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HEROES

Prepared foods manufacturer and restaurant franchisor WSMP Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSMP)") else Response.Write("(Nasdaq: WSMP)") end if %> jumped $2 3/4 to $23 3/4 after announcing it will acquire the core business of Pierre Foods from chicken processing giant Tyson Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSN)") else Response.Write("(NYSE: TSN)") end if %>. With the acquisition, WSMP aims to become more vertically integrated in its sandwich business, with its own precooked meats, bread, packaging, marketing, and distribution. The company hopes to become the major force in the $2 billion U.S. prepared sandwich business. Cincinnati-based Pierre Foods produces and distributes packaged, precooked food products, including sandwiches, to retail and institutional markets such as schools, the healthcare industry, and large convenience store operators. The core business that WSMP is acquiring represents about $150 million in sales and competitors include Sara Lee <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>, Bridgford Foods Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRID)") else Response.Write("(Nasdaq: BRID)") end if %>, and the McLane unit of Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>.

International Business Machines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> was the kingmaker today, catapulting Equinox Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EQNX)") else Response.Write("(Nasdaq: EQNX)") end if %> and driving up Number Nine Visual Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NINE)") else Response.Write("(Nasdaq: NINE)") end if %>. Server-based communications products developer Equinox Systems leapt $2 3/8 to $19 1/2 after announcing that IBM will incorporate its SuperSerial communications products into systems for the U.S. Postal Service's "Point-of-Service One" project. Number Nine more than doubled to finish up $1 3/8 at $2 7/8 after the maker of high-performance PC graphic accelerators and processors announced a new contract with IBM whereby Number Nine's graphics accelerator will be standard equipment in IBM's new line of Netfinity 3500 Enterprise Servers for Small Business. Number Nine, formerly a $20+ stock that generated 1997 revenues of $47 million but gross profits of only $3.15 million, traded heavily on volume of more than 2 million shares compared with its 30-day average volume of 122,000.

QUICK TAKES: AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> connected for a $1 7/16 gain to $62 11/16 after announcing it has won a five-year, $750 million contract to provide data networking services to Citibank, a subsidiary of Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %>... Affymetrix Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFFX)") else Response.Write("(Nasdaq: AFFX)") end if %>, which designed its GeneChip system to acquire, analyze, and manage complex genetic information, gained $4 1/8 to $32 3/4 after announcing it will sell roughly 1.6 million shares of Series AA Preferred Stock to Glaxo Wellcome Americas, a unit of Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %>, for $50 million. The stock will be convertible into Affymetrix common stock at about $40 a share... Vancouver-based industrial equipment auctioneer Ritchie Brothers Auctioneers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBA)") else Response.Write("(NYSE: RBA)") end if %> shot up $4 1/8 to $21 1/8 from its initial offering price of $17.

Pfeiffer Vacuum Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PV)") else Response.Write("(NYSE: PV)") end if %>, a German manufacturer of vacuum pumps used in a multitude of manufacturing applications, powered up $4 1/8 to $38 after announcing its intent to list shares on Frankfurt's "Neuer Markt" on April 15... Internet stocks continued to climb this morning due to positive sentiment about the sector. Internet/intranet consultant USWeb Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USWB)") else Response.Write("(Nasdaq: USWB)") end if %> advanced $1 9/32 to $21 7/32. RealNetworks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %>, which develops streaming software that allows audio and video broadcasters to deliver products over the Net in real time, jumped $1 7/16 to $18 1/8. Australian Internet service provider OzEmail Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OZEMY)") else Response.Write("(Nasdaq: OZEMY)") end if %> gained $2 13/16 to $12 11/16. Cyber-auctioneer ONSALE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> bid up $2 to $35, and Internet secure-payment services provider CyberCash Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> registered $1 15/16 to $14 9/16.

Durakon Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRKN)") else Response.Write("(Nasdaq: DRKN)") end if %> leapt $7/8 to $9 after announcing that it plans to buy back up to 600,000 shares, or just under 10% of the company's diluted share count. The manufacturer of tow trucks, car carriers, and bed liners for trucks also reported fourth quarter earnings of $0.18 per share compared with $0.31 in the year-earlier period... Southern Pacific Funding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFC)") else Response.Write("(NYSE: SFC)") end if %> rebounded $3/4 to $16 15/16 after its fall yesterday as the sub-prime home-equity lender reiterated its confidence in establishing cash neutral operations by the end of the year. As previously announced, Southern Pacific Funding plans to sell a portion of its loans for cash this year... Specialty hospital supplies manufacturer Maxxim Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAM)") else Response.Write("(NYSE: MAM)") end if %> gained $1 5/8 to $27 after Standard & Poor's affirmed its double-B'-minus rating on the company's corporate credit and said its outlook is stable. The company also announced the completion of a secondary offering of 3.5 million shares at $24 a share.

StarTek Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SRT)") else Response.Write("(NYSE: SRT)") end if %> climbed $9/16 to $10 13/16 after the integrated outsourced services provider announced plans to open a new 22,000-square-foot call center in Laramie, Wyoming, in April... Credit and debit card-processing company Total System Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSS)") else Response.Write("(NYSE: TSS)") end if %> added $2 3/8 to $31 1/4 after announcing yesterday that it is negotiating with Sears, Roebuck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> to support Sears' private-label credit card accounts, which have led to the retailer's higher bad debt reserves... Nortek Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NTK)") else Response.Write("(NYSE: NTK)") end if %>, which makes building, remodeling, and environmental control products, leapt $3 1/16 to $34 1/16 after announcing that it has agreed to acquire NuTone Inc., a wholly owned subsidiary of Williams Plc and maker of built-in home products, for $242.5 million in cash.

Science products and services company Fisher Scientific International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSH)") else Response.Write("(NYSE: FSH)") end if %> moved up $3 to $54 3/4 after announcing that it will effect a five-for-one stock split on March 19... Advertising holding company True North Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TNO)") else Response.Write("(NYSE: TNO)") end if %> headed up $1 13/16 to $29 9/16 after reporting fourth quarter earnings of $0.59 per share before charges, compared with $0.57 for the year-earlier period and the First Call mean estimate of $0.67. Merrill Lynch raised its long-term rating on the company to "buy" from "accumulate" while keeping its "near-term accumulate" rating... Carpenter Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRS)") else Response.Write("(NYSE: CRS)") end if %>, manufacturer of specialty materials such as stainless steel and titanium, rose $2 5/8 to $50 11/16 from an initial offering price of $48 1/16 on about 3.16 million shares... Software company Waters Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAT)") else Response.Write("(NYSE: WAT)") end if %> gained $2 5/16 to $48 3/8 after announcing that pharmaceutical firm Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> has chosen the company to be its sole provider of liquid chromatography data management software.

RATINGS CHANGES: Continental Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI.A)") else Response.Write("(NYSE: CAI.A)") end if %> took off for $4 3/8 to $61 3/4 after Morgan Stanley Dean Witter raised its rating on the airline to "strong buy" from "outperform" and gave the stock a 12-month target of $70 a share... Software and systems consultant Computer Sciences Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSC)") else Response.Write("(NYSE: CSC)") end if %> gained $2 3/8 to $96 15/16 after Merrill Lynch upgraded its short-term rating on the company to "buy" from "accumulate"... Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> jumped $4 21/32 to $42 7/16 after Salomon Smith Barney raised its rating on the computer systems, semiconductor, and software company to "buy" from "outperform"... Circuit City Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %> added $3 1/4 to $46 5/8 after Merrill Lynch raised its near-term rating on the consumer electronics retailer to "buy" from "accumulate" while maintaining its "long-term buy" rating.

Bear Stearns upgraded its rating on Ruby Tuesday <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RI)") else Response.Write("(NYSE: RI)") end if %> to "buy" from "neutral," driving the restaurant chain stock up $1 to $26 5/8... In the wake of its announcement to acquire Canadian forest products company Avenor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANR)") else Response.Write("(NYSE: ANR)") end if %>, paper producer Bowater Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %> rose $5 3/16 to $55 after Merrill Lynch raised its short-term rating on the newsprint producer to "buy" from "accumulate"... Facilities-based telecommunications company Pacific Gateway Exchange <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PGEX)") else Response.Write("(Nasdaq: PGEX)") end if %> climbed $5 1/4 to $50 1/2 after Bear Stearns started coverage of the company with a "buy" rating... Deutsche Morgan Grenfell started covering Micromuse Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUSE)") else Response.Write("(Nasdaq: MUSE)") end if %> with a "buy" rating, driving the information technology services provider up $2 13/16 to $23 7/16.

ATS Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATSI)") else Response.Write("(Nasdaq: ATSI)") end if %> gained $3/4 to $6 1/4 after Raymond James initiated coverage of the mechanical heart valve maker with "buy" rating... Teen catalog retailer dELiA*s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLIA)") else Response.Write("(Nasdaq: DLIA)") end if %> advanced $3 to $29 after Rodman & Renshaw raised its rating on the company to "buy" from "hold"... Arterial Vascular Engineering <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVEI)") else Response.Write("(Nasdaq: AVEI)") end if %> advanced $3 3/4 to $43 9/16 after J.P. Morgan raised its first quarter EPS estimate for the coronary stent systems manufacturer to $0.45 from $0.35... Paine Webber raised its rating on USX-Marathon Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRO)") else Response.Write("(NYSE: MRO)") end if %> to "attractive" from "neutral," sending the oil company's stock up $1 11/16 to $35 13/16.

GOATS

Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> fell $7 1/4 to $29 5/8 today after the Illinois Attorney General sued the computer technology school for fraud stemming from the way it enticed potential students to enroll in courses at one of its campuses in the state. According to the Attorney General, the company allegedly misrepresented how easily students could transfer credits to other colleges, inflated the expected starting salaries and job placement statistics for graduates, understated classroom size, and failed to provide enough computers, books, and equipment to the students. The Illinois AG is looking to suspend the company's operating charter in Illinois and is asking for restitution, a $50,000 civil penalty, and $50,000 for each of the eight alleged violations. Considering that the company's Illinois facilities contributed roughly 11% of the total revenues generated in 1997 (on a sales-per-square-foot basis), investors may want to evaluate whether a little more than "a worst case scenario" has been factored into the price today or whether more states might jump on the legal bandwagon, deflating the company's lofty valuation further.

Consolidated Cigar Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIG)") else Response.Write("(NYSE: CIG)") end if %> was stepped on for $3 3/4 to $21 after blowing smoke in investors' faces today, announcing that it expects fiscal Q1 earnings to show little or no growth compared to the same period a year ago and falling short of the street's mean earnings estimate of $0.37 per share. The company said sales have slowed due to inventory imbalances, an excess supply of heretofore unknown brands in the marketplace, and production problems at its new plant in Mexico. However, the recent love affair between U.S. consumers and fat, expensive stogies has not cooled, according to the company. It expects the Q1 results will not be indicative of the entire year, adding that fiscal 1998 EPS will be more than 20% higher than in 1997. The news pulled other cigar makers lower, with recent Daily Trouble subject General Cigar Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPP)") else Response.Write("(NYSE: MPP)") end if %> losing $1 3/16 to $17 5/16, Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %> dropping $5/16 to $14 3/4, and 800-JR CIGAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JRJR)") else Response.Write("(Nasdaq: JRJR)") end if %> falling $2 3/8 to $21 3/4.

Transworld HealthCare <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWHH)") else Response.Write("(Nasdaq: TWHH)") end if %> slid $1/2 to $6 after it ended talks with fellow healthcare services provider HealthCall Group Plc about a possible buyout bid. Transworld declined to give a reason why it was pulling its expected offer for the British firm, saying only that it "has no present intention" to buy the firm. The company's bid was rumored to value HealthCall at around $96.5 million. The acquisition would have beefed up the company's U.K. operations, which currently consist of 72 medical supply locations in the country. With Transworld out of the way, the door has been flung wide open for a management buyout group made up of HealthCall directors and merchant bankers from National Westminster Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NW)") else Response.Write("(NYSE: NW)") end if %> to buy the company. The management group, which is now the sole bidder, submitted an offer last month that valued the company at about $82.6 million.

QUICK CUTS: Satellite maker Loral Space and Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOR)") else Response.Write("(NYSE: LOR)") end if %> gave back $1 3/8 to $27 15/16 after running up 13.5% yesterday on releasing its Q4 earnings report... Digital imagery and effects developer Discreet Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSLGF)") else Response.Write("(Nasdaq: DSLGF)") end if %> lost $2 11/16 to $22 3/8 after agreeing to buy Toronto-based digital video software developer MGI Software in a stock swap valued at $108 million... Communications systems equipment provider Andrew Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANDW)") else Response.Write("(Nasdaq: ANDW)") end if %> slipped $3 5/16 to $24 3/4 before trading was halted around 3:30 p.m. ET pending further news from the company. After the bell, the firm announced that slower sales and delays in wireless infrastructure construction in Brazil and Asia will result in fiscal Q2 EPS of about $0.28, a nickel below the First Call mean estimate.

Cable TV programmer USA Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USAI)") else Response.Write("(Nasdaq: USAI)") end if %> fell $1 1/2 to $51 1/4 after agreeing to acquire the 50.4% stake in Ticketmaster Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKTM)") else Response.Write("(Nasdaq: TKTM)") end if %> that it does not already own for about $400 million, or $28.80 per share -- a 9% premium to the stock's closing price yesterday... Arrow Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARW)") else Response.Write("(NYSE: ARW)") end if %> was shot down, losing $1 3/4 to $33 15/16 after Salomon Smith Barney downgraded the electronic components producer to "neutral" from "buy"... Flat rolled carbon, stainless, and tubular steel products maker Olympic Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZEUS)") else Response.Write("(Nasdaq: ZEUS)") end if %> melted $1 7/8 to $14 3/8 after the company was downgraded to "market outperform" from "trading buy" by Goldman Sachs... Semiconductor test equipment maker Aseco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASEC)") else Response.Write("(Nasdaq: ASEC)") end if %> shorted out $1 3/8 to $8 1/8 after warning that its fiscal Q4 earnings will come in well below expectations due to lower demand for its core products, which has led to a bookings slowdown.

Telecom network synchronization products manufacturer Datum Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DATM)") else Response.Write("(Nasdaq: DATM)") end if %> slumped $2 3/8 to $12 7/8 after issuing a warning that the Asian financial crisis will result in a fiscal Q1 loss of $0.30 per share on sales of between $20 and $22 million. The First Call mean estimate called for earnings of $0.02... Spectrian Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPCT)") else Response.Write("(Nasdaq: SPCT)") end if %>, which supplies power amplifiers to wireless communications services providers, dipped $1/2 to $16 on warning after the bell yesterday that it will report lower-than-anticipated fiscal Q4 revenues that will be about 5% to 26% lower than during the same period a year ago. The company will also eliminate about 25% of its workforce and take a $500,000 charge... Semiconductor wafer processing equipment maker Silicon Valley Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SVGI)") else Response.Write("(Nasdaq: SVGI)") end if %> sank $2 15/16 to $21 1/16 on warning that it expects fiscal Q2 earnings to come in at about $0.29 per share, 25% below the street's expectation of $0.39 per share.

White Plains, N.Y.-based electric power producer Trigen Energy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TGN)") else Response.Write("(NYSE: TGN)") end if %> was zapped for a $1 1/16 loss to $16 7/16 after PECO Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PE)") else Response.Write("(NYSE: PE)") end if %> said it will not pay the full contract price for energy delivered by the Grays Ferry Cogeneration Partnership, which includes Trigen, PECO, and NRG Generating <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRGG)") else Response.Write("(Nasdaq: NRGG)") end if %>... Security First Network Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFNB)") else Response.Write("(Nasdaq: SFNB)") end if %> fell $1 1/8 to $10 5/8 after Royal Bank of Canada <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RY)") else Response.Write("(NYSE: RY)") end if %> yesterday agreed to buy for $20 million the Internet bank that has $55 million in deposits and $61 million in loans and securities... Office supply retailer Staples Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLS)") else Response.Write("(Nasdaq: SPLS)") end if %> dropped $1 to $22 5/16 after the company announced that its chairman and CEO, Thomas G. Stemberg, exercised 1.3 million options to buy common shares. Netting out a sale of 1,143,000 shares, Stemberg now owns 2.1 million shares, or about 1% of the company... Pairgain Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAIR)") else Response.Write("(Nasdaq: PAIR)") end if %> fell $1 5/8 to $18 7/16 on even thought Hambrecht & Quist reiterated its "buy" rating on the digital subscriber line (DSL) products company.

FOOL ON THE HILL
An Investment Opinion
by Jim Surowiecki

Merger in Jeopardy

And then there were four again. In a startling about-face, both the Justice Department and the Pentagon have announced their opposition to the proposed merger between defense giants Lockheed Martin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMT)") else Response.Write("(NYSE: LMT)") end if %> and Northrop Grumman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOC)") else Response.Write("(NYSE: NOC)") end if %>. While the two companies are engaged in continuing discussions with the government in an attempt to allay antitrust concerns, it seems increasingly likely that the deal will be quashed. A joint statement from the two companies, in fact, said if they failed to convince the Justice Department that the deal should be approved, "it is anticipated the government will move to block the transaction."

Although the Justice Department and the Federal Trade Commission have been considerably more vigilant on the antitrust front in recent years, almost no one saw Monday's announcement coming, least of all shareholders in Northrop Grumman, who ran for the doors on the news and sent the stock's price down 20 points in a single day. At the time the deal was announced back in July, the Wall Street Journal reported, "Most observers expect that the Lockheed-Northrop deal will ultimately be approved." In general, the market accepted Lockheed's argument that there was little overlap in the companies' business and that the cost savings from the merger would be sizable. In the months since, there had been no real signs that these arguments were not winning the day.

In no small part, the ease with which investors assumed that the Lockheed-Northrop deal would vault any regulatory hurdles was the product of the Defense Department's own attempts to encourage consolidation in the industry. In 1993, William Perry, then Deputy Secretary of Defense, told a group of defense industry executives that in the absence of mergers, some of them would be driven out of business. In the wake of substantial cuts in weapons spending and a dramatic reduction in the number of different weapons systems used by the U.S. military (the Pentagon, for example, will buy just three new fighter aircraft models over the next decade), the duplication and overlap engendered by a crowded defense industry seemed to be in no one's best interests. Ironically, by encouraging mergers the Pentagon rejected arguments about the importance of competition in spurring innovation in favor of a stance that saw competition as essentially wasteful.

At the same time, the Lockheed-Northrop deal fit into a pattern of mergers -- including the Boeing-McDonnell Douglas deal and the abortive British Telecom-MCI deal -- that the Justice Department had okayed because their real impact would be on global markets rather than domestic ones. Since a larger Lockheed would be a stronger player abroad, particularly in its aggressive pursuit of armaments contracts in Eastern Europe, it seemed possible that the government would view the merger as being in the national interest.

On the other hand, in retrospect it seems clear that there were storm clouds already gathering as the deal was announced. One defense industry attorney said at the time, "The door is clearly closing at high speed on large-denomination defense mergers," and Joel Klein, the head of antitrust at the Justice Department and Bill Gates' chief nemesis, told the industry not to expect "carte blanche approval" of new mergers. The concerns that appear to have sabotaged the merger -- most notably doubts about its impact on innovation in advanced weapons technologies and electronics -- were present from the beginning.

Lockheed Martin and Northrop are not direct competitors in most areas, but they do have substantial overlap in the field of electronic countermeasures, such as anti-radar devices. A divestiture of assets in this field, much like Raytheon's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTN)") else Response.Write("(NYSE: RTN)") end if %> sale of a major semiconductor chip-making operation when it bought the defense operations of Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %>, would certainly be a necessary step in answering the government's concerns, but even that, it now appears, may not be enough. Doubts about whether the merger of the companies' research and development pipelines would hurt technological progress and a more general concern that reducing the entire defense industry to three major players would erode the supposed benefits of the cost reductions Lockheed promises have cast a cloud over the entire situation.

The big loser, if the deal doesn't go through, will be Northrop, both because the deal represented a premium for its stock and because as the runt of the defense industry it will find it difficult to compete successfully. Neither Lockheed nor Northrop, as it happens, has turned in an impressive performance over the last year. Operating margins for the two companies rarely climb above 10% and net margins average closer to 4.8%, while earnings growth has been erratic over the last four quarters. (Northrop, however, did turn in a relatively strong fourth quarter.) The flip side of having a captive customer market, after all, is that when that market shrinks, it becomes difficult to find sources of sustained growth (thus making mergers a logical place to look). It also seems likely that the relative insulation of the defense industry from global competition has allowed companies to coast more than they otherwise would have.

At the same time, though, the Pentagon's about-face raises serious questions about its plans for the continuing consolidation of weapons systems, and perhaps represents a failure to recognize the real implications of the cuts in defense spending that we've seen since the end of the Reagan years. With less money to go around, it may not make economic sense to have as many players as we once did. And even with regard to technological innovation, there's not much convincing evidence that competition and smaller companies are necessary to spur technological progress. The role of antitrust law is certainly a crucial one in maintaining an open economy. But in this case, bigger might just have been better.

CONFERENCE CALLS

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Dale Wettlaufer (TMF Ralegh), Fool
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