Megabuck merger announcements often excite a rally on Wall Street, but investors were more circumspect Monday at the latest batch of proposed combinations.
Tempered by the troubling prospect of higher interest rates in the near future, analysts turned a critical eye to the proposed marriages of Monsanto and Upjohn & Pharmacia in the drug sector and Burlington Northern Santa Fe and Canadian National Railway in the transportation sector. Share prices of all four companies fell.
In the Monsanto/Upjohn deal, analysts said they were looking for a more promising outcome to Monsanto’s widely discussed search for a merger partner and said Upjohn may attract a higher bidder.In the railroad merger, analysts said they expect a protracted and difficult regulatory approval process.
Behind both transactions lie expectations that interest rates are headed higher early next year, a factor that complicates the attempt to evaluate any merger.
The Dow Jones industrial average, which set a record intraday high during Friday’s session, fell 113.16, or 1.0 percent, to 11,144.27 on New York Stock Exchange volume of 902 million shares. The Standard & Poor’s 500 index slipped 2.94, to 1418.09.
There’s nothing surprising about a decline in the Dow industrials or S&P 500 on the Monday after the quarterly expirations of stock-related options and futures contracts, known as triple-witching Friday.
Nor should stocks be expected to stampede higher on the day before a Federal Reserve interest rate policy meeting, set for Tuesday.
If, as expected by some economists, the Fed announces an inclination to raise its short-term interest rate target next year, the investment climate for merger deals and investing in general will become more problematic.
Ralph Acampora, a bullish forecaster at Prudential Securities, on Monday said the Dow would reach 13,500 to 14,000 next year, an advance of as much as 26 percent.
But Acampora warned that inflation fears and higher interest rates could trigger several market slides of up to 10 percent in 2000.
Higher interest rates have already made an impact.
On Monday, the benchmark yield on 30-year Treasury bonds rose to 6.44 percent, the highest level since October 1997.
Analysts said Tuesday’s Fed meeting will give the central bankers a chance to try, at least, to talk interest rates higher, even if they, as expected, leave the short-term rate target unchanged at 5.5 percent.
The Fed has come under fire for stating its bias toward future interest rate policy. Concern about aggravating Year 2000 computer scares might keep the Fed mum Tuesday.
Meanwhile, optimism about business growth among leading technology companies overcame interest rate fears once again Monday, sending the Nasdaq composite index to its 55th record closing high this year. Solid gains by Dell Computer, Cisco Systems and Oracle helped push the Nasdaq composite index up 30.81, to 3783.87.
Unlike the skepticism that greeted the drug and rail merger announcements, investors cheered news that Cisco Systems, a leading supplier to Internet infrastructures, would acquire the optical systems business of Italian industrial conglomerate Pirelli. It was Cisco’s first major acquisition in Europe.
Cisco gained $3.56 to a record closing high of $103.25.
Treasury auction: Interest rates jumped at the weekly auction of 3- and 6-month Treasury bills. Three-month bills sold at a discount rate of 5.40 percent, up from 5.21 percent a week ago. It was the highest rate since November 1995.
Six-month bills sold for 5.60 percent, up from 5.41 percent a week ago. It was the highest rate since May 1995. The coupon-equivalents at Monday’s auction were 5.57 percent for 3-month bills and 5.86 percent for 6-month bills.
Local news: Chicago-based Quaker Oats gained $1.12, to $62.87, after Merrill Lynch boosted its earnings forecast for the company for this year and next. A Merrill Lynch analyst cited strong sales of Quaker Oats’ leading beverage, Gatorade, resulting in part from comparatively warm fall weather this year. On the other hand, the analyst noted that warm weather has hurt sales of hot oatmeal.
Schaumburg-based Motorola gained $3.09, to $134.66, after bullish comments by a Banc of America Securities analyst. The analyst said Motorola’s first-quarter unit sales growth, which often fades from the fourth-quarter numbers, is looking strong for 2000, a “very bullish signal.”
