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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, May 3, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the shareholders meeting today at TRW to decide on the hostile takeover
attempt by Northrup, the continue market volatility due to oil prices,
accounting issues, and sell recommendations from brokerage houses, and
the announcement this week that, thanks to help from the State of Ohio,
Ford will shift production of its most popular SUV to the Avon Lake assembly
plant.
April Baer–It's D-Day today for TRW. Within
the hour shareholders for this Cleveland-based industrial company will
convene in Lyndhurst for a special meeting to vote on an offer by defense
contractor, Northrup Grumman. NG has put a full court press on TRW shareholders
over the past month, urging them to accept a $53 per share buyout as part
of a hostile takeover attempt. This could be a make or break day for Northrup
Grumman. If shareholders turn down the offer, TRW's Board may have more
power to fend off Northrup Grumman's advances. Other business news of
the week has been up and down. The Dow Jones Industrial Average closed
Monday below 10,000 - meaningless in market terms, but possibly important
psychologically. There was a midweek rebound and the magic number at Thursday's
close was 10,091. Scott Roulston of Fairport Asset Management joins us
now for our Friday business roundup. Scott, good morning.
Scott Roulston–Good morning, April.
AB–All this huge volatility in the market.
I'm dizzy already. What is making the market so crazy this week?
SR–Lots of things. We have to underline turmoil
in the Middle East and oil prices, questions about the recovery - when
and how and how strong is it going to come back, and accounting issues
are still overhanging. That is creating a lot of volatility, especially
in very widely held stocks like GE and Tyco. Even more recently, you actually
had the brokerage firms (the research analysts) issuing sell recommendations.
So that's a new twist - we haven't seen that in a long, long time.
AB–Wait a minute. A sell recommendation? Is
this a major brokerage that's doing this?
SR–We actually have had a couple in the last
few weeks. You know, brokerage recommendations have been coming under
the gun by Attorney General Spitzer in New York, but that's a different
issue. I think what we're talking about here is the clarity of the recommendations
- you know, kind of like forecasting the weather. I just want to know
if it's going to rain today or not. So often you can't even tell from
the weather report if it's going to be good weather or not. Well, same
thing goes in these brokerage reports. They have so many different variations
- strong buy, weak buy, and so forth. But firms are actually coming out
with sells. Credit Suisse First Boston had a sell on WorldCom and the
stock dropped 33%! Merrill Lynch actually had a sell on VeriSign earlier
this week - actually a couple of weeks ago. The stock then dropped 46%.
So that's influencing the volatility.
AB–Let's do some talking about this TRW matter.
The shareholders again are in a special meeting today to consider the
Northrup Grumman takeover offer. Somebody said to me this week that everyone
has their price, but so far the shareholders have stood firm. What do
you think is going through a stockholder's mind at a time like this?
SR–Well, as far as going to the meetings and
everything, these events are usually kind of boring. But seriously, the
meeting is very important but today's meeting at TRW is very unpredictable.
It's very complicated. This is the first time this Ohio takeover law is
being tested. It was passed 20 years ago but this is the first situation
where - it's a 2-step voting process that, frankly, only a lawyer could
appreciate. It's very complex. We don't really have time to get into it,
but the key thing to keep in mind here is that big institutional shareholders
(the banks and the insurance companies and the pension funds) are controlling
this vote. So they are being influenced by what they think they can do
to maximize their exit - because it is going to be an exit one way or
the other. Eventually they are going to sell the stock.
AB–TRW's Board has been telling its shareholders
"you know, you really shouldn't take this deal because for all we know,
the way it's structured, Northrup Grumman might decide later to pay you
a lower price for your stock." Is there much precedence for that? Have
you seen that happen before where an offering is made and then the story
changes when the ink is dry?
SR–Absolutely. This story is evolving as we
go along and it will continue to evolve. TRW is playing this whole thing
very cleverly because they are keeping behind the curtain these other
buyers. They are not tipping their hand at all. So they are playing this
very tough. Northrup Grumman, on the other hand, is saying "well, you
know we're not going to raise our bid" but they have raised their bid.
So we really don't know where this is going to come out. This is a pretty
tough fight between two big companies.
AB–In other news, there was a big announcement
out of Avon Lake this week. The State of Ohio has poured $70 million into
incentives to convince Ford to bring out its new line of SUV's at an existing
plant that was originally going to be phased out. Now Ford is going to
be salvaging most of the jobs that otherwise would have been lost. $70
million from the State, though! Do you think that's a reasonable investment?
SR–Obviously the Governor does. It does appear
that is what you have to do in order to get the cars built here. Ford,
which of the Big Three is probably going through the biggest pressure.
Meanwhile GM announced their sales were up in April - very significantly.
It really boosted the market earlier this week. Ford is really going through
a tough time. So I'm sure that when Ford is looking toward where they
are going to put a new line in or add some jobs, they are going to be
looking for all the incentives they can get. You have to pay to play.
AB–Scott Roulston of Fairport Asset Management
joins us on Fridays, known to the veterans of the 1970's broadcast industry
as "Rocking Rollie".
SR–(laughter). Uh oh!
AB–(I've been talking to your wife!) You have
a good weekend, Scott.
SR–Okay, you too!
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