AIG joins the Treasury roll; more bank deals brewing; Longs Drug Stores, SanDisk reject offers

By Aaron Hochman-Zimmerman

New York, Sept. 17 - Wall Street absorbed another shelling on Wednesday after a mild bounce back during Tuesday's session.

The investment world revolved around the government's loan to American International Group, Inc., which may have prevented the worst from happening but did not prevent a 45% drop for AIG's shares.

Banks once again played like Keystone Cops as the scramble to save themselves and help each other continued under the anxious eyes of the world's investors.

The major U.S. banks were joined in the deal parade by banks from the United Kingdom. Lloyds TSB Group plc is believed to have completed talks and will buy HBOS plc.

Outside of finance, Longs Drug Stores Corp. spurned an offer from Walgreen Co. and opted to honor its deal with CVS Caremark Corp.

SanDisk Corp. found a rare victory after it turned down a $35.00-per-share offer from the Samsung Group.

Despite rare pockets of success, the world has seen the share prices of the most affected institutions cut to ribbons, but ICAP merger-arbitrage analyst Shahin Shah points out that troubles at AIG and others have taken a big chunk out of the arb world as well.

The questions that hang over AIG have caused banks to severely cut lending to one another. The problem had been in place since the credit crunch began, but more recent concerns over AIG sent lenders running for cover.

Without capital, no deal is safe, Shah noted.

Spreads have been thrown wider on deals that seemed to be a sure thing as stock prices have fallen below deal prices.

Shares of Anheuser-Busch Cos. Inc. (NYSE: BUD) fell by $1.65, or 2.50%, to close at $64.40, while the sale price agreed to with InBev NV is $70.00 per share.

The spread for the deal between Cleveland-Cliffs Inc. and Alpha Natural Resources Inc. recently hit 66%, he pointed out.

After Wednesday's thrashing, the Dow Jones Industrial Average ended lower by 449.36, or 4.06%, at 10,609.66, while the Nasdaq Composite Index gave up 109.05, or 4.94%, to finish at 2,098.85.

The S&P 500 hemorrhaged 57.20, or 4.71%, to close at 1,156.39.

An offer AIG can't refuse

Share prices dumped on Wednesday, but there was still a palpable sense of relief over the rescue of AIG.

There was no gun to its head, in the literal sense, but AIG could not turn down the $85 billion deal pushed in front of it by Treasury Secretary Hank Paulson, who had already made clear his intension to allow Lehman Brothers Holdings Inc. to fend for itself in bankruptcy.

AIG was a different case, but many still felt that the taxpayer money given to AIG was more of an investment than an act of charity.

For its trouble, the American public will charge AIG Libor plus 850 basis points for the loan and now owns an 80% stake in the behemoth insurer.

Also, chief executive officer Robert Willumstad was shown the door for his role in AIG's fall from grace.

"I am hopeful the U.S. government will actually do well with AIG," a trader said.

"He can sell three-month bills at 0.09% and charge AIG 11%," the trader said about Paulson.

"Not a bad deal," he added.

With its $85 billion, the government pushed aside Maurice Greenberg for the time being.

Greenberg was expected by many to come to the aid of his former firm, which he takes credit for building.

Still, "Greenberg may buy AIG [subsidiaries] from the estate," the trader said.

As issues continued to be settled with first Merrill Lynch & Co., Inc., then Lehman Brothers and AIG, the nearest threat to the market on Wednesday seemed to be Washington Mutual, Inc.

Shares of AIG (NYSE: AIG) plummeted $1.70, or 45.33%, to end the day at $2.05.

Spotlight shifting to WaMu

Market sharks have smelled the blood in the water around WaMu for a long time.

On Wednesday, an analyst said that some of the few remaining "haves" were reportedly contacted by the Federal Reserve over what to do with "have-not" WaMu.

Still, no formal negotiations between JPMorgan Chase & Co., Wells Fargo & Co., HSBC and the Fed were made public.

WaMu's shares (NYSE: WM) closed lower by $0.31, or 13.36%, at $2.01, as private equity firm Texas Pacific Group allowed WaMu to raise capital as necessary without suffering a penalty attached to TPG's $1.5 billion investment in the Seattle-based bank.

TPG waived its right to make up for share dilution if WaMu sells more than $500 million in stock at a price lower than $8.75 per share, where TPG invested.

TPG's investment came as part of a $7 billion capital injection for the spiraling bank.

When the dust settles, "I see JPMorgan getting WaMu," a trader said without specifying a price.

"Although, the market is saying Morgan Stanley needs to merge with JPMorgan to have deposit funding in place, in lieu of commercial paper," he added.

Feathers continued to fly around the market as another market source put his money, in the rhetorical sense, on Morgan Stanley's rumored combination with Wachovia Corp. to be the next deal to go down.

The investment bank model is seriously troubled, he said, crediting the success of JPMorgan and Citigroup Inc. to their retail banking businesses.

The venerated Goldman Sachs Group, Inc., on the other hand, will survive as an investment bank, he said.

Lloyds buys HBOS

Yet another bank in the crosshairs was HBOS.

Early in the day, Lloyds TSB was looking for a bargain and was on the trail of HBOS as the two confirmed they were in advanced talks.

After the close, reports surfaced that an official announcement of a deal may appear on Thursday morning.

"They'll need help for that," the market source said, expecting Lloyds to find an outside source of financing to complete any deal with HBOS.

American Depositary Shares of Lloyds TSB (NYSE: LYG) sank $0.96, or 4.78%, to close at $19.11.

Longs sticks with CVS

Longs Drug Stores was unimpressed by Walgreen's $75.00-per-share offer and said it will proceed with CVS Caremark even though its offer is a lower $71.50 per share.

Longs estimates that beginning a deal with Walgreen would add nine months to 12 months to the completion date and "Walgreens has not presented a clear roadmap to completion," Longs said in a press release.

"A fixed $75 per share in cash does not compensate Longs stockholders for this potential lengthy delay," the release said, adding, "As you know, our transaction with CVS Caremark has already obtained all required regulatory approvals."

Walgreen still insisted it will continue its pursuit of Longs.

Shares of Longs Drug Stores (NYSE: LDG) shed $1.52, or 1.99%, to close at $74.79.

Shares of CVS Caremark (NYSE: CVS) gave up $1.12, or 3.10%, to end the day at $35.01.

Shares of Walgreen (NYSE: WAG) lost $1.52, or 4.54%, to end at $31.96.

SanDisk kicks back Samsung offer

In technology, after rounds of snipping back and forth, SanDisk rejected an offer of $26.00 per share, or $5.85 billion, from Samsung, saying it "significantly undervalues SanDisk given the long-term prospects of its business," according to a press release.

The Korea Times reported that SanDisk is hoping for a $35.00-per-share offer, according to an unnamed source.

SanDisk complained that the offer was even less than the original proposal of $28.75 per share, which represented a 55% premium on May 22, when the two first began discussions of a transaction.

Despite the tone of the exchanges, which has been less-than-friendly at times, SanDisk still claims to be interested in an offer from Samsung.

"We have been and remain willing to enter into good-faith discussions with Samsung," said Irwin Federman, lead independent director of SanDisk.

"However, due to Samsung's unwillingness to meet fair and reasonable process conditions coupled with their desire to acquire SanDisk at a significant discount to our view of its intrinsic value, the board believes that this proposal is not in the best interests of stockholders," he said in a statement.

Investors seemed to expect a better offer as shares of SanDisk (Nasdaq: SNDK) shot up $5.88, or 39.10%, to close at $20.92.

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