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Raynor reviews: Mergers and acquisitions
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Following a recent wave of mergers and acquisition activity, Nick Raynor, investment adviser at The Share Centre, looks at how such deals can affect a company’s share price
In the economic chaos which followed the credit crisis mergers and acquisition activity came to a virtual standstill. In the US, for example, mergers and acquisitions fell 42% in the first half of this year and, according to Bloomberg data, the drop in activity was even greater in Europe and Asia.
However, as confidence in the market grows and the weakness of sterling attracts foreign predators to British brands, it appears mergers and acquisitions are making something of a comeback in the UK.
Earlier this month, T-Mobile’s UK business agreed to merge with the UK arm of Orange, creating the UK’s largest mobile carrier with around 37% of the market. The move is expected to deliver savings of approximately £0.5bn a year by 2014.
Also, American food giant Kraft made a $10.2bn (£6.4bn) bid for Cadbury. The British confectionary company dismissed the hostile bid as significantly undervaluing the business and warned a tie-up with a conglomerate such as Kraft would stifle the growth of the company.
Whether it’s an official announcement or just a rumour, talk of a takeover can significantly affect a company’s share price. Because announcements of mergers and acquisitions are usually made outside market hours, market makers will factor the proposed deal into the company’s share price in time for the market opening.
For the investor, timing is crucial. If you already hold shares in any of the companies involved prior to a rumour or announcement of a takeover, you’re well positioned to profit from any activity. In the case of Cadbury, its share price rose almost 40% the day Kraft’s bid was announced.
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If, however, you decide to buy shares in the target company immediately following the announcement it’s important to monitor the success of the bid. If the bid isn’t successful and you bought the shares at an elevated price, there’s a risk you will lose money.
Should the bid continue as expected, there’s a good chance your investment will remain stable. And, if there are alternative bids for the target company, you might even find the share price rises.
Overseeing all takeovers and mergers is The Panel on Takeovers and Mergers (generally referred to as PTM or POTAM) which plays an important role in ensuring each party involved has a fair and equal chance to state its case.
Because the period leading up to a formal bid approach can be the most volatile for the market – and any leakage of information or unsubstantiated rumours can significantly affect the price of shares – PTM can force a potential bidder into showing their hand. This helps prevent the potential for a false market to develop in the target company’s shares and reduces the risk of insider dealing.
Remember, should you hold shares in a company which is the subject of an official announcement, or even a rumour regarding a takeover, you could stand to benefit significantly. If you’d like to find out which companies might be worth keeping an eye on, have a look at my views on mergers and acquisitions.
by Nick Raynor, investment adviser at The Share Centre, 20 August 2009
