December 1999

Contents

OpenTV Gets Stellar Reception For IPO

OpenTV Corp. was a star on a hectic day for new-stock offerings, demonstrating investorsí faith in interactive TV. The company, which makes software used in television set-top boxes, sold 7.5 million shares at $20 each. The stock more than tripled to $62.75 on the Nasdaq Stock Market in its initial trading session, giving the company a market capitalization of about $2.7 billion. OpenTVís offering follows on the heels of rival Liberate Technologies Inc. which went public in July and has a market value of about $6.6 billion. Liberate, formerly Network Computer Inc., is an offshoot of Oracle Corp. that also inherited operations from Netscape Communications Corp. OpenTVís lineage is more international, and more complicated. The company was founded in 1996 as an interactive-TV venture of Sun Microsystems Inc. and Franceís Thomson Multimedia SA. MIH LTD., a company that was formed by South African media companies and is based in Amsterdam, later purchased Thomsonís interest. MIH owns 70% of OpenTV, based in Mountain View, Calif., and incorporated in the British Virgin Islands.

Most of OpenTVís sales to date have been to European cable and satellite-TV companies. OpenTVís software helps such companies develop services that enhance conventional television, letting users with a remote control shop and call up information such as sports statistics and weather data. The company hopes to enter the U.S. market next year, starting with a contract with the satellite-service EchoStar Communications Corp., Englewood, Colo. OpenTV reported a net loss of $8.4 million in the nine months ended Sept. 30, but revenues nearly tripled to $17.5 million. Analysts say the growth suggests that interactive TV, a hot topic six years ago, is finally becoming a serious business. But which companies will dominate the living room is an open question. One major competitor is Microsoft Corp., which markers the WebTV service and has close relationships with AT&T Corp. and its cable operations.

SBC, Prodigy Form Limited Partnership

Local telephone giant SBC Communications Inc. and Prodigy Communications Corp. have agreed to combine their Internet operations. The deal gives San Antonio, Tex.-based SBC 43% of Prodigy, a White Plains, N.Y. Internet service provider. The two companies will form a limited partnership, of which Prodigy shareholders will own 57%. The dealís structure enables SBC to defer paying taxes on any gains from the transaction until one of two situations occur: It converts its partnership stake into Prodigy common stock and realizes a gain; or, it sells its stake in Prodigy outright.

The limited partnership structure also helps SBC buy Prodigy without jeopardizing the accounting of its acquisition of Chicago-based Ameritech Corp. That deal, accounted for as a pooling of interests, limits the amount of accumulative tax gains SBC can realize over the next two years. Though the Prodigy deal will not trip that limit, SBC, an expansion-minded company, is eager to keep these gains in check.

Prodigy in-house general counsel and executive vice president for business development said for Prodigy shareholders nothing changes. Financial terms of the deal were not disclosed, but SBCís stake is worth about $885.5 million based on Prodigyís closing stock price last week. Under terms of the agreement, SBC will make Prodigy its exclusive retail consumer and small business Internet access service to the approximately 100 million people in its area. Prodigy will also assume management of SBCís current 650,000-customer base. Americaís largest local telephone company will exclusively market delivering at least 1.2 million new customers in the next three years to Prodigyís member base.

Annotate.net Solves The Web Navigation Problem

Annotate.net, a Silicon Alley upstart focused on solving the Web-navigation nightmare, announced beta testing of the first Web-navigation network and Find Engine that cuts through Web-content clutter to guarantee the relevance of Internet information. The combination instantly delivers customized, personalized content thatís 100% relevant to a Web page being viewed. In fact, Web content more than doubled from December 1997 to February 1999 and search engine coverage of that content dropped from approximately 34 percent to 16 percent, according to an NEC Institute study on Web search tools. Today, an estimated 8,000 new Web pages are added every day, with no way for users to discern the veracity or the dependability of that content. According to eMarketer, consumers donít like leaving their Web a full 40% never click on a banner.

The Annotate.net Find Engine is a persistent desktop icon that does not interfere with the Web page being viewed. The tool detects a browser URL and instantly delivers customized, personalized content that 100% relevant to the Web page being viewed. The Annotate.net Find Engine is a super-thin (400 Kbytes) client module that users download for free from the annotate.net Web site. Unlike traditional search engines, the Annotate.net Find Engine delivers relevant content without interfering with the Web page being viewed and without requiring users to leave a Web page to gain more information. In addition, users retain control over which content providers can deliver their information. After downloading the super-thin client module, Annotate.net users subscribe to their preferred content and commerce advisors and automatically begin receiving 100% relevant content whenever they surf the Web. For content providers, joining the Annotate.net Network offers the chance to turn brand equity into brand addiction.

Investorsí Fear Of IPO Volume Has Vanished

Amid the unprecedented boom this quarter in Internet-related stocks, there have been fears that the market world collapse under the weight of deals in the three-week period between Thanksgiving and the Christmas slowdown. Last week, investors showed they arenít bothered by volume. Nine initial public offerings came to market Tuesday - an unusual number for any single day, but especially for a holiday week. Wall Street underwriters had little choice but to bring a slew of deals to market last week. There has been a ìpretty breakneck schedule,î given the volume of deals. Underwriters who had been marketing deals in preoffering roadshows leading up to last week needed to price the offerings before the Thanksgiving break to avoid losing momentum with investors.

There was little choice as to when new issues could make their debut last week. Monday openings for IPOs are rare, Thursday the market was closed, and Friday saw an abbreviated trading session. While it was business as usual on Wednesday, underwriters knew trading would be light ahead of the day off. That left only Tuesday. Investors shrugged off any concerns about volume. Two stocks - Digital Impact Inc. and OpenTV Corp. - closed at more than three times their offering prices, and only one faltered: SmarterKids.com Inc. closed even with its $14 offering price. What made Tuesdayís performance all the more remarkable was it that came on one of the few down days of late on the Nasdaq Stock Market. The Nasdaq Composite Index slipped 1.5% that day. Against that backdrop, many analysts had lowered their expectations during the dayís trading. With Thanksgiving done, many market watchers believe there is little ahead to slow the IPO boom.

Concerns over an investment slowdown because of the possibility of year-2000 computer glitches have been steadily subsiding since late summer.

Redback Networks Is Acquiring Siara Systems In $4.3 Billion Deal

The makers of Internet-switching equipment are looking more like dot-coms every day. The latest example: Redback Networks Inc. which has soared to a $6 billion market value in six months as a public company, is expected to announce today that it is acquiring closely held Siara Systems Inc. which hasnít completed its first product, for $4.3 billion in stock. The deal, which the companies describe as a merger, will combine two promising young gear manufacturers that hope to play a key role in a new generation of telecommunications networks, but that now have scant revenues and no profits. By combining the two companies hope they will have greater heft to take on equipment titans such as Lucent Technologies Inc. and Cisco Systems Inc.

Redback, Sunnyvale, Calif., makes equipment to manage computer traffic on high-speed digital-subscriber lines. Its shares have leaped more than 11-fold since its IPO. In abbreviated trading on the Nasdaq Stock Market Friday, Redback closed at $136.50, down $4.0625. For the first nine months, Redback reported a loss of $9.2 million on sales of $38.2 million. Siara, in neighboring Mountain View, Calif., was formed in June 1998 and has yet to announce what its products will be. In general terms, the company has said it is working on equipment to help telecommunications companies more efficiently start, stop and manage Internet services, such as security- and remote-software programs. Unlike Redback, whose equipment goes into the offices of telecommunications companies, at least some of Siaraís gear is expected to be housed at large businesses and office buildings. Siara was considered a hot start-up because it brought together engineers with telecommunications expertise and top-flight semiconductor designers, most of whom formerly worked at Advanced Micro Devices, also in Sunnyvale.

Japanese Business in the United States

  • Fujitsu Ltd. will help Visteon Automotive Systems, and automotive supplier of the ford Motor co. group, to develop a computer-aided engineering system. The system, to be built using hardware and software for Fujitsu, will boost efficiency in designing components for use in automotive air-conditioning systems.
  • Kuroda Precision Industries Ltd. in April will unify on a worldwide basis its brands for pneumatic equipment with those of U.S. air-compressor manufacturer Parker Hannifin Corp. Japanís leading air-compressor manufacturer was brought under the umbrella of the U.S. company in the summer, when Parker acquired a 33.5% stake in Kuroda.
  • KDD Submarine Cable Systems Inc. (KDD-SCS), a wholly owned subsidiary of KDD Corp., has signed a multiyear contract with U.S.-based Corning Inc. to buy optical fiber for undersea cables. KDD-SCS has bought the fibers only from Japanese suppliers until now, but the continuing strength of the yen has made it more cost-effective to use overseas suppliers.
  • Sharp Corp. later this month will begin shipments to the U.S. and Europe of handheld digital-versatile disc (DVD) players with liquid-crystal displays. The company will double production at its plant in Tochigi Prefecture to 6,000 units per month.
  • Kyorin Pharmaceutical Co. has tied up with Merck & Co. to provide the U.S. drug maker with development and sales rights to a new diabetes treatment. KRP-297 is an insulin sensitizer that also corrects certain lipid abnormalities. Merck, which has not offered a major diabetes drug before, will develop and sell the product worldwide in areas outside East Asia.
  • NEC Corp. will supply AT&T with its wavelength division multiplexing system for transmitting data on fiber-optic lines. AT&T is expected to pay about $300 million this fiscal year for the system, while the total deal will be worth an estimated $1 billion over three years.
  • Toyota Motor Corp. has decided to invest about 30 billion-yen to build a second factory at its Indiana plant in order to increase production capacity in North America. The automaker already has an annual manufacturing capacity of 1.25 million vehicles on the continent.
  • Itochu Corp. has begun marketing in the U.S. a feed-use additive developed by Calpis Co. The product, Calsporin, is a probiotic, that is, a beneficial bacteria product. The additive reportedly reduces harmful bacteria, such as salmonella, in the intestines of livestock, improving livestock productivity and making meat and egg products safer.
Contact Information: Morgen, Evan & Company, Inc. Copyright 1999