Arbitrage spreads on mergers have narrowed a bit from their widest levels two weeks ago, but still remain wide on a historical basis, according to Andy Baker, special situations trading strategist for Jefferies & Co Inc. 

Spreads measure the difference between the offered takeover price and the target company’s current trading price. Historically, the wider the spread, the more investors doubt a deal will close. 

Spreads are about three times wider than they were prior to the bankruptcy of Lehman Brothers, Baker said, with raw spreads currently averaging just under 10 percent.

Average spreads on strategic stock deals have improved in the past week, tightening to 8.9 percent at last night’s close, down from 11.5 percent a week ago. Strategic cash deals tightened somewhat to 6.3 percent, versus 6.9 percent a week.

Still, the spread for the InBev and Anheuser-Busch deal stood at 11.6 percent on Wedneday, while  Bank of America Corp’s planned purchase of Merrill Lynch had a spread of 10.6 percent. The spread of Cleveland Cliff’s planned purchase of Alpha Natural Resources stood at 35.7 percent, according to Reuters data.

Leverage buyouts continue to have among the widest spreads, reflecting the greater uncertainty that those deals will close amid the weak credit market and global financial crisis, Baker said. The spread on the $32.5 billion LBO of BCE Inc, the parent of Canada’s largest telephone company, stood at 18.9 percent, according to Reuters data. 

Some spreads have been stretched to the breaking point.

On Wednesday, Samsung Electronics Co Ltd, the world’s top memory chip maker, withdrew a $5.9 billion unsolicited bid for flash memory card maker SanDisk, citing the U.S. company’s deepening losses and uncertain outlook.

Investors had already been doubtful of a deal between Samsung and SanDisk, given that the spread between Samsung’s offer price and SanDisk’s trading price was 80 percent, according to Reuters data.

Another day, another round of hand-wringing: Do I, or don’t I? That seems to be the mantra of top executives mulling buys in what continues to be a rocky market while those on the receiving end are left wondering will he, or won’t he?

So far, it ain’t looking good — for the sellers, or the buyers.

Late last night, Samsung Electronics Co Ltd, the world’s top memory chip maker, decided to dump its pursuit of flash memory card maker SanDisk Corp. That unsolicited deal would have been worth $6 billion, but Samsung apparently got cold feet after seeing SanDisk’s wider-than-expected quarterly loss.

“Your surprise announcements of a quarter billion dollar operating loss, a hurried renegotiation of your relationship with Toshiba and major job losses across your organization all point to a considerable increase in your risk profile and a material deterioration in value, both on a stand-alone basis as well as to Samsung,” Samsung CEO Lee Yoon-woo wrote to SanDisk management in a letter disclosed by Samsung on Wednesday.

As a result of these developments, we are no longer interested in acquiring SanDisk at $26/share.”

Ouch. At least Lee won’t be accused of beating around the bush.

The move, of course, wasn’t a big surprise. Many investors had been doubtful a deal would get down in the first place, given that the spread between Samsung’s offer price and SanDisk’s trading price was 80 percent, according to Reuters data.

But it’s also another sign that caution rules these days. As reporter Jessica Hall pointed out in her DealTalk column earlier this week, even marquee mergers have become more difficult and costly to close amid an ongoing credit freeze and financial crisis.

Look at GE and its appliance unit. That dance card has been open since May and suitors remain reluctant. Reporter George Chen, in another DealTalk column, points out that potential buyer Haier, China’s largest home appliance maker, plans not to bid for the unit until it sees clear signs of a U.S. market recovery. Chen was citing people with direct knowledge of the matter.

Meanwhile, General Motors is looking for a large investment from outside investors as a possible alternative to a deal with Chrysler, the Financial Times reported on Tuesday. GM and Chrysler have been in merger talks in an attempt to shore up cash and survive an industry slump, sources have said.

As the old saying goes, money makes the world go round. But the globe doesn’t appear to be spinning very fast these days.

More Deals of the Day:

** Japan’s largest beer maker Asahi Breweries Ltd is in a leading position in a bid for Groupe Danone’s Australian and New Zealand businesses, which could be worth up to A$1 billion ($678 million), a financial source said.

** Samsung Electronics Co Ltd, the world’s top memory chip maker, dropped a $5.9 billion unsolicited bid for flash memory card maker SanDisk Corp, citing the U.S. company’s deepening losses and uncertain outlook.

** Barnsley Building Society is to merge with larger UK rival Yorkshire Building Society after revealing a possible 10 million pound writedown from its exposure to two Icelandic banks, the companies said in a joint statement.

** Nissan Motor Co is proposing to buy about 20 percent of Chrysler and bring the troubled automaker into the Franco-Japanese alliance with Renault SA , the Detroit News reported, citing sources familiar with the situation.

** British Gas owner Centrica Plc said it bought Semplice Energy Ltd, a clean technology services provider, for up to 1.5 million pounds ($2.53 million) in cash to expand its range of energy efficiency and low-carbon capabilities.

** Legal and professional fee insurer Abbey Protection Plc said it would acquire three companies in the Accountax fold for an initial consideration of 4.4 million pounds ($7.4 million).

** Shares in global miner and takeover target Rio Tinto Ltd jumped 5 percent in a weak market, swept up by rumours ranging from a sweetened cash bid by BHP Billiton to a Chinese counter-bid.

** Wind turbine maker Clipper Windpower Plc said it has completed a joint venture agreement with an energy unit of oil major BP Plc for the development of a windfarm in U.S.

** Spain’s largest property company Martinsa Fadesa said its 50 percent owned Moroccan unit has sold assets for 165.7 million euros ($218.5 million), making a pretax gain of nearly 43 million.

** U.S.-based DTCC (Depository Trust & Clearing Corporation) and London-based LCH.Clearnet said they planned to merge to form the world’s leading clearing house. LCH.Clearnet shareholders would receive total consideration of up to 739 million euros ($974.7 million), the majority of which would be funded through LCH.Clearnet’s revenue, the companies said in a media release.

** Vienna stock market operator Wiener Boerse agreed to buy a majority stake in the Prague Stock Exchange to boost its position in the emerging markets of central and Eastern Europe.

** CITIC Pacific Ltd said it was in preliminary talks to sell its motor vechicle and food distribution unit, Dah Chong Hong Holdings Ltd.

It was a busy day for several leading drug companies, as they made acquisitions, or sought to reassure investors they have the means to follow through with planned acquisitions:

** GlaxoSmithKline Plc is acquiring Biotene, maker of a leading over-the-counter treatment for dry mouth, for $170 million in a move to bolster its consumer healthcare business.

** Swiss drugmaker Roche Holding AG confirmed its commitment to a $43.7 billion bid for the rest of Genentech Inc and reported a 2 percent fall in nine-month sales to 33.3 billion Swiss francs ($29.26 billion).

** Novartis AG has reached a deal to buy the pulmonary drug delivery unit of Nektar Therapeutics for $115 million in cash.

OTHER DEALS OF DAY:

** The Paris and Amsterdam airport authorities will own 8 percent of each other in a strategic alliance and cross-shareholding agreement announced by the French government.

** Russian airline S7 will file a “serious” bid for Austrian Airlines on Tuesday but it will tie it to conditions and ask for more time in the auction due to end next week, a source close to S7 said.

** Google Inc Chief Executive Eric Schmidt said the company had agreed to keep talking with the U.S. Justice Department about its proposed online advertising deal with Yahoo Inc.

** Brazilian mining giant Vale denied rumors that it was preparing a renewed proposal to buy a stake in Swiss rival Xstrata.

** Verizon Wireless, the second-largest U.S. mobile service provider, says it intends to follow through with its acquisition of Alltel Corp, despite tough credit market conditions, the Wall Street Journal reported.

At a time when many dealmakers want to prove their ability to fund an acquisition, Swiss drugmaker Roche Holding AG is staying mum on how it would pay for its bid to buy the rest of Genentech.

“At this point we would not give any details or further information on how we arrange the financing and where exactly we stand in the negotiating process,” Roche Chief Executive Severin Schwan told reporters.  “I would like to reaffirm that we remain committed to the deal and we aim for a negotiated settlement.”

Earlier this month, Roche was in talks with a group of 10 to 15 banks regarding funding, but talks were characterized as “slow” by bankers close to the deal.

When Roche first made its $89 per share offer in July to buy the 44-percent of Genentech it does not already own, it cited the weak dollar as an attractive incentive. Since then, the more than 10 percent increase in the value of the U.S. dollar versus the Swiss franc has prompted some analysts to question whether the deal would be too costly.

Roche has said, however, the currency changes had not altered its willingness to do a deal. On Tuesday, when Roche reported its nine-month results, it said its strong cashflow in the U.S. was a natural hedge for the Genentech bid.

Genentech rejected the $89 per share offer, saying it undervalued the company. Shares of Genentech traded at $85.59, up $1.33, in midday trading on Tuesday. In a Reuters poll in August, the consensus of industry analysts was that Roche would have to hike its offer to about $107.50 per share, raising the cost of the deal to $53 billion from $43.7 billion.

Rodman & Renshaw analyst Christopher James said on Tuesday he saw $95 per share as a fair value for Genentech, and an acquisition premium would push the price “well above $100 per share.”

That’s a lot to finance, especially at a time when other mega-deals, such as InBev’s acquisition of Anheuser-Busch, have been slow to syndicated funding that was already secured.

Warren Buffett has a reputation for being a step ahead of the game in his financial investments. This certainly seems to be the case in Berkshire Hathaway unit MidAmerican Energy’s proposed acquisition of Constellation Energy. 

According to Constellation’s proxy statement, MidAmerican approached the liquidity-strapped power company on Sept. 16 with virtually the same deal the two companies agreed upon: $26.50 a share for Constellation, plus a $1 billion cash investment in convertible preferred stock. 

MidAmerican held firm on its terms. Constellation CEO Mayo Shattuck was initially dissatisfied with the deal price, but the only concession he could get from MidAmerican was a 7-hour delay of the Sept. 17 deadline it set for Constellation to sign the deal. 

Constellation clearly believed it had to sign the deal. The filing describes a company struggling to avoid a downgrade it believed would clearly push it into bankruptcy. And it knew time was running out — the company was worried that ratings agency Moody’s could pull the trigger on a downgrade in the absence of immediate action. 

Moreover, many of Constellation’s European trading counterparties had stopped doing business with the company by Sept. 18. And as Constellation teetered near financial disaster, the company’s board voted to back the deal.

GM may want to help Cerberus get out of the dismal auto business, but there are real doubts about where it comes up with the cash to put a deal together. Markets worry about financing for Altria’s deal for UST and even InBev’s purchase of BUD. We hear a lot about the early thaw of credit markets, but winter seems to be here to stay for a while in M&A. 
 
“Even marquee mergers of large companies with famous brand names have become more difficult and costly to close as the credit markets essentially remain frozen amid the global financial crisis,” reports Jessica Hall.
 
According to Hall, InBev has committed financing to acquire Anheuser-Busch, but the second round of loan syndication has been slowing. InBev last week postponed its $13.4 billion rights issue to complete the takeover but said it still plans to close the purchase this year. Altria said last week it would hold off closing its $10.4 billion purchase of UST until early January because its lenders advised that it would be better to close the deal in 2009.
 
And that’s just beer and tobacco, the more recession-proof end of the corporate spectrum. In the demolition derby that is the auto sector, Jui Chakravorty Das and Kevin Krolicki report that finding willing lenders relies heavily on a government aid. Chrysler has $9 billion of debt, which would have to be paid off as part of a deal if it cannot be refinanced. That would seriously deplete the $11.7 billion pile of cash that GM would grab as part of a deal. 
    
GM needs between $4 billion and $5 billion for payouts for the estimated 30,000 to 40,000 jobs that would be cut through a merger and to close most of Chrysler’s 14 assembly plants, sources have said. GM had about $21 billion in cash at the end of the second quarter, but it was burning through more than $1 billion a month and its market capitalization was only $3.7 billion at the start of this week.
 
Gina Keating reports that while the credit meltdown has throttled mega deals like Waste Management’s $6.7 billion takeover of Republic Services and United Technologies‘ $2.64 billion offer for Diebold, mid-market deals of $500 million and less are going through. 
    
She reports that data on U.S. merger and acquisition activity shows small and mid-sized deals are down but have been more resilient than deals of $1 billion or more so far this year.
    
Over the first three quarters of 2008, deals of $500 million or less are down just 18 percent, while deals in the large-cap space are down 41 percent, said analyst Matthew Toole of ThomsonReuters’ investment banking division.
    
For smaller deals, “you don’t need the huge high-yield financing and syndicated lending packages that the banks are just not willing to extend right now,” Toole said.
    
“We’ve heard the financing is available for those (smaller deals), or at least it was,” he said. “Certainly, with the credit issues we’ve had over the past month or two, that might be different” in the fourth quarter. 

Deals of the day:

* Novartis  has reached a deal to buy the pulmonary drug delivery unit of Nektar Therapeutics for $115 million in cash.

* The Paris and Amsterdam airport authorities will own 8 percent of each other in a strategic alliance and cross-shareholding agreement announced by the French government.

* Norway’s SpareBank 1 Alliance, a consortium of savings banks, has agreed to acquire failed Icelandic Glitnir Bank’s Norwegian arm for 300 million Norwegian crowns ($45.86 million), the alliance said.

* British financial services firm Evolution said it has agreed to acquire the investment management team of Singer and Friedlander Investment Management, a unit of nationalised Icelandic bank Kaupthing, for an undisclosed amount.

*Swiss drugmaker Roche Holding said it was committed to a $43.7 billion bid for the rest of Genentech and reported a 2 percent fall in nine-month sales to 33.3 billion Swiss francs ($29.26 billion).

If anyone has a steady enough business to fund a deal in these uncertain times, it’s a utility. Exelon’s $6.2 billion bid for NRG is two-thirds the size of NRG’s bid last May for energy provider Calpine. That probably says more about how cheap assets are today than whether an Exelon-NRG deal makes more sense.
    
Calpine rejected NRG’s $9.2 billion all-stock offer, calling it too low, but said it might be willing to talk later. Now it is later, and NRG is the target. Calpine would have received a premium of about 7 percent from NRG — a far cry from the 27 percent Exelon is offering to NRG. 
    
NRG’s share price, at $19.33, is less than half what the stock was trading for when the company bid for Calpine, making Exelon’s offer an attractive exit for anyone unconvinced by NRG’s standalone business model.
    
The stodgy utility sector is heavily regulated, boosting its appeal to investors in a time of economic and market stress. But what makes NRG’s business attractive is its non-regulated direct-to-grid power supply income. Government regulation of business is winning new fans every day in the United States, but Exelon has other ideas.

Deals of the day:

* Dutch financial group ING says it will sell its Taiwan life insurance unit to Fubon Financial for $600 million, a day after securing a 10 billion euro ($13.5 billion) government cash injection.

* SanDisk of the United States said it would sell 30 percent of NAND memory chip production capacity at joint ventures with Toshiba to the Japanese partner, in a deal worth about $1 billion.

* The chief executive of Merrill Lynch says that emergency measures by U.S. authorities had solved concerns about liquidity problems and that his bank’s merger with Bank of America was on track.

* India’s Reliance Anil Dhirubhai Ambani Group is looking at the Asian insurance business of American International Group outside of India, the Economic Times reported citing unnamed sources.

* Czech coal mining group NWR said it would acquire a 25 percent stake in Ukrainian iron ore company Ferrexpo for 126.6 million pounds.

* France Telecom said it acquired a majority stake in a Ugandan mobile phone operator and will launch services under its Orange brand in the coming months.

* Panoramic Universal has acquired remaining 21.93 percent stake in Hi-Flyers Travel services Ltd and 51 percent in Sri Vatsa Hotels Pvt, the company said in a statement to the BSE.

* Educomp Solutions says it has acquired 51 percent in Takshila Management Services, which specializes in setting up schools in cities across India.

An auction of Lehman’s Neuberger Berman unit and other investment management bits and pieces moved closer yesterday with bid procedures getting clearance from a New York judge.
 
Private equity groups Bain Capital and Hellman & Friedman agreed last month to purchase Lehman’s prized asset management unit for $2.15 billion, and they will be the lead bidders at an auction for the unit in December.
 
In a status update prior to the judge’s ruling, Lehman’s lead attorney, Harvey Miller, said prosecutors had opened three grand jury investigations into the investment bank’s demise. The New York Post reported that disgraced CEO Dick Fuld is among 12 Lehman executives being subpoenaed. Fuld, questioned by a U.S. congressional panel earlier this month, denied deceiving shareholders.
 
Politicians and the public are calling for heads to roll on Wall Street. Looking into Lehman are federal prosecutors as well as at least one state attorney general. And the FBI is in the early stages of examining mortgage finance companies Fannie Mae and Freddie Mac and insurer American International Group, which were bailed out by the government after getting caught in the credit crunch.
 
Did anyone actually understand the rocket science behind the engineering of the credit default swaps and other complex financial tools that blew up behind the scenes? If not, then it might be a hard sell to convince anyone that investors were intentionally misled.

In the brave new financial world that emerges from the chaos of the ‘08 crash, will Wall Street executives be expected to understand everything their firms are doing? Sounds reasonable, if unlikely.

Deals of the day:

* The credit crisis has forced Dutch builder Royal BAM Groep to put on hold its plan to sell its 21.5 percent stake in Dutch dredger Van Oord, BAM said.

* Japanese trading house Itochu Corp and six Asian steelmakers have agreed to jointly buy a minority stake in Namisa, an iron ore mine owned by Brazilian steelmaker CSN, sources familiar with the deal told Reuters. 

* San Miguel may bring in foreign partners in a bid for a 40 percent stake the Philippines is selling in oil refiner Petron Corp, the president of Southeast Asia’s largest food and beverage firm said.

* India’s Tata Sons has been in talks to buy a stake in AIA, a major Asian unit of American International Group, according to sources close to the matter, as the U.S. insurance giant seeks to sell assets after nearly collapsing last month.

The bloodletting of the third quarter is splattering over Wall St this morning, with grim market conditions taking their toll. Merrill Lynch reported a third-quarter net loss of $7.5 billion on write-downs and credit losses on complex debt securities. The once mighty brokerage last month accepted a takeover bid from Bank of America. It said that the net loss applicable to common shareholders widened to $5.58 per share from $2.3 billion and its loss from continuing operations was $5.56 per share, where analysts were expecting a $5.18 per share short-fall.

It also said revenues, excluding $8.3 billion in interest expenses, were $16 million dollars for the quarter. Seem paltry? Well, it was a big turnaround from the $2.1 billion net revenue loss recorded in the second quarter, but a far cry from the $380 million of net revenue taken in the same quarter a year ago. Contrast this with compensation and benefits expenses, which rose 76 percent to $3.5 billion “primarily due to the reversal of compensation expense accruals in the prior-year quarter”.  

Chief Executive John Thain engineered the speedy sale to Bank of America on the same weekend that Lehman Brothers was forced into bankruptcy, with just a few weeks left in the quarter, so there was plenty of writing on the wall. Did Merrill’s army of sales reps run out of steam trying to convince an investment-wary marketplace to take on risk? Given how grim things have been, they should probably be congratulated on managing positive net revenues at all.

Deals of the day:

* A bank founded by Russian gas giant Gazprom has bought one of Russia’s top 50 banks, the latest purchase of a privately owned bank by state-related structures as Russia fights the credit crisis. Gazenergoprombank, whose website says it was “founded by structures included in the Gazprom group”, said in a statement it bought 100 percent of Sobinbank. It did not disclose the price.

* Japanese trading house Marubeni said it has agreed to buy an additional stake in Australia coal miner Resource Pacific Holdings from Xstrata’s Australian coal unit for about 13 billion yen ($130 million).

* Mighty River Power has become a 19.95 percent cornerstone shareholder in wind turbine manufacturing company Windflow Technology with an investment of over $7.1 million.

As the U.S. government takes over large parts of the financial setup, it also seems to be embracing a key Wall Street tradition: secrecy.

U.S. officials including Fed’s Ben Bernanke and Treasury’s Henry Paulson announced plans to spend some $250 billion on buying stakes in banks, but they gave few details on how they plan to distribute the funds or even to whom. Instead, reporters have had take the route of getting details of the plan from unnamed sources.

Nine banks will apparently account for as much as $125 billion of taxpayer money. The government never said which banks will get the money and how much. Four of those nine institutions — JPMorgan, Wells Fargo, State Street and Bank of New York — announced publicly that they were part of the plan, but the other five have had to do so.

It is hard to imagine why the government would not want to make that information public in the first place, after it has those institutions on board anyway, whether they wanted to be or not. The Wall Street Journal reported that the capital injections were essentially rammed down the throat of reluctant banks like Wells Fargo.

Still, Paulson made a point of stressing the nine were “healthy institutions.” Shouldn’t identifying them just back that assertion?

There’s even less clarity on how the recipients of the other $125 billion will be identified.

Before the plan was announced, the Los Angeles Times quoted an unnamed industry insider as saying, “Here we have thousands of banks. The guys at Treasury are thinking as Wall Street people. But they are about to bump into something called democracy. They are going to hear from 5,000 banks, 3,000 credit unions saying, ‘You are picking winners and losers.’”

The paper said the insider spoke on condition of anonymity because he was not authorized to discuss the plan publicly.

(Photo credit: Reuters)