New data from Dealogic shows that July was the fifth straight month of growth in U.S. mergers and acquisitions activity -- and the highest total since a year ago.
But it's not quite as good as it looks. The data is skewed upward by foreign bids for American companies like Genentech (NYSE: DNA) and Anheuser-Busch (NYSE: BUD) and, according to the Associated Press, "the rise in M&A ... more likely reflects foreign companies taking advantage of the weak dollar than it does a loosening of credit."
But from an investors' perspective, the cause of the increase probably doesn't really matter. Deep value investors like Mohnish Pabrai have been struggling to post strong returns of late, in part because the private equity funds that could be relied on to buy undervalued companies a couple years ago have brought their U.S.-based activity to a hault.
But now the foreign companies and sovereign wealth funds are in the game and, from an investors' perspective, that's just as good -- whoever will buy undervalued public companies at a premium will boost returns. The low price-book, low price/earnings, contrarian investment strategies that haven't worked lately could be ready to start working again, just as they have historically.
Genentech (NYSE: DNA) is recently trading at $93, above its close on Friday of $81.82.
Roche Holding AG offered to buy the rest of DNA for $89 in cash. Roche, the world's largest maker of cancer drugs, acquired a majority in DNA in 1990 and currently owns 55.9% of DNA. Goldman Sachs says: "We expect the independent directors to negotiate with Roche for a higher price."
DNA August option implied volatility of 31 is near its 26-week average according to Track Data, suggesting non-directional price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
This morning's announcement that Roche wants to pay $43.7 billion for the 44.1% of Genentech (NASDAQ: DNA) it doesn't already own raises the question: "Why is Genentech worth so much to Roche?" The answer: it outperforms its competitors when it comes to innovation.
Roche is offering a 9% premium to Genentech's market value at Friday's close. Reuters reports that Roche wants Genentech's $2.6 billion (2008 estimated sales) Avastin, a colorectal cancer treatment, and Herceptin, a $1.3 billion (estimated 2008 sales) breast cancer drug, as well as Genentech's drug development portfolio.
Roche also expects to save $750 million to $850 million in pretax costs, but the long-term benefit would be for Genentech's innovative culture to take over the relatively dry drug development environment of Roche. If that doesn't happen, the deal could be unprofitable for both companies.
Roche, the Swiss drug maker, has offered to buy the 45% of biotech giant Genentech (NYSE: DNA) that it does not already own. The offer totals $43.7 billion in cash. According toReuters, Roche "would offer $89 per share to buy up the remaining stake, a 9 percent premium to the biotech company's closing share price on Friday."
The transaction would probably be a poor deal for Genentech holders and the board of the company should reject it and push for a higher price. When reporting quarterly earnings recently, the company raised its outlook to a range of $3.40 to $3.50 per share, from $3.35 to $3.40. Several brokerages made positive comments about Genentech and Citigroup began coverage of the stock as a "buy" with a $91 price target.
Although Genentech's shares are trading at a 52-week high at nearly $82, the firm is just recovering from rough earnings in last 2007. Early last year, before the rocky patch, the stock traded just below $90. The Genentech's No.1 drug, cancer treatment Avastin, is expected to do extremely well over the next several years.
The Roche offer does not take into account the fact that Wall St. expects Genentech to be a powerful growth company during the rest of the decade making the stock worth well over $90.
Douglas A. McIntyre is an editor at 247wallst.com.
Genentech, Inc. (NYSE: DNA) Q2 2008 Earnings Conference Call July 14, 2008 4:45 PM ET
Management Summary
Operator
I would like to welcome everyone to the Genentech second quarter 2008 earnings conference. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Katherine Littrell, Vice President of Investor Relations. Ms. Littrell, you may begin.
Katherine Littrell, Vice President of Investor Relations
Thank you, Gerald. Good afternoon everyone and thank you for joining our Q2 2008 earnings call. We have posted an earnings call slide set on our website, as per our usual, on www.gene.com.
This call is being electronically recorded and is copyrighted by Genentech. No reproductions, retransmissions, or copies of this conference call can be made without the written permission of Genentech.
Genentech (NYSE: DNA), the manufacture of Avastin, a treatment for patients with advanced lung, colon, or breast cancer, is scheduled to report Q2 EPS on July 14. DNA August option implied volatility of 29 is near its 26-week average according to Track Data, suggesting non-directional price movement.
The Wall Street Journal also reported that the oil industry and some U.S. lawmakers are looking to end long-standing bans on domestic drilling put in place to protect areas that are environmentally-sensitive, fueled by concerns about global energy.
In an interview with the Financial Times, Citigroup Incorporated's (NYSE: C) former chairman and CEO Sandy Weill acknowledged that choosing Chuck Prince as his successor in 2003 turned out not to be the "right thing" for the company and was flawed. Instead of handing the job to Prince, Weill said the board should have fostered competition among the bank's top managers for the job.
OTHER PAPERS:
According to the Washington Post, MedImmune, a unit of drug giant AstraZeneca Plc (NYSE: AZN),settled with Genentech Inc (NYSE: DNA) a lawsuit over a patented component of its best-selling drug Synagis, which is aimed at preventing respiratory infections in infants. No details of the settlement were provided.
It has been a rocky year for Wall Street, but even amid the uncertain market conditions there are some companies that are playing with a lot of cash. In addition, they know how to wisely use their funds, which makes them strong enough to beat any challenge.
One important factor that determines the stability of a company is its corporate cash flow. CNNMoney is looking at stocks with both healthy cash flow and a surplus of cash, which helps them avoid tough situations where they may need to raise their capital (check out its slideshow of these five picks). Another element that CNNMoney takes into account when picking companies is their ability to reinvest cash in ways that assure them a nice profitability.
Let's look at some of the companies that CNNMoney likes:
Genentech (NYSE: DNA) shares are trading higher today after the company announced that a trial of Avastin in colon cancer patients who have undergone surgery will be completed earlier than expected. Though the news has no effect on the likelihood of the drug's success, investors seem excited that the drug might be approved for use in colon cancer patients up to a year ahead of schedule. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on DNA.
After hitting a one-year low of $65.35 in December, the stock hit a one-year high of $82.2 in March. DNA opened this morning at $70.37. So far today the stock has hit a low of $69.52 and a high of $70.60. As of 11:55, DNA is trading at $69.98, up $1.15 (1.7%). The chart for DNA looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $65 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 12.4% return in just five weeks as long as DNA is above $65 at June expiration. Genentech would have to fall by more than 7% before we would start to lose money. Learn more about this type of trade here.
DNA hasn't been below $65 at all in the past year and has shown support around $67 recently. This trade could be risky if one of the company's treatments gets into regulatory trouble, but even if that happens, this position could be protected by the support the stock might find around $66, where it has bottomed out twice in the past six months.
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. At publication time, Brent neither owns nor controls positions in DNA.
MOST NOTEWORTHY: McGraw-Hill, Curis and Azure Dynamics were today's noteworthy initiations:
Jefferies initiated McGraw-Hill (NYSE: MHP) with a Buy rating and $49 target. The firm believes the downturn in credit markets has already been fully priced into shares and expects the stock to gain momentum throughout 2008 in anticipation of liquidity returning to credit markets.
RBC Capital initiated Curis (NASDAQ: CRIS) with an Outperform rating and $2.50 target based on the company's partnership with Genentech (NYSE: DNA) and potential upside from its pipeline.
Merriman started Azure Dynamics (OTC: AZDDF) with a Buy rating. The firm believes the company's focus is where customers see the most benefit from a medium-duty hybrid or market-appropriate solutions and finds the stock attractively valued.
With the current challenging market conditions probably many of us are wondering which are those reliable stocks that could offer us a big profit in the next coming years. In the light of those questions, Gene Marcial's new book, 7 Commandments of Stock Investing, reveals his perspective over seven stocks that are considered to be worth buying and holding for the next seven years (check out BusinessWeek's slideshow of his seven picks).
Taking advantage of the experience he gained over the past 30 years, BusinessWeek's Gene Marcial shares his opinions related to investors' strategy to use market meltdowns for their own benefit, being able to turn the stock market panic into success.
MOST NOTEWORTHY: Hershey Foods, Genentech and Garmin were today's noteworthy downgrades:
Bernstein downgraded Hershey Foods (NYSE: HSY) to Market Perform from Outperform, citing commodity cost pressures & slowing volume growth.
Thomas Weisel downgraded Genentech (NYSE: DNA) to Market Weight from Overweight after the company reported Q1 results, due to Avastin growth concerns and a lack of meaningful drivers of long-term revenue growth until 2009.
Oppenheimer cut Garmin (NASDAQ: GRMN) to Perform from Outperform on concerns regarding PND pricing and the company's profitability dynamics.
OTHER DOWNGRADES:
Blackrock (NYSE: BLK) was downgraded at Goldman to Neutral from Buy and to Market Perform from Outperform at Wachovia.
Genentech announced that its profit during the first-quarter rose 12% to $790 million, or 74 cents per share, boosted by strong cancer drug sales. These numbers are up from $706 million, or 66 cents a share reported in the same period a year ago. Excluding special items, the company's earnings would have come at 84 cents a share, exceeding analysts' forecasts for a quarterly profit of 82 cents a share.
The company's quarterly revenue saw a growth of 8% to $3.06 billion, up from $2.84 billion a year ago. However, this was not enough to beat analysts' predictions for sales of $3.1 billion in the quarter, according to Thomson Financial.
Genentech
This morning's announcement that 
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It has been a rocky year for Wall Street, but even amid the uncertain market conditions there are some companies that are playing with a lot of cash. In addition, they know how to wisely use their funds, which makes them strong enough to beat any challenge.
With the current challenging market conditions probably many of us are wondering which are those reliable stocks that could offer us a big profit in the next coming years. In the light of those questions, Gene Marcial's new book, 7 Commandments of Stock Investing, reveals his perspective over seven stocks that are considered to be worth buying and holding for the next seven years (check out BusinessWeek's .gif){kind=logo}
Serious Money: How 'Stable' after 345 DJIA drop? -- CB, DIS, JNJ, TEVA & XEL
Closing Bell: Dow plunges amid grim economic news; AIG, CIEN, LM, TEX decline, WMT gains
Is BT's offer to save Britain's red phone boxes for £500 fair?
