Publish date:

TheStreet.com's DAILY BULLETIN

November 25, 1999


Market Data as of Close, 11/24/99:

o Dow Jones Industrial Average: 11,008.17 up 12.54, 0.11%

o Nasdaq Composite Index: 3,420.50 up 77.63, 2.32%

o S&P 500: 1,417.08 up 12.44, 0.89%

o TSC Internet: 968.04 up 18.75, 1.98%

o Russell 2000: 455.93 up 1.48, 0.33%

o 30-Year Treasury: 98 25/32 down 9/32, yield 6.203%

Companies in Today's Bulletin:

E*Trade (EGRP:Nasdaq)

Telebanc (TBFC:Nasdaq)

Birmingham Steel (BIR:NYSE)

In Today's Bulletin:

o Online Brokers: A Growing Spread Shakes Up E*Trade's Bank Deal
o Retail: For Catalog Retailers Pushing Online, the Check's in the Mail
o Evening Update: Birmingham Steel Weighing Its Options for the Future
o Bond Focus: Bonds Shake Off Early Losses, but Still Finish Down

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Europe: As Construction Giant Holzmann Falters, German Banks Appear Content to Watch

This change in attitude could signal an end not only to Holzmann, but also to the cozy business-banking relationships in Germany.


Online Brokers: A Growing Spread Shakes Up E*Trade's Bank Deal


Caroline Humer

Staff Reporter

11/24/99 6:13 PM ET

The sound you heard Wednesday was the door slamming behind




Their march for the exit came Wednesday amid waning confidence in the pending acquisition of Telebanc by



as investors latched onto a Monday night regulatory filing that said neither company had decided how to proceed if the deal isn't completed by Dec. 31. (

TheStreet.com explored this issue in a Sept. 3 story and again on Nov. 8 and on Tuesday.


The brokerage-bank merger has run into regulatory snags almost from the beginning. First, issues surrounding Japanese technology and venture capital firm


27% stake in E*Trade came up as the companies argued that Softbank doesn't actually control the U.S. thrift and therefore shouldn't be regulated as a thrift holding company. Then there were concerns about Telebanc's responsibilities under the federal

Community Reinvestment Act

, which mandates that banks and thrifts make loans in poor areas.

On Wednesday, Telebanc shareholders bailed out in droves, pushing the stock down more than 10% while E*Trade was off just 1% at one point during the day. The difference between the two stocks should only account for a ratio of 1.05 E*Trade shares for every Telebanc share. Instead, Telebanc was trading at 26 3/8 and E*Trade at 31 3/8, a spread of about 25% of the value assigned to Telebanc by the agreement.

Just two weeks ago, investors were blessing the deal with a spread of only a few percentage points. Now they're wondering what the companies will do if their agreement deadline passes on Dec. 31.

Telebanc President Mitchell Caplan says that the companies aren't addressing what will happen after that date because they are too busy working on fulfilling their commitment to get the deal done this year.

In the filing, E*Trade and Telebanc say that they haven't decided what they'll do when that year-end date arrives. There is no financial penalty either before or after Dec. 31 for walking away from the deal, he says. A $54 million fine mentioned in the filing is only associated with a takeover of Telebanc by a third party.

"There's so much speculation out there it's ridiculous," says Caplan. "We are singularly focused on trying to get the thing closed by year-end."

E*Trade spokesman Patrick DiChiro reiterated that Wednesday saying, "The various parties, as the


says, have not made any decisions on that." In the interim, he says, "We are all committed to do everything we can to finish by year-end."

Greg Smith, an analyst at

Hambrecht & Quist

, in a note Wednesday called "E*Trade/Telebanc Merger -- A Waiting Game," says investors are speculating because they don't know where the deal is headed.

"Since it is possible that the deal won't close by the end of the year, both companies are essentially leaving shareholders hanging by not discussing their strategic plan," he writes. (H&Q has done underwriting for both E*Trade and Telebanc. He rates E*Trade buy and doesn't cover Telebanc.)

Investors aren't exactly sure what it all means for them. One arbitrage trader who got out of the stocks earlier this month when the merger failed to close says there's still a 50-50 chance for success.

Announced in June, the deal was supposed to close by Sept. 30. Now, the companies concede in the filing that, in order to get to the Dec. 31 date, the

Office of Thrift Supervision

will have to move faster than the time period it has allowed to deem the application complete and then render a decision. As part of its application procedure, the OTS can request more information from the company, allowing 30 or 45 days for responses. At the moment, it is still considering whether it has enough information to close the application, after which it has 60 days to render a decision. That puts the deadline into February 2000, according to the OTS Web site.

Last one out, turn off the lights.

Retail: For Catalog Retailers Pushing Online, the Check's in the Mail


Suzanne Kapner

Senior Writer

11/24/99 1:00 PM ET

In a series of tests begun this fall,

Lands' End

(LE) - Get Report

, the catalog and Internet retailer of earthy, classic clothing, tried to discern whether its growing online business would allow it to reduce catalog mailings and thereby cut costs.

If only it were that easy.

Early results suggest that such cost savings, seen as a trump card for catalog companies as they move online, are more complicated to achieve -- and less substantial -- than anyone expected. Meanwhile, pure online retailers are taking a page from traditional direct marketers by mailing catalogs of their own, underscoring just how narrow the bridge is between the old and new economies -- and how hard it can be to reach customers without expensive mailings.

Paper Chase

The benefits that catalog companies expected to see in moving to the Net are manifold. There is the leverage of existing back-end distribution. Automation makes processing orders online cheaper than staffing telephone banks with warm bodies, companies say. And as more customers order online, the companies could reduce catalog circulation, their largest expense.

But retailers on both sides of the electronic divide are stumbling upon a common truth: "There are no cheap ways to reach people," says Lisa Sharples, chief merchandising and marketing officer for


(GDEN) - Get Report

, which recently mailed its first catalog.

Indeed, Lands' End found "a direct correlation between catalog mailings and online sales," says Charlotte LaCombe, the company's director of investor relations. "When the catalogs arrive in our customers' homes, we see a spike in Internet sales." The reverse also held true: Internet sales dropped dramatically for one group of customers that received no mailings.

"There's a lot more noise out there today," explains Seema Williams, an analyst with

Forrester Research

, which has consulted for Lands' End. "These companies forgot that they still have to remind consumers to show up on a regular basis."


That means it won't be easy to escape the hefty costs associated with mailing catalogs. At Lands' End, for instance, the costs of printing, producing and mailing catalogs accounted for 17% of sales. "It's our single-largest cost," LaCombe says.

LaCombe maintains that Lands' End will lower these costs using the Web, but "maybe not as much as originally anticipated." The company, she says, is toying with the idea of reducing the number of books mailed to certain customers who show a greater propensity to order online. It remains unclear how much money that would save.

This finding has stark ramifications for other retailers that seek to cash in on the online push. At Lands' End's blossoming online business, sales are expected to more than double from a year ago, to $150 million for the current fiscal year, or around 10% of the company's $1.4 billion in sales. Investors richly rewarded this progress, pushing shares to a 52-week high of 83 1/2 in early November, valuing the stock at some 40 times 2000 earnings estimates.

But when the company warned, in its third-quarter earnings release, that it expected sales to decline slightly for the fourth quarter as a result of lingering inventory issues, the stock slid some 30% in a day. The shares are now nearly 40% off the 52-week high they reached earlier this month.

Pick Your Poison

"People may have overblown the savings and the ease with which you can get them" by selling online, admits Evan Guillemin, president of



, which began selling its trendy merchandise online last year through a joint venture with



. For instance, Guillemin says that while processing via the Web can save as much as $2 per order, the added costs of running and staffing a Web site largely offsets those savings. "Maybe over time you could cut 1% out of your cost structure," he says. "But that's not going to radically change your business."

"People think that the Web will solve everything," adds Mike Moriarty, vice president of

A.T. Kearney

, which hasn't consulted for Lands' End. "There are a lot of theoretical cost savings. People think running a Web site is cheaper than printing and mailing a catalog --

but it's not."

Lands' End, for instance, has trained 200 employees to handle Web queries. That's 8.6% of the customer service reps it has to handle catalog orders, LaCombe says, although she points out that the company's innovative "shop with a friend" service is completely automated.

Wallet Share

And with the competition for customers' attention fiercer than ever as a host of dot-coms enter the direct marketing arena, catalogs remain an important way to reach people. When Garden.com, an online shop for gardening tips and products, mailed its first catalog this month, it targeted the 250,000 copies of the 50-page glossy book at people who had never shopped with the company before.

"For the new person who needs to be introduced to the brand, they need to be touched in other ways besides banner ads," says Garden.com's Sharples. While she declines to say how much the mailing cost, she estimates that it's substantially less than the dot-com marketing vehicle of choice: a portal deal that can run in the millions of dollars.

To be sure, existing catalog operations retain several advantages over their online counterparts, not least of which are established brand names and fulfillment capabilities that Web companies such as


(AMZN) - Get Report

are desperately trying to replicate. Furthermore, Web sites still hold the potential to pay off big for old-line companies by increasing sales and customer awareness.

But before investors turn the page on the costs involved in achieving those payoffs, they may want to remember that, in retailing, even the best bargains come at a price.

Evening Update: Birmingham Steel Weighing Its Options for the Future


Tara Murphy

Staff Reporter

11/24/99 6:49 PM ET

Birmingham Steel


said it is contemplating a possible sale, after an ongoing dispute with a group of protesting shareholders over control of the company. Birmingham said its board gave the go-ahead for its management and financial advisor,

Credit Suisse First Boston

, to consider strategic options.

In other post-close news (earnings estimates from

First Call/Thomson Financial

; earnings reported on a diluted basis unless otherwise specified):

Mergers, acquisitions and joint ventures

HW Group

said it will be bought by

TMP Worldwide


, in a deal valued at $57.9 million.

Offerings and stock actions


New York Stock Exchange

said that ADRs of



will be halted on at 11:30 a.m. EST on Friday for a company statement about its tender offer.

Waste Connections


said it cannot explain the recent decline in its stock price and said that it is on track to meet its fourth-quarter seven-analyst estimate of 24 cents a share and its fiscal 2000 estimate of $1.25 a share.

Bond Focus: Bonds Shake Off Early Losses, but Still Finish Down


David A. Gaffen

Staff Reporter

11/24/99 3:27 PM ET

In an abbreviated trading session, the bond market managed to shake off some of the morning's early losses, but still finished underwater. Fresh economic news told a well-known tale: labor markets are tight and the economy is growing strong.

Bonds reached their highest yields in almost a month. With several important economic releases due next week, including the November

employment report

, it's unclear whether bonds have reached a bottom, but there was buying activity in the late morning, lifting bonds off their lows.

"The market has taken

the data in stride pretty well and really didn't quite go as low as people thought," said Bill Kirby, co-head of government trading at

Prudential Securities

. "We've failed to break down and consequently traded back up."

The 30-year bond's yield is up 1 basis point to 6.21%, highest since Oct. 28. The price fell 9/32 to 98 25/32. But


reported volume at just half the usual because the

Chicago Board of Trade

closed up shop at 2 p.m. EST.

Join the discussion


Message Boards.

In today's limited spate of economic releases, the third-quarter rate of


was revised upward to 5.5% from an advance estimate of 4.8% and

initial jobless claims

fell to a record low for the current economic expansion. Claims for the week ended Nov. 20 fell 13,000 to 274,000, a figure reached two separate times this year.



has stated that, despite current levels of productivity, the economy needs to cool off to ward off inflation. The Fed doesn't believe that the current growth can continue without eventually causing wage pressures in this extremely tight labor market. Though third-quarter productivity figures released Nov. 12 show productivity accelerating at a 4.2% rate, the market continues to worry about the prospect of inflation.

John Blough, chief investment strategist at


, believes that another rate hike, should it happen, will only help the bond market. "In their communiqu¿ after raising rates, they stated that they will watch labor market conditions," he said. "There's no reason to think that productivity gains won't continue to offset labor costs even if the unemployment rate goes below 4%. Another tightening would ensure a soft landing, and bonds can do better."

The implicit price deflator, the GDP report's inflation measure, was revised to 1.1% from 0.9%. January oil futures closed up 43 cents to $26.87 today. The rise in the contract was attributed in part to weekly data from the

American Petroleum Institute

, which reported a 2.1 million-barrel decline in crude stocks.

The market is closed tomorrow for Thanksgiving and will close at 2 p.m. Friday.



Street Sightings

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