July-August 1999

Contents

JUNIPER JUMPS 191 PERCENT DESPITE MARKET WARINESS

Despite market nervousness about U.S. interest rates, Internet technology firm Juniper Networks rose 191 percent after its initial public offering, on one of the busiest days in the IPO market this year. Juniper, which makes high-performance routers designed to direct traffic along high-speed Internet and data networks, rose from $64.88 to $98.88. The offering, which priced above its expected range, raised $163.2 million. Earlier this week, e-commerce enabling software provider Ariba Inc. climbed 268 percent on its first day of trading. This week's debuts by Internet infrastructure firms have been cheered by investors and have helped revive the IPO market. Developed business models and strong growth prospects for companies involved with Internet-related technology has created the recent enthusiasm for these deals.

The gains have been even more remarkable because they occurred in a cautious market ahead of the Federal Open Market Committee meeting on June 29th and 30th. Mounting concern that a series of rate hikes could be in the cards has weighed on U.S. stocks and bonds. The tech heavy Nasdaq closed almost a point lower on Friday at about 2552. Four of the seven companies that debuted registered gains. Persistence Software, another Internet infrastructure IPO, rose 26 percent, or $2.81 to $13.81. The company offers software products used for high-volume e-commerce transactions. It raised $33 million through the IPO. Online postage company Stamps.com Inc. also gained upon debut, climbing 24 percent, or $2.69 to $13.69. It raised $55 million after pricing at the top of its expected range. The company's technology, which has yet to be approved by the U.S. Postal Service, enables users to print stamps using printers. Demand from small businesses is very strong, but analysts also said Stamps.com Inc. may face strong competition from Pitney Bowes Inc., which dominates the market. Financial Institutions Inc., which owns community banks and savings and loan holding company Greater Atlantic Financial Corp. also debuted. Financial Institutions closed up $1 to $15 after its $14 per share IPO, while Greater Atlantic closed unchanged from its offering price of $9.50 a share. Internet.com Corp., which offers a network of Web sites targeting information technology professionals, closed unchanged at $14.

Gains for Recent IPOs Pull Alley Shares Higher

Despite some late week selling in technology shares across the markets, the @NY Index posted a 7 percent gain this week with rebound performances of several recent IPOs leading the group. After a string of local Net IPOs that have hovered below their IPO pricing, last week's Silicon Alley IPO Mail.Com, bucked the trend. Mail.com priced last Thursday at $7 a share and closed yesterday at $12.56, up $5.56 or 79 percent. Another recent IPO, Juno Online Services, posted an enormous gain, leaping $11.25 or 103 percent on the week to close yesterday at $22.19 as the stock moved above its $13 a share IPO price for the first time.

Several factors drove Juno up. First, a Bear Stearns analyst wrote in a report that the company could reach the 10-million subscriber mark in 12 months, which would make Juno the second largest ISP after America Online. Then, later in the week, after a series of ISP merger deals roiled the sector, rumors began to circulate that AOL was eyeing a possible acquisition of Juno. In fact, at midday Friday Juno shares were up an additional $3.94 or 18 percent.

Barnesandnoble.com also closed Thursday back above its $18 a share IPO price. But other recent IPOs lingered. Alloy Online closed Thursday at $10.94 a share, well below the company's recent $15 a share IPO price. Coming public this morning was Internet.com Corp., the Westport-based company that owns @NY and SiliconAlleyJobs.Com. Internet.com priced at $14 a share last night, above the expected $10 to $12 a share range and opened for trading at $15.25 at midday. Meanwhile, DoubleClick shares were hit hard this week. First, two online privacy watchdog groups assailed the company's planned acquisition of database marketer Abacus Direct. Then, yesterday, an analyst from Janney Montgomery Scott downgraded the stock from buy to accumulate because of concerns about CMGi's proposed acquisition of Web search site AltaVista.

AltaVista remains far and away DoubleClick's biggest client, accounting for 21 percent of the company's total revenues in the first quarter of 1999 and 43 percent of the revenues for the company's basic ad server services in the first quarter. Of course, AltaVista does have a contract with DoubleClick not due to expire until 2001.

Compaq, CMGI Cement Deal On AltaVista

Internet venture capital company, CMGI Inc., will buy a majority stake in Compaq Computer Corp.'s AltaVista Internet search engine business for $2.3 billion in stock and debt, CMGI and Compaq announced. In exchange, Compaq will acquire an equity stake worth 2.1 billion in CMGI, as well as a $220 million, three-year note from the Internet investment company. The deal, expected since word of negotiations first leaked, will integrate AltaVista into CMGI's portfolio of 40 Web companies, providing CMGI with the ability to cross-market its sites with AltaVista, the 10th-most popular site on the Internet's World Wide Web in May, according to Media Metrix.

The deal puts the technologically powerful but undermarketed AltaVista into more Internet-savvy hands, while retaining for Compaq a piece of Web access to tie in to its millions of personal computer customers, analysts said. Compaq is the largest PC maker. CMGI will also take control of Compaq's Shopping.com and Zip2 Web sites, which are considered part of AltaVista. Compaq, meanwhile, will integrate CMGI's Internet offerings into its PC offerings through Web browser and keyboard access to AltaVista and other CMGI services.

As part of a further alliance, Compaq and CMGI said they will collaborate to develop new Internet technologies and Web appliances. CMGI will own 83 percent of AltaVista after the deal is completed. In exchange, Compaq will receive 19 million CMGI common shares, plus preferred stock equivalent to 1.8 million CMGI shares, representing a 16.4 percent equity stake in Andover, Mass.-based CMGI, making Compaq its largest outside shareholder.

CMGI will also issue a $220 million three-year note to Compaq as part of the deal, and Compaq will get a spot on CMGI's board of directors. The $2.3 billion valuation for an 83 percent stake implies a $2.7 billion value for all of AltaVista. The deal is binding to both parties and does not need shareholder approval. CMGI shares rose $9.81, to $107.50, on the Nasdaq stock market, while shares of Compaq rose 94 cents, to $23.25, on the New York Stock Exchange.

Qwest Sends Shareholder Letter, Mulls Next Step

Qwest Communications International Inc. sent a letter to its shareholders saying it may consider new ways to encourage U S West Inc. and Frontier Corp to accept Qwest's unsolicited $48 billion takeover offers -- a move traders viewed as a sign the company may launch hostile bids. A Qwest spokesman said the No. 4 U.S. long distance company sent letters to its shareholders, saying it could consider various new strategies in its takeover efforts as circumstances changed.

Qwest also may set a deadline for U S West and Frontier to respond. Traders said the letters indicate Qwest may change its bidding strategy and launch hostile offers, taking its proposal directly to the shareholders of U S West and Frontier. Qwest declined to comment. Qwest raised its offers to buy both local and long distance phone company Frontier and local telephone carrier U S West in a second attempt to wrest them away from their existing merger agreements with Global Crossing Ltd.

Frontier's board is meeting on Monday and may have a decision as early as Monday evening, sources familiar with the situation said. U S West has said it would evaluate the Qwest offer in due course. Frontier and U S West decided to take no action on Qwest's original offers, citing factors such as the 20 percent drop in Qwest's stock price. Qwest's new bids for both companies are valued at about $48 billion compared with Global Crossing's offers, which are currently valued at about $41 billion.

Global Crossing is unlikely to make any moves until U S West and Frontier respond to the latest Qwest proposal, sources said. Global Crossing would have five days to respond if U S West and Frontier agreed to link with Qwest. Separately, cable television network CNBC reported Frontier might issue a profit warning, saying its 1999 earnings may fall short of expectations. Frontier declined to comment. Traders said a possible earnings shortfall at Frontier would not seriously complicate the takeover battle much since the two companies want Frontier for its physical assets, not its balance sheet.

IBM May Acquire Sequent

IBM is in advanced talks to acquire computer maker Sequent Computer Systems, and a deal could be announced in the next few days, though the terms haven't been finalized, The Wall Street Journal reported. Sequent's market capitalization stands at around $588 million. A Sequent acquisition would bolster IBM's line of computer servers. Beaverton, Oregon-based Sequent makes high-end "mini-supercomputers" built by combining multiple Intel chips. These computers can crunch numbers quickly -- great for database applications. Sequent customers include Ford Motor Co. and Boeing.

For its part, Sequent has been struggling to expand beyond its high-end niche. According to its 10-K filing for last year, the company posted a loss of $52.5 million compared with net profit of $38.8 million the year before. Revenues dropped 6% to $784.2 million. While Sequent views IBM as a competitor -- along with Hewlett-Packard, Sun Microsystems and Compaq Computer -- the company is also in partnership with IBM on Project Monterey, an IBM initiative to develop an industry standard 64-bit version of UNIX for Intel's IA-64 (Merced) microprocessor.

Officials at International Business Machines Corp. and Sequent Computer Systems Inc. declined to comment on a published report that the two companies are in merger talks. The Wall Street Journal, quoting a person familiar with the deal, said IBM is in the ``advanced'' stage of discussions to acquire Beaverton, Ore.-based Sequent. A spokesman at Armonk, N.Y.-based IBM, the world's biggest computer company, said the company does not comment on speculation or rumor. A Sequent spokesman also declined comment on the matter. Shares of Sequent jumped in pre-open trade, rising to $18 a share on the Instinet electronic broker system from a closing price of $14. Shares of IBM, which closed at $122.56 a share, were not active in pre-open trade.

Japanese Business in the United States

  • Oki Electric Industry Co., Sony Corp. and Cadence Design Systems Inc. of the U.S. said they will take part in a Pennsylvania state-sponsored project to foster the development of system chip technologies. The state will work with large companies, universities and local start-ups to create an infrastructure for the joint development of reusable system chip technologies, as well as to build an Internet-based market for their sale and exchange.
  • Sharp Corp. has teamed up with Conexant Systems Inc. of the U.S. to jointly develop a next-generation system chip. Sharp hopes to use the advanced chip, which will have a circuit-line width of 0.15 micrometers, as the "brain" in its high-growth potential digital electronic appliances.
  • Visteon Automotive Systems, a major U.S. auto-parts maker, and two Sumitomo group companies have set up a U.S. venture to develop and market electronic parts for automobile modules. Sumitomo Electric Industries Ltd., Sumitomo Wiring Systems Ltd. and the U.S. partner plan to meet growing demand for module systems for wire harnesses and other auto parts.
  • Minolta Co. said it will take a majority stake in QMS Inc., turning the U.S. color printer company into a subsidiary. The acquisition will give Minolta roughly 10% of the U.S. color printer market - about even with the third largest printer maker - and about 24% of the European market, placing it behind Hewlett-Packard Co.
  • Technos Japan Co. plans to enter the U.S. market this month with its remote-control system operated by brain waves. The disability-related equipment maker plans to set up a production base in Denver, Colorado. It claims to be the first company in the world to commercialize a brain wave-operated remote control.
  • Marubeni Corp. has taken an equity stake in a U.S, start-up as part of a deal giving the trading house exclusive Japanese marketing rights to the company's remote surgical system. The California start-up, Intuitive Surgical Inc., has created a system that enables surgeons to conduct operations from a remote location by controlling a robotic hand with a surgical knife attachment as they watch on a monitor.
  • Ishikawajima-Harima Heavy Industries Co. has acquired the nuclear reactor pressure-vessel inspection unit of Southwest Research Institute, a Texas technological development organ, for about $13 million. Ishikawajima has already established a new company, IHI Southwest Technologies, in Texas with a capitalization of $13 million.
  • Mitsubishi Materials Corp. plans to begin offering wireless Internet access service for mobile terminals in the U.S. in 2001. The industrial-materials maker plans to start the same service in Japan at a later date.
    • Contact Information: Morgen, Evan & Company, Inc. Copyright 1999