FOOL FEATURES

What's going on with the semiconductor issues? After Intel whispered sweet nothings in the ear of the street yesterday, many chip stocks soared. But are things as rosy as they seem? Today's Lunchtime News addressed just that question. We're always adding to Earnings Central, and by tonight we expect to have conference call synopses for Paychex, Scholastic and Heilig-Myers. In tonight's Fool on the Hill, MF Templar takes a look at companies Microsoft might purchase in the coming years. Enjoy!

CONFERENCE CALLS

MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>
Announcement about new addition to Windows platform
1-800-456-5304 (passcode 9707) -- available until 7 pm PDT

APPLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>
Discussing information appliances and future Newton technology products
1-800-642-1687 (passcode 47956)

HEROES

ALLIED WASTE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWIN)") else Response.Write("(Nasdaq: AWIN)") end if %> announced this morning that it would purchase the solid waste management operations of LAIDLAW INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LDW.A and LDW)") else Response.Write("(NYSE: LDW.A and LDW)") end if %>. The deal is worth $1.2 billion in cash plus securities which brings the full value to $1.5 billion. Though Laidlaw was more the winner in terms of share price, Allied's prospects look quite interesting, given the cost synergies which they plan on achieving as well as the terms under which the deal was done. Laidlaw finished the day up $1 at $11 3/8 while Allied rose $3/8 to $9 1/2.

OPTICAL SENSORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OPSI)") else Response.Write("(Nasdaq: OPSI)") end if %> moved up $2 3/8, or 28%, to close at $10 3/4 on news that it is taking commercial orders for its SensiCath Sensor. With this sensor, which can be mounted on an IV pole or directly on the patient, the blood gases of critical care, emergency, and surgical care patients can be sampled every two minutes. Of particular benefit, this frequent sampling can be done without drawing or handling blood and without the use of lab technicians.

Adding something around $90 million to its market cap today, DIAMOND SHAMROCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DRM)") else Response.Write("(NYSE: DRM)") end if %> moved up $3 to close at $31 1/2. While a refining company would not normally be helped out by today's fairly strong move in October crude oil, Diamond has been on a tear since last Wednesday, moving up more than 16% since then. Apparently, its gas-station and pipeline revenues and profitability more than override the fall in profits normally felt by pure-play refiners when crude is moving up.

QUICK TAKES: Another blood monitoring system passed an important milestone, this one a blood glucose monitoring device from SELFCARE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SLF)") else Response.Write("(AMEX: SLF)") end if %>. Selfcare jumped $2 1/4 to $16 on news that a subsidiary of JOHNSON & JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> would convert into stock a loan to Selfcare and pay the company a $7 million success fee for gaining FDA approval for the device... CYBEROPTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYBE)") else Response.Write("(Nasdaq: CYBE)") end if %> shot up $1 5/8 to $13 3/8 on no apparent news. The company doesn't release earnings until next month and said that it had no new product releases to talk about. Which brings us to another non-event... ANN TAYLOR STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %> rose $1 1/8 to close at $16 3/8 on news that its expansion plans have shifted somewhat. In the whole scheme of things, the change in the number of stores included in the capital budget is not all that significant, as its CFO strenuously pointed out on the phone, but the market liked the news anyway... WAVEPHORE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAVO)") else Response.Write("(Nasdaq: WAVO)") end if %> moved up $2 to $9 on news that the company had signed a contract with the Standard & Poors unit of THE MCGRAW-HILL COMPANIES<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MHP)") else Response.Write("(NYSE: MHP)") end if %>.

GOATS

Stock of ambulance service provider AMERICAN MEDICAL RESPONSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMT)") else Response.Write("(NYSE: EMT)") end if %> might be in need of emergency treatment after news of significant insider selling came public today and dropped shares $2 3/4 to $33 5/8. Insiders, among them chairman Paul Verrochi, who liquidated 73% of his holdings, sold over 400,000 shares in August, a fairly inauspicious development for a company that only went public four years ago. President and CEO Paul Shirley indicated that one-time events, such as executives who were building new houses and co-founders who were scaling back their involvement, were responsible for the sell-off. Investors apparently didn't put much credence in this explanation, but they should remember that

The recent activity in temporary services is enough to make your head spin. CAREER HORIZONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHZ)") else Response.Write("(NYSE: CHZ)") end if %>, which agreed in August to merge with ACCUSTAFF <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASTF)") else Response.Write("(Nasdaq: ASTF)") end if %>, dropped $1 3/8 to $36 5/8 after announcing that it would pay $50 million to acquire TSG Professional Services. For its part, Accustaff was off $1 1/8 to $24 3/8. As reported in the Lunchtime News, OLSTEN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %> joined MANPOWER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAN)") else Response.Write("(NYSE: MAN)") end if %> in receiving a downgrade this week. Olsten was cut from "buy" to "moderate attractive" by brokerage Robert Baird and plunged $3 1/2 to $23 1/8.

While everything might seem fine and dandy for semiconductor manufacturers at the mini-moment, TENCOR INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TNCR)") else Response.Write("(Nasdaq: TNCR)") end if %>, which supplies various products to those manufacturers, is missing out on the fun, dropping $2 3/8 to $17 1/4. The company announced that it has cut its workforce by 15%, or 220 workers, because of a slowdown in the sector, and that will take an unspecified charge in the third quarter for this reduction. In the attempt to realign operations "to match current market conditions," the company will also freeze hiring, reduce base pay for corporate officers and schedule a series of temporary plant shut-downs. Ouch.

QUICK CUTS: Retail furniture concern RHODES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHD)") else Response.Write("(NYSE: RHD)") end if %> plummeted $3 1/8 to $7 1/2, on news that its merger deal with HEILIG-MEYERS CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> would value each Rhodes share at 0.5 of a Heilig-Meyers share... VALLICORP HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VALY)") else Response.Write("(Nasdaq: VALY)") end if %> terminated merger discussions with another, unnamed bank holding company and sunk $2 1/4 to $16... Merrill Lynch cut its medium-term rating for NETSCAPE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> from "accumulate" to "neutral," and the stock fell $3 3/8 to $42 5/8... American depository receipts of BUSINESS OBJECTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOBJY)") else Response.Write("(Nasdaq: BOBJY)") end if %> slipped $2 1/2 to $12 3/4 on fears that the French company's quarterly results would be hurt by a transition to a new release of its Business Objects analytical software... ICT GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICTG)") else Response.Write("(Nasdaq: ICTG)") end if %>, which manages telemarketing call centers, dropped $4 3/4 to $11 after giving guidance that third quarter revenue would be flat due to project delays... Semiconductor switch-maker CP CLARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPCL)") else Response.Write("(Nasdaq: CPCL)") end if %> continued its drop, falling $1 to $9 1/2, after predicting a second quarter loss yesterday... Bed and bath giant FIELDCREST CANNON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLD)") else Response.Write("(NYSE: FLD)") end if %> expects to miss estimates, and fell $2 1/4 to $16.

An Investment Opinion
by Randy Befumo (MF Templar)

FOOL ON THE HILL

Adding to Microsoft's World Domination

There can be no question as to MICROSOFT'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> ultimate goal -- world domination. Or at least world domination in as much as it relates to the software world. Whether we are talking enterprise or consumer code, Microsoft wants to be numero uno everywhere it applies itself. If it cannot develop the capacity in-house fast enough, Microsoft has never shied away from acquisition. Currently, there are three rather large sectors of software-space where Microsoft does not occupy pole position and three relatively inexpensive companies that Microsoft has in the past expressed an interest in acquiring -- companies which, if acquired by Microsoft, would vault the software giant into the number one position in each of their sectors.

Educational, Entertainment and Personal Productivity Software. Although Microsoft has made great strides in all three of these segments, personal productivity products are really the only niche where it can pretend to be close to being tops. Microsoft owns the desktop from the operating system to the applications, but the company has never consistently parlayed its ability to bundle products into producing consistent hits in any of these realms. Educational software is software that is designed to teach someone something, whether in an entertaining or strictly didactic format. Entertainment software consists of products that are just plain fun. Personal productivity programs are things like banner makers, calendars and other aids to daily functions that are not full-blown applications or part of the operating system.

The dominant company in this realm is Novato, California-based BRODERBUND <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %>. The software company of brotherly love has consistently dominated the educational and entertainment segments of the market with top-flight hits that reached across all demographic groups. Whether we are talking about the geography learning franchise that is "Where In The World Is Carmen Sandiego," smash hit CD-ROMs like "Myst" and the upcoming "Myst II" or the evergreen sales of personal productivity hits like "Print Shop," Broderbund has been consistent in its success. Until this year, that is, when the surprise delay of "Myst II" left its product pipeline empty, sending projections for revenues and earnings below last year's record levels. Broderbund unfortunately cannot blame it all on the business environment -- the company has fooled itself for years by pretending it did not need a new hit to rake in record profits. Its mantra of "good products create their own distribution" has been one-upped by new Internet-based distribution schemes for entertainment products that are bringing consumers in the software stores a lot less frequently.

Temporary setbacks do not make for total disasters, though. Broderbund is currently priced at October, 1994 levels in spite of the fact that the company has enlarged its Carmen Sandiego franchise tremendously since then. Broderbund made a little less than a dollar in 1994 -- the company will make close to $1.77 EPS next year. Although its joint ventures are not bearing the kind of fruit it would have wanted and the Living Books series is currently not making money, the calm waters of Broderbund will see another multi-year hit emerge again -- it is only a question of when. Despite that fact that the company is trading at about 1.7 times trailing sales net cash and they are buying back 10% of the outstanding shares, sentiment remains pretty negative about the company's prospects going forward. This math could add up to some value for a larger company with better distribution... say, Microsoft.

Why might Broderbund welcome a takeover where before it has publicly said it wanted no such thing? The software market is changing and distribution is becoming more and more important. By combining its impressive catalog of hits with Microsoft's backlog of entertainment, education and personal productivity software products, the management at Broderbund could run what would be the force in the industry, one-upping their arch enemies at SOFTKEY INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SKEY)") else Response.Write("(Nasdaq: SKEY)") end if %>. The managers who wanted to stay in the game could and the rest could retire on the fat premium to the current market value that the shares would deliver.

Personal Finance Software. INTUIT'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> domination of electronic checking books is unquestioned. From the Quicken franchise established in 1984, the company took over taxes ("TurboTax") and small business accounting ("QuickBooks"). With more than two-thirds of the market by almost all counts, its only real competition are Microsoft's "Money" and the tepid "Managing Your Money" product purchased by an alliance of banks last year. Intuit has recently stumbled in the home banking and electronic bill payment realm, crying uncle earlier this week when it sold Intuit Services Corp. (ISC) to CHECKFREE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CKFR)") else Response.Write("(Nasdaq: CKFR)") end if %> lock, stock and barrel for more than $250 million of the company's highly-valued stock. Once bid up to near $90 a share on prospects for this unit, management's failure to make it work explains quite a bit of the company's fall to its current $32 3/4 perch. The success of Intuit's current online ventures and the potential for a piece of portfolio management software they could add to their oeuvre could erase this negativity.

Microsoft made a run at Intuit in 1995, pledging a split-adjusted $40 a share for the company's Quicken, TurboTax and QuickBooks franchise. Although the company has developed and shed an electronic commerce component since then, its value to Microsoft has probably not declined. Quicken continues to take market share and has grown its installed base for all of its products by quite a bit over the past year and a half since Microsoft's original offer was made. With one sell-side analyst calling Intuit's management "tired," another run at a business combination with Microsoft may not be completely out of the question. With CheckFree now holding substantial electronic commerce assets after it bought ISC, the Federal Trade Commission's aversion to an Intuit-Microsoft combination may not be quite as acute as it was in the last go-around. Microsoft is also not months before an important launch of an online service bundled in its new operating system, perhaps giving them a little more stomach for a fight this time around.

Proprietary Online Services. Imagine Bill Gates and Paul Allen arguing over a potential acquisition. "Are you going to buy it? 'Cause if you aren't, I am going to buy it." ..."Errr... I don't know if I am going to buy it." ... "If you want it, I will let you have it, but otherwise I am going to buy it." They were arguing over NETSCAPE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> or some other ultra-hot piece of online technology, right? Wrong. Witnesses to the multi-year debate between Gates and Allen over who would purchase what say that the company they both have aspired to own was none other than AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>. Despite the market's obsessive discounting of all things online, the public's appetite for interactive online services has only been whetted. Although many have been predicting its demise for more than two years now, America Online's package of built-in interactivity in a non-library format has given it more than six million sets of eyes worldwide, an impressive feat for any media venture. The fact that America Online is perceived as competing head-on with the Internet combined with a growing difficulty in recent quarters to add subscribers without paying through the nose has hosed the shares in recent weeks.

The debate still rages as to why the Microsoft Network (MSN) was moved to the Internet. Technophiles maintain it was because Gates saw that the platform of the future was HTML, not a proprietary system that one company owned. It is debatable as to whether or not Gates believes he can turn the Internet into a proprietary system that he effectively owns by giving away browsers. Regardless, the benefits of a proprietary system enhanced for communication -- one that is not just a viewing technology with interactivity slapped on as a bunch of secondary applications -- should appeal to a company that wants to put a computer in every home. Although sophisticated computer users can download and install Internet Relay Chat, this population of users is already online. The "other 89%," as America Online Chairman and President Steve Case likes to say, is going to be less sophisticated than the first 11% and needs simpler software to access the digital world. With America Online set up to deliver just this, it might make a nice feather in Microsoft's cap.

Two years out, one of these companies will probably be part of Microsoft. Although people will give you a big list of reasons why none of them might ever approach a business combination with Microsoft again, the synergies are just too apparent. Microsoft's distribution system combined with any of the above family of products would make for an absolute killer combination that would continue to take market share. It would be an interesting exercise to construct a portfolio weighted equally with all three companies and to see where it goes over the next 24 months.


Randy Befumo (MF Templar), a Fool
Fool On the Hill

Selena Maranjian (MF Selena), a Fool
Heroes & Goats & Editing

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