Explosion of M&A Activity Boosts Markets
Despite persistent headlines bemoaning economic weakness in the UK and US, August saw an abundance of M&A activity and speculation.
From BHP Billiton’s attempt to secure ownership of PotashCorp via a hostile takeover bid, to the even more recent speculation that Cable & Wireless might be set to court interest from various suitors, including US telecoms giant AT&T, the business pages are awash with both fact and rumour relating to M&A deals.
We look at some of the reasons for the explosion in takeover activity and discuss how these deals may impact the financial markets.
Flurry of activity
While the headline-stealing deal of the summer has been BHP’s grab for PotashCorp, various other possible mergers and acquisitions are lined up to shape markets during the forthcoming months. Hewlett-Packard recently knocked out Dell in a bidding war for data storage firm 3Par, while Korea National Oil Corporation made a hostile takeover bid for Dana Petroleum after an initial offer was turned down, and FTSE-listed Vedanta Resources has announced plans to obtain a controlling stake in Cairn India Ltd. And these make up just the tip of the iceberg. In fact, the total value of buyouts announced in August in the US alone is over $175 billion. [1] But what is fuelling this desire for deal-making?
Cash-rich and optimistic corporations?
First, there is the cynical view that corporate balance sheets are simply carrying an abundance of cash and that managers have no idea what to do with it, so are simply throwing it at projects to expand their business empires. This is certainly true to an extent; extremely low interest rates and reduced expansion opportunities during the recession have led many businesses to stockpile cash. On the other hand, none of the major deals announced so far smack particularly of foolhardiness; BHP, for instance, has insisted that it will only seal the Potash deal at the right price. Equally, Cable & Wireless has been touted as a potential candidate for takeover for many years, and AT&T would seem an apposite suitor.
The alternative, then, is that business leaders see real opportunity for growth in the current market. While equities have been under pressure during August, increasing volumes and a shift in sentiment have led to a bright start to September for the FTSE and the Dow Jones. Solid data, including a better-than-expected PMI figure from China, supports the view that economic recovery is still broadly on track.
While the sovereign debt crises in Europe and lower trading volumes during the traditionally quiet summer period have kept equities in check, deal-making chatter has remained surprisingly strong.
M&A rumours have certainly helped fuel this month’s rally. Some of the strongest performers on the FTSE have been takeover targets, with investors speculating that bid interest will increase the value of their share holdings. For instance, C&W’s share price rose by more than 8% during one trading session last week as investors anticipated an offer for its shares.
What next for equities?
With a lot of potential deals having been set-up during the past month, it is now a case of seeing how many of them come through. This will depend partly on the perceived health of the wider economy.
However, this perception itself is affected by M&A activity. Last Friday, for instance, the FTSE was buoyed by further speculation that a range of companies, including Microsoft, SAP and Oracle, are interested in the FTSE-listed enterprise software company, Autonomy. The business added 3% during early trading on 3 September, consolidating a gain of 5.2% over the previous trading session. [2]
Take a position
With a range of potential tie-ups on the horizon, investors will be looking to profit from the ensuing fluctuations in share prices. By using an IG Index spread betting account, you can take a position on thousands of individual shares, with permanently low dealing spreads and low deposit requirements. Alternatively you can spread bet on a range of major stock indices, including our Daily FTSE market which attracts a dealing spread of just 1 point.
If you don’t have an IG Index account, you can apply online in just a few minutes.
Updated: 06/09/10
Sources:
[1] seekingalpha.com (1 September 2010)
[2] FT.com (3 September 2010)
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
SHARE: