Analyst: Sell Data Domain equity now; Merck, Schering meetings set; GM inks deal to sell Saab

By Stephanie N. Rotondo

Portland, Ore., June 16 - A market analyst recommended Tuesday that investors take some profits and sell Data Domain Corp. stock.

The recommendation came just one day after the company's board of directors rejected an unsolicited offer from EMC Corp. in favor of a bid from NetApp Inc. But the analyst, while not surprised by the board's suggestion, believes that shareholders will likely make their own decisions.

Meanwhile, special meetings to vote on their merger proposal have been set for both Merck & Co., Inc. and Schering-Plough Corp. An analyst told Prospect News that he does not foresee any roadblocks to the deal's completion.

In the automotive sector, General Motors Corp. announced it had inked a preliminary deal with a Swedish sports car manufacturer to sell its Saab unit. But some see the pairing of the two entities as odd.

Broadcom Corp.'s tender offer for Emulex Corp.'s stock is set to expire on Wednesday, but one market player believes that the offer will be extended for a second time. Though Emulex has rejected the deal from the beginning, he said, the proposal "has legs."

Overall, the stock market ended the session weaker, but more modestly so than the previous session.

The Dow Jones Industrial Average declined 77.84 points, or 0.90%, to 8,534.29, and the Standard & Poor's 500 index slipped 8.82 points, or 0.95%, to 914.90. The Nasdaq Composite was also lower, falling 14.05 points, or 0.77%, to 1,802.33.

Analyst: Sell Data Domain

In a research report obtained by Prospect News, a ThinkEquity LLC analyst recommended selling off Data Domain's equity at current price levels.

The recommendation comes one day after Data's board of directors recommended rejecting a $30-per-share all-cash bid from EMC in favor of a $30-per-share cash-and-stock bid from NetApp.

"[Data Domain's] preference for [NetApp's] offer over EMC's offer was not a surprise, in our view," Rajesh Ghai wrote in a note to clients. "However, we believe [Data Domain's] response to EMC's proposal provides EMC with a specific course of action to sweeten the pot for [Data Domain] and, hence, would not be surprised if EMC returns with an offer to the board addressing those specific issues in the near future.

"[Data Domain's] response to EMC's proposal indicates that it would like EMC to make a more definite and less-conditional offer, sign 'NDAs' to formally initiate a negotiation process, and potentially sweeten the pot by addressing the potential uncertainty related to anti-trust issues."

And, though Data Domain's board has historically favored the NetApp deal, an all-cash offer might carry more weight with shareholders.

"We continue to believe that an all-cash offer will trump a cash-stock combo offer," Ghai concluded. "We believe that a majority of [Data Domain's] shareholders are likely to prefer keeping the capital allocation decision to themselves instead of the [Data Domain] board and prefer the all-cash offer from EMC over [NetApp's] cash-stock combo, especially if the total consideration is the same."

Data Domain's stock slipped 57 cents, or 1.73%, to $32.30. EMC's stock fell by 36 cents, or 2.77%, to close at $12.62, and NetApp's stock fell 54 cents, or 2.72%, to $19.28.

Data Domain makes deduplication storage appliances and is based in Santa Clara, Calif.

EMC, located in Hopkinton, Mass., develops information infrastructure technology and solutions.

NetApp is a Sunnyvale, Calif.-based data storage company.

Merck, Schering meetings

Pharmaceutical companies Merck and Schering-Plough have scheduled meetings for Aug. 7 to allow shareholders an opportunity to vote on the parties' potential merger.

Merck's shareholders will meet at 8:30 a.m. ET, and Schering-Plough's meeting is scheduled for 1:30 p.m. ET.

One analyst said he does not foresee any roadblocks to the $41.1 billion deal.

"We expect both companies to approve it," said Dr. Jon LeCroy of Natixis Bleichroeder. "Merck's growth prospects alone are not very impressive."

However, he said, growth opportunities at Schering-Plough are abundant.

Under the so-called reverse merger, Merck will acquire Schering-Plough and integrate the company under the Merck moniker.

However, based on the logistics of the deal, Schering-Plough is technically the remaining company. That has resulted in Johnson & Johnson - with whom Schering-Plough has a partnership on some product lines - alleging that the transaction constitutes a change of control. Therefore, Johnson is stating that the partnership is void.

Schering-Plough is "vigorously contesting" the allegations, according to regulatory documents.

Merck's stock fell 44 cents, or 1.76%, to $24.52, while Schering-Plough's equity dipped 14 cents, to 0.61%, to $22.94. The companies are based in Whitehouse Station, N.J., and Kenilworth, N.J., respectively.

GM to sell Saab

General Motors has entered into a preliminary agreement to sell its Saab brand to Swedish carmaker Koenigsegg Group AB.

The sale is just one of many that the Detroit automaker is trying to settle as it reorganizes in bankruptcy court. The goal is to offload some of its money-losing assets in an effort to emerge from Chapter 11 protections a lean, mean car-making machine.

"This is yet another significant step in the reinvention of GM and its European operations," Carl-Peter Forster, GM's European president, said in a press release. "Saab is a highly respected automotive brand with great potential. Closing this deal represents the best chance for Saab to emerge a stronger company.

"Koenigsegg Group's unique combination of innovation, entrepreneurial spirit and financial strength, combined with Koenigsegg's proven ability to create world-class Swedish performance cars in a highly efficient manner, made it the right choice for Saab as well as for General Motors."

But several news reports out Tuesday indicated that some felt the combination of Saab and the boutique sports car manufacturer was odd, to say the least. Koenigsegg is a much smaller company, with only 45 employees. Saab, for its part, has faced several years of declining sales, which have only increased during the economic downturn.

"The deal appeared to be the only serious offer for Saab and the company now has a chance of becoming a viable, technology- and green-orientated premium carmaker, although the road ahead looks very tough indeed," IHS Global Insight analyst Tim Urquhart wrote.

"Although there is still a good amount of goodwill towards the Saab brand across Europe, there is no doubt that Saab's brand values of innovation, safety and original design have been significantly diluted and undermined during the period of GM ownership," Urquhart added. "However, Koenigsegg can play a part in revitalizing the company's brand values as well as extending them to include the development of green technologies, as specified by the conditions attached to the [European Investment Bank] loan.

"However, there are enormous obstacles to overcome, not least ensuring that the company can limit its cash burn and buy sufficient time and attract funding to underpin a turnaround," he concluded. "It also needs to ensure that sales do not fall much further than 2008's figure of 92,000 units, while overseeing the successful launch of the new 9-5."

GM's shares increased by 6.9 cents, or 5.48%, to $1.329. GM filed for bankruptcy on June 1.

Broadcom tender offer

Broadcom's tender offer for Emulex's equity expires on Wednesday, and one analyst speculates that the offer will be extended.

"More than likely we'll end up seeing an extension of that," said Gary Mobley of Noble Financial. "The deal still has the possibility to come to fruition."

Though less than 5% of Emulex's stock has been tendered, Mobley opined that the offer deadline will be moved to July 8, also the date of a scheduled court hearing in which Broadcom will attempt to "eliminate the poison pill contained in Emulex's charter."

Also, Mobley said it is not impossible that Broadcom will increase its $9.25-per-share offer, especially if Emulex's board agrees to release non-public information to the company.

"It has legs," Mobley said of the deal. On the one hand, merging with Emulex would be "highly accretive" for Broadcom. Additionally, Emulex currently produces technology that Broadcom does not have - meaning Broadcom can either develop it or acquire another company that does, which would likely be "much more costly" than the current proposal.

Broadcom's shares softened 47 cents, or 1.80%, to $25.60. Emulex's equity closed 17 cents, or 1.56%, weaker at $10.52.

Emulex is a Costa Mesa, Calif., storage networking company. Irvine, Calif.-based Broadcom provides semiconductors for wired and wireless communications.

Mentioned in this article:

Broadcom Corp. Nasdaq: BRCM

Data Domain Corp. Nasdaq: DDUP

EMC Corp. NYSE: EMC

Emulex Corp. NYSE: ELX

General Motors Corp. Pink Sheets: GMGMQ

Merck & Co., Inc. NYSE: MRK

NetApp Inc. Nasdaq: NTAP

Schering-Plough Corp. NYSE: SGP

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