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Alcoa leads stock drop

| Saturday, July 28, 2007

For the first time in the 4 1/2-year bull market, stocks are losing the support of investors betting on mergers and acquisitions.

Alcoa Inc., Macy's Inc. and more than a dozen other companies have lost as much as 10 percent in the past week. They're unlikely to bounce back because funds for leveraged buyouts are drying up, Richard Bernstein, Merrill Lynch & Co.'s chief investment strategist, wrote in a report.

"For the time being, takeover speculation is not going to be sending U.S. stocks higher,'' said Jonathan Monk, who oversees $1.3 billion of U.S. equities at Aerion Fund Management in London. "Credit managers are running for the exits,'' he said. "This will cause a bottleneck to mergers and acquisitions throughout the summer.''

The $1.5 trillion of U.S. mergers and acquisitions this year have been a pillar for the stock market rally. The Dow Jones Industrial Average and S&P 500 Index, which rose to records last week, fell the most since February on Thursday and Friday on concern that higher borrowing costs will slow mergers, spur defaults and curb earnings.

It was the worst week for the Dow and the Standard & Poor's 500 index in five years. The Dow fell 208.10, or 1.54 percent, to 13,265.47, with nearly 140 points of that loss coming in the final half-hour of trading. For the week, the index fell more than 585 points, or 4.23 percent. The week's point decline was the worst in five years, while the percentage decline was the largest since late March 2003.

The S&P 500 ended down 23.71, or 1.60 percent, at 1,458.95. For the week, the S&P gave up 4.9 percent. It was the S&P's worst performance, in percentage terms, since the week ended July 19, 2002.

Leveraged buyouts, or LBOs, where buyers typically use debt backed by a target's assets to finance purchases, were the engine behind the S&P 500's largest second-quarter gain since 2003. The index rose 5.8 percent as mergers increased 77 percent from a year earlier, Bloomberg data show.

While U.S. deals are running 52 percent ahead of last year's record rate, investors are showing less willingness to finance them. Earlier in the week, Daimler Chrysler AG's Chrysler unit and Alliance Boots Plc, the U.K.'s biggest pharmacy chain, failed to find investors for $20 billion of loans.

Alcoa, based in New York with its operations center in Pittsburgh and which had been the Dow's best performer in 2007, fell the most in the gauge Thursday and lost 59 cents yesterday, closing at $37.41, its 10th straight decline. Shares of Macy's, based in Cincinnati, declined eight consecutive days, closing at $36.90, down $1.14 yesterday.

Bernstein, the No. 2 portfolio strategist in Institutional Investor's 2006 ranking, said credit markets are signaling the buyout boom is ending.

"With the debt markets quickly moving to ration credit, the probability of companies being 'taken out' is plummeting,'' New York-based Bernstein wrote in a note to clients. "Equity investors should discontinue their speculation regarding takeovers.''

Goldman, Sachs & Co. analysts said that Alcoa, the world's second-largest aluminum producer, may remain independent because there are few potential buyers. Alcoa shares lost 14 percent this week, the most since September 2001.

Alcoa dropped its $27.7 billion hostile bid for Montreal-based aluminum producer Alcan on July 12 after Rio Tinto Group of Melbourne, Australia, offered $38.1 billion. Alcoa's withdrawal renewed speculation the company itself may be a target.

The 14 percent loss in Macy's shares this week is the steepest since just after the September 2001 terrorist attacks. Women's Wear Daily said last week that New York-based Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. will offer to buy the retail chain for $24 billion.

Micron Technology Inc. of Boise, Idaho, fell 11 percent this week, the most in nine months. Trading in options to buy shares of the largest U.S. maker of computer memory chips surged to the highest since September 2005 on May 24 amid speculation the company would be acquired.

Level 3 Communications Inc., based in Broomfield, Colo., posted the biggest weekly drop since April 2005, losing 14 percent. The possibility the data-network operator will be acquired by Google Inc. had helped the shares gain, an analyst at Buckingham Research Group said July 10. The analyst said a purchase is unlikely. The shares were up 26 percent this year before yesterday.

Marsh & McLennan Cos. has retreated 8.4 percent this week, the most since August. Shares of the world's largest insurance brokerage rose in April on speculation the New York-based company would be acquired.

Investors sought the relative safety of government debt as they sold shares. U.S. 10-year Treasuries are headed for their biggest weekly gain in almost five months.

"When there's a flight to quality, or what somebody else termed a flight from confusion, people return quickly and directly to fundamentals'' such as corporate profits, said Richard Weiss, who manages $55 billion as chief investment officer at City National Bank in Beverly Hills, Calif. "Takeover premiums in a bear market or in a flight to quality are seen as expendable, and they're the first things to get sold.''

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