Merger mania boosts shares

Sometimes I wonder what it might have been like to have been a headline writer. Those pithy phrases are designed to capture people's attention and deliver a great deal of information in very few words. Just now, the obvious headline to describe our own stock market would be "Merger Mania Boosts Shares". It is difficult to know how to describe the present situation better.

Both 1996 and early 1997 were active in the takeover field. The reasoning then was an incoming Labour government would be more likely to obstruct corporate activity. In this, as in so many ways, today's Government is proving relatively indistinguishable from its predecessor thus far. Meanwhile, the steady globalisation of trade is leading to a frenzy of merger activity all around the world.

The big news was the impending marriage between Glaxo and SmithKline Beecham. The drugs industry is no stranger to alliances. Both partners in this particular deal are themselves the product of relatively recent mergers. SmithKline jilted another potential suitor in order to tie the knot with Glaxo. American Home Products may even now he looking at alternatives.

Karl Marx wrote that capitalism must fail eventually because successful companies inevitably become larger, so reducing competition. He was writing at a time when we lacked today's information technology, corporate regulation and competitive environment. Even so, it is worrying to see how powerful some firms have become.

I have written before on how multi-national corporations have more wealth and exert greater influence than many countries. Indeed, I read recently that the 400 wealthiest people in the world own more than the 44 poorest nations. So much for greater equality.

With bidders lining up for Energy Group and GUS trying to take out troubled Argos, the industries touched by this M&A rampage are many and varied and the profits delivered to investors considerable to compensate for the lack of windfall bonuses this year. It also has the ring of perpetual motion about it. Takeovers tend to reduce the supply of equity. Shortages push up prices. It is not just the victims of corporate predators that see their share values rise in circumstances such as this.

It is not too cynical to believe that heightened corporate activity can be the sign of a mature bull market. Things have changed, though, so it is probably too simplistic to believe this is the last rush of the unwary before realism sets in. Still, with the effects of the Asian crisis still under-represented in Western markets and looming hostilities in the Gulf, it would be as well not to take the burst of takeover activity as a sign that a new golden age for investors is dawning.

Instead, it strikes me that an opportunity exists for investors to weed out shares and take profits ahead of a Budget which is likely to be less friendly to those who place their faith in equities.

Brian Tora is chairman of the investment strategy committee at Greig Middleton.