DJIA             7539.07   -512.61      (-6.37%) 
 S&P 500           957.53    -69.72      (-6.79%) 
 Nasdaq           1499.23   -140.45      (-8.57%) 
 Value Line ndx    741.75    -41.75      (-5.33%) 
 30-Year Bond   103 17/32   +1 3/32  5.26% Yield 
 

HEROES

Seattle-based financial services company Washington Mutual <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAMU)") else Response.Write("(Nasdaq: WAMU)") end if %> rose $5/16 to $32 after its proposed merger with H.F. Ahmanson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %> was approved on Friday by the companies' respective shareholders. Ahmanson picked up $1 1/16 to $53 5/16 today. If federal regulators put their stamps of approval on the deal, the combined company will be the largest U.S. savings and loan by far with $150 billion in total assets. (For comparison's sake, analysts estimate that the combined Norwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOB)") else Response.Write("(NYSE: NOB)") end if %> and Wells Fargo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC)") else Response.Write("(NYSE: WFC)") end if %> will have about $191 billion in total assets.) Apparently, there is little hostility remaining between these two firms, which warred over Great Western Financial in the spring of 1997. Washington Mutual won that clash and later, in an unexpected case of winner eats loser, decided to buy out its defeated adversary as well.

Specialty property and casualty insurer Gainsco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNA)") else Response.Write("(NYSE: GNA)") end if %> gained $11/16 to $7 1/4 after hiring Wasserstein Perella to examine "strategic alternatives," which may include the possible sale of the company. The announcement comes just days after an investment group led by Lamar Hunt, the erstwhile founder of the Kansas City Chiefs pro football club, requested that the company hold a special meeting to let shareholders decide whether to put the "For Sale" sign out on the front lawn. Just two weeks ago, Gainsco appeared ready to stay independent and expand by acquisitions, such as its $40 million cash buyout of privately held LaLande Group. In fact, The Wall Street Journal Interactive Edition quoted the company's recently departed CEO last week as saying that Gainsco has already told two potential acquirers to take a hike so far this year. Shareholders should sit up and take notice, as the company's latest "180" has blurred the company's strategic visibility a bit.

QUICK TAKES: Measuring and control instrument maker TSI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSII)") else Response.Write("(Nasdaq: TSII)") end if %> tacked on $5/8 to $8 after Barron's reported that strong demand for the company's air-quality and biological agents monitoring systems may result in better-than-expected earnings... Cardiovascular Diagnostics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CVDI)") else Response.Write("(Nasdaq: CVDI)") end if %> was pumped up $7/8 to $6 5/8 on news that a unit of Chiron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHIR)") else Response.Write("(Nasdaq: CHIR)") end if %> has agreed to distribute certain Cardiovascular blood clot diagnostic testing products worldwide. Additionally, Chiron said it will buy $6 million of newly issued Cardiovascular shares at $10 a pop.

Metal products processor and distributor Reliance Steel & Aluminum Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RS)") else Response.Write("(NYSE: RS)") end if %> rolled ahead $1 3/4 to $30 1/2 after increasing its share buyback program by 2.5 million shares to a total of 4 million shares... Specialty apparel catalog retailer Brylane <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BYL)") else Response.Write("(NYSE: BYL)") end if %> picked up $15/16 to $25 15/16 after announcing a plan to buy back up to $40 million of its shares... Freight hauler J.B. Hunt Transport Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBHT)") else Response.Write("(Nasdaq: JBHT)") end if %> motored ahead $1 1/4 to $16 15/16 after Furman Selz upgraded the company to "buy" from "hold"... Bank holding company First Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FTFN)") else Response.Write("(Nasdaq: FTFN)") end if %> gained $2 to $14 after declaring a $0.06 per share dividend for fiscal Q3, which is 20% higher than last year's payout.

Turf and forage seed company AgriBioTech <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABTX)") else Response.Write("(Nasdaq: ABTX)") end if %> rose $1/2 to $8 5/8 after completing its acquisition of Allied Seed Co. The company also said it completed a private placement of 1.75 million shares and 885,000 warrants with Fidelity Investments, Soros Fund Management, and the Wisconsin Investment Board.

GOATS

Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %>, the nation's fourth largest airline, fell $2 3/8 to $27 13/16 as a strike by about 6,000 of its pilots continued into its third day with no end in sight. With no talks scheduled to resolve the strike, Northwest has cancelled domestic flights at least through Wednesday and international flights through Thursday. In addition, the St. Paul, Minnesota-based company plans to extend the cancellations by a day for every day the strike continues. The walk-out, which is affecting about 1,700 flights and up to 150,000 passengers per day, is costing the company about $27 million in revenue per day. Over the weekend, Northwest was able to reschedule passengers on other airlines, but that will prove to be especially difficult during the upcoming Labor Day weekend. A gap of $70 million to $100 million currently exists between the airline and the pilots. The pilot's union wants substantial pay increases -- a little above the pay at the three largest U.S. airlines. Today Standard & Poor's placed its double-'B' corporate credit ratings on Northwest on CreditWatch with negative implications.

CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> dropped $3 1/2 to $25 3/4 today amidst the general market slide. Of interest, though, the company announced last week that it will sell up to 20% of its radio and outdoor advertising unit in an initial public offering. The company says the offering will bring in up to $3 billion, tax-free, which will be used to repay debt or reduce unfunded pension obligations. Under the plan, CBS will transfer to the unit, Infinity Broadcasting, $750 million in debt taken on in the acquisition of American Radio Systems. Meanwhile, CBS will retain other long-term debt and pension obligations, which the IPO could potentially reduce by nearly 50%. However, one could argue the company's contention that the deal results in "a lower burden of financial obligations in the aggregate for CBS." If the company does replace $3 billion in debt with equity, it has only shifted its obligations from one group of investors to another -- from lenders to equity holders. On the whole, the cost of the company's capital should actually rise after the transaction is accomplished. The drop today represents not a discounting of smaller financial obligations, but of greater financial obligations at CBS.

Technology stocks took a bloodbath today, leading the Nasdaq down 8.6%, or 140 points. Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> plunged $18 3/4 to $100, Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> dropped $12 13/16 to $81 7/8, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> sank $9 5/16 to $95 15/16, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> finished down $5 13/16 to $71 3/16, Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> lost $3 to $31 3/16, Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> was trimmed $2 5/8 to $39 5/8, Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> slid $1 3/8 to $19 15/16, Seagate Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> plummeted $3 1/16 to $17 1/8. On the New York Stock Exchange, Dow component IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> tumbled $9 15/16 to $112 5/8, Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> tanked $2 13/16 to $27 15/16, Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> slid $3 1/2 to $48, and Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> pulled back $6 1/16 to $47 5/16.

Internet stocks also suffered today. Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> was pummeled for a $14 1/16 loss to $69, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> was pounded for a $8 3/16 loss to $21 11/16, Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> nosedived $22 1/8 to $83 3/4, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> crashed $14 5/16 to $81 15/16, Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> lost $5 1/2 to $18, Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> was deflated $8 13/16 to $21 3/4, Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> skidded $4 3/16 to $17, CMG Information Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %> was cut $11 7/8 to $38 1/8, MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> shed $3 7/8 to $26 7/8, Broadcast.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCST)") else Response.Write("(Nasdaq: BCST)") end if %> plunged $6 1/2 to $37 7/8, Egghead.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> dropped $1 7/16 to $6, Spyglass Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> was stripped $2 7/16 to $10 5/8, and NetGravity <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETG)") else Response.Write("(Nasdaq: NETG)") end if %> felt gravity's pull, falling $2 1/16 to $7 3/4.

QUICK CUTS: Drug companies also took a beating today. Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> went into a tailspin for $11 7/16 to $115 15/16, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> was dragged down $8 5/8 to $93, Eli Lilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> dropped $6 3/4 to $65 3/4, America Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> sank $6 3/16 to $50 1/8, and Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> tumbled $9 1/4 to $65 1/4, Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> was ditched $9 to $86, Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> lost $10 15/16 to $97 7/8, Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> lost $4 1/16 to $55 3/8, Baxter International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAX)") else Response.Write("(NYSE: BAX)") end if %> fell $3 3/16 to $53 1/8, and Pharmacia & Upjohn <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %> fell $3 1/4 to $41 11/16.

Banking stocks also were hit today (what wasn't?). Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> fell $8 13/16 to $108 5/16, Citicorp merger partner Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> was cut $3 15/16 to $44 3/8, Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> lost $4 to 52 1/2, NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> pulled back $4 13/16 to $57 1/2, BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> was down $5 1/16 to 64 1/2, First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> was thrown for a $2 1/4 loss to $48 1/8, J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> sold off $4 1/4 to $93 1/2, Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> plunged $7 3/16 to $58 1/16, Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> crashed and burned $7 1/2 to $66, and American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> gave back $9 1/2 to $78... Thrift holding company Matrix Capital Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTXC)") else Response.Write("(Nasdaq: MTXC)") end if %> plunged $5 3/4 to $8 3/4 after announcing it will not be acquired by Fidelity National Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNF)") else Response.Write("(NYSE: FNF)") end if %>, which dipped $1 1/4 to $27 11/16. The companies agreed to terminate their agreement after determining that they may not be able to obtain regulatory approval for the merger.

Camera maker Polaroid Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRD)") else Response.Write("(NYSE: PRD)") end if %> had a Kodak moment of sorts today, losing $6 3/16 to $28 1/8 after Barron's reported that the company's earnings estimates are too high and its stock could fall up to 50%... Lennar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %> slid $5 7/8 to $18 1/8, Pulte Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHM)") else Response.Write("(NYSE: PHM)") end if %> shed $4 7/8 to $28 7/8, and MDC Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDC)") else Response.Write("(NYSE: MDC)") end if %> dipped $2 1/8 to $16 after Morgan Stanley Dean Witter lowered its ratings on the home builders to "neutral" from "outperform," citing expectations that the U.S. housing market has reached its cyclical peak... Full-service distributor of microcomputers, peripherals, and software products CHS Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> lost $1 7/16 to $12 9/16 despite saying that the economic turmoil in international markets has had only "marginal impact" on sales and profitability, and that it is "comfortable" with analysts' expectations for Q3 and Q4.

Aerospace giant Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> fell $3 to $30 15/16 as its effort to sell a civilian model of its C-17 transport was stalled over concerns that the technology may be too sensitive to export... Satellite-related companies fell on concern about potential launch delays and turmoil in overseas markets. Iridium World Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IRIDF)") else Response.Write("(Nasdaq: IRIDF)") end if %> dropped $4 to $33, Comsat Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CQ)") else Response.Write("(NYSE: CQ)") end if %> lost $3 13/16 to $21 13/16, Echostar Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DISH)") else Response.Write("(Nasdaq: DISH)") end if %> plunged $4 3/4 to $17 5/8, Globalstar Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GSTRF)") else Response.Write("(Nasdaq: GSTRF)") end if %> crashed $3 7/8 to $13 5/16, and ViaSat Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VSAT)") else Response.Write("(Nasdaq: VSAT)") end if %> tumbled $1 3/4 to 10 1/2... Staffing specialist AccuStaff Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASI)") else Response.Write("(NYSE: ASI)") end if %> was quartered $4 1/2 to $12 1/2 after Legg Mason downgraded its rating on the company to "outperform" from "buy."

Hong Kong Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HKT)") else Response.Write("(NYSE: HKT)") end if %>, the main phone company in the Special Administrative Region of China, was disconnected for a $1 3/4 loss to $16 11/16 after Hong Kong's Hang Seng index dropped 7.1% as it appeared the government stopped buying shares to prop up the market there... Machinery company Columbus McKinnon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCO)") else Response.Write("(Nasdaq: CMCO)") end if %> sank $2 1/2 to $17 7/8 after warning that fiscal Q2 EPS will fall short of expectations by $0.30 to $0.35... Automotive occupant safety systems company Breed Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDT)") else Response.Write("(NYSE: BDT)") end if %> plummeted $3 1/8 to $7 after announcing it will delay releasing its Q4 and fiscal year 1998 earnings report as it works out how to record repositioning and other special charges with the SEC.

Computer systems services firm Cambridge Technology Partners <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CATP)") else Response.Write("(Nasdaq: CATP)") end if %> shed $3 1/16 to $32 1/2 after announcing it will acquire privately held Excell Data Corp. for about 1.68 million shares, which will result in an $8 million charge... Casino games maker Paul-Son Gaming Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSON)") else Response.Write("(Nasdaq: PSON)") end if %> lost $1 1/2 to $6 3/4 after reporting a fiscal Q4 loss of $0.34 a share, compared with earnings of less than $0.01 a year ago. The company also restated Q2 results to a loss of $0.07 per share from a profit of $0.02... Russian telecommunications company Vimpel-Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VIP)") else Response.Write("(NYSE: VIP)") end if %> plummeted $3 to $8 as economic instability continues in Russia.

FOOL ON THE HILL
An Investment Opinion
by Michael Dowd

Starwood Restructures

Starwood Lodging <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOT)") else Response.Write("(NYSE: HOT)") end if %> announced a major revision in its corporate structure late last week. The market promptly turned up its nose and dropped the price some 6% on Friday and more than 9% today. There is a wide range of opinions as to whether this presents a buying opportunity, but it is certainly worthwhile to look at the recent history of this Cinderella stock.

A very talented deal-making CEO named Barry Sternlicht, some talented hotel managers, brilliant financing, a bit of good luck, and a tiny loophole in the tax law helped drive Starwood from being an almost unknown $4 a share stock in 1994 to being the world's largest lodging company by the end of 1997. In the process it swallowed ITT-Sheraton, beating out Hilton Hotels' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %> formidable deal-maker Steve Bollenbach and infuriating hoteliers with names like Marriott <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAR)") else Response.Write("(NYSE: MAR)") end if %>. The resulting behemoth is the largest real estate investment trust (REIT) in America, and the largest lodging company in the world with $16.4 billion in assets.

Then, after aggressive lobbying by Hilton, Marriott, and others, Congress closed Starwood's tax loophole. Between that and other problems, the REIT market has suffered a negative total return of over 11.8% so far this year. The worst-performing sector has been hotels, down over 20%. Now it seems the world's largest REIT will soon be almost de-REITed. Starwood employed the best bankers, lawyers, and accountants that a $16 billion dollar company can buy, and the market promptly whacked its price on the head. Under the new structure, the company will convert from its previous "paired-share REIT" status to become a conventional "C-Corp.," just like Hilton or Marriott International (or GM for that matter). However, Starwood won't completely abandon REIT status. It will keep its present real estate in a REIT that will be a wholly owned, private subsidiary of the parent company. The shareholders in the parent C-Corp. will then receive one share in the REIT for each share they own. The REIT shares will be non-voting, and not publicly tradable.

One effect (if the plan goes according to Hoyle) will be that Starwood will lose most of its REIT exemption from corporate taxes. That will cost about $150 million a year. In return, the parent company will no longer be under the REIT requirement to pay out 95% of earnings as dividends. It expects to cut its dividend pay-out by some $600 million. That will leave investors with a 1.5% dividend, not big for REITs (which average about a 6.9% yield), but exactly average for an S&P C-Corp.

There will be other adjustments, including a stock buyback, but most analysts figure that after all is said and done, Starwood will have improved its cash flow in 1999 from about $750 million to over $1 Billion.

There are four other advantages of the C-Corp. format for Starwood:

1. A C-Corp. can own and operate its own hotels and casinos without restrictions imposed by the REIT law.

2. There is a larger pool of investors and analysts who understand and follow C-Corporations than for REITs.

3. As a C-Corp., Starwood can (maybe) get listed on the S&P (as ITT formerly was). Starwood's CEO Sternlicht believes might that cause demand for another 20 million shares. Increased demand for equity should raise the price of the shares.

4. It may well be easier for a C-Corp. to get a good rating on its debt, so Starwood may be able to cut its borrowing costs.

Will this be the kiss from the Prince that turns Starwood's battered shares into a beautiful Princess? That depends on a couple of real-world things in addition to mere corporate structure. There are a lot of people frightened about the hotel market right now. Still burned by the real estate crisis of the '80s, they see the threat of over-building. It's worth noting that upscale and luxury hotels (like the Sheratons and Westins that Starwood owns) have only had one year in the last 25 when there was a decline in revenue per available room. "RevPAR" is the prime measure of hotel profitability. In that one year (1991), a Middle East war, a decade of overbuilding, a major recession in the U.S., a threat of terrorism, and a fear of rising gas prices were able to knock RevPAR a bit for luxury hotels, but normal upscale hotels actually increased by 0.5%.

Otherwise, RevPAR has increased an average of 6.1% a year for the last ten years. Upscale hotel RevPAR s up 6.1% again the first six months of 1998. Starwood's upscale properties are doing even better. Its owned U.S. Sheratons are up 9.5%, and Westins are up 11.7%. They are not alone -- Four Seasons reports its RevPAR is up 10.3% YTD. There is always a danger of over-building sooner or later, but there is no evidence yet that Starwood's major markets will see it for the next three or four years. Hotel rooms have only about 30% marginal costs. A 10% increase in RevPAR will usually generate a 15% increase in income before debt service, and it's not hard to see upscale hotel companies converting that to 20% increases in earnings per share. So, upscale hotel economics look startlingly good now, and for a while longer.

If we want a quick measure of the quality of Starwood's management, the gains in revenues per room its managers are racking up make them look pretty capable. Good managers in a good market. So what's been wrong?

I suspect it is not as much a matter of corporate structure, as a matter of how the market perceives hotels. Let's compare Starwood with other lodging companies on a multiple of cash flow:

Company        Corporate Form     Cash Flow Multiple 
 Starwood        (Paired Share REIT)             12.13 
 Hilton          C-Corp.                          9.83 
 Host Marriott   C-Corp. Becoming a REIT          8.54 
 Hotel Industry  Some of each                    12.29 
 The S&P         C-Corps                         22.16

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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 Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last