper catalog of the Learning Company seems wrong-headed. With roughly $7 million in long-term debt and only $93.4 million in cash as of last quarter, financing the Learning Co. deal will have to occur through debt---something software makers have always avoided through high margins and recurring upgrade revenues. SoftKey would have been much better served buying troubled edu-tainment maker Spectrum Holobyte, whose Civilization and Colonization games are great products, but which has been poorly run---a classic SoftKey company. SoftKey apparently thinks it can upgrade itself and its image by vaulting into the forefront of the edu-tainment market with a few acquisitions. This management style, however, is exactly the form of piracy which has made takeover deals in this industry as rare as they are. Whether SoftKey can do the deals it wants remains up in the air; whether they really want to even if they could would appear to the objective observer to be a "no."
CALENDAR: Tuesday's Economic Events
---October Consumer Confidence (10:00)
---September New Home Sales
---Agricultural Prices
Byline: Befumo/Sheard (MF Templar/MF DowMan)