IF YOU you can predict them, mergers and acquisitions will no doubt ensure that your cup runneth over. One only has to calculate the share price appreciation of companies that are subjected to takeover offers to realise the rich rewards prophetic punters are currently receiving.
Mere rumours late last year that BHP Billiton was set to launch a takeover of Rio Tinto sent the latter's share price from $107 to $149 in one morning. When Westpac announced a merger with rival bank St George last month, St George shares jumped from $26.65 to $34.15.
Shareholders in both takeover targets reaped a substantial windfall.
But for those who missed the boat -- the ones who watched in frustration as Rio Tinto and St George share prices climbed without their cash invested -- is it too late to join the party?
Have all the swift investors -- the ones who saw it coming, or those who were quick on the buy button -- wrung all the profits from these deals?
Treat each case on its merits, analysts advise. You just have to pick the right deal and ensure your timing is accurate.
Hedge fund specialist MM&E Capital has made a killing in recent years by throwing its clients' cash into mergers, both after the fact and before.
MM&E managing director Tom Elliott is a firm believer in investing in companies that are both the target of takeovers and the instigator of takeovers.
His firm is also trialling a fund that invests in companies they predict will be takeover targets in the short term.
In regard to returns, there is obviously no comparison between that speculative fund and MM&E Capital's major fund, which focuses on current mergers and acquisitions. The speculative fund wins hands down, but Mr Elliott says the less volatile firm merger fund is also producing strong gains.
He told The Sunday Telegraph the success of both funds proved shareholders in stocks that were currently under takeover should, in most cases, hang in there for greater returns.
Mr Elliott also suggested that -- again, in most cases -- it wasn't too late for those who had missed the boat.
"With companies that are being taken over, it's always best to hang on, because there's a 35 to 40 per cent chance that you'll get a higher bid -- and it's always worth waiting to see,'' he said.
"A more interesting issue is whether you should hang on to companies making takeover bids, as often the share price of the bidding company goes down during the bidding process because they are offering their own shares.
"Assuming the bids are successful, the jury is out. It's around 50-50 whether bids ultimately create value for shareholders. Some do and some don't.''
For a poles-apart comparison to back up Mr Elliott's 50-50 claim, potential investors need look no further than the disastrous AMP bid for GIO in 2004 -- which resulted in shareholders on both sides losing significant value -- and BHP Billiton's 2005 takeover of Western Mining Company.
The latter was an "unqualified success'', Mr Elliott said, and proof that successful mergers could be a win-win situation for all parties involved.
So how should investors view the plethora of mergers, acquisitions and takeovers currently on the table?
* WESTPAC-ST GEORGE
THE banking pair have agreed on merger terms, paving the way for the combined group to become Australia's biggest bank, with a value of $66 billion.
Although St George is currently trading at a significant premium to the price Westpac is offering, many analysts expect a counter-bid from National Australia Bank during the coming weeks.
UBS banking analyst Jeff Emmanuel believes there is some worth in purchasing St George Bank shares, purely on the gamble that a counter-bid is forthcoming.
Given the Federal Government's renewed firm stance on its Four Pillars policy (which prevents the four major banks from merging with one another), Emmanuel believes that a counter-bid for St George is highly likely.
"We believe the reiteration of the four-pillars policy increases the chances of a counter-bid for SGB,'' he says in a research note.
"SGB is the nation's fifth-largest bank, with a large customer base and a significant presence in Sydney, Australia's largest market.
"We believe it is a key asset in the Australian banking system that would be highly valued by each of the major banks.''
Although increasing uncertainty is usually a share price-killer for companies involved in mergers, uncertainty over whether other players may bid for the target company can only be a driver of share-price value.
"St George is already trading at a substantial premium to the bid that is on the table, so you are actually buying some potential downside at the moment,'' Tom Elliott says.
"But watch out if another bid comes in.''
And as for investing in Westpac, which has seen its share price depreciate since launching the bid?
"Assuming that Westpac's bid is successful, it will take them a year or two to extract the cost savings that they will need to do to make it earnings-accretive,'' Mr Elliott says.
"Think long-term,'' he adds.
* BHP BILLITON-RIO TINTO
THESE giants of the mining world have been the talk of the town this year, for reasons other than the blessed resources boom.
BHP-Billiton has twice offered a price to take over Rio, but has twice been told to shove it.
Rio Tinto has since drifted well under the offer range BHP was willing to shell out and represents solid value, analysts say.
"If you believe the China story, if you buy either BHP or Rio you are basically buying into China's demand for more material,'' Tom Elliott says.
"If that's the case, you can buy either of them.
"Some prefer BHP because it has quite substantial oil interests, which Rio doesn't have.
"One thing is certain. If they are successful in combining the two companies, they will have a great deal of pricing power -- meaning they will be able to extract better prices for iron ore from their customers.''
* MURCHISON-MIDWEST
ALMOST everyone wants a piece of Midwest, an exciting iron-ore company in Western Australia.
Sinosteel had an offer of $6.38 a share on the table.
That was trumped a few weeks later by fellow iron-ore player Murchison Metals, which offered Midwest $7.17 a share.
Shares in the target are currently trading well under the second bid price, presenting investors who are assured that Murchison will win out with a quick and easy buck, market analysts believe.
Sinosteel also hasn't ruled out upping its bid for Midwest -- a further guarantee of share price upside in the latter.
Last week, the giant Chinese steel-maker bumped up its stake in Midwest to 33.82 per cent.
* PREMIER-JUST GROUP
SAVVY billionaire Solomon Lew's audacious bid for Just Group has already been knocked on the head by the retailer, which said the $898 million offer dramatically undervalued the company.
But if you think the knockback will force Lew's Premier Group to scuttle its takeover plans, you had better think twice, Tom Elliott cautions.
Mr Elliott believes there is significant value in both stocks, given that they are both at the bottom of the retail cycle downtrend.
Mr Lew's expertise would also be a welcome addition to the Just Group, he says.
"If you think Solomon Lew is a retail genius and he would be successful in creating value for Just Group, you can buy into that,'' Mr Elliott says.
* ZINIFEX-OXIANA
MERRILL Lynch analysts recently upgraded Oxiana and Zinifex -- two medium-scale miners readying themselves for a merger -- to "buy'' recommendations.
The analysts said the synergies attainable through a merger would create value for current shareholders.
ABN-Amro also has "buy'' recommendations on both stocks, and are particularly bullish on Oxiana.
"A merger with Zinifex will increase management expertise and provide scale and size, a long-term positive for both companies,'' its analysts say. "We like the long-term prospects of OXR and believe the company could develop into an Aussie mining major.''
* OTHERS
Other mergers currently offering value for investors are Lihir's link-up with Equigold, Spotless's hostile takeover of Programmed Maintenance Services and the merger of gas companies AWE and Arc Energy.
