02/07/2008 - 22:00

Looking for a bubble effect

02/07/2008 - 22:00


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Academia is often looking in the rear view mirror when it comes to documenting worldwide trends.

Academia is often looking in the rear view mirror when it comes to documenting worldwide trends.

But the study of takeovers does provide some insight because humans often behave in similar ways over time, especially in cyclical investment markets.

Considered an expert in the takeovers field by his peers, UWA Business School professor Raymond da Silva Rosa has a number of observations from research into this sector that ought to make investors take note.

One of Professor da Silva Rosa's warnings is, perhaps, something that the market intuitively recognises - that scrip bids are more likely to underperform.

"Those that don't perform well are those that have shares issued as consideration," he said.

"The reason is the shares are often overvalued."

Professor da Silva Rosa said that, while it was understandable that companies would want to take advantage of a high share price, it was often those that make cash bids that performed better in the longer run.

"If you are using hard cash, you tend to investigate more thoroughly."

He said his current interest was whether or not the market was in a bubble period.

"One of the things for a bubble is when some form of displacement occurs that renders usual valuations invalid," Professor da Silva Rosa said.

"You get optimists and pessimists. No-one knows who is right, so the optimists prevail. Then you have momentum."

An example of such displacement is the iron ore price, which has rocketed to such an extent that corporate activity in that sector is reflective of that formerly seen among gold stocks.

Professor da Silva Rosa noted that a bubble sidelines the short-sellers who can't make profits from share price falls.

However, when it came to iron ore, he said the market included three majors who could make or break the smaller players with their price settings.

"Those three between them control a large amount of iron ore and their costs are much lower than the marginal producers," Professor da Silva Rosa said.

"If they start to protect their market share this whole thing could unravel."

The UWA professor likens equity markets to housing. When valuations are lower there is an incentive for those with expertise to buy them, make improvements and on-sell. Rising interest rates often pushed those buyers out of the market.

Professor da Silva Rosa also warned that the best advisers tend to get the deals over the line more often, but that was no guarantee of long-term success, either.

"A top-tier adviser is helpful in the acquirer getting their target, but is no guarantee that the takeover will be a success in terms of paying off," he said.

"Advisers are principally interested in completing the deal, that's how they get rewarded, and not necessarily in getting the best price."


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