Morgan Stanley, Wachovia jump as deals okayed; Vishay, Waste Management, United Tech drop bids

By Paul Deckelman

New York, Oct. 13 - With Wall Street on Monday echoing the cheers of an international financial community heartened by the prospect of concerted U.S. action with the countries of the European Union to combat the global financial crisis, banking shares in general were better - and Morgan Stanley absolutely zoomed as Japanese banking giant Mitsubishi UFJ Financial Group went ahead with its $9 billion investment in the New York-based brokerage company, which is in the process of converting to a standard commercial bank.

Also coursing upward was Wachovia Corp. as the Federal Reserve formally okayed its sale to Wells Fargo & Co., the war of words between the latter company and unsuccessful rival Citigroup Inc. over who would scoop Wachovia up now in the rearview mirror - although Citi will continue to seek retribution in its ongoing mega-lawsuit against the newly combined Wells Fargo and Wachovia.

But even as the financial markets were strongly bouncing back from the debacle of the previous week, arguably the worst week ever in the annals of Wall Street, several potential merger-and-acquisition situations faded away, partly due to the tense market conditions that make arranging financing for multi-billion-dollar deals more difficult, but also due to the reluctance of the pursued party to get involved in what it would denounce as an inadequate offer.

Vishay Intertechnology Group Inc. threw in the towel and withdrew its $23 per share offer for International Rectifier Corp., after the latter's shareholders on Friday convincingly defeated Vishay's attempts to elect three directors to the El Segundo, Calif.-based power semiconductor manufacturer's board of directors and change its by-laws to facilitate Vishay's unwanted takeover bid.

Waste Management Inc. likewise trashed its $6.73 billion offer to acquire an unwilling Republic Services Group Inc., freeing the latter company to proceed with its own previously announced merger agreement with Allied Waste Industries Inc. Shares of all three waste-hauling companies went up on the news.

And United Technologies Corp., deciding finally that it would not go where it was not wanted, ended its pursuit of ATM machine maker Diebold Inc. and withdrew its $40 per share offer.

Morgan Stanley leads the way

With the news that the U.S. government will seek to invest in healthy U.S. banks and take other sweeping measures in order to head off any further financial industry problems such as those which kayoed Bear Stearns Cos., Lehman Brothers Holdings Inc., IndyMac Bank, Washington Mutual Inc. and American International Group Inc., bank stocks mostly boomed Monday - but none louder than Morgan Stanley, whose shareholders breathed a sigh of relief that the investment bank's deal to get a $9 billion capital infusion from Mitsubishi UFJ Financial Group did, in fact, go through, although there was some minor rejiggering of the terms of the arrangement.

Morgan Stanley's shares (NYSE: MS) roared upward by as much as 96.9% in intraday dealings before finally ending the day at $18.10, still up $8.42, or 86.98%. Volume of nearly 200 million shares was five times as heavy as usual.

The company's shares, as well as its bonds, had gyrated wildly at mostly sharply lower levels last week, on investor fears that Tokyo-based Mitsubishi would pull out of the investment deal at the last minute, leading to a Lehman-like collapse of Morgan Stanley. That did not happen - but the Japanese bankers pressed their advantage to get concessions from Morgan Stanley and from the U.S. government. Mitsubishi will still take a 21% stake in the American bank, but will receive all preferred shares, as opposed to the $3 billion of common stock at book value of $31.25 per share plus $6 billion of preferred. Under the new terms, Mitsubishi will get $7.8 billion of 10% perpetual preferred shares with a conversion price of $25.25 per common share and no maturity date, plus $1.2 billion of 10% non-convertible perpetual preferred shares.

The Treasury, which wanted to see a Morgan Stanley deal get done as a bulwark against eroding investor confidence in the banking sector, reportedly agreed to guarantee that should it invest capital in Morgan Stanley under the $700 billion bank rescue plan, it would see to it that Mitsubishi's shares were protected against dilution.

A trader thought it notable that although Morgan Stanley's shares had virtually doubled in price from the lows they hit during last week's market debacle, they are still trading well under the $22 level at which the Mitsubishi investment was valued.

At another desk, a market source said that "all over the weekend, people were saying that if [the Mitsubishi deal] doesn't close, who knows what's going to happen?" He suggested it would have been "Lehman redux."

But the investment did close, although on somewhat more favorable terms for Mitsubishi, and Morgan Stanley's shares took off for the skies. Even so, he said, even with the near-doubling in the stock's price, "a year ago, you would have never thought it possible" for Morgan Stanley to be trading at $18; in fact, on Friday, Oct. 12, 2007, it had closed at $67.25.

Wachovia gains as Wells Fargo deal okayed

Another winner amid the generally stronger banking sector was Wachovia (NYSE: WB) whose shares rose 70 cents, or 13.59%, to end at $5.85, on the news that the Federal Reserve had formally okayed its acquisition by Wells Fargo, bringing to an end the uncertainty about the Charlotte, N.C.-based bank company's future. San Francisco-based Wells Fargo (NYSE: WFC) rose $2.09%, or 7.38%, to finish at $30.40. Volume of 80.2 million shares was about two-thirds the norm.

"That will close quickly," a trader said. "All they need is shareholder approval." However, on Monday, Wachovia announced that it in view of the need for quick action on the acquisition, it would waive the shareholder approval requirement - a decision endorsed by the NYSE.

Morgan, Goldman on the hunt

The trader said that with Wachovia being folded into Wells Fargo, and Morgan Stanley now safe with its $9 billion cash infusion from Mitsubishi, the big shakeout among major banking names could go into hibernation.

He also noted press reports - notably in The Wall Street Journal - indicating that Morgan Stanley and rival Goldman Sachs Group, which like Morgan Stanley is converting over to a commercial bank, would look to buy an existing bank in order to gain access to its deposit base as a stable way of funding its activities. He opined that a large regional bank would be a likely target, although not naming any specific names, and said that this portion of the financials sector - which did not shoot sharply higher Monday the way the bigger banks did - would likely benefit from the consolidation buzz that has been dropped into the market. Among the potential targets mentioned by the Journal were National City Corp., Fifth Third Bancorp., Sun Trust Banks Inc., Regions Financial Corp. and Huntington Bancshares.

Santander to buy out Sovereign

Long after U.S. stock trading had wrapped up for the day. Spanish lender Banco Santander said that it had agreed to buy the 75.65% of Philadelphia-based Sovereign Bancorp Inc. in a $1.9 billion deal under which Sovereign shareholders will receive 0.2924 Banco Santander American Depository Share for every share of Sovereign common stock, translating to a value of around $4 per share. Sovereign (NYSE: SOV) was one of the rare bank-sector losers during the regular session, before news of the Santander buyout, down 13 cents, or 3.41% to $3.68 on volume of 22 million shares, about 1½ times usual activity. In after-hours trading, when the Santander announcement hit the market, Sovereign rose 16 cents, or 4.20%, to $3.97.

The buyout deal had been widely expected.

According to published reports, when Santander took its current 24.35% stake in the American bank, it agreed that any buyout of the remaining shares would come at $40. However, the fact that Sovereign's stock continues to trade at just one-tenth of that level, even with the announcement of the roll-up, is being seen as a sign that Sovereign - which earlier Monday reported a loss of $982 million, or $1.48 per share in the third quarter - is likely to waive that condition as the price for coming under the protection of a financially more solid company such as Santander.

Credit crunch kayos M&A moves

While sector consolidation seems to be the watchword among the financial players, with the weaker names seen as easy pickings for the better capitalized big banks, in other industries not yet so hard hit as the financials, the credit crunch is having the opposite effect, putting a damper on a lot of merger and acquisition activity, particularly that involving a pursuer and an unwilling pursuee.

A market source noted the demise of three such situations on Monday alone - Vishay-International Rectifier, Waste Management-Republic Services Group, and United Technologies-Diebold. That comes on top of last week's abrupt end of Walgreen Co.'s efforts to snare Longs Drug Stores Corp. and Service Corp. International's dropping its pursuit of Stewart Industries Inc.

"Unsolicited takeover attempts haven't been working very well recently except for ImClone" - and even there, the target company ended up finding someone else as a white knight, in this case Eli Lilly & Co., while the original unwanted suitor, Bristol-Myers Squibb Co., did not get the prize it was seeking.

He said that the companies' decisions may well have been influenced by the reluctance of their lenders to put up the funds for a hostile takeover of another company since "no bank wants to get into a bidding war right now, because essentially it's going to be [aiming at] a moving target," since a company wanting to convince an unwilling target to accept an offer may have to come back with a sweetened bid and the lenders "want to know going in before they sign on and make a commitment, and nowadays, you have to have a commitment from a bank in order for an offer to have any credibility."

He cited the case of Vishay's ill-fated attempt to win over International Rectifier management or shareholders, since one of the main points management raised to attack the Vishay offer was that the company never announced that it had a funding commitment - so probably it did not have any funding.

Meanwhile, as long as there was no agreement between Vishay and its target, "the banks didn't know how much they had to commit - and they won't know that, until they know that a deal has been struck at a certain price," making for a nearly perfect Catch-22 - no agreement from the target company until the banks commit to funding the acquisition and no funding commitment from the banks until they know that a deal has been struck at a set price.

"Meanwhile," he continued, "the credit markets have continued to deteriorate, and if they can't raise it [the necessary amount of bank funding for a takeover], they'll have to put more equity in - and it's unlikely that people want to do that."

Vishay gives up

Looking at the specific deals that did not go down, Vishay Intertechnology on Monday gave in to the reality that International Rectifier and its shareholders are not interested in being acquired by the Malvern, Pa. -based high-tech manufacturer and withdrew its offer to acquire International Rectifier for $23 a share - an offer which the latter company had repeatedly criticized as inadequate, "opportunistic" and "highly conditional.

In announcing its withdrawal, Vishay addressed what it called the "significant" number of International Rectifier shareholders who backed its unsuccessful proxy campaign to unseat three directors backed by International Rectifier's management, telling them "we share your disappointment with the outcome," decided at the latter company's annual meeting Friday.

Vishay noted that it had "consistently said, we can not pursue our proposal in the face of opposition from a board of directors that has refused to engage in any discussion with us regarding our offer."

A market source said that "we had expected" a Vishay withdrawal, noting that the company had said at the start of last week that if it did not win its proxy battle at the Friday meeting, it would withdraw its bid.

Back in August, International Rectifier had rejected Vishay's original unsolicited $1.6 billion acquisition offer, which would have paid its shareholders $21.22 per share and then did the same in early September when Vishay upped its offer to $23 per share, or about $1.7 billion. Vishay responded by going directly to the shareholders with a hostile tender offer. International Rectifier complained that both of the Vishay offers were lowball bids, valued, it said in a statement at the time "on the basis of a trough in the stock price for IRF following the company's emergence from a restatement and during adverse market conditions."

International Rectifier also questioned whether its shareholders could "have any confidence that Vishay will get the financing for this transaction when it hasn't announced any financing commitments in today's tight credit market," and noted "so many subjective and discretionary conditions tied to this tender offer - including a 'general market conditions' out? When Vishay said earlier this month that it might be willing to raise its offer if International Rectifier management would negotiate and convince it that such a higher offer was warranted, the latter company ridiculed the Vishay gambit as "a hypothetical increase of an illusionary offer" and it was really just an opportunistic trick.

While International Rectifier was pleased that Vishay had finally decided to go away, the latter's own shareholders were equally glad that their company will not have to now borrow nearly $2 billion at presumably onerous interest rates and other conditions to finance such a takeover - particularly since the last deal that Vishay did with International Rectifier, the purchase of its power control systems unit for $290 million, completed last year, had proven to be a major dud. Vishay (NYSE: VSH) jumped $1.01, or 23.01% to $5.40, on volume of 2.2 million shares, about 16% above normal. International Rectifier (NYSE: IRF) gained $1.49, or 10.67%, to end at $15.46, on volume of 1.9 million shares, twice normal.

Waste Management's white flag

Another failed takeover attempt Monday was top U.S. trash hauler Waste Management's efforts to gain control of Fort Lauderdale, Fla.-based Republic Services Group, Number-Three in the industry.

"When we began this process, we said that we would be a disciplined buyer and that we would not risk our strong financial position to acquire Republic," said David Steiner, Waste Management's chief executive officer, in a published statement. "Given the current state of the financial markets, we believe that it would not be prudent to continue to pursue the acquisition of Republic," he concluded.

From the get-go, back in July, Republic Services also consigned the unsolicited acquisition offer from Houston-based industry leader Waste Management to the circular file - even after Waste Management sweetened its bid to $37 per share from $6.2 billion, or $34 per share, originally - and it proceeded with its own separate plans to acquire Phoenix-based Allied Waste, the second-biggest player in the industry, in a $6.06 billion deal that is now expected to close in December.

Republic Services said that its planned deal with Allied offers more value and certainty to its shareholders, since it is less likely to incur antitrust scrutiny as a takeover by the larger Waste Management may have.

Some observers said that the Waste Management takeover offer was an ill-disguised attempt to keep the second-and-third biggest industry players from getting together to create a more formidable challenger to its industry dominance.

From a credit standpoint, "given that Republic's board had already deemed Waste Management's $37 per share offer as undervalued, it is likely that Waste Management would have had to borrow additional debt greater than the amount previously contemplated to complete the transaction," said analyst James T. Siahaan of Standard & Poor's in a research note.

"Such incurrence, if even feasible amid the volatility of today's credit markets, would carry high interest costs and could have impaired the company's credit profile to the point where its investment-grade status could have been called into question." Because such a deal is not going through, however, the agency kept the company's corporate credit rating at a coveted investment-grade-worthy BBB, with a stable outlook, and ended its review of the ratings for a possible downgrade, which began back when Waste Management first announced its offer for Republic Services.

Siahaan also noted that "the backdrop of a weak economic environment has the potential to depress earnings and cash flow generation in the near term, which [had the takeover gone through] would have complicated the company's ability to reduce leverage to appropriate levels."

The Fitch Ratings service also affirmed Waste Management's BBB ratings.

Waste Management shareholders were just as relieved as the ratings agency that there will be no acquisition of Republic Services for nearly $7 billion of borrowed money; they took its shares (NYSE: WMI) up $4.63, or 17.97%, to $30.39, on volume of 7.6 million, double the usual turnover.

With the way now cleared for its accusation by Republic Services, Allied Waste (NYSE: AW) soared $2.10, or 24.59% to $10.64, on volume of 6.3 million, or over1½ times the usual. Republic Services (NYSE: RSG) went up an even $2, or 8.89%, to $24.50, on volume of 3.3 million, also more than 1½ times the average turnover.

Diebold bid dies

Yet another would-be suitor pulling an unwanted takeover try was United Technologies, whose $2.64 billion, or $40 per share, offer to buy ATM and electronic voting machine maker Diebold, first unveiled all the way back in late February, withered and died on the vine. United Technologies' chairman, George David, said in a letter to his opposite number at Diebold, John Lauer, that "in light of your extended refusals of UTC's requests for management discussions and due diligence, we are withdrawing our offer.

"We had hoped we could negotiate a transaction that would have created substantial value for both you and your shareholders. It's unfortunate this won't happen."

A market source said that United Technologies' withdrawal of its offer "was expected - they made it in February and Diebold refused to talk to them for eight months. It was only a matter of time" before the company pulled its bid.

Diebold (NYSE: DBD), whose shares began the year languishing under $30, then shot up above the $40 mark on United Technologies' offer, came back down on Monday to below their start-of-the-year levels, plunging as much as 16.9%, or down to $23.50 on news of the withdrawn bid. They later came off that low as the North Canton, Ohio-based company reaffirmed its full-year profit forecast and said its board is confident the company - which has embarked on a three-year, $100 million belt-tightening campaign - is "on the right path."

Lauer issued a statement saying that Diebold believes that its shareholders will eventually benefit from "strategic initiatives to gain cost efficiencies and increase profitability." The shares ended up 41 cents, or 1.45% on the day, at $28.69 on volume of 7.2 million, over 11 times the average daily handle.

Hartford-based helicopter, air conditioning equipment and elevator maker United Technologies' shares rose $6.50, or 13.65%, to $54.13 on volume of 13.7 million, or almost double the usual amount.

Autos drive higher

Detroit was meantime abuzz with speculation about a possible combination of two of the traditional Big Three U.S. auto giants, on news reports that industry leader General Motors Corp. was in preliminary talks with privately held Chrysler Group LLC's 80% owner, Cerberus Capital Management, and had previously sounded out its other domestic rival, Ford Motor Co., on the possibility of getting together.

However, although Ford (NYSE: F) jumped 40 cents, or 20.10%, to $2.39 on volume of 121.9 million shares, or double the norm, and GM (NYSE: GM) did even better, up $1.62, or 33.3% to $6.51 on volume of 61.8 million shares, more than double the usual, a trader said the Ford news was essentially old hat, and doubted that much would come of the GM-Chrysler speculation, given the weakness of both companies.

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