Monday's Merger Madness
It was a very busy day on Wall Street that echoed the glory days of the late 90's where Merger Monday's were commonplace. The markets were buoyed at the open on the merger news but stocks faded from their highs by the close. Earnings reports from three Dow components and a better than expected home sales report were not enough to keep the bulls focused. Caution ahead of tomorrow's FOMC meeting and news of four more lethal car bomb attacks in Iraq weighed on investor confidence.
U.S. exchanges got a boost from a strong Japanese NIKKEI index, which added 1.15% or 118 points to close at 10,454. The Hang Seng was also positive, up 13 points. European exchanges joined their Asian counterparts with the German DAX adding 1.87% or 64 points to close at 3517. The London FTSE closed higher by 12 points. By the end of today's session the DJIA was up almost 26 points to 9608. The NASDAQ added 17 points or 0.92% ending at 1882 and the S&P 500 squeaked out a 2-point gain to close at 1031.
Market internals were positive with advancing stocks outnumbering declining stocks nearly 19 to 9 on the NYSE and 20 to 10 on the NASDAQ. Up volume was strong on both exchanges, measuring almost 2-to-1 versus down volume on the NYSE and not quite 3-to-1 on the NASDAQ. Total volume was modest with 1.6 billion shares trading on the Big Board and 1.5 billion on the NASDAQ. Crude oil futures closed below the $30 a barrel mark, down 24 cents on the session while gold futures dropped $1 to $388.20 an ounce.
Chart of the DJIA:
Chart of the NASDAQ:
Launching the markets to an early lead was news that Bank of America (BAC) would pay $47 billion in stock to buy FleetBoston Financial (FBF). Together the two would become the nation's biggest consumer bank and their union would rank as the third largest merger (in financial value) behind the Travelers-Citicorp merger and Nations-BankAmerica merger, which both occurred in 1998. The acquisition would give FBF shareholders 0.5554 shares of BAC stock for each share of FBF owned, which equates to a 41.5% premium for FBF over Friday's close. Together the two banks would hold 9.8% of the nation's banking deposits, which is just below the 10% cap set by federal regulators. However, if the merger is approved the new entity can certainly grow their business beyond the 10% level. A merger of this size is going to come under a lot of federal scrutiny but management believes it will be completed in the first half of 2004. As expected shares of FBF soared today, ending higher by more than 23% while shares of BAC dropped more than 10% as traders worried that the company may have paid too high a price for growth.
The BAC-FBF news sent the financial sector in motion. Several regional banks like Coamerica Inc, KeyCorp, PNC Financial, Soveriegn Bancorp and SunTrust Banks all rose on speculation that further consolidation will make them takeover targets. The broker-dealer sector also jumped on the news. Big Wall Street houses Goldman Sachs, Merrill Lynch and Morgan Stanley, all with large investment banking arms, were trading higher since additional M&A activity means big business for them.
Speaking of big business, the two largest Blue Cross Blue Shield providers also announced a merger today. Anthem (ATH) announced it would buy its larger rival WellPoint Health Network (WLP) for more than $16 billion in cash and stock. In a somewhat convoluted agreement, ATH is buying WLP for nearly $24 in cash and one share of stock for each share of WLP. Yet WLP shareholders will own more than 53% of the new entity and the combined corporation will be call WellPoint Inc. The merger will create the nation's largest health insurer.
Another health insurance merger was announced today with UnitedHealth (UNH) declaring its intent to purchase Mid Atlantic Medical Services (MME). The agreement has UNH spending $18 in cash and 0.82 shares of its stock for each share of MME, which gives MME shareholders a 16% premium over Friday's closing price. All told the deal will measure about $3 billion. The two health insurance mergers today had shares of Oxford Health (OHP) trading higher on takeover speculation.
Monday's merger news wasn't confined to financials and healthcare. Technology companies also got into the act. Symantec (SYMC) has agreed to buy On Technology (ONTC) in a deal worth $100 million in cash. Meanwhile Ciber (CBR) announced it is buying SCB Computer Technology (SCBI) for $90 million in cash and stock. Plus, the Internet empire built by Barry Diller expands to France as InterActive Corp (IACI) declares plans to buy Anyway.com, a French subsidiary of Canadian tour operator Transat for almost $63 million.
As if that wasn't enough merger news R.J. Reynolds Tobacco (RJR) announced after the closing bell today their plans to buy rival cigarette maker Brown & Williamson, a division of British American Tobacco (BTI). RJR plans to spend $2.6 billion in cash and stock for a 58% ownership in the new company to be named Reynolds American. The new entity will have 30% slice of the U.S. cigarette market with $10 billion in sales a year under their combined brands American Spirit, Camel, Kool, Lucky Strike, Pall Mall and Winston.
The breakout of merger news overshadowed earnings announcements from three Dow components. American Express (AXP) turned in Q3 earnings that beat estimates by a penny with 59 cents a share. Revenues were strong and the company guided to the high end of previous forecasts for the full year but investors seemed disappointed that results weren't stronger. Shares lost 1.82%.
Fellow Dow component International Paper (IP) fared poorly as well. Shares lost more than 1% after reporting Q3 earnings that were worse than year-ago levels and missed current estimates by a penny. IP's net income of 24 cents a share was hurt by weak demand and pricing for its paper and packaging products. Management was quoted as saying the fourth-quarter "looks tough".
The third Dow component to announce today was consumer products giant Procter & Gamble (PG). The company reported Q3 earnings that rose 20% over a year-ago period but only managed to beat current estimates by a penny. Net income came out to be $1.26 a share with revenues up 12.9% to $12.2 billion, which was above analyst estimates. PG said its third quarter was boosted by strong demand for its heartburn drug Prilosec and cost cutting.
Housing Market Hot
Counter balancing the lackluster earnings news was a better than expected existing home sales report. Home sales in September were on fire as sales rose an unexpected 3.6% to a record-setting 6.69 million annual pace. New home sales were flat at $1.145 million, but remained at a very strong pace. Analysts had been estimating small declines in September home sales. Mortgage rates are up off their 40-year lows from June but homebuyers are taking advantage of rates that remain near historically low levels. It is a common train of thought that home sales create demand for appliances, home furnishings and furniture. Thus, the high pace of home sales is yet another clue to the improving economic picture and strong consumer demand.
It may have been a positive Monday on Wall Street but it was a bloody one in Iraq. The media is reporting that four attacks/car bombs have hit three Iraqi police stations and one Red Cross building in Baghdad. The violence claimed another 30 to 35 lives and wounding more than 230, mostly Iraqis. The Iraq situation may no longer be a factor influencing the markets but if conditions continue to heat up it is unclear how it may affect the future of American consumer confidence and investor sentiment. Crossing the wires this evening is another warning from the U.S. government urging citizens to avoid all non- essential travel to Saudi Arabia due to "credible" information regarding terrorist activities. This in and of itself should not affect trading in the U.S. exchanges but should extremists strike down a passenger plane entering or leaving Saudi then we could see a sharp reaction in the markets.
Hopefully we'll see some follow through on the rebound from Friday's low but a lot may depend on earnings news and economic reports out tomorrow. The Durable Goods Order report will be out before the opening bell. Shortly after the open should be the Consumer Confidence report. Later in the afternoon will be the FOMC meeting on interest rates. Everyone is expecting the Fed to leave rates unchanged at the 41-year low of 1% but all eyes and ears will be focused on what they have to say about the economy, the recent signs of improvement and any new concerns over the d- word (deflation). Overall the rash of merger news today is a healthy sign of stronger investor confidence. These big corporations would not be making these kinds of acquisitions if they didn't think the economy wasn't improving.