EDIT: After further investigation, my original assumption that this was an anomaly (bug?) of the declare @var datatype = value
syntax is incorrect.
I modified your script for 2005 since that syntax is not supported, then tried the modified version on 2008. In 2005, I get the Attempting to grow LOB beyond maximum allowed size of 2147483647 bytes.
error message. In 2008, the modified script is still successful.
declare @KMsg varchar(max); set @KMsg = REPLICATE('a',1024);
declare @MMsg varchar(max); set @MMsg = REPLICATE(@KMsg,1024);
declare @GMsg varchar(max); set @GMsg = REPLICATE(@MMsg,1024);
declare @GGMMsg varchar(max); set @GGMMsg = @GMsg + @GMsg + @MMsg;
select LEN(@GGMMsg)