At long last, the CVS (NYSE: CVS), Caremark Rx (NYSE: CMX), Express Scripts (NASDAQ: ESRX) menage-a-trois has been settled. CVS will acquire Caremark Rx for $26.5 billion. Bidding for Caremark Rx by both Express Scripts and CVS has been going on in public for several months. Due to pressure from Express Scripts, which had sought to acquire Caremark Rx to form a huge pharmacy-benefits management company, CVS will pay a hefty premium after sweetening the deal on three separate occasions to beat back acquisition overtures from Express Scripts. Up to the proverbial last minute, Express Scripts insisted it would meet or exceed any CVS offer if only Caremark Rx would be more forthcoming with company information. According to Dinah Brin of The Wall Street Journal, Express Scripts had offered 0.426 of its own shares plus $29.95 in cash for each Caremark share. It also agreed to a penny per share daily fee during the closing period. Federal antitrust regulators had concerns about this deal, which again opened the door for another offer by CVS.

CVS will pay 1.67 of its own shares plus $7.50 in cash for each Caremark share. CVS shareholders will own 54.5% of the new company, while Caremark Rx shareholders will own 45.5 %. CVS had argued in print that the Express Scripts' proposal would create a company that was so highly leveraged it would rate a "junk" credit rating. Also, the combined Express Scripts-Caremark company would be many times larger than any deal Express Scripts had previously negotiated. It would be very difficult for Express Scripts to integrate Caremark into a combined company.

Express Scripts management had argued that both Express Scripts and Caremark are pharmacy-benefits management companies, whereas CVS is a drug retailer trying to acquire a pharmacy-benefits company it does not understand and will not know how to run.

CVS and Caremark management estimated half a billion dollars in cost savings annually from the combined company, with annual revenues closing in on close to $1 billion by some optimistic estimates. The combined company hopes to use its size to increase bargaining power against Walgreen Company (NYSE: WAG), Wal-Mart Stores, Inc. (NYSE: WMT) and Medco Health Solutions, Inc. (NYSE: MHS), the nation's largest pharmacy-benefits management company.

Investors are used to receiving conflicting ideas about what to do with their money, but at the exact same minute, Marketwatch reported two different ideas for Caremark RX, Inc. (NYSE:CMX) shareholders. At 1:58 PM, Michael Baron reported that Express Scripts urges Caremark shareholders to nix CVS deal. After that, or perhaps immediately before, I don't really know, Katherine Hunt reported that CVS urges Caremark shareholders to vote for merger.

CVS Corp. (NYSE:CVS)pointed to the "conditionality and risk" inherent in Express Scripts' offer. Express Scripts (NSADAQ:ESRX) said that "If we discover additional value during due diligence, it is only logical that we could increase our offer."

I don't know about you, but these takeover battles are the most exciting part of following the market. I'll be continuing to follow this one closely.

Walgreen Co. (NYSE:WAG) opened at $44.28. So far today the stock has hit a low of $44.24 and a high of $45.05. As of 1:00 this afternoon, WAG is trading at 44.10, down 0.04 (-0.1%), well off its morning highs.

After hitting a one year high of 51.60 in September, the stock dropped sharply and has since seen resistance around 47. Tensions over the deal between CVS (NYSE:CVS) and Caremark (NYSE:CMX) wreaked havoc on drug store stocks yesterday, including a big dip in WAG stock yesterday afternoon. Most of these stocks bounced back earlier today but are now sliding with the rest of the market, with the CVS/CMX vote scheduled for tomorrow. The technical indicators for WAG have been bearish and steady, while S&P gives the stock positive 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $37.50 range. WAG hasn't been below 39.50 at all in the past year, and has shown support around 40. This trade could be risky depending on how the CVS-CMX deal turns out, but the strong support for WAG around 40 could protect this position.

Brent Archer is an options analyst and writer at Investors Observer. (Free Subscription)

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about.

CVS Corp. (NYSE: CVS) opened at $31.90. So far today the stock has hit a low of $31.81 and a high of $32.28. As of 12:40 this afternoon, CVS is trading at $32.03, up $0.71 (2.3%).

Shares have recovered a bit over the past few months, showing support around $31. Though rival Express Scripts (NASDAQ: ESRX) has increased its offer for the hostile takeover of Caremark Rx (NYSE: CMX), CVS officials say that the CVS buyout offer will likely prevail due to antitrust concerns regarding the Express Scripts offer. The technical indicators for CVS have been bullish but deteriorating, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.

For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $27.50 range. CVS hasn't been below $27.50 in the past year except for a few days in November and has shown support around $30.75. This trade could be risky depending on what happens with the CMX-ESRX-CVS mess, but even if CVS pulls back some, this position could be protected by the strong support just below $28.

Brent Archer is an options analyst and writer at Investors Observer (Free Subscription). DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about.

Express Scripts Inc (NASDAQ: ESRX) upped its offer for Caremark RX Inc (NYSE: CMX) last night. Express, a pure pharmaceutical benefits management company, or PBM, is in a battle with CVS Corporation (NYSE: CVS), the pharmacy chain, over Caremark.

Express supposedly raised its offer over concerns that it will soon receive a second request from regulators. This would most likely mean the deal would not close for another six to nine months. CVS and Caremark have already received regulatory approval with the shareholder vote coming in a few weeks.

This is a bizarre transaction in that a PBM like Caremark has never merged with a pharmacy chain like a CVS. Shareholders believe Caremark management and board is acting in their own best interests rather than the interest of shareholders. Actually, there are few sell-side analysts or shareholders who know the industry well who actually see the business merits of the two companies merging.

Meanwhile, as this battle unfolds, it appears the fundamentals for this industry are improving. Medco and Express both reported very strong results and guided to strong results.

Express' management is very well-respected and most believe would do a very good job working with Caremark. The battle is set for the shareholders' meeting set in the next few weeks. We will see if Express increases their offer again prior to the shareholder meeting.

MOST NOTEWORTHY: The New York Times Co (NYT), Moody's Corp (MCO), Nokia Corp ADS (NOK) and Circuit City Stores (CC) were some of today's most notable downgrades:

• Lehman Brothers cut the New York Times Co (NYSE: NYT) to Underweight from Equal-Weight as they believe the company's recent cost cuts reflect management's concerns over its top-line.

• Moody's Corp (NYSE: MCO) was downgraded to Underperform from Neutral at Credit Suisse based on the potential to impact from a slowdown in collateralized debt obligation issuance on growth.

• Nokia Corp ADS (NYSE: NOK) was removed from Goldman Sachs's Conviction Buy List based on its recent strength.

• William Blair cut Circuit City Stores (NYSE: CC) to Underperform from Market Perform as the firm has concerns over the slowing of the advanced TV cycle and challenges to the company's turnaround plans.

OTHER DOWNGRADES:

• UBS lowered Cypress Semiconductor Corp's (NYSE: CY) rating to Neutral from Buy based on valuation.

• Citigroup cut BAE Systems plc ADR (OTC: BAESY) to Hold from Buy.

• Raymond James downgraded Caremark RX (NYSE: CMX) to Market Perform from Outperform.

• Matrix USA downgraded The Goodyear Tire & Rubber Co (NYSE: GT) to Hold from Buy and removed the company from its Focus List as they see little upside from its recent rally.

• Nollenberger downgraded shares of Station Casinos (NYSE: STN) to Neutral from Buy after the company accepted a revised buyout offer from Fertitta Colony Partners as they feel the chance for a higher offer to emerge is unlikely.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Monday February 19

• U.S. markets closed for President's Day holiday

Tuesday February 20

• Wal-Mart Stores (NYSE: WMT) to report Q4 earnings; conference call at 7:30am. Analysts will review Wal-Mart's same store sales, overall traffic, new products displayed, overall product mix, employee retention rates, sector position, and margins, along with Wal-Mart's overall global new store opening timetable, including store square footage expansion targets.
• Hewlett Packard Company (NYSE: HPQ) to report Q4 earnings; conference call at 5pm. Analysts will be focusing on HP's overall revenue, the performance of their various divisions, and any comnent's HP makes about the effect of the launch of Microsoft Corporation's (NASDAQ: MSFT) Vista on sales.
• Caremark Rx (NYSE: CMX) had scheduled a special shareholder meeting regarding the CVS Corporation (NYSE: CVS) merger today. It was postponed until at least March 9 by the Delaware Chancery Court to allow more time for dissemination of information.

Wednesday February 21

• Nokia Corporation (NYSE: NOK), Sprint Nextel Corporation (NYSE: S) and Qualcomm Inc (NASDAQ: QCOM) to hold press conference, according to PhoneNews.com, which speculated that the conference could be the end of patent disputes between Nokia and Qualcomm, meaning Nokia may announce a return to CDMA handset distribution, with EV-DO chipsets.

Thursday February 22

• BEA Systems Inc (NASDAQ: BEAS) to report Q4 earnings; conference call at 5pm. Note that BEA Systems just concluded a stock options review that did not result in a breakup in management, which Pacific Crest Securities believes removes an overhang on the company.

Friday February 23

• CVS Corp had scheduled a shareholder meeting today, but it has been postponed in light of the Delaware Chancery Court's decision to enjoin the February 20, 2007 shareholder meeting of Caremark Rx.

Yesterday a Delaware judge, Chancellor William B. Chandler III, stepped into a takeover battle between CVS Corp. (NYSE: CVS), CareMark Rx, Inc. (NYSE: CMX), and Express Scripts, Inc. (NYSE: ESRX) because CMX's board has fallen down on the job.

For the last several weeks, I've been a fairly lonely voice in the wilderness (: <) railing against how CMX directors were low-balling its shares to CVS in order to protect CMX's management team. At one point, ESRX's bid was $5 billion above CVS's. I made such comments here, here, here and here.

But in the last week, I've gotten some company -- specifically, Glass, Lewis & Co., CtW Investment Group and Institutional Shareholder Services said that CMX's board is not getting the best deal for its shareholders and urged, before the latest CVS offer, that Caremark shareholders reject the bid.

Yesterday there was a new development. Chandler intervened to delay the shareholder vote on the CVS/CMX deal from February 20 to at least March 9. A major shareholder, Louisiana Municipal Police Employees' Retirement System (LMPERS), sued for more time to consider the CVS offer. The judge granted LMPERS's request after reading an SEC filing in which CMX disclosed that it met with ESRX in 2001, 2003 and most recently in 2005 to review potential transactions -- meetings which Chandler concluded a reasonable shareholder would find "highly relevant." Chandler also set an injunction hearing for February 16, which could possibly halt or delay the CVS deal.

Perhaps now the shareholders of Caremark Rx Inc. (NYSE:CMX) will listen to the notion expressed here last week by Peter Cohan that they are getting screwed by the company's decision to accept the purchase offer of pharmacy giant CVS Corp. (NYSE:CVS). Proxy firm Glass Lewis & Co. released a report this week that concluded the Caremark team had not done a proper job of exploring all opportunities before shaking hands with CVS and, by implication, was leaving money on the table.

This report is yet another prod to Caremark stockholders to nix the deal and send the management team to the woodshed. Much of the controversy follows a bid for Caremark, a benefits management company, from Caremark's competitor Express Scripts Inc. (NASDAQ:ESRX). The higher offer was received a month and a half after the CVS deal was announced. CVS responded by adding a $2 dividend and a 150 million share repurchase to its offer.

Caremark ended the week at $61.32. According to Reuters, today the value of the CVS offer stands at about $24.51 billion, while Express Scripts' is valued at $25.67 billion. But what's a billion dollars among friends?

Beyond the numbers, a war of words has been steaming up the financial news pubs as CVS and ES trade accusations, using words like "smoke and mirrors" and "flawed and value-destroying."

This might be a wonderful stockholder's meeting to eavesdrop on.

MAJOR PAPERS:

• A full page advertisement by CVS Corporation (NYSE: CVS) in this morning's Wall Street Journal (subscription required) warned Caremark Rx Inc (NYSE: CMX) shareholders that their "[investments] would be at risk" under Express Scripts' (NASDAQ: ESRX) proposal and recommended the CVS/Caremark merger. Also in the Journal:
• Investors at Clear Channel Communications Inc (NYSE: CCU) believe they are being short changed and have started a showdown with private equity buyers.
• The NYSE Group Inc (NYSE: NYX) and the Tokyo Stock Exchange are expected to announce an alliance.
• US Airways Group (NYSE: LCC) may increase its offer for Delta Air Lines (OTC: DALRQ).
• The Financial Times (subscription required) featured articles on News Corporation (NYSE: NWS) and Corus Group ADS (NYSE: CGA).
• News Corp's MySpace is close to launching local versions in Canada and Mexico.
• Tata Steel is expected to top CSN's offer for Corus Group at a takeover auction on Tuesday.

OTHER PAPERS:

• USA Today wrote that two years ago, Verizon Communications' (NYSE: VZ) Verizon Wireless turned down the opportunity to be the exclusive distributor of the iPhone in the U.S. because of Apple Inc's (NASDAQ: AAPL) financial terms and other demands.
• Investor's Business Daily's "New America" column mentioned Universal Stainless & Alloy Products (NASDAQ: USAP) positively, writing that Universal is looking to expand abraod with little foreign competition. The specialty steel products company focuses on the aerospace and power industries and named Boeing Company (NYSE: BA) as a key customer.

MOST NOTEWORTHY: Dominion Resources (D), Caremark RX (CMX), Intel (INTC) and CVS Corp (CVS) top today's extensive list of downgrades.

• Dominion Resources, Inc. (NYSE:D) was downgraded to Sell from Hold at Deutsche Bank and to Underperform from Hold at Jefferies. Both firms cited the E&P sale that would lead to near-term dilution.
• Caremark Rx, Inc. (NYSE:CMX) was downgraded at Wachovia to Market Perform from Outperform citing the merger with CVS Corp (CVS) valued Caremark RX too low. First Albany and FTN Midwest also downgraded Caremark RX to Neutral, citing the merger with CVS Corp.
• Intel Corp (NASDAQ:INTC) was downgraded at Merrill Lynch to Neutral from Buy, citing weakened demand and increased capacity.
• CVS Corp (NYSE:CVS) was downgraded to Hold from Buy at Deutsche Bank citing the uncertainties of the Caremark RX (CMX) merger. CVS Corp was also downgraded by William Blair to Market Perform from Outperform.

OTHER DOWNGRADES:

• Morgan Stanley downgraded MasterCard, Inc. (NYSE:MA) to Equal Weight from Overweight.
• Robert W. Baird downgraded SRA Int'l (NYSE:SRX) to Neutral from Outperform based on lower than expected organic revenue near-term, federal agencies to operate under CR beyond mid-November, recruiting retention challenges and valuation.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Futures are positive in early morning trade, pointing to a higher start for stock.

Today investors will analyze the data from the retail sector, they will look at some economic indicators for an idea about employment, inflation and productivity. Strong retail sales could help the market rally, as are the falling oil prices of this morning.

This morning, some retailers have already reported same-stores sales and the market is now looking for a 3.4% rise in October for the industry, or a 4.9% increases ex-Wal-Mart Stores, Inc. (NASDAQ:WMT). Wal-Mart said last week it is expecting a 0.5% gain in same-store sales (sales at stores that have been open at least a year). It had just reported as expected.

Already reporting sales data this morning are Costco Wholesale Corp. (NASDAQ:COST) with a 4% rise, Pier 1 Imports, Inc. (NYSE:PIR) with an over 13% decline in sales, and American Eagle Outfitters, Inc. (NASDAQ:AEOS) that reported an 8% jump in same-store sales last night. AEOS also raised third-quarter earnings guidance. The stock might still be under pressure as some were expecting a 10% rise in sales. Walgreen Co. (NYSE:WAG) Oct same-store sales rose 11.4% and J.C. Penney Co.'s (NYSE:JCP) sales rose 8.1%.

This morning, some economic data is also due out. First, weekly jobless claims will be released at 8:30, but investors are waiting the main job report tomorrow. Also at 8:30, third-quarter productivity and unit labor costs will be reported. Unit labor cost could give investors a better idea about inflation, so barring any surprises, this is the number to watch out for. Finally, at 10:00, September factory orders are due. The European Central Bank makes its decision on interest rate today.

Top news stories this morning:

According to the Wall Street Journal, Tribune Co. (NYSE:TRB) said that due to low bids, it is now prepared to sell parts of the business and will consider offers.

Unilever NV/PLC (NYSE:UN, UL) reported a third-quarter profit drop of 48% after one-time gains from asset sales. Sales rose 1.6%. The figures were at the top end of market forecasts. Unilever shares were up over 4% in Europe.

Reporting today:

• Caremark Rx Inc. (CMX) - 63 cents per share for Q3.
• CVS Corp. (CVS) - 32 cents per share for Q3.
• International Paper Co. (IP) - 43 cents per share for Q3.
• Whole Foods Market Inc. (WFMI) - 29 cents per share for Q4.

Other stories:

Electronic Data Systems Corp. (EDS) reported third-quarter after the bell yesterday with profit climbing sharply to 24 cents per share on a 9% increase in revenue of $5.29. However the company said contracts for future work declined. Analysts were expecting 20 cents per share.

Apple Computer, Inc.'s (NASDAQ:AAPL) new iPod Shuffle will arrives in stores this Friday, tomorrow.

Goldman Sachs upgraded Dell, Inc. (NASDAQ:DELL) to neutral from sell.

General Electric Co. (NYSE:GE) has signed a $300 million deal with a Chinese company to make jet engine parts for it.and French engine maker Snecma.

In the auto industry:

• New car registrations in Germany are expected to have risen in October with foreign automakers boosting their share of Europe's biggest car market to 36.1%.
• Advanced Auto Parts Inc. (NYSE:AAP) reported Q3 (ending Oct 7) net income dropped to $58.9 million, or 56 cents a share but it includes 3 cents a share in stock option expense. Revenue rose to $1.1 billion from $1 billion. Analysts expected earnings of 54 cents a share. The company also lowered Q4 guidance.

Following Baidu.com, Inc.'s (NASDAQ:BIDU) earning, yesterday I revisited rumors of Google, Inc. (NASDAQ:GOOG) or Yahoo!, Inc. (NASDAQ:YHOO) buying Baidu.

Google is releasing a new version of its mobile email today.

Yahoo is going into the food business starting a site offering thousands of recipes, advice from chefs, video cooking guides and easy-to-use Web tools to help cooks answer the daily question: What's for dinner?

Hewlett-Packard (NYSE:HPQ) will have a fourth quarter earnings call on Thursday, Nov. 16, 5:30 p.m. ET/2:30 p.m. PT here.

Wendy's (NYSE:WEN) is offering DVD movie kiosks at its restaurants.

In Pharma: Global pharmaceutical sales grew 5% in the 12 months to August in leading markets, the same rate as recorded a month earlier. Pfizer Inc's (NYSE:PFE) Lipitor cholesterol pill remained the top-selling drug with sales of $11.6 billion.

Russian oil output fell again in October partly because the country and Exxon Mobil (NYSE:XOM) holding back the start up of full-scale production due to differences.

XM Satellite Radio (NASDAQ:XMSR) and Cingular Wireless (held by AT&T (NYSE:T)) announced a partnership to stream 25 XM music channels to Cingular handsets.