Business Blog Posts

South Korea .KS11 and Japan .N225 led gains, with the former ending up below a record high and the latter closing at a nine-month peak.

Japan, which is the best performing Asian market this year with year-to-date gains of more than 3 percent, has benefited from a shift into developed markets and generally strong corporate earnings. The index closed up 0.5 percent.

South Korea has seen inflows from investors rotating out of last year's hot performing emerging markets in South and Southeast Asia due to relatively attractive valuations.

The broader MSCI index of Asian stocks outside Japan was up 0.4 percent to within striking distance of a three-year peak tested in January.

So far this year, Asian stocks have underperformed the MSCI world index by nearly three percentage points due to a variety of factors such as frothy valuations in some markets in South and Southeast Asia and strong data out of the U.S.

Investors pulled out $7 billion from emerging markets equity funds in the week of February 4, their biggest outflow in three years, data from fund tracker EPFR Global showed, putting a sizeable dent in record inflows seen in this category in 2010.

But indications that Asian authorities are demonstrating greater urgency to tackle inflation, with Indonesia being the latest country to increase interest rates by a quarter point last week, have made investors optimistic about the near-term outlook.

"Policymakers are likely to adopt more administrative measures and front-load rate hikes as inflationary expectations continue to rise," Barclays Capital strategists said in a note.

Most Asian markets which were closed for the Lunar New Year holiday late last week reopened on Monday with the exception of China, where trading will not resume until Wednesday.

DOLLAR DIPS

Boosted by Friday's data, which showed a sharp drop in the U.S. jobless rate, the dollar gained briefly against a basket of currencies. The dollar index .DXY, which tracks the greenback against a basket of major currencies, had dipped 0.2 percent by midday, nearing a three-month low of 76.881 tested last Wednesday.

The euro was up 0.2 percent at $1.3617 with traders citing talk of euro-buying by Asian names.

Reports of euro zone infighting over a French and German push for a comprehensive package of reforms to address the region's debt crisis also kept a lid on the euro.

Indeed, Credit Agricole said many of its Asian clients were skeptical about any signs of improved sentiment toward the eurozone's debt troubles.

The boards of both companies were scheduled to hold separate meetings on Sunday to discuss the status of a potential deal, but no final decision was likely to be made, said the sources, who declined to be named because the talks were not public.

French drugmaker Sanofi is still conducting due diligence on Genzyme's financial records and manufacturing operations, and discussions between the sides could linger into the week, sources said.

An agreement would come nearly nine months after Sanofi first put the idea to the U.S. biotech group.

Buying Genzyme will give Sanofi a new area for growth in the high-margin business of rare diseases as it seeks to make up for patent losses that will take out roughly a third of its 2008 sales base until 2013.

A deal is likely to be priced at roughly $74 per share in cash, or $19.2 billion, based on Genzyme's outstanding shares of 258.99 million as of October 29, plus a contingent value right, or CVR, with an intrinsic value of $5 to $6 a share, the sources said.

The CVR is a tradable instrument, which promises a payout to shareholders over time, based on the performance of Genzyme's experimental drug Lemtrada for multiple sclerosis. The drug is already sold under the brand name Campath for leukemia.

The nominal value of the CVR is expected to be between $12 and $15 a share, to be paid out over seven or eight years, assuming Lemtrada fulfills Genzyme's highest sales projections, according to one source.

That nominal CVR value is above what Wall Street had been expecting, said Mark Schoenebaum, an analyst at ISI Group.

"We suspect the market will deeply discount the vehicle," Schoenebaum said. "Our back-of-the-envelope calculations suggest that a $13.50 CVR that pays out over 7.5 years might trade at around $3 a share today. This assumes a 10 percent discount rate and 40 percent probability adjustment."

Since many Genzyme shareholders are short-term investors, the CVR could trade closer to $2 a share, according to one source. In that case, the deal would give Genzyme a tradable value of about $19.68 billion.

A BETTER DEAL

Sanofi Chief Executive Chris Viehbacher first told Genzyme CEO Henri Termeer he was interested in a deal on May 23 last year. He took an initial bid of $69 a share directly to Genzyme shareholders in October. But the two companies have entered direct negotiations on a higher price in recent weeks.

"A $74 cash deal makes financial and strategic sense for Sanofi. It removes a substantial overhang and gives a bridge over the patent cliff they face," said Marc Booty, a fund manager at Pictet.

Genzyme's stock traded at about $50 as recently as July, 2010. The stock closed Friday at $73.40.

Nasdaq OMX Group said on Saturday that it found "suspicious files" on its U.S. computer servers, but said there was no evidence hackers had accessed or acquired customer information or that its trading platforms were compromised.

The news comes as flows into U.S. equity mutual funds show signs of recovering after years of outflows following the financial crisis and the debilitating experience of the "flash crash" last May that sent U.S. indexes plunging.

"There have been a number of events over the last few years that have damaged investor confidence and this could certainly be another one," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Just last week, an unexplained hour-long glitch locked the prices of two key indexes -- the widely followed Nasdaq Composite and the Nasdaq 100.

Given that about 21 percent of all U.S. cash equity trading was matched on one of Nasdaq OMX's exchanges last year -- second only to Big Board parent NYSE Euronext -- the integrity of its marketplace is closely aligned with the smooth functioning of U.S. markets in general.

The timing is poor as a stocks rally from last year has started to draw retail investors back into equities and away from bond funds.

The last three weeks of January saw back-to-back inflows into domestic equity mutual funds amounting to $10.3 billion, the longest streak of inflows in 1-1/2 years, according to data from the Investment Company Institute.

Individual traders also returned in force to U.S. equity markets in January, helping drive volumes to their highest levels since the "flash crash" last May.

Daily trading among retailers, including active "day traders" who drive much of the volume, jumped some 25 percent from December to January, Sandler O'Neill analyst Richard Repetto wrote in a note estimating market activity.

Although this event in itself is unlikely to have an impact on that trend, maintaining confidence is key at a time when regulators are concerned about the stability of the electronic marketplace and many retail investors believe the odds are against them.

"In general, investors have become increasingly concerned about some of the movements in the market ... and things like this just serve to undermine confidence," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Meckler said Nasdaq needed to release more information about the security breach.

"Just entering a system is a lot different from using a system to profit from it," he said. "That distinction is yet to be made."

Jim Awad, Managing Director at Zephyr Management New York, said investors were reserving judgment until Nasdaq released more information.

The VIX, a gauge of investor anxiety, dropped last week despite unrest in the Middle East and oil prices are basically unchanged from two weeks ago. After posting its best week in the past nine last week, the S&P 500 has actually seen oversold levels tick lower.

"I expect the market to continue to rally despite the fact the economic news is sluggish in the jobs front," said Michael Yoshikami, chief investment strategist at YCMNet Advisors in Walnut Creek, California.

Government data showed Friday the U.S. economy created 36,000 jobs in January, far fewer than expected, but the unemployment rate fell to its lowest since April 2009. Economists agreed a recovery in the labor market was proceeding but not gaining speed.

Upbeat signals in the economy, coupled with a positive bias in the current earnings season, should continue to propel equities higher.

More than 70 percent of the S&P 500 companies have reported earnings above estimates so far, according to Thomson Reuters data. Investors expect aggregate earnings rose 37 percent in the last quarter, the highest estimate for that period in more than 10 months.

"We believe corporate earnings will continue to recover as companies are more efficient and economies bounce back," Yoshikami said.

FEW HURDLES AHEAD

The energy, industrials and technology sectors are "trading well into overbought territory," according to a report from Bespoke Investment Group. But two recent weeks of declines are helping ease overall selling pressure, and the rally that started in September shows no signs of weakness.

"This market has been really eating up resistance levels as an every week event," said John Kosar, director of research at Asbury Research in Chicago. "We targeted 1,313 for (last) week as a near-term inflection point, and we haven't broken it yet."

The target coincides with the benchmark's highest level in August 2008. Chartists have mentioned the 1,360 area, the 76.4 retracement of the S&P's downhill move from late 2007 to March 2009, as one of the few technical hurdles the index faces before hitting 1,400.

The S&P has risen 25 percent since the start of September, which has led to a lack of confidence and calls for a pullback. Still, the CBOE volatility index .VIX fell 20.5 percent this week after a near 30 percent spike in the two previous weeks.

"There's a healthy degree of skepticism and many people are still calling for a correction," said Richard Ross, a global technical strategist at Auerbach Grayson in New York.

THIN DATA CALENDAR

This week is slow in terms of economic indicators, with the preliminary reading of the Reuters/University of Michigan consumer sentiment as the highlight of the week.

The boards of both companies are scheduled to meet on Sunday to decide on Sanofi's proposed acquisition, according to sources with knowledge of the situation.

The deal is expected to be priced at $74 a share in cash, or more than $19 billion, plus a tradable contingent value right, or CVR, with an intrinsic value of $5 to $6 a share, the sources said.

Buying Genzyme will give Sanofi a new area for growth in the high-margin business of rare diseases as it seeks to diversify to make up for patent losses that will take out roughly a third of its 2008 sales base through to 2013.

"A $74 cash deal makes financial and strategic sense for Sanofi. It removes a substantial overhang and gives a bridge over the patent cliff they face," said Marc Booty, a fund manager at Pictet.

Sanofi Chief Executive Chris Viehbacher, who first told Genzyme CEO Henri Termeer he was interested in a deal on May 23 last year, took an initial bid of $69 a share directly to Genzyme shareholders in October. But the two companies in recent weeks have entered direct negotiations on a higher price.

The CVR is a tradable instrument, which promises a payout to shareholders over time based on the performance of Genzyme's experimental drug Lemtrada for multiple sclerosis. The drug is already sold under the brand name Campath for leukemia.

It is not possible to pin down what the CVR will begin to trade at, but a reasonable estimate may be $2 a share, since many of Genzyme's shareholders are short-term investors who will want to sell immediately.

CONFIDENTIALITY PACT

A Sanofi spokesman said the French drugmaker was continuing to review Genzyme's business and declined to say when a deal might be concluded.

"As we have already indicated, we have signed a confidentiality agreement with Genzyme and we are still looking at non-public information. We have no further comment," he said.

Sanofi is due to release its full-year financial results on Wednesday and a deal could be announced before then, possibly as early as Monday, although unresolved issues mean the timing is uncertain, according to sources familiar with the matter.

The two companies have been discussing a potential deal, including a CVR, for several weeks, trying to bridge a wide gap in their expectations for Lemtrada. Genzyme has forecast peak annual sales of $3.5 billion, while Sanofi, using the average of several analyst estimates, expects only about $700 million.

Helvea analyst Karl-Heinz Koch said a CVR was a smart way for Sanofi to deal with the unknowns surrounding Lemtrada.

"They are not paying upfront for a lot of uncertainty -- that's important," he said. "At $74 plus a CVR the deal terms would be within reason ... The earnings leverage to Sanofi is substantial. They can extract a couple of billions in profit by integrating Genzyme."