Is There Anything U.S. Investors Won't Buy?The high risks of investing in places where the only rule is caveat emptor.

The Lockheed Redemption: Surprisingly, Lockheed has not been accused of corruption in the last three months. Its proposed merger with Northrop Grumman was held up by the Justice Department over antitrust concerns, but all indications are that the merger will go through in early 1998. In the meantime, Lockheed continues its lobbying efforts to get Eastern European countries into NATO, which will help create a whole new market for expensive weapons technology, and it has entered into a series of new partnerships with Hungarian companies. It also recently entered a complicated financial arrangement with General Electric, whereby GE is trading $2.8 billion in preferred stock in exchange for $1.5 billion in cash and Lockheed's interests in a number of small countries. All that's important to know is that it's a win-win situation. The redemption continues.

Conglomerations: Union Pacific Resources' attempted hostile takeover of Pennzoil has yet to succeed, thanks mainly to Pennzoil's steadfast board of directors and the poison-pill provision in Pennzoil's charter. UPR has taken Pennzoil to court over the matter, but the last month has not shown UPR in the best light. Leaked documents showed that Smith Barney, which is advising UPR on the deal, valued Pennzoil at a higher price than the $84 a share that UPR is offering. Then UPR reported profits that were 13 percent lower than they were a year ago, even as Pennzoil came in with profit numbers that crushed analysts' estimates. Finally, UPR tried to convince a judge that Smith Barney could both advise it on the takeover attempt and serve as an independent arbitrator on the litigation issues in the UPR-Pennzoil court case. The judge rather lyrically termed this "an epistemological leap of heroic proportions." Indeed. In some sense, the UPR-Pennzoil battle has been overshadowed by another equally contentious takeover attempt, namely Hilton Hotels' quest to buy ITT. ITT, which is now but a shadow of the conglomerate Harold Geneen ran in the 1960s, did everything but blow up its headquarters in order to dissuade Hilton; its CEO, Rand Araskog, and Hilton head Stephen Bollenbach have savaged each other in the press. Somewhat surprisingly, ITT's rear-guard actions seem to have worked, since a white knight in the form of Starwood Lodging Trust has appeared. Unless things change dramatically in the next month, Bollenbach may, for the first time in a long while, have found a company he couldn't acquire.

Apple: Since becoming interim CEO of Apple, Steven Jobs has done nothing to suggest that the picture of him as being driven by totalitarian impulses was at all exaggerated. He ended Apple's licensing agreement with the largest manufacturer of Mac clones, and it appears certain that he will cut off all cloning deals in the near future, which will further marginalize Apple. He endorsed the "Think Different" ad campaign, which links Apple to Einstein, Bob Dylan, and Mahatma Gandhi. And he continues to deny rumors that he's going to stay on as permanent CEO, even as he makes it more and more difficult for Apple to convince any serious outside candidate that he/she would be able to manage independent of Jobs. The latest Dataquest survey showed Apple with just 3 percent of the personal-computer market, which makes the company's continued existence a matter of some doubt.

Avis: Avis' record as the company of the moment--regardless of what that moment is--remains unblemished. Its initial public offering was tremendously successful, as most IPOs this year have been. (Chrysler just announced it's going to spin off its Thrifty rental-car business in an IPO, too.) Avis is also thoroughly of the moment in another way, since HFS, its parent company, spun it off while keeping for itself the Avis trademark, its franchise agreements, and its reservation system, all of which Avis now leases from HFS. What, then, did Avis shareholders buy? Mainly the right to sell in the future.

Fieldcrest Cannon: Just after its successful campaign to defeat a unionizing drive at its North Carolina plants, Fieldcrest Cannon sold itself to major competitor Pillowtex. Needless to say, Pillowtex's interest in Fieldcrest would have been less intense had UNITE won that National Labor Relations Board vote. Fieldcrest also reported profits for the quarter that were up 600 percent from the year before. See where union-bashing gets you?

Casino Hollywood: It was, in the end, a disappointing summer for Hollywood, although most studio executives spun it as an unparalleled triumph. Revenues were up just slightly from over a year ago, and were down when you controlled for ticket prices. There are a few signs that the studios may be stepping back a bit from the "blockbusters, damn it!" strategy. For one, a number of films scheduled for the winter and spring of 1998 that two years ago might have cost over $100 million instead came in at less than $80 million. (Hey, every little million counts.) Foremost among these is a remake of Dr. Dolittle with Eddie Murphy. Well, maybe not foremost, but there's a lot riding on it. I promise. As for MGM, three weeks ago, the company registered for its planned IPO, in which it will put 12.5 million shares on the block at a price of $20 to $23 apiece, a price that is, rather remarkably, higher than anticipated. Considering that MGM lost $744 million in 1996 and hasn't made money since 1988, you might wonder how investors could possibly see this as a wise place to put their money. But then we went over all that, didn't we?

Wade Cook: We got a nice letter from someone who works at Wade's company, assuring us that Wade was an honorable soul and that anyone making insinuations to the contrary was deeply mistaken. The letter didn't explain what had happened in Arizona when Wade went into bankruptcy and had the criminal charges filed, etc. That was probably just forgetfulness on the letter-writer's part. A couple of interesting things have happened since our story appeared, though. First, Wade's company revealed that it is putting its excess cash to work in real estate. Why, if Cook's methods offer guaranteed monthly results of 20 percent to 30 percent, would you put your money anywhere but into the stock market? Only Cook knows. Second, Wade's company changed its stock-ticker symbol to WADE. Excellent.

Sara Lee: Sara Lee has yet to announce precisely which of its many divisions it will be outsourcing as it transforms itself into a company whose major asset is its brands. But Wall Street remains enamored of the corporation's reinvention. Sara Lee's performance in the most recent quarter was less than impressive: Its revenue and sales growth were essentially flat. It did do very well in Europe and Mexico, though, especially with its packaged-meats company Aoste and its Mexican firm Kir Alimentos. "Ah, Kir Alimentos! Que bueno!" It remains to be seen whether Kir will survive de-verticalization.

Java: Sun Microsystems and Microsoft have agreed to merge, and Scott McNealy and Bill Gates are going to rent a house together in the Hamptons this summer. Their next-door neighbors will be Michael Eisner and Jeffrey Katzenberg, who have gone so far as to actually buy a house together in the Hamptons.

Disasters: A flood has not hit Fidelity in the last month, and no earthquake has swallowed Schwab's mainframe. The closest thing to a disaster we've had was, of course, the minicrash, but the New York Stock Exchange and NASDAQ computer systems came through with flying colors, handling record trading volumes with nary a problem, a far cry from 1987. A few blips mainly involved brokerage houses that, because of back-office problems, didn't carry out trades for customers until prices had changed significantly. All those houses have announced that they will be reimbursing their customers. The total could run to as much as $10 million. Internet brokerage services also did relatively poorly during the crash, as more than a few customers found themselves unable to access their accounts or make trades. The head of Schwab explained that it was just a case of too much demand and too little supply, but then that's precisely what defines a breakdown in service, isn't it? The real looming disaster is the Year 2000 problem, which may very well be the subject of a future column. We're now just two years away from the moment when unrepaired computers are going to believe it's 1900, and there's still not much evidence that corporations are taking the necessary steps to correct the problem. Deutsche Morgan Grenfell strategist Ed Yardeni recently upped from 30 percent to 40 percent his estimate of the chance that the world economy will enter a recession as a result of Year 2000 woes.

Java: All right, here's what's really happening. Sun Microsystems has sued Microsoft, claiming that Microsoft has violated its Java licensing agreement by distributing a version of Java software that is not 100-percent compatible with Sun's specifications. Sun also claims that Microsoft illegally distributed key Sun programming code when it released a test version of a set of Java development tools. Microsoft insists that the disputed version has never been released. Microsoft also countersued Sun for violating the same licensing agreement by not making tests, specifications, and other information about Java available to Microsoft when it did so to other licensees. The amount of money involved in the suit is piddling. The real questions involve Microsoft's continued access to Java--which it very much wants--and Sun's ability to carry through on its promise to replace Windows as a platform. To read the text of the licensing agreement, click here.

Analysts: The week our column on stock-market analysts and their undue impact on stock prices appeared, Joe Nocera published a piece in Fortune on stock-market analysts and their undue impact on stock prices, and Alan Deutschman published a piece in GQ on stock-market analysts and their undue impact on stock prices. Nocera's piece focused specifically on Intel, while Deutschman did a very nice job of elaborating on the conflicts of interest created by the fact that houses do both investment banking and brokerage. Both pieces are required reading for anyone looking to understand the way Wall Street works today. Meanwhile, Tom Kurlak, the semiconductor analyst who specializes in sudden changes of heart and loves to make earnings estimates that are much higher or lower than those of his colleagues, was voted to the Institutional Investor First Team all-stars yet again. Apparently, he's the best semiconductor analyst in the United States.

McDonald's Midlife Crisis: Those curious radio ads for the "Did somebody say McDonald's?" campaign continue to run, and the last time I looked, the local McDonald's still had golden arches. So, not much has changed. The one substantive new problem McDonald's faces is the success of Burger King's Big King sandwich, which is intended as an explicit competitor to the Big Mac but tastes much, much better. The Big King has been a big hit so far, but Burger King has been pricing it at 99 cents, so it's not clear if the sandwich's popularity will endure. Incidentally, if you're interested in McDonald's suicidal legal campaign against those anarchists who supposedly libeled it, the New Press has just published a solid new book about the case, called, fittingly enough, McLibel. It's worth checking out for its portrait of a company that has seemingly lost all sense of proportion.

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Consider it a case of exquisitely bad timing: Just as stock markets around the world were diving in response to currency troubles in Hong Kong and general unease about the future of Asian economies, China Telecom--that country's largest provider of cellular-phone service--went public. When the initial public offering was first announced, Hong Kong investors acted as if tickets to a Beatles reunion had gone on sale, lining up before dawn outside bank branches to procure the application forms needed to buy shares. By the time China Telecom actually made it to market, though, those same investors had other things on their mind--you know, minor things like whether the entire Hong Kong real-estate market was about to fall to pieces.

The same was true, to a lesser extent, of investors in the United States, to whom China Telecom must suddenly have looked less like a savvy investment in an infinitely expandable market and more like an overvalued investment in a region plagued by dubious financing practices and even more dubious accounting. The result was predictable. Where most IPOs this year have been strikingly successful--AMF Bowling, of all things, being just the latest company to see its share price jump--China Telecom's shares fell by 10 percent in the first three days of trading.

Of course, even with the bad timing, China Telecom did raise $4 billion, including $424 million in the United States alone, in the IPO. And the investment banks that underwrote the offering took home close to $100 million. So it'd be hard to call the deal a failure, especially when you consider that the company's shares rebounded sharply when the U.S. market rallied. In fact, from a certain angle, and especially given the turmoil in Asia, China Telecom's IPO looks like a real triumph, the kind of triumph, in fact, that makes you wonder, "What won't investors buy?"

That question is especially pertinent here in the United States, because the combination of a booming stock market at home and the privatization of state-owned enterprises abroad has meant a dramatic upsurge in the number of foreign companies whose shares are listed on U.S. exchanges. Through the end of August, 73 foreign corporations have gone public here this year, raising a total of $7.5 billion in capital. Since then, France Telecom, Bell Canada, and China Telecom all have been added to the list. (France Telecom did it in style, bringing cancan girls onto the floor of the New York Stock Exchange for the first day of trading.) By the end of the year, the number of foreign IPOs should surpass last year's record 98 offerings.

Foreign companies, of course, want their shares listed in the United States for the same reason that Willie Sutton robbed banks. The U.S. capital market is the world's largest. All the money that continues to pour into mutual funds has to go somewhere, and the rhetorical drumbeat of globalization has made investors more comfortable with companies like Spain's Telefónica de España and Brazil's Telebras, let alone companies like Toyota and Sony. The U.S. capital market is also exceptionally liquid, and price-earnings multiples are high. Foreign companies believe that U.S. listings both increase trading in their shares and improve valuations. An IPO, then, becomes a lucrative and relatively painless way of raising capital.

It's especially painless because the vast majority of the shares of foreign companies trade in the United States in the form of something called American Depositary Receipts. The ADR was invented--as was so much else--by J.P. Morgan in 1927, when he created the device so that U.S. investors could trade shares of a British department store called Selfridge's. Essentially, an ADR is a security, issued by a bank--the depositary--that represents a share in a foreign corporation. In most cases, the owner of the ADR does not have voting rights. In selling shares in the United States, then, foreign corporations can raise loads of money without suffering a dilution of the control they exercise over their own affairs.

"So what?" you might justifiably ask. After all, the overwhelming majority of U.S. investors never bother with their voting rights in U.S. companies, and the decline in the practice of paying out dividends means that most American stockholders care about only one thing: the price of their shares. And you can care about the price of an ADR just as easily as you can about the price of a bona fide share. If China Telecom's share price is going to double over the next year, why shouldn't you buy it?

If it is going to double, then you should buy. There, wasn't that easy? The problem, though, is that the ADR phenomenon has created a situation where U.S. investors are pouring billions of dollars into companies whose standards of financial disclosure and corporate governance are dramatically different from our own and which are, in some cases, nonexistent. That means, in turn, that it's hard to figure out whether a company will be profitable next year, let alone whether its stock price is going to double. And without full voting rights, there's nothing that investors--even institutional investors--can do if things go haywire.

Take Tsingtao Beer, for instance. It went public in 1993, and its shares were quickly snapped up. Instead of using the money it raised from the IPO to expand, though, it lent the $110 million to other Chinese state enterprises and then watched many of those loans go south. Needless to say, these plans had not been in the prospectus. Similarly, China Telecom has said that it will "explore opportunities for strategic investments in [China's] telecommunications industry." But it's not clear whether this really means "strategic investments" or whether it means "investments to prop up companies run by aging members of the CP." Of course, it's possible that the pressure from China Telecom's chief competitor may keep it on track. That competitor, incidentally, is a joint venture run by the People's Liberation Army, which brings new meaning to the words "price war."

The point is not that investing in foreign companies is necessarily a mistake. U.S. investment, in fact, is likely to improve standards of disclosure and accounting in many foreign corporations. And foreign investment is often crucial to a company's development. The U.S. railroads, for instance, would not have been built without British capital. But foreign investment takes place in a realm, even today, where the rules that govern U.S. markets do not always apply. "It has been most demoralizing," a British emissary to a U.S. company wrote his bosses in the late 1890s. "Even one of our own Directors in New York, when asked to give us some information as to what had become of the English capital sent out--what do you think he said? He told us, 'Well, really, Sir, that is what I am always asking, but which I can never get to know.' " It's not that hard to imagine a similar message being sent home by someone investigating what happened to Tsingtao.

What the fad for foreign IPOs ignores is the massive uncertainty still attached to foreign markets, even as it has led U.S. investors to overlook everything they take for granted at home: regular reports, corporate accountability, open books, the Securities and Exchange Commission. After all, transparent and efficient markets are not natural but rather man-made. And what the triumph of capitalism in the last decade has hidden is the reality that in most places, those markets have not yet been built. Caveat emptor, indeed.

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