Kraft’s potential multi-billion pound takeover of Cadbury has set tongues a wagging in the City. Monday may have been the most depressing day of the year (according to some survey or other) but there was no time for any of that gloom in the Square Mile.
Instead, all the talk was of M&A activity making a come back in 2010. And as any seasoned investor knows, where takeovers occur there is money to be made.
The amount of money changing hands because of takeovers dropped to $2.1 trillion (£1.3 trillion) last year, down from a peak of $4.2 trillion in 2007 - the year the last bull market ran out of steam. This year, Citi is predicting an M&A recovery as 2009’s global stock market rally, increasing consumer confidence and improvements in the global economy encourage bid activity to resume.
Citi is not alone in expecting the volume of takeovers to increase, with some commentators predicting that UK companies look attractive as bid targets in a global context. Matterley Fund Management, an offshoot of stock broker Charles Stanley, said: “The weakness of our currency is a key factor in our forecast for further consolidation. Both European and US companies will look at their UK comparator and muse with interest their increased buying power.”
Investors can play the M&A theme two ways. A hint that a company may become a bid target can be enough to send a company’s share price surging. Cadbury’s share price has jumped 8 per cent over the past two weeks as bid speculation reached fever pitch.
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Trying to spot who is going to be next as a takeover target can therefore be a profitable pastime. That said, buying shares solely in the hope of a bid is a dangerous ploy because profits can quickly be lost if a takeover comes to nothing. Investors who pile in or sell when the merger rumours are in the open often miss the best gains so ideally you need to take a punt before the City gossips start gabbing.
Although Citi is not specific about the stocks it thinks are ripe for takeover it does suggest areas of the market that look ready for consolidation: health care, telecoms, technology and the consumer sectors. If you are keen to cash in on an M&A recovery it may be worth having a scout round those sectors to try to spot some of the weaker players which would benefit most from a takeover. Well-capitalized firms with large cash holdings but few growth plans may also find themselves increasingly targeted by activist shareholders in 2010, says Citi.
Alternatively, rather than trying to spot potential bid targets you could just wait for the bids to happen. Then seek out other companies in the same sector that look good value. With all eyes on the bid target, the attractions of similar companies may get overlooked. Happy hunting.