merger

WEYERHAEUSER CO. $84 (New York symbol WY; Conservative Growth Portfolio, Resources sector; Shares outstanding: 236.5 million; Market cap: $19.9 billion; WSSF Rating: Average) is a leading forest products company, with 6.4 million acres of timberland in the United States, and 30 million acres of leased timberland in Canada. It makes a wide variety of wood products for the construction industry, as well as cardboard packaging. In August 2006, Weyerhaeuser agreed to merge its fine-paper operations with Canadian forest products company Domtar Inc. Weyerhaeuser will own 55% of the new company, which will be North America’s largest producer of uncoated paper. Domtar will also pay Weyerhaeuser $1.35 billion. Weyerhaeuser is giving its investors the choice of keeping their Weyerhaeuser shares, or exchanging them for stock in the new company....

The Resources and Commodities sector of the economy has gone through a once-in-a-generation price boom in the past few years. Investors generally expect booming demand from India and China to keep prices high. However, this sector has always been highly volatile and subject to sudden downdrafts. We feel the best way to cut your resource risk is to stick with high-quality companies such as these three. They all have a broad range of income streams, which helps them stay profitable, even if prices fall. Hidden or little appreciated assets should fuel their growth for decades. They also have the flexibility to adjust production in the face of lower prices, which conserves cash for dividends and stock repurchases. CHEVRON CORP. $70 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.2 billion; Market cap: $154.0 billion; WSSF Rating: Above average) is the second-largest integrated oil company in the United States, after ExxonMobil Corp....

ANHEUSER-BUSCH COMPANIES INC. $51.16, New York symbol BUD, gained nearly $2 on rumors it is thinking about merging with European brewer InBev. A merger would create the world’s largest brewer, and undoubtedly run into anti-trust problems in several countries. It would also take years of restructuring before the merged company started to realize any cost savings. Regardless of whether the deal goes through, we still like Anheuser-Busch’s long-term prospects. It has around 50% of the United States beer market, and this makes it easier for the company to pass along rising costs to consumers. Major investments in breweries in Mexico and China also add to its appeal. Anheuser-Busch is a buy....

STATE STREET CORP. $68.35, New York symbol STT, has agreed to acquire rival Financial Services Corp. in an all-stock transaction worth $4.5 billion, or roughly 20% of State Street’s market cap of $22.7 billion. Financial Services provides custodial and related services to institutional investors. State Street investors will own roughly 85% of the combined company. The company anticipates between $625 million and $675 million in pre-tax restructuring charges. But merging the two firms’ back offices and technology platforms should save State Street between $345 million and $365 million in the first two years, and bring additional savings in future years. State Street’s stock moved down on the news, due to concerns over the company’s ability to reach its cost savings targets. It may also have trouble hanging on to some Financial Services’ clients. The stock will probably stay in a narrow range until it realizes some of the benefits of the merger....

GAMESTOP CORP. (New York symbols GME $56 and GME.B $56; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 75.8 million; Market cap: $4.2 billion; WSSF Rating: Extra risk) sells new and used video game players and software through over 4,600 stores in the United States and 14 other countries. GameStop was a wholly owned subsidiary of Barnes & Noble Inc. up until February 2002. That’s when Barnes & Noble sold its GameStop class A common shares (one vote per share) to the public at $18 each. In November 2004, Barnes & Noble handed out its GameStop class B shares (10 votes per share) to its investors as a special dividend. GameStop now wants to convert the class B shares into class A shares, which would improve liquidity. The conversion requires stockholder approval....

Many studies show that one of the best ways for a company to unlock hidden value is to spin off a subsidiary as a separate company. Shares of the new company sometimes fall in the first few months, as many investors tend to sell their new stock. But over time, both the parent and the spin-off usually outperform comparable stocks. In the past two years, several of our recommendations have completed spin-offs. All of these new companies have done well. That’s not surprising, since they came from well-managed parent companies with long histories of rising profits. Here are five recent spin-offs. We like all of them, but only three are buys right now....

WACHOVIA CORP. $56 (New York symbol WB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 2.0 billion; Market cap: $112.0 billion; WSSF rating: Average) is the nation’s fourth-largest bank. Like Bank of America and J.P. Morgan, Wachovia has used acquisitions to grow in the past few years. In 2005, it tried to buy MBNA, but could not reach agreement on a price. However, Wachovia wound up with 150,000 of MBNA’s credit card accounts. That helped it start its own credit card business, and it now has 350,000 credit card accounts. Credit cards account for just 1% of Wachovia’s total loans, so there’s plenty of room to expand this business. Wachovia’s latest acquisition is its $24.2 billion cash and stock purchase of Golden West Financial Corp., one of our long-time WSSF recommendations. Golden West gave Wachovia a much greater presence in California and nine other western states, and increased its assets by roughly 20%....

Bank stocks have been among our top performers in the past few years, as an improving economy and low interest rates spurred strong demand for loans. Many banks have used their strong earnings to make acquisitions. Their bigger size gives them access to new clients and economies of scale. (However, a bigger market cap also limits the possibility of a takeover by a domestic or foreign competitor.) Although higher interest rates have slowed their earnings growth and increased the potential for loan write-offs, their prospects remain strong. Cost cuts and growing fee income will also help offset any drop in lending. Investors should aim to own one or two of these four banks. We like all four, but Bank of America is our top choice for new buying....

MICROSOFT CORP. $30.60, Nasdaq symbol MSFT, earned $0.26 a share in its second fiscal quarter ended December 31, 2006, down 23.5% from $0.34 a year earlier. The company is absorbing costs associated with new hardware and software that are not yet profitable but could make major profit contributions in the next few years. Revenue in the quarter grew 5.9%, to $12.5 billion from $11.8 billion. This figure excludes $1.5 billion in revenue from sales of coupons that let buyers of new computers upgrade to the new Windows Vista operating system. Microsoft has already released the corporate version of Vista, and will start selling the consumer version next week. Vista will probably have a hard time matching the huge initial sales of previous upgrades, but should generate substantial cash flow. The company’s Xbox 360 video game machine is also selling well, and new services like movie downloads will expand its revenue....

ARKANSAS BEST CORP. $39.75, Nasdaq symbol ABFS, has struggled in the past few months, as weaker sales of consumer and industrial goods hurt demand for its trucking services. Rising fuel costs and upgrades to its fleet also squeezed profits. But the stock jumped several dollars this week, partly in response to the dive in oil prices, which will cut its fuel costs. In addition, retailers will soon have to re-stock their stores after the busy Christmas buying season. The stock is still cheap at just 11 times earnings, while the $0.60 dividend yields 1.5%. Arkansas Best is a buy for aggressive investors. IDEARC INC. $29.53, New York symbol IAR, was a wholly owned subsidiary of Verizon Communications until November 2006, when Verizon spun off Idearc through a special dividend of one Idearc share for every 20 Verizon shares they held....