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FOOL PLATE SPECIAL
An Investment Opinion
by Warren Gump
Yahoo Splits (and Falls)!
This morning, Internet blue-chip Yahoo!'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> 2-for-1 split took effect, yet the stock traded down $11 3/4 (6.8%) to $161. This activity provides a great example that, contrary to popular opinion, a stock split does not automatically increase the value of a firm. In fact, a split in and of itself does nothing to change the value of a company.
When a company splits its stock, the only thing happening is that the company is being divided into more pieces. When Yahoo! split its shares today, it doubled the number of shares outstanding. Instead of having around 117 million equivalent shares outstanding, the company is now composed of 234 million shares. A simple analogy is that of a pizza. You can take an 8-piece pizza and cut every slice in half, resulting in 16 slices of pizza. While you now have 16 slices, you don't have any more pizza. Similarly, even though Yahoo now has twice as many shares outstanding, the company is unchanged. Each share represents half of what it did previously.
Why does a company split its shares? In an effort to keep its stock price in a range that the board of directors feels is attractive to investors, it is simply playing a psychological game. Some companies don't want their stock price trading above $100 a share. Others prefer their stock trading for under $40. They feel it seems "too expensive" to investors. Whenever a company's stock exceeds such a threshold, the board enacts a split to reduce its share price. Although the price of each share comes down, the valuation of the company does not -- because more shares are outstanding.
Despite not altering the value of a company, stock splits usually do occur at companies that are perceived to have good prospects. Considering that a split occurs after a stock's price has increased dramatically, investors must have high expectations for future performance. You should not, however, associate that good performance with a stock split. The strong performance is related to the business decisions made by management and how investors expect future developments to emerge.
When looking for investment candidates, look at the underlying fundamentals of a business, not at whether a stock has split. One of the best investments of the past thirty years, Warren Buffett's Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A)") else Response.Write("(NYSE: BRK.A)") end if %>, has never split its stock.
Specialty insurance company Executive Risk <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ER)") else Response.Write("(NYSE: ER)") end if %> jumped up $18 7/8 to $62 7/8 after Chubb Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CB)") else Response.Write("(NYSE: CB)") end if %> agreed to buy the company for $71.71 per share in Chubb stock, a 63% premium on Friday's closing price. The total value of the deal is approximately $850 million and will result in the formation of a new firm, Chubb-Executive Risk, which will manage the executive protection business of both companies.
Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> rose slightly, adding $1 15/16 to $161 15/16, following news that the software giant is about to announce a major reorganization that would divide its business into four segments based on the customers they serve: consumer, enterprise, developers, and knowledge workers (small-business customers and office workers who use the Microsoft Office suite of applications). The company is currently organized by product lines. Separately, the company reportedly will also announce an alliance with British Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %> to develop and market wireless Internet services for corporate customers overseas. In November, Microsoft formed a joint venture with Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> to do the same here in the U.S.
Wireless phone company Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> earned $1 23/32 to $32 after announcing a partnership with Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>, Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %>, and software company Unwired Planet to offer Internet access and other wireless data services to its customers. Nextel will use Motorola phones, software developed by Unwired Planet, and a wireless Internet portal based on Netscape's Netcenter website. Motorola, up $1 7/16 to $67 7/8, also reported a pact with Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> to develop wireless networks for the Internet. The companies plan to cross-license technology and develop complementary products and to jointly invest up to $1 billion over four to five years to deliver a "wireless Internet."
Several semiconductor equipment makers moved ahead this morning after Merrill Lynch issued a handful of upgrades. STMicroelectronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> advanced $4 3/4 to $94 3/4 following a boost to "intermediate-term accumulate" from "neutral" and to "long-term buy" from "accumulate." Fabrication systems supplier Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> improved $2 13/16 to $63 1/2 on an intermediate-term boost to "buy" from "accumulate." Cymer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYMI)") else Response.Write("(Nasdaq: CYMI)") end if %>, which makes excimer lasers for deep ultraviolet (DUV) photolithography systems, added $1 25/32 to $26 29/32 on an identical upgrade, and yield management and process control systems manufacturer KLA-Tencor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> moved ahead $2 11/16 to $56 9/16 on an identical upgrade. ASM Lithography <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASMLF)") else Response.Write("(NYSE: ASMLF)") end if %> gained $2 3/8 to $45 3/8 after upgrades to "intermediate-term accumulate" and "long-term buy" from neutral ratings.
Network engineering and consulting firm Micros-To-Mainframes Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTMC)") else Response.Write("(Nasdaq: MTMC)") end if %> raced ahead $3 5/32, or 49.5%, to $9 17/32 after the company said it plans to have two e-commerce sites online by March 1.
Software development and consulting firm Computer Management Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMSX)") else Response.Write("(Nasdaq: CMSX)") end if %> ran up $4 1/16 to $27 9/16 after Computer Associates International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> agreed to buy the company for $28 per share, a 19% premium over Monday's closing price.
Ligand Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGND)") else Response.Write("(Nasdaq: LGND)") end if %> rose $1 11/16 to $13 15/16 after the gene transcription company said late Friday afternoon that the FDA approved its Ontak protein for treatment of cutaneous T-cell lymphoma. Ligand also won approval for its first product, Panretin gel for AIDS-related lesions, last week.
Marketing software developer Exchange Applications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EXAP)") else Response.Write("(Nasdaq: EXAP)") end if %> rose $3/4 to $13 1/4 after announcing the sale of its Valex database marketing package to three companies, including Bell Atlantic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %> and two Australian firms.
Vantive Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNTV)") else Response.Write("(Nasdaq: VNTV)") end if %>, a leader in front-office automation software, grabbed $1 1/2 to $12 5/16 after Adams, Harkness & Hill raised its rating to "strong buy" from "accumulate" and set a $15 per share price target.
Information technology services firm Electronic Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %> slid another $2 7/8 to $45 1/4 after falling more than 7% Friday after reporting Q4 EPS of $0.53, a penny above Street projections before charges. However, analysts reportedly lowered their earnings estimates for Q1 and fiscal 1999 after the company gave a cautious near-term outlook and failed to provide guidance for the full year.
Facility and janitorial services roll-up firm Building One Services Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOSS)") else Response.Write("(Nasdaq: BOSS)") end if %> dropped $2 3/8 to $17 3/4 after terminating its previously announced $25 per share merger with an affiliate of Apollo Management L.P. Instead, the company will implement a recapitalization plan by itself and will buy 23 million of its outstanding shares at the same $25 per share price. The company plans to pay for the transaction through an expected $350 million in high-yield debt financing and a $350 million credit facility. Building One also posted Q4 EPS of $0.38, which was a penny ahead of the estimate the company said analysts had been expecting.
Online software retailer Egghead.com Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> was fried for $1 13/16 to $18 7/16 after filing a 4.8 million share secondary offering with the SEC. The company plans to use the estimated $95.2 million raised by the offering for working capital and other business purposes.
Nonbank financing company Newcourt Credit Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCT)") else Response.Write("(NYSE: NCT)") end if %> fell $4 1/16 to $32 15/16 on reports that Deutsche Bank has backed out of negotiations to provide the firm with up to $1.2 billion in new funding by taking a large equity stake in Newcourt.
Singapore-based Internet services provider Pacific Internet Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCNTF)") else Response.Write("(Nasdaq: PCNTF)") end if %> lost $11 7/16 to $36 9/16 after closing at $48 per share on its first day of trading on Friday following an initial public offering of 3 million shares at a price of $17 per stub.
Computer services firm Perot Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PER)") else Response.Write("(NYSE: PER)") end if %> slipped $7 to $59 after running up to $66 per share by the close on Friday following its initial public offering of 6.5 million shares at a price of $16 each last Tuesday.
E-commerce software developer Sterling Commerce <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SE)") else Response.Write("(NYSE: SE)") end if %> shed another $2 1/16 to $30 7/16 after falling 23% Friday on word that it sees a near-term revenues slump, which prompted downgrades from a number of brokerages.
American Airline parent AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> descended $2 3/16 to $57 3/4 after canceling a total of 330 flights on Saturday and Sunday as pilots protested the company's acquisition of Reno Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %>. More than 30 additional flights were cancelled today, according to reports.
International freight forwarder C.H. Robinson Worldwide <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHRW)") else Response.Write("(Nasdaq: CHRW)") end if %> was rerouted $1 7/16 lower to $27 7/16 after Morgan Stanley Dean Witter lowered its rating to "neutral" from "outperform."
Ear, nose, and throat surgical products maker Xomed Surgical Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XOMD)") else Response.Write("(Nasdaq: XOMD)") end if %> wheezed $3 1/8 to $37 3/8 after saying it will no longer distribute ArthroCare's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARTC)") else Response.Write("(Nasdaq: ARTC)") end if %> electrosurgical products after making "virtually no revenue" from a distribution agreement signed last June.
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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |