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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Ascend Acquires Stratus
Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> ticked down another $17/32 to $43 15/16 this morning after taking a shave of a more than $8 per share last week in the midst of rumors suggesting the company would acquire fault-tolerant computer systems and software company Stratus Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SRA)") else Response.Write("(NYSE: SRA)") end if %>. Unlike all the other rumors that have involved Ascend over the last year, this was turned out to be true -- and it doesn't even involve Lucent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> as a potential acquirer, either. In fact, Lucent will be even more squarely in Ascend's sights now. This morning Ascend announced that it has reached a definitive agreement to acquire Stratus by exchanging 0.75 of its shares of each Stratus share, valuing the Marlboro, Massachusetts-based company at $822 million. After considering excess cash and securities of approximately $150 million, the value of the transaction is substantially smaller than the sticker price, though.
Ascend is interested in the company's telecom software and fault-tolerant hardware assets, not the enterprise server and software units. Those non-telecom units will be divested, according to Ascend, which may bring in some cash, but the important thing is to get rid of value-neutral or value-destroying businesses. Ascend thus believes the acquisition will be accretive to 1999 earnings, currently estimated at $1.50 per share according to I/B/E/S. With this acquisition, Ascend adds another product that Lucent would love to have -- a high-density remote access switch that can comb data from voice, offloading data onto a lower-cost Internet protocol network and unburdening switched voice networks.
This is the reason why the talk of Lucent taking out Ascend last year wasn't totally off base, as switch congestion on Lucent's flagship Class 5 ESS switches is still an issue. Rather than deploying more and more of these switches, Baby Bells, competitive local exchange carriers, and even Internet service providers (ISPs) will be able to order a switching solution that can more cost effectively accommodate a mix of dial-up voice and data, T-1, T-3, ISDN, and other edge-of-network connections. Further, Ascend offers the full complement of backbone switching hardware and software.
This deal means that Ascend can offer a wider complement of network components that carriers need, which should scare Lucent, Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>, and Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. That Ascend shares were down this morning is surprising. It's not giving away a huge chunk of its equity to do the deal, especially considering the excess cash and the planned divestitures. It will also have a wider product line that improves its strategic position in carrier-class switching. Finally, the company has the capital allocation sense to get rid of something that isn't going to add value. It appears as though Ascend is going to have to work to educate investors on what the transaction can mean to the company. With memories of the Cascade merger still fresh in some people's minds, the nonplussed reaction this morning maybe isn't so surprising. This deal looks like a win for the company for the long term and from the outset of the deal.
PC maker and computing products giant IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> advanced $1 7/16 to $133 15/16 after introducing its newly developed "silicon-on-insulator" technology for building faster chips for servers, mainframes, and hand-held electronic devices. The company said the development could improve the speed of computers and communications products by as much as 35%.
American Stores Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASC)") else Response.Write("(NYSE: ASC)") end if %>, which operates supermarkets such as Acme Markets and Jewel Food Stores, rose $3 5/8 to $26 13/16 after agreeing to merge with Boise, Idaho-based Albertson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABS)") else Response.Write("(NYSE: ABS)") end if %> for $11.7 billion in stock and assumed debt. Albertson's expects the deal will add to its earnings in fiscal 1999 and will yield about $300 million in annual cost savings. Albertson's fell $2 7/16 to $45 9/16.
Food and consumer products maker Sara Lee Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %> added $2 to $52 1/8 after announcing a plan to restructure its household and body care products businesses, including closing or selling plants and divesting non-core operations. The transactions are expected to yield a total of $200 million in cash and cash flow proceeds by fiscal 2000, which will be used to partly fund a $3 billion stock repurchase program.
Imaging and data storage technologies company Imation Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IMN)") else Response.Write("(NYSE: IMN)") end if %> gained $1 5/16 to $17 1/8 after photographic and imaging products maker Eastman Kodak Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> agreed to buy the company's medical imaging business for about $520 million in cash. Kodak said the purchase will have no effect on earnings in the first year and will be accretive thereafter. Kodak fell $2 1/4 to $81 5/8.
Title insurance and real estate services firm First American Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FAF)") else Response.Write("(NYSE: FAF)") end if %> picked up $2 9/16 to $29 1/16 after agreeing to buy privately held electronic mortgage document delivery systems developer ShadowNet Mortgage Technologies for an undisclosed sum.
Office supplies distributor U.S. Office Products Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OFIS)") else Response.Write("(Nasdaq: OFIS)") end if %> rose $13/16 to $13 9/16 after naming former Westinghouse Electric Corp. executive Joseph T. Doyle its new CFO and executive vice president.
Hicksville, N.Y.-based electric and gas utility MarketSpan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MN)") else Response.Write("(NYSE: MN)") end if %> surged $3/4 to $28 5/16 after setting a plan to buy back up to 10% of its outstanding stock, or about 15.8 million shares.
Prison operator Corrections Corp. of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCA)") else Response.Write("(NYSE: CCA)") end if %> tacked on $15/16 to $18 7/8 after announcing an agreement with officials in Youngstown, Ohio to tighten security measures at CCA's Northeast Ohio Correctional Center following the escape of six inmates last week. The company also said it is working on a plan to transfer some District of Columbia prisoners housed in the facility to other CCA prisons.
Vision correction lasers maker LaserSight Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LASE)") else Response.Write("(Nasdaq: LASE)") end if %> beamed up $17/32 to $6 15/16 after the FDA approved the company's premarket approval application for its Kremer Excimer Laser system for use in a procedure to correct nearsightedness and myopic astigmatism.
AmeriSource Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAS)") else Response.Write("(NYSE: AAS)") end if %> plunged $22 3/8 to $53 3/4 while Bergen Brunswig <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBC)") else Response.Write("(NYSE: BBC)") end if %> tanked $10 1/16 to $42 15/16 after a U.S. district court judge ruled in favor of the Federal Trade Commission against the companies' separate acquisitions by McKesson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCK)") else Response.Write("(NYSE: MCK)") end if %> and Cardinal Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAH)") else Response.Write("(NYSE: CAH)") end if %>, respectively, on antitrust concerns. The proposed mergers would bring together the nation's four largest drug wholesalers and create two industry giants. McKesson, which reportedly said it was highly unlikely to pursue its merger with AmeriSource, lost $15/16 to $79 11/16. Cardinal, which is weighing its options, fell $3 1/16 to $93.
Enterprise applications software firm SAP AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> of Germany lost $1 15/16 to $59 9/16 on the first day its American depositary receipts were listed on the New York Stock Exchange.
Enterprise software firm PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> fell $1 3/8 to $36 5/16 after forming an alliance with router maker Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> to develop new technologies to speed up the flow of business data through public and corporate computer networks. Cisco climbed $1 13/16 to $97 9/16.
Consumer products giant Procter & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %> fell another $15/16 to $78 7/16 in the wake of comments by the company last week that earnings growth might slow in the first half of fiscal 1999.
Wireless communications products wholesaler and retailer CellStar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLST)") else Response.Write("(Nasdaq: CLST)") end if %> was disconnected for a $3 3/16 loss to $10 13/16 after announcing that the SEC is investigating the company's compliance with federal securities laws. The company said it believes it has fully complied with all securities laws and will fully cooperate in the investigation.
After a spectacular debut last Friday, Cyberian Outpost <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COOL)") else Response.Write("(Nasdaq: COOL)") end if %> got a cold reception this morning, losing $2 7/16 to $18 1/16. The online computer retailer's initial offering price was $18.
Other Internet companies headed downward as well. Egghead.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> was cracked for a $1 7/16 loss to $13 1/16; Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> shed $1 1/4 to $23 5/8; Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> lost $2 3/32 to $55 1/32; Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> fell $3 to $88; and Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> dipped $1 1/4 to $37 3/4.
Computer network infrastructure company Vanstar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VST)") else Response.Write("(NYSE: VST)") end if %> sank $2 1/8 to $7 7/8 after announcing it expects a fiscal Q1 loss of $0.20 to $0.25 per share. Analysts had been predicting a $0.02 loss. The company blamed the shortfall on a decline in average sales prices for computers and manufacturer's product shortages.
Radioactive waste management company GTS Duratek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRTK)") else Response.Write("(Nasdaq: DRTK)") end if %> plummeted $2 13/16 to $6 15/16 after warning that it expects a Q2 loss of around $0.06 a share, short of analysts' mean estimate of a profit of $0.12. The shortfall is due to the company's decision to postpone a radioactive metal melt campaign until Q3; one-time costs associated with a new nuclear plant and restructuring its Oak Ridge, Tenn., operations; and higher-than-expected costs for proposals to decommission two nuclear plants.
Gift products developer and distributor Russ Berrie & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RUS)") else Response.Write("(NYSE: RUS)") end if %> dropped $2 1/2 to $20 1/2 after Goldman Sachs downgraded its rating on the company to "outperform" from "trading buy."
Software developer Ansoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANST)") else Response.Write("(Nasdaq: ANST)") end if %> was pummeled for a $3 1/8 loss to $5 3/4 after warning that it expects flat year-over-year fiscal Q1 revenue and a Q1 loss of $0.09 to $0.11 a share. That compares with a profit of $0.08 a share a year ago and the analysts' mean estimate of a profit of $0.07. The company attributed the shortfall to slowdowns in Asia.
Brokerage firm Siebert Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIEB)") else Response.Write("(Nasdaq: SIEB)") end if %> lost $1 5/8 to $8 5/8 after announcing last Friday that it has commenced a rights offering to its shareholders by which shareholders can buy one Siebert share at $7.50 for each share they own. The company said the primary purpose of the offering is to raise capital to expand its Internet trading business.
Earnings Movers
Global Payment Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GPTX)") else Response.Write("(Nasdaq: GPTX)") end if %> down $1 3/4 to $9 3/4; Q3 EPS: $0.14 (before one-time gain) vs. $0.09 last year
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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 |