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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Seedy Split
The bid to combine a cash-flow rich pharmaceutical company with a pipeline-rich global life sciences company is over. American Home Products Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> and Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> announced today that they have terminated their previously announced merger agreement "by mutual consent." However, there are about as many opinions as to why the split occured as there are commentators.
The word on the Street, according to David Faber of CNBC, is that American Home's earnings-driven corporate governance clashed with the research and development ethos of Monsanto. This explanation is somewhat facile, but altogether reasonable when considering the mechanics of individual business unit link-ups. (Although no mention of this fundamental clash emerged at the onset of the deal.) Meanwhile, independent analyst Hemant Shaw was quoted by Bloomberg News as saying, "We know that American Home was bending over backward to please Monsanto and get the job done.... Maybe Monsanto kept asking, and maybe American Home decided enough was enough." Even though no smoking gun -- or offending straw -- has materialized, what is clear is that both Monsanto CEO Robert Shapiro and American Home CEO John Stafford have built their respective companies on acquisitions -- and each has met with much success in determining the outcome of those mergers.
The combined company was expected to grow in the high teens, and analysts are scrambling to downgrade both firms in the wake of the announcement. Monsanto will now have to hustle for some financing to keep its capital structure in-line considering the four acquisitions that it has announced in recent months. In the month before the deal, Monsanto announced that it would purchase the remaining shares of seed company DeKalb Genetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %> that it didn't already own, as well as cotton-seed company Delta & Pine Land Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLP)") else Response.Write("(NYSE: DLP)") end if %>. These moves solidified Monsanto's ability to be a successful player in the agricultural biotechnology and nutrition segment by itself -- and this was without Cargill's seed operations and Plant Breeding International being brought into the fold. Responding in part to speculation that it was pondering a hook-up with DuPont, Monsanto stated at the time that it would only consider mergers to develop its pharmaceuticals business (which will be looking great if Celebra gets approved as quickly as analysts think).
Overall it looks like American Home is in the weaker position after the split -- although both have opened lower, which makes those claims of "shareholder interest" ring hollow. This is especially true if you follow Hemant Shaw's reasoning that American Home has already shown that it is willing to sacrifice a lot to do a deal, as evidenced by its willingness to award a significantly smaller company with half of the board seats in a combination.
In the latest wave of consolidation in the supermarket industry, Dominick's Supermarkets <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DFF)") else Response.Write("(NYSE: DFF)") end if %> jumped $6 5/8 to $48 after announcing it will be acquired by the nation's second-largest supermarket chain, Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>, for $49 a share in cash, or around $1.2 billion plus $646.2 million in assumed debt. The offer represents an 18.4% premium to Dominick's closing price yesterday of $41 3/8. Major shareholders Yucaipa Cos. and Apollo Advisors, whose affiliates own roughly 41% of Dominick's outstanding shares, have agreed to tender their shares to Safeway.
Diversified manufacturer, NBC parent, and financial services company General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> moved up $1 9/16 to $75 5/8 following yesterday's announcement that its acquisition-happy Capital Services unit will buy a Pitney Bowes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBI)") else Response.Write("(NYSE: PBI)") end if %> brokerage operation that specializes in equipment leasing for about $800 million, giving GE Capital greater access to small and midsize companies.
French telecommunications equipment giant Alcatel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALA)") else Response.Write("(NYSE: ALA)") end if %> American depositary shares picked up $1 1/8 to $18 3/4 after late yesterday announcing it will acquire wire-speed routing and gigabit ethernet solutions company Packet Engines Inc. in a deal valued at $315 million, which includes an unspecified cash sum as well as a Technology Development Incentive Plan focused on developing new networking products.
Satellite-to-car radio broadcaster CD Radio <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDRD)") else Response.Write("(Nasdaq: CDRD)") end if %> transmitted a $4 7/8 gain to $23 3/8 after this morning announcing that Prime 66 Partners L.P. will acquire a $100 million, or 20%, interest in the company. Prime 66 Partners is an investment vehicle of Sid R. Bass of Fort Worth, Texas.
Enterprise network and data security software company Security Dynamics Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDTI)") else Response.Write("(Nasdaq: SDTI)") end if %> was up $15/16 to $9 1/8 after late yesterday reporting Q3 EPS of $0.10 (before one-time items), down from $0.15 last year but right in line with analysts' estimates. The company gave its stock a boost by announcing plans to buy back as many as 4 million shares over the next 12 months.
Client/server computing switching systems maker Apex PC Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APEX)") else Response.Write("(Nasdaq: APEX)") end if %> gained $2 1/8 to $17 1/4 after late yesterday reporting Q3 EPS of $0.29, compared with $0.22 a year ago and the mean estimate of $0.26 from two analysts. The company's gross margin improved to 48.1%, up from 44.5% last year, largely due to continued strong sales of higher-margin branded products. Third quarter branded sales increased 61% to $7.8 million from a year earlier and rose 11% from the previous quarter.
Network switching solutions and diagnostic systems manufacturer Tekelec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> added $2 1/16 to $15 7/8 after announcing late yesterday that Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> has chosen to use its integrated EAGLE Signal Transfer Point (STP) and Local Number Portability (LNP) solution in the telecommunications company's Local Telecommunications Division and Long Distance Division. EAGLE will serve as Sprint's national STP and master LNP database.
Earnings Movers
Atmel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATML)") else Response.Write("(Nasdaq: ATML)") end if %> up $1/2 to $8 3/8; Q3 EPS: $0.04 vs. $0.30 last year; Estimate: $0.03
Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> up $3/4 to $72; Q3 EPS: $1.00 vs. $0.73 last year; Estimate: $1.00
Donaldson, Lufkin & Jenrette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> up $1 3/8 to $26 7/8; Q3 EPS: $0.15 vs. $0.93 last year; Estimate: $0.23
Lattice Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LSCC)") else Response.Write("(Nasdaq: LSCC)") end if %> up $1 to $22 7/8; Q2 EPS: $0.42 vs. $0.62 last year; Estimate: $0.41
Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> up $1 3/16 to $45 1/16; Q3 operating EPS: $0.28 vs. $1.24 last year; Estimate: $0.48
For more earnings announcements, see today's Breakfast With the Fool.
Photographic products maker Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> dropped $7 1/8 to $76 7/16 despite reporting fiscal Q3 EPS of $1.21 versus $0.71 last year, beating analysts' estimates by a penny. However, the company reportedly told analysts in a conference call this morning that its market share in the U.S. consumer film market declined during the quarter. The firm also predicted "flat" global demand for photographic products for the rest of 1998. For more on Kodak's earnings, see this morning's Breakfast With the Fool.
Shares of skiing products maker K2 Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KTO)") else Response.Write("(NYSE: KTO)") end if %> went over a cliff this morning, tumbling $6 to $8 3/16 after the firm said its fiscal Q3 operating EPS will be $0.09, which is well below the $0.34 projected by the Street. However, that figure excludes results from its Simplex building products division, which the company is treating as a discontinued operation and intends to sell by early 1999.
Interactive training software firm CBT Group PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBTSY)") else Response.Write("(Nasdaq: CBTSY)") end if %> slid $2 to $8 1/4 after reporting fiscal Q3 EPS of $0.06, missing the Street's downwardly revised estimate of $0.12. New management committee member William McCabe, who apparently has replaced recently ousted CEO James Buckley as the firm's mouthpiece, said it will take "several quarters" to return CBT to its previous growth plan.
Enterprise resource planning software firm Baan Co. NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> lost another $1 13/16 to $11 11/16 after falling 24% yesterday following a warning that it expects a fiscal Q3 loss between $0.13 and $0.16 per share.
Computer software consultant and Year 2000 problem solver Analysts International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANLY)") else Response.Write("(Nasdaq: ANLY)") end if %> fell $9 5/32 to $14 3/8 after reporting fiscal Q1 EPS of $0.27, which was $0.03 higher than last year but $0.03 below the Street's mean estimate. The company blamed the shortfall on a merger involving one of its customers, which resulted in a project cancellation.
Number one PC maker Compaq Computer Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> dropped $1 7/8 to $25 7/16 after Piper Jaffray reduced its fiscal Q4 EPS estimate to $0.30 from $0.34. The brokerage firm also cut Compaq's Q4 revenue estimate to $10.5 billion from $11 billion.
Satellite-based communication services provider PanAmSat Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPOT)") else Response.Write("(Nasdaq: SPOT)") end if %> slid $7 7/16 to $29 5/16 after Credit Suisse First Boston lowered its rating on the firm to "hold" from "buy" and Morgan Stanley Dean Witter lowered the firm's 12-month price target to $50 per share from $60 per share. Satellite maker Hughes Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %>, which owns 81% of PanAmSat, also fell $4 3/16 to $32 9/16 this morning.
American Airlines parent AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> descended $2 9/16 to $49 3/16 following a Morgan Stanley Dean Witter downgrade to "outperform" from "strong buy."
Visual effects production products supplier Discreet Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSLGF)") else Response.Write("(Nasdaq: DSLGF)") end if %> was trampled for a $2 1/4 loss to $9 3/8 after pre-announcing fiscal Q1 revenues between $25 million and $27 million and EPS between $0.03 and $0.08, which is short of the $0.16 expected by the Street.
Real estate investment trust (REIT) Associated Estates Realty Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AEC)") else Response.Write("(NYSE: AEC)") end if %> sank $2 7/16 to $13 1/2 after saying that its fiscal Q3 funds from operations will fall about $0.08 below analysts' expectations of $0.56. The REIT's Q4 results are also expected to be about $0.08 below estimates due to lower-than-expected income from its development activities and higher operating expenses.
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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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