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Inside Wall Street


United and Continental: Just the Ticket?

Now that Northwest (NWA) and Delta (DAL) airlines have agreed to merge, expect more deals to take off. "In 30 days it is likely Continental Airlines (CAL) will either acquire or merge with UAL (UAUA)," says Vincent Carrino, president of sBrookhaven Capital Management, which has accumulated shares of both. The surging price of oil has wreaked havoc on the airlines' earnings and sunk their stock. UAL, parent of United Airlines, the world's second-largest carrier, tumbled to 13.95 on Apr. 23, down from 51 last October. And Continental shares dived to 15.93, down from 40 in May, 2007. Standard & Poor's (MHP) reduced both airlines' credit outlook to "negative" on Apr. 18. Carrino says the big impetus for consolidation is to let the airlines slash capacity (number of flights and seats) by 10% and boost fares to cope with the rising price of oil, which hit $119 a barrel on Apr. 22. Carrino predicts UAL will be the surviving company, with Continental's management taking charge. Both airlines have a solid foothold overseas, especially in Asia, he notes. "That's one area where they could cut capacity sharply." A combined Continental-UAL would be a "very powerful" entity, which suggests that their shares represent "deep value," says Daniel McKenzie of Credit Suisse, who rates Continental outperform. With Northwest and Delta merging, a Continental-UAL deal "is imminent," predicts McKenzie.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Ziopharm's Drugs to Arrest Cancer

It isn't quite the norm for foreign sovereign wealth funds to buy into tiny U.S. biotechs, but Abu Dhabi Investment Authority (ADI) has a 5% stake in Ziopharm Oncology (ZIOP), now at 2.92 a share, down from 6.50 last May. ADI isn't the biggest stakeholder. Essex Woodlands Health Ventures, a $1.6 billion U.S. investment outfit, owns 10%, as does ProQuest Investments. What's Ziopharm's allure? It is developing three oral drugs targeting cancer. One is indibulin, which stops cancer cells from dividing and migrating. "It's one of the best drugs of its type in development," says Larry Norton, director of breast cancer programs at New York's Memorial Sloan-Kettering Cancer Center. Chrystyna Bedrij of Griffin Securities, who rates the stock a buy, says trials so far produced positive results.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

A Bid for Diebold May Spark Others

Diebold (DBD) is in a pickle that could be a sweet play for investors. On Mar. 2, United Technologies (UTX) made an unsolicited bid to buy Diebold at 40 a share. Diebold, which makes automated transaction systems, including ATMs and voting machines, is handicapped by a Securities & Exchange Commission inquiry into how it books sales. Yet it rejected UTC's offer, which was 66% above the Feb. 29 price, as too low. The shares have speculative appeal, notes Value Line's David Cohen, as UTC may offer more. Or other players, such as Tyco International (TYC) or Honeywell (HON), may make richer bids, suggests Gil Luria of Wedbush Morgan Securities, who tells clients to hang on to the stock. Now at 38.37, Diebold hasn't reported results since Mar. 31, 2007, because of the probe, but it will post first-quarter sales on Apr. 30. Stay tuned.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


Steve Ballmer, Power Forward
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