Spring fever on takeover trail

TAKEOVER bids are suddenly roaring back into fashion after a six-month lull following the terrorist attacks on New York last September. Shell's £3.5bn bid for Enterprise Oil, Britain's biggest independent oil company, hard on the heels of its £1.3bn offer for Pennzoil of the US, brings its recent bids bill to £5bn and the total of billion-pound-plus bids in recent weeks to a stunning £20bn.

This spring takeover spree has thrust no fewer than five Footsie companies - Innogy, Powergen, P&O Princess, Imperial Tobacco and Enterprise - into the bid limelight. A flutter of smaller deals involving Enterprise Inns, Thistle Hotels, Amersham, JJB Sports, Johnston Press, Haslemere Estates, Queens Moat Houses and Sytner has swollen the grand total to more than £25bn.

This may be small beer beside Vodafone's £80bn takeover of Mannesmann two years ago, but is enough to suggest 2002 could easily overtake 2001 as a year for big deals. It could also be a sign that the bear market is drawing to an end and that Western-world capitalism has recovered its collective nerve after September's shocks.

City bankers, who thrive on merger and acquisition work, are suddenly talking of a sustained revival in takeover bids and merger deals, and forecasting that the pick-up in activity will gather pace later in the year.

This has to be close to manna f rom Heaven for small investors, who have had to suffer two years of falling share prices and a serious dearth of takeover bids to perk up the markets in that period. They are suddenly discovering a wealth of extra value in companies they had begun to find boring.

The signs are that there will be more delights to come. The strength of the spring spending spree suggests the past month's rash of bids will not be the last this year and there is a distinct possibility of counterbids.

There is already talk of a £5bn merger between Granadaand Carlton after the collapse of their ITV Digital venture, while Royal Caribbean is waiting in the wings pending the regulatory review of Carnival's bid for P&O Princess and could revive its own earlier merger proposal.

Meanwhile, the takeover bids and deals made so far this year are shaking and stirring a few sectors such as oil explorers, utilities and leisure in a way they have not been for years.

Investors should enjoy the show and regard it as a just reward for their patience over two years of falling markets.

But they should also stay near the exit, not get carried away by their sudden good fortune and be looking to take some profits as events unfold.

You only have to recall the way Granada shares have underperformed the market since its 1996 megabid for Forte, the poor progress of Allied-Lyons after its 1994 takeover of Domecq or the decline of Greg Hutchings's Tomkins after buying Ranks Hovis McDougall to see the risks in big takeovers and surveys over the years have consistently shown that most takeovers fail to add value. A recent study from consultant AT Kearney found that only 30% of merged companies realised any increase in aggregate profitability and 57% became less profitable. 'While a minority of mergers are very successful, it comes as no surprise that just over half actually destroy shareholder value,' says the firm's Jim McDonnell.