FOOL PLATE SPECIAL
An Investment Opinion by Randy Befumo

Bankers Shopping in Bay Area

Shares of HAMBRECHT & QUIST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %> lost $3 5/8 to $30 1/2 after Smith Barney lowered its rating on the investment bank and brokerage to "underperform" from "neutral" based on price. In addition, the general business media, from CNBC to the San Francisco Chronicle, have been rather vocal about the pricing of investment firms of late. The implication in these reports is that investment bankers and brokers are getting out while the getting is good or that, in the case of Robertson Stephens, the price paid was too high.

First of all, to clear up valuation misperception held by some, Robbie Stephens wasn't priced at 5 times equity value. In economic terms, BANK AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> paid about 3.0 to 3.5 times book value after taking into account tax benefits that will come with the deal. In addition, these deals aren't going off totally on a cash basis -- NATIONSBANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> is trading its shares in addition to some cash for its acquisition of Montgomery Securities. If these deals are done correctly, they may not even be dilutive in the short term (though the long term should be the focus of the deals).

For example, say NationsBank were acquiring H&Q (forgetting for the moment that it is buying Montgomery) and it paid a 15% premium to last night's closing price for that firm. Would that be a good deal? That would put the buyout price at 3.7 times book, a fat premium. What kind of return can H&Q generate on that equity value, though? In good quarters, returns on equity (ROE) of over 30% and up to 40% have been achieved. That's on an unleveraged balance sheet, too. It's not a MERRILL LYNCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %>, which generates ROE of 25% with a highly leveraged balance sheet. Looking at H&Q's owners' equity value of $10.60 per share, one might reasonably expect the company to generate EPS of $3.18 in the coming 12-months, which is to say the company can generate a 30% return on beginning owners' equity over the next calendar year. Trading stock for stock at that valuation, NationsBank would be ceding equity valued at 14.2 times calendar earnings for that same period. H&Q's multiple for that same period? 12.3 times earnings estimates.

Finally, there are considerations that we're not always hearing about. One: H&Q is a venture capital firm. It holds stock in a lot of dynamic companies, which one would see on its balance sheet at cost, not at market value, since they're not public. If H&Q continues to do the job it has done since the 1960s, it is probably safe to assume there are hidden assets there. Finally, if a company like NationsBank can pick up a franchise equity underwriter, that only helps its lending business. Forget about retail distribution. It's all about client relationships.

Note: Dale Wettlaufer is a fan and an owner of Hambrecht & Quist.

Correction: On June 25, we wrote that SEQUUS PHARMACEUTICALS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEQU)") else Response.Write("(Nasdaq: SEQU)") end if %> "... had a New Drug Application (NDA) denied by the Food & Drug Administration (FDA)." This was not correct. The NDA for Amphotec was approved on Nov 25, 1996. What did happen to cause the stock to fall on April 15th was that a FDA advisory committee stated that there was insufficient evidence to conclude that a Sequus drug was equally or more effective than amphoterecin B for empirical treatment of FUO (fewer of unknown origin). Their "expanded indications application" as neither been approved nor denied.

UPS

Medical products company ARTERIAL VASCULAR ENGINEERING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVEI)") else Response.Write("(Nasdaq: AVEI)") end if %> picked up $3 1/8 to $30 on a Goldman Sachs rating upgrade to "recommended list" from "outperform."

Mutual fund company PILGRIM AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PACC)") else Response.Write("(Nasdaq: PACC)") end if %> gained $1 9/16 to $16 1/4 as investors struggle with pricing financial services companies. T. ROWE PRICE ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %> also gained $1 1/2 to $50.

BRIGHTPOINT INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CELL)") else Response.Write("(Nasdaq: CELL)") end if %> gained $2 5/8 to $31 1/4 after the cellular telephone distributor announced that it has completed negotiations for a 60% increase in its credit lines.

Southern and Midwestern department store company MERCANTILE STORES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MST)") else Response.Write("(NYSE: MST)") end if %> jumped $4 3/4 to $61 1/2, courtesy of Business Week's "Inside Wall Street" column.

DOWNS

AMERICAN FILTRONA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFIL)") else Response.Write("(Nasdaq: AFIL)") end if %> fell $4 to $41 after the maker of cigarette filters and plastics products said that WBT Holdings LLC has canceled a merger agreement between American Filtrona and that company. The company added that it will continue to contemplate strategic alternatives.

NEUREX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXCO)") else Response.Write("(Nasdaq: NXCO)") end if %> slid $1 3/4 to $15 3/8 on a rating change from Genesis Merchant Group. Neurex yesterday announced that a FDA panel recommended for approval a hypertension drug for intravenous delivery.

Cable company TELE-COMMUNICATIONS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %> ticked down $1 to $15 on a Morgan Stanley rating downgrade to "neutral" from "outperform."

AMC ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AEN)") else Response.Write("(AMEX: AEN)") end if %> was dimmed $1 1/8 to $18 3/4 on a Bear Stearns downgrade of the movie theater company to "neutral" from "attractive."

CONFERENCE CALLS

ECHLIN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(800) 683-1535 (password: McCurdy) -- replay through 6/27

CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>
(402) 220-5185 -- replay available through 6/30

06/26/97 (Thursday)
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
(800) 997-6910 -- replay available from 1:15 p.m. EDT to midnight 6/30

THIS WEEK'S CONFERENCE CALL SYNOPSES

JABIL CIRCUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %> Q3 Call
ST. JOHN KNITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJK)") else Response.Write("(NYSE: SJK)") end if %> Q2 Call
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> Q3 Call
MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> Q3 Call
BRODERBUND <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %> Q3 Call
COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> / TANDEM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDM)") else Response.Write("(NYSE: TDM)") end if %> Merger
3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> Q4 Call
ABOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %> Q2 Call

FOOL PORTFOLIO                  BORING PORTFOLIO

ATCT up $1/8 at $5 1/8         ATLS up $1/8 at $32 3/8
AOL up $1/8 at $56 3/8         BGP down $1/8 at $23 7/8
CHV up $3/8 at $74 1/4         CSL unch. at $35 5/8
COMS down 43/4 at $46          CSCO up $1/4 at $67 7/8
DJT down $1/8 at $10           GNT up $1/4 at $35 5/8
GM up $7/16 at $55 13/16       ORCL down $5/32 at $50 1/2
IOM down $3/16 at $20          OXHP down $3/4 at $73 1/8
KLAC up $7/8 at $51            PMSI up $1/16 at $11
LU up $1 at $72 7/16           TDW up $3/8 at $43 7/16
MMM up $1 1/4 at $103 1/4
T down $3/8 at $35 3/4

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Randy Befumo (TMF Templr), a Fool
Fool Plate Special

Dale Wettlaufer (TMF Ralegh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), and yet another Fool
Editing