US SMALL/MIDCAPS-Stocks rally late as M&A offsets weak energy

Mon May 17, 2010 4:38pm EDT

* Universal Health Services to buy Psychiatric Solutions

* Astellas Pharma Inc to buy OSI Pharmaceuticals Inc

* Energy shares weigh as oil slips

* Bargain hunters buy up beaten down shares

By Edward Krudy

NEW YORK, May 17 (Reuters) - Mid- and small cap stocks rallied late Monday as M&A activity in the health care and biotech sectors offset a steep drop in energy stocks on falling crude prices.

Stocks got a further lift as bargain hunters bought up shares that have fallen on concerns euro zone debt problems could hurt the global economy.

Universal Health Services Inc (UHS.N) said it would buy mental health facilities operator Psychiatric Solutions Inc PSYS.O for about $2 billion. Japan's Astellas Pharma Inc (4503.T), agreed to buy U.S. biotechnology company OSI Pharmaceuticals Inc OSIP.O for $4 billion.

Pressuring energy stocks U.S. crude oil futures fell sharply on worries public debt burdens may stunt growth in the euro zone. Signs China's economy may have peaked also helped pressure commodity prices. Copper fell more than 5 percent.

Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas said he had been using Monday's earlier weakness to snap up beaten down shares.

"We think good earnings will keep moving the market higher," he said. "It's held up remarkably well, despite the negative news with Greece and the Gulf oil spill."

Bradshaw said he had bought Brigham Exploration Co BEXP.O on Monday, which traded down 3.3 percent to $16.40.

The S&P MidCap 400 index .MID rose 0.2 percent while the S&P SmallCap 600 index .SML added 0.6 percent. In comparison, the benchmark S&P 500 .SPX rose 0.1 percent. Monday's rise broke two days of losses for all indexes.

Shares in hospital operator Universal Health Services Inc rose 7.9 percent to $42.14 after its $33.75 offer for Psychiatric Solutions. Psychiatric Solutions fell 0.7 percent to $32.39.

Meanwhile Astellas Pharma Inc (4503.T), Japan's No. 2 drugmaker, agreed to buy U.S. OSI Pharmaceuticals Inc OSIP.O for $57.50 per share. OSI's stock eased 4.1 percent to $57.35, falling more in line with the offer price.

Weakness in the energy sector pressured the wider market as the S&P mid cap energy index .4GSPE fell 2.3 percent and the S&P small cap energy index .6GSPE lost 2.2 percent.

Among energy companies losing ground were Plains Exploration & Production Co PXP.N down 2.8 percent to $23.91, and Quicksilver Resources Inc (KWK.N), down 1.9 percent to $12.59.

On the New York Mercantile Exchange, front-month June crude CLM0 fell $1.55, or 2.16 percent, to settle at $70.06 a barrel

(Reporting by Edward Krudy; Editing by Andrew Hay)