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HEROES

In a further attempt to recreate his media empire, Rupert Murdoch today decided that he would separate his News Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> armada into two separate squadrons, sending the firm's shares up $3 9/16 to $33 1/16. News Corp.'s 20th Century Fox movie studios, Fox TV network, and its interests in various cable channels and U.S. sports teams will be bundled together with 22 Fox station affiliates under the Fox Group name, with a 20% stake to be sold to investors in an upcoming initial public offering. The firm's publishing units, including HarperCollins and the New York Post (but not the recently sold TV Guide), will remain under the News Corp. name. The motive behind the move is clear -- Murdoch is playing the old "sum of the parts is greater than the whole" game with investors, which he hopes will lead to a better market valuation for his sizable properties.

Clear! Emergency external defibrillators maker Physio-Control International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYS)") else Response.Write("(Nasdaq: PHYS)") end if %> jumped $3 1/14 to $26 1/4 after agreeing to merge with pacemaker and heart valve developer Medtronic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDT)") else Response.Write("(NYSE: MDT)") end if %>. Each Physio-Control share will be converted into $27.50 in Medtronic stock, valuing the company at a 19.5% premium to its closing price of $23 per share on Friday. The deal, which is expected to add immediately to Medtronic's earnings, is an unusual example of vertical integration in the medical products sector. External defibrillators zap a burst of electric current into heart attack victims in the hopes that the shock will restart a stopped heart. By making Physio-Contol's devices more available to ambulance and emergency crews in an effort to save more heart attack victims, Medtronic can then market its pacemakers and internal defibrillators to those saved patients in the recovery room.

Television broadcaster Young Broadcasting <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YBTVA)") else Response.Write("(Nasdaq: YBTVA)") end if %> exploded for a $16 5/16 gain to $63 13/16 after the company announced that it is investigating "strategic alternatives" to "maximize shareholder value." Despite being in a hot industry where consolidation has been blazing and multiples to cash flows have been on the rise, the company's stock has only performed in-line with the S&P 500 over the last three years. While radio broadcasters have been the hot properties in broadcasting, TV has been left behind somewhat. Nonetheless, other network TV broadcasters rose on today's news. Hearst-Argyle Television <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HATV)") else Response.Write("(Nasdaq: HATV)") end if %> climbed $1 1/4 to $38 1/2, and Granite Broadcasting <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBTVK)") else Response.Write("(Nasdaq: GBTVK)") end if %>, though its enterprise value to cash flow ratio is extremely high, moved up $1 1/4 to $12 1/8.

QUICK TAKES: Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> rose $3 to $107 7/16 after Deutsche Morgan Grenfell reiterated its "buy" rating on the stock, citing the well-received launch of its new Windows 98 operating software... Direct PC marketer Dell Computer Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> gained $1 3/4 to $94 1/8 after being authorized to sell Hewlett-Packard's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> entire line of printers and scanners in North America. H-P moved up $1 1/8 to $61 3/4... Internet portal company Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> jumped $9 7/8 to $85 7/8 after setting a two-for-one stock split payable July 20... Drug maker Warner-Lambert Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> rose $2 1/2 to $69 7/16 after Donaldson, Lufkin & Jenrette recommended that investors drop rival Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> in favor of Warner-Lambert. Pfizer fell $2 to $109 15/16.

Iomega Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> rose $7/16 to $6 1/16 after the Zip and Jaz drive maker settled a patent infringement lawsuit with Nomai S.A. and took a majority stake in the French developer of removable data storage products for $21 million... Electrical and defense systems maker Rockwell International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> climbed $9/16 to $49 after announcing it will spin off its semiconductor unit to shareholders in an effort to concentrate on its other businesses. The company also said it would restructure its other operations and cut 3,800 jobs worldwide... Rambus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RMBS)") else Response.Write("(Nasdaq: RMBS)") end if %> rose $4 7/8 to $61 1/2 after #1 PC maker Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> said it would use the company's Direct Rambus-enhanced dynamic random access memory (DRAM) chip technology for its next generation AlphaServer line of enterprise computing platforms.

Internet portal and software company Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> picked up $7 7/8 to $74 3/8 after its Tripod unit signed an agreement with the Major League Baseball Players Association to make its Bigleaguers.com website a part of Tripod's Sports Zone community. The MLBA site will be managed by THINK New Ideas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THNK)") else Response.Write("(Nasdaq: THNK)") end if %>, which rose $1 1/2 to $26 7/8... Finnish telecommunications equipment maker Nokia Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %> tacked on $4 9/16 to $74 9/16 after PaineWebber raised its fiscal Q2 EPS estimate to $0.54 from $0.50 and its fiscal 1998 estimate to $2.25 from $2.14... Educational software products developer The Learning Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %> added $1 7/16 to $28 1/8 after SBC Warburg Dillion Read raised its rating on the firm to "strong buy" from "buy."

Oil well maintenance, testing, and services firm Dawson Production Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DPSI)") else Response.Write("(Nasdaq: DPSI)") end if %> was lifted $1 15/16 to $14 3/8 after contract drilling and oil field services company Key Energy Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KEG)") else Response.Write("(NYSE: KEG)") end if %> offered to buy the company for $16 per share in cash... Auto parts maker Borg Warner Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BWA)") else Response.Write("(NYSE: BWA)") end if %> climbed $2 5/16 to $47 after Morgan Stanley Dean Witter raised its rating to "strong buy" from "outperform"... Consumers Water Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CONW)") else Response.Write("(Nasdaq: CONW)") end if %> rose $1 3/4 to $26 after agreeing to merge with fellow water utility holding company Philadelphia Suburban Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PSC)") else Response.Write("(NYSE: PSC)") end if %> in a $270 million stock swap. The deal will create the second largest publicly held water utility in the country, serving more than 1.6 million customers in five states.

Compuware Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPWR)") else Response.Write("(Nasdaq: CPWR)") end if %> gained $2 7/8 to $49 3/4 after Morgan Stanley Dean Witter upgraded the software products and services company to "strong buy" from "outperform"... Unit Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNII)") else Response.Write("(Nasdaq: UNII)") end if %>, which makes gas flow controls for the semiconductor fabrication business, jumped $2 9/16 to $9 1/8 after saying it is in merger talks with an undisclosed third party... Labor-intensive, task-repetitive contract staffing provider AHL Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AHLS)") else Response.Write("(Nasdaq: AHLS)") end if %> gained $2 7/8 to $38 7/8 after agreeing to buy a German industrial staffing firm for about $42 million... Electronic interconnect products contract manufacturer Altron Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALRN)") else Response.Write("(Nasdaq: ALRN)") end if %> rose $1 3/8 to $12 7/8 after investment manager Scott Black made favorable comments about the company in the latest edition of Barron's.

GOATS

Today was a cereal killer for the major cereal makers. Big Daddy Kellogg Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %> fell $1 9/16 to $38 5/16 after Donaldson, Lufkin & Jenrette lowered its rating on the largest cereal company to "underperform" from "market perform" and cut its second quarter earnings estimate to $0.36 from $0.38 per share. Citing weakness in cereal sales, DLJ also reduced its 1998 EPS estimate for Kellogg to $1.60 from $1.75 and its 1999 estimate to $1.70 from $1.90. DLJ also downgraded No. 2 cereal maker General Mills <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIS)") else Response.Write("(NYSE: GIS)") end if %>, which lost $1 13/16 to $68 7/16, to "market perform'' from "buy," citing that Kellogg probably will make some changes soon to improve sales, which would likely put pressure on its competitors. Last week, Kellogg announced the appointment of 23-year veteran Carlos Gutierrez as president and chief operating officer. Investors are hoping that the 44-year-old executive, who may well be the heir apparent to 61-year-old chairman and CEO Arnold Langbo, will be able to help the company regain lost market share. Kellogg's recent problems began in 1996, when Philip Morris Co.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> Post cereals unit cut prices an average of 20%, setting off a price war among cereal makers. Meanwhile, discounted generic-brand cereals gained market share and now hold about a fifth of U.S. sales, while at the same time, the overall U.S. cereal market has dropped to $7.5 billion from $8 billion four years ago.

Toolmaker Snap-On Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNA)") else Response.Write("(NYSE: SNA)") end if %> was unsnapped for a $3 1/2 loss to $34 15/16 after warning that second quarter earnings will be about 40% below the $0.63 per share reported in the same year-ago period and that third quarter earnings might be 10% below the $0.57 per share earned in Q3 1997. The company also announced a massive restructuring plan that will involve cutting 1,000 jobs, or 8.3% of its workforce, and closing five plants, five warehouses, and 40 to 45 small offices in North America and Europe. The company, which supplies tools and diagnostic equipment to repair shops and automakers, expects to take a $175 million restructuring charge in the third quarter. The restructuring comes after years where the company focused on growth rather than efficiency as it expanded rapidly through acquisitions -- 17 in six years. Snap-On expects the changes will save roughly $30 million in 1999 and $60 million per year after that.

QUICK CUTS: Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> lost $2 to $109 15/16 after The Wall Street Journal reported that the Food and Drug Administration has received about 100 reports of men suffering serious adverse reactions or dying after taking the company's impotence drug Viagra but maintains that the pill is safe... Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> slipped $1 1/16 to $44 5/8 as The Wall Street Journal reported that British Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAB)") else Response.Write("(NYSE: BAB)") end if %> is close to awarding an order for 100 short-haul jets valued at $3.84 billion to Airbus Industrie over Boeing. British Airways has historically bought planes from Boeing, not Airbus... America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> declined $4 1/4 to $103 1/2 in advance of its announcement after the closing bell that it will offer about $500 million of its shares in a block trade.

International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> fell $1 to $42 7/8 on concern that earnings growth will be limited this year due to increased worldwide paper production and a strong U.S. dollar... Office technology company IKON Office Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IKN)") else Response.Write("(NYSE: IKN)") end if %> plummeted $6 3/4 to $15 5/16 after issuing a terse statement announcing that it expects fiscal third quarter earnings will be "significantly lower" than analysts' expectations of $0.34 per share... Retail software products and professional services company JDA Software Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDAS)") else Response.Write("(Nasdaq: JDAS)") end if %> dropped $5 3/4 to $47 after Morgan Stanley Dean Witter cut its rating on the company to "neutral" from "strong buy"... Stuffed toys and toy pillows designer Play-By-Play Toys & Novelties <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PBYP)") else Response.Write("(Nasdaq: PBYP)") end if %> plunged $2 11/16 to $10 9/16 after Merrill Lynch lowered its near-term rating on the company to "neutral" from "accumulate" but maintained its long-term "buy" rating.

Specialty financial services company Cash America International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWN)") else Response.Write("(NYSE: PWN)") end if %> was bounced for a $4 9/16 loss to $15 5/8 after announcing on Friday that it expects Q2 earnings will be about half the earnings reported for the year-earlier period due to losses related to the company's Mr. Payroll Corp. subsidiary... Laser Vision Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVCI)") else Response.Write("(Nasdaq: LVCI)") end if %> sank $2 1/4 to $11 5/8 after SBC Warburg Dillon Reed cut its rating on the operator of ophthalmic laser-surgery centers to "outperform" from "strong buy" and lowered its EPS estimate for fiscal 1999 to $0.23 from $0.31 and for fiscal 2000 to $0.58 from $0.70... Property and casualty insurance company Vesta Insurance Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTA)") else Response.Write("(NYSE: VTA)") end if %> lost $1 5/8 to $25 after announcing that as a result of its investigation into accounting irregularities, it will restate historical financial statements to reflect a $49 million reduction in reported net after-tax earnings between 1993 and 1997 and an additional $9.8 million reduction for the first quarter.

Analytical Surveys <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANLT)") else Response.Write("(Nasdaq: ANLT)") end if %>, which provides customized data conversion and digital mapping services for the geographic information systems (GIS) market, shed $2 1/8 to $34 5/8 after announcing plans Friday to sell 2.25 million shares... Unilever NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UN)") else Response.Write("(NYSE: UN)") end if %> lost $3 to $79 13/16 after Goldman Sachs cut its rating on the consumer goods and food company to "recommend list" from "global priority list." Analyst Nomi Ghez said she doesn't believe the stock has the same potential now that it has hit a 52-week high and since the company invests heavily in marketing of new products... Metro One Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTON)") else Response.Write("(Nasdaq: MTON)") end if %> fell another $1 3/16 to $7 5/8 in the wake of announcing that its contract with BellSouth Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %> BellSouth Cellular and parts of its contract with Ameritech's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %> Ameritech Cellular aren't expected to be renewed when they end this year.

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

Merger Mania

Aside from the obvious human frailties inherent in forecasting, many mergers between companies fail simply because an inordinate amount of attention is focused on accrual gains at the expense of value creation -- which is not necessarily reflected in short-term accounting assessments. The bottom line, pun intended, for the companies involved should be guided by the following value equation: the present value of the available merger synergies minus the premium paid for control. That is, an acquisition only enhances value for the purchaser if the present value of the cash flow gains exceed the cost of acquiring those cash flow streams.

Sounds simple right? And, of course, all merger and acquisition (M&A) departments know this to be the case, but the reality is often that the acquiring company makes overly optimistic projections about the benefits that are likely to accrue through the combination, and hence overpay for a controlling interest. Warren Buffett provides some insight as to why this might be the case:

"The reasoning that Berkshire applies to the merger of public companies should be the calculus for all buyers. Paying a takeover premium does not make sense for any acquirer unless a) its stock is overvalued relative to the acquiree's or b) the two enterprises will earn more combined than they would separately. Predictably, acquirers normally hew to the second argument because very few are willing to acknowledge that their stock is overvalued. However, voracious buyers -- the ones that issue shares as fast as they can print them -- are tacitly conceding that point. (Often, also, they are running Wall Street's version of a chain-letter scheme.) In some mergers there truly are major synergies -- though oftentimes the acquirer pays too much to obtain them -- but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked."

Buffett in his 1994 letter to Berkshire Hathaway shareholders actually recounts the story of a CEO explaining rather unpersuasively to his directors about the economic and strategic rationale for a pending merger until finally breaking down and pronouncing "with an impish look... 'Aw, fellas, all the other kids have one.'" While acknowledging the humor present in both the initial delivery by the CEO and the subsequent recounting of the episode, the example should highlight to investors some of the more subconscious, less-than-rational motivations that often pervade M&A activity.

To the extent that earnings per share serve as a proxy for cash flow, they can inform the acquisition analysis. However, accrual accounting is, of course, purposefully set-up in such a way as to not reflect the reality of cash on cash returns, but rather the overall business picture. Earnings per share results should therefore not come to the fore in an initial merger assessment, in part by virtue of the fact that companies can choose various accounting techniques -- all acceptable under the flexible guidelines of GAAP -- which yield divergent earnings per share outcomes.

Should companies be valued differently in the marketplace based on these different EPS outcomes, even when their underlying cash generation capabilities and purchase prices remain the same? The following table lays out the scenario of Acquirer Inc. taking out Victim, Inc. err... Target Inc. with no operational synergies and no acquisition premium. The deals include: all stock, half-stock/half-cash, and all cash. (AOL readers please expand window to view table.)

EPS & VALUE IMPACT (of various financing sources for an acquisition)

                     Acquirer   Target  100%Stock   50/50   100%Cash
 
 
 
 Sales                     654      648       1302    1302       1302
 
 EBITDA                    193       97        291     291        291
 
 EBIT                      183       87        271     246        246
 
 Interest Expense            -       18         18      46         76
 
 Pretax Income             183       69        253     224        195
 
 Tax                        62       24         86      76         66
 
 Goodwill Amortization       -        -          -      25         25
 
 Net Income                121       46        167     123        104
 
 Earnings Per Share      $6.04    $2.29      $6.24   $5.27      $5.18
 
 PE Multiple              12.9     11.4       12.5    15.5       16.8
 
 EV/EBITDA                 8.1      7.4        7.8     8.2        8.5
 
 Debt                        -      200        200     462        724
 
 Enterprise Value         1556      724       2280    2369       2458
 
 Market value (equity)    1556      524       2080     190       1734
 
 Shares Outstanding         20       20         27      23         20
 
 Share Price               $78      $26     $77.81     $82        $87

CONFERENCE CALLS

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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool Editing Brian Bauer (TMF Hoops), another Fool Jennifer Silber (TMF Amused), Fool at last