I wonder if we are going to see an announcement on Monday that Watson Pharmaceuticals (NYSE: WPI) has agreed to sell itself.
Watson traded pretty flat for Friday until a little after 3:00pm, when it shot up about a point. Granted, a one-point move on a $40+ stock is no big deal, but the timing makes me wonder. It is not that unusual to see a stock telegraph this kind of new on the preceding Friday, and WPI is widely considered to be one of the relatively few prime acquisition targets left in the generics space.
Although Watson chose not to pursue the growth-by-acquisition strategy like Teva (Nasdaq: TEVA) and Mylan (NYSE: MYL) and has focused on producing solid free cash flow and ROIC, investors do not always appreciate that sort of discipline. More than that, generics is a volume business where scale matters (when Wal-Mart (NYSE: WMT) starts a dive for the bottom with $4 prescriptions, that can happen...) and Watson is now behind in that regard.
On one hand, Watson has a solid oral contraceptives business and that's good. On the other hand, Watson has a solid U.S. business (#3) but not much overseas and that is not so good. Add in the all-too-common relatively cheap valuations in healthcare, and you have a company that is a good takeout candidate.
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