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M&A, Health-Care, and High-Flying Head-Scratchers

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar, and welcome to the Friday Five. This is our look back at the week's most interesting, illuminating, and even outrageous data points and news briefs. Here with me is Morningstar's Jeremy Glaser. He's the markets editor for Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason.

Stipp: So what have you got for me this week? What are the five?

Glaser: Well, we've got some crazy merger mania. We've got some Lehman lives on--the legacy just keeps going. We have some airline aggravation, some health-care confusion, and even a little bit of retail resilience.

Stipp: OK. Well, let's start with the mergers, something that maybe we haven't seen in the news as much, but starting to heat up a little bit.

Glaser: Yeah, this week we saw Adobe buy Omniture, which was one that really left me scratching my head. I think if you have to issue a press release with a graphic trying to describe exactly what these two companies are going to do together, you're probably in for some trouble.

I don't really see how these two companies fit together, other than that Adobe makes the content and that Omniture helps you analyze it a little bit better. It doesn't seem to make a ton of sense. They're paying a pretty big premium to our fair value estimate. It doesn't seem like a great deal for Adobe shareholders.

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Stipp: So with the mergers, there's always the talk of the synergies, and those seemed a little bit cloudy here. But I do have to say overall, stepping back, it is maybe a bright thing to see that some M&A activity is going on. There's going to be bad deals, there's going to be good deals, but at least companies seemingly are able to get deals done.

Glaser: Yeah, I guess some of the fear is out of the market. But at the same time, some deals might make sense. Cadbury getting bought up by Kraft, maybe you see something making sense there. I think we see a lot more of these deals where it just seems like people are doing it because they can. I don't know if it's such a good thing for shareholders.

Stipp: Not always the best decision just because you can.

Glaser: Yeah, exactly.

Stipp: OK, number two.

Glaser: I think that we saw some of the Lehman stuff come out. It's been a year since Lehman collapsed, and as we look back, it seems like banks are still taking on a lot of risks. And the question is, have we really internalized the lessons of Lehman, and have we really started to think about maybe we should completely revitalize the banking system or try to get rid of some of these systematic risks?

The banks that were to big to fail a year ago are bigger now than they were before. Obama gave a speech on Monday, and touched on some of these points. I think it could be a big theme going forward.

Stipp: So even bigger "too big to fail" at this point.

Glaser: Exactly.

Stipp: What have you got for number three?

Glaser: You know, I think we see that a lot of weird airline aggravation. American Airlines came out and said that they've raised almost $3 billion in some sale-leasebacks and some other transactions, and they're going to buy some new regional jets, and they're going to add some new routes.

I think that the airline industry is still just a scary place for people to be. We've seen fuel prices continue to fall, yet they're not able to turn a profit, as nobody's willing to pay up for premium tickets. Nobody is willing to travel on those more expensive routes, and you have the airlines just continuing to bleed money. For long-term investors, it's a value trap.

Stipp: Yeah, I think it was Buffett that said something about the Wright brothers perhaps should have been shot down by a good capitalist, given that the airlines have pretty much over the long term never made any money.

Glaser: Yeah, it would have saved us a lot of grief.

Stipp: All right, so what's next on the docket?

Glaser: I think we have some health-care confusion. We finally see a bill come out of the Senate Finance Committee that, frankly, doesn't really make a lot of sense compared to a lot of the stuff that's going out there.

It doesn't include a public option. Obama's out there now talking about wanting to keep a public option in there. None of the Republicans seem on board, though it's not clear they're going to be on board with any proposal. Even some of the Senate Democrats are out there rallying against the bill that's come out of this committee.

There's still a lot of confusion about what health-care reform is going to look like. I think it's becoming more likely that something is going to happen, but we have no idea what it's going to look like, no idea what the impact is going to be on managed care organizations, on pharmacy companies, or on device manufacturers.

There's so many different variables here. I think there's going to be a lot of volatility and a lot of confusion among investors in the health-care space for some time until this gets sorted out.

Stipp: And it certainly seems like the managed care are going to be among the most extreme potential outcomes, A or B, depending on what we see coming out of Washington.

Glaser: Yeah, if it turns out that it's a very minor change to what we're doing now, and if anything it requires more people to purchase it but they have to do it in the private market, maybe their stocks are incredibly cheap right now.

If it turns out that we have a very robust public option that tons of people flow into, and everyone leaves the private insurers, maybe there's a lot of downside there. So there could be some trepidation before going in there.

Stipp: Quite a bit to still work out. And number five.

Glaser: I think we've seen some retail resilience. I think one of the interesting things in the retail sales that came out this month is everyone expected it to be up. "Cash for Clunkers" had auto sales through the roof, and people really expected a big number. But even when you got rid of the auto sales, we still saw over a 1% increase in retail sales.

I think this has been key, because for months now we've seen other economic indicators start to inch up, but the consumer was really hesitant to open their wallet.

If we have consumers out there spending, and we have people starting to buy more things, I think we could see the recent improvement in the economy not being just from restocking of inventory, but from people actually buying inventory, which I think is the first signs of us being on an actual sustainable recovery, and not just a temporary blip up.

Stipp: So, it seems like we might see that vicious cycle perhaps turn into a virtuous cycle with a little bit more consumer spending, maybe eventually some upside to employment as well.

Glaser: Yeah, I sure hope so.

Stipp: Well, thanks for joining me, Jeremy.

Glaser: Oh, you're welcome.

Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.