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  • Author:
  • Publish date:'s DAILY BULLETIN

November 5, 1999

Market Data as of Close, 11/4/99:

o Dow Jones Industrial Average: 10,639.64 up 30.58, 0.29%

o Nasdaq Composite Index: 3,055.95 up 27.44, 0.91%

o S&P 500: 1,362.64 up 7.71, 0.57%

o TSC Internet: 796.81 up 27.49, 3.57%

o Russell 2000: 439.90 up 1.44, 0.33%

o 30-Year Treasury: 100 09/32 up 16/32, yield 6.088%

Companies in Today's Bulletin:

American Home (AHP:NYSE)

Warner-Lambert (WLA:NYSE)

Pfizer (PFE:NYSE) (PCLN:Nasdaq)

Microsoft (MSFT:Nasdaq)

In Today's Bulletin:

o Biotech/Pharmaceuticals: Pfizer Bid Sours American Home's Sweet Deal
o Wrong! Dispatches from the Front: Understand the Full Story Before Buying
o Evening Update: Disney's Earnings Not Too Magical and WebVan Delivers
o Bond Focus: Ahead of Jobs Report, Treasuries Sustain Rally

Also on

Truth Serum: Toys in the Attic: Talk of Dayton Hudson Deal Sparks Toys R Us Rally

The stock rises some 6% even though the deal makes no sense, a number of observers say.

Internet:, Net2Phone to Offer Bidding on Long-Distance Phone Calls

Visitors to will be able to bid on phone calls that will travel over an Internet protocol network.

Options Buzz: Drug Stock, Microsoft Options Players Face Crunch Time

More deals and a judge's decision make today's positions crucial.

Bob Gabele: Insiders at Health-Care Firms Step Up to the Stock-Buying Plate

Tired, perhaps, of seeing their companies' share prices languish, health-care insiders go on a buying spree.

Biotech/Pharmaceuticals: Pfizer Bid Sours American Home's Sweet Deal


Jesse Eisinger

Senior Writer

11/4/99 7:29 PM ET

At Thursday morning's lovefest for

American Home





, held at the New York's


hotel, a microphone was making loud knocking sounds. Lodewijk de Vink, at the cusp of becoming the CEO of a new giant in the drug industry, joked: "Maybe that's Bill Steere," referring to the chairman and CEO of




Everybody laughed.

Join the discussion on


Message Boards.

They aren't laughing now. In the afternoon, things have

turned hostile, and downright bleak for American Home.

Now, Wall Street is asking: Who will win Warner-Lambert, Pfizer or American Home? American Home's all-stock proposal was valued Thursday morning at about $72 billion, or around $84 a share for Warner shareholders; Pfizer's all-stock offer is for $82.4 billion, or $96.40 a share. Course, as Pfizer and American Home got hit, the values went down. Thursday Warner closed up 6 11/16 at 90 1/2, Pfizer was down 1 5/16 at 37 1/4 and American Home was off 1 at 55. Representatives of all three companies declined to comment on the bidding.

There are several schools of thought on the likely outcome.

Pfirst and Pforemost

Pfizer backers point out that the New York company is offering more, has more money and enjoys a good relationship with the Street. Moreover, its currency is more valuable to Warner-Lambert shareholders: Pfizer stock, which has been a strong performer in recent years, trades at 46 times 1999 earnings, compared with 30 for American Home.

A Pfizer-Warner combo also offers a four-year growth rate of around 19%, according to one buy-side estimate, topping the 17% projected for


, as the American Home-Warner linkup would be called. (And that growth rate is before American Home presumably raises its offer, which would dilute earnings by forcing it to issue more shares.)

"If I had to guess, it would be Pfizer" that wins, says an analyst for a major hedge fund that's long Pfizer, but not Warner or American Home. "It's a better piece of paper. Pfizer is a strong company, and American Home is a broken company."

Another point in Pfizer's favor: Because of its financial strength, it's likely to be amenable to sweetening the deal. One risk arbitrager points out that a deal for Warner could add to its earnings all the way up to $120 a share. American Home's leverage isn't nearly as great.

What's less clear is why Pfizer wants to do the deal. It co-promotes


with Warner and gets about 40% to 45% of the profit from the monster cholesterol drug, analysts estimate. Perhaps it wants it all. "Pfizer knows the costs," says Tom Malley, a health-care money manager for


, which at June 30 owned Warner and Pfizer but not American Home, according to

First Call/Thomson Financial

. "Presumably, they know exactly what the economic value of Lipitor is. My assumption is that this is not an ego thing."

Malley speculates that maybe Pfizer had a "belief that Lipitor could suffer" during a merger, as managers focused on cost savings and losing their jobs.

The Spoiler

The other school suggests that Pfizer cannot win -- or doesn't want to. One New York money manager speculates that Pfizer is simply throwing a wrench in the deal to make it tougher for American Home. "It just makes the deal less attractive," says the money manager, who is long American Home and Warner. American Home "will be forced to raise the offer, and the company looks less good, especially compared with Pfizer."

Certainly, Warner's de Vink didn't want his company to be merged into Pfizer, which said Thursday that it had tried to contact Warner to discuss a merger but was ignored. Perhaps, several Wall Streeters suggested, de Vink took a look at Hank McKinnell, Pfizer's president, operating chief and heir apparent to Steere, and decided he wasn't in line for the top job in a combination with Pfizer. So, with de Vink in American Home's court, American Home has a better chance.

There's also some thought that maybe Pfizer can't prevail over the conditions that Warner and American Home set in their deal. For one, Warner and American Home designed a stock-option agreement that amounts to a poison pill. In effect, the two companies have an option to buy a chunk of each other's stock -- typically 19.9%, arbs say -- that's triggered by a third party's bid. This could prevent Pfizer from using pooling accounting, which allows companies to sidestep goodwill charges. (Goodwill accounts for the premium a company pays over book value.)

American Home and Warner also agreed that if the deal doesn't go through, the breaker-up must pay $2 billion to the dumped company. Pfizer, in a letter to Warner's de Vink, called the fee "egregious" and said its offer was conditioned on Warner's not paying it.

But four arbs believe that neither the breakup fee nor the complex agreement that's designed to stop other bidders will stop Pfizer from getting what it wants.

The Delaware courts, where Pfizer sued Thursday to block the Warner/American Home deal, generally look askance at so-called poison pills that stop shareholders from getting the highest bid.

Home Sour Home

One thing is sure, according to several pharmaceutical specialists: American Home is screwed. Either it's forced to pay more for Warner, meaning the new company's earnings are diluted and it's far less attractive financially, or it loses. If American Home loses, it's the third deal in about two years that Jack Stafford, chairman and CEO of American Home, hasn't been able to consummate, after January 1998 merger talks with

SmithKline Beecham


and a mid-1998 deal with




"American Home made a big mistake here saying that it would only achieve $1.2 billion in synergies," said a Boston-area money manager long all three stocks. He thinks the two companies were low-balling the Street. But "they laid themselves open for this" bid from Pfizer.

And no one likes the look of three black eyes.

Wrong! Dispatches from the Front: Understand the Full Story Before Buying


James J. Cramer

11/4/99 5:02 PM ET

Optical Coating Lab


, I was a day away from learning about you.

Cramer's Latest: Join the discussion on


Message Boards.

Yep, last night Jacobs put a list on my desk of stocks he wants me to learn so we can get long.

At the top of the list is Optical. Darn homework. Darn, I need to understand what it does. Dang insistence on knowing more than the chart and the symbol!

Yeah, it is like that in this market. Some of these stocks, by the time you research them, the moment is gone. But I can't kick myself too hard.

Last year I plunged into the CLECs at the top and got killed. I wrote about it extensively, under the heading

ICG Communications


, and I can't afford to get in until I understand the story -- or else I will look just like that deer who stared at me at 3:45 this morning as I made my way to Interstate 78.

Internally, the temptation is to just jump on the next name on the list.

But you can forget about that. It was




Random musings

: That call on last week's show to get long the



of the world worked out pretty well. I am still long, but I let some go today cause it was such a homerun.

Tell that to



if you didn't get the call to buy these. Not to mention



. What do they have against you making money? What are they, the government?

I don't think so.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long E*Trade. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

Evening Update: Disney's Earnings Not Too Magical and WebVan Delivers


Eileen Kinsella

Staff Reporter

11/4/99 8:45 PM ET



failed to dazzle investors with its fourth-quarter earnings report. The entertainment giant said excluding charges, earnings were 10 cents a share, in line with the 20-analyst estimate, but down from the year-ago 14 cents.

Excluding charges, fourth-quarter earnings fell 37% to $212 million from $296 million a year earlier amid a slump in its home video and product licensing businesses. Including the charge, net income fell to $85 million. This includes a $132 million charge related to consolidation as well as costs associated with its acquisition of Internet search engine




According to


, Michael Eisner said the company would focus on current operations over new products, saying Disney had lost its bottom-line discipline. Eisner said he sees opportunities in DVD, Internet and international operations, and said cost-cutting could achieve $500 million in savings by 2001, Reuters reported.

The much-anticipated IPO of online grocer



was priced top range at $15 a share. Lead underwriter

Goldman Sachs

raised the estimated range on the 25 million shares to $13 to $15 a share from $11 to $13. WebVan offers a wide range of products online -- from hand-cut meats to fine wines -- currently in the San Francisco Bay area.

The offering was

postponed last month in response to

Securities and Exchange Commission

concerns about the company's possible failure to observe quiet-period restrictions in giving pre-IPO interviews and roadshow presentations.

Equity funds reported inflows of $4.1 billion for the week ended yesterday, the largest in 11 weeks, according to

AMG Data Services

, with two-thirds going to all growth sectors. International funds reported inflows, though outflows continue from Latin American and European funds. Inflows to technology funds are the largest since mid-April. Taxable bond inflows totaled $266 million, while inflows return to high yield bond funds for the first time since August 25th.

After-Hours Trading

A late-night push in warrants of



helped the company regain the top slot on

Island ECN

after dropping to the No. 3 position.



jumped to the No. 2 spot, edging out former No. 1



, which fell to No. 3.

So basically, the top three issues on Island played "follow the queen" in the last hour of trading.

With eight of the ten most active valued in the teens and four of those valued below ten, Island was a veritable Lilliput. All that makes





stand out even more.

The only thing Lilliputian about


was the trading volume, which was positively anemic. Not one issue traded in quadruple digits.

Island ECN, owned by Datek Online, offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EST.


MarketXT, formerly Eclipse Trading, offers after-hours trading to retail clients of Morgan Stanley Dean Witter'sundefinedMorgan Stanley Dean Witter Online and Mellon Bank'sundefinedDreyfus Brokerage Services. Clients can trade 200 of the most actively traded New York Stock Exchange and Nasdaq Stock Market issues, 4:30 p.m. to 8 p.m. EST Monday through Thursday.


explains how the rules change when the sun goes down in Investing Basics: Night Owl, a section devoted to after-hours trading.


Eric Gillin

In other post-close news (earnings estimates from First Call/Thomson Financial; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews



posted a first-quarter loss of 3 cents a share, narrower than the eight analyst expected loss of 11 cents, but down from year-ago earnings of 10 cents. CompUSA said it sees direct sales falling 60% in the second quarter of 2000 compared with its year-ago period, though second-quarter retail comparable store sales would be slightly positive. The company said it expects second-quarter non-recurring, transition costs of $3 million to $6 million and said its strategy would hurt quarterly earnings by 3 cents a share through the year.

Dot Hill Systems


posted a third-quarter loss of 46 cents a share including items, compared with a year-ago loss of 10 cents a share on items. The single-analyst estimate was for earnings of 10 cents a share.



posted a fourth-quarter loss of 2 cents a share, narrower than the six-analyst estimate of a 6-cent loss and the year ago 51-cent loss.

Star Telecommunications


reported at third-quarter loss of 15 cents a share, narrower than the three-analyst estimate of a 33-cent loss but down from the year-ago 5-cent profit.



posted fourth-quarter earnings of 50 cents a share, including a 43-cent gain. The seven-analyst expectation was for a loss of 3 cents a share, while the year-ago earnings were 49 cents, which also included a gain.

Mergers, acquisitions and joint ventures


U.S. Justice Department

approved the $4.6 billion acquisition of



by European rival

New Holland (NH)

with the companies agreeing to exit some businesses.

Offerings and stock actions


American Electric Power


said it is eliminating about 168 consumer service jobs as part of its plan to phase out segments of its electric technologies unit.

Coca-Cola Bottling


said it will restructure some units and take a fourth-quarter charge. The bottler said it was consolidating eight operating divisions into six and that as many as 300 jobs could be affected.

U.S. Airways


and the

Communication Workers of America

have reached a tentative agreement on an initial contract covering about 10,400 passenger service employees. The agreement, which would cover ticket, reservation and gate agents, among others, is subject to ratification by the union's membership.

Bond Focus: Ahead of Jobs Report, Treasuries Sustain Rally


Elizabeth Roy

Senior Writer

11/4/99 4:56 PM ET

Treasuries rallied hard for the sixth time in the last seven sessions today, driving yields down to one-month lows.

Market watchers said the rally was driven in equal parts by momentum and by a Fed official's comments suggesting the Fed may not hike interest rates when it meets on Nov. 16.

The market: Join the discussion on


Message Boards.

The benchmark 30-year bond ended the day 17/32 higher at 100 11/32, trimming its yield 4 basis points to 6.10%, the lowest since Oct. 4. Shorter-maturity note yields, more closely tied to the interest rate set by the Fed, eased by like amounts.

And at the

Chicago Board of Trade

, where futures on the fed funds rate are

listed, the November contract discounted a 43% chance of a rate hike, down from 47% yesterday.

Momentum is driving Treasury prices higher, analysts say, as the extraordinarily large speculative short base that existed two weeks ago, the last time that base was measured, continues to unwind. Translation: Every other Friday, the

Commodity Futures Trading Commission


measures exposure to listed commodities by hedgers and speculators.

On Oct. 22, it found that speculators in Treasury futures were net short more contracts than ever before. As the market goes up, those positions lose value, and the more it goes up, the greater the incentive to unwind them by buying the market back. Which sends it progressively higher.

"I think a lot of it is momentum,"

Barclays Capital

senior economist Henry Willmore said. "A lot of people last week were short and got caught by surprise. More and more of them are covering, capitulating, and that's more and more upward momentum for the bond market."

At the same time,

Donaldson Lufkin & Jenrette

Treasury market strategist David Ging said, "Everyone wants to buy a dip, so you never get it."

"When that happens, you go above fair value," he added.

And then there's the Fed, which investors by the day consider less likely to pull the interest-rate trigger for a third time this year by raising the fed funds rate from 5.25% to 5.50%. Until Tuesday, the odds of such a move, as measured by futures prices, were over 50%.

Philadelphia Fed President Edward Boehne's comments to the

Washington Post

today certainly fostered the impression that the Fed will stand pat. Boehne, a middle-of-the-road policymaker,

said, "There is nothing in the numbers to suggest that inflation is about to jump up and get us." Higher inflation is a risk that "may or may not materialize," he added.

"If what he said represents the consensus view, the market is probably right to take out the additional tightening it had priced in," Willmore said.

As a District Fed president, Boehne's turn to vote at meetings of the Fed's monetary policy committee comes up every three years. He votes this year and again in 2002.

The recent sharp run-up in prices increases the Treasury market's vulnerability in the event of an unfriendly October

employment report

, analysts say. The report, the most important to hit the Street each month, is due out tomorrow at 8:30 a.m. EST, and some market-watchers say it will take friendlier-than-expected numbers to push the bond market higher still. Even an in-line report might be met with selling, they say.

The question of what constitutes an in-line report is somewhat more complicated than usual. The report's main component,

nonfarm payrolls

, may be significantly above trend, compensating for a significantly below-trend performance in September. So bond traders may pay more attention to whether other key components --

average hourly earnings

and the

unemployment rate

, specifically -- print close to forecasts.

"If earnings are stronger than expected you'll get people worried about inflation, and if unemployment drops, the Fed won't like that," Ging said.


Street Sightings

James J. Cramer will be a guest on Fox News Channel Friday, Nov. 5 at 7 a.m. EST on Fox and Friends; 5 p.m. EST on Your World with Neil Cavuto; and 7 p.m. EST on Fox Report with Shepard Smith.

Copyright 1999,