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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Blind Mellon?
Mellon Bank Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> declined another $2 3/16 to $72 11/16 as risk arbitrageurs and others dump its stock, returning the shares to the neighborhood where they were trading before Bank of New York <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %> offered to merge with the company in a deal valuing Mellon at $90 per share. One dissident shareholder, Wyser Pratte & Co., complained that the bank dismissed the offer without a serious look: "Your immediate rejection of the offer -- before the board had even met to consider it -- raises questions about the process by which the decision was reached." Mellon had already conducted talks with Bank of New York around the beginning of the year, though, so it's probably not fair to say that the company dismissed the offer out of hand. Wyser Pratte has asked that the issue be put to shareholders in a "timely manner."
All of this should be familiar to Mellon's board, who demanded the same of CoreStates Financial in a losing bidding contest with First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> last year. Mellon employed the same tactics that Bank of New York is now pulling on Mellon -- using information gathered during merger talks, Mellon leaked to the press that it was unsatisfied with CoreState's terms, effectively putting the matter to investors to decide. That's all today's dissident shareholder is saying. At a proposed merger valuation of 6.1 times book value, 9.7 times tangible book value, 27.4 times net income (backing out amortization of goodwill and intangibles from expenses), and a near-industry high price/assets ratio of 53.92%, the company is certainly not cheap.
The board of directors at Mellon might not be blind to the true value that has been offered. In Bottomline Banking: Meeting the Challenges for Survival and Success, co-authored by BANC ONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> Chairman and CEO John McCoy, the merits of a deal can be looked at through a "Board Decision Matrix," which was adapted from a Keefe, Bruyette & Woods report. The two variables in the matrix are the deal premium and a bank's internal capital generation rate, which is the company's return on equity multipled by the earnings retention ratio (1 minus the payout ratio). With an amortization-adjusted ROE of 22.53% and a retention ratio of 0.56, then multiplying the two together, the firm's internal capital generation rate is 12.62. At a deal premium of approximately 28%, Mellon Bank can expect to earn back that premium within just a hair over two years. Based on past deals in the banking industry, a two-year period to earn back the premium is very tame. The Bank of New York offer is not that quantitatively enticing, especially since it's a stock swap. If it were a cash offer, that would be different. Strategically, one could argue that it's a compelling offer -- but it's not cash, so no dice.
Online service provider America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> moved up $3 3/4 to $79 1/8 after Merrill Lynch resumed coverage of the company with near- and long-term "buy" ratings and a price target of $100 per share.
Ziff-Davis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZD)") else Response.Write("(NYSE: ZD)") end if %>, publisher of PC Magazine, PC Week, and Computer Shopper, rose $2 11/16 to $18 3/16 after the company sold 25.8 million shares in an initial public offering this morning at a price of $15.50 per share. The IPO, which represents a 26% stake in the company, raised nearly $400 million in fresh cash for parent company Softbank.
Pharmaceutical company Pharmacia & Upjohn <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %> advanced $2 7/16 to $41 1/4 after reporting Q1 EPS of $0.36, which was a penny less than a year ago but on target with the First Call mean estimate. The company is "very much on track" to see double-digit earnings growth in 1998, the firm's CFO told reporters in a conference call covered by Bloomberg News.
IRI International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IIR)") else Response.Write("(NYSE: IIR)") end if %>, a manufacturer of oilfield equipment, gained $1 1/8 to $12 15/16 after agreeing to terminate its proposed merger with Norway's Hitec ASA due to "issues" related to aligning Hitec's financial statements with U.S. Generally Accepted Accounting Principles (GAAP).
Manufacturing process and automation software developer Aspen Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AZPN)") else Response.Write("(Nasdaq: AZPN)") end if %> was lifted $3 3/16 to $49 after agreeing to acquire privately held supply chain management software firm Chesapeake Decision Sciences for 2.95 million newly issued Aspen shares. The deal will result in a $4 million charge to Aspen's earnings but will not dilute its fiscal 1998 or 1999 earnings per share, the firm said.
Coffeehouse operator Starbucks Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBUX)") else Response.Write("(Nasdaq: SBUX)") end if %> perked $2 1/16 higher to $47 1/8 after reporting that its April total revenues rose 41% to $98.4 million compared to the same period a year ago. The company also said it is acquiring Britain's Seattle Coffee Co. for 1.8 million shares.
PC and software catalog retailer Micro Warehouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWHS)") else Response.Write("(Nasdaq: MWHS)") end if %> rose $1 1/16 to $15 7/16 after reporting Q1 EPS of $0.28 versus $0.23 a year ago, beating the Street's estimate by a nickel. Sales of "Wintel" computer units grew by 95% in the quarter, the firm said.
Network switching products maker Tekelec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> added $4 3/8 to $49 after reporting Q1 EPS of $0.19 (before a $1 million one-time gain) compared to $0.06 a year ago, which was ahead of the First Call mean estimate of $0.10.
Telecommunications systems and software developer Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> rose $2 7/16 to $50 7/8 after the company won a one-year contract to supply its dense wavelength division multiplexing (DWDM) system to Hermes Europe Railtel, which will use the system to resell bandwidth along its fiber optic network in Europe.
Outpatient surgical and rehab center operator HealthSouth Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRC)") else Response.Write("(NYSE: HRC)") end if %> gained $1 3/8 to $29 7/16 after Merrill Lynch analyst Kenneth Weakley made the company a "Focus 1 selection," adding that the Street's EPS estimates of $1.16 in fiscal 1998 and $1.41 in fiscal 1999 are too low.
Neurex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXCO)") else Response.Write("(Nasdaq: NXCO)") end if %>, which develops "pain management" drugs, soared $9 3/16 to $28 15/16 after agreeing to merge with Irish drug developer Elan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELN)") else Response.Write("(NYSE: ELN)") end if %>. Each Neurex share will be exchanged for 0.51 of an Elan American depositary share, effectively valuing Neurex at $31.81 per share -- a 61% premium to its closing price of $19 3/4 per share yesterday. Elan shares dropped $3 1/4 to $59 1/8
Magazine publisher Reader's Digest Association <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDA)") else Response.Write("(NYSE: RDA)") end if %> advanced $7/8 to $26 5/8 after the company chose Thomas Ryder as its new chairman and CEO. Mr. Ryder is the former president of American Express's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> Travel-Related Services unit.
Music distributor Platinum Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTET)") else Response.Write("(Nasdaq: PTET)") end if %> jumped $1 3/4 to $13 5/8 after teaming up with information technology software firm Platinum Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAT)") else Response.Write("(Nasdaq: PLAT)") end if %> to create a website providing access to Platinum Entertainment's list of almost 500,000 music titles, which users will be able to download, order by mail, and use to create customized compact disks.
Pharmaceutical company Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> fell $1 1/4 to $112 1/8 on news that several large insurers are tightening reimbursement rules for the company's new and popular impotence drug Viagra. Insurers are requiring men to submit a note from their doctor stating that they suffer from erectile dysfunction and limiting the number of pills a patient can take per month.
Command Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMND)") else Response.Write("(Nasdaq: CMND)") end if %>, which provides information technology services to financial services companies, plummeted $7 7/16 to $7 1/16 after announcing that it expects to see "short-term variations in both revenue and earnings growth" as it invests in additional infrastructure. Also, for its first quarter as a publicly listed company, Command Systems reported earnings of $0.04 a share, up from a loss of $0.06 per share for the prior-year period.
Semiconductor capital equipment company Integrated Process Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IPEC)") else Response.Write("(Nasdaq: IPEC)") end if %> lost $1 1/16 to $17 15/16 after reporting a wider-than-expected third quarter loss of $0.14 a share versus a profit of $0.12 per share in the year-earlier period. On average, analysts had expected a loss of $0.08 per share. As the company warned early this month, certain customers in Asia delayed a significant number of shipments. Even though the company has started containing costs, fourth quarter results are "not expected to improve significantly."
Capital Automotive REIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CARS)") else Response.Write("(Nasdaq: CARS)") end if %>, formed to acquire car dealerships and other car-related businesses, dropped a second day, falling $1 15/16 to $14 15/16 after yesterday reporting first quarter earnings of $0.14 per share and pro forma EPS of $0.19. Pro forma results are adjusted as if the company had been generating rental income since January 1 instead of just since its initial public offering on February 19. The company also announced an initial cash dividend of $0.076 per share for the first quarter.
Corporate health and benefits plans administrator HealthPlan Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPS)") else Response.Write("(NYSE: HPS)") end if %> sank $2 3/16 to $23 3/4 after SBC Warburg Dillon Read downgraded its rating on the company to "neutral" from "outperform," citing that the company's first quarter results suggested that its earnings potential is below Warburg's original estimates. Warburg cut the company's 1998 estimate to $1.24 per share from $1.35 but kept the 1999 estimate at $1.65.
Earnings Movers
Aames Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAM)") else Response.Write("(NYSE: AAM)") end if %> down $3/8 to $13 11/16; Q3 EPS: $0.15 vs. $0.51 last year; Estimate: $0.22
En Pointe Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENPT)") else Response.Write("(Nasdaq: ENPT)") end if %> down $1 9/16 to $8 13/16; Q2 EPS: $0.04 vs. $0.23 last year; Estimate: $0.21
Gardenburger <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBUR)") else Response.Write("(Nasdaq: GBUR)") end if %> down $1 to $11 1/8; Q1 EPS: loss of $0.50 vs. loss of $0.04 last year; Estimate: loss of $0.43
InterVU Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITVU)") else Response.Write("(Nasdaq: ITVU)") end if %> down $2 3/4 to $17 3/4; Q1 EPS: loss of $0.66 vs. loss of $0.21 last year; Estimate: loss of $0.16
Saville Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAVLY)") else Response.Write("(Nasdaq: SAVLY)") end if %> down $1 15/16 to $50 3/4; Q1 EPS: $0.23 vs. $0.11 last year; Estimate: $0.21
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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
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