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FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer

SmithKline May Be Welcoming Glaxo

SmithKline Beecham <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBH)") else Response.Write("(NYSE: SBH)") end if %> gained $5 11/16 to $68 13/16 and Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> jumped $9 3/16 to $63 this morning after the two companies announced they are well along in discussing a merger under which Glaxo shareholders would own 59.5% of the new combined company. SmithKline had been in merge talks with American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %>, which was down only $2 5/16 to $93 1/18 this morning. Upon performing due diligence on American Home, SmithKline pulled away because of possible liabilities arising from the phen-fen diet drug debacle. Interesting, too, is that two U.K. companies are talking, which removes the issues that would come along with a trans-Atlantic merger.

The Wall Street Journal this morning identified the research & development synergies that would come about from the combination. The huge cost of developing new drugs and steering them through world regulatory processes, as well as the "cornucopia" of biotechnology-driven opportunities available to the drug industry, demand the resources of a massive company. It's not that different from the experience of Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %>, General Dynamics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GD)") else Response.Write("(NYSE: GD)") end if %>, or Airbus Industrie. Those companies all have to spend a couple hundred million to a few billion dollars to get a new product developed and into production. What's better for drug companies, though, is that once a drug or treatment has been successfully developed, margins are huge and patents protect the intellectual property of the product. The resulting products are cash cows because the content is a few molecules of protein and not a 225 foot-long mass of specialty metals and avionics.

The merger valuation being bandied about is $65 to $70 billion, but the market cap of Glaxo Wellcome has shot up to a new high in London trading. At 70.1 billion pounds sterling, the implied deal price on SmithKline is closing in on $79 billion, or $72 per share. With a prospective market cap of $200 billion, the combined company would share a characteristic or two with other tech giants, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. Those companies can issue very few shares (relative to their size) to acquire smaller companies, thereby helping them build their portfolios while minimizing the risk of earnings per share dilution on each individual deal. In that way, the secondary market functions as a wealth builder for employees, shareholders, and society.

In anticipation of the need to approach the size of this new global dreadnought, drug companies around the world are being bid up today. Novartis was bid up 2.25% in Swiss trading, Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> gained $2 to $68 15/16, Bristol Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> gained $3 1/2 to $103 3/16, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> rose $2 11/16 to $84 7/16, Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> ticked up $1 1/4 to $118 5/8, Warner Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> improved $5 1/2 to $156, Eli Lilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> nosed ahead $3 1/8 to $70 3/4, and Zeneca Group plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZEN)") else Response.Write("(NYSE: ZEN)") end if %> jumped $13 7/16 to $132 1/2.

UPS

Health and annuities insurance company Aetna <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> gained $3 1/8 to $76 5/8 after the Wall Street Journal reported that the company is contemplating the sale of its individual life insurance unit, which currently has written coverage of $50 billion. That would leave the company free to concentrate on the tough business of health insurance with the U.S. Healthcare unit. Some must think the rumored sale is a prelude to buying Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %>, since Aetna followed the same pattern of divesting businesses before buying U.S. Healthcare. That Oxford rumor surfaced on Friday afternoon and has sent Oxford up another $1/4 to $17 3/4 this morning.

Magnetic resonance imaging (MRI) equipment company Advanced Magnetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AVM)") else Response.Write("(AMEX: AVM)") end if %> jumped $2 7/16 to $13 11/16 after being glowingly profiled in Alan Abelson's "Up and Down Wall Street" column in this week's Barron's. Hedge fund manager Mark Lampert told Abelson that he sees any one of three products earning the company a "couple of dollars a share."

Firstbank of Illinois <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FBIC)") else Response.Write("(Nasdaq: FBIC)") end if %> gained $2 5/8 to $40 5/8 on agreeing to merge with St. Louis-based Mercantile Bancorp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTL)") else Response.Write("(NYSE: MTL)") end if %>. Each share of Firstbank is valued at a 10% premium, equal to 0.8308 shares of Mercantile, or $41.96 as of Friday's close.

Lake Tahoe casino operator Harvey's Casino Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HVY)") else Response.Write("(NYSE: HVY)") end if %> jumped $4 to $26 11/16 after the company agreed to be purchased for $28 per share in cash by a private buyer, which includes the company's Chair and CEO, Chuck Scharer.

Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NA)") else Response.Write("(NYSE: NA)") end if %> rose $2 1/4 to $43 5/8 after the cookie, cracker, and foods unit of RJR Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> announced the resignation of its Nabisco Biscuit Co. president and the appointment of a new president. The new biscuit guy comes from Diageo, the successor company to the merged Grand Metropolitan and Guinness. RJR also gained $1 1/16 to $32 1/2 on the news. This move comes on the heels of last week's announcement that Nabisco was disappointed with its biscuit unit's performance.

BGS Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGSS)") else Response.Write("(Nasdaq: BGSS)") end if %> blasted ahead $7 1/4 to $43 3/4 after the software performance tools company agreed to be acquired by software tools developer BMC Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BMCS)") else Response.Write("(Nasdaq: BMCS)") end if %> for $45 per share in BMC stock.

DOWNS

Semiconductor fabrication process equipment company Etec Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ETEC)") else Response.Write("(Nasdaq: ETEC)") end if %> fell $1 to $40 1/2 after the company discovered a problem with a "critical subassembly" and said the problem will lead to a postponement in shipping an Alta 3500 mask and reticle writing system. According to the company, this will bring revenues and earnings for the second quarter significantly below what investors and analysts had been expecting.

National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> was bounced for a $4 3/4 loss to $23 3/8 after the company said shipments to South Korean customers have slowed and that shipments of chips for wireless telecom equipment have slowed due to macroeconomic factors in East Asia. In addition, the company expects a sequential decline in Cyrix sales due to process difficulties.

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Dale Wettlaufer (TMF Ralegh), Fool One

Alex Schay (TMF Nexus6), Fool Two
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Brian Bauer (TMF Hoops), Fool Three
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