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HEROES

Blessings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BCO)") else Response.Write("(AMEX: BCO)") end if %> jumped $3 1/16 to $20 3/4 after agreeing to a cash tender offer by privately owned Huntsman Packaging Corp. at a price of $21 per share. The offering price represents an 18.7% premium to Blessings closing price of $17 11/16 per share yesterday. The two companies operate in a seemingly unexciting industry that is typically taken for granted by consumers -- namely, manufacturing the plastic films and flexible wrappings used to package consumer goods. Blessings mostly focuses on making the packaging for diapers, feminine products, and medical and surgical items. Its largest customer, Huggies and Depends maker Kimberly-Clark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>, accounted for 45% of the firm's total revenues of $174.8 million in fiscal 1997. Its products will complement Huntsman's existing line of plastic wrapping products, which are used by such consumer products giants as Campbell Soup Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>, Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>, and the Kraft/General Foods unit of Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>.

Tobacco stocks gained ground today after RJR Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, said it would not abide by the $368 billion smoking liability pact brokered by major tobacco companies and several states last summer after a Senate committee approved a bill last week to increase the settlement to as much as $506 billion over 25 years. Other cigarette makers quickly threw their support behind RJR, whose CEO said there is "no process that is even remotely likely that would lead to an acceptable comprehensive solution." However, President Bill Clinton said he remains "determined" to reach some sort of settlement soon. "[The tobacco companies] ought to rethink their position. We're going to get this done one way or another," he said. However, without the industry's agreement to waive its First Amendment rights with respect to advertising, the bill may degenerate into federal tax increases on coffin nails. RJR tacked on $1 1/16 to $30, Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> gained $2 1/4 to $39 13/16, UST Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UST)") else Response.Write("(NYSE: UST)") end if %> rose $1 1/4 to $30 1/8, B.A.T. Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTI)") else Response.Write("(NYSE: BTI)") end if %> added $3/8 to $18 11/16, and Gallaher Group PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLH)") else Response.Write("(NYSE: GLH)") end if %> advanced $7/8 to $21 3/8.

QUICK TAKES: AirTran Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAIR)") else Response.Write("(Nasdaq: AAIR)") end if %> climbed $1 31/32 to $8 27/32 as the CEO of the company formerly known as ValuJet said the airline will be "solidly profitable" in fiscal 1998.... Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> picked up $2 5/8 to $65 3/4 and Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> gained $2 13/16 to $46 3/8 after Lehman Brothers analyst Kimberly Alexy told Bloomberg News that the two firms' well-managed inventories and diverse mix of products place them in a good position to ride out a theoretical PC price war... Internet search engine company Yahoo Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> jumped $4 to $97 1/4 as the market anticipated the fiscal Q1 earnings report due after the close today. Late this afternoon the company reported diluted EPS of $0.08, topping Street estimates of $0.04.

Xerox Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> added another $5 3/16 to $112 after announcing a restructuring plan yesterday that includes the elimination of about 9,000 jobs... CDnow Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> soared $3 1/16 to $30 13/16 after agreeing to pay $5.5 million to be the exclusive online music retailer to Lycos Bertelsmann, which is a joint venture between search engine company Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> and German media giant Bertelsmann AG... Long-distance and Internet telephony firm IDT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> was lifted $3 to $35 1/16 after agreeing to buy privately held international debit card network operator InterExchange for about $120 million in cash and stock... Defense electronics and commercial communications systems maker Esco Electronics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESE)") else Response.Write("(NYSE: ESE)") end if %> climbed $13/16 to $17 15/16 after the Puerto Rico Electric Power Authority selected the firm to provide about $50 million in power line communications equipment.

Bolt Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BTJ)") else Response.Write("(AMEX: BTJ)") end if %> rose $7/8 to $8 7/16 after the maker of geophysical data collection equipment reported fiscal Q3 EPS of $0.23 yesterday, which was more than double the $0.11 earned a year ago... Shares of aluminum producers rallied today after Alumax Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMX)") else Response.Write("(NYSE: AMX)") end if %> reported fiscal Q1 EPS of $0.81, beating the Street estimate of $0.68. Alumax gained $1/2 to $46, Kaiser Aluminum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KLU)") else Response.Write("(NYSE: KLU)") end if %> picked up $3/8 to $10 1/16, and Aluminum Co. of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AA)") else Response.Write("(NYSE: AA)") end if %> added $7/8 to $68 7/8... Fertilizer maker Agrium Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGU)") else Response.Write("(NYSE: AGU)") end if %> jumped $1 3/16 to $15 5/16 after saying it will expand its plan to buy back 5% of its outstanding shares to 10%, or about 12.6 million shares.

Ultrasound imaging agents developer Molecular Biosystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MB)") else Response.Write("(NYSE: MB)") end if %> gained $5/8 to $10 3/8 after agreeing to license two of its products to Japan's Chugai Pharmaceuticals for a $14 million up-front fee and the opportunity to garner milestone payments of up to $20 million... Hughes Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %> was lifted $2 9/16 to $49 9/16 after signing a multi-year alliance yesterday with long-distance and local exchange carrier GTE Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTE)") else Response.Write("(NYSE: GTE)") end if %> to market and distribute Hughes' DirecTV direct satellite service to GTE's customers... Printing company Consolidated Graphics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGX)") else Response.Write("(NYSE: CGX)") end if %> tacked on $3 1/4 to $60 3/4 after completing its acquisition of Philadelphia-based color printer Tursack Inc.

Salton/Maxim Housewares <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SALT)") else Response.Write("(Nasdaq: SALT)") end if %>, maker of the Juiceman juice machine and Farberware cutlery, rose $9/16 to $10 9/16 after a shareholder owning less than a 5% stake in the firm called for a merger with toaster and electric toothbrush maker Windmere-Durable Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WND)") else Response.Write("(NYSE: WND)") end if %>, which owns a 50% stake in the company... Wireless communications products wholesaler Brightpoint Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CELL)") else Response.Write("(Nasdaq: CELL)") end if %> was boosted $1 to $17 1/4. It will join the S&P SmallCap 600 index to replace specialty metals and auto parts manufacturer Handy & Harman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNH)") else Response.Write("(NYSE: HNH)") end if %>, which is being acquired by steel manufacturer WHX Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHX)") else Response.Write("(NYSE: WHX)") end if %>... Airbag maker Safety Components International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABAG)") else Response.Write("(Nasdaq: ABAG)") end if %> gained $1 5/8 to $17 3/4 after announcing a "major" client increased its orders for the firm's products.

Dental, medical, and veterinary products maker Atrix Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRX)") else Response.Write("(Nasdaq: ATRX)") end if %> was lifted $1 1/8 to $19 7/8 after receiving a letter from the FDA suggesting its Atridox periodontal disease drug is "approvable." The last barrier to final approval is the issue of how to properly label the product, the company said... Industrial software provider System Software Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSAX)") else Response.Write("(Nasdaq: SSAX)") end if %> rose $17/32 to $8 9/32. After the bell yesterday, the company's founder, chairman, and CEO Roger E. Covey resigned to explore other interests. He will be replaced by the firm's chief operating officer, William M. Stuek... Information technology training services provider Mastering Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MASC)") else Response.Write("(Nasdaq: MASC)") end if %> picked up $2 3/16 to $12 1/16 after data base and systems management company Platinum Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAT)") else Response.Write("(Nasdaq: PLAT)") end if %> agreed to amend its merger agreement with the firm, ensuring Mastering shareholders $12.50 in Platinum stock for each Mastering share. Platinum rose $2 to $24 9/16 on the news.

Ratings Movers: Tech Data Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TECD)") else Response.Write("(NYSE: TECD)") end if %> gained $1 13/16 to $38 1/4 after Deutsche Morgan Grenfell upgraded the PC distributor to "buy" from "accumulate"... DSET Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSET)") else Response.Write("(Nasdaq: DSET)") end if %> increased $2 5/16 to $21 1/16 as BT Alex. Brown and BancAmerica Robertson Stephens started coverage of the maker of telecommunications network management tools with a "buy" rating... Shells Seafood Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHLL)") else Response.Write("(Nasdaq: SHLL)") end if %> was lifted $17/32 to $11 3/16 after EVEREN Securities started coverage of the restaurant chain with an "outperform" rating... Managed healthcare provider Humana Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> gained $1 3/16 to $26 1/2 after Goldman Sachs started coverage of the stock with a "market outperform" rating.

IMC Mortgage Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMCC)") else Response.Write("(Nasdaq: IMCC)") end if %> gained $3/4 to $14 1/2 after Bear Stearns upgraded the mortgage lender to "buy" from "attractive"... Computer networking products company Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> rose $2 1/8 to $40 7/16 after being upgraded to "buy" from "hold" by NationsBanc Montgomery Securities... Cargo air carrier Atlas Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %> added $1 13/16 to $33 1/8 after BT Alex. Brown started covering the stock with a "strong buy" rating... Genesis Microchip <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNSSF)") else Response.Write("(Nasdaq: GNSSF)") end if %> advanced $13/16 to $12 1/4 after CIBC Oppenheimer began coverage of the maker of technology for displaying digital video images with a "buy" rating.

GOATS

Integrated circuit maker Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> dropped $3 3/16 to $27 5/16 after reporting a larger-than-expected Q1 loss of $0.39 per share. That compares with a Q4 loss of $0.09 per share and positive EPS of $0.09 for the year-earlier period. According to First Call, analysts expected a $0.29 per share loss, already adjusted from an earlier estimate of a loss of $0.19. Year-over-year revenues fell $72 million to $540 million, with roughly half of the shortfall due to lower-priced K6 chips. The other half was accounted for by a drop-off in the firm's other products, which helped push gross margins down to 21.7% due to fixed costs. While Asian weakness, pricing pressure, and product transitions all contributed to the results, the future for AMD is linked to gross margins and K6 production leverage gained from yield improvements. The company shipped 1.5 million K6 chips in the quarter (with over 10% at 0.25 micron) and expects to ship 10.5 million more for the year. Depending on the estimates used, this K6 figure combined with possible capacity additions from International Business Machines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> accounts for most of the expected PC growth for the remainder of the year. Assuming that Intel and National Semiconductor don't let AMD grab all the growth in 1998, its pretty safe to say that withering price wars will be the result and cash-rich manufacturing clout will be left standing.

Israel-based industrial production software developer Tecnomatix Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCNOF)") else Response.Write("(Nasdaq: TCNOF)") end if %> plunged $11 9/16 to $23 1/16 after announcing that it expects first quarter earnings between $0.14 to $0.18 per share, short of the First Call mean estimate of $0.28. The shortfall was due to lower-than-anticipated sales resulting from the "timing of large orders as well as the adverse effect of foreign currency translation." Excluding large deliveries to Ford Motor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> in Q1 1997 and 1998, sales would have increased 32%, versus 14%. Measuring sales in constant currencies, including all sales would have boosted Q1 earnings growth to 20% from that 14%. The company said that it has recently increased its sales force to target new markets such as heavy machinery, consumer electronics, and car parts manufacturers, and expects business in these markets will "increase substantially their contribution to our results." BancAmerica Robertson Stephens lowered its rating on the company to "long-term attractive" from "buy."

QUICK CUTS: Oil giants Exxon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> and British Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BP)") else Response.Write("(NYSE: BP)") end if %> retreated today as the companies announced plans to develop the Hoover and Diana fields in the Gulf of Mexico at a cost of $1.2 billion. Production is expected to begin in 2000. Exxon, which has a 66.7% stake in the two fields, lost $1 5/8 to $66 1/8, and BP, with a 33.3% stake, slipped $1 7/16 to $86 15/16... Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> shed $2 15/16 to $127 13/16 as the drug company announced it has received FDA approval to market Cosopt, an eye drop that reduces elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension who do not respond adequately to beta-blockers alone.

Online brokerage firm E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> sank $3 3/8 to $23 9/16 after reporting second quarter earnings of $0.15 per share versus $0.09 for Q2 1997 and even with the First Call mean estimate. Deutsche Morgan Grenfell lowered its rating on the company to "accumulate" from "buy"... Lawn and garden tools manufacturer Acorn Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACRN)") else Response.Write("(Nasdaq: ACRN)") end if %> was trimmed $1 5/8 to $8 3/8 after announcing late yesterday that it anticipates lower-than-expected Q3 earnings due to weak sales in February and March. Sluggish orders resulted in gross sales in those two months totaling $27 million, which was 3.6% lower than the year-earlier period.

Integrated circuit maker Siliconix Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SILI)") else Response.Write("(Nasdaq: SILI)") end if %> dropped $4 3/16 to $30 5/16 after announcing that Q1 operating income "will decline sharply" compared with the year-earlier period. The company said a slowdown in bookings in Q4 1997 due to market conditions has negatively affected Q1 sales... Unitrode Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTR)") else Response.Write("(NYSE: UTR)") end if %> lost $1 5/8 to $15 3/4 after the integrated circuit maker announced that it anticipates Q1 sales to be about 30% to 35% lower than the $40.8 million reported in the year-earlier period as a result of weaker-than-expected bookings. The company expects earnings of $2-$3 million before taking a $5-$7 million charge related to the realignment and write-down of inventory and equipment.

King World Productions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KWP)") else Response.Write("(NYSE: KWP)") end if %>, which produces and syndicates shows such as The Oprah Winfrey Show and Wheel of Fortune, was cut $1 1/2 to $28 3/4 after reporting Q2 earnings of $0.44 a share, down from $0.48 for the prior-year period. The First Call mean estimate was $0.47... Real-time video insertion system developer Princeton Video Image <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PVII)") else Response.Write("(Nasdaq: PVII)") end if %> lost $1 3/8 to $6 1/2 after announcing that its president and CEO Douglas J. Greenlaw will resign by the end of this year to spend more time with his family. Company co-founder Brown Williams, chairman and former CEO, will continue to co-manage the company with Greenlaw until a successor is found.

Online travel agency Preview Travel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTVL)") else Response.Write("(Nasdaq: PTVL)") end if %> slid $2 5/8 to $32 1/8 after announcing a public offering of 3.5 million shares of common stock, 1.5 million from the company and 2 million from certain stockholders... Local anesthetic injection system maker Milestone Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAND)") else Response.Write("(Nasdaq: WAND)") end if %> dipped $15/16 to $16 5/16 after announcing the resignation of its chief financial officer Pat Mele for "strictly personal reasons" to take a position with a privately held company.

TV programming company Sinclair Broadcast Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBGI)") else Response.Write("(Nasdaq: SBGI)") end if %> finished down $2 9/16 to $56 9/16 after selling just over 8 million Class A shares at $58 1/4 in a $467.8 million public offering. The company raised $336.4 million from the sale, and selling shareholders collected $113.8 million after fees... Banco de Galacia y Buenos Aires <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGALY)") else Response.Write("(Nasdaq: BGALY)") end if %> fell $1 3/16 to $21 11/16 on concern that the Argentine bank's earnings could fall if the government decides to raise its reserve requirements... Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> shed $1 to $12 after The Washington Post reported that the Federal Trade Commission and the Department of Education are investigating the information technology and computer-related training company. Yesterday the company's stock fell 26% after Illinois state officials ordered the company to suspend marketing and enrolling students at one of its training centers.

Rating Movers: Merrill Lynch lowered its near-term rating on BFGoodrich Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GR)") else Response.Write("(NYSE: GR)") end if %> to "neutral" from "accumulate" and its long-term rating to "accumulate" from "buy," driving the specialty chemicals producer and aircraft systems and services provider down $2 1/16 to $50 7/16... Nordstrom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOBE)") else Response.Write("(Nasdaq: NOBE)") end if %> dropped $1 5/8 to $60 7/8 after Prudential Securities downgraded the upscale department store chain to "hold" from "buy"... Foundation Health Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHS)") else Response.Write("(NYSE: FHS)") end if %> dipped $1 3/8 to $26 7/16 after Goldman Sachs started coverage on the healthcare services company with a "market perform" rating... Foundation competitor PacifiCare Health Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHSYB)") else Response.Write("(Nasdaq: PHSYB)") end if %> lost $1 5/16 to $74 13/16 after it was also started as "market perform."

British antivirus software company Dr. Solomon's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOLLY)") else Response.Write("(Nasdaq: SOLLY)") end if %> slumped $4 7/8 to $26 1/8 after the company was cut to "market perform" from "attractive" by Adams, Harkness & Hill despite reporting that Q3 earnings per American depositary share rose 36% from the year-ago period.

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

More on Citigroup

Yesterday, in looking at the aftermath of the Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> - Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> agreement to join forces to form a galactic financial services powerhouse, we returned to one of our favorite questions -- "What is a Bank?" In the two-month look at the financial services sector we're conducting in the Drip portfolio, the question of the nature of banking has come up a number of times. That's because the nature of banking has transcended the typical bread-and-butter lending function and has evolved into banks concentrating ever greater amounts of institutional resources into developing numerous lines of business: transaction facilitation, fiduciary lines of business, asset management, raising capital, data processing, and financial engineering.

Besides the data processing, which has been a natural by-product of banking, these business lines have all been traditionally the domain of securities firms. In particular, both Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> and American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> have emerged as the largest virtual, nonbank banks. One doesn't see Merrill jumping up and down to get into commercial lending -- it already took the juice away from commercial banks with the explosion of money markets in the 1970s and 1980s. Commercial lending isn't the most profitable line of business unless a bank is heavily into highly leveraged transactions, which the mega-regionals such as NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> are.

Right now, Merrill takes a slight pinch off the top of the money market transactions it facilitates for corporations, either through the trading process or the origination of commercial paper. Granted, commercial banks do this as well, but Merrill's thrust in the equivalent of commercial lending is in light-on-capital money market transactions while commercial banks maintain capital-intensive commercial lending activities on a very large scale.

In highly leveraged transactions, or basically buyouts, takeovers, and debt-financed recapitalizations, Merrill is nearly dwarfed by Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, which is a leading commercial lender in this area. Including contingent commitments, Merrill's exposure here is nearly $1 billion while Chase last year alone committed over $1 billion in new exposure. Here again, though, Merrill participates in raising capital for corporation and government entities as an underwriter and syndicator of debt rather than as a retainer of risk for its own account. In securities underwriting, Merrill Lynch is nearly 2.5 times bigger than Chase. With market share anywhere from 13% to 16% in debt and equity, Merrill generated underwriting and M&A advisory fees of $2.75 billion last year compared with Chase's $1.14 billion.

In asset management, Merrill pulled away from Chase in terms of sheer size last year, as its acquisition of U.K. money manager Mercury Asset Management added $167 billion to assets under management, which finished the year at $446 billion. Chase, one of the largest bank asset managers, had $155 billion in assets under management at the end of the year. No competition for Merrill there. The real kicker, and this is the one that really ticks off the banks because so much of it came out of their deposit bases in the age of inflation, is Merrill Lynch's $1.2 trillion in client assets. This asset base doesn't have to turn all that often for Merrill to make money on it. The pure float that it generates for Merrill averaged around $20 billion last year, creating net revenues of up to $1.14 billion or more with virtually no credit risk to Merrill Lynch.

Having in excess of $1 trillion in client assets would make any bank CEO salivate because they know that those assets don't resemble a bank's loans. Those assets are readily liquid, which means that margin lending is a highly controllable risk where collateral can be easily liquidated in the case of nonperformance on the margin loan. Those assets are also like a huge pinata hanging there, waiting to be swatted by Merrill's financial consultants. Converting a client's capital into an annuity is the coup de grace on this particular pinata because it not only means a huge commission for the financial consultant (aka broker), but it's also a great source of funds for the firm, especially for older folks who might go onto the great beyond in the year after annuitizing assets.

Banks know this is something they can't do. Sure, they can entice more money out of their customers, but part of the battle is already won at Merrill because the client's assets are already there, all ready to be converted. A bank isn't going to come to you and suggest turning your mortgage into some other financial product. Luckily for the banks, though, asset-backed securities markets came along in the 1980s, letting them partially accomplish a higher turnover of loans. That doesn't solve the whole problem of keeping a relationship going, which good brokers know is the key to profitability rather than doing quick-buck moves on their clients.

Overall, though, Merrill is a bank in its financial model. The amount of capital needed to generate $1.9 billion in earnings is staggering. In fact, on a return on average assets (ROA) basis, Merrill Lynch's 0.771% lags by nearly 63 basis points, or by a magnitude of 55%, the average ROA of 1.4 for the 14 companies in our universe of large bank holding companies and integrated financial services giants. Looking again at the breakdown of return on average equity, we can see where Merrill's ROE comes from.

To refresh your memory:

      Net Income      Avg. Assets      Revenues 
 ROE = -----------  x  ------------  x  ----------- 
        Revenues          AOE           Avg. Assets

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