Financial Markets – Bid Targets

Financial Markets – Bid Targets Explained

Like the Queen and Barbara Windsor, Marks And Spencer is a well loved British institution and, as such the fight between Stuart Rose and Philip Green over who got to sell the nation its underwear had huge appeal as a spectator sport.

However, as a spread betting opportunity the fight was something of a damp squib. There’s early money to be made. The FSA are have started checking out the trading patterns just before the broadcast of Green’s interest which suggest some ‘speculative forays’ were made, not least by Rose himself.

However, with Green succeeding in fluffing his lines, Rose has been left to get on with the job of fixing the damage to the company’s bottom line. It is a hard task but for the moment at least it looks like the hot money has moved on.

The fight for the hearts and minds of M&S shareholders has at least fired up some attention in what would otherwise likely have been a doomed summer for the markets. The IPO market is presently running out of steam and apart from some marked volatility in Vodafone (accountability is on the hedge funds) and some shifting sands underneath the oils and the banks, the chief markets are trying for time before the business end of the year kicks into action in September.

Some action has been going on lower down the Footsie food chain that brought some celebrated winnings to punters at one spreads firm.

During November last year, haulage contractor Tibbett & Britten issued a profits warning summoning a downturn in both its UK and its Mexican businesses and the shares had been in the doldrums ever since. This report passed most of us by, but come early June, some shrewd players in the market obviously smelt something in the water and the share price started to show signs of life. Within a week that something was confirmed, as the company proclaimed an official takeover approach from fellow logistics group Exel.

The shares were affected, rising 94.5p or 19% on 15 June to 584.5p on news of an offer. The shares advanced a further 82p the next day when a bid of 668p-a-share was confirmed and then carried on rising above even this level when the unlikely story went around that Deutsche Post might be getting ready for a spoiler move. This is an instance of how merger and acquisition can produce its own heat given the right target and the right conditions.

Ups and downs

Tibbett & Britten was definitely an encouraging tale for five punters at City Index. They distributed over £500,000 between them, betting on the company receiving an approach. Consequently, it offers an example of where financial spread betting can really work.

Unfortunately, June also presents an example of one of those ‘punter beware’ situations that are all too often disregarded even by experienced traders.

All the firms stated that trading on easyJet in May and June was brisk. Tom Houaard from City Index stated ‘Some people lost a fortune on that one’. Until very recently, the low-cost airlines appeared to have the world at their feet. easyJet was the ideal momentum play as escalating passenger numbers and rising profits quickly translated through to the share price, which until the beginning of this year was on a steep upward curve, achieving an all-time high of 380p in mid-January.

However, while some punters were taken in by the positive updates, those looking at the broader picture could see clouds on the horizon. Contention inside the industry was escalating, not least from the national carriers. They had plans to regain some ground in the short haul market by cutting their prices. At the same time, European Union regulatory investigations were moving to the top of the agenda and increasing oil prices were starting to cast a huge shadow across the very notion of cheap flights.

Tom Hougaard stated that ‘People were asking where the profit was. ‘There was no real obvious support for the share price where it was.’

At the beginning of May, easyJet reported their first profits warning, blaming competition as a factor behind a likely drop in earnings. The stock moved 25% on the day, changing from around 300p to little more than 220p.

Optimists were given a second warning in early June when oil prices continued to balloon. The stock continued to lose a further 24% of its value, staying at one time on a record intra-day low of 152.5p, or well over 50% lower than its high point at the start of the year. Excellent money for those who went short on the stock but an especially harsh lesson or anyone who didn’t recall one of market’s basic rules of thumb – profit warnings tend to come in twos.

The easyJet tale brings home the old saying: never try to catch a falling knife. Evaluating when a stock or an index has hit bottom is a particularly hard task, even for professionals. Bring up a name like Marconi to any spread better and watch the blood drain from their faces. Even with stop-losses in position, your remaining balance can be severely hurt by such sudden shocks and umpteen of these can leave you facing an unwelcome margin call.

Things can only get better (sometimes)

Sometimes, the knife has gone as far as it can possibly go and once punters find that out, opportunity knocks. One such example from the recent past concerns office rental firm Regus. It was affected by a right hammering from mid-2001 to late 2002 when the office market hit a downturn and rental income plummeted off a cliff both in the UK and, particularly, in the US. At its lowest ebb, the share price hit 3p.

With the company struggling to stay afloat, it takes some conviction to go long even at that kind of price. But with such little down side, this one was as close as you could get to a free bet and so it proved to be. Though no doubt agonizing for the management, the reorganization eventually was seen to be making headway and the share price bounced back in sympathy. By the time the company had bounced back, the shares reached a high in March this year of 78p. For anyone in the practice of running their winners, it would have added up to a very healthy profit indeed.

When the markets appear to be at their bleakest – as at various times over the past three and a bit years – it is clear that there is money to be made. Volatility is its own reward and for those taking note, mergers and acquisitions can give most people a glimmer of hope.

Segregating the wheat from the chaff in terms of what is and isn’t reliable information on possible bid targets is no easy task. Add together the rumour mills of the City and the newspapers and you have a arrangement that often feeds off nothing much more than hot air.

But if even dingy old M&S can be forced to dump its chief executive and chairman overnight in favour of Stuart Rose’s new broom, then anything can happen. Consider that the clock is already ticking on the new boss’s makeover. Philip Green may have been defeated this time, but things don’t last forever, so keep your bid buying boots handy.