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Market Report: Footsie fades after SmithKline news sends drug sector soaring

The stock market was high - for a time very high - on drugs after SmithKline Beecham confirmed it was in merger talks with American Home Products.

At one time SB was up 71.5p but in heavy two-way trading the shares ended lower, off 3p at 740p.

Old-fashioned profit taking and intriguing plays by arbitrageurs prompted the somersault. AHP, ran the argument, contains much more upside potential than SB. So when New York opened AHP shot ahead, possibly reducing the likely SB valuation in any merger.

What would be the biggest ever corporate merger sent the rest of the drugs pack soaring. But again shares ended well below the levels hit in the early, frenetic stampede.

Glaxo Wellcome stretched 62p higher, then settled for a 30p gain to 1,669p at the close. Zeneca was another on a dizzy roller-coaster. The shares surged almost 200p, ending 60p higher at 2,357p.

Others to move ahead included ML Laboratories, up 11.5p to 130.5p, and Cantab Pharmaceutical, 10p higher at 680p in response to UBS buy advice.

Nycomed Amersham headed the blue chip leader board, with a 162p gain to 2,397p. Salomon Smith Barney rates the stock, suggesting a 2,700p target.

Zeneca, despite its failure to hold its best level, has remerged as a bid candidate in the wake of the SB/AMP talks. The leapfrogging approach to obtaining industry leadership, which seems to dominate drug thinking, could make it a target for Roche, the Swiss group, or Glaxo.

With London seemingly very much in the forefront of corporate thinking, there has been a series of under-card takeovers, many from overseas. The impression reigns that more deals are in the pipeline. Talk of mega-mergers - and they do not come much bigger than SB/AHP - is growing louder. The possible drugs alliance is clearly only one reason why many corporate advisers are slaving late into the evening.

There are even suggestions that BT, deprived of its expensive MCI adventure in the US, is feeling the winds of vulnerability. The shares, up 8.75p to 550p in busy trading, have climbed from 478.5p this month. There was even a deal at 573p. The buzz is that AT&T, the US giant often seen as dialling in on Vodafone, could be mulling over approaching BT which, after being a front runner, is now seen as limping behind in the race for world telecom supremacy.

Cable & Wireless, another possible victim of BT's ambitions, added 7.5p to 508.5p after its Hong Kong Telecom offshoot accepted a pounds 500m-plus cash settlement for an early end to its international telephone monopoly in the former colony.

Others still in the takeover spotlight included Safeway, up 5p at 372.5p, with rumoured predator Asda 4p higher at 193.5p.

Footsie, after an early 25 points drugs-inspired boost, ended just 4.6 higher at 5,278.2. Turnover topped 1 billion, with ABN Amro Hoare Govett trading in Elementis, the chemical group, swelling volume. The securities house placed the 7.63 per cent shareholding held by Sime Darby, the Malaysian group, at 125p. Hoare Govett said the shares were placed to a "wide group of institutional investors". Elementis eased 2p to 128.5p.

The flight to defensive domestic shares continued. Morgan Stanley supported National Power, up 10p at 670p, and UBS lifted British Energy 7.5p to 463p. Credit Lyonnais Laing and Daiwa kept PowerGen on the boil, up 24p to 873p.

In a generally unsettled financial sector Prudential Corporation fell 26p to 770p, reflecting a fourth-quarter slowdown by its US subsidiary, Jackson National. GRE firmed 3.25p to 371.25p on NatWest Securities support. Suggestions that Woolwich could descend on a French bank clipped the shares 4p to 336p.

British Steel firmed 1p to 128p ahead of an analysts' meeting; Rank, the leisure group, labelled a "weak hold" by UBS fell 7.75p to 326.75p.

The strong pound continued to hit exporters with Smiths Industries off 25p to 730p.

Jarvis, the construction and rail maintenance group, jumped 25.5p to 408p. It won a pounds 26m repairs contract with Royal & Sun Alliance and formed a joint venture with Railtrack dedicated to improving railway performance. Lonrho, on hopes that a South African coal mining deal is at last near, added 3.25p to 85.25p.

Argos, off 26p to 400p, was hit by deals below the then market price but Tate & Lyle, up 18.5p to 551.5p, continued to advance on profit upgradings.