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Diagnosis merger

It is always dangerous to read too much into short-term market movements. The way in which shares took off in the first few hours of trading in the new year made me wonder if I had missed something. Then we started to hand it all back again.

Which trend looks most sustainable over the coming year? Neither, really. Markets never move in a straight line or maintain the same direction for more than a few sessions at a time.

There are, however, some conclusions to be drawn from the way some of the news is developing. The decline in the oil price is both good and bad – good because it should lift some of the short-term inflationary pressure and bad because cheaper fuel and energy costs could stimulate economic activity and rekindle longer-term inflationary fears. In other words, you can interpret much of what is happening in a variety of ways.

One topic of conversation in the bars of the Square Mile is the shrinking supply of shares. Corporate activity is restricting availability of our core stock in trade. The last time this happened to such an extent was the end of the 1990s when buybacks were in vogue. Share prices were driven up and investment carried out in areas that proved financially disastrous.

It is worrying to realise so much of corporate Britain is falling into foreign hands or being taken into the murkier waters in which private equity houses operate. These, at least, should re-emerge at some stage through flotation or as a consequence of a trade sale.

Bids and deals are, of course, good for the City. Aside from the bonuses they generate, the wealth of talent gathered in Europe’s premier financial centre ensures that the majority of these transactions are handled here. This boosts the earnings of what is a very big contributor to the UK’s overseas earnings.

But the shares of the principal beneficiaries of this acquisition frenzy are some of the most volatile in the sector. It is still the investment banks themselves, rather than the investment banking subsidiaries of the major diversified banks, that grab the lion’s share of this most lucrative sport. With a fair chunk of the not inconsiderable earnings they generate from advising on mergers and acquisitions ending up in the pockets of the whizz-kids employed to do the deals, competition to ensure the best performing teams are on board can lead to some very fancy pay packets being touted around. The trouble is that the greater the level of activity in this field, the more the banks feel obliged to pay up, either to attract the best talent or to keep their own guys on side.

At some stage, activity will start to turn down because economic prospects deteriorate or as a consequence of Government intervention, regulatory interference or the realisation that takeover bids do not always work for shareholders. Just as it is wrong to build a portfolio on expectations that bids will deliver the value uplift, so it is foolish to expect M&A activity to support the market indefinitely. My worry is this is precisely what some investors believe.

Brian Tora ( is principal of the Tora Partnership


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