Merger mania returns

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Merger mania is back in the air. Citicorp is combining with Travelers Group. Household International is getting together with Beneficial Corporation. British names such as Rolls-Royce, Savoy Hotels and Cunard Line are being swallowed by foreign buyers. In the US, takeover deals have totalled more than $32bn so far this year. Has the world gone mad?

The urge to merge was enough to push indices both sides of the Atlantic through important barriers: 9,000 on the Dow Jones went on the back of the mooted creation of the world's largest financial company. We saw 6,000 fall here soon after. It is amazing what the odd bit of corporate activity can produce.

Even though there are plenty who draw attention to the extended valuation levels of most main markets, it is becoming increasingly hard to find really committed pessimists these days. The trouble has been that those who have been bearish have usually turned out to be talking their book, having unwisely stuck to cash as the market continued to rise. And there is a belief that there are still big investors sitting on the sidelines waiting to dive in with their liquidity at the first sign of a wobble. I wonder if this is not just wishful thinking.

Two things trouble me. First, all this activity smacks of a mature bull market. These recent mergers represent cases of companies getting together with a view to cutting costs, improving profits and so justifying present market ratings. Second, I am no longer convinced the economic outlook is as rosy as the bulls would have you believe. The higher pound must be taking its toll on UK earnings. Continental markets are racing away without any sign as yet that a full-blown recovery is on the way. And as for Japan - therein could lie Nemesis.

This market is liquidity driven. Too much money has been chasing a supply of stock that has had no natural renewal built into it for some time. There are no privatisations to speak of in the UK. Demutualisations may well have swelled the market capitalisation, but only by unlocking embedded value. If anything, the issuance of new shares as societies turn themselves into companies created more of a problem than it solved. Demand was created from institutional investors who had no option but to pile into the market.

With the OECD forecasting that economic growth this country could fall to as little as 1.2 per cent by the middle of this year, it is hard to see present valuation levels holding up. It would be a brave person who would recommend a wholesale selling of this market, given the demographic pressures that are likely to drive more money into equities in the long term, but surely enough is enough so far in 1998.

The old adage "sell in May and go away" was probably more to do with the social calendar in those days when markets were moved by individuals, not faceless investing corporations. The big players in the markets closed off their London houses and went off to enjoy themselves through the summer. I believe the time has come to repair to the country early. This year, the season starts for me at Easter.

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