Takeovermanship
MONEY
NICHOLAS DAVENPORT
It may have been noticed that whenever I express the reasonable view that equity share prices are high enough, discounting, as they do, a continuance of the 1968 rate of growth in company profits some years ahead, some brash, pushing little company makes a bid for a big, not-so-pushing company at a price which is high above the current price and so sets the whole equity share markei, rushing upwards again, like a temperature chart, inflamed with takeover fever. I do not know whether Mr Anthony Crosland will act on the suggestion I made last week and appoint a special umpire to oversee industrial takeovers, but I suggest that Mr Stephen Potter, the expert on games- manship and upmanship, should be the man for this job.
So many of the recent takeovers have havily been 'cricket.' I am thinking of Traiali:ar House, a company of £32 million whi..h made a bid for City of London Real Property whose assets were valued at £170 million. (This, however, had the good effect of bringing out further bids from Metropolitan Estates and Land Securities and a marriage offer from Oldham Estates.) Over the weekend there was much excitement in the textile in- dustry after a disclosure by Mr Joe Hyman of Viyella that the great to was considering a defensive textile consortium (Listers, 'Gingers and Carrington and Dewhurst, etc) to counter the Ccurtaulds bid for English Calico. (A dif- ficult case for Mr Potter to decide which, if any. of these parties has acted in a gentlemanly and sporting manner.) The result was a tempo- rary marking up of textile shares which dis- regarded the urgent need for a calmer valuation of equity share prices. The truth of the matter is that while takeovers are a necessary feature of the reorganisation of British industry, they are a damnable market disturbance and prevent the stabilisation of share prices. The result is often to reduce the supply of shares on the market and increase the amount of money chasing them.
Last year, as I have said, they accoun- ted for nearly £3,000 million changing hands in cash and paper. Part of this wits the reactivation of money lying idle in company treasuries and handed over to private indivi- dual shareholders who promptly ploughed it back into the market. The result was a sharp increase in the velocity of Stock Exchange turn- over and if it had pot been for the huge rise in 'rights' issues of equity shares, which at £364 million were five times as large as in 1967, equity share prices would have gone through the roof.
About a year ago there was a learned dis- cussion in a Lloyds Bank review by Mr John Whittaker of the level of equity share prices. He pointed out that in an economy where the company sector as a whole is adding to its physical assets share prices are unlikely to stand for long below the current market value of the assets underlying them. For, if they do,_ it is cheaper for companies to expand by takeover than by expenditure on physical assets, even 'after allowing for the generous investment
grants bestowed by the Government if the ex- penditure is incurred in the so-called develop- ment areas. The large amount of takeovers since that date suggests that it has been much cheaper for an expanding company to proceed by way of takeover than by expenditure on new physical assets. Indeed, Mr Whittaker concluded that takeovers would generally be executed at prices one third above the level represented by the current market value of the underlying assets, which he called 'the support level' of the market. The research departments of the brokers are no doubt busy working out the 'support level' for the different industrial share markets and until I hear from them some- thing to the contrary 1 am going to assume that the equity share markets cannot now fall much below their present level because the takeover merchants would immediately start trading. Besides, the valuation of underlying assets takes no account of intangible assets such as 'know- how,' and, even if it did, it is the bidder who generally has the better 'know-how' to exploit the existing assets.
It is curious that Mr Whittaker in this review should have made another test of the dearness or cheapness of the equity share markets by making a comparison between the income re- turn from estimated dividends and that from gilt-edged bonds. The probable excess which estimated dividends gave at that time seemed to him unmaintainably small, but he thought that equilibrium was likely to be restored by a fall in interest rates and a rise in the gilt-edged market! Alas! the gilt-edged market has since
fallen to levels which have never been seen before—with War Loan at 421 offering a yield of 81- per cent. Can equity share yields catch up on such a high return over the next three to five years? It depends on the rate of earn- ings growth. At the current index average in- dustrial shares are yielding 4.77 per cent on earnings and 3.66 per cent on dividends. I doubt whether the rate of industrial growth will en- able shares to beat the gilt-edged return. For 'gross' funds the answer is no.
It would, of course, be absurd to plunge into the government bond market if interest rates are still moving upwards. In the United States the discount rate has been marked up to 51 per cent, the 'prime rate' to 7 per cent—this is the rate charged by the banks to their safest bor- rowers—and the Euro-dollar rate to 8 per cent. The American dear-money argument is that inflation is rampant and that President Nixon is bound to make it worse by increasing government spending on the cities and on armaments in order to speak to the Russians from a position of greater strength. But I find this argument unconvincing. The Vietnam war expenditures are being rapidly cut—peace may even be near—and ex-President Johnson left a budget surplus in sight as a result of his tax surcharge. The Federal Reserve is certainly trying to curb the inflation with dearer and shorter money but they are not likely to pursue a policy of monetary squeeze a day longer than it is necessary. And I cannot see it being neces- sary in the second half of the year. At the moment of writing the American Treasury Bill Rate has fallen to 6 per cent which suggests that the worst of the rise in money rates may have been seen.
I hope that the Treasury will not be panicked into putting up Bank rate this week from 7 per cent to 7+ per cent. Industrial investment is not increasing at the rate necessary to main- tain a decent growth rate in the economy. (The Treasury is thinking of a miserable 2 per cent, not the 6 per cent of the ruc.) Lately the Associated Portland Cement has had to raise a debenture with a 9 per cent coupon. Few companies can see a profit of over 10 per cent on new physical investment at current prices. Much dearer money will stop our economic growth.
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