Internet connectivity provider NETCOM ON-LINE COMMUNICATION SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETC)") else Response.Write("(Nasdaq: NETC)") end if %> surged $6 1/16 to $21 3/16 after agreeing to merge with competitive local exchange carrier ICG COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICGX)") else Response.Write("(Nasdaq: ICGX)") end if %> in a stock swap valuing Netcom at $17.42 per share, net of cash and debt on Netcom's books. Assigning a 10% sequential growth rate in revenues for Netcom over the coming 12 months, that acquisition price is equal to revenues. PSINET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> is also known to be on the block, but it seems that founder William Schraeder has not wanted to cut a deal at a valuation level potential acquirers are looking for. Assuming a 15% sequential growth rate in PSINet's revenues over the coming 12 months, its price/sales ratio (adjusted for net cash on the balance sheet) stands at 2.14. At twice the valuation of Netcom, one has to wonder if the differences in the asset composition and customer base are worth the premium price PSINet now carries, or whether its strategy of waiting is flawed. Those who believe that the CLECs need a facilities-based Internet service provider to be competitive might agree with that strategy.
British tobacco peddler and financial services company B.A.T. INDUSTRIES PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTI)") else Response.Write("(NYSE: BTI)") end if %> gained $1 13/16 to $20 on word that the company is conducting talks to spin off its tobacco unit and merge the rest of the company with Zurich Insurance Group, a diversified financial services firm best known perhaps for reinsurance and now mutual funds management. The tobacco unit, meanwhile, would be an alluring merger target for former American Brands (now Fortune Brands) company GALLAHER GROUP PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLH)") else Response.Write("(NYSE: GLH)") end if %>, maker of Benson & Hedges and other European brands. Based on the prospect that Gallaher could become the world's largest tobacco company by merging with the maker of Kool, Lucky Strike, 555, and other popular brands of fags, Gallaher rose $2 to $21 1/8.
Internet protocol (IP) telephony software companies did well today as Barron's highlighted them in this week's edition. VOCALTEC COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOCLF)") else Response.Write("(Nasdaq: VOCLF)") end if %>, which has crafted deals with MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> and DEUTSCHE TELEKOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DT)") else Response.Write("(NYSE: DT)") end if %> and is by far the market share leader for Voice over IP (VoIP) software, gained $3 9/16 to $29 9/16. RSL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSLCF)") else Response.Write("(Nasdaq: RSLCF)") end if %> gained $1 1/2 to $29 3/8 as the article profiled the company's Internet phone cards and Internet gateways used to make $0.48 per minute phone calls to Japan. Even story stock CAMELOT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAML)") else Response.Write("(Nasdaq: CAML)") end if %> got into the act, gaining $1 1/8 to $6 7/8. While the article is a good overview of the market, it failed to mention that VoIP customers may soon elect to pay for higher-quality service with Quality of Service (QoS) guarantees and that corporations are likely to adopt the software for cheap internal communications via dedicated networks, which can deliver the needed bandwidth and network management to make VoIP viable.
QUICK TAKES: IMATRON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMAT)") else Response.Write("(Nasdaq: IMAT)") end if %> better than doubled today, gaining $2 13/16 to $5 5/16 after the medical equipment company said its Ultrafast CT scanner can track the progression of coronary artery disease even in patients with lower cholesterol levels... Music and video marketer K-TEL INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> rose $1 3/8 to $7 after reporting a 34% increase in Q4 revenues and EPS of $0.02, compared with a loss of $0.38 per share in last year's fourth quarter... Voice over IP software company NETSPEAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSPK)") else Response.Write("(Nasdaq: NSPK)") end if %> rose $3 to $21 as Barron's profiled Internet telephony software companies this week's... Internet service provider CONCENTRIC NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNCX)") else Response.Write("(Nasdaq: CNCX)") end if %> rose $2 to $14 3/4 on the back of today's Netcom On-Line acquisition news... Ricochet wireless wide area network access provider METRICOM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCOM)") else Response.Write("(Nasdaq: MCOM)") end if %> added $1 7/8 to $14 3/4 after deep-pocketed Microsoft co-founder Paul Allen raised his ownership position to the 49% level, as had been speculated upon recently.
A. SCHULMAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHLM)") else Response.Write("(Nasdaq: SHLM)") end if %> moved $2 15/16 higher to $24 7/8 after the maker of plastics and resins said it feels comfortable with 1997 EPS estimates of $1.35 and 1998's mean EPS estimate of $1.55� Hydrogen fuel cell development company BALLARD POWER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLDPF)") else Response.Write("(Nasdaq: BLDPF)") end if %> gained another $8 1/8 to $69 3/8 as investors buy into the company's story of freeing the world from fossil fuel internal combustion engines, which is significantly strengthened by the sponsorship and investment of German engineering and industrial dreadnought DAIMLER BENZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %>� REED INTERNATIONAL PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RUK)") else Response.Write("(NYSE: RUK)") end if %> rose $6 1/4 to $41 after the British specialty publisher said it is in talks to merge with Wolters Kluwer NV to form the world's largest publisher of trade and scientific journals. Reed's partner in an Anglo-Dutch partnership, ELSEVIER NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENL)") else Response.Write("(NYSE: ENL)") end if %>, also moved higher on the news, gaining $3 5/8 to $33 1/4� Home healthcare provider APRIA HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHG)") else Response.Write("(NYSE: AHG)") end if %> added $1 9/16 to $16 1/4 before TRANSWORLD HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWHH)") else Response.Write("(Nasdaq: TWHH)") end if %> and Hyperion Partners II L.P. offered to acquire the company for $14 per share in cash plus $4 per share in stock in the resulting merged entity.
New Zealand-based oil and gas company FLETCHER CHALLENGE ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FEG)") else Response.Write("(NYSE: FEG)") end if %> advanced $5 5/16 to $52 3/4 after Morgan Stanley initiated coverage of the company with a "strong buy" rating noting the low valuation relative to estimated 1998 cash flow... Communications headset manufacturer PLANTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLT)") else Response.Write("(NYSE: PLT)") end if %> nosed ahead $2 3/4 to $40 1/2 on reporting Q2 EPS of $0.51, beating the mean Zacks estimate of $0.48... BOISE CASCADE OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %> gained $1 3/8 to $20 3/8 on saying that it expects further improvement in the fourth quarter. Earlier, Boise reported solid third-quarter earnings of $0.20 a share.
Cancer treatment products company NEOPROBE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEOP)") else Response.Write("(Nasdaq: NEOP)") end if %> went into remission, falling $1 3/4 to $12 after announcing that it had terminated its marketing agreement with U.S. SURGICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USS)") else Response.Write("(NYSE: USS)") end if %>. Back in September 1996, U.S. Surgical entered an agreement to market Neoprobe's combination drug/medical device product used for the detection of colorectal cancer. Down over 25% in this morning, Neoprobe battled back after it was revealed that the two companies were trying to work out a new partnership in which U.S. Surgical would have control over the manufacturing process, which was the reason for the termination of the initial agreement. U.S. Surgical spokesman Steve Rose commented on Neoprobe's inability to manufacture its products fast enough, "They have a good product, but they just weren't able to keep up." In addition, Raymond James lowered its rating on Neoprobe shares to "neutral" from "buy."
QUICK CUTS: Manitowoc, Wisconsin-based maker of ice cube machines, commercial refrigeration equipment, and lattice boom cranes MANITOWOC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTW)") else Response.Write("(NYSE: MTW)") end if %> lost $4 7/16 to $34 1/16 on reporting earnings of $0.55 a share, short of analysts' estimates of $0.60 a share ($0.04 of earnings were shifted to the fourth quarter)... Contract oil and gas driller ROWAN COS. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDC)") else Response.Write("(NYSE: RDC)") end if %> fell $2 9/16 to $40 5/16 after posting 3Q EPS of $0.61 versus estimates of $0.60... Medical device company VIDAMED INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VIDA)") else Response.Write("(Nasdaq: VIDA)") end if %> fell $1 9/16 to $5 1/2 after Hambrecht & Quist downgraded the company to "hold" from "buy" and said it does not expect the company to post a profit until early 2000... Shares of removable computer storage products company SYQUEST TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYQT)") else Response.Write("(Nasdaq: SYQT)") end if %> fell today $1/2 to $5 3/16 despite HD Brous & Co.'s reiteration of its "speculative trading buy" rating on the company... Japanese supermarket retailer DAIEI INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAIEY)") else Response.Write("(Nasdaq: DAIEY)") end if %> fell $2 1/2 to $9 1/2 after a Japanese newspaper reported on Friday that the company's estimated pre-tax profit in the half year ended in August fell 50% to 3 billion yen.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
The Curious Case of Sterling
How can a subsidiary be worth more than the parent company? When the names of both enterprises involved begin with Sterling, apparently -- and the subsidiary isn't really a subsidiary anymore. STERLING SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SSW)") else Response.Write("(NYSE: SSW)") end if %>, with a $1.4 billion market cap, is the proud parent company of $3.4 billion STERLING COMMERCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SE)") else Response.Write("(NYSE: SE)") end if %>, which only came public in March of 1996. Doubtless intrepid readers are wondering how such a strange circumstance came about and whether or not this constitutes an investment opportunity.
Public since 1983, Sterling Software has been a steady if unimpressive performer, growing its share value at an 11.8% annual rate since 1987. The Dallas-based software firm is among the largest software providers in the world, making tools for network management, applications development, and data access for a variety of customers. The company has historically grown by gobbling up smaller software vendors and has digested 26 over the past 14 years. Possibly the largest and most indigestible of these acquisitions was KnowledgeWare in 1994, which resulted in a flurry of legal activity as that company misrepresented its financial status.
Sterling Software shares were subject to a huge run-up in 1996 in anticipation of the October 8, 1996 spin-off of Sterling Commerce to shareholders. A leader in electronic data interchange (EDI), Sterling Commerce represented Sterling Software's largest division, and management's prescience that the two firms would be more valuable separate than together appeared to be accurate. Sterling Software shareholders received 1.5926 shares of Sterling Commerce for each share they controlled.
Looking at a three-year price chart of Sterling Software, you can see the precipitous drop the day Sterling Commerce was spun-off, reflecting the fact that the spin-off was treated as a dividend and the share price was reduced as a result. Two months before, U.S. LONG DISTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USLD)") else Response.Write("(Nasdaq: USLD)") end if %> had been involved in a similar spin-off where the company that was spun-off, BILLING INFORMATION CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BILL)") else Response.Write("(Nasdaq: BILL)") end if %>, was actually worth more than the parent company. Unlike that pair, however, shares of Sterling Software have gone nowhere since they were sundered from Sterling Commerce. Right after the spin-off, Sterling Commerce enjoyed a brief run into the mid-$40s and has since waffled in the mid-$30 area.
This is an instance where the performance prior to a spin-off was actually better than the performance after a spin-off. As Sterling Commerce recently ended its license with Sterling Software and is buying its North American locations from the parent company, the label of "subsidiary" that appears in much of the investment literature about the company seems misguided. It appears after the recent restructuring, all the two companies have in common is a name. Under terms of the agreement, Sterling Commerce will pay $5.2 million plus book value for the facilities, cash that Sterling Software will probably use to help finance its recent acquisition of the software operations of TEXAS INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %>.
Investors who may be skeptical at this point are cautioned to remember that the outperformance that tends to arise from spin-offs usually comes a year or two after the entire spin-off process has been completed. Exactly a year after the complete and final separation of Sterling Software from Sterling Commerce, both stocks stand pretty much where they were the day the deal was completed. Although in the near term charges resulting from the acquisition of the Texas Instruments operations and the write-down of the Sterling Commerce assets have befuddled Sterling Software's income statement, analysts are looking for the company to regain its 20%-plus annualized rate of growth after this year. With the shares currently trading at 16.6 times forward earnings estimates, they may be worth a look.
ECHLIN, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(800) 683-1535 (code: refocus) -- replay through 10/17
ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
(800) 475-6701 (code: 358559) -- replay through 10/17
10/14/97 (Tuesday)
SPRINT CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>
8:30 am EDT
(800) 659-4363 -- live
(816) 650-0613 -- live for international callers
(800) 659-4363 -- replay @ 10:30 am, 2:30 pm, 4:30 pm EDT
10/14/97 (Tuesday)
HARLEY-DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %>
(402) 220-0107 -- replay
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