IN the past few weeks, hardly a day has gone by without another one of our leading companies attracting a takeover rumour or a formal bid.
These takeover bids and the wild speculation that often accompanies them is one of the reasons why stock markets have continued to move higher, despite a sea of pessimism.
Indeed, in the past month alone, we have seen formal bids for Sainsbury's, Alliance Boots, EMI and Reuters.
Further speculation of pending bids also continues to swirl around the likes of Scottish and Newcastle, ICI, International Power, Hanson, Cadbury Schweppes and Morrisons to name a few.
Given the sheer scale and staggering number of recent takeover approaches, some financial commentators are even taking this as a signal that the Stock Market is close to its peak and a crash is only just around the corner.
After all, a similar takeover frenzy heralded the last major Stock Market crash, in 2000.
Trying to call the peak of any market is, of course, a mug's game, but for what it is worth, I support HSBC's view that the latest flurry of takeover activity does not look reckless just yet.
Despite the strong rally in many share prices, valuations remain attractive, hence we are seeing so many takeover approaches.
However, some of the recent bids, particularly by the private equity companies, have become more ambitious, and with interest rates now on the rise, there could be trouble ahead.
Traditionally, most takeover approaches were made by companies using cash squirreled away in their bank accounts from years of accumulated profits.
They would then use this money to launch a takeover bid for a rival company to expand their business and boost profits. Now an increasing number of takeovers are being undertaken by private equity companies, which often prefer to borrow huge amounts of money to buy out and restructure companies, rather than using their own money.
Although there is nothing wrong in borrowing money to take over a company, indeed most traditional companies borrow at least some funds on debt markets to fund takeovers, it is the sheer scale of the money borrowed that is raising a few eyebrows.
Borrowing funds (also called gearing) is fine, providing that the interest payments on the funds borrowed are met.
The greater the borrowing, the greater the interest payments, and amplification of risks for all concerned, especially if interest rates were to rise sharply.
In recent days, private equity activity has reached several new milestones, but none is more significant than Kohlberg, Kravis Roberts' takeover for Alliance Boots for a whopping £11bn. This makes is the largest private equity buyout ever in Europe, and the first for a company listed on London's FTSE 100 Index.
Given the sums involved, it takes financing risk to a new level. It is hard to say if the current private equity buyout phenomena and, by implication, share prices are close to their peak.
Interest rates are still relatively low by historical levels, despite last week's 0.25 per cent rise in interest rates, which means that private equity firms are still able to finance borrowings.
However, given that many share prices have rallied strongly, most of the easy money has already been made, and there is a temptation for private equity companies to borrow even larger sums of money and undertake more risky investments to maintain their investment returns.
If this trend continues, and interest rates rise higher than anticipated, serious trouble could be just around the bend.
*Mark McMullan is an Investment Manager in the Teesside office of Wise Speke, and can be contacted on 01642-608855.
Views expressed are the author's own and are not necessarily held throughout the Brewin Dolphin Group. Wise Speke is a division of Brewin Dolphin Securities Limited, a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority.
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