Stocks surge on takeover news

Wall Street surged higher Monday as investors put aside Pfizer’s decision to halt development of a key drug and focused instead on another series of takeover deals.

Pfizer shares fell about 12% after the company stopped the development of the cholesterol drug torcetrapib because of deaths and cardiovascular problems among people taking the drug during clinical trials. The stock was also downgraded by several Wall Street analysts on concern that Pfizer’s revenue growth would weaken.

The news was offset by takeover announcements that reinforced the belief that companies were optimistic about the economy and therefore were willing to take some risks. Leading them was Bank of New York’s $16.5-billion deal to buy rival Mellon Financial to create an asset management powerhouse.

“Trading activity is being driven by the large amount of merger and acquisition announcements, specifically in the banking, semiconductor and hotel sectors of the market,” said Michael Sheldon, chief market strategist at Spencer Clarke. “Many investors remain concerned about the economy but are optimistic that a soft land lies ahead for U.S. financial markets.”

He said Friday’s report on November employment from the Labor Department would add “fuel to the fire” if it was weaker than expected, or provide relief after a string of sluggish economic reports. Today the Commerce Department issues data on factory orders for October, and the Institute for Supply Management releases its service sector business index.

The Dow Jones industrial average rose 89.72 points, or 0.7%, to 12,283.85.

Broader stock indicators were also higher. The Standard & Poor’s 500 index was up 12.41 points, or 0.9%, at 1,409.12, and the Nasdaq composite index added 35.18 points, or 1.5%, to 2,448.39.

Stocks had stumbled Friday after a manufacturing survey unexpectedly contracted in November, pushing the major indexes to a loss for the week. However, major indexes are still poised to finish 2006 with double-digit gains. The Dow is up 14.6% this year, the S&P; 500 has gained 12.9%, and the Nasdaq 11%.

“We really need somewhat of a pullback to keep us from using up all this fuel,” said Al Goldman, chief market strategist with A.G. Edwards & Sons. “But overall I’m still optimistic with a level of caution after the party we’ve already had.”

Bonds were little changed, with the yield on the benchmark 10-year Treasury note flat at 4.43%, unchanged from Friday.

Oil prices reversed some of their increases last week but were seen moving higher amid worries about possible production cuts by the Organization of the Petroleum Exporting Countries. Crude oil futures fell 99 cents to $62.44 a barrel on the New York Mercantile Exchange.

In other market highlights:

* Drug makers were in focus after Pfizer pulled its cholesterol drug. Shares of the Dow component fell $2.96, or 10.6%, to $24.90.

Rivals Merck and Schering-Plough were mixed, although their cholesterol drugs were expected to thrive with competition eliminated. The two companies jointly make Zetia and Vytorin. Merck fell 36 cents to $44.70, and Schering-Plough rose 80 cents to $22.73.

* Bank of New York’s all-stock deal to buy Mellon would create the world’s leading asset servicer, with $16.6 trillion in assets under custody. It also would rank among the top 10 global money managers, with more than $1.1 trillion in assets under management.

Shares of Bank of New York leaped $4.27, or 12%, to $39.75. Mellon rose $2.73, or 6.8%, to $42.78.

* LSI Logic said it would buy rival chip and storage system maker Agere Systems for $4 billion in stock. The purchase price represents a 28% premium for Agere shareholders. LSI fell $1.44, or 13.6%, to $9.12; Agere Systems rose $1.51, or 8.5%, to $19.30.

* Financier Kirk Kerkorian’s investment arm, Tracinda, launched a cash tender offer Monday to acquire 15 million shares of casino operator MGM Mirage. Tracinda currently holds a 55.9% stake in the Las Vegas-based company, whose shares rose $2.68, or 5%, to $56.35.