The Evening News - Monday, March 3, 1997

HEROES

In a move that says Internet telephony is "not just for hobbyists anymore," VOLCALTEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOCLF)") else Response.Write("(Nasdaq: VOCLF)") end if %> rose $2 1/4 to $8 3/4 on signing a memorandum of understanding with MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>, whereby Motorola will license and distribute VocalTec's Internet telephony software. Motorola has set up a business unit to exploit the possibilities of Internet/intranet voice and fax telephony, which offers corporations the ability to cut down on the cost of their telephone services by bypassing the Baby Bell local access charges on both ends of a call. NATURAL MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NMSS)") else Response.Write("(Nasdaq: NMSS)") end if %>, another firm providing this sort of capability, fell $5 1/4 to $23 1/2 as it demonstrated its Internet protocol-ready resource boards at the Cellular Telecommunications Industry Association Conference this week.

CONRAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRR)") else Response.Write("(NYSE: CRR)") end if %> moved up $7 1/8 to $111 5/8 after numerous media sources reported that the railroad company is close to signing a merger agreement with CSX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSX)") else Response.Write("(NYSE: CSX)") end if %> for a revised bid of $115 per share, which is a far cry from the original bid valuing 40% of Conrail's shares at $92.50 and the rest at $87.70. In addition, the company will not get Conrail's hammerlock on the New York market, as suitor NORFOLK SOUTHERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSC)") else Response.Write("(NYSE: NSC)") end if %> will most likely purchase some of the 11,000+ route miles belonging to Conrail. This will introduce competition into Conrail's monopoly-like Northeastern corridor for the first time in decades -- to the delight of shippers -- and will also link up the Midwestern and Southern systems of both Norfolk and CSX.

Speaking of constructing contiguous Midwestern infrastructures, Indiana-based lender CB BANCORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBCO)") else Response.Write("(Nasdaq: CBCO)") end if %> rose $4 3/8 to $33 on agreeing to merge with PINNACLE FINANCIAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PNFI)") else Response.Write("(Nasdaq: PNFI)") end if %> of Michigan. CB Bancorp. is the holding company for Community Bank, which operates three offices in northern Indiana. Despite a valuation of more than two times book and 15 times 1997 earnings estimates, Pinnacle believes the $35 per share stock swap will be accretive to earnings and book value. The $43 million acquisition will allow Pinnacle to round out its presence in the southern Michigan-northern Indiana market, where it is wrapping up its merger with Indiana Federal Bank for Savings.

QUICK TAKES: ENAMELON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENML)") else Response.Write("(Nasdaq: ENML)") end if %> flew $4 5/8 to $17 7/8 on the continued strength generated from last week's appearance in Investor's Business Daily, which discussed a product that "could actually reverse tooth decay"... Singapore semiconductor test equipment company ASE TEST LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASTSF)") else Response.Write("(Nasdaq: ASTSF)") end if %> jumped $3 1/2 to $25 3/8 after announcing the purchase of two companies from Advanced Semiconductor Engineering of Taiwan... RELIANCE ACCEPTANCE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RACC)") else Response.Write("(Nasdaq: RACC)") end if %> gained $2 to $15 1/4 after the former Cole Taylor auto lending unit reported large fourth quarter losses, which includes loan-loss reserves of $18 million... Disk drive head maker APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> regained $4 5/8 to $43 1/8 as READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> rebuffed the company's hostile stock-for-stock merger offer... SWIFT ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFY)") else Response.Write("(NYSE: SFY)") end if %> rose $1 1/2 to $23 after its board authorized a $20 million share buyback... On announcing a $200 million credit facility, GALOOB TOYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GAL)") else Response.Write("(NYSE: GAL)") end if %> gained $1 1/8 to $17 1/4... AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> gained $2 1/2 to $40 following an article in this weekend's Barron's in which Legg Mason fund manager William Miller waxes quite bullish on the shares... LEVIATHAN GAS PIPELINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEV)") else Response.Write("(NYSE: LEV)") end if %> moved up $1 1/8 to $21 1/8 after PaineWebber rated the company a "buy," citing the company's fat dividend yield... DOW JONES & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJ)") else Response.Write("(NYSE: DJ)") end if %> rose $1 5/8 to $41 7/8 after the New Yorker reported this weekend that GENERAL ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> or Bloomberg is interested in acquiring the company or parts of it.

GOATS

Asynchronous transfer mode (ATM) access products company YURIE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YURI)") else Response.Write("(Nasdaq: YURI)") end if %> was smashed for a $3 1/8 loss to close at $9 5/8 today. The company's lead IPO underwriter, Alex. Brown & Sons, issued a "buy" rating on the company, which closed its first day's trading last month at $15 1/8, up from its IPO price of $12. Investors may have been nonplussed by the "buy" rating, expecting something a little stronger. Those investors might also be worried about the sharpened competitive pressures in the networking field, though there is certainly room in the product lines of many companies for ATM network access products, as opposed to core switching products.

OLYMPIC FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLM)") else Response.Write("(NYSE: OLM)") end if %> lost $2 to $9 after Smith Barney initiated coverage of the company with an "underperform" rating and Oppenheimer reiterated its "sell" rating on the auto lender. Both analysts questioned the accounting practices of the company after reading its prospectus for the issuance of $300 million in debt securities. Smith Barney put a price target of $7 on the stock, as William H. Ryan wrote in this morning's research note: ''We also noticed that Olympic's aggressive extension and rewrite policy has understated, in our opinion, delinquencies, repossessions and charge-offs.'' This implies that Ryan expects Olympic to take large charge-offs in the future and that the quality of its current earnings are suspect, which is a subject that has been visited numerous times in this industry in the young year of 1997.

QUICK CUTS: COR THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CORR)") else Response.Write("(Nasdaq: CORR)") end if %> lost $2 15/16 to $9 3/8 after announcing on Friday that the FDA rejected its application for an adjunct therapy to angioplasty procedures... Circuit board manufacturer MERIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERX)") else Response.Write("(Nasdaq: MERX)") end if %> lost $2 15/16 to $13 13/16 after the company projected a Q3 loss of up to $0.20 per share... PCB maker and contract manufacturer SIGMATRON INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SGMA)") else Response.Write("(Nasdaq: SGMA)") end if %> inexplicably lost $8 3/4 to $14 1/2 as it approaches its earnings release... WALSHIRE ASSURANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WALS)") else Response.Write("(Nasdaq: WALS)") end if %> fell $2 1/4 to $12 after the property & casualty company reported a fourth quarter loss of $0.21 per share, well short of EPS estimates of $0.20... Engineering software company SUMMIT DESIGN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMMT)") else Response.Write("(Nasdaq: SMMT)") end if %> lost $1 1/2 to $8 3/4 after completing its acquisition of privately held Triquest Design Automation... INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITDS)") else Response.Write("(Nasdaq: ITDS)") end if %> slid $3 3/16 to $20 on announcing last Friday that it has filed a registration statement for the sale of 2.1 million shares, of which 500,000 will be sold by the company... AT&T CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> fell $3 to $36 7/8 after detailing in a conference call this morning (the replay number is available below) growth initiatives for the year and saying that Q1 EPS may fall "slightly below" Q4 EPS of $0.76... LCI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCI)") else Response.Write("(NYSE: LCI)") end if %> also lost $1 1/8 to $17 7/8 as AT&T gave further indication that consumer long-distance is extremely competitive at the moment.

FOOL ON THE HILL
An Investment Opinion by MF Templar

From the Bargain Bin

Shareholders of BHC FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BHCF)") else Response.Write("(Nasdaq: BHCF)") end if %> had reason to rejoice this morning. Financial processing behemoth FISERV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FISV)") else Response.Write("(Nasdaq: FISV)") end if %> announced today it was acquiring all of the outstanding shares of BHC in a stock-for-stock transaction valued at $212 million. Shares of BHC Financial rocketed $11 7/8 to $31 7/8 for a snappy 59% gain after FIserv informed shareholders that it would profer $33.50 of worth of its own stock for each share of BHC. This merger represents only the latest in a wave of ongoing consolidation in the financial processing business, a fast-growing industry feeding off of the ongoing conversion of paper dollars to electronic dollars in the digital economy.

FIserv is the second-largest financial processing company in the United States, behind only outsourcing giant ELECTRONIC DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %>. FIserve provides financial data processing systems and related information management services to more then 5,000 banks, credit unions, mortgage firms and savings institutions worldwide. The company's services include check clearing, funds transfer, credit card administration and data processing. With the acquisition of BHC Financial, FIserv now adds securities processing to its oeuvre, managing the transactions related to stock and bond accounts for the securities brokerage affiliates of banks and other financial institutions. Even the most cursory examination of the two companies highlights the outstanding fit between the two businesses, the principle reason that FIserv climbed $3 7/8 to $36 5/8 today.

Today's gain in FIserv is paltry compared to the returns shareholders have reaped in the stock over the last decade. Since March 3, 1987, the average annual return has been 20.2%, almost twice the S&P 500's 10.8% annual gain over the same period. How has FIserv managed to lap the S&P over the past decade? Largly through the ability of its top management to find solid, well-run acquisition candidates with strong management. The company has eagerly played into the trend of financial services providers to outsource functions, adding services to its line up incrementally over the past ten years. Co-founders George Dalton and Leslie Muma still manage the company, applying the same criteria to acquisitions today as they did when they started the business back in 1984.

With FIserv priced at $36 5/8, it will need to issue 5.8 million shares to pay for Philadelphia-based BHC Financial. For those 5.8 million shares of stock, FIserv gets a company with $81.2 million in trailing revenues and $18.0 million in trailing earnings, boasting 22% net profit margins. Until the merger today, BHC traded at only 1.35 times sales, subtracting from the market capitalization the current cash the company has on the balance sheet. With $2.69 per share in trailing earnings, BHC was trading at less than 7.4 times earnings. Why was the stock so cheap? Only one lone analyst is currently covering BHC Financial, according to both First Call and Zacks, with very low profit estimates for both 1997 and 1998 -- $2.75 per share and $2.90 per share respectively. This analyst was forecasting flat growth over the next two years in spite of the company's share buyback program, leaving the crucial earnings growth factor out of the investor interest equation.

Was BHC's only potential value its earnings? With an infrastructure dedicated to one specific line of securities transaction processing, it is painfully obvious in retrospect that the answer was no. Even paying $33.50 a share for BHC gives FIserv an incredible acquisition that will add to earnings (or be accretive, as the Wall Streeters like to say) from day one. FIServ currently has 45.36 million shares outstanding. By adding 5.8 million more shares (at the current price) to get BHC Financial, it will now have 51.16 million shares outstanding. It is also adding 18.0 million in trailing earnings, meaning that instead of the $60.8 million in trailing earnings over 45.36 million shares FIserv had before it did this deal, it now has $78.8 million to spread over 51.16 million shares. Trailing earnings goes from $1.34 per share to $1.54 per share overnight, meaning that should this deal go through, FIserv's price/earnings ratio will drop from 27.2 to 23.7, assuming a share price of $36 5/8.

Why would FIserv want to acquire a business that one analyst forecasts will show little growth over the next two years? With $798.3 million in trailing revenues, FIserv has an extremely large established base of customers that are buying a significant amount of product. Many of these customers are banks that are starting to get into the brokerage business because of the recent banking reform (detailed in the November 8, 1996 issue of the Evening News). It is entirely possible that FIserv can generate more out of BHC if BHC becomes a subsidiary of the company than BHC could generate alone. Certainly FIserv's management believes so, or else it would not be interested in closing the transaction. So FIserv purchases a company in a complementary business at a price that does not dilute earnings for current shareholders, an investor's dream.

Certainly, it is easy to say a merger was obvious after it happened. This is the stuff of which punditry is made. An important lesson that investors can take away from this is to look at the market share a company has in its current line of business and factor that into the overall valuation for the company. Did BHC Financial have a very large market share? The only other company in this line of business that I am familiar with was purchased by CONCORD EFS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEFT)") else Response.Write("(Nasdaq: CEFT)") end if %>, a smaller competitor of FIserv, late last year. Because BHC was so tiny and poorly covered by analysts, institutional investors had missed it. If there are any other companies like this left, odds are they will be attractive to transaction processors like Electronic Data Systems, FIRST DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %>, NATIONAL DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NDC)") else Response.Write("(NYSE: NDC)") end if %>, BA MERCHANT SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BPI)") else Response.Write("(NYSE: BPI)") end if %>, FIRST USA PAYMENTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTI)") else Response.Write("(NYSE: PTI)") end if %> and SPS TRANSACTION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAY)") else Response.Write("(NYSE: PAY)") end if %>, to name a few.

CONFERENCE CALLS

AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>
To Discuss 1997 Initiatives
(800) 475-6701 code # 333536
(320) 365-3844 code # 333536 outside the U.S.
Until midnight on Wednesday, March 5

DEPUY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DPU)") else Response.Write("(NYSE: DPU)") end if %> & Landanger-Camus
Regarding merger
(800) 964-4428 - replay through 3/5
(402) 280-9277 (outside US)

3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> -US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>
To Discuss Merger Proposal
(800) 633-8284 (code 2531747) -- replay

ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %>
(402) 220-5186 -- replay through 3/7

NOVELL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %>
(402) 280-9008 -- replay

INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %>
(800) 938-1160 -- replay

EZ COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EXCIA)") else Response.Write("(Nasdaq: EXCIA)") end if %>
AMERICAN RADIO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFM)") else Response.Write("(NYSE: AFM)") end if %>
(800) 475-6701 (access code: 332094) -- replay available through 3/3

ECHLIN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(re: recent changes at the company)
2:00 p.m. EST
(800) 683-1535 (password: New company) -- live and replay thru 3/7

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