Airline Leveraged Buyouts to Have Far-Reaching Impact

Three airlines became the subjects of Securities & Exchange Commission filings recently, and stock prices of nearly all airlines soared as investors rushed to take positions. United Airlines, USAir, and Midway Airlines all were notified that investors had acquired more than 5% of their outstanding stock. All 3 stocks rose sharply on increased volume, and other airline shares rose as a group. Since the deregulation of the airline industry in 1978, the proliferation of new airline companies led to the widespread use of takeovers to eliminate competition and generate growth. Airlines are now attractive for 3 reasons: 1. The consolidation of the industry has meant that fewer companies control larger market shares, resulting in more sustained profitability and cash flows. 2. Airlines now have enormous amounts of value, thus, with used aircraft selling at premium prices, acquisition debt can be retired more easily with asset sales. 3. Nearly all other industries already have restructured, leaving the airlines as one of the few remaining opportunities to realize major gains.
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Kernstock, Nicholas C.

Full text: [Aviation Week & Space Technology] Aug 14, 1989

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Country Watch: Japan: Banks See Future Growth In Foreign Pa

Business prospects for Japanese banks are headed for a downturn in fiscal 1989. At the end of fiscal year 1988, the City Banks of Japan posted an average recurring profit growth only slightly more than 3%. The 13 City Banks are rapidly closing the gap between their capital adequacy ratio of 2 years ago and the standards set by the Bank for International Settlements to be reached in 1992. This will gradually release them from the constraints of assets expansion and strengthen their foundation more in the long run. The European presence of the 13 City Banks kept growing throughout the first quarter of 1989. Japanese banks have also been entering the market in Southeast Asia. Sanwa Bank’s goal to be first among Japanese banks in profits by March 1990 appears unlikely. However, in Hong Kong, the Peoples’ Republic of China, Thailand, Malaysia, and Indonesia, Sanwa is ahead of its country rivals. Japan’s top 4 securities firms held a combined 41% of the total market share of Eurobond issues for the first 6 months of 1989.
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Chowdhury, Amitabha
Behrmann, Neil

Full text: [Asian Finance] Aug 15, 1989

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Summer Months Nourish Timber Company Stocks

Dropping interest rates and rising wood product prices have made for a surprising July and August for Willamette Industries Inc. and Louisiana-Pacific Corp., Portland’s largest forest products companies. Usually the two companies’ stock prices move with the speed of Northwest glaciers. Absent a regional recession or an all-out economic boom, the stock prices of the lumbering giants generally trade in a fairly narrow range. But since the end of June, both companies have seen their stock prices climb steeply. Willamette Industries’ stock has shot up 18.4 percent since the end of June, closing at $50.75 per share Aug. 15. (excerpt)
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Gauntt, Tom

Full text: [The Business Journal] Aug 21, 1989

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Central Newspapers Inc. Shareholders Offer Stock to Public

Indianapolis-based Central Newspapers Inc. — parent of Phoenix Newspapers Inc., publisher of the Arizona Republic, Phoenix Gazette and Arizona Business Gazette — plans to sell $61 million to $72 million in an initial public offering of its class A common stock. According to a prospectus filed with the Securities and Exchange Commission, the offering consists of 3,592,800 shares that will carry an initial asking price of $17 to $20 a share. Three million shares will be offered in the United States, with the remaining 592,800 to be offered concurrently outside country. (excerpt)
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Anonymous

Full text: [The Business Journal] Aug 21, 1989

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Graham’s Continued Stock Surge Baffles Analysts

Since mid-July, Graham Corp.’s stock price has had investors scurrying to buy and analysts scrambling to explain why. Over the last month, the company’s stock has nearly tripled, jumping from about $11 a share to more than $32 a share last week. “It’s been a real surprise to us,” said Alvin Snyder, Graham’s vice president for finance. “Our previous high had been about $16 a share.” Joseph Rulison, vice president of Marsh Capital Management Inc., said investors began to take interest in Graham following its second-quarter earnings report. Prior to that report, almost no one on Wall Street followed Graham’s stock, which totals only about 940,000 shares outstanding. (excerpt)
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Johnston, Phil

Full text: [Rochester Business Journal] Aug 21, 1989

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Nasta Now Bringing Toys Out of the Box, Onto TV

Arriving at work on a recent Monday morning, Gerald Steinberg was greeted by a 38-page memo faxed to him from the company’s Hong Kong plant. After the list of items which had been shipped was a notation stating that the Batman sunglasses would be late because a generator had broken down. Such are the problems Steinberg has to deal with as executive vice president of Nasta International Inc., a toy manufacturer with offices in Hong Kong, New York and Philadelphia. Although Nasta has been profitable every year since being formed in 1968, nobody has ever confused the company with the likes of Fisher-Price or Mattel. (excerpt)
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George, John

Full text: [Philadelphia Business Journal] Aug 21, 1989

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Institutions Enjoy Airline Ride

A number of institutional investors are watching as UAL Corp., United Airlines’ parent, and the other airlines’ stocks rise in response to the recent takeover mania in the industry. Investors had staked positions in the airlines in anticipation of strong earnings from the consolidation of the deregulated industry. However, earnings were stronger than expected during the first half of 1989, which prompted a dramatic run-up in airline stocks and a flurry of investment activity and takeover speculation among the nation’s 4 largest carriers: 1. UAL, 2. Delta Air Lines Inc., 3. AMR Corp., owner of American Airlines, and 4. USAir Group Inc. UAL has been the focus of the investment community since the recently publicized conditional buyout offer, worth about $5.4 billion, from Marvin Davis. Investor optimism is being tempered by the cyclical nature of the industry, which could make debt service payments from a leveraged buyout unwieldy in an economic downturn.
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Vosti, Curtis

Full text: [Pensions & Investment Age] Aug 21, 1989

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Finally a Profit, but Grow May Have to Shrink Anyway

Troubled by a chemical warehouse fire, a friendly deal gone sour and eight straight quarters of losses, President Russell Banks had reason to cheer when Manhattan-based Grow Group Inc. showed a profit. With fourth-quarter income of $1.2 million, or 10 cents per share, compared with a loss of $695,000 from continuing operations in the prior-year period, Mr. Banks says Grow is on the verge of a turnaround. Quarterly revenues were $120 million. But the day after Grow’s announcement last week, Wall Street remained unimpressed. The $383 million chemical and paint company’s was stock at 11, down by 25 cents from the week’s high of 11 1/4. (excerpt)
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Temes, Judy

Full text: [Crain's New York Business] Aug 21, 1989

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Making a Virtue of Restlessness: Bank-Software Titan SEI Is Exploring Lots of New Channels

Alfred P. West, Jr., chief executive officer (CEO) and founder of banking software and services company SEI Corp. (Wayne, Pennsylvania), is a great believer in flux. This is a good thing because SEI is currently going through some tough times. Business is off in key areas, and earnings are flat. West has rapidly built SEI into a leader in trust accounting through a series of savvy diversifications. Automating trust departments, which are among the most hidebound areas of finance, has proven to be particularly lucrative. After registering as a broker-dealer in the early 1980s, the company began selling money-market mutual funds just in time to benefit from an interest rate boom. Things have soured since then, in part because of the 1987 stock market crash. Erratic earnings may be the inevitable consequence of West’s management style. West argues that it is impossible to have all smooth runs and no rocky stretches. To be sure, this passion for flexibility poses risks, but SEI has learned from its CEO to thrive on change.
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Weber, Joseph

Full text: [Business Week] Aug 21, 1989

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Brokers’ Stock Climb Despite Poor Earnings

Believing that the soft property-casualty insurance market will harden next year, investors are starting to buy insurance brokerage stocks despite continued poor brokerage earnings. Analysts note that brokerage stock prices have increased to record or near-record highs in the past several weeks, even though brokers reported sub-par earnings in the first half of 1989 and revenue growth pales in comparison with 1987 levels. For example, while the New York Stock Exchange composite rose 8% between July 1 and August 15, the stock values of Hilb, Rogal & Hamilton Co. increased 31.7%; Alexander & Alexander Services Inc. increased 14.6%; Arthur J. Gallagher & Co. rose 15%; Corroon & Black Corp. grew 10.9%; and Marsh & McLennan Cos. Inc. rose 6.9%. An exception to the brokerage stock boom has been Frank B. Hall & Co. Inc., which reported large net losses in the 2nd quarter and first half of 1989.
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Collins, Linda J.

Full text: [Business Insurance] Aug 21, 1989

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You Gotta Believe: Otherwise, Carrington’s Stock Price Is a

There are few more impressive instances of the power of faith on Wall Street than Carrington Laboratories Inc. (Irving, Texas). For years, the company has been developing a drug called Carrisyn, which is derived from the aloe vera plant. So far, Carrington has yet to earn government marketing approval for its drug, much less its first cent. Since the end of 1988, Carrington’s shares have appreciated by 140%. Despite the company’s exuberant claims and the rocket-like rise of its shares, it is by no means clear that company will ever win approval from the Food & Drug Administration to market Carrisyn. In addition, Carrington is the target of a lawsuit that levels some very ugly charges against the company. The lawsuit apart, the road ahead for Carrington looks anything but smooth. For one thing, the company’s finances are not exactly robust. Also, the medical community remains skeptical that an aloe-derived substance is an effective drug.
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Savitz, Eric J.

Full text: [Barron's National Business and Financial Weekly] Aug 21, 1989

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Tunnel Vision: Labor Strife Clouds the Outlook for Coal

Marc Cohen follows the coal industry and domestic oils for Kidder, Peabody. In an interview, Cohen discussed the implications of the recent upheaval in the coal industry. On April 5, 1989, the United Mine Workers went on strike against Pittston Coal Group. Cohen said that there is underlying concern that the Pittston strike will spread. If the strike does erupt on a national scale, it will last at least a month and will be a very crippling event. If this does happen, everyone from the coal producers to consumers will be hurt. Pittston is prepared for a lengthy strike. The company is convinced that the work rules changes, the savings on the health benefits, and, over time, a new esprit de corps that it hopes to develop will lead to higher productivity. Cohen also expressed overall concern about the stock market. He is worried that some of the stocks are being pushed up for the wrong reasons.
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Welling, Kathryn M.

Full text: [Barron's National Business and Financial Weekly] Aug 21, 1989

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Stone Container Corp.: It Whacks at Debt While Reaping Acquisition Benefits

Six years ago, Stone Container Corp. started on an expansion and acquisition spree that has made it the largest producer of commodity paper and packaging products. The firm is number 2 in the entire paper industry, just behind International Paper Co. Chairman Roger W. Stone, the chief executive, likes to attribute much of Stone’s success to a management credo drummed into employees about the importance of innovative and high-quality products, combined with excellent service. He acknowledges that the big factor has been a series of major acquisitions, capped by the $2.7-billion takeover of Consolidated-Bathurst. The Bathurst acquisition does a lot for Stone’s core businesses and also sharply expands Stone Container’s sales. In addition, the acquisition piles on a lot of new debt. Roger Stone is disconcerted about pricing trends. He thinks the industry will try again in early 1990 to boost prices on linerboard.
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Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] Aug 21, 1989

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Remaking Maytag

Maytag Co. (Newton, Iowa) has recently piled up debt nearly equal to its net worth. Borrowing helped finance the acquisition of Chicago Pacific Corp. as well as heavier-than-usual spending on new products and plant expansion and modernization. Maytag Chairman and Chief Executive Officer Daniel J. Krumm asserts that the company had no other choice if it was to survive as an independent manufacturer of household appliances. Maytag had to expand significantly to keep up with larger competitors and not be shut out of international markets. Most analysts believe that Maytag paid too much to acquire Chicago Pacific. The acquisition will dilute earnings, and pressure on profits could mount if demand for appliances declines. Krumm leaves the impression that, if faced with an unfriendly takeover attempt, Maytag would do whatever was required to enhance shareholder value. That could include a stock buyback or restructuring.
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Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] Aug 21, 1989

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Hibernia Corp.: Conservative Lending, Acquiring Spell Banking Success

Hibernia Corp. (New Orleans, Louisiana) could write the book on how to succeed in the banking business during the oil industry’s depression. Though appearing to be a play-it-safe bank, the company’s Hibernia National Bank has been a growth-minded institution since new management took over in 1973. Hibernia has grown to No. 1 in Louisiana by pursuing aggressive, but disciplined, banking practices and through recent acquisitions. Picking through the wreckage of the banking and savings and loan business, Hibernia’s executives see opportunities for corralling a lot of sound banking assets. However, Hibernia itself could be an inviting target for an out-of-state bank (Louisiana has a national interstate reciprocal law). Hibernia is not thriving by acquisitions alone. It is aggressive in promoting banking and related services. Hibernia’s performance numbers stack up nicely with peer banks nationally, usually equaling or bettering the average.
dbs foreign exchange

Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] Aug 21, 1989

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A Viable Option: The Case for Writing Covered Calls

Options can be part of very conservative hedging strategies. One of the best is covered call writing, a favorite of investment professionals. A call is an option contract that gives its buyer the right to purchase 100 shares of the underlying stock at a specific price for a specific period. If the seller of the call owns the stock, that person is “covered.” There is risk in stock ownership, and covered call writing offers a way to minimize this exposure conservatively. The cash that the writer receives for selling an option offers protection against a slide in the underlying stock’s price. However, as an imperfect hedge, an option itself poses risks. A call writer wishing to retain underlying stock when its price is surging has 3 choices: rolling the options forward, rolling them up, or simply buying back the calls. Selling covered calls on a stock spiraling downward would be unwise. When a stock is rocketing skyward, writing covered calls would curb an investor’s upside potential.
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Moscovitz, Steven D.

Full text: [Barron's National Business and Financial Weekly] Aug 21, 1989

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Report Blasting First Liberty Has Bank Officials Fighting Back

A long-simmering feud between First Liberty Financial Corp. and its stockholders has exploded with the publication of a pointed research report by Robinson-Humphrey Co., the investment bank that helped take First Liberty public in 1983. The 10-page report, released to selected Robinson-Humphrey clients in late July, was sent to the Chronicle in an unmarked envelope the following week. Sources in the banking and investment communities were surprised by the overt negative tone of the report, which repeatedly characterizes the bank as having made poor management and investment decisions. (excerpt)
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Rubinger, David

Full text: [Atlanta Business Chronicle] Aug 21, 1989

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Shroff

The recent losses by investors when shares were listed exposed the Stock Exchange of Thailand for allowing Krung Thai Bank and Thanaphum into the market, which should only accept companies with a good history. The issue of offering bad stock is discussed.
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Handley, Paul

Full text: [Far Eastern Economic Review] Aug 24, 1989

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A power play

Analysts James Ashley and Colin Mills from W. I. Carr outlined how ten different themes might affect the performance of a single industry–electronics. The themes are discussed.
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Full text: [Far Eastern Economic Review] Aug 24, 1989

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5 Regional Banks Likely Takeover Candidates

Five Capital Region banks, including Falls Church-based First Virginia Banks Inc. and Crestar Financial Corp. of Richmond, have been picked as likely acquisition targets in the 1990s, according to a recent report by Smith Barney, Harris Upham & Co., a New York-based brokerage firm. Lacy M. Shockley, a banking analyst who wrote the report, not only sees First Virginia and Crestar as possible acquisitions in the upcoming years, but Richmond-based Signet Banking Corp., Mercantile Bankshares Corp. of Baltimore and Dominion Bankshares Corp. of Roanoke as well. (excerpt)
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Atkinson, Bill

Full text: [Washington Business Journal] Aug 28, 1989

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