Countrywide backs off day's high; Navistar rises; Novelis rockets up; Zanett zooms; Broadcom better

By Ronda Fears

Memphis, Jan. 26 - Rumors of a buyout of Countrywide Financial Corp. by Bank of America Corp. sent the former surging in trade Friday. And similar market chatter drove several other names higher with players seemingly throwing caution to the wind about being long over the weekend despite the broader market's reversal late in the week.

"It's a little bit scary. People are downplaying yesterday's downturn in the market. There is a lot of speculation about a lot of deals, a lot in the technology space, everywhere really," remarked one trader, of the market's overall willingness to chase stocks based on deal rumors.

"Ever since July the market has been going up and up; it's just a matter of time before there is some sort of correction. I'd like to see significant recovery on heavy volume. Personally, I'm skeptical about staying long right here."

Another trader at a bulge bracket firm agreed, saying the Countrywide situation - like the bidding wars such as that for Equity Office Properties Trust - was fueling undue ebullience of a stellar offer for the mortgage lender. A buyout by Bank of America would put the No. 2 domestic bank with the top domestic mortgage lender, but the trader cited weak home sales and falling mortgage originations.

"I think the market way overshot the price for Countrywide," the trader said, noting the stock retreated well off the day's high of $45.26. He added that before the rumor Countrywide shares had been trading rather stagnant compared with the rest of the market as well as its peers.

Countrywide shares (NYSE: CFC) settled the session better by $1.71, or 4.24%, at $42. The trader also noted that Bank of America shares suffered on the development, with the stock (NYSE: BAC) losing 36 cents, or 0.69%, to $52.04.

As for Equity Office, the stock was steady on higher ground but activity quieted down considerably Friday on the heels of The Blackstone Group upping its bid to $54 per share for the Chicago-based office real estate investment trust. Traders said players were "holding on" to see if the rival group headed by New York office REIT Vornado Realty Trust will decide to top Blackstone's new bid over the weekend. Equity Office shares (NYSE: EOP) closed up 32 cents to $55.22, while Vornado shares (NYSE: VNO) retreated with a decline of $1.49, or 1.18%, to $124.27.

Despite traders' unease with market levels, they said special situations continue to offer lots of opportunity, and there were several interesting plays on Friday. Technology was a hot area, one trader said, with the "whole sector strong relative to the market because there are lots of names in that sector ripe for the picking."

Of note, as well, many stocks that traded sharply higher Friday, on speculation and in some cases on specific news, closed the session well off their highs.

For instance, little-known Zanett, Inc. more than doubled on heavy volume Friday after the company said it was part of a team that was recently awarded a contract to provide information technology services to the U.S. Department of Homeland Security. The five-year contract is worth up to $45 billion. The New York IT services company's stock (Nasdaq: ZANE) zoomed up to $3.30 before easing back to close the day with a gain of 74 cents, or 54.41%, at $2.10.

Elsewhere, refining and gasoline marketer Sunoco Inc. was rumored to be in play as a takeover target with the likes of the giant BP plc, or British Petroleum, said to be on the hunt, according to another trader. Philadelphia-based Sunoco shares (NYSE: SUN) were better by 55 cents on the day, or 0.91%, at $60.94 while BP shares (NYSE: BP) added 8 cents to $63.73.

Outside the United States there is rising interest, as well, traders said.

The Australian markets were closed Friday for the Australia Day holiday, but on Monday traders said the big Perth-based development and construction concern Multiplex could see extended gains as the latest target in the takeover frenzy that has spanned from the United States into real estate names abroad.

Multiplex shares (Australia: MXG) spiked more than 17% on Thursday after the company confirmed it has been approached by an unnamed predator that has had preliminary discussions with its founding Roberts family, which holds a 25% stake in the company.

Novelis surges on sale buzz

Players were backing up the truck to load up on Novelis Inc. shares Friday after the Atlanta-based aluminum sheet metal maker and recycler said, "in response to increased trading volume in its common stock," that it is currently in discussions with various parties that could lead to a potential sale of the company.

Traders pointed to a report out of India in The Hindustan Times that the Asian cement giant Aditya Birla Group is the buyer in question, with the deal pegged at $5 billion to $6 billion.

Novelis shares (NYSE: NVL) traded in a band of $33.63 to $39.85 before ending the day with a gain of $7.17, or 23.8%, to $37.30 amid whopping volume of roughly 10 million shares versus the norm of 430,131 shares.

In addition, the Novelis bonds spiked, with its 7¼% notes due 2015 shooting up 5.5 points to the 103 area at one point of the session, bond traders told Prospect News.

While Novelis said its press release was in response to higher trading volume in the stock, the shares had not moved dramatically in price until the press release was made, a stock trader pointed out. He said the stock this week really only "barely moved off the $30 mark more than a dime one way or the other" until the company's press release hit the tape.

The stock was halted Friday on the "pending news" but when trade resumed around noontime it "shot out of the roof," as the trader put it.

Details of a deal did not emerge by press time; the company did not give a time frame for the talks to produce an outcome.

Novelis bills itself as the global leader in aluminum rolled products and aluminum can recycling. The company operates in 11 countries and reported $8.4 billion in 2005 revenue.

Fiat, GM drive Navistar

Fiat SpA chief executive Sergio Marchionne says the company's Iveco heavy-duty truck division could be interested in mergers or takeovers, and the news lifted its shares as well as truck maker Navistar International Inc. as a potential buyer or as a buyout target itself, traders said.

Navistar shares (NYSE: NAV) advanced $1.01 on the session, or 2.5%, to $41.35.

On its news, Fiat shares (NYSE: FIA) spiked higher by 81 cents, or 3.97%, to $21.22.

A similar announcement to Fiat's the day before from General Motors Corp. also was fodder for Navistar's gain, one trader said. But he noted that GM shares were in retreat Friday due to saying it will delay its quarterly report amid a major restatement. GM said Thursday that it is exploring a potential sale of its Allison Transmission division, which makes transmissions and hybrid propulsion systems for commercial trucks, buses and military vehicles.

Analysts were expounding that GM may look to divest its medium-duty truck business as well. Navistar is the best fit, in many analysts' view, largely as a way to help it plan for "life after Ford," as Bear Stearns' Peter Nesvold put it in a report Friday.

A trader added another plus for Navistar buyers is its plans to pay off another $400 million in debt by the end of 2007, which will improve the balance sheet, plus make it better situated as a potential target.

The Warrenville, Ill.-based maker of truck and industrial engines spent most of 2006 in a mode of working to fix balance sheet trouble - tweaking bank debt, buying back bonds and the like - that had delayed its 2005 financials, and the trader noted many analysts forecast another tough year for heavy trucks.

This trader said he's bullish on Navistar because of the work it has completed heading into perhaps another shaky year for other truck manufacturing names. And, he thinks Navistar is a better takeover target than an acquirer.

"Once Volkswagen combines MAN, Scania and its truck operations in Latin America, Volkswagen will look at North America and that means Navistar, which it may either take over or [enter] into partnership with," the trader said.

A three-way combo for Volkswagen AG, German truck maker MAN AG and Swedish truck maker Scania AB is not certain, but the three seem to be steering that direction. Earlier this week, MAN withdrew its hostile $13.3 billion takeover bid for Scania and said it would instead seek a friendly linkup. Volkswagen, a major shareholder in both MAN and Scania, said a cooperative deal among the trio would be preferable to a hostile bid, which Volkswagen had rejected.

Broadcom burdens lifting

In the tech group, another trader remarked that there was market chatter to the effect that Broadcom Corp. could be catching some eyes as a buyout candidate, after shooting up on Thursday on an upgrade partly on the basis that higher guidance this week from NetLogic Microsystems Inc. and Integrated Device Technology Inc., as well as Apple Inc.'s growth, bodes well for Broadcom.

A huge boon to the story, however, the trader said, was the company erasing the overhang from an options accounting fiasco, which the company said earlier this week was concluded with filing restatements for years 1998 to 2003 resulting in $2.2 billion for options charges. The past-due financials also had threatened delisting of the stock, but the reports were filed Tuesday. Broadcom's option grants are still the subject of a formal Securities and Exchange Commission inquiry and an informal inquiry by federal prosecutors, however.

Broadcom shares (Nasdaq: BRCM) advanced 35 cents on the day Friday, or 1.13%, to close at $31.42.

"There's so much we don't know, of course, but I think a perfect storm could be brewing for Broadcom stock; just look at the action after they raised guidance a couple of quarters back. I think longs will be pleasantly surprised sooner or later," said the head trader at a brokerage that specializes in technology and telecom stocks.

"There might be some bumps along the way, the broader market could slump here and go bearish, but for Broadcom I think they will see a lot of velocity."

He said strong guidance from networking names like NetLogic and Integrated Device Technology is a boon for Broadcom as 32% of its sales are generated from that sector. Irvine, Calif.-based Broadcom provides semiconductors for wired and wireless communications to enable the delivery of voice, video, data and multimedia to and throughout the home, office and mobile environment.

In addition, he said Broadcom is widely expected to be chosen for the components for Apple's iPhone touchpad controller, although that is just speculation at this point, and the iPhone touchpad "is the only truly innovative aspect of the device, based on what we were allowed to see at MacWorld. I mean, there was a collective gasp when it was unveiled, because it was so sexy and sleek; there weren't any pesky plastic keys like the regular run-of-the-mill gizmos."

Getting picked by Apple, he said, could lead to interest from other players like LG Electronics Inc. or Motorola Inc. and potentially even create a bidding war for Broadcom if it goes into play as a takeover target.

"I would guess that other major players will want to follow suit and incorporate this touch screen functionality into their various other contraptions, not just phones," the trader said.

"Here's a recent quote from Cody Willard [manager of CL Willard Capital Management, LLC and regular author of a blog on RealMoney.com] regarding Broadcom, 'Meanwhile, the company's really hitting their stride from a fundamental perspective, aside from some lingering inventory build up issues in their channels. But from Ethernet transceivers that go into every Xbox 360 to the WiFi, Bluetooth and sensor components in every Wii box, Broadcom's gonna sell a lot of very high margin chips into the 3GVG cycle.' "

In a report Friday, Willard panned Broadcom's reporting of only top-line numbers, however, saying that stirs further suspicion about a semi inventory glut.

Informatica slides 5%

Elsewhere in the tech sector, another trader said there were rumors swirling that Informatica Corp. could be a great takeover target, which he attributed to chatter coming out of a bulge bracket brokerage, but the stock was back-tracking from a run-up in advance of the earnings that were reported Thursday.

Informatica shares (Nasdaq: INFA) lost 63 cents on the day, or 4.76%, to close at $12.61.

"On the earnings a lot of people are looking at this saying the glass is half empty, I guess. Today we lost all of the run-up ahead of earnings," the trader said.

"But there was a rumor that Informatica was on a list as a great takeover target at one of the big sellside shops, so that brought it off the lows."

At another big sellside shop, however, he said analysts were saying that after the pleasing fourth-quarter results, the Redwood City, Calif., enterprise data software company was going to see decelerating organic license growth.

Informatica reported fourth-quarter net income increased to $13.9 million, or 15 cents a share, from $13.6 million, or 14 cents a share, from a year prior, as revenue rose to $91.8 million from $79.8 million.

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