Heard it on the grapevine: The City thrives on gossip about possible takeovers. But how, William Kay wonders, do these rumours start?

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The Independent Online
IT COULD turn out to be the hottest story of the year - or it might just melt in the summer sunshine.

For most of last week the London stock market was buzzing with the tale that the industrial conglomerate BTR might make an audacious takeover bid for General Electric Company, the pounds 8bn group led by Lord Weinstock.

According to the magazine Acquisitions Monthly, that would be the biggest bid since 1989, when Sir James Goldsmith's consortium made an unsuccessful attempt to take over tobacco giant BAT Industries.

It would also dwarf BTR's last large-scale foray into the UK takeover market, when it bid pounds 1.5bn for Hawker Siddeley three years ago.

Such daunting precedents were no deterrent to speculators determined to get in on what they saw as a possible money spinner. And, for some, it was.

It all seemed to start in the most unlikely fashion on Saturday, when the Daily Mail quoted an anonymous investor as saying: 'The time is ripe for a bid. It would be welcomed with open arms. Let us hope BTR has a go.'

No reason was offered as to why BTR rather than any other large company should throw down the gauntlet to Lord Weinstock, who would prove a formidable foe despite already being under fire for his declared wish to stay at the helm for at least another two years beyond the 70th birthday he celebrated last month.

But that was enough to set the hares running. The day before that quote appeared, GEC shares had closed 31 2 p down at 2801 2 p on an unexceptional volume of 3.9 million shares traded.

However, last Monday the volume traded jumped to 5.7 million as the price nipped up to 2841 2 p. The next day the Evening Standard picked up the trend, pointing out: 'There is little downside at these levels.' Volume rose to 7.2 million shares, taking the price to 292p.

On Wednesday morning my colleague Derek Pain observed in the Independent's stock market report: 'As the market thrashed about seeking to pinpoint the next takeover victim, the stories grew more and more bizarre. BTR descending on GEC was one.'

That was the day the market really got the bit between its teeth, trading 15 million GEC shares at a price which closed at 300p. The fever cooled on Thursday, and by Friday the trading volume was back to the 3.9 million of the previous week. But the price stayed stubbornly at 302p, and the two companies remained resolutely tight-lipped.

'I'm sorry, but we don't comment on market rumours,' said Stuart Gendell, BTR's spokesman. 'It's just something that has boiled up over the past few days.'

Graham Roy, Mr Gendell's counterpart at GEC, echoed: 'We don't comment on press speculation.'

Conspiracy theorists might argue that it is surely more than coincidence that the companies share the same stockbroker - the aristocratic and ultra-discreet Cazenove & Co.

But surely a firm of Cazenove's calibre would maintain an implacable 'Chinese wall' between those of its brokers working on the two accounts? Arthur Drysdale of the firm's corporate finance department said merely: 'I wish you good luck with your inquiries, and thank you for your interest.'

Such platitudes were being mouthed in many corners of the corporate jungle last week, for BTR-GEC was only one of a spate of such rumours doing the rounds in what was otherwise a quiet week for anything other than the most routine company news.

Hanson bidding for Argyll Group, Tomkins for Eastern Electricity, Scottish Power for Southern Electric, unnamed American companies bidding for Wellcome or Royal Insurance Holdings, the French- based LVMH doing a deal over its stake in Guinness, GEC coming in for British Aerospace - and the revival of a long-running song-and-dance act, Cadbury Schweppes allegedly tilting at United Biscuits.

Rob Buckland, equity strategist at Natwest Securities, explained: 'Rumours always tend to circulate when the market starts getting livelier. It's one thing that has been totally missing from this bull market since we left the ERM in 1992. As more companies become convinced that inflation really is under control, they will adjust to this and start to think about takeovers. That's why we believe there's more to go for on this bull run.'

A minority of rumours are undoubtedly the result of insider dealing, with the criminal penalties that carries. If a takeover bid really is being prepared, then in the days running up to the public announcement it is unavoidable for several dozen people to get to know about it.

These range from the merchant bankers and brokers who were probably in at the start, to printers and publicity agents and their messengers and secretaries. They may not pass on what they know, but unless they are regular stock market investors, the very fact that they are buying a particular share will alert others.

But most rumours are based on flimsier evidence, as analysts, dealers, securities salesmen, fund managers and journalists swap the gossip of the day.

Derek Pain, a veteran of many a stock market tale over the years, said: 'I don't think there is any one source for these stories, but the market does make money out of getting in on the ground floor of big stories and some do inevitably come true. You rarely get these stories cropping up without there being a grain of truth in them. It can be very tenuous, and at this time of the year when things are quiet people in the market do want to drum up business. But the market's definitely in the mood for a bid, and one or two people I have spoken to say that their corporate finance departments are working overtime.'

Last week's GEC story translated into more than just gossip: over pounds 100m of GEC shares changed hands, generating around pounds 500,000 of commission for the brokers. Not bad in the dog days of August.

Philip Wolstencroft of Smith New Court, the market's top-rated equity strategist, pointed out: 'Markets go up and people try to think of reasons why. GEC was oversold, and has had a bit of a bounce, and people make up stories to explain it, and possibly to cover their positions. I don't tend to follow these stories. My suspicion is that most of it is hot air. It's not something I would spend too much time on.'

An anonymous broking salesman added: 'When things go quiet you can get mischievous rumours springing up. People see big lines of stock going through and put two and two together and get the wrong story. The rumours can also make people think a stock is cheap anyway so they might as well have a few, with the bid possibility thrown in for nothing. But for every batch of rumours not more than two ever turn out to be true, and even then it can take ages for them to come to fruition. One hears a lot of things and most you tend to ignore - frankly I'm ignoring the BTR-GEC story.'

Those could be famous last words if BTR pounces tomorrow. But by then another rumour will be tantalising investors and setting nerves on edge in the boardroom of another might-be target company.

(Photograph omitted)