Stock Market Week: Mega-mergers add to Footsie's power
Monday 01 February 1999
The index will become even more overpowering if just a few of the rumoured mega-mergers thought to be under consideration are concluded.
It is a case of the rich getting richer and the poor getting poorer, as Footsie companies have grown larger and larger. In 1986 Footsie represented 70.9 per cent of the market. At the start of the decade it was 74.1 per cent and last year 80.4 per cent.
Mergers, privatisations and demutualisations have been the major influences behind its rampant growth. The tendency of big institutional investors to chase easily tradable blue chips rather than get caught in the tortuous byways of smaller companies has also helped.
Even within Footsie, power is more concentrated. The top 15 Footsie constituents are set, when the three mega-mergers go through, to represent no less than 53.9 per cent of the index and a remarkable 44.2 per cent of the entire market.
In 1986 the top 15 blue chips accounted for 46.5 per cent of Footsie and 32.9 per cent of the share community.
The way Footsie's dominance has become self- feeding has been illustrated by the huge merger between British Petroleum and the US Amoco oil group. Shares of BP Amoco have to a large extent managed to ignore the gloom which shrouds most oil shares because the merger forced tracker funds to pile into the new behemoth's shares. They needed to increase their weightings to accommodate the increase in the oil group's capitalisation caused by the takeover of the American business.
So while the shares of rival Shell, still short of anything approaching a major corporate deal, bump along at a three-year low, BP Amoco's display relative strength. They are below the year's peak of 968.5p but, at 822p, are still well above their 1998 low point of 737p.
BP Amoco, with a an pounds 81bn capitalisation, down from pounds 85bn when the new group first arrived on the market at the start of the year, is still the biggest Footsie constituent. Glaxo Wellcome (pounds 75bn) is in second spot with BT (pounds 60bn) at number three, although it may be overtaken by Vodafone- plus-AirTouch. The valuation of the present top awesome threesome is more than the whole of the small-cap sector of the market. The 15th biggest group is Halifax (pounds 17.5bn).
Halifax is one of the Footsie members thought to be contemplating corporate action. A merger with another banking group would, of course, push the former building society higher up the league.
Last year corporate action totalled pounds 90bn, up from pounds 64bn in the previous year. Biggest 1998 deal was the Commercial Union/General Accident insurance merger, worth pounds 6.8bn. The BP/Amoco merger will feature in this year's calculations.
Although most deals occur on the market's under-card, Footsie constituents are keen and, in cash terms, the major players. Perhaps offering another indication of blue-chip popularity among big investors, Robert Buckland and Jonathan Stubbs at Salomon Smith Barney ask: "Why play the merger and acquisition game with small and mid cap stocks when the real game is being played at the top end of the market?"
Underlining why they think the merger mania will continue, Bob Semple and David McBain at BT Alex.Brown offer a host of reasons.
They range from defensive mergers - BTR and Siebe - or disenchanted institutions flexing their muscles. They point out that improved pricing power can be generated through get-togethers; as well as opportunities for cost cutting. Strategic fit is another influence; the Zeneca and Astra deal, where the drug pipelines are complementary, and Vodafone and AirTouch, improving geographic spread, are cited as examples.
There is also management self-interest - "this can be undiluted megalomania but more often than not it is driven by greed - you get paid more for running bigger companies."
With the crude oil price in the doldrums the BP merger with Amoco was largely a cost-cutting exercise - cuddling together to keep warm. It was the biggest British strike for an overseas company and with the advent of Euroland, cross-border deals will gain more momentum.
Two Footsie constituents feature on this week's results schedule - Imperial Chemical Industries and BAA, the airports group.
ICI is a sad case of how to lose City support. Its shares have slumped from 1,244p to 543p as it has struggled to complete its transformation into a speciality chemical group.
Its year's results are in little doubt. It has indicated around pounds 315m, with a maintained dividend of 32p a share. What the market will be seeking with some anxiety will be details of its debt position. With the chemical market moving against it, ICI has failed to raise the expected cash from disposals. It needs to reduce its debt mountain, which could be around pounds 4bn. It is argued that the chemical giant should cut its debt to a more manageable pounds 1.5bn. It may have to undertake the sale of what has hitherto been regarded as core business. The depressed share price would make a rights issue difficult to accomplish.
BAA, with third-quarter profits, should roll out a modest gain, although a disposal could lift the figure to around pounds 130m against pounds 104m. The problems surrounding the probable end of European Union duty-free sales and details of any possible sale of its property division are likely to create more interest than the profit figures.
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