LONDON MARKET: Pre-millennium mergers to push up prices

UK STOCKS may rise as companies rush to organise mergers before the year 2000 computer problems begin to dull market activity and pressure on prices encourages companies to look for ways to cut costs. Retailers may decline on signs that consumers are forcing prices lower.

"There are literally dozens of companies who are in talks or who are rumoured to be in talks," said Mike Felton, manager at Royal & Sun Alliance. "There's a window of opportunity prior to year 2000 problems. There's a rush to do deals right now."

Companies such as Cable & Wireless, BOC Group, First Choice Holidays and Morland all may gain after merger announcements or speculation of future bids.

The FT-SE 100 Index rose 1.09 per cent last week. The Oil & Gas index led the gains, climbing 5 per cent, as crude oil rose on signs cuts in production are reducing a world glut and hopes of rising demand in Asia. "We remain very keen on oil companies," said Felton. "Shares are still lagging oil prices a bit - $18 to $20 should be the appropriate range," for crude oil prices.

The FT-SE Telecommunications index rose 2.9 per cent last week on hopes for mergers in the industry. European phone companies Mannesmann and France Telecom were reported to be the front runners in the race to buy One2One, which Cable & Wireless jointly owns. "As the major telecom companies of Europe are trawling over One2One, they're probably looking at the whole of C&W," said Felton.

Year 2000 concerns are expected to dull corporate activity in the last few months of this year, as companies focus on the job of keeping computer systems running. That's causing a flood of merger and acquisition activity now. In addition, the price pressure that retailers face may also prompt companies to consider acquisitions as a way to cut costs.

"In this low-price inflation environment, the way you make your profits is to take costs out and a merger is the most attractive way of doing this," said Hilary Cook, analyst at Barclays Stockbrokers.

Rising unemployment and signs of slow inflation are likely to provide a boost to bond prices amid speculation that the Bank of England will reduce the cost of borrowing further to stimulate economic growth.

"If inflation remains benign, it will keep alive the idea of one more cut in interest rates," said Juli Collins-Thompson, an economist at Banque Nationale de Paris.