The bid for Cadbury signals the start of the next phase of the bull market -- takeover mania is back!
The FTSE 100 has surged through the 4,900 level, and now has its sights firmly set on 5,000.
It was just March this year when global stock markets were facing one of the biggest meltdowns in history. The FTSE 100 briefly dipped below 3,500. When (not if) it reaches 5,000, it will be up an astonishing 43% from that bottom point.
FTSE 5,000 Here We Come
Why am I so confident the FTSE 100 will breach 5,000?
Firstly, time is on the market's side. Over time, it does rise. Believe it or not, but one day the FTSE 100 will breach its 31 December 1999 all-time high of 6,951. It will take a number of years, but it will break through 7,000.
Secondly, this market is currently like a freight train. Stand in front of it, and you'll be smashed to pieces. In the short term, momentum is hard to stop. People shorting shares do so at their own peril. With the potential for unlimited losses, shorting is not a game I'd be playing now, or never for that matter.
The way the momentum is going, FTSE 5,000 is just around the corner. It might even happen today, or this week, such is the forward velocity of the freight train. As I write, it is only one decent day on Wall Street away from smashing through the 5,000 market.
Confirmation Of The Bull Market
Putting its stamp on the bull market was Kraft's £10.2 billion takeover offer for Cadbury (LSE: CBRY). Mega-takeovers are children of bull markets. Up until recently, there has been a dearth of mergers and acquisitions, despite valuations being at all-time lows.
The problems have been threefold…
1) Debt financing has been virtually impossible to raise. Banks weren't lending, and there were precious few other sources of debt around.
2) Because the share prices of most companies were depressed, potential acquirers were not willing to pay for acquisitions by issuing shares.
3) Like everyone else, companies were fearful. The market was in freefall, the global economy was in deep do-do, and despite the cheap prices on offer, no-one was willing to take on the risk of an acquisition.
Fast forward to today, and if ever you needed evidence of the renewed economic confidence, Kraft's bid for Cadbury proves it. It's not the only takeover happening now. There are few bids around at the smaller end of town, and a bit further up the scale is the bid from CVC and Stagecoach (LSE: SGC) for National Express (LSE: NEX).
More Takeovers On The Way
Now people can see the economy is in the process of stabilising, I fully expect merger and acquisition activity to increase, especially amongst larger companies.
For some time now I've been extolling the virtues of investing in high-yielding FTSE 350 companies. It seems I'm not the only one seeing value, as Kraft were willing to pay a 30% premium to acquire Cadbury. And the premium is not going to stop there either -- the market fully expects Kraft to raise its bid and/or other bidders are likely to enter the fray.
What is also instructive is to look back at Cadbury's share price and valuation. Unlike many companies, its share price didn't crater in March. But also neither did Cadbury enjoy the market rally to the same extent as companies like Barclays (LSE: BARC) and Aviva (LSE: AV), its shares only rising 14% over the past 6 months, prior to Kraft's bid.
Valuation-wise, Cadbury was trading on a forward P/E of 14.4 and forward dividend yield of 3.3%. In this market and this economy, the valuation seemed about right.
Break Out The Champagne
Kraft can obviously afford to pay more for Cadbury than a non-complimentary company, but even still, they are willing to pay a decent premium. It tells you something about the economy, the increasing levels of business confidence, and the stock market. It all points to FTSE 5,000 and above.
Before you break out the champagne and take out a free 30-day trial to Champion Shares, be aware that Kraft wouldn't be the first company to overpay for an acquisition. They also wouldn't be the first company to make an acquisition at precisely the wrong time. And just because Kraft are willing to hand over large chunks of change to Cadbury shareholders, it doesn't mean you should immediately go hunting for the next acquisition prospect.
The Bull In Full Swing
What it does signal is the bull market is now officially in full swing. As to how long it remains in bull mode, it remains to be seen. I remain cautious, but also respectful of the market.
I'm not one for standing in front of freight trains, but I'm also not one for jumping aboard just because everyone else is, because if you don't hop off in time, today's speeding bullet could become tomorrow's train wreck. In the meantime, enjoy the journey.
More on the economy and the markets:
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> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
