Hayek said in a telephone interview that he plans to spend around 500 million Swiss francs ($327.4 million or 312.1 million euros) on acquisitions. He was talking to a number of possible takeover targets, and a deal could be announced soon. He refused to say with which companies negotiations are underway. However, he said Swatch was interested in acquisitions in Europe and the US; and in companies producing brand watches and electronic systems. In addition to its watch business, Swatch is active in micro-electronics; supplying components, for example, for mobile phones and other nonwatch related industries.

Focus on innovation

Further investments of up to 500 million francs also were planned. This would be spent on doublingproduction in growth areas of finished watches and micro-electronics, as well as on the launch of new products, Hayek said. He added that growth in the watch industry is obtained through innovation: Swatch's first innovation was making watches into a fashionable accessory; now innovation had moved to using high technology to "put everything into a watch, be it a telephone or Internet entry."

Swatch said net profit increased to 139 million francs in the first half, up from 128 million francs a year earlier. Gross sales rose 6.7 per cent to 1.62 billion francs, up from 1.52 billion francs a year earlier. Performance was particularly strong in Swatch's core business of branded watches, with sales rising in the finished watch sector by an overall 9.2 per cent.

Swatch said sales grew roughly 5 per cent in Europe, 12 per cent in Asia and Australia, and 13 per cent in North and South America. In addition to the Swatch brand, Swatch includes in its portfolio Omega, Longines, Blancpain, Rado, Tissot, Certina andCalvin Klein watches, among others.

Hayek said that he expects both sales and profits to accelerate in the second half, and he anticipates a higher net-profit growth for the full year. He estimated that sales of finished watches in the second half would be boosted by faster growth in Europe of up to 10 per cent and in Asia of up to 15 per cent. He expects sales growth in the Americas to remain at around the level of the first half.

Hayek said the second half had begun well, with finished watch sales rising 13 per cent in July; and, he added, an estimated up to 15 per cent in August. Other factors expected to boost growth in the second half include a cut in production costs and the introduction of new watches, he added.

Reducing forecasts

Bank Sal. Oppenheim analyst Freddie Hauslauer said he expects a full-year net-profit growth of over 10 per cent. However, Bank Sarasin analyst Markus Furler said that, after the announcement, he would reduce somewhat his full-year net-profit growth estimatefrom a previous forecast of 12 per cent.

"The bottom line was lower than expected," Furler said. In 1998, Swatch posted a net profit of 357 million francs on gross sales of 3.27 billion francs.

Sales of watch components to other companies decreased 12 per cent in the first half to 572 million francs, down from 653 million francs in the year-earlier period. The sector was hit by Japanese producers' massive oversupply of low-cost watch components and a consequent erosion of prices. Hayek said he expects the market to stabilise this half, as Japanese producers cut production. However, Bank Julius Baer analyst James Amoroso said that it was far from sure how long it will take to clear the market. He added that this uncertainty was of concern to investors.

In Thursday trading in Zurich, Swatch bearer share fell 2.7 per cent to 1,135 francs, from 1,166 francs. Amoroso said a further shadow was the news Thursday that Swatch would postpone completion of a share buyback program.

A reduction of share capitalafter share repurchases helped increase earnings per bearer share to 22.27 francs in the first half, from 19.48 francs a year earlier, and registered shares in creased to a P/E ratio of 4.45 francs, from 3.90 francs. Hayek said financial resources would be better used for acquisitions.

The Wall Street Journal