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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer

Universal Banking

In a proposed merger of stunning size, Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> and Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> revealed this morning that they've agreed to get together. If that is shocking, it shouldn't be, as trends in the world of financial services have been pointing toward a deal of this sort for at least a year. Driven in part by speculation that it would merge with Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, Merrill Lynch's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> move to the high $80s makes all the sense in the world. When assets under management are measured in high fractions of the trillions of dollars and look to be moving to whole-number multiples to trillions, deals of this size to form what Europeans call the "universal bank" are inevitable. Travelers exploded $7 11/16 higher to $69 3/8 and Citicorp jumped $26 15/16 to $169 13/16.

Although the pundits will come up with fin de siecle moans that these are end-of-bull-run mergers of delusion, the size of the global economy doesn't necessarily demand, but definitely accepts, universal banks of this size. When looking at a company of this potential size, or GE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> or Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, it makes no sense at all to compare market capitalization to U.S. GDP or to look at 1990s multiples on banks in comparison with 1950s rules of thumb on multiples to book. Rather, one should compare equity capitalizations to the size of global gross economic product. Had it not been for the Glass-Steagall Act, which tore apart the nascent universal banks such as National City, Citicorp's forerunner, this sort of U.S. company would already exist. One should also consider that the days in which these companies trade at peak multiples of 1.5 book value are a thing of the past. The regulatory environment and business realities, where a holding company can operate insurance underwriters, securities underwriters, commercial banks, merchant banks, and securities brokerages, are totally different from the "good old days" of banking.

This merger of equals calls for a new holding company, Citigroup Inc., to be formed, with the shareholders of each company splitting up ownership of the new company equally. With a combined equity valuation of about $145 billion, there are pretty much no smaller companies the new company could not subsume with ease. If it wanted to take out a super-regional such as Key Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KEY)") else Response.Write("(NYSE: KEY)") end if %>, SunTrust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STI)") else Response.Write("(NYSE: STI)") end if %>, or something the size of the former Barnett Banks, no problem. Those would be bite-sized deals for Citigroup. On a global scale, financial institutions trading at price/book, price/earnings, price/assets, or price/capital at fractions of U.S. multiples could also be fodder for the Big Red One.

The merger has reminded arbitrageurs of the imperative that size matters in the global economy. American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %>, a virtual bank and financial services giant and very nice fit for many possible merger partners, climbed $4 1/4 to $103 1/4. J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %>, already on the lookout for strategic partners, slimming down to the image desired by Wall Street and basking in the glow of increased valuations multiples gained over the last 45 days, surged $9 1/16 to $143 on the news. Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %>, which in part set the tone for the latest wave of large-scale mergers when it announced its deal with Dean Witter Discover last year, gained $2 3/8 to $77 13/16, while the financial world's most eligible bachelor, Merrill Lynch & Co., jumped $6 1/4 to $92 3/4.

Surprisingly, the arbs have left asset manager Franklin Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEN)") else Response.Write("(NYSE: BEN)") end if %> alone this morning. Though expensive in the eyes of some, the company would make a tempting strategic target providing beautiful annuity cash flow for any company with the equity value to take it over. Alliance Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AC)") else Response.Write("(NYSE: AC)") end if %> was only bid up $9/16 to $27 7/8 while T. Rowe Price <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %> gained a more healthy $2 3/16 to $73 5/8. If it's a financial services company and it's moving today, thank Sandy Weill and John Reed. They've now confirmed the trend toward universal banking in the U.S.

UPS

Biopharmaceutical company Gilead Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GILD)") else Response.Write("(Nasdaq: GILD)") end if %> jumped $7 1/8 to $43 1/4 after the firm said a study indicated that its Preveon drug reduced the HIV RNA, or viral load, of HIV patients when used with a combination of other anti-HIV drugs. The company also said that in another study, Preveon reduced the amount of hepatitis B virus DNA in the majority of infected patients to an "undetectable" level.

Analog and mixed signal integrated circuit maker National Semiconductor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> picked up $1 9/16 to $21 13/16 after announcing that its plans to combine "a dozen or so" microprocessors used in PCs into a single chip will see the light of day by mid-1999, which could cut PC prices "dramatically." The chip will be developed around existing technologies created by the firm's Cyrix microprocessor unit.

Aluminum products and alumina company Aluminum Co. of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AA)") else Response.Write("(NYSE: AA)") end if %> gained $2 to $71 after reporting fiscal Q1 EPS of $1.25 versus $0.92 a year ago, thumping the First Call mean estimate of $1.09 for the quarter.

America West Holdings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %>, the parent of air carrier America West Airlines, moved $11/16 higher to $28 11/16 after chairman and CEO William Franke announced on Friday that the firm's fiscal Q1 EPS will be "at the upper end" of analysts' forecasts of $0.40 to $0.47 per share. If fuel prices remain at their current levels, the airline's bookings in fiscal Q2 will also be "strong," he said.

Wire-based money transfer firm Moneygram Payment Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MNE)") else Response.Write("(NYSE: MNE)") end if %> was lifted $1 3/16 to $16 3/4 after agreeing to a tender offer by airline caterer and fellow money transfer services company Viad Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VVI)") else Response.Write("(NYSE: VVI)") end if %> at a price of $17 per share. The purchase price represents a 9% premium to Moneygram's closing price of $15 9/16 on Friday.

Local access network (LAN) and wide area network (WAN) technologies firm Datatec Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DATC)") else Response.Write("(Nasdaq: DATC)") end if %> moved up $11/16 to $6 3/16 after software maker Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> selected the company to assist its clients in installing and testing Microsoft's upcoming Windows 98 and NT 5.0 operating systems.

Enterprise software developer J.D. Edwards & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDEC)") else Response.Write("(Nasdaq: JDEC)") end if %> gained $15/16 to $38 1/8 after announcing product alliances with international trade logistics software firm Vastera, time and employee attendance management systems provider Kronos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KRON)") else Response.Write("(Nasdaq: KRON)") end if %>, and job applicant software developer Personic Software Inc.

The American depositary shares of ING Groep N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ING)") else Response.Write("(NYSE: ING)") end if %> rose $3 7/16 to $66 1/4 after Bloomberg News reported that the Dutch insurance giant is thinking about selling its American property and casualty insurance unit, which could fetch up to $1 billion.

Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> picked up $1 1/8 to $29 11/16 after Piper Jaffray started coverage of the chip maker with a "buy" rating and a 12-month price target of $40 per share.

Networking solutions and software/hardware support services firm 4Front Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FFTI)") else Response.Write("(Nasdaq: FFTI)") end if %> tacked on $15/16 to $14 1/16 after Wheat First Union started coverage of the stock with a "buy" rating and a 12-month price target of $17.50 per share.

Concentric Network Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNCX)") else Response.Write("(Nasdaq: CNCX)") end if %>, a provider of Internet access and Web hosting services to businesses and consumers, was lifted $3 1/2 to $28 5/8 after agreeing to provide backbone data network services to broadband Internet services provider Teligent Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGNT)") else Response.Write("(Nasdaq: TGNT)") end if %>

DOWNS

Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> dipped $3 9/16 to $89 7/16 after The Wall Street Journal reported that the Justice Department may bring new antitrust charges against the computer software behemoth this month. The new allegations would include violation of the Sherman Antitrust Act through "illegal maintenance and extension" of Microsoft's control of personal computer operating software. The case would also repeat allegations that the company violated a 1995 antitrust settlement by bundling its Internet Explorer software with Windows 95 and, now, Windows 98, which is scheduled to be released to computer makers next month.

Self-service solutions software company Edify Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EDFY)") else Response.Write("(Nasdaq: EDFY)") end if %> plummeted $6 13/16 to $11 5/16 after announcing it expects a first quarter loss of about $0.08 to $0.10 a share on sales of $13.5-$14 million. The First Call mean EPS estimate was $0.04. The company said it "executed poorly" during the quarter and suffered order delays especially from larger financial services and call center customers.

Internet telecommunications company IDT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> lost $1 5/8 to $31 1/8 on Friday's news that the Federal Communications Commission may levy fees on companies offering long-distance service over the Internet. In response, IDT announced it is offering free PC-to-phone calls at http://www.net2phone.com for Americans to call their Congressman, Senator, and the FCC to lobby against the proposed plan.

Biopharmaceutical company Cephalon Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEPH)") else Response.Write("(Nasdaq: CEPH)") end if %> and biotechnology firm Chiron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHIR)") else Response.Write("(Nasdaq: CHIR)") end if %> fell after announcing that the Food and Drug Administration has cancelled the Peripheral and Central Nervous System Drugs Advisory Committee meeting originally scheduled for April 9 so that the agency can continue its review of the companies' application for approval to market Myotrophin Injection for the treatment of Lou Gehrig's disease. Cephalon sank $3 15/32 to $11 29/32, and Chiron slipped $5/8 to $20 15/16.

Robotic Vision Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROBV)") else Response.Write("(Nasdaq: ROBV)") end if %>, which makes 3-D machine vision systems for inspecting semiconductor devices, tanked $3 7/8 to $8 11/16 after announcing that it expects second quarter results to be "significantly below" the company's and analysts' expectations. Sales are expected to be around $47 million, down 13% from the $53.8 million reported in the first quarter, due to a fall in orders and revenues in its semiconductor equipment group. Excluding charges, the company expects to report a loss of approximately $2.5 million.

Consumer household products maker Sunbeam Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> continued falling, losing $1 7/8 to $ 32 1/2 this morning after announcing on Friday that it will report a Q1 loss due to acquisition charges and a 5% decline in sales compared with the year-earlier period. Goldman Sachs removed Sunbeam from its "recommended list" and gave it a "market perform" rating. Bear Stearns lowered its rating on the company to "neutral" from "buy." Coleman Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLN)") else Response.Write("(NYSE: CLN)") end if %>, one of the companies being acquired by Sunbeam, fell $1 7/8 to $24 1/2.

Pentium chip maker Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> lost $1 9/16 to $75 1/8 after National Semiconductor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> announced that its "system on a chip," which combines a microprocessor with circuitry of more than a dozen additional chips needed to make a PC, will debut next June, possibly driving PC prices down to less than $400.

Software and professional consulting services provider Viasoft Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VIAS)") else Response.Write("(Nasdaq: VIAS)") end if %> shed another $1 9/16 to $16 1/2 after giving further guidance following Friday's announcement that it expects third quarter results to be below expectations. Yesterday the company said it expects earnings to be between $0.12 and $0.14 per share on revenue of $25.5-$26.5 million. The First Call mean EPS estimate was $0.26.

Oil and gas company St. Mary Land & Exploration <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MARY)") else Response.Write("(Nasdaq: MARY)") end if %> was drilled for $6 7/16 to $32 5/8 after reporting that its initial test at Atchafalaya Bay, in which the company holds a 40% working interest, has shown the zone to be non-productive.

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ANOTHER FOOLISH THING

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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
Contributing Writers

Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last
Editing