Yahoo! rises on merger talk; Armor, Starwood climb on buyout rumors; Clear Channel up on thwarted bid

By Kenneth Lim

Boston, May 4 - Takeover rumors made the rounds on Friday as Yahoo! Inc. ran higher then retreated on reports of merger talks with Microsoft Corp.

Armor Holdings Inc. also climbed following a positive research report and speculation that it could be the target of a buyout.

Meanwhile, Clear Channel Communications Inc. gained after the company's board rejected a sweetened takeover bid by a private equity group.

Investors looking for possible takeover action got the rumor machine going on Friday, with Starwood Hotels & Resort Worldwide Inc. also coming under the microscope, a trader said.

"There's some chatter about HOT, Starwood Hotels getting bought out," the trader said. "It's the normal kind of Friday when people are putting stuff like these out there. It's unbelievable. The stock is up, there's no news. The rumor mill has been circling around."

Starwood Hotels stock (NYSE: HOT) gained 1.71% or $1.19 to close at $70.91 on Friday. The hotel and resort operator is based in White Plains, N.Y.

Yahoo! rumors fizzle

Yahoo! went on a wild ride Friday as early reports first said it was exploring a merger with Microsoft but a report near the end of the session said the discussions were no longer active.

Yahoo! stock (Nasdaq: YHOO) finished the day at $30.98, up by 9.94% or $2.80.

"I think everyone and their mother traded it," a sellside trader said. "The story I think is the fact that neither company came out and denied it was certainly the most interesting point. Normally you've seen people come out and deny it or not make any comments, but in this case they didn't say anything, which was very telling."

Reports by the Wall Street Journal and the New York Post early Friday said Sunnyvale, Calif.-based Yahoo!, an online services provider, and Redmond, Wash.-based Microsoft, the maker of the Windows operating systems and the Xbox game consoles, were in talks to discuss a merger between the two companies. The reports placed a possible $50 billion value on Yahoo!, or about $37 per share.

But a new report just minutes before the market closed said the discussions were not active. That report came after mounting skepticism over the day about a deal going through.

"There's talk about how it could be...just an advertising partnership," the trader said.

An analyst said a merger could face antitrust issues.

"Given Microsoft's track record and the kind of clout a combined Microsoft-Yahoo! would have in the market, I wouldn't be surprised if the antitrust people block the deal," the analyst said.

Microsoft and Yahoo! also have a significant amount of overlap in terms of their online businesses, which makes the benefits of a merger less clear-cut, the analyst said.

"Microsoft's got its own MSN and Microsoft Live services so there's significant overlap here, although Microsoft's main business is still traditional software," the analyst said. "But I wouldn't say that a merger is obviously a good move."

Yahoo!'s zero-coupon convertible due 2008 surged about 20 points outright, tracking the stock with a deal seen as unlikely to yield any extra points for holders.

"This is probably a parity item," a convertible analyst said. "It's trading right now at parity plus three-quarters of a point or something like that, and it's not all that exciting. There's no takeover protection at these levels because you're already in the money so it's not really interesting."

Armor Holdings rides report, rumors

Armor Holdings also improved on Friday after a broker raised his target price on the stock and rumors emerged that Lockheed Martin Corp. could be interested in buying the company.

Armor Holdings stock (NYSE: AH) rose 5.74% or $4.46 to close at $82.15.

"There's been takeover chatter the last couple of days," a trader said.

Armor Holdings, a Jacksonville, Fla.-based maker of tactical wheeled vehicles, and Lockheed Martin, a Bethesda, Md.-based defense company, could not be reached for comment.

Prudential Equity analyst Byron Callan on Friday raised his price target for Armor Holdings stock to $80 from $72 with an overweight rating. Callan cited expectations that Armor Holdings will benefit from the United States' plan to double the size of its mine-resistant ambush-protected vehicle fleet.

Armor Holdings' 2% convertible due 2024 also surged on the buyout rumors and may have improved slightly on a dollar-neutral basis on initial confusion about the extent of its takeover protection, a convertible analyst said.

The convertible closed at 165.75 against the closing stock price of $82.15.

"There's been some talk that Armor Holdings could be bought by Lockheed Martin," the analyst said. "The Armor Holdings convertible was up because the takeover make whole is really good on the convertible."

"The premium had widened out a little bit even though the bonds are way in the money based on the thinking that they'd be taken out for cash, and then you'd have this big takeover premium," the analyst said. "But with the stock where it is, with 22 points of make whole and the premium right now is only like 12 points, so people got all excited and thought, well gee, I'm going to set this up and I'll take the extra 10 points. But what people need to remember is that there needs to be some kind of discount because there's a public acquirer waiver."

The analyst explained that because Lockheed Martin is a publicly traded company, if it acquires Armor Holdings it can elect to change the notes so that they are convertible into Lockheed Martin common stock and avoid paying the make-whole.

"If they're a public acquirer I can't imagine why they would want to pay 20 points over parity as a make-whole if holders convert because they'd be converting into cash and they would have to pay 20 extra points so they end up paying an extra for no reason."

Clear Channel higher as bid falters

Clear Channel improved on Friday after its board of directors rejected a higher $19.6 billion private equity bid. Along with indications that fund manager and major shareholder Fidelity would also oppose the deal, the offer appeared to be in trouble in its current form, a trader said.

Shares of San Antonio, Texas-based Clear Channel (NYSE: CCU), a radio broadcasting and outdoor advertising company, ended the day at $36.35, up by 1.11% or 40 cents.

"It wasn't a very big surprise," a trader said. "The big shareholders like Fidelity already said they didn't like the deal, so even if the board thought it was a good deal it had a pretty slim chance of getting passed. I think some people are hoping a better deal will be put on the table."

Clear Channel's directors said late Thursday that the $19.4 billion offer by private equity firms Bain Capital Partners and Thomas H. Lee Partners was not materially better than their earlier offer. The new offer represents about $39.20 per Clear Channel share, compared to the earlier offer of $39 per share. Clear Channel also said it enough shareholders disapprove of the deal to block it. Fidelity, one of the company's largest shareholders, has already said it will not approve the deal, and Institutional Shareholder Services has also opposed the offer.

Clear Channel shareholders will vote on the deal May 8.

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