Friday Deal Talk Spurs Buyers

Calls in 3Com, Cabletron and Philip Morris pop in early action.
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As is often the case on Fridays, takeover chit-chat took off early in the trading session, sweeping up off the floor the long-rumored acquisition targets

3Com Corp.

(COMS)

and

Cabletron Systems

(CS) - Get Report

.

"On Fridays, you have to be careful," said one hedge fund manager. "Sometimes it's just the rumor

du jour

." Traders are also wary of breaking news over the weekend, so they buy calls as an inexpensive way to participate if a deal is announced.

A trader in the 3Com options pit at the

Pacific Exchange

produced some of the usual names that have already made the merry-go-rounds: Swedish telecom giant

Ericsson

(ERICY)

and conglomerate

Siemens

of Germany. "It's hard to tell if the order flow is retail or institutional. But we are hearing the same rumors, that Siemens has dropped out, that Ericsson is in talks with 3Com, and a deal might be paid for in stock," the trader said.

"

3Com was unduly penalized for its acquisition of

US Robotics

, and now it's possible they'll end up selling off that part of the business to someone else," said one options strategist. "There's also quite a bit of expectation about a new product due out within a month or so."

Call activity was notable in 3Com, with the stock up as much as 3 15/16 to 26 1/4. The out-of-the-money May 30 calls gained 3/4 ($75) to 15/16 ($93.75) on volume of 2,255 contracts, compared with open interest of 3,551.

A spokeswoman for Ericsson declined to comment on the rumors; however, she pointed to the fact that all Ericsson's deals have been in cash.

Siemens seems the more likely acquirer, although it likely has spent the $1 billion it earmarked for data-networking investments in the U.S. In March, the company's new U.S. subsidiary

Unisphere

disclosed plans to acquire several startups, including

Redstone

for $500 million stock.

Hambrecht & Quist

Analyst Eric Suppiger says 3Com has grown tighter with its longtime partner Siemens in recent months. Together they are developing integrated voice and data network systems for carriers. Suppiger rates the stock a neutral; his firm has no banking ties with 3Com.

Cabletron Systems also made a bow to the Rumor Goddess, with call activity heavy in the morning trading session. "They've cut expenses but done nothing else. Someday they'll sell out, but now?" said Paul Foster of 1010 WallStreet.com in Chicago.

"Smart money came in this morning, the volatility popped and the rumor spread some more. After the stock popped, there were sellers of the May 27 1/2 call options," which nearly doubled early by midday, up 1 1/4 ($125) to 1 5/8 ($162.50) on volume of 1,900 contracts. "We've seen this before, almost every Friday for the last few weeks."

Finally, no takeover speculation, but the breath of Midas, that is,

Warren Buffett

, fueled talk in the market that he was a buyer of

Philip Morris

(MO) - Get Report

stock.

Options investors have been buying calls in Philip Morris consistently for several weeks, but were they to play the Buffett rumors today, "likely they'd be buyers of June 45 calls, not something very near-term, since it takes eight or nine weeks for his filings to start showing" details of new positions, Foster said. Foster is a holder of the underlying stock.

Investors reacted positively to news earlier this year that Philip Morris rival

RJR Nabisco Holdings

(RN)

is expected to spin off the domestic and international tobacco businesses. Traders could be playing for a similar move by Philip Morris.

Implied volatility, or the measure of how much the market expects a stock to move, in Philip Morris options has been trending higher, from 35 a month ago to 39 yesterday. That compares with an average of about 31 to 32 during the past nine months. "Something is afoot," said Foster.