FOOL ON THE RADIO

So you have heard us on RealAudio ... wanna hear us on the real radio? Dale, Alex and I want to promote the world's only analytical and Foolish processed News product by doing the local radio talk show tour. Unfortunately, we have no clue what local radio shows are out there in this great land of ours and need your suggestions. Do you listen to a radio talk show that might have Alex, Dale and I on as guest to talk stock-specific news, analyzing companies in general or investing in general? If you do, please send the show name, host name, producer name and the station's phone and fax number to [email protected]. If you don't know any of those, just call up the station and ask -- they will be happy to supply you with the necessary information. We're sure they want us ... they just don't know it yet.

HEROES

Southern California community bank HARBOR BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HABN)") else Response.Write("(Nasdaq: HABN)") end if %> gained $2 3/4 to $22 3/8 on announcing a definitive agreement to merge with CITY NATIONAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYN)") else Response.Write("(NYSE: CYN)") end if %> in a deal valuing Harbor at $24.10 per share. Harbor shareholders can elect to receive either cash or stock in the deal. City National, a bank that specializes in loans to small businesses, construction loans, trust operations, and plain vanilla banking services is going purely for Harbor's depositor base in Long Beach and Orange County. City National represents another sort of banking institution that breaks the traditional mold of thinking about a bank as being overvalued at two times book value. With less money tied up in assets that have to be supported by a lot of debt and more of an emphasis on services and less on lending, the traditional valuation paradigm in banking is becoming less and less useful.

Internet telephony is back, and baby, it's hot! VOCALTEC COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOCLF)") else Response.Write("(Nasdaq: VOCLF)") end if %> jumped another $4 to $23 7/8 after yesterday's news that DEUTSCHE TELEKOM AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DT)") else Response.Write("(NYSE: DT)") end if %> will take a 20% stake in the company and market VocalTec's Internet telephony software. An appearance by a company officer on CNBC's Squawk Box this morning didn't hurt either. IDT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> gained $3 1/8 to $13 after the Japanese paper NIKKEI reported on a possible alliance between Nippon Telephone & Telegraph and IDT to use IDT's Internet telephony software for international telephone calls. Finally, on no apparent news, voice over Internet protocol (VoIP) software company NETSPEAK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSPK)") else Response.Write("(Nasdaq: NSPK)") end if %> jumped $3 3/8 to $11 1/4.

QUICK TAKES: OUTLOOK GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OUTL)") else Response.Write("(Nasdaq: OUTL)") end if %> gained $1 1/4 to $7 1/4 after the graphic services and packing company agreed to be acquired by a private investment firm for $8.25 per share in cash... Rubber components and plastics manufacturer VERSA TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRSA)") else Response.Write("(Nasdaq: VRSA)") end if %> rose $2 1/4 to $22 1/2 on announcing that it is considering a deal to be acquired by diversified manufacturer APPLIED POWER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APW)") else Response.Write("(NYSE: APW)") end if %> for $24.62 per share in cash.... REXEL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RXL)") else Response.Write("(NYSE: RXL)") end if %> picked up $1 15/16 to $20 13/16 after the electrical parts distributor said French parent Rexel SA wants to buy the rest of Rexel -- the 49% it doesn't now own, for $19.50 per share in cash... A real estate investment trust that looks more like a specialty finance company, VALUE PROPERTY TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VLP)") else Response.Write("(NYSE: VLP)") end if %> rose $2 5/16 to $15 3/8 after WELLSFORD REAL PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WRP)") else Response.Write("(NYSE: WRP)") end if %> put in a cash and stock bid worth $16.91 per share to acquire Value Property... OCEAN ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OEI)") else Response.Write("(NYSE: OEI)") end if %> rose $3 3/4 to $64 5/16 after PaineWebber initiated coverage of the oil and gas exploration and production company, formerly known as Flores & Rucks, with a "buy" rating, estimating 1998 EPS of $2.60... FIRST PALM BEACH BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FFPB)") else Response.Write("(Nasdaq: FFPB)") end if %> rose $2 7/16 to $35 as the banking consolidation spotlight turned to Florida this morning with the Barnett Banks story (see tonight's Fool on the Hill)... Medical products manufacturer POLYMEDICA INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PM)") else Response.Write("(AMEX: PM)") end if %> climbed $1 9/16 to $12 1/8 on a favorable mention in today's Investor's Business Daily New America feature... Virginia bank CRESTAR FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CF)") else Response.Write("(NYSE: CF)") end if %> rose $2 3/16 to $44 11/16 as investors were beating the bushes for attractive bank merger situations.

GOATS

LVMH MOET HENNESSY LOUIS VUITTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVMHY)") else Response.Write("(Nasdaq: LVMHY)") end if %> lost $2 1/2 to $42 1/8 after UBS Securities in France lowered its rating from "neutral" from "buy" on the maker of Moet & Chandon and Dom Perignon champagnes, Hennessy Cognac, Louis Vuitton leather goods, and owner of such haute couture designers as Christian LaCroix, Kenzo, and Givenchy. Analysts are worried about the company's exposure to economies in Asia/Pacific, where capital markets and currencies are blowing up left and right. LVMH's recently purchased a 61% stake in DFS, a luxury goods duty-free retailer with a lock on the Pacific Rim. LVMH is now selling at about 50% of annualized sales, which is rare for a company with such a brand name stable. With the company's stake in Guinness PLC and its bold plan to stop the merger between Guinness and Grand Metropolitan PLC, there's more behind the story here than just a bunch of highfalutin fashion names.

WISCONSIN CENTRAL TRANSPORTATION CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCLX)") else Response.Write("(Nasdaq: WCLX)") end if %> lost $1 5/8 to $31 after Donaldson, Lufkin & Jenrette lowered its rating on the railroad company and international railroad developer to "market perform" from "buy." Since July 7, DLJ has lowered, raised, and then lowered again its rating on the company. Not that DLJ could be said to be indecisive on the stock, but the first downgrade was because the company reached the analyst's price objective. The upgrade came around the time that the stock sold off in connection with an employee vote to unionize. This downgrade comes two days after the company announced an agreement to purchase Tasrail from the Australian government for $16.5 million.

BLACK & DECKER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDK)") else Response.Write("(NYSE: BDK)") end if %> was drilled for a $2 13/16 loss to $38 5/16 on a Smith Barney rating downgrade to "outperform" from "buy." The stock price is still significantly above the level it hit in early December 1996 when the company said earnings would be light. Indeed, the company has turned in zero sales growth over the last six months, and EPS of $0.47 from continuing operations in the second quarter was flat over last year's results. Part of the problem has been a decrease in sales of the Snakelight, a flexible flashlight that, unhappily, doesn't lend itself to repeat sales like tissue paper or cola. Even if there has been no earnings growth, the company is a cash generator, and if it could control inventories a little better (inventory turns are a little low), the company might see better year-over-year creation of wealth for shareholders.

QUICK CUTS: Asia/Pacific closed-end mutual funds are being hit by the currency and capital markets turmoil in that region. TAIWAN FUND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWN)") else Response.Write("(NYSE: TWN)") end if %> fell $1 1/2 to $25 9/16 and GREATER CHINA FUND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GCH)") else Response.Write("(NYSE: GCH)") end if %> lost $1 1/4 to $20 3/4... TELE DANMARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLD)") else Response.Write("(NYSE: TLD)") end if %> lost $1 9/16 to $26 11/16 despite reporting a 19% increase in operating earnings in the first half of the year... Latin American stocks sold off today, with TELEBRAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBR)") else Response.Write("(NYSE: TBR)") end if %> showing one of the sharpest losses in that group, falling $7 1/8 to $117 7/8. TELEFONOS DE MEXICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMX)") else Response.Write("(NYSE: TMX)") end if %> slid $2 7/8 to $45 7/8 as the Mexican Bolsa sold off almost 3% today... RMI TITANIUM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTI)") else Response.Write("(NYSE: RTI)") end if %> lost another $1 7/16 to $20 15/16 after losing a good deal of business to a rival for the airframe titanium business of Boeing... Networking semiconductor company PMC - SIERRA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMCS)") else Response.Write("(Nasdaq: PMCS)") end if %> lost $3 1/4 to $28 11/16 as investors figure ALTERA's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALTR)") else Response.Write("(Nasdaq: ALTR)") end if %> pre-announcement of below-forecast earnings yesterday might have some pertinence to the outlook for PMC, formerly known as Sierra Semiconductor.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

The Money Mergers

Banking mergers received a lot of attention today after NATIONSBANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> bought out Florida-based BARNETT BANKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBI)") else Response.Write("(NYSE: BBI)") end if %> for somewhere in the neighborhood of $13.5 billion in stock, based on today's closing prices. Barnett shares vaulted $13 5/16 to $68 1/8 after being held for most of the morning for news pending. Unfortunately, all that energy failed to carry over to NationsBank, which sagged $3 9/16 to $59 3/4 over concerns that it was paying a pretty rich premium for the firm. The deal ranks as one of the most expensive bank mergers ever, topping both WELLS FARGO'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC)") else Response.Write("(NYSE: WFC)") end if %> acquisition of First Interstate in 1996 for $11 billion and CHASE MANHATTAN'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> purchase of Chemical Bank for $10 billion in 1995.

Based on the current shareholder's equity of Barnett Banks, NationsBank is paying roughly 4.2 times book value for Barnett, one of the highest valuations for a banking merger in the past three years. This is an 83% premium to NationsBank's own price-to-book ratio of 2.3 and does a lot to explain why investors are selling shares of NationsBank today in spite of the fact that the Barnett deal gives it 30% of the deposits in Florida. Much of this excitement over the multiple that NationsBank is paying can be explained by a number of complicated accounting factors -- unfortunately, not too many accounting-impaired commentators are willing to do the math right before a three-day weekend.

Looking at Barnett's results over the past two and a half years, one of the most striking factors is the company's near-religious frenzy in buying back its stock. Dramatically overcapitalized in 1995, the company began buying back shares in giant fistfuls, culminating in $650 million in stock buybacks in the last six months alone. One of the interesting effects stock buybacks have on corporate accounting is that they reduce book value dollar for dollar because they reduce "retained earnings," the part of shareholder's equity that measures how much of a company's earnings have been held by the company instead of being spent on frivolous stuff like dividends and share repurchases.

If you add back all of the stock Barnett has purchased over the past three years, the deal is really closer to 2.75 times book value, well below the 3.26 times book value F&M paid for FB&T in 1995 or that FIRST UNION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> paid for SIGNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBK)") else Response.Write("(NYSE: SBK)") end if %> on July 21 of this year. Even considering that Barnett's recent acquisitions of both Oxford Resources, a second-hand auto lender, and EquiCredit Corp., a consumer finance company, have both added intangibles to Barnett's shareholder's equity because of the difference between the purchase price of these corporations and their own book value at the time, the valuation of this deal is just on the high-end -- it does not redefine the high-end as it is currently being advertised.

Much has been made of the dated rule of thumb that says the average bank should be bought at 1.5 times book value. Back in 1995 when deals done above 2 times book value started to appear on a regular basis, a lot of commentators emptily assumed bank valuations had peaked. Coming out of the savings and loan debacle in the early '90s, however, most quality banks were substantially overcapitalized because of the doom and gloom scenarios that prevailed at the time (much like the Year 2000 doom and glooming that is going on now). As it became clear that a global catastrophe on the scale of the Great Depression was not about to occur, these companies decided that one way to intelligently deploy this capital would be to acquire other banks, diversify into new, higher-margin businesses, and to buy back their own stock.

The banking companies were helped along the way by reforms in the punitive, Depression-era Glass-Steagall Act that limited the amount of non-banking business a bank could do. With all of these changes in the banking industry, it is only natural that the valuation paradigm would begin to change too. Unfortunately, whenever anyone says something like this, the perma-bears come out of the coffin-like freezers they have been locked in for the last decade, wild-eyed and screaming, "Things AREN'T different this time, things AREN'T different this time."

However, if the economic realities have changed and book value is being directly affected by this, sticking to a single outdated rule for measuring bank valuations in takeovers is myopic to the point of being blind. Certainly, you can look at price-to-assets, relate the return on assets (ROA) to the multiple being paid, or use half a dozen other valid calculations to ensure that one simple measure does not become the Big Brother of stock analysis, the single hub of the universe around which everything turns. This reductionism in valuation is the same kind of silliness that you see when people obsess about price/earnings ratios to the point where they ignore the underlying growth of the company, the value of its franchise, or the actual, tangible value of the assets it owns free and clear.

Why would NationsBank be willing to pay a high price? With 10 other institutions bidding for Barnett, someone was going to have to pay a pretty dear price if they wanted the bank. With 12% of the deposit base in Florida, Barnett had a lot of room for economies of scale and cost cutting that no other bank in the U.S. could offer. NationsBank will have so much of Florida's deposit base that it will have to divest itself of some to comply with federal regulations limiting one bank to 30% of the deposits within any single state, meaning that worries about any account losses are nil as it actually has to lose accounts. The company will do business with 40% of Florida households, 40% of Florida businesses, own 25% of all car financing in the state, and control 27% of the accounts of fast growing businesses with below $50 million in sales -- all fodder for the investment banking business at NationsBank's new Montgomery Securities unit.

To have this kind of franchise in one of the fastest growing states in the country clearly was worth a lot to NationsBank, and the talk of cutting half of Barnett's operating costs to integrate all of this into its operations is not necessarily hot air. NationsBank will dump the most unattractive deposits and keep the cream of the combined crop, becoming the third largest bank in the country with probably one of the best deposit bases as a result. With the specialty finance and investment banking businesses to back up the Florida franchise, a franchise rife with older people with more valuable assets and more banking needs, NationsBank's decision to pay the price it did may in a few years make a lot more sense than people believe now.

CONFERENCE CALLS

METROWERKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTWKF)") else Response.Write("(Nasdaq: MTWKF)") end if %>
(402) 220-4219 -- replay through 8/29 @ 8:00 pm EDT

OSICOM TECHNOLOGIES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FIBR)") else Response.Write("(Nasdaq: FIBR)") end if %>
(800) 475-6701 (Access code 352514) -- replay through 9/2
(320) 365-3844 -- replay for International callers

09/03/97 (Wednesday)
ETEC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ETEC)") else Response.Write("(Nasdaq: ETEC)") end if %>
(800) 633-8284 (code: 3030112) -- replay from 7:00 pm EDT for 24 hours

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Randy Befumo (TMF Templr), a Fool
Fool on the Hill

Dale Wettlaufer (TMF Ralegh), another Fool
Heroes & Goats

Brian Bauer (TMF Hoops), and yet another Fool
Editing