MARKET REPORT : Smith & Nephew swept up in takeover euphoria

After displaying remarkable foresight over SG Warburg, the stock market thrashed around seeking the next takeover target - and alighted on Smith & Nephew, the health care group.

As speculation continued over Warburg's future and shares of the other recent bid candidate, Thorn EMI, displayed considerable aplomb in the face of a bid denial, there was a dramatic build up in activity at Smith.

In busy trading the shares moved to within a whisker of their year's high as stories swirled that Johnson & Johnson, the US giant, was about to pounce.

Smith has experienced a number of convulsions in the past few weeks in the face of the Johnson story. The latest outbreak of interest pushed the shares 3.25p higher at 172.5p.

Smith is known to be seeking acquisitions. With the upheaval in the health industry gathering pace - witness the Glaxo swoop on Wellcome - it clearly needs critical mass to survive as an independent.

This year is expected to be renowned for mega-bids. So far the Glaxo strike, the Northern Electric fiasco and the Warburg discomfort have materialised. On a lower wavelength Fisons is talking to Medeva, with Zeneca hovering in the background, and Jupiter Tyndall, the investment group, has fallen victim to Commerzbank. And, after nearly two years of talking, Scottish & Newcastle is on the verge of swallowing Courage, the country's second largest brewer.

An offer for Smith in the next few days would underline the market's clairvoyancy and the conviction this will indeed be the year of the mega- bid.

Thorn, however, did its best to hit the wrong key. It denied what had been intense speculation it planned to sell its music division to Walt Disney. The shares fell 24p to 1,164p, a surprisingly muted response.

Warburg had to contend with yet another profit warning, instead of the rumoured profits statement, and consequently failed to build on Tuesday's progress. It fell 7p to 814p.

The market is fascinated by the sad Warburg saga and and although Swiss Bank Corporation has emerged as one suitor it is widely suspected other possible bidders are holding back until they see the colour of Warburg's figures. Merrill Lynch, the US group, is thought to be hovering on the sidelines. Mercury Asset Management, excluded from any SBC deal, fell 17p to 844p.

The market enjoyed another rousing session. With New York again in rampant form the FT-SE 100 index climbed to a new year's high, up 14.4 points at 3,262.6. Today's elections have been discounted and the attitude is that any failure to move interest rates higher could be bearish for shares.

Insurances were firm. Royal Insurance added 5p to 317p as Barclays de Zoete Wedd gave the shares a 365p target. Interim figures are due next week.

Sun Alliance was 2p higher at 242p. Societe Generale Strauss Turnbull suggests a switch into Royal or Commercial Union, up 9p at 577p. SGST suggests Sun's profits will hit £460m this year but fall to £385m next. Reuters jumped 19.5p to 491p with a New York presentation submerging the bearish tone of the recent yearly meeting and at least one cautious stockbroker circular.

Cookson, the industrial materials group, slipped 2p to 235p. Analysts are due to visit its US operations next week.

Pearson, reflecting BSkyB results, gained 14p to 595p and Reed International put on 12p to 836p on Kleinwort Benson support. Vickers was helped 5p higher to 195p by Smith New Court.

Caradon, the building materials group, was ruffled by fears of a profit downgrading, falling 4p to 244p; Dixons, lowered 4p to 236p, was thought to have attracted bearish comments from Credit Lyonnais Laing. Rentokil lost 3.5p to 257.5p, with James Capel believed to have moved from buy to hold.

BT was firm at 399p, with ABN Amro Hoare Govett said to have put a 450p tag on the shares.

The Whitbread results inspired brewers. Bass frothed 11p higher at 568p and Scottish 8p to 547p. Whitbread added 10p to 573p.

Cray Electronics continued to register despair with last week's profit warning. The shares retreated another 2.5p to 66.5p; Body Shop International, on its figures, lost a further 3.5p to 149p; Danka Business Sytems was another suffering from profits below expectations, off another 17p at 356p. Lack of anticipated takeover activity is also taking its toll. Micro Focus, the computer group, slumped 37p to 733p on a restructuring.

British Airways rose 5p to 408p on the increased April traffic figures. The expected loss of the £60m BA advertising contract left Cordiant 2p higher at 96p.

GKN shaded to 547p, worried by lower US car sales, but T&N improved 10p to 164p ahead of today's shareholders' meeting. There are hopes of an encouraging trading statement to soften the asbestos difficulties. Rolls- Royce, still flush from the success of its recent rights issue, rose 7p to 184p.

Electricals dimmed on some aggressive selling. Eastern fell 11p to 643p. RJB Mining felt the growing controversy over its chief, Richard Budge, losing 20.5p to 395.5p.