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Investment view

If there is one thing guaranteed to fire enthusiasm among investors, it is the resurgence of takeover activity. You might have thought that deals are more likely to be struck when share prices are flat on their back. The reality is that buoyant market conditions are necessary if corporate activity is to get off the ground. It is a sign that health has returned to the stockmarket, that merger and acquisition activity is well and truly on the up.

Takeovers, of themselves, provide no guarantee that shareholder value is enhanced. True, shareholders in the company being acquired will usually gain once a bid succeeds. It is the acquiring company which often finds the perceived benefits to be less than originally thought. Takeover bids may get the adrenaline going in the Square Mile but most investors should view them with at least some degree of caution.

Of course, some are spectacularly successful. The Royal Bank of Scotland&#39s profits performance last week demonstrated what a better fist the Scots have made of running National Westminster Bank than the previous management. RBS is now the world&#39s fifth-biggest bank but there are plenty of investors who are nervous that it might take a step too far, perhaps realising the ambitions they have to gain a real presence in the US and suffering indigestion as a consequence.

It has to be said that takeover bids are fun. You should never construct a portfolio in the hope that the constituent companies are all takeover targets but when a bid comes, it can add that extra spice to your investment returns.

Hostile bids are doubly exciting. The battle that seems set to commence for Walt Disney following Comcast&#39s unwelcome (to Michael Eisner at any rate) approach could turn into the saga of the year. Mind you, Walt Disney shareholders deserve a break. The possession of one of the most powerful brands in the world has been no guarantee of prosperity.

The return of merger and acquisition activity has helped in another way, too. Corporate finance departments of investment banks were having a lean time. Last year, bonuses returned as bid activity picked up. If the start of 2004 is anything to go by, we could be heading for some very significant numbers by the year-end. Whether we will return to the heady days of five years ago is debatable.

In the end, the success or otherwise of an acquisition strategy will depend upon valuation and ability. Pay too much for a company and you will never extract value. If you lack the management capability to run the business you acquire more effectively than the previous incumbents, you will be wasting time as well as money. Bradford & Bingley has maintained its independence because no one has yet considered that they may have a way of improving the returns they achieve. Sticking to your last can be a very successful strategy.

Sitting in a crowded radio studio last week, I was rem-inded how important to trading activity takeover bids can be, regardless of whether they succeed. We were reviewing the previous day&#39s trading in Vodafone shares, which had been at a record high, despite the failure of its bid. In the end, we concluded it was probably hedge funds closing out short positions that had created the activity. It is an ill wind and a reminder that takeovers may be fun but they can be injurious to your financial health as well.


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