Tuesday, December 8, 1998 Published at 14:19 GMT
Business: Your Money
Riding the merger wave
Merger and takeover opportunities abound - but where next?
The merger mania that has gripped Europe's corporate landscape has dollar signs ticking over in the eyes of some share investors.
There is no doubt that the current wave of consolidation in many industries provides opportunities for quicker profits as predatory companies offer attractive prices to snare competitors.
However, buying shares in rumoured takeover targets in the hope of windfall gains leaves more investors high and dry than it creates winners.
However there is no denying the opportunities exist. Peter Sullivan, European equity strategist at Goldman Sachs, said: "We're nowhere near the end of this merger wave, I think we could see it go on for years."
Understanding why its happening helps to identify where activity will next appear:
The financial, energy and pharmaceutical sectors are leading the way. Other sectors tipped include chemicals and metals, beset by declining commodity prices, while carmakers and telecommunications face tough competition and rationalisation must take place.
Brokers agree that the financial sector is the most significant for takeover activity with UK banks such as Barclays, NatWest, Lloyds and Halifax seen as prime candidates.
However, the speculator's horse has bolted for most banks. Mr Urquhart-Stewart said the exception is Barclays Bank which has seen its share price suffer because of recent management troubles.
Likewise, major insurance companies are already reflecting merger speculation but Norwich Union is an exception, a merger possibility with a weak share price.
Others suggest looking further afield - the German, French, Spanish and Italian banks are just as ripe.
Depressed oil prices have already seen a great deal of movement among the big energy names like BP, Exxon and Mobil while speculation has seen share prices among the others.
However, the smaller national oil companies will have to rationalise too, Mr Urquhart-Stewart said. "And smaller producers and explorers, which are deeply unfashionable at the moment, will eventually see some merger activity." He sees Enterprise and Lasmo as prime candidates.
One analyst who declined to be named believed Total's takeover plans did not end with Petrofina and predicted a merger with its French rival Elf Aquitaine.
There was also speculation that pharmaceutical companies were ripe for mergers earlier in the year but this has eased off after market turmoil mid-year. They should move up again and Zeneca provides the best scope for share price gain, according to Mr Urquhart Stewart.
Smaller drug and biotech stocks will see merger activity but there are too many and they are too hard to pick, he added.
Chasing the gains
There are two ways investors exploit merger and takeover activity. Smaller companies taken over by a larger competitor are where speculators find the best gains. "In the US merger wave in the early 90s this was the way to make money," Peter Sullivan said.
In buying a majority share in their targets, such companies often pay well above the market share price. But after picking the right stock, timing when to buy and then sell is another challenge altogether.
Get in early, the more speculation intensifies, the more investors will buy in and drive up the price. The old adage is often the best rule: Buy on rumour, sell on fact.
Once a takeover deal firms up, the unknowns become knowns and the scope for any speculative gain reduces.
More considered investors look for a longer-term investment, companies that will lift profits after successfully joining forces. Look for a company doing the taking over that has a good record of buying firms and reaping the benefits, Mr Sullivan said.
Other investors take a "scattergun" approach, picking one sector and buying a portfolio which covers many stocks within it.
"This makes a lot of sense", Mr Sullivan said, because even if you don't pick the right ones, merger activity in one industry usually sees shares rise across the whole sector.
Finally, don't buy a poor quality stock just because it might get taken over, Mr Urquhart-Stewart warned. "Buy a good quality company and you should at least get your money back if your merger hunch comes to nothing."
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