Kodak / Xerox Merger Rumor

Looking at recent price and volume action of both Eastman Kodak (EK) and Xerox (XRX), you've gotta wonder if the rumor of a merger between the two is more than just idle speculation. Kodak has been a part of more buyout and merger rumors than I can remember, so I am skeptical.

Both Xerox and Kodak are struggling and their management teams are trying their best to turn the companies around. Right now, Xerox commands a market cap of $14.6B, which is a little more than twice Kodak's $6.6B. Both companies are in similar spaces, and their product and service offerings complement each other well.

Anyway, let's take a quick look at some recent trading history.

Xerox
11-Oct-06 - 8,491,500 - 16.21
10-Oct-06 - 3,854,100 - 15.86
09-Oct-06 - 2,485,800 - 15.70
06-Oct-06 - 2,416,400 - 15.68
05-Oct-06 - 3,978,400 - 15.59
04-Oct-06 - 2,945,100 - 15.74
03-Oct-06 - 3,078,400 - 15.40
02-Oct-06 - 2,864,000 - 15.37

Eastman Kodak
11-Oct-06 - 5,715,300 - 23.08
10-Oct-06 - 1,412,200 - 22.16
09-Oct-06 - 1,340,700 - 22.48
06-Oct-06 - 2,196,000 - 22.25
05-Oct-06 - 1,474,400 - 22.46
04-Oct-06 - 2,521,200 - 22.40
03-Oct-06 - 2,335,900 - 22.16
02-Oct-06 - 1,644,300 - 22.39

Notice that Kodak traded roughly 1.8MM shares each day over the past 7 days (excluding today), and Xerox had an average daily volume of 3.4MM shares over the same period. Today, Xerox trades up 2% on a whopping 8.5MM shares. The stock hasn't seen that sort of heavy trade since August 2. And, look at Kodak and its respectable 4.2% jump on heavy volume of 5.7MM shares. It hasn't seen that much volume since the 1st of August.

Looking at options activity...

EK October '06 Calls - $25 Strike (EK-JE) - Volume: 1215, Open Interest: 4938

I didn't see anything noteworthy looking at the Xerox call options, however.

I wonder how passive an investor Bill Miller is when it comes to his large holdings. The Legg Mason funds own approximately 25% of Kodak right now. And, for those who follow the markets, you're well aware that Legg Mason got clobbered today on reduced earnings guidance. Maybe this will put pressure on them to be more proactive and push Kodak towards a beneficial merger or alliance.

Additionally, there was no big news coming out of Xerox today, and all I saw from Kodak was a small press release about an exclusive offering of some Martha Stewart-designed photo products. I'd say that there's no chance that this move was based on that news. All this on a relatively negative day for the markets. Really makes you wonder, doesn't it?

*** Edit #1 ***

Looking more closely, it looks like 4MM of today's volume in Xerox was due to a large block trade. So, it's probably wise to ignore most of what I said above, but it's still fun to toss the idea around.