The Lunchtime News featured a discussion of the Supreme Court's ruling on a suit brought by S&Ls against Uncle Sam. We've got a Special Section today on acquisitions, with FoolWires covering Republic Industries's acquisition of ADT, Haliburton's acquisition of Landmark, Rockwell's acquisition of Brooktree, and other deals.
MF Merlin's Economic News today talks about the probable action of the Federal Reserve at tomorrow's Open Market Committee meeting and reports on the results of the National Association of Purchasing Management's June member survey. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on the Evening News screen. In tonight's Fool on the Hill, MF Templar focuses on a Supreme Court ruling in favor of some Savings and Loans. Enjoy!
Computer graphics concern LANDMARK GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LMRK)") else Response.Write("(NASDAQ: LMRK)") end if %> surged $9 1/2 to $28 3/4 after oil services and equipment giant HALLIBURTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> offered 0.574 of its own stock in a takeover valued at more than $557 million. Halliburton said that it will issue about 10 million shares in the deal, giving it about 124.8 million shares outstanding after the acquisition. The company also said that it will pursue an alliance with ELECTRONIC DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %> to create an information management environment that will "automate and integrate petroleum exploration and production from energy company offices throughout their oil fields". Shares of Halliburton fell $3 1/8 to $52 3/8 on the news, perhaps on fears of the impending stock dilution.
ROCKWELL INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> announced today that it was acquiring BROOKTREE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BTRE)") else Response.Write("(NASDAQ: BTRE)") end if %> in a deal valued at around $275 million, or $15 per share. According to Rockwell Semiconductor President Dwight Decker, the "merger of our businesses will broaden Rockwell's existing competencies in mixed-signal computing and brings Rockwell critical new communications and multimedia-processing building blocks. In addition, Rockwell's portfolio will now include video processing, PC graphics, and high-speed digital WAN (wide area network) communications products." At the same time the deal was announced, though, Brooktree reported that third quarter results would see an operating loss on lower-than-expected revenues and on an inventory write-down. This unforeseen loss is in addition to the premium Rockwell is already paying to acquire Brooktree. Shares of Brooktree rose $3 3/4 to $14 1/4 while Rockwell stock slipped $5/8 to $56 3/4.
NETWORK GENERAL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETG)") else Response.Write("(NASDAQ: NETG)") end if %> debuted a new product today called the "Network Visibility Solution Set", which is a "complimentary set of UNIX-based network fault and performance management tools designed to deliver enhanced network performance, reliability and quality and service". And if that didn't wake the Street up, the company also received an upgrade from perhaps the best-named brokerage firm in the world, Punk Ziegel. The Punks raised their rating on the stock from "buy" to "aggressive buy", and sent the stock soaring $4 13/16 to $26 5/16.
Computer graphics concern LANDMARK GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LMRK)") else Response.Write("(NASDAQ: LMRK)") end if %> surged $9 1/2 to $28 3/4 after oil services and equipment giant HALLIBURTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> offered 0.574 of its own stock in a takeover valued at more than $557 million. Halliburton said that it will issue about 10 million shares in the deal, giving it about 124.8 million shares outstanding after the acquisition. The company also said that it will pursue an alliance with ELECTRONIC DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %> to create an information management environment that will "automate and integrate petroleum exploration and production from energy company offices throughout their oil fields". Shares of Halliburton fell $3 1/8 to $52 3/8 on the news, perhaps on fears of the impending stock dilution.
ROCKWELL INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> announced today that it was acquiring BROOKTREE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BTRE)") else Response.Write("(NASDAQ: BTRE)") end if %> in a deal valued at around $275 million, or $15 per share. According to Rockwell Semiconductor President Dwight Decker, the "merger of our businesses will broaden Rockwell's existing competencies in mixed-signal computing and brings Rockwell critical new communications and multimedia-processing building blocks. In addition, Rockwell's portfolio will now include video processing, PC graphics, and high-speed digital WAN (wide area network) communications products." At the same time the deal was announced, though, Brooktree reported that third quarter results would see an operating loss on lower-than-expected revenues and on an inventory write-down. This unforeseen loss is in addition to the premium Rockwell is already paying to acquire Brooktree. Shares of Brooktree rose $3 3/4 to $14 1/4 while Rockwell stock slipped $5/8 to $56 3/4.
NETWORK GENERAL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETG)") else Response.Write("(NASDAQ: NETG)") end if %> debuted a new product today called the "Network Visibility Solution Set", which is a "complimentary set of UNIX-based network fault and performance management tools designed to deliver enhanced network performance, reliability and quality and service". And if that didn't wake the Street up, the company also received an upgrade from perhaps the best-named brokerage firm in the world, Punk Ziegel. The Punks raised their rating on the stock from "buy" to "aggressive buy", and sent the stock soaring $4 13/16 to $26 5/16.
QUICK TAKES: AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> rose $2 3/8 to $46 1/8 after being added to Lehman's "Ten Plus" list, viewed as an "uncommon value". The company has recently unveiled new features, a co-branded credit card, and a new 20-hours-for-$20 pricing option... STANDARD COMMERCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STW)") else Response.Write("(NYSE: STW)") end if %> said that it expects earnings for fiscal 1997 to be 20% higher than current estimates, which sent the stock up $1 3/4 to $13 3/4... INTERPOINT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTP)") else Response.Write("(NASDAQ: INTP)") end if %>, up $1 to $15, announced that it intends to spin off its Advanced Digital Information data storage subsidiary and merge its remaining businesses with CRANE CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CR)") else Response.Write("(NYSE: CR)") end if %>... FLOWERS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLO)") else Response.Write("(NYSE: FLO)") end if %> bloomed today, up $1 3/8 to $17 1/2 after Goldman Sachs raised its rating on the stock from "market underperform" to "market perform"... REPUBLIC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RWIN)") else Response.Write("(NASDAQ: RWIN)") end if %> agreed to acquire ADT LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADT)") else Response.Write("(NYSE: ADT)") end if %> for $5 billion in a stock swap today, sending shares of ADT up $3 7/8 to $22 7/8... INTERNEURON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IPIC)") else Response.Write("(NASDAQ: IPIC)") end if %> rose $3 3/4 to $33 3/4 as more investors hoping to profit off the company's anti-obesity medication piled into the stock... NATIONAL RE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NRE)") else Response.Write("(NYSE: NRE)") end if %> skyrocketed $13 5/8 to $51 3/8 after it was announced that reinsurance competitor GENERAL RE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRN)") else Response.Write("(NYSE: GRN)") end if %> was entering into a definitive pact to buy the company for $53 a share, or $940 million... Shares of IMMUNOMEDICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMMU)") else Response.Write("(NASDAQ: IMMU)") end if %> shot up $3 5/8 to $12 7/8 after the company received Food & Drug Administration approval for a cancer detection agent.
PENEDERM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DERM)") else Response.Write("(NASDAQ: DERM)") end if %> got smashed today for $3 3/4 to $13 1/4 after receiving a "non-approvability" letter from the Food and Drug Administration (FDA) regarding new drug applications for its retinoic acne gel, AVITA. The FDA requested further study to prove the product's efficacy, and Penederm explained that it has already completed an additional study and will be submitting results shortly. Perhaps benefiting from Penederm's struggle is Fool Portfolio holding, MEDICIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDRX)") else Response.Write("(NASDAQ: MDRX)") end if %>, which rose $3 7/8 to $45 1/8.
Long-term healthcare and rehab service provider LIVING CENTERS OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCA)") else Response.Write("(NYSE: LCA)") end if %> had its investors pressing the "nurse" button today, as shares plunged $7 3/8 to $27. The company warned that earnings, instead of the expected $0.67 per share, would be roughly $0.62 per share, including $0.10 ($2 million) generated from life insurance proceeds after the company's President, Don Wortley, passed away. The company blamed a slow turnaround in its therapy services, rising operating expenses, and weak occupancy levels, but it expects net earnings for fiscal 1996 to be 20% ahead of 1995.
The ever-volatile GREENWICH AIR SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GASIB)") else Response.Write("(NASDAQ: GASIB)") end if %>, scion of the Cabot Market Letter and Louis Navellier's MPT Review, dropped $2 to $17 1/2 after the MPT Review reportedly faxed out a sell recommendation. Also being booted from the Navellier corral is electro-optical measurement device developer ZYGO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZIGO)") else Response.Write("(NASDAQ: ZIGO)") end if %>, which slumped $1 3/4 to $42 despite the announcement that it had acquired privately-held Technical Instruments for $14.5 million, and NEUROGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NRGN)") else Response.Write("(NASDAQ: NRGN)") end if %>, developer of anti-obesity pharmaceuticals, off $1 1/4 to $24 1/2.
QUICK CUTS: Database software developer SYBASE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYBS)") else Response.Write("(NASDAQ: SYBS)") end if %> dropped $3 5/8 to $20 on concerns that it will report lower-than-expected earnings... PERFORMANCE FOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PFGC)") else Response.Write("(NASDAQ: PFGC)") end if %> was munched for $4 1/4 to $21 3/4 after major customer Cracker Barrel said that it would seek outside bids... OPTICAL COATING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCLI)") else Response.Write("(NASDAQ: OCLI)") end if %> dropped $2 1/4 to $15 3/4 today after describing shipment delays and announcing the purchase of Optical Corp. for 1.9 million shares... MELAMINE CHEMICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTWO)") else Response.Write("(NASDAQ: MTWO)") end if %> shares had a bad reaction to news that the company was scrapping its plans to expand in Europe and Memphis, TN, falling $1 3/8 to $7 3/4... SEGUE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEGU)") else Response.Write("(NASDAQ: SEGU)") end if %> warned of disappointing earnings in its second quarter due to some delayed large orders. Shares slipped $5 1/4 to $24 1/2... Drug company HYBRIDON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HYBN)") else Response.Write("(NASDAQ: HYBN)") end if %> and computer data processing firm PRISM SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRZM)") else Response.Write("(NASDAQ: PRZM)") end if %> were down $2 1/16 to $9 5/8 and $4 3/4 to $18 3/4, respectively, on no apparent news... Word that TANDEM COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDM)") else Response.Write("(NYSE: TDM)") end if %> has engaged Lehman Brothers to explore strategic options for its UB networks sent shares down $1 3/8 to $11... SUNGLASS HUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAYS)") else Response.Write("(NASDAQ: RAYS)") end if %> shares were eclipsed by a Gerard Klauer Mattison downgrade from "buy" to "hold", tumbling $4 3/8 to $20.
An Investment Perspective
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Wish All Thrifts Could Be Californian...
Savings and loans (S&Ls) had a banner day, with a number of the institutions surging after news of a long-awaited Supreme Court decision hit the airwaves. The stern 7-to-2 ruling showed that Rehnquist and Ginsberg were the only two Justices who dissented from this decision. This whole episode harkens back to the bygone days of the savings and loan crisis, when under-capitalized and poorly-managed S&Ls were going belly-up, threatening the government's insurance fund for that industry. In order to shore up the banking establishment, the government urged healthy S&Ls to acquire their anemic brethren, giving them the perk of amortizing the goodwill resulting from the acquisition over a generous 40-year period.
As described in this afternoon's LunchTime News, goodwill is an accounting convention used to represent the value of an acquisition above and beyond the assets acquired. For instance, if you acquire an S&L for $100 million that only has assets of $50 million, then you take $50 million of goodwill, also called water, on the balance sheet. S&Ls would then be able to count this goodwill as capital to make new loans for much longer than they otherwise would have been able to, spurring on a number of these mergers. This all came to a screeching halt in 1989 when Congress saw fit to get involved.
Congress passed the Financial Institution Reform, Recovery and Enforcement Act (FIRREA) in 1989, which was an attempt to forestall a complete collapse of the savings and loan industry. This law increased the minimum capital requirements for S&Ls, consequently restricting their ability to amortize the "supervisory goodwill" obtained in some government encouraged acquisitions. Suddenly the benefit of the government-encouraged acquisitions had evaporated -- but the healthy S&Ls were now burdened with the second-rate goods they had already acquired under the previous rules. For example, Glendale Federal was suddenly denied the use of $500 million in goodwill to meet minimum capital requirements, forcing it to replace that with cash or to reduce its earning assets to avoid seizure. Writing the majority opinion today, Justice David Souter concluded that the Federal government had violated a contract with thrifts, leaving the door open for billions in liabilities.
The major beneficiaries of today's decision are the 100 S&Ls that currently have claims against the government, particularly a number of California-based S&Ls. These are either national S&Ls with a heavy presence in California, like A. H. AHMANSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %> or small S&Ls located almost completely within the Golden State such as GLENDALE FEDERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLN)") else Response.Write("(NYSE: GLN)") end if %>, COAST SAVING BANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSA)") else Response.Write("(NYSE: CSA)") end if %> and CALIFORNIA FEDERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAL)") else Response.Write("(NYSE: CAL)") end if %>. In fact, Coast Savings was so excited over this ruling that it issued "goodwill participation" securities to shareholders, entitling them to 25% of any damages it got back from the government. It was Glendale Federal's suit against the government that actually made it to the Supreme Court today, although this decision will affect a number of other cases that are currently working their way up the judicial ladder.
Many of the California S&Ls have been driven up over speculation on this ruling in the past few weeks, pushing them far above the normal valuation range of 12 times trailing earnings or 0.8 to 1.2 times book value. The reason for this is heightened speculation about an economic turnaround on the Left Coast, which represents 12% of the United States's gross domestic product (GDP). As California has taken longer to emerge from the recent economic slump than many other areas in the country, there is actually some earnings upside for these financial stocks that thrive off of the bread-and-butter mortgage origination business. The final key to the valuations in the California S&Ls is banking reform that has driven a number of regional banks to try to become national concerns. Glendale, Coast Savings, CalFed and Ahmanson all represent significant entrees into the California market at a time when many regionals like Nationsbank and First Union are trying to build coast-to-coast empires.
This said, a lot of it has already been priced into these stocks given their valuations and the jump on the Supreme Court ruling today. All of this activity concentrated on the California savings and loans ignores one of the major trends in the S&L industry -- the fact that the traditional thrift business just ain't all that profitable anymore. Originating CDs to fund fixed-rate mortgage loans is a business that has been totally eaten away by the mortgage banks and government-sponsored entities like Fannie Mae and Freddie Mac. The reason for this erosion over the past two decades is due mostly to the fact that most mortgages are now securitized into mortgage-backed securities and sold to institutions, allowing the big guys to get their capital back quickly and go out and make more loans.
Without the same securitization resources, the S&Ls just cannot compete. The few that have been attempting to get into other, higher-margin lines of business like loans to companies and credit card operations have had mixed success. GREAT WESTERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GWF)") else Response.Write("(NYSE: GWF)") end if %>, a California thrift not involved in the "supervisory goodwill" decision today, diversified ten year ago and has yet to improve its financial performance. Much of this diversification is probably just getting dressed up to attract a buyer, with the possibility of "supervisory goodwill" damages and a recovering Californian economy adding some spritzers. Deals last year for non-S&Ls were in the 1.5 to 2.5 times range, suggesting that much of the upside in a takeover is gone unless these companies get the settlement in a relatively timely manner -- which is no way guaranteed given the very long nature of court proceedings.
Glendale was up $1 1/2 to $19 5/8;Ahmanson rose $3/8 to $27 3/8;
Coast Savings levitated $2 3/8 to $35 1/8;
CalFed surged $3/4 to $19.