Analyst says the time is right for DRS-Finmecanica merger, but regulatory approvals are not a slam dunk

By Paul A. Harris

St. Louis, May 8 - DRS Technologies Inc. shares were up 15.92%, or $10.15, to close at $73.89 on Thursday in response to a Wall Street Journal story reporting that the Parsippany, N.J.-based defense company (NYSE: DRS) is in advanced talks to be acquired by Italy's Finmeccanica SpA.

The Journal story held that Finmeccanica would likely make an offer reflecting a 25% premium to Wednesday's closing price of $63.74 per share.

An analyst who covers DRS stock said that an $80 per share price for DRS stock would be hard to turn down.

"The deal would make sense for both parties," said the analyst, who agreed to speak only on background.

"Finmeccanica would get nice exposure to the U.S. market in a big way."

However, the source added, the deal - an international merger involving a U.S. defense company - is bound to face hurdles.

"The stock market is telling us that the deal is uncertain because the stock is trading 10% below where the Wall Street Journal suggested the deal could get done.

"The reason that it might not get done is because DRS has cutting edge technologies which the U.S. Department of Defense might feel uncomfortable seeing in foreign hands, even though Italy is an ally.

"DRS is quite plugged into the Washington, D.C., scene. I don't think that DRS would confirm that they are in negotiations if the prospects for approval were difficult.

"But it's not a slam dunk," the analyst added, noting that whether the deal receives Defense Department and Justice Department approvals remains to be seen.

The source also said that the timing of the deal likely has to do with a growing expectation that the euro has just about peaked versus the dollar (late Thursday a market source spotted the euro at $1.5333)

Timing of the deal might also factor in concerns that the next U.S. presidential administration might be less receptive toward mergers and acquisitions - particularly international ones - than the present administration has been, the analyst said.

Shares of Finmeccanica (Milan: FNC) fell 2.134% on Thursday to close at €21.55, €0.47 lower.

Proxy fight for Take-Two likely, analyst says

More than a week has passed since the release of Take-Two Interactive Software Inc.'s flagship video game Grand Theft Auto 4.

However the company's share price continues to ride within a smaller than 5% trading range that it has failed to breach during the past month.

Take-Two is the target of a takeover bid by Electronic Arts Inc. - an offer that was decreased by Electronic Arts to $25.74 per share from $26 per share when Take-Two management issued share options to itself.

The deadline for Electronic Arts' tender is May 16.

In the face of that deadline an equities analyst sees the arbitrage players standing fast.

On Thursday Take-Two (Nasdaq: TTWO) shares gained 1.29%, or $0.34, to close at $26.60, $0.86 above the revised tender.

The analyst said that the release of Grand Theft Auto 4 early last week was "extra-huge versus just huge.

"I don't think anyone expected that this was not going to be a successful release," the source added.

"The numbers were better than the public forecasts, but probably not better than the whispered numbers."

The analyst went on to say that the likeliest scenario would be that Electronic Arts goes genuinely hostile with its bid when the tender expires on May 16, by initiating a proxy fight.

The source ran down a list of other possibilities:

• Electronic Arts could walk away from the deal;

• Electronic Arts and Take-Two could engage in private negotiations; and

• Another bidder could surface with a higher bid for Take-Two.

However, the analyst said, all three scenarios seem less likely than a proxy fight.

The source said that the stability in Take-Two's share price over the past month reflects that arbitrage players are not buying the idea that the Grand Theft Auto release was stronger than expected, an outcome which might prompt Electronic Arts to bid more.

But the arbitrage investors also are not buying the idea that Electronic Arts will walk away from the deal, the analyst added.

Shares of Electronic Arts (Nasdaq: ERTS) gained 0.9% on Thursday to close at $52.58, up $0.47 on the day.

Matria shareholders approve merger

Elsewhere on Thursday, Matria Healthcare, Inc. announced that it received shareholder approval for its proposed $1.18 billion acquisition by Inverness Medical Innovations, Inc.

The deal is expected to close promptly, pending customary closing conditions.

Last January Inverness and Matria struck the deal whereby Inverness will acquire Matria stock for $39.00 per share, payable $6.50 in cash plus $32.50 in convertible preferred stock of Inverness.

On Thursday Matria (Nasdaq: MATR) shares closed at $24.15 up $0.45 or 1.9%.

Thursday's situations took place against a backdrop of marginal gains in all three U.S. stock indexes.

The Nasdaq saw the biggest bump, 0.52%, and closed at 2,451.24, up 12.75 on the day.

The Dow Jones Industrial Average gained 0.41%, or 52.43 points, and closed at 12,866.78.

The S&P 500 was up 0.37 on Thursday, up 5.11 points to close at 1,397.68.

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