For Wall Street, bigger seems to be better.
The possible merger of two pharmaceutical companies, which would be the largest corporate coupling ever, caused a late rally in stocks yesterday.
Word of the merger talks, between SmithKline Beecham and American Home Products, lifted the stocks of many drug companies as investors took the discussions as a sign that the industry might consolidate further.
The American Stock Exchange's 15-company pharmaceutical index rose 5.1 percent yesterday. The index is up 8.8 percent this year, making it one of the year's best-performing stock indexes.
The news also fueled a larger rally, which pushed the Dow Jones industrial average up almost 120 points as broader market indexes also gained more than 1 percent.
If SmithKline Beecham was to buy American Home Products, the deal would surpass the largest corporate combination to date, Worldcom's planned $37 billion purchase of MCI Communications, and would create one of the world's largest health care companies.
''It underscores that there's still financial deals to be done,'' said Andrew Brooks, a vice president in charge of equity trading at T. Rowe Price Associates in Baltimore.
American Home Products' stock, which closed at 94 1/4, is trading at the lofty level of about 28 times estimated 1997 earnings. At such a price, ''if it's a value to the people who run these companies, then there's value for shareholders,'' said Steven Goldman, chief market strategist at Weeden & Company, in Greenwich, Conn., explaining why investors pushed up the stock 13 9/16 points.
Gathering steam from the drug stock rally, broad market indexes sailed higher. In its initial day of trading after the stock market's first observance of the Martin Luther King Jr. holiday, the Dow Jones industrial average rose 1.5 percent, or 119.57 points, to 7,873.12. Last week the blue-chip index rose 173 points.
The Standard & Poor's 500 stock index gained 17.09 points, or 1.8 percent, to 978.60 yesterday. And the Nasdaq composite index rose 1.7 percent, to 1,590.14, a 27.26-point gain.
Calmer markets in Asia provided a favorable backdrop for the market's surge. After posting strong gains on Monday, equity markets in Indonesia, Hong Kong, South Korea and Japan were modestly higher.
The lack of any new financial routs from that region, as well as a round of strong fourth-quarter earnings reports from American companies, heartened investors and sent buyers back into the market yesterday afternoon, analysts said.
The telephone equipment maker Lucent Technologies and the investment bank Donaldson, Lufkin & Jenrette, as well as Continental, Northwest and America West airlines, all reported earnings that topped analysts' expectations, while companies like Lockheed Martin, Johnson & Johnson, Pfizer and Paine Webber Group posted earnings in line with forecasts.
But some financial services companies -- including Merrill Lynch and multinational banks like Citibank, J. P. Morgan and Chase Manhattan -- took a hit as Asia's market turmoil cut into earnings. Such earnings reports reminded investors that Asia's woes could still affect the future earnings of American companies, some analysts said.
''The full impact of the events in Southeast Asia has not hit some of these companies,'' said Robert Freedman, chief investment officer at John Hancock Funds in Boston.
''The worst of the crisis has not fully been realized,'' he said, adding that he still expected investment banks and multinational banks, as well as some technology concerns, to see earnings crimped because of the Asian crisis.
Mr. Freedman anticipates that retail stocks, health care and some technology issues, as well as regional United States banks, will do well because of their limited exposure to the Southeast Asian economy. However, banks with a big international presence may continue to suffer.
In December, analysts' forecasts of fourth-quarter earnings growth for the companies in the S.& P. 500 index fell from more than 13 percent to about 8 percent, Thomas Galvin, chief equity strategist at Deutsche Morgan Grenfell, told investors in a recent market comment. However, forecasts for the first quarter and all of 1998 are still too high, he said.