A Bigger, Better Bank of America? Confusion Reigns at Compaq

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Bank of America (BAC)

Jim: Right off, Mike, let me note that I have a checking account at Bank of America . . .

Mike: . . . as do I.

Jim: Which means I'm among those who are nickeled-and-dimed to death with all sorts of fees because BofA, with its $614 billion in assets--that's billion, with a b--can't possibly shoulder those costs alone. However, that won't affect my opinion of its stock.

Mike: Same here. Bank of America, of course, is the gigantic California bank with a fabled history that's headquartered in--what's this?--Charlotte, N.C.?

Jim: It's true.

Mike: Boy, this is not my grandfather's BofA. In fact, it's not even my older brother's BofA!

Jim: That's because BofA last year merged with another huge bank, NationsBank, that called Charlotte home.

Mike: Let's be more precise, Jim. BofA got taken over by NationsBank.

Jim: Good point. This was one of those deals called a merger of equals, but except for keeping the BofA name, the surviving bank clearly is dominated by NationsBank and its culture. That's also why BofA's longtime headquarters in San Francisco was abandoned in favor of Charlotte.

Mike: I'm not surprised. I always believed in these "merger-of-equals" things about as much as I ever believed there was, oh, a "new Nixon."

Jim: Or that BofA was "here to serve you." Anyway, the new Bank of America has found itself in the hole in recent months. After completing the merger with NationsBank, BofA was being hit with huge losses from investment trading overseas and from its high-risk hedge-fund unit, called D.E. Shaw. By the way, now you know why BofA nicks you for $1.50 every time you want to use another bank's ATM machine. I mean, someone has to finance its gamble on currency futures and the like.

Mike: Actually, the big loser from that fiasco was BofA's old CEO, David Coulter.

Jim: True. Coulter became the No. 2 executive to NationsBank's CEO, Hugh McColl, after the merger. But he was shown the door last fall after these problems surfaced, and now McColl's having to clean things up.

Mike: Well, let's think about BofA from the customer's standpoint. You know, we recently talked about Washington Mutual, the savings-and-loan behemoth that's struggled lately to absorb the customers of the numerous thrifts it's bought, especially here in Southern California.

Jim: And these problems are nothing new, of course. They were evident after BofA bought Security Pacific Bank a few years ago.

Mike: Right. The other day I had to execute some paperwork involving a BofA account, and was told I had to fill out the same form twice, once for BofA and once for NationsBank, because BofA is changing its computer system over to the NationsBank system at the end of the month.

Jim: Did they charge you $1.50 for the extra ink you needed?

Mike: Point is, that episode raises a very legitimate question about what snags may occur throughout the bank as it completes this merger, and whether they will impact the company's earnings and its stock.

Jim: No question these problems have to be overcome, as in any merger. But I'd still buy BofA as a conservative, long-term investment, though there was nothing conservative about the bank's forays into overseas, high-risk trading that caused so many of its recent problems.

Mike: At least the new management is putting a leash on that activity.

Jim: McColl & Co. have spent a good amount of time paring all this esoteric speculation. Also, don't forget that BofA seems on track to wring about $1 billion of costs out of the newly merged bank per year, which was one of its main goals in the first place.

Mike: And the bank is preparing to give some of that savings back to its stockholders via a buyback program of more than 7% of its stock over the next couple of years which, at current prices, amounts to some $9 billion. That's already helped the stock.

Jim: Bank of America got as high as $88 a share last year, only to plunge to about half that price after its problems began coming to light. But it's since rebounded to a recent $75 or so, or about 16 times its estimated '99 earnings per share.

Mike: Well, as a BofA customer I'm sitting here gripping the arms of my chair, because this merger will be a rocky ride for account holders. But as a stockholder, I'd like to get the savings that are going to be taken out of my hide as a customer.

Jim: So you'd buy the stock?

Mike: I would. Now whether I'd be courageous enough to buy it through my Bank of America brokerage account before these problems get fixed is quite another matter.

Compaq Computer (CPQ)

Jim: Since we're talking about companies trying to climb out of deep holes, Mike, we turn to Compaq Computer.

Mike: For years this maker of personal computers was led by a CEO named Eckhard Pfeiffer who, according to everything I read, was one brilliant leader. He executed some great strategies and handled some big mergers, including Compaq's takeover of Digital Equipment Corp. last year.

Jim: DEC being a leading maker of larger-scale computers.

Mike: And yet Pfeiffer got fired in April.

Jim: Right, because just as Compaq was taking over DEC, the wheels came off Compaq's basic business and its stock plunged. What a difference from a year ago, when Compaq was considered one of high-tech's most astute players.

Mike: Which tells you a lot about how fast things change in high-tech.

Jim: Absolutely. Let's retrace what happened. Compaq a year ago was the biggest seller of PCs (and still is), and it made the deal to buy DEC, which once dwarfed Compaq in size.

Mike: This was going to allow Compaq to be a genuine player in the computing big leagues, competing against the likes of IBM and Hewlett-Packard.

Jim: But suddenly Compaq's PC business began to slow down. Its sales growth stalled, and with PC prices plunging, its earnings started evaporating. Plus, Compaq was still in the process of digesting DEC.

Mike: Which is still sitting in Compaq's stomach, so to speak.

Jim: So Compaq's first-quarter earnings this year fell sharply, and it's talking about a second-quarter loss. Its stock, which is among the most heavily traded on the New York Stock Exchange, has plunged from a high of about $51 a share in January to half that price today.

Mike: Of course, all of this put the itch back in the trigger finger of Compaq's chairman, one Ben Rosen, a high-tech legend who has now bounced his chief executive for the second time this decade. Problem is, he's having to run Compaq day to day, which may not be his strong suit.

Jim: While he looks for Pfeiffer's replacement.

Mike: So the question is: Do you want to buy this stock and place a bet on a company whose major strategies are under fire, that has yet to solidify a new strategy going forward, and that doesn't have a chief executive?

Jim: Not me. I'd avoid this stock for now. Look, one could easily see Compaq's bloodied stock as a great opportunity to buy a household name at a bargain price. But that's a bear trap, because Compaq's situation isn't going to improve very quickly.

Mike: I wouldn't buy the stock, either. The main problem with Compaq's basic PC business is not the hardware itself, but rather how it's sold. Compaq found itself staring at the headlights because it missed the trend toward selling computers over the Internet or over the telephone.

Jim: Custom-built PCs, made to order.

Mike: This is a trend, of course, that was perfected by Dell Computer, which is still a much stronger company even though it's smaller than Compaq in terms of unit sales. And why is it better to sell mail order? Because you don't have a lot of expensive inventory sitting on store shelves.

Jim: Or employing a huge sales force.

Mike: And that's crucial when what you're building is something with an absolutely mind-boggling rate of obsolescence. You can serve your customers much better by giving them exactly what they want--one computer at a time--and do it more cheaply.

Jim: Compaq is now selling direct too, of course.

Mike: There are complexities in selling direct that Dell has solved. But Compaq is still working out the bugs, and that's a drain on earnings growth.

Jim: Let's be clear: We're not saying Compaq builds a lousy machine.

Mike: But it never made the cheapest machine, nor the most powerful one. They're reliable and they get the job done. And their customer service is pretty good. That's why it has a wide following.

Jim: And let's not forget Compaq's latest move. It announced plans to sell Alta Vista--an Internet search engine it acquired with DEC--for some $3 billion to a company called CMGI, which invests in Internet firms.

Mike: But once again, this is an area of confusion. Compaq had stated outright that it wanted to be a bigger player on the Internet. But how does this deal make Compaq a bigger player on the Net when it's selling its biggest Internet asset?

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book "Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age." Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik's weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Bank of America, Monday: $74.63

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Compaq Computer, Monday: $26.38

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