Savvy traders look to profit from surge in takeover deals

FOLLOWING a dearth of mergers and acquisitions (M&amp;A) activity during the depths of the financial crisis, upbeat figures released last Friday by Thomson Reuters showed that UK target M&amp;A is up 39 per cent year-to-date compared to the same period last year.<br /><br />There has been a recent pick-up in global M&amp;A activity with London dominating the scene. Buyout vehicle Resolution&rsquo;s bid for insurer Friends Provident and the $1.7bn purchase of oil and gas exploration company Venture Production by domestic rival Centrica Resources both hit the headlines last week. <br /><br />And with the economy showing signs of recovery, further M&amp;A deals could well be on the cards. Stock prices are at multi-year lows, so now may be a good time for companies to pick up assets at distressed prices which will look like great bargains in years to come. As the market ticks up, and credit constraints begin to ease, companies will find it easier to shore up their balance sheets and can look to use their cash for acquisitions. <br /><br />Contracts for difference (CFDs) traders can also look to profit from the rise in M&amp;A, providing they stay well-informed &ndash; if you have an execution-only provider, make sure you have access to a squawk service or real time news flow. <br /><br />It is acquisitions that offer the most opportunity to CFD traders and where your efforts should be concentrated. This is because the bidder will normally make a offer that is at a premium to the target company&rsquo;s current share price in order to convince shareholders and the board to accept the deal. When there is a merger of equals, there is relatively little upside to the target company&rsquo;s share price. <br /><br /><strong>PREMIUM PRICE</strong><br />In an acquisition, the target company&rsquo;s share will jump as the market seeks to price in the offer and canny CFD traders can look to move quickly and capitalise on this surge by going long on the target company. Unless shareholders reject the deal, the share price of the target should remain around the premium price offered, which creates some certainty for CFD traders, who can then look to lock in some profits. <br /><br />However, if you miss the initial leg upwards, there may well be the opportunity to capture profits later as the Resolution-Friends Provident deal shows. On Friday, Friends Provident countered Resolution&rsquo;s potential offer, which saw its shares slip. But yesterday, Resolution sweetened the bid by offering cash for the first 2,500 shares and Friends Provident shares rose by as much as 3.4 per cent. <br /><br />Richard Perry, market strategist at CFD-provider Central Markets, says: &ldquo;This is a good example of the to-ing and fro-ing impacting on the very near-term share price and indicates how important it is for traders to keep on top of news flow.&rdquo;<br /><br /><strong>MIRROR POSITION</strong><br />And if the takeover does go ahead, then your CFD position will mirror what happens in the underlying stock, says Perry. For example, if shareholders were offered five shares in the new company for every 10 they held in the target, then this would be reflected fully in your CFD portfolio.<br /><br />While financials are clearly top of the agenda, the mining sector is in focus with Xstrata still keen to merge with Anglo American. Both companies&rsquo; share prices have been very volatile with Xstrata down to 555p last Monday but now back above 700p &ndash; a 30 per cent rise in a week.<br /><br />Ronnie Chopra, senior derivatives trader at stockbroker Falcon Securities, says: &ldquo;With share prices in many sectors still well under half of where they were last year, there are a number of companies that would attract interest from potential acquirers. For example, J Sainsbury was a takeover target from the Qatar Investment Authority at 600p per share 18 months ago but now the shares are trading at 315p.&rdquo;<br /><br />M&amp;A activity should increase substantially from its lows last autumn and CFD traders, particularly those who day trade, can benefit from the associated jumps in the share price, providing they are quick to react to newsflow.