Tuesday morning brought modest declines to the stock market, falling back from near-record levels as investors tried to get a handle on a wide variety of issues. Fears that the U.S. economy could fall into recession if the Federal Reserve doesn't intervene seemed to gain momentum, pushing 10-year Treasury bond yields back below the 2% mark. By 11:30 a.m. EDT, the Dow Jones Industrial Average (DJINDICES: ^DJI) was down 40 points to 26,688. The S&P 500 (SNPINDEX: ^GSPC) lost 10 points to 2,935, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) was down 52 points to 7,954.
In the gap between earnings seasons, major corporate moves take on greater importance, and today, AbbVie (NYSE: ABBV) announced a huge deal to acquire Allergan (NYSE: AGN) that many investors seemed not to like. Meanwhile, Microsoft (NASDAQ: MSFT) has been the darling among tech giants lately, and some wonder if it'll be able to keep its market capitalization above the $1 trillion mark longer than two of its rivals did.
AbbVie pays up for growth
Shares of AbbVie sank 15% after the pharma giant said that it would buy industry peer Allergan. The deal values the maker of Botox at $63 billion.
Image source: AbbVie.
Under the terms of the merger agreement, AbbVie will pay $120.30 in cash and 0.8660 AbbVie shares for every Allergan share investors own. That amounts to a total of $188.24 per share -- far above the $129.57-per-share price at which Allergan's stock closed Monday afternoon.
It's easy to understand why AbbVie decided to make such an aggressive move. With its blockbuster drug Humira looking ahead at a downward spiral in sales from patent expirations and greater competition, AbbVie had to take steps to bolster its growth prospects. CEO Richard Gonzalez thinks buying Allergan will do just that, calling the deal "a transformational transaction for both companies [that] achieves unique and complementary strategic objectives."
Yet skeptics believe that AbbVie could have done better elsewhere. Allergan has faced some difficulties recently in finding growth of its own, and although Botox has done well, setbacks in areas like its CoolSculpting process and its Restasis eye treatment don't necessarily point to lightning-fast growth.
At their current prices, investors don't have high confidence that the AbbVie-Allergan deal will go through. Based on today's reaction in AbbVie's stock, that might not be such a bad result for the pharma giant.
Microsoft holds onto its sky-high market cap
Meanwhile, shares of Microsoft were down 2% Tuesday morning. That wasn't enough to take away the tech giant's $1 trillion-plus market cap, but it reflected some long-term concerns about the company's prospects for parts of its core business.
Analysts at Jefferies presented a more negative case for Microsoft in light of the stock's huge run higher so far this year. Jefferies kept an underperform rating on Microsoft, arguing that its valuation risen too far even as it continues to face massive competitive pressures. In particular, although Microsoft's Azure cloud computing platform has gained momentum, it's still likely to underperform Amazon.com's Amazon Web Services unit in terms of profit margin. Jefferies did boost its price target on the stock by $10, but that leaves the new figure of $90 per share still roughly a third below its current level.
As the third stock to achieve $1 trillion status, Microsoft is looking to succeed where its rivals have failed. Amazon and Apple were both above that key level for a short time, but they've since lost ground and stand well below that mark. Fans of the Redmond-based Windows maker think that a strong mix of loyal customers for office productivity and operating system software should provide a base of support.
Regardless of what happens in the long run, Microsoft has already proven to be a success story. After a decade in the doldrums, the company reinvented itself in a way while taking full advantage of its stranglehold on key products. As long as it remains the go-to place for those needing office productivity software, Microsoft should be able to hang onto its $1 trillion market cap.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Dan Caplinger owns shares of AAPL. The Motley Fool owns shares of and recommends AMZN, AAPL, and Microsoft. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.