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M&A Fever Sweeps the Street

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Relationships are being forged left and right.

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"Donger's here for five hours, and he's got somebody. I live here my whole life, and I'm like a disease."
--
Samantha Baker, Sixteen Candles


Spring has sprung and love is in the air. True to form, companies across various industries are hooking up in the fertile meadows of fresh promise, with many relationships being consummated without management's blessing.

Last night, while appearing on FBN America's Nightly Scoreboard, we tackled these trysts en masse. In particular, we mused about whether they're arriving out of necessity or opportunity and if they'll continue at such a rapid pace. Here are some top-line vibes, straight from the innards of Studio B:

Yahoo (YHOO) and Microsoft (MSFT)

  • In the next-gen mediascape cell phones, plasmas and laptops are the same.
  • In that centrally served world, networks will become channels.
  • Eyeballs equal audience. Yahoo has massive reach and Microsoft sees the value therein.

Prognosis: Microsoft will hold the line on its offer and the merger will go through.



Take Two-Electronic Arts (TTWO)

  • Madison Avenue has been squeezed from traditional channels.
  • TiVo (TIVO) allows you to fast forward through commercials.
  • Satellite radio has pushed advertising away from radio.
  • The Internet has been the main beneficiary.
  • Video games, with their captive eyeballs, is the next intuitive spend.


Prognosis: Electronic Arts (ERTS) sees the secular upside on the advertising side and so does Take-Two. I have no strong opinion on whether this deal closes with the original terms but I like this sector on a relative basis.


Newsday, NY Times (NYT), Zell's Purchases

  • Content is king.
  • The online migration of advertising has been priced in.
  • The portals will need content. I wouldn't be surprised to see portals acquire newspapers as the next iteration of media consolidation.

Prognosis: I'm warming up to the newspaper stocks, including Gannett (GCI), McClatchy (MNI) and NYT.


Northwest (NWA) and Delta (DAL), Possible Continental (CAL) and United (UAUA) Deal

  • Scale won't solve the price of crude.
  • This complex is a prime candidate for nationalization

Prognosis: While we could see trading rallies (when crude 'pops'), I have no interest in being involved with these names (or air travel, for that matter!).


Bank of America (BAC)-Countrywide (CFC), JP Morgan (JPM)-Bear Stearns (BSC)

  • Ken Lewis, CEO of Bank of America, probably got the same call that Jamie Dimon got. He just didn't get the Fed put in his back pocket, as JPMorgan did.
  • There are five options for the financials: massive issuance, buy-side interest, Sovereign Wealth Funds, consolidation and closing their doors.
  • Able acquirers are fading.
  • The credit crunch will take years to unwind.
  • The financials historically bottom below book value. On the March lows, the S&P 500 financials had a valuation of about 1.3 times book.
  • During the 1989-1991 recession, approximately 25% of the financial universe disappeared. The tally for this recession is less than 7%.

Prognosis: Deals will close but it'll likely be a function of need rather than want. Look for more dilution in the complex, potential acquisitions by hedge funds, sharp rallies in the context of a bear market (many stocks are 50% lower since October), further toxicity on the balance sheets and continued government intervention. "Containment vs. contagion" remains the single most important dynamic, not only for the financials but for the world at large.

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No positions in stocks mentioned.
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