Evening Update

M&A Deals Start Week Off in the Positive

Numerous global M&A announcements, possible aid to Greece and better-than-expected consumer spending were able to let the bulls loose to start the week, despite a report showing that the pace of growth in manufacturing sector slowed, construction spending declined, and personal income increased at a smaller rate than expected. UK insurer Prudential Plc agreed to acquire American International Group’s pan-Asian life insurance unit for about $35.5 billion, German pharmaceutical firm Merck KGaA is set to purchase biotech equipment company Millipore Corp for about $7.2 billion, while Japan’s Astellas Pharma Inc launched a hostile bid for US firm OSI Pharmaceuticals. In equity news outside of M&A, Dish Network reported 4Q EPS that exceeded forecasts. Treasuries ended the day fractionally higher and showed little reaction to the data.

The Dow Jones Industrial Average rose 79 points (0.8%) to close at 10,404, the S&P 500 Index was 11 points (1.0%) higher at 1,116, and the Nasdaq Composite gained 35 points (1.6%) to 2,274. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil was $0.96 lower at $78.70 per barrel, wholesale gasoline was down $0.03 to $2.16 per gallon, and the Bloomberg gold spot price fell $0.20 to $1,117.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.3% to 80.74.

Global M&A news dominated the headlines, with UK insurer Prudential Plc (PUK $16) announcing that it has reached a definitive agreement to purchase American International Group’s (AIG $26) pan-Asian life insurance unit AIA Group for approximately $35.5 billion. The deal includes about $25 billion in cash, $8.5 billion in equity and equity-linked securities, and $2.0 billion in preferred stock of Prudential. AIG said the cash portion of the agreement will go to pay down the debt it owes the US government. AIG was solidly higher and Prudential was under pressure.

Also, German pharmaceutical firm and liquid crystal supplier for flat panel TVs, Merck KGaA (MKGAY $27), announced that it has reached an agreement to acquire biotech equipment firm Millipore Corp. (MIL $105) for about $107 per share in cash, or a total transaction value of $7.2 billion. The transaction is expected to create a firm with a significant scale in high-growth bioresearch and bioproduction segments. The announcement follows last week’s speculation that MIL received a $6 billion takeover bid from Thermo Fisher Scientific Inc. (TMO $49), although the media reports were not confirmed. Shares of MKGAY and MIL were higher, while TMO relinquished an early gain and finished lower.

Continuing the M&A theme, Japan’s Astellas Pharma Inc. (ALPMY $38) announced that it will commence a tender offer to acquire all outstanding share of OSI Pharmaceuticals (OSIP $57), for $52 per share in cash, or approximately $3.5 billion. Astellas said the acquisition of OSIP would help it become a global leader in oncology. Astellas said the offer follows its attempts over the past 13 months to engage OSIP in meaningful discussions. OSIP is up over 50%. OSIP confirmed the receipt of the bid, but is advising stockholders to take no action at this time. The company noted that it had received an oral offer from Astellas in February with the same value of $52 per share and its Board of Directors determined that it was not interested in selling at that price, since it believed the proposal “very significantly” undervalues the company. ALPMY was lower, while shares of OSIP surged 52% on the news.

Elsewhere, Dish Network Corp. (DISH $21) reported 4Q EPS of $0.40, seven cents above the consensus estimate of Wall Street analysts, with revenues increasing 1.4% year-over-year (y/y) to $2.96 billion, compared to the $2.94 billion that the Street had expected. The satellite TV company said it gained approximately 249,000 net subscribers during the quarter. Shares were up nearly 8%.

ISM Manufacturing shows rate of growth slowed, while personal outlays come in mixed

Kicking off a busy economic week, the ISM Manufacturing Index (chart) fell to 56.5 in February from 58.4 in January, a larger decline than expected, with the Bloomberg survey of economists forecasting a reading of 58.0. The survey of executives is a diffusion index that reflects the number of people saying conditions are better compared to the number saying conditions are worse, with 50 being the level that separates contraction versus expansion. New orders and production remained strong, but reversed an upward trend, with new orders declining to 59.5 from 65.9, and production falling from 58.4 from 66.2. On a positive note, employment rose to 56.1 from 53.3, marking the third-straight month of growth in manufacturing jobs. The reading of exports showed the eighth straight month of growth despite declining to 56.5 from 58.5, while imports grew for the sixth consecutive month, coming in at 56.0 versus 56.5 the prior month.

During the economic recovery we have been experiencing, US companies benefitted from a declining dollar and strength in exports, while imports have been sluggish as US consumers have been slower to spend, in an effort to repair balance sheets savaged from a decline in net worth from the combination of lower home and stock prices, while debt levels remain high. However, the trend in the US dollar reversed late 2009 as concerns rose about the risk of government debt levels, highlighted by Dubai and Greece.

Meanwhile, personal income was 0.1% higher in January, below the Bloomberg estimate of 0.4%, and December was revised from a 0.4% gain to a 0.3% rise. Personal spending rose 0.5% in January, versus the 0.4% Bloomberg expectation, while December’s 0.2% increase was upwardly revised to a 0.3% gain. The savings rate declined to 3.3% in January, after a downwardly revised 4.2% for December.

Also, the PCE Price Index, which is released with the income and spending data, increased 2.1% year-over-year in January, compared to the consensus forecast of 2.2%, and December’s 2.1% rise was unchanged. The core PCE Price Index, which excludes food and energy, was flat, matching expectations. Year-over-year, core prices moved 1.4% higher, also inline with the consensus of economists surveyed by Bloomberg. Treasuries are slightly lower, showing little reaction to the income and spending data.

In other economic news, construction spending was also released this morning, falling 0.6% in January, matching expectations, and December’s 1.2% decline was left unrevised. A 1.1% increase in residential construction was offset by a 1.4% drop in nonresidential as weaknesses in manufacturing, healthcare, and office construction paced the decline.

Treasuries were marginally higher, as traders may be treading cautiously ahead of the nonfarm payroll report that comes at the end the week. The yield on the 2-year note was down 2 bps to 0.79%, the yield on the 10-year note decreased 1 bp to 3.61%, and the yield on the 30-year bond lost 1 bp to 4.55%.

Greece aid speculation and plentiful economic news garner attention

Speculation that Greece may gain assistance to finance its debt aided sentiment early as Greek Prime Minister George Papandreou is set to meet with Germany Chancellor Angela Merkel on March 5. However, EU Monetary Affairs Commissioner Olli Rehn commented that the debt-ridden nation must disclose additional measures shortly in order to help dispel European officials’ concerns of its current plan.

There was a plethora of major economic news in the eurozone, with February PMI Manufacturing reports in France, Germany and the overall euroarea being revised higher. France’s PMI was revised to 54.9 in February, above the 54.6 expected by economists polled by Bloomberg, and Germany’s PMI for February ticked higher to 57.2, slightly above forecasts of it remaining at the prior 57.1 reading. The PMI for the 16-member euroarea rose to 54.2 in February from the initial estimate of 54.1, and the highest level since August 2007, while the eurozone unemployment rate came in unchanged at a downwardly revised 9.9% for January, compared to the expectation that the rate would increase to 10.1%. The first look at February PMI manufacturing for the UK remained at 56.6, above the slight decline to 56.5 expected. Elsewhere, there were some GDP reports of note, as Italy’s annual GDP dwindled 5.0%, more than the Bank of Italy’s 4.8% forecast last month, while output in Sweden contracted 0.6%, well below the 0.3% rise expected.

In the Asia/Pacific region, two separate reports showed China’s PMI Manufacturing activity declined, with the main index falling from 55.8 in January to 52.0 in February, versus the decline to 55.2 that economists had expected, while Taiwan’s Manufacturing PMI improved in February. Elsewhere, Japan reported that vehicle sales rose 35.1% y/y in February on the back of government incentives.

There are no economic reports scheduled for tomorrow in the US. However, the international docket will include 4Q GDP from Switzerland and Australia, CPI from Italy and the Eurozone, Japanese PMI figures, and the Bank of Canada will release its monetary policy report.