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midday09-07-99's MIDDAY UPDATE

September 7, 1999


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Market Data as of 9/7/99, 12:58 PM ET:

o Dow Jones Industrial Average: 11,084.47 up 6.02, 0.05%

o Nasdaq Composite Index: 2,857.50 up 14.39, 0.51%

o S&P 500: 1,357.97 up 0.73, 0.05%

o TSC Internet: 606.38 up 10.56, 1.77%

o Russell 2000: 437.03 up 1.06, 0.24%

o 30-Year Treasury: 100 27/32 down 19/32, yield 6.057%

In Today's Bulletin:

o Midday Musings: Market Eases Into Postholiday Period With Minor Gains
o Herb on TheStreet: Rx for Underpriced Medical Device Makers: Getting Acquired

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Midday Musings: Market Eases Into Postholiday Period With Minor Gains


Justin Lahart

Senior Writer

9/7/99 1:09 PM ET

September and October have not been particularly kind to the stock market the last couple of years, and since midsummer investors have worried that this year would be no different.

It has not helped that stocks have followed a similar contour to 1997's and 1998's. The run-up in the winter, the spring consolidation, the jump to new highs in July, the drop down from there, the fake-out rally. Until Friday, it looked like the market was following the script perfectly. This year's demon would not be a crisis from overseas as in the past, but homegrown. The


would again tighten on Oct. 5, damaging the stock and bond markets -- perhaps accelerating capital flows away from the U.S. -- and driving major indices below the lows they hit in August.

But then came the weak

employment report

Friday, and everything looked different. While one report doth not an on-hold Fed make, even the more hawkish economists on the Street agree the new jobs data upped the odds that the central bank will stand pat. And while stocks are not making much headway today, it says something that, despite a bit of a pullback in the bonds, they are holding onto their gains they made on Friday's huge rally.

"Treasuries are a little heavy, and that's dampened the carryover enthusiasm from Friday," said Bill Schneider, head of U.S. equity block trading at

Warburg Dillon Read


But while the dangers of the markets getting upset this fall may have been diminished, it seems likely that volatility will continue to rule the roost, said Charles Crane, chief market strategist at

Key Asset Management

. "Watching the latest economic statistic crawl across the tape has become a great pastime," he said. "The market will remain very sensitive to indicators of business activity for the next several weeks. I suspect we continue this recent bout of volatility, and may even see it become more pronounced."

"The market is going to get too negative and too positive," Schneider agreed. "The pendulum for me is still swinging to the positive side of that equation. I think the market could do all right here."


Dow Jones Industrial Average

was lately up 3 to 11,082 while the

S&P 500

was up half a point to 1358. Big-cap techs continued to outperform -- the

Nasdaq Composite Index

was up 14, or 0.5%, to 2858. Internet Sector

index was up 11, or 1.8%, to 607. The

Russell 2000

was up 1 to 437.

Media stocks were the focus, on the heels of the news that





(CBS) - Get CBS Corporation Class B Report

would combine. Investors liked the deal, in part because there is little overlap between Viacom's and CBS' operations. Viacom rose 6.5% on the news, while CBS was up 3.2%.

While the deal signals that investment bankers are apparently back from vacation -- cheering the Street with the thought that deals will get rolling again -- plenty of traders were stretching their Labor Day. Volume was light to moderate on slightly negative breadth. In

New York Stock Exchange

action, decliners were beating advancers on 1,516 to 1,288 with 395 million shares changing hands. There were 59 new highs and 48 new lows. On the

Nasdaq Stock Market

, decliners were leading advancers 1,842 to 1,737 on 521 million shares. There were 118 new highs and 36 new lows.

The bond market was slumping, with the bellwether 30-year Treasury off 19/32 to 100 27/32, its yield rising to 6.06%. (For more on the fixed-income market, see today's early

Bond Focus.)

Tuesday's Midday Watchlist

By Eileen Kinsella
Staff Reporter

CBS and Viacom unveiled merger plans which call for Viacom to buy CBS, combining their media and entertainment divisions in a $37 billion stock swap. Viacom Chairman Sumner Redstone is expected to remain chairman and CEO of the merged company, while current CBS CEO Mel Karmazin will be tapped as its president and chief operating officer. CBS rose 1 9/16 to 50 1/2 while Viacom vaulted 2 15/16, or 6.5%, to 48.


King World Productions


inched up 15/16 to 40 7/16 after saying it will delay until Sept. 14 its shareholder vote on a planned $2.5 billion merger with CBS. The decision followed news of the Viacom deal, though both CBS and King World reiterated their commitment to proceed with the merger.

Mergers, acquisitions and joint ventures

Bell Microproducts


was unchanged at 8 after saying it has inked a deal with

Advanced Micro Devices

(AMD) - Get Advanced Micro Devices, Inc. Report

to use AMD's microprocessors.



added 7/16 to 12 1/4 after saying it signed a deal with



to sell Clarus business procurement software. Shares of Compaq slipped 1/8 to 23 1/8.

Fleet Financial Group

(FLT) - Get FLEETCOR Technologies, Inc. Report

lost 5/8 to 38 15/16 after it forged a $1.4 billion deal to sell 278 branches and other assets to

Sovereign Bancorp


, lately up 25/32 to 10 3/4. The bank is attempting to meet regulatory requirements for its proposed acquisition of competitor



, lately down 5/8 to 45 5/16. Fleet announced plans in March to purchase BankBoston, establishing the eighth-largest bank in the U.S. Sovereign said it would receive $12 billion in deposits and an estimated $8 billion in loans, in what is being called the largest proposed bank divestiture.

Federal Realty Trust

(FRT) - Get Federal Realty Investment Trust Report

lost 15/16 to 23 after saying it will spin off its retail site unit to shareholders as a new public company. The REIT also said a third party may acquire most of its community shopping centers through a merger for a combination of cash and stock for about $18 a share.

Hilton Hotels

(HLT) - Get Hilton Worldwide Holdings Inc Report

slipped 3/4, or 5.8%, to 11 1/16 after it agreed to pay $4 billion in cash, stock and debt for

Promus Hotels

(PRH) - Get Prudential Financial, Inc. 5.7 % Subordinated Notes 2013-15.3.53 Jr Subord Report

. The deal calls for Hilton to pay $38.50 per share in cash for 55% of Promus shares. The remaining 45% of the Promus stock would be exchanged for Hilton common stock at a rate determined by market conditions. Promus CEO Norman Blake Jr. said he will not take a position with the merged company once the transaction is complete. Shares of Promus popped up 3 1/2, or 11.2%, to 34 7/8.

Dutch supermarkets group

Koninklijke Ahold


added 1 3/8 to 37 1/16 after acquiring Spanish supermarket chains



Las Postas

. Ahold said it will operate seven supermarket chains in southern Spain and Madrid when the deals are completed.


(NOK) - Get Nokia Oyj Report

lost 1/16 to 87 9/16 after setting an agreement with

Tele 1 Europe's

Finnish division to provide its DX 200 switching system to the Nordic telecom operator's customers by September.

Professional Bancorp

(MDB) - Get MongoDB, Inc. Class A Report

shed 4 3/8, or 21.7%, to 15 3/4 and

FirstFed Financial


added 7/16 to 16 5/8 after the companies said they had ended merger talks, scuttling a potential $50 million deal. Professional said its board had decided to kill the deal with FirstFed when it concluded it would not secure the $23.50 per share the banks had agreed on earlier this year.

Russian cell-phone operator

Vimpel Communications


rose 3/16 to 15 3/8 after it said it was in talks with strategic partner


of Norway for joint financing of up to $300 million in investments.

Earnings/revenue reports and previews

Circuit City

(CC) - Get Chemours Co. Report

lost 13/16 to 36 15/16 despite reporting same-store sales for August up 6%.



sparkled 2 1/16, or 5.9%, to 37 1/4 after posting fourth-quarter earnings of 23 cents a share, beating both the 12-analyst estimate of 21 cents and the year-ago 16-cent gain. The retailer also said that board member and former president and COO Beryl Raff would become its acting CEO after Robert DiNicola resigned from the position. DiNicola will remain the company's chairman.

Offerings and stock actions

Westpoint Stevens


gained 1 9/16, or 6.8%, to 24 5/8 after it added 4 million additional shares to its current share repurchasing program, raising the possible total of the buyback to 6.4 million shares. The company said the increase gives it authorization to repurchase about 12% of its 55 million outstanding shares.

Analyst actions

Merrill Lynch

airline analysts Candace Browning and Mike Linenberg sliced their estimates on U.S. airlines, citing increasing fuel prices, air traffic control delays and capacity growth.

US Airways

(U) - Get Unity Software, Inc. Report

lost 13/16 to 29 1/2 after third-quarter estimates were cut to 45 cents a share from 95 cents.


(LUV) - Get Southwest Airlines Co. Report

lost 5/8 to 16 7/16 after third-quarter estimates were lowered to 24 cents a share from 26 cents and



lost 3/4 to 27 5/8 after third quarter numbers were chopped to $2.10 from $2.30.


(DAL) - Get Delta Air Lines, Inc. Report

fell 2 to 50 11/16 when its third-quarter estimates were trimmed to $2.10 from $2.15. Separately Delta said it tapped Edward West to replace Warren Jenson as its CFO. Jenson left Delta to become the CFO of

(AMZN) - Get, Inc. Report



(BBI) - Get Brickell Biotech, Inc. Report

added 1/8 to 14 11/16 after


rolled out coverage of the stock with an initial buy rating.


(CI) - Get Cigna Corporation Report

lost 11/16 to 93 1/8 after

ING Barings

started coverage with a buy rating and a price target of 110.



added 1 1/4, or 5.4%, to 24 9/16 after

Credit Suisse First Boston

rolled out coverage with a strong buy rating and a price target of 35.



lost 1 11/6, or 8%, to 19 3/8 after Merrill Lynch initiated coverage of the stock with a long-term buy rating.

PaineWebber axed both

Dow Chemical

(DOW) - Get Dow, Inc. Report


Union Carbide


to neutral from attractive. Dow lost 1 5/16 to 114 1/16 while Union Carbide slipped 15/16 to 57 7/16.

El Paso Energy


darkened 1 5/16 to 38 1/8 despite Merrill Lynch's upgrade of its intermediate-term rating to a buy from an accumulate.

General Electric

(GE) - Get General Electric Company Report

climbed 2 17/32 to 118 15/16 after Salomon Smith Barney raised its rating on the shares to buy from outperform and set a new price target of 135.


powered up 5 3/8, or 18%, to 35 after

SG Cowen

started coverage of the stock with a buy rating.

Kansas City Power


added 1/16 to 24 3/16 after

ABN Amro

initiated coverage with a buy rating.

Oregon Steel


added 3/4, or 6.7%, to 11 7/8 after ABN Amro upped its rating to a buy from an outperform.

Provantage Health Services


lost 1/16 to 13 3/8 after

Lehman Brothers

initiated coverage of the stock with a buy rating.

SBA Communications

(SBAC) - Get SBA Communications Corp. Class A Report

lost 7/16 to 11 1/4 after

Wachovia Securities

started coverage of the stock with an initial long-term buy rating.

Merrill Lynch reiterated its buy rating on

Texas Instruments

(TXN) - Get Texas Instruments Incorporated Report

and set a price target of 110,


reported. Texas Instruments added 1/4 to 35 1/8 .



(PEP) - Get PepsiCo, Inc. Report

lost 3/8 to 34 1/4 after saying it chose former


head Gary Rodkin as its president and CEO. Tropicana is a unit of PepsiCo.

Herb on TheStreet: Rx for Underpriced Medical Device Makers: Getting Acquired


Herb Greenberg

Senior Columnist

9/7/99 6:30 AM ET

Is there a doctor in the house?:

The small-cap medical device industry has been a yawner from a stock-price standpoint -- so much so that companies with promising technologies are starting to get acquired.

Just last week

CardioThoracic Systems


, no stranger to this column, said it was selling itself to



. Remember CardioThoracic's seesawing battle -- over valuation -- with



? Heartport, with its blue-chip

Kleiner Perkins

venture backing and blue-chip roster of investment bankers (led by

Morgan Stanley

) was thought to be the hand's-down winner. CardioThoracic, backed by a group of venture capitalists including low-key

Vertical Group

of Summit, N.J. and a group of smaller bankers (

Piper Jaffray

among them) was considered a joke.

Look who's laughing now! It works that way on Wall Street sometimes. The size of the backers doesn't always determine a company's success. In this case, Kleiner Perkins is involved in many technologies; Vertical, which was joined in CardioThoracic by

New Enterprise Associates


Morgenthaler Ventures

, is focused exclusively on medical devices.

So, who's next in the pipeline to be bought? Hard to say, but for a clue take a look at the companies in which Vertical has large, published stakes. (Why focus on Vertical? By way of disclosure: The only reason I know Vertical is because 12 years ago, during what I now like to refer to as a year's sabbatical from journalism, I worked as an analyst at a risk arbitrage firm then run by two Vertical general partners. Nothing like knowing your sources from the inside out.)

These are long-term investors, steeped in research, who are willing to wait years for an investment to pay off. "Even if we're sitting on something for 10 years and it doesn't do something for eight, we're hoping that the last two years will make a rate of return for 10 years," says managing director Dick Emmitt, a Wall Street health-care industry analyst for 12 years before jumping to Vertical.

For example, Vertical has owned

Xomed Surgical Products


, which makes products for ear, nose and throat surgery -- and a predecessor company -- since 1990; last week, three days before CardioThoracic agreed to be bought by Guidant, Xomed agreed to be sold to


(MDT) - Get Medtronic Plc Report

. Other former, large 5%-plus investments that were bought out include

SciMed Life Systems


Cardiovascular Imaging

. "Even though we're not looking for investments to get acquired, that is how we think about whether there is value," Emmitt says. "We ask ourselves whether a bigger company would be interested in adding this company's business or technology to its mix."

Other companies Vertical has made similar long-term bets on, according to


filings, include

Lifecore Biomedical



previously in this column),

Merit Medical Systems

(MMSI) - Get Merit Medical Systems, Inc. Report

, and

Innovasive Devices


. Private companies that it thinks are worth watching include


, which makes cardiac support systems, and



Neuron Therapeutics

; both specialize in stroke therapies.

Vertical, which has an average annual return of 25%, also tries to leverage its info to its benefit. Classic example: A few years ago, after CardioThoracic took a tumble, Vertical stepped up and doubled its position in the company. (The purchase was noted by this column, then in

The San Francisco Chronicle

.) Vertical also used its info on the market to short Heartport. That was when Heartport was in the 20s; it then went as high as 44, but because they knew the industry, they didn't cover as it rose. It's now 2.

End of story (and hopefully lesson learned).

From the fair and equal treatment department:

An item

here Friday took

Dendrite International


to task for a number of issues, including the way it capitalizes its software development costs. Officials hadn't been able to be reached by this column's deadline; the following is from CFO George Robson:

The large increase in capitalized software costs in the 2Q was primarily due to the acquisition of MMI. This acquisition was accounted for as a purchase, and $2 million of the purchase price was allocated to capitalized software costs. Similarly, a portion of the ABC acquisition during the 3Q of 1998 was also allocated to capitalized software costs. Therefore, nearly one half of the total capitalized software balance resulted from external acquisition costs, rather than internal spending. The percentage of gross R&D spending, which has been capitalized, has remained relatively consistent for the last two and a half years. The company expects the percentage of costs, which are capitalized, to decline in the future. In addressing the revenue model issues, Dendrite generally recognizes license revenue using the percentage of completion method. For older generations of software, this had the effect of spreading the license fee over a period of nine to 12 months, commencing with the execution of the license agreement and ending with completion of initial customization and implementation. Our newer products require much less customization (in some cases, none at all), which has reduced the implementation time period to approximately three to six months. In cases where customers choose not to customize the software, we recognize the revenue upon delivery, in accordance with generally accepted accounting principals. Regarding your point concerning concentration of our customers, there are two things you should keep in mind: The information you stated was taken from the common stock registration statement we filed with the SEC earlier this year. As stated in our most recent Form 10-Q, and after giving effect to our recent acquisitions, the concentration of revenue from our three largest customers as of Dec. 31, 1998, was approximately 49%. In addition, based on 1999 results, to date, we currently expect that percentage to decline further as we continue to expand our business. Although having a large portion of our revenue concentrated within three global blue-chip customers could be perceived as a risk, Dendrite's business practice has been to foster, as our competitive advantage, strategic partnerships and long-term relationships, which distinguish us from short-term technological suppliers.

A gem of a story:

An item

here midsummer went through the relationship between

Cree Research

(CREE) - Get Cree, Inc. Report



(CTHR) - Get Charles & Colvard, Ltd. Report

. Both companies are run by brothers, and Cree has a guarantee that requires C3 to buy all of Cree's silicon carbide crystal production through next June. Those crystals are used by C3 to make "moissanite" fake diamonds. According to C3's own press release in mid-July, C3 had shipped more than 30,000 carats of moissanite in the first half of the year and expected subsequent shipments "to as much as double the shipments" made in the first half.

Which brings us to last Thursday: C3 issued a press release trumpeting the first shipment of three-inch moissanite crystals from Cree. Then (oh, by the way) buried deeper in the release under the category of "other corporate news," the company said that it is "developing a deeper understanding of the impact of seasonality on gemstone shipments. The summer months, both domestically and abroad, are traditionally the slowest time of the year for jewelry retailers and have resulted in a slower pace of sales than that of the second quarter for C3."

Put another way, the third quarter may not meet analyst estimates and Christmas had better be a barnburner or all bets are off.

C3 officials were vacationing Friday and couldn't be reached; if they respond, they'll get the same treatment as Dendrite above.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.

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