Takeover updates

There appeared to be plenty of work over the weekend to keep corporate financiers out of the sunshine. Late on Sunday the board of Pfizer announced they were prepared to pay £55 per share to the shareholders of AstraZeneca, a company that according to Analyst Rating Network is worth around £40 per share based on the average recommendation of the analysts who research the company. The Board of AstraZeneca was swift to reject the offer, despite their previous position that they wished to see an offer above £53.5 to open discussions. The shares fell to £42 at one stage on Monday morning, approximately 15% on the news of the rejection. One would imagine Mr Johansson's (Astra’s Chairman) phone will be red hot as institutions look for answers as to why the Board are not prepared to engage with Pfizer, and to explain where the board feels the undiscovered value in the company lies, to justify the rejection of the offer. Should the shareholders fail to encourage the board to enter discussions and the deal falls through, Mr Johansson will be under even greater pressure to extract that value.

The European Bank stress tests appear to be having their effect as Deutsche Bank and Portugal's Banco Esparto Santo announce their intension to raise capital. Deutsche Bank has been rumoured for quite some time to be one of the banks that may be forced to strengthen their balance sheet to comply with the results of the stress tests. The results of the European Bank Stress tests are due in October; there may be more European bank rights issues ahead of that date.

The larger broader indices remain directionless; demand for equities remains robust according to Nomura's fund flow report. Equities and bonds attracted nearly $20bn of capital last week, over half going into equities. European equities attracted nearly $3bn, the 46th consecutive week of net inflows. According to Nomura despite these consistent inflows investors have purchased only about a half of the $170bn they removed from equities between 2007 and 2013. Most broker equity sentiment indicators continue to remain supportive of equities but one has to take note of the de-risking that has taken place in the past few weeks. The recent fall in the Nasdaq index, we also pointed out the recent weakness in the middle capitalised FTSE 250 index, and the Russell 2000, the US index of small sized companies has fallen over 10% in the past few weeks. We also noted last week the fall in peripheral bond markets, another sign investors were de-risking. The recent rally in US treasuries may also be a sign of investor caution; some analysts are suggesting that these moves could be pointing to a correction in the broader markets. 

After the rise we have had, and as the Federal Reserve continues to taper, and while the ECB still look reluctant to step up to the plate in a meaningful way, a correction for developed equities may be on the cards. Trying to prepare for a correction is difficult when you awake to the possibility of $100bn of deals in one day (AstraZeneca/Pfizer, AT&T/DIRECTV). If you do sell and equities continue to attract capital, you are unsure when to reinvest, and if the correction does occur, the move may be swift and the window to reinvest limited. One may have to take any short-term pain, and believe, as has been the case over the past four and a half years, in the long-term gain.

Posted on May 20, 2014 .