It makes you wonder how far behind a potential blockage of the Medco Health Solutions Inc. (NYSE: MHS) and Express Scripts Inc. (NASDAQ: ESRX) merger is.  Express Scripts is the would-be acquirer and the deal has been heavily criticized by many watch groups and we have noted how wide the merger-arbitrage spread is.  The blocked AT&T Inc. (NYSE: T) acquisition of T-Mobile started (or added to) much of the blocking concerns from investors.

The FTC issued a complaint to block the hostile acquisition of the rival long-term care pharmacy provider alleging that this combination of the two largest U.S. long-term care pharmacies would harm competition and also because the merger would allow Omnicare to raise the price of drugs for Medicare Part D consumers and others.  As noted (full release):

“If Omnicare is allowed to purchase its biggest and only national competitor, it will diminish competition and raise health care costs – leaving taxpayers and patients to foot the bill,” said Richard Feinstein, Director of the FTC’s Bureau of Competition. “The Bureau will continue to be vigilant in our efforts to prevent these sorts of anticompetitive deals.”

JON C. OGG

Because we have covered this merger and because we cover financial news, we receive many emails on this topic.  While we have received little to no great emails on how the merger will benefit the public, we have received ample emails from industry watch groups and public outreach groups which have stated their opposition to this merger.  Take a look at the headline summaries from MergerInvesting.com and you can see just how much opposition there is compared to support.

The merger arbitrage spread in this deal today is right at 13% when other normal mergers carry traditional merger arbitrage spreads of 1% to 4%.  Part of the arbitrage is because Express Scripts has offered to buy Medco in cash and stock, but there is a serious degree of approval uncertainty priced in here. 

With a deal that is not expected to receive approvals until the first or second quarter (if then), it sure seems as though the merger-arb community is not overly convinced that this merger will go through.  If the deal does go through, there could be many divestitures or asset sales which are required.

One institutional broker who covers some merger-arbitrage and index-arbitrage accounts gave a bit of a funny quote here when we asked for feedback.  His answer, from one of his clients, about whether or not the merger would be allowed was simply “Give me one second, there is no easy answer.”

The Department of Justice noted as far back as September of 2011 that this merger was going to face an extended review period.  Medco holders will own about 41% of the combined interest after this merger, if it is approved.

The company with the highest degree of flux before and after this deal could be Catalyst Health Solutions, Inc (NASDAQ: CHSI) with a market cap of under $3 billion.  Much of the public (and investing public) is not even aware of it under the name Catalyst Rx.

There is one interesting merger ETF to consider in arbitrage.  It is the IQ Merger Arbitrage ETF (NYSE: MNA).  Unfortunately, it is very thin trading volume.

Keep in mind that there are no assurances that the DOJ, the FTC, nor other agencies will actually try to block this acquisition.  There are no assurances of approval either.  A chart of the spreads from Bloomberg has been shown below.

JON C. OGG

S&P’s threat of a downgrade of eurozone nations puts huge pressure on the region’s leaders. (Reuters)

An independent panel that reviewed the financial activity of Olympus suggests legal action be taken. (Reuters)

An MIT report says the U.S. power grid is vulnerable to cyber attacks. (Reuters)

BP (NYSE: BP) says high oil prices could hurt global growth. (Reuters)

Samsung announces a new flash memory chip operation in China to cost as much as $4 billion. (Reuters)

John Corzine ignored warnings about his firm’s risky trades, some of which were given to his board by management. (WSJ)

Merkel and Sarkozy will support changes in the euro area treaty that would hold nations more closely to their budgets. (WSJ)

Ford (NYSE: F) begins to search for a CEO as Alan Mulally plans to leave within two years. (WSJ)

AMR (NYSE: AMR) likely will make deep expense cuts so it can exit Chapter 11. (WSJ)

Kraft Foods (NYSE: KFT) announces who will manage the two divisions into which the company will be broken. (WSJ)

Clearwire (NASDAQ: CLWR) will try to raise $300 million. (WSJ)

California Governor Jerry Brown will try to get a tax on high-income residents to cover the costs of education. (WSJ)

Alpha Natural Resources (NYSE: ANR) will pay fines to cover a mining disaster that happened before it owned the operator of the mine involved — Massey. (WSJ)

BP says Halliburton (NYSE: HAL) destroyed evidence about the Deepwater Horizon disaster. (WSJ)

A leading Greek politician says his country’s recession will last through 2013. (WSJ)

Viacom (NYSE: VIA) expects strong ad growth in the near term. (WSJ)

ConocoPhillips (NYSE: COP) says that two agencies approved its drilling in the Alaska’s National Petroleum Reserve. (WSJ)

Eastman Kodak (NYSE: EK) changes some of its advisers as it tries to avoid Chapter 11. (WSJ)

Norway’s sovereign-wealth fund pushes to replace board members at some U.S. firms it owns. (WSJ)

Debate over whether Walmart (NYSE: WMT) will hurt local merchants in India has caused deep rifts in a government that may let large retailers own stores in the country. (NYT)

An antitrust hearing will check issues with the Express Scripts (NASDAQ: ESRX) and Medco Health Solutions (NYSE: MHS) merger. (NYT)

Edgar M. Bronfman Jr. departs as chairman of Warner Music Group (NYSE: WMG). (NYT)

Dubai may refinance $10 billion in state debt. (FT)

Douglas A. McIntyre

There was a point, not so many years ago, when Prozac did not exist, and neither did ADHD. People were depressed or distracted. There was not a lot to be done about it. Those afflicted had to live with their afflictions.

Medco Health Solutions’ (NYSE: MHS) recently released report shows that many people with mental troubles no longer have to suffer, or at least not as much as they used to. In a research report titled “America’s State of Mind,” the experts who did the work say that “more than one-in-five adult Americans took at least one medication commonly used to treat a psychiatric or behavioral disorder in 2010.” The drug companies make billions of dollars on the sales of these medicines. It is hard to say whether the treatments make most people feel better.

Medco makes a great deal of money when it treats the mentally afflicted. So do the large pharmaceutical companies and thousands of American doctors and hospitals. The MHS study’s weakness is that it fails to show whether medicines help, or perhaps to show that people who get the drugs feel better because of the attention they have received.

Douglas A. McIntyre

Apple (NASDAQ: AAPL) names Walt Disney (NYSE: DIS) CEO Robert Iger to its board. (Reuters)

Dell (NASDAQ: DELL) says sales were flat and it warns about future results. (Reuters)

Nokia (NYSE: NOK) to release a Microsoft (NASDAQ: MSFT) Windows-based tablet next year. (Reuters)

Shareholders want Eastman Kodak (NYSE: EK) to remove its poison pill. (Reuters)

More than 30,000 MF Global investors cannot get their money back. (WSJ)

The debt of Austria, France and the Netherlands comes under attack and yields rise. (WSJ)

Dissent among Merrill Lynch brokers may hurt CEO Brian Moynihan’s position with the Bank of America (NYSE: BAC) board. (WSJ)

Ford (NYSE: F) to launch a new SUV with the hope that its can be sold around the world. (WSJ)

Citigroup (NYSE: C) will cut almost 1,000 jobs. (WSJ)

Sony (NYSE: SNE) may start an internet TV service. (WSJ)

Medco’s (NYSE: MHS) Neuroscience Therapeutic Resource Center reports that the use of psychiatric drugs has spread quickly. (WSJ)

U.S. retail sales rise more than expected in October. (WSJ)

A Brazilian effort will cause the World Trade Organization to look at the yuan’s value. (WSJ)

General Motors’ (NYSE: GM) Cadillac will launch more cars to compete with BMW. (WSJ)

Walmart (NYSE: WMT) posts mediocre earnings on improved U.S. same-store sales. (WSJ)

LinkedIn (NYSE: LNKD) will try to keep confidence in its shares as major holders sell. (WSJ)

Sony, Universal and EMI will be part of the release of a new Google (NASDAQ: GOOG) music service. (WSJ)

The flow of oil from Libya increases substantially. (NYT)

Apple sells more products into the business market. (NYT)

A new Stanford study shows the size of middle-class neighborhoods is shrinking. (NYT)

Airbus and Boeing (NYSE: BA) each get about the same number of orders at the Dubai air show. (Bloomberg)

Car sales fall in Europe in October, with Fiat losing sales. (Bloomberg)

Douglas A. McIntyre

Microsoft (NASDAQ: MSFT) may make a bid for Yahoo! (Reuters)

Sprint-Nextel (NYSE: S) to sell the iPhone with an unlimited data plan. (Reuters)

The EU likely will allow Microsoft to buy Skype. (Reuters)

Twenty-five states voice concern about an Express Scripts (NASDAQ: ESRX) takeover of Medco Health Solutions. (NYSE: MHS). (Reuters)

Banks repay $4 billion to TARP that was meant for small business. (WSJ)

U.S. Postal System hopes to handle more junk mail as a way to increase volume. (WSJ)

Morgan Stanley (NYSE: MS) still fights to show the market that its balance sheet is safe. (WSJ)

Germany suggests a system to backstop EU area banks that cannot be rescued by their countries. (WSJ)

Oracle (NASDAQ: ORCL) to increase its use of cloud computing. (WSJ)

Greece sees larger strikes against austerity. (WSJ)

Friendly’s restaurant chain filed for bankruptcy. (WSJ)

Microsoft and Hulu increase their paid video businesses. (WSJ)

Bank of America (NYSE: BAC) says problems with its website are due to upgrades. (WSJ)

The Federal Reserve says it made progress on plans to change the compensation of big bank senior management. (NYT)

EU banks to be the subject of stress tests meant to see what effects write-downs of sovereign debt would have. (FT)

Tim Geithner says the EU debt crisis could cause global problems. (Bloomberg)

Douglas A. McIntyre

S&P cuts Italy one notch and says its outlook is negative. (Reuters)

Head of UBS (NYSE: UBS) seeks a vote of confidence from his board. (Reuters)

Samsung may take legal action against Apple (NASDAQ: AAPL) on the iPhone. (Reuters)

Broken China IPOs may get private equity money. (Reuters)

China to continue to buy U.S. debt. (People’s Daily)

The SEC looked into trades just before U.S. debt was downgraded. (WSJ)

Greece says conversations with EU and IMF leaders about a bailout were productive. (WSJ)

Merkel’s ally party says it opposes bailout investments. (WSJ)

Citigroup (NYSE: C) aggressively solicits credit card use. (WSJ)

General Motors (NYSE: GM) may expand its relationship with China car company SAIC to improve sales in the world’s most populous nation. (WSJ)

Royal Dutch Shell (NYSE: RDS) may get EPA approval to drill in Arctic waters off Alaska. (WSJ)

China’s Xinjiang Goldwind to build a wind farm in Illinois. (WSJ)

Some consumer groups oppose an Express Scripts (NASDAQ: ESRX) and MedcoHealth Solutions (NYSE: MHS) merger. (WSJ)

A generic version of blood thinner Lovenox to appear on the market after a year of legal fighting. (WSJ)

Chrysler nears a deal with the UAW. (WSJ)

STX kills a bid for a majority control of South Korean chip maker Hynix Semiconductor. (WSJ)

Copper reaches a one-year low. (WSJ)

Apple now worth $23 billion, more than Exxon Mobil (NYSE: XOM). (WSJ)

More economists view an orderly default of Greece as better than years of austerity and perhaps a depression. (NYT)

Growing number of Americans worry about being laid off. (NYT)

Aetna (NYSE: AET), Humana (NYSE: HUM), Kaiser Permanente and UnitedHealth Group (NYSE: UNH) would give patient information to a nonprofit group. (NYT)

Airbus raises estimate for long-term demand of commercial planes. (NYT)

Siemens (NYSE: SI) moves 6 billion euros to the ECB to lower risk. (FT)

Ireland’s economy begins to recover. (Bloomberg)

Douglas A. McIntyre

The announcements are almost always tied to restructuring of companies, but you can’t have that many big companies simultaneously hiding behind this excuse. What is obvious as a sore thumb is that the weak economy is continuing to hurt business fundamentals, forcing companies to pare down their head counts. Economists also know that there is a difference between furloughs and layoffs. Layoffs generally imply that businesses are anticipating a longer period of slowness. When you see this many layoffs at this many companies at once, the obvious answer is that a system wide weakness is not just present — it is building.

This trend comes at a time when corporate balance sheets are stronger than ever, with many buying back stock and increasing dividends. Interest rates are close to record lows again. The gridlock over the debt ceiling and budget deficits further motivated companies to sit back and not hire. The growing sense is that the new round of layoffs at the major companies may be followed by more layoffs at rival companies.

How long can that last if the economy keeps sliding? From Borders to Research In Motion, to Cisco, pharmaceutical companies, banks, and Wall Street firms — all are getting pushed out the door. Meanwhile, economic indicators are getting worse rather than better. If the numbers get any softer, don’t be surprised by more layoff announcements. At a minimum, this will keep the larger corporate employers from having to make new hires.

The Layoff Kings of 2011

Borders Group is now bankrupt and the last of the workers are solely conducting store-closure sales. All stores were being closed, and more than 10,000 workers are wondering if they can get a job at a library or another book store. While particularly in Borders’ case, the shift to digital may be partly to blame, along with with poor management, but the economy is certainly also playing its part in curbing consumer purchases.

Boston Scientific Inc. (NYSE: BSX) announced plans in July to trim an additional 5% to 6% of its workforce. This puts the layoffs between 1,200 to 1,400 employees through the end of 2013. The aim is to cut $225 million to $275 million from the yearly operating costs. Sadly, this is at the same time the company is expanding its China workforce.

Cisco Systems Inc. (NASDAQ: CSCO) has recently announced it would lay off 6,500 employees, or 9% of its full-time workforce. The company aims to trim about $1 billion from its operating costs. But some question whether this is enough, so this number could increase. Consequently, news outlets have claimed that as many as 10,000 layoffs will be announced. This “rebalance” is going to be somewhat system wide and affect many management positions, including about 2,100 who accepted early retirement packages.

Delta Air Lines Inc. (NYSE: DAL) is not imminently sending its workers home packing, but it announced in late July that about 2,000 workers — out of its more than 80,000 workers — have accepted voluntary buyouts as the carrier trims flights. Whether the latest drop in fuel matters or not is up in the air (no pun intended).

Advanced Micro Devices, Inc. (NYSE: AMD) Raised to Market Perform at Wells Fargo; Raised to Buy at Canaccord Genuity.
American Express Co. (NYSE: AXP) Reiterated Buy and raised target to $65 at Argus.
AstraZeneca (NYSE: AZN) Cut to Neutral at BofA/ML.
Crown Castle Inc. (NYSE: CCI) Raised to Outperform as Bull of the Day at Zacks.
Dean Foods Company (NYSE: DF) Raised to Buy at BofA/ML.
Huntington Bancshares Inc. (NASDAQ: HBAN) Cut to Market Perform at FBR.
LM Ericsson Telephone Co. (NASDAQ: ERIC) Reiterated Buy with $19 target at Argus; Raised to Buy at S&P Equity Research.
Medco Health Solutions Inc. (NYSE: MHS) Cut to Hold at Argus.
Netflix, Inc. (NASDAQ: NFLX) Maintained Outperform with $280 target at Credit Suisse.
SanDisk Corporation (NASDAQ: SNDK) Maintained Sell at Zacks; Reiterated Buy at Gleacher.
Solazyme, Inc. (NASDAQ: SZYM) Started as Outperform at Baird.
Tellabs Inc. (NASDAQ: TLAB) Maintained Underperform as Bear of the Day at Zacks.
UnitedHealth Group (NYSE: UNH) Reiterated Buy as Value at Zacks.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Express Scripts is offering what will come to $71.36 on the merger, and the terms proposed call for $28.80 per share in cash and 0.81 Express shares per Medco share.  The combined entity’s boost comes from massive cost reductions for customers due to efficiencies and from streamlining the combined supply chain.

The pharmacy services and pharmacy benefits manager deal potentially leaves Walgreen Co. (NYSE: WAG) in the lurch.  Otherwise you would not see Walgreen down 3% today.  The acquisition of Drugstore.com is just too small to matter here.

On the flip side, CVS Caremark Corporation (NYSE: CVS) is up 3.3%.  Another hidden winner is Catalyst Health Solutions, Inc. (NASDAQ: CHSI) because of a relative value comparison.  Catalyst is the pharmacy benefits manager that recently acquired a PBM operation from Walgreen.

How this proposed Medco-Express merger will pan out is anyone’s guess in the end.  The company is technically leveraging up and shares are back to within about 10% of highs with a $29.5 billion market cap.  Medco is up almost 15% at $64.00 with a market cap of about $25.5 billion.

On a separate note, Express Scripts basically beat earnings estimates and reaffirmed 2011 guidance with $3.15 to $3.25 EPS on a standalone basis.

JON C. OGG