Cliffhanging takeover dramas help push Dow to highest level since October

Corporate raiders sure know how to liven up a dull stock market. Hostile takeovers, white knights, and counteroffers brought market news to the front pages of newspapers last week. Perhaps the biggest story was Federated Department Stores Inc.'s agreement to merge with white knight R.H. Macy & Co. This stymied, at least temporarily, Canadian investor Robert Campeau's attempt to take over the country's largest department store chain.

Not to be lost in the shuffle was T. Boone Pickens's unsolicited offer last Monday of almost $2 billion for Homestake Mining Company, one of the country's largest gold producers.

Investment banker Shearson Lehman Hutton Inc. joined a British construction company in a hostile offer worth $1.33 billion for Koppers Company, a construction materials and chemical company in Pittsburgh.

In addition, the Stop & Shop Companies accepted a $1.2 billion offer from Kohlberg, Kravis, Roberts & Company, which would take the New England grocery and retail chain private - and away from a hostile takeover bid from the Haft family of Maryland.

The action behind these stories and others helped propel the Dow Jones industrial average on Monday to 2,071.62 points, its highest level since the market crashed to 1,738.74 last October. The Dow finished the week at 2,057.86, up 34.65 points.

But the brisk level was nothing more than coincidence, says Eugene Peroni, director of technical research for Janney Montgomery Scott Inc. in Philadelphia. ``There are no special economic or monetary reasons for this now; takeover activity has been an accelerating trend for several months,'' he notes.

The trend has been fueled by many factors. ``The market is still 700 points down from its high of last year,'' points out Alfred Goldman, director of technical market analysis at A.G. Edwards & Sons Inc. in St. Louis. ``Companies and raiders may see stocks as undervalued, so you have stock buybacks and acquisitions. It's cheaper to buy the existing company rather than build a new plant,'' he adds.

A second factor fueling the takeover activity is the belief that the next administration may not be as agreeable to major takeovers as the Reagan administration has been, Mr. Goldman says.

Michael Metz, portfolio strategist for Oppenheimer & Co. in New York, cites a handful more reasons. ``Corporate cash flows are high, and political restraints on takeovers are nil,'' he observes.

``Furthermore, foreign investors are buying, using their hard dollar assets, and there is an enormous amount of entrepreneurial money around that is not going into anything, like real estate,'' he adds.

Since the October market low, the Dow has recovered 16 percent, as of Feb. 26, according to Elliott Schlang, vice-president at Prescott, Ball & Turben in Cleveland. The Standard & Poor's 500 index has improved 17 percent, while over-the-counter stocks have rebounded 25 percent, Mr. Schlang says.

``The market move has crept up on people,'' he notes. ``At first people thought it was the carryover lift provided by the January effect, but it has continued. The market is making slow but steady progress, and people who are out there heavy in cash are concerned that they're missing something.''

Takeovers in the retailing industry have been drawing attention for weeks. ``It's partially fueled by a sentiment in the activity; entire sections tend to heat up, as is happening with retailing now,'' Mr. Peroni points out.

The takeover activity in retailing is somewhat surprising to Metz. ``It's one of the most unlikely, because the outlook for the industry is not so good,'' he explains.

Industries that are likely takeover candidates, he says, include drugs, consumer products, finance, petroleum, chemicals, and paper.

``The next big area will be oil,'' Metz predicts. ``I think Texaco will be dismembered, and this will set off the takeover activity in that industry.''

In the current market, analysts tend to look at individual stocks. Goldman of A.G. Edwards says he's focusing on raising cash for the buying opportunities he expects in the next few weeks.

``It's critical that an investor be above average in cash,'' he says. ``Even though people feel good about the economy and interest rates and think we won't have a recession, we're not out of the woods yet,'' he claims.

The market's momentum as it has climbed recently has not shown the same degree of intensity as when it dropped, Goldman explains. ``The market still is in a serious correction. Despite the positive signs, institutions are sitting on the sidelines.''

Peroni characterizes the market as two-tiered. ``The market is lackluster, but underneath there's a real fire burning, in certain issues,'' he says.

Stocks Peroni likes now include steel, chemical, and opticals, specifically Arco Chemical and Bausch & Lomb. Others he includes on his list are Meredith Corporation, the Maytag Company, and Penn Central Corporation.

``I'm extremely selective now,'' he says. ``In some aspects the market is undervalued, but it's dangerous to misread that. Only certain stocks are undervalued.''

``We're value investors,'' says Metz of Oppenheimer. ``We watch the cash flow and earnings of companies. We don't take a macro view.'' He likes Polaroid Corporation, Gulf and Western Industries Inc., First Chicago Corporation, and Champion International Corporation.