Update on takeover speculations of Credit Lyonnais and implications for BNP Paribas (page 1 of 3)

US Stocks
• Recommendation update

Defence sector struggled last week. As we had mentioned, the Pentagon is going through its weapons programs and a few defence contractors such as Northrop Grumman Corp. (NOC, $91.23, CSFB: restricted), and Boeing Co. (BA, $31.40, CSFB: Outperform), received more funds than others. With regards to NOC, the US Air Force may buy no more than 36 F/A-22 fighters per year, down from 38 a year planned for 2007-2009. Furthermore, the Pentagon was reviewing whether to cut the program to 180 aircraft from as many as 339 (source: Bloomberg). Boeing is also under pressure. The Army was directed to reduce to 650 from 1207 the number of RAH-Comanche helicopters it plans to buy, and to focus its research on producing a reconnaissance helicopter rather than a dual-purpose, scout-attack chopper. Research funds for the Commanche would be cut by $450 million through 2003 and production funds by $725 million. Currently we have a buy rating on Boeing Co., believing current stock price does not reflect BA's fair-value of $45.00.

Northrop Grumman Corp. announced that its $11.8 billion acquisition of TRW was completed. TRW systems will be renamed Northrop Grumman Mission Systems, and TRW Space & Electronics will be renamed Northrop Grumman Space Technology. However, the U.S. Justice Department said it cleared the acquisition after NOC agreed to continue selling parts for military satellites to competitors like Lockheed Martin Corp. (LMT, $49.70, CSFB: Outperform), and Boeing Co. (BA, $31.40, CSFB: Outperform). Without the pledge, Defence Department officials raised concerns Northrop would have an incentive to stop selling sensors and other electronic gear that competitors need. With this acquisition, Northrop Grumman will acquire $2 billion in annual Pentagon sales. This acquisition is part of NOC's expansion strategy and follows the $2.6 billion purchase of Newport News Shipbuilding Inc. in last January, and the $5.2 billion acquisition of Litton Industries Inc. in May 2001. Based on military contracts last year, Northrop Grumman will remain the third-largest military contractor, behind Lockheed Martin and Boeing, with $13 billion in awards. LMT had about $14.7 billion in contracts, and Boeing had $13.3 billion. NOC's management expects that the acquisition of TRW will help lift profit to $7-$7.50 a share in 2003, and to $7.90-$8.40 in 2004, up from $6.10-$6.20 expected in 2002. Although these three acquisitions in a short period would take a couple of years to digest, we believe the expected increase in Northrop's EPS is not reflected in stock price. Hence we maintain our Buy on NOC.

There have been no significant news items out on our 2 tobacco stocks, Philip Morris Companies Inc. (MO, $40.98, CSFB: Not Rated) and Carolina Group (CG, $20.23, CSFB: Not Rated). CG recommended on the 3rd of December is up 9.3% and MO recommended on the 18th of November is up 7.7%. However, we would like to reiterate that both have been recommended principally for their high and safe dividend yields. MO and CG currently yield 6.3% and 8.8% respectively. We continue to view the stocks as attractively valued at current levels and maintain our BUY rating on both.

Europe
• We reiterate our buy call on DaimlerChrysler and Aventis. We consider the low 30s for DaimlerChrysler and low 50s for Aventis a very attractive entry level for an investor adopting a 12 to 18 months horizon
• Nokia's midquarter update

The European Central Bank cut at most its growth forecast for the region to 2.1 percent next year, down from a June estimate of as much as 3.1 percent.