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HEROES

Delray Beach, Florida-based Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %> tacked on $1 3/8 to $26 1/4 after reporting fourth quarter earnings of $0.28 per share (excluding charges), a 27% increase from $0.22 per share in the prior-year period and better than the First Call mean estimate of $0.26. For the year, the discount office supply retailer rang up EPS of $1.02 compared with $0.80 in 1996. After charges of approximately $16.1 million, or $0.05 per share after taxes, related to the company's unsuccessful merger attempt with Staples Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLS)") else Response.Write("(Nasdaq: SPLS)") end if %>, 1997 EPS comes to $0.97. Office Depot opened 42 new stores in 1997 (28 in the fourth quarter) and expects to open at least 80 more in 1998. Given that expansion plan, analysts are expecting EPS growth of 19% in the coming year, down from this year's 25% EPS growth rate. With the company reiterating growth targets for 1998, Brown Brothers Harriman repeated its "strong buy" rating on the company and Prudential repeated its "buy" rating.

Drypers Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DYPR)") else Response.Write("(Nasdaq: DYPR)") end if %> gained $3/4 to $7 1/16 after announcing that Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> has awarded the disposable diaper maker the discount retailer's Mexican and Puerto Rican private-label diaper business. In exchange, Drypers has agreed to transfer ownership of the Cozies brand name to Wal-Mart. The deal is a coup for Drypers. The company is now the sole private-label diaper supplier to every Wal-Mart store in Latin America and Puerto Rico. Wal-Mart has also agreed to carry Drypers' branded products in its stores in Mexico. All this should mean increased geographical diversification and continued sales growth for Drypers, whose international sales accounted for 36% of total sales last year versus 24% the year before. In an interview today, Drypers Chairman and Co-CEO Walter Klemp said the company is anticipating 50% sales growth from existing international operations in 1998. Drypers aims to triple sales to Latin America over the next three years. Closer to home, this month Drypers is also launching a TV advertising campaign to promote the Drypers brand.

Managed care insurance company United Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> rose $2 3/16 to $58 3/16 after reporting Q4 EPS of $0.58, in-line with the First Call mean estimate. Enrollment grew 13% in the year while operating expenses grew at a rate of more than 16%. During the fourth quarter, though, the company kept operating expense growth down to 13.6%, resulting in a Q4 medical loss ratio of 84%, which was better than the full-year 84.3% medical loss ratio. The company said, "We believe our strategic realignment will further enhance the company's ability to sustain a superior rate of growth and performance going forward." Reflecting the company's comments on trends in the managed care industry and strength in pricing, other managed care organizations also rose today. Humana <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> climbed $1 7/8 to $24 3/8, Wellpoint Health Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLP)") else Response.Write("(NYSE: WLP)") end if %> added $3 to $56 7/8, and PacifiCare Health Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHSYA)") else Response.Write("(Nasdaq: PHSYA)") end if %> climbed $1 7/8 to $59 3/8.

McDonald's Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> gained $1 13/16 to $53 after Credit Suisse First Boston initiated coverage of the ubiquitous fast-food giant with a "buy" rating. This follows McDonald's announcement on Tuesday that it has reached an agreement to acquire a minority interest in World Foods, operator of Chipotle Mexican Grill, a chain of 14 Mexican food restaurants in the Denver, Colorado, market. McDonald's Executive Vice President Patrick Flynn told Futures World News that the investment will mean no change in the company's domestic strategy of expanding its hamburger-restaurant business. "McDonald's is making an opportunistically driven minority investment in a small restaurant concept that has a strong customer following and an excellent performance record," Flynn said. The key word there is domestic, though. What the company plans to do in Latin American markets with the intellectual property and expertise it picks up in this investment wasn't addressed by Flynn.

QUICK TAKES: Dallas-based Sterling Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SSW)") else Response.Write("(NYSE: SSW)") end if %> jumped $6 3/4 to $48 9/16 after announcing late yesterday that it is raising its 1998 EPS forecast to between $2.40 and $2.50 based on better-than-expected performances of its businesses. The new forecast surpasses the First Call consensus estimate of $2.21 per share. Sterling also reported earnings of $0.49 per share for the first quarter compared with $0.33 in the prior-year period... Oil and gas drilling equipment manufacturer Varco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VRC)") else Response.Write("(NYSE: VRC)") end if %> surged $3 to $24 3/4 after yesterday reporting fourth quarter earnings of $0.28 per share, up 115% from the year before and better than the First Call consensus estimate of $0.23... Automobile insurer Mercury General Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCY)") else Response.Write("(NYSE: MCY)") end if %> shot up $5 1/2 to $55 3/8 after reporting Q4 EPS of $0.88, surpassing First Call's estimate of $0.70 and Q4 EPS of $0.51 the year before.

Canadian communication systems maker Mitel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLT)") else Response.Write("(NYSE: MLT)") end if %> climbed $1 to $11 7/8 after late yesterday announcing the $225 million cash acquisition of semiconductor firm Plessey Semiconductors Ltd. and certain related entities from General Electric Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>. Mitel financed the acquisition with $310 million of senior secured credit facilities... NAACO Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NC)") else Response.Write("(NYSE: NC)") end if %>, whose subsidiaries make forklifts and electric kitchen appliances and mine and market lignite coal and lime, advanced $8 1/16 to $126 1/16 after announcing yesterday fourth quarter earnings of $3.62 per share, compared with $1.82 for the year-earlier period... After 76 months without a contract, the United Auto Workers union has agreed to a tentative labor contract with heavy equipment manufacturer Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>. The agreement goes to a full vote next week, ending a long period of rancor during which strikes lasted for up to 1 1/2 years. Cat was up $1 9/16 to $53 9/16.

PC multimedia card maker Creative Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREAF)") else Response.Write("(Nasdaq: CREAF)") end if %> gained another $15/16 to $23 1/2 today after announcing earlier this week that it will begin shipping 3D graphics cards enabled by 3Dfx's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> Voodoo2 chipset on Feb. 20... Mercantile Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTL)") else Response.Write("(NYSE: MTL)") end if %> surged $2 9/16 to $56 1/16 after Standard & Poor's announced yesterday that the commercial bank will replace ITT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITT)") else Response.Write("(NYSE: ITT)") end if %> in the S&P 500 after the close of trading on February 20. ITT is merging with S&P REIT Index component Starwood Hotels & Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOT)") else Response.Write("(NYSE: HOT)") end if %> in a deal scheduled to close on February 21... New York-based stock brokerage firm Siebert Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIEB)") else Response.Write("(Nasdaq: SIEB)") end if %> shot up nearly 58% to $16 15/16 after announcing that it plans a four-for-one stock split in early April.

Mushroom spawn producer Sylvan Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYLN)") else Response.Write("(Nasdaq: SYLN)") end if %> soared $1 7/8 to $14 1/4 after reporting fourth quarter earnings of $0.30 per share, compared with $0.26 for the prior-year period (excluding a one-time gain)... Medical diagnostic imaging equipment maker Elbit Medical Imaging <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMITF)") else Response.Write("(Nasdaq: EMITF)") end if %> advanced $2 1/2 to $8 after announcing that it has signed an agreement to sell its Ultrasound Division to GE Medical Systems for $230 million... Paging Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAGE)") else Response.Write("(Nasdaq: PAGE)") end if %> rose $1 to $13 15/16 after CS First Boston started coverage of the wireless communications company with a "buy" rating and Merrill Lynch raised its rating on the company to "long-term buy" from "long-term accumulate." Earlier this week, PageNet said it would eliminate 30% of its workforce and focus on delivering "branded, customized, value-added wireless information services"... Trans World Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> climbed $11/16 to $12 1/8 after reporting a Q4 loss before extraordinary items of $0.44 per share, much better than the loss of $0.63 expected by analysts.

GOATS

Wireless switching products maker World Access <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAXS)") else Response.Write("(NYSE: WAXS)") end if %> slumped $2 15/16 to $27 11/16 after announcing that its Q4 earnings will be negatively impacted by planned acquisition of Cherry Communications Inc. Cherry Communications is doing business as Resurgens Communications Group and is currently under Chapter 11 bankruptcy protection, even though the company reported operating revenues of $180 million in fiscal 1997. World Access added that it will delay the announcement of its fourth quarter financial report until its negotiations with the privately owned international network access provider are concluded. The company warned that its Q4 earnings are not going to meet analysts' expectations, however, because the merger agreement prevents it from including $9.4 million in products delivered to Cherry Communications as revenue. "We're not allowed to take it as revenue," the company's CFO told Bloomberg News. "We weren't given any other avenue." First Call's mean estimate for Q4 earnings is $0.24 per share.

Telecom services provider Qwest Communications International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %> fell $5 25/32 to $67 after Joan Lappin of Gramercy Capital Management panned the stock in Business Week's "Inside Wall Street" column. Lappin said Qwest is expensive compared to competitors such as IXC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIXC)") else Response.Write("(Nasdaq: IIXC)") end if %>, which was pushed up $3 3/4 to $49 on the comments. Qwest is only starting to offer clients full telecom services, which accounted for a mere 16.5% of its fiscal 1997 revenues, Lappin said. She predicted Qwest's telecom business will account for $350 million in sales in fiscal 1998, leading to net losses of $88 million for the unit. "Qwest has made the year look terrific by reporting 1997 earnings that have little to do with its telecom activities -- which have been losing money," she said. Lappin's comparison is somewhat misguided, though, since Qwest is also a provider of fiberoptic network construction services, which are paying for the construction of its high-capacity network. Qwest is also rolling out 7.5 cents per minute long-distance voice-over-Internet protocol telephony. Based on that price, Qwest should be able to take market share from the big telecom carriers and make more money doing so with its lower-switching costs.

QUICK CUTS: Tenneco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %>, maker of Hefty trash bags and Monroe shock absorbers, was thrown for a loop after Morgan Stanley DWD downgraded the stock to "neutral" from "outperform." The stock ended the day down $1 5/16 to $40 7/8... Concrete and steel pipe manufacturer Ameron International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMN)") else Response.Write("(NYSE: AMN)") end if %> slid $3 1/2 to $58 after mutual fund company Neuberger & Berman reported owning a 10.19% stake in the company in a 13G disclosure filing... ZIP drive maker and Fool Portfolio component Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> fell $1/2 to $9 1/16 after a law firm announced that investors who bought the stock from Sept. 22, 1997 through Jan. 22, 1998 are eligible for a class action lawsuit against the company. The firm also lowered the price of its Jaz drive to $299 from $399 for the external model...

Cancer and AIDS drug developer U.S. Bioscience <% if gsSubBrand = "aolsnapshot" then Response.Write("(Amex: UBS)") else Response.Write("(Amex: UBS)") end if %> slipped $1/2 to $9 9/16 after reporting a Q4 loss of $0.19 per share, wider than the $0.17 loss expected by analysts... DNA researcher Centocor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNTO)") else Response.Write("(Nasdaq: CNTO)") end if %> lost $2 1/16 to $37 5/8 after announcing that it will sell $350 million of 7-year convertible subordinated debentures to acquire the property rights of the cardiovascular drug RETAVASE from a unit of Switzerland's Roche Holding... Lawn care company Aquagenix Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AQUX)") else Response.Write("(Nasdaq: AQUX)") end if %> was trimmed $7/16 to $5 7/8 after the company said several of its executives have been buying "substantial shares" of Aquagenix stock recently... Electronic security device maker Detection Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DETC)") else Response.Write("(Nasdaq: DETC)") end if %> lost $1 3/8 to $10 5/8 after saying that higher manufacturing costs will erode Q3 earnings. The company also announced that it will buy an Australian electronic security company for $5.1 million.

Savior Technology Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SVTG)") else Response.Write("(Nasdaq: SVTG)") end if %> dropped $1 5/16 to $11 7/16 after the computer peripheral equipment maker reported Q4 EPS of $0.19, just missing the First Call mean estimate of $0.20... SOLD! Online auction house ONSALE Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> fell $2 7/16 to $26 1/4 after reporting a Q4 loss of $0.09 per share, in-line with the First Call consensus estimate... Year 2000 software company SEEC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEC)") else Response.Write("(Nasdaq: SEEC)") end if %> lost $1 1/2 to $18 3/4 after selling an additional 1.31 million common shares at $20 per share... Illinova Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ILN)") else Response.Write("(NYSE: ILN)") end if %> was jolted $1 1/16 to $27 5/8 after the company's Illinois Power Co. subsidiary declared an alert at its Clinton nuclear power station. No radiation was released even though the plant's main cooling system was shut down for six hours... Semiconductor fabrication equipment company PRI Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRIA)") else Response.Write("(Nasdaq: PRIA)") end if %> slipped $1 5/8 to $35 3/8 after the company was downgraded by Morgan Stanley DWD to "outperform" from "strong buy" because the stock hit its target price.

Banc One Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> lost $1 3/4 to $55 after CS First Boston downgraded the shares of the Columbus, Ohio-based bank holding company to "buy" from "strong buy"... Telecommunications software provider Versatility Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VERS)") else Response.Write("(Nasdaq: VERS)") end if %> lost $2 7/16 to $3 3/16 after announcing late yesterday that it expects to report a fiscal Q3 loss of $2 per share, just a bit outside of the Zacks mean estimate of a loss of $0.09 per share... Management software company Logility Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGTY)") else Response.Write("(Nasdaq: LGTY)") end if %> dropped $4 to $9 1/4 after reporting that it expects Q3 EPS of $0.02 to $0.04, lower then the First Call mean estimate of $0.05... Simon Transportation Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIMN)") else Response.Write("(Nasdaq: SIMN)") end if %> hit a speed bump, losing $3 3/4 to $13 3/8 after reporting that it expects quarterly and fiscal year revenues and earnings to "fall substantially short" of analysts' expectations.

American Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMSWA)") else Response.Write("(Nasdaq: AMSWA)") end if %> dropped $1 3/4 to $8 1/8 after the management software developer said it expects to report Q3 EPS between $0.06 and $0.09, below the street estimate of $0.12... Shares of brokerage Hambrecht & Quist <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %> fell $2 1/2 to $32 1/8 after The Wall Street Journal reported that Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> ended merger talks with the company, apparently because Merrill objected to H&Q's practice of "spinning" shares of hot initial public offerings to its preferred clients... Tobacco distributor and fresh flower importer DIMON Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DMN)") else Response.Write("(NYSE: DMN)") end if %> wilted $3 13/16 to $17 11/16 on reporting Q2 earnings of $0.25 per share versus $0.40 per share last year, short of the First Call mean estimate of $0.51 per share.

Computer maintenance firm DecisionOne Holdings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DOCI)") else Response.Write("(Nasdaq: DOCI)") end if %> fizzled for a $2 loss to $21 7/8 after reporting a pro forma Q2 loss of $0.86 per share, much wider than the First Call consensus estimate of a loss of $0.21 per share... Coinmach Laundry Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WDRY)") else Response.Write("(Nasdaq: WDRY)") end if %> was wrung for a $2 1/4 loss to $21 after investment advisor Asensio & Co. alleged in one of its highly entertaining press releases that the provider of washers and dryers to multi-family properties overstated free cash flow in its fiscal third quarter financial report... Aircraft maintenance provider First Aviation Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FAVS)") else Response.Write("(Nasdaq: FAVS)") end if %> fell $11/16 to $5 7/8 after saying that it expects Q4 EPS of $0.11 to $0.13, well below the I/B/E/S mean estimate of $0.23. SBC Warburg Dillon Read downgraded the stock to "neutral" from "buy."

Biopharmaceutical company Biogen Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %> slipped $1 15/16 to $43 11/16 as Morgan Stanley DWD downgraded the stock to "neutral" from "outperform"... Online brokerage E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> lost $1 5/8 to $26 1/8 after a director of the company reported selling 20,000 shares and another investor said it sold 38,008 shares in two separate disclosure filings with the SEC. Earlier this week, competitor Ameritrade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> said it will continue its advertising full-court press into 1998... Petrochemical technology equipment maker ICO Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICOC)") else Response.Write("(Nasdaq: ICOC)") end if %> tumbled $7/16 to $4 15/16 after reporting a loss of approximately $0.11 per share (before a slew of extraordinary items), down from last year's Q1 EPS of $0.06 and well below the single First Call estimate of $0.02... Grocery store operator Food Lion <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FDLNB)") else Response.Write("(Nasdaq: FDLNB)") end if %> lost $7/16 to $9 3/8 despite reporting Q4 EPS of $0.18, just ahead of the First Call mean estimate of $0.17.

FOOL ON THE HILL
An Investment Opinion
by Jim Surowiecki

CSC Seeks White Knight

Computer Sciences Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSC)") else Response.Write("(NYSE: CSC)") end if %>, the $6.5 billion designer and integrator of computer systems that received an unsolicited takeover bid from software developer Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> on Wednesday, is, as they say, most definitely in play. Almost immediately after Computer Associates went public with its $108-a-share cash bid, analysts began speculating about other possible suitors for CSC, including the French consulting company Cap Gemini and the German computer services firm Debis.

That speculation was fueled further today by a report in USA Today that CSC's management is actively seeking a white knight to ride in and save the day by acquiring CSC and repelling Computer Associates' bid. The companies mentioned included all the obvious choices: IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, and EDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %>. Another possible suitor not widely considered in the press is GE Capital Information Technology Solutions, part of conglomerate General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>. Acquiring CSC would roughly double the size of that GE subsidiary. At all costs, it appears, CSC wants to avoid becoming the latest in Computer Associates' long series of acquisitions.

In part, the speculation about all the alternatives to CA is simply the result of CSC's frosty reaction to the takeover bid. Hostile takeovers have been very unusual in the computer industry, and although Computer Associates has acquired more than 60 companies in the last two decades, almost all of them have been friendly deals. CA's willingness to make an offer for CSC in the face of management opposition suggests that it views the deal as crucial to its future growth, but it is decidedly unclear how a hostile takeover would permit a smooth integration of CSC's business into Computer Associates' operations. And given that CSC's major assets are its 44,000 employees, upon whose goodwill the company's success depends, an unfriendly acquisition raises the specter of CSC workers fleeing en masse, especially since Computer Associates has a well-deserved reputation as a lean, mean operation, which is in decided contrast to CSC's looser, more low-key approach.

Even more important than doubts about the wisdom of a hostile takeover, though, are concerns about the poor fit between the businesses of the two companies. Computer Associates is primarily a provider of complex software products that help corporations organize and maintain their information technology networks and infrastructure. CSC, by contrast, is fundamentally a consulting firm specializing in information technology. It helps companies do a better job of integrating their various computer and telecommunication systems. (As Wednesday's Fool Plate Special pointed out, CSC is also one of the world's largest providers of solutions to the so-called "Year 2000 problem.") Now, from one angle, you can see why Computer Associates believes that the two companies are a perfect match. With the addition of CSC, Computer Associates will be able to offer its clients everything they need in the information technology field, and will be able to compete more successfully with IBM, which is both a large corporate software provider and has a huge services division.

From another angle, though, Computer Associates' dream of a perfect match looks more like another example of the delusion of synergy. Instead of one and one adding up to three, the collision between two distinct businesses can add up to less than two. Real synergy occurs, if ever, when two companies are able to learn from each other and to fill holes that have previously gone unplugged. In this case, CSC would seem to have a better chance of doing that with companies like Cap Gemini or IBM, which are strong where CSC is weak and, to a certain extent, vice versa. Cap Gemini could compliment CSC geographically, creating a firm that would have a strong presence in both the U.S. and Europe, while IBM could benefit from CSC's strong Year 2000 business. In addition, the clash in corporate cultures between Computer Associates and CSC would be a very real one, and should not be discounted as a reason for imagining that any acquisition would be problematic.

It's not surprising, then, that investors dumped Computer Associates' stock when the takeover bid was announced, driving it down more than eight points in two days, even as skepticism about the possible success of the bid caused CSC's stock to fall nearly ten points on Wednesday from its intra-day high (though it still finished the day up more than 12%). The really interesting question now is what CSC's board of directors will do. Computer Associates has yet to make a formal tender offer, which means CSC is under no legal obligation to respond. But yesterday, a CSC shareholder filed suit, asking a Nevada court to compel CSC's board to negotiate with Computer Associates and alleging that the board has "clear and material conflicts of interest" that are keeping it from taking CA's offer seriously. CSC, predictably, had no comment, while Computer Associates insisted that it had nothing to do with the lawsuit.

In legal terms, the CSC board is on relatively firm ground, since courts have given boards of directors considerable latitude in deciding whether a takeover bid is in the best interests of the company. A J.P. Morgan study, in fact, shows that in the last four years only a third of hostile takeover bids have succeeded. And while the fact that the Computer Associates bid is in cash rather than in stock makes it more difficult to dismiss, it seems likely that the board will both seek a higher price for the company and will look for a buyer within the consulting and services field.

Hostile takeovers are odd things, in the sense that the acquiring company wants to make its bid high enough to seem credible and to lure shareholders into selling, but low enough so that the deal makes sense financially. That Computer Associates is offering to buy CSC at what was a premium, after all, doesn't mean that the deal was necessarily a smart one for CSC shareholders. Consider, for example, if some smart company had offered to buy America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> at $60 a share when AOL was trading at $33 a share. That would have meant that stockholders could have nearly doubled their money immediately. But since AOL's stock has risen almost 300% since its 52-week low, AOL stockholders would have essentially lost money by selling out.

Computer Sciences Corp. is most definitely not AOL and, in fact, it seems possible that Computer Associates' bid was overgenerous at 1.5 times annual sales. But the broader point still stands, which is that in evaluating a takeover offer, investors should look not just at how much money they're going to make in the short term, but also at how much potential long-term gain they may be giving up. Any company whose shares you're really anxious to dump when a takeover offer comes along is probably a company you shouldn't own in the first place.

CONFERENCE CALLS

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Dale Wettlaufer (TMF Ralegh), Fool
Alex Schay (TMF Nexus6), Fool
Jim Surowiecki (TMF Cinder), Fool
Yi-Hsin Chang (TMF Puck), Fool
Brian Graney (TMF Panic), Fool
Contributing Writers

Brian Bauer (TMF Hoops), Fool
Editor