U.S. Stocks Advance on Takeovers; Affiliated Computer Surges

By Lynn Thomasson

Sept. 28 (Bloomberg) -- U.S. stocks rose, sending benchmark indexes up the most in five weeks, as takeovers in the drug and technology industries added to evidence that mergers and acquisitions are rebounding from the slowest pace in six years.

Affiliated Computer Services Inc. jumped 14 percent after Xerox Corp. agreed to buy the company for $6.4 billion. Abbott Laboratories advanced 2.6 percent on plans to purchase Solvay SA’s pharmaceutical unit and gain control of the TriCor cholesterol drug. Cisco Systems Inc., the largest maker of networking equipment, gained the most since July as Barclays Plc predicted revenue will increase.

The Standard & Poor’s 500 Index added 1.8 percent to 1,062.98 at 4:09 p.m. in New York, snapping a three-day losing streak. The Dow Jones Industrial Average gained 124.17 points, or 1.3 percent, to 9,789.36. About 979 million shares changed hands on the New York Stock Exchange, 21 percent fewer than the three-month average as trading slowed on the Yom Kippur holiday.

“We’ve seen a pickup in acquisitions and it’s a very big plus,” said Hugh Johnson, who manages more than $1.6 billion as chairman of Albany, New York-based Johnson Illington. “It’s always good news when you see money come into the market.”

Financial stocks climbed 3.4 percent collectively to lead gains in all 10 of the S&P 500’s main industries, trimming the decline in the index to 0.8 percent since it reached an almost one-year high on Sept. 22. The benchmark gauge for U.S. equities has climbed 57 percent from a 12-year low in March. Companies in the S&P 500 traded at 20.2 times reported profits from continuing operations on Sept. 22, data compiled by Bloomberg show, the highest valuation since 2004.

M&A

Mergers and acquisitions involving U.S. companies have totaled $49.1 billion in September, compared with $26.6 billion in August and $36.8 billion in July, based on Bloomberg data. Through the first three weeks of September, M&A dropped by about half in the U.S. to $492.5 billion this year, the slowest pace since 2003, Bloomberg data show.

Xerox, the world’s largest maker of high-speed color printers, said it’s buying Affiliated Computer for $63.11 in cash and stock for each Affiliated Computer share, 34 percent more than the closing price on Sept. 25. The purchase will extend Xerox’s reach in the services market as sales of its traditional printing equipment decline.

Affiliated Computer jumped 14 percent to $53.86 for the S&P 500’s biggest gain. Xerox posted the biggest loss in the index with a 14 percent slide to $7.68.

Abbott added 2.6 percent to $48.58, its highest price since March. The company’s purchase of Solvay’s pharmaceutical unit will also give Abbott a bigger presence in emerging markets and lower its dependence on the arthritis drug Humira.

Cash Flow

As the economy emerges from the worst recession in seven decades, U.S. companies’ cash flow may rise from the $1.5 trillion reported by the Commerce Department for the year ended in June, according to data compiled by Credit Suisse Group AG and Bloomberg. Cash relative to share prices will climb to the highest in at least two decades next year compared with yields on corporate bonds, the data show.

The previous high in 2005 preceded the two busiest years ever for takeovers.

Europe’s Dow Jones Stoxx 600 Index jumped 1.8 percent. Germany’s DAX Index advanced 2.8 percent after Chancellor Angela Merkel won re-election with enough support to govern with the pro-business Free Democrats.

The MSCI Asia Pacific Index fell 1.5 percent, led by Japanese exporters as the yen strengthened to an eight-month high.

Cisco rose for the first time in five days, jumping 4.4 percent to $23.61. Barclays raised its recommendation on the company to “overweight” from “equal-weight.”

Insurers Rally

A gauge of insurers in the S&P 500 rallied 5 percent, with MBIA Inc. and Hartford Financial Services Group Inc. jumping more than 10 percent to lead gains in all 21 companies in the group. Insurance Services Offices Inc. said U.S. property and casualty insurers, a group including Allstate Corp. and Travelers Cos., returned to an underwriting profit in the second quarter, making more on premiums than they paid in expenses and claims.

Americans holding $3.5 trillion in cash are giving money managers increasing confidence that the stock market rally under President Barack Obama will continue through the end of the year. Even after reducing money-market accounts by 11 percent this year, investors have cash equal to 73 percent of S&P 500 companies’ net assets, according to data compiled by the Investment Company Institute and Bloomberg. At the peak of the bull market in 2007, the measure of buying power was 62 percent.

MEMC, Gander Mountain

MEMC Electronic Materials Inc. lost 3.1 percent to $16.75. The maker of silicon wafers for solar modules and semiconductors was cut to “hold” from “buy” at Citigroup Inc.

Gander Mountain Co. surged 34 percent to $5.10. The sporting-goods retailer said it will go private, buying out stockholders who own fewer than 30,000 shares for $5.15 a share.

GenTek Inc. jumped 40 percent to $37.67 for the second-biggest advance in Russell 2000 Index. The maker of valve-train equipment and chemicals used in water treatment agreed to be acquired by American Securities LLC for about $411 million, or $38 a share.

Pomeroy IT Solutions Inc. added 11 percent to $6.47. The consultant and seller of business management software and services agreed to be bought by Platinum Equity LLC for $6.50 a share.

Earnings season starts next week with Alcoa, the first Dow company to release results, scheduled to give third-quarter earnings on Oct. 7. Walgreen Co., Micron Technology Inc. and Constellation Brands Inc. are among the S&P 500 companies set to release reports this week.

Wien Calls for Rally

The S&P 500 is poised for its biggest fourth-quarter rally in a decade as the economy recovers and earnings exceed analysts’ forecasts, according to Byron Wien, vice chairman of Blackstone Group LP.

The benchmark gauge for U.S. stocks will rise to 1,200 by the end of the year, a 13 percent advance from today’s close of 1,062.96, Wien said in a telephone interview. The forecast is a reiteration of Wien’s prediction at the start of 2009 that the S&P 500 would climb 33 percent this year.

“I’m not backing away from it,” said Wien, 76, the former chief market strategist for hedge fund Pequot Capital Management. “In March, that didn’t look too good and people wouldn’t make eye contact with me. But now, with three months to go, that looks like it may be realized. The economy will be stronger and corporate earnings both in the third and fourth quarters will be better than expected.”