Merger Monday: 2 Blue Chips Making Smart Buys

The market was thinking happy thoughts on the eve of the FOMC's two-day meeting and betting on reassurance from Chairman Bernanke, as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average rose 0.8% and 0.7%, respectively.

Some retail therapy for Lowe's
Spin-offs can often be wonderful investments, but there is a way the parent company can ensure it's a disaster instead: saddle the company being spun out with so much debt that it is ultimately forced to file for bankruptcy. This is what Sears Holdings did with Orchard Supply Hardware Stores less than two years ago, or as Orchard put it: "[Orchard's] substantial debt due, in part, to significant recapitalization dividends paid to Sears, made it difficult, if not impossible for the company to right itself."

(Another example of this is Verizon's spin-off of its telephone directory business into a company named Idearc in November 2006. Suffocating under its debt load, Idearc filed for Ch. 11 bankruptcy in March 2009.)

But Orchard shareholders' losses could be Lowe's shareholders' gains, as the No. 2 home-improvement retailer looks set to acquire Orchard's assets out of the Ch. 11 bankruptcy process. Lowe's said it would buy at least 60 neighborhood and garden stores in California for about $205 million (and assume its trade payables.) Lowe's is acting as a "stalking horse bidder," setting a floor on the price for the business that other bidders can still top.

The acquisition would add some attractive, high-density locations in California, helping it close the gap in a key market with rival Home Depot.

Johnson & Johnson doubles down on prostate
Meanwhile, Dow component Johnson & Johnson announced it will pay up to $1 billion for Aragon Pharmaceuticals. Aragon's flagship product is an experimental prostate cancer drug that helps patients whether or not their cancer has spread to other parts of the body. In terms of drug portfolio, the product fits in nicely with J&J's blockbuster drug Zytiga, which it obtained in another $1 billion acquisition, that of Cougar Biotechnology, in 2009.

The market appeared to validate J&J's logic, adding 0.85% to the share price today, compared to a 0.23% gain for the S&P 500 Health Care Sector.

Two acquisitions and both look like they make sense -- it's not every day you see that in the market.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Lowe's. It recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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