Most recently, after the dust in the Toll takeover has settled another flurry of takeovers and mergers & acquisitions has set in. For the past few weeks the level of takeover activities seems to be at record high for this time of the year. Some of the big names and high profile takeovers and mergers (some have just been sealed and others are still unfolding as we go to press) of late include: Coles, which is rumoured to be targeted by a consortium of private equity companies; OAMPS which received a friendly offer from Wesfarmers; MFS bid for S8 to create a major player in the holiday accommodation industry in Australasia; the AGL- Alinta merger; the OneSteel and Smorgon Steel merger; Allco Equity’s failed bid for Baycorp and Wattyl.

While there’s no question that mergers and acquisitions tend to generate more activity and a certain level o fvolatility in the markets, the question to be asked is how do these corporate fights

affect traders and investors. We asked several industry analysts and observers about their view and opinion.

Trade Review (TR): What’s the impact of mergers and acquisitions/takeovers in the overall market or in the companies involved?

Hamish McCathie (HM): Director, CFD Trading Pty Ltd:

“The slightest hint of a takeover or merger is more than enough to give share prices a boost both in terms of the level of activity and sometimes volatility. This is obviously the case with Coles share price which has been trading around the $13.80 - $14.00 level since the word of a possible approach from potential buyers came out a few weeks ago.”

DI: “There are trading opportunities around mergers and takeover bids. However, a lot depends on how the deal is structured and the type of strategies deployed. If there are two companies bidding for a company this could be the start of a ‘bidding war’ the best case for a target company’s shareholders at this point you would be purchasing shares in the target company.

The other opportunity that would exist is if the buyer was to offer stock to the target in this case you maybe able to identify an opportunity to go long and actually short the acquirer. This strategy really pays off when the acquirer has to offer additional cash incentive to sweeten the deal for the target company’s shareholders to encourage them to accept the deal.”

TR: What do traders and investors have to look out for if they want to get a piece of the action during

takeover or mergers and acquisitions?

GC: “You have to do your homework and make sure there will be no opposition to the takeover. An example of this was the takeover bid for Adsteam from a Danish shipping company. At some stage the bidder was confident that the deal would be approved, but then the competition regulators turned around and this has affected the Adsteam share price. You have to do your research and study the sectors or companies involved to find out if there will be potential oppositions or hurdles.”

DI: “Investors should lookout for a potential “bidding war” where two buyers have the same target as this could lead to a higher price being paid, or alternatively if there is one buyer try and determine what they can afford to pay and what the acceptance of the current shareholders is, if low buy in.”

. In 1993 he joined a Bermuda-based international hedge fund where he honed his trading skills and put his own developed trading systems to ultimate use.

From Bermuda Richard looked to other international markets and opportunities that would not limit him on the trading floor. He started trading currencies, treasury and would later on invest his personal money on start up companies.

At last count Richard must have backed over 50 start-up companies, including some technology firms on the lead up to the tech boom in the early 2000. Some of the companies he backed went bust when the tech bubble eventually burst.

However, his early wins and profitable investment put him in good stead.

Despite his investments in various start up companies and other ventures, Richard said he is not a tough businessman, at least not in the sense the word tough is being flaunted in the business or corporate world.

“It is a tough environment out there because there are far less opportunities or valuable investment vehicles to find. But that doesn’t mean you have to be tough or be unscrupulous in doing business,” Richard said.

He said he’s happy that despite his investment in various companies (at last count it shows that he must have invested in at least 50 start up and other fledgling companies in the past 10 years) he hasn’t made any enemies. This he said is quite an enviable track record in the business world.

Though these may all sound too good to be true, Richard admitted that the road to his success has not always been smooth. He had his share of rough patches and bumps along the way. In his book “Taming the Lion”, he shared some of his trading and investment strategies.

Though quick to admit that small companies may have a higher failure rate compared to their giant counterparts, Richard believes that small companies offer the best risk-reward particularly if combined with diversification.

As an ‘angel investor’ to start up companies, Richard had invested in various ventures including several technology companies, diamond mine, private member’s club, sporting goods retailer and corporate advisory business. So far, he had 26 wins and 26 losses in his venture capital investment.

As we know not all things are perfect, so we need to identify the weaknesses and strengths in all trading tools we use. Understanding these subtleties can make the difference between receiving income or incurring an expense.

Let’s take a look at a few aspects, first, the Wave Four Buy in Advance Get or Profit Source. The first thing to understand with Elliott Wave is that there are eleven different types of corrections, this is the difficult part of using Elliott, because a correction could be any one of these types of corrections.

The good news is there are also ‘guidelines’ that are helpful to use when applying Elliott Wave. One of these is the guideline on ‘Alternation’, that is, if wave two is simple then we can expect wave four to be complex, also if wave two is sharp we can expect wave four to be sideways.

Understanding the internal structures of corrections is also very helpful in understanding what type of correction the market is in. For example, Expanding Flat, Regular Flat, Running Flat or a Zigzag, Triangle or a combination of all of these patterns.

Essentially because wave four is normally the complicated correction and the most difficult to navigate through, as a guideline wave four normally retraces 38.2% the distance of wave three, or for a more accurate indication wave four retraces to wave four of one lesser degree.

A few ways to strengthen the wave four buy is to use the Trading Levels which I wrote about in an earlier article (Feb 06 Trade Review), that is buying above a Trading Level, eg buying above a market constructional support level.

In summing up the range of Elliott software, the Profit Source software seems much more user friendly and the cost is lower, they are a great way to learn the Elliott Wave theory.

The CMC 2 Day Pro CFD course looks at how to further strengthen these Elliott Wave entries and offers a more detailed look into Elliott Wave Analysis. Contact Bradley Field at CMC b.field@cmcmarkets.com for course details.

Also as mentioned last month we have developed an Excel spreadsheet for CMC Markets share CFDs that updates every 15 minutes. It includes risk management, portfolio, multiple R, expectancy and a trade plan. This is a free product and it is for educational purposes only. For a free copy email info@ka-ching.com.au

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“I usually have a short list of potential trades, say about 10 positions that I will look at, then I will choose two or three out of the 10,” Reynaldo said.

Some of his outstanding wins include a 7000 per cent increase in his trading capital in four months. There was also a nine month period where he increased his trading capital by 500 per cent.

He trades mostly CFDs these days with the majority in Australian and US share CFDs. Foreign exchange and index trading make up about 20 per cent of his trades.

With more than five years of trading under his belt and an impressive success rate, Reynaldo said one of his ongoing challenges is to stay “focused and not to become egotistical amidst his winnings.”

“Sometimes it is easy to get the feeling that you have to be successful and profitable with all your trades. You want all your trades to be winners. You don’t want to think or accept that some trades can go wrong. But for me, I’d rather be a profitable trader than sticking to a trade that’s gone wrong,” Reynaldo said.

One of the areas to look out for in the coming month is the energy sector which is facing an interesting time. The volatility being seen in this area is probably responding to the choppy nature of the oil price at the moment. Currently US Crude Oil is trading a little below the US$69 a barrel mark. In recent months we haven’t seen the price of oil remain below the US$70 mark for any length of time before being pushed higher once more.

The reason this is quite an interesting position for traders is because of the enormous number of unforeseen factors that can move the oil price, but as I suggested, it will be a little tricky to predict. Simmering geopolitical tensions aside awareness of the impact that further serious hurricanes could have on production in the Gulf of Mexico should not be underestimated. Despite the fact that this hurricane season has thus far been quite moderate, this is a factor that could certainly change and will have an immediate effect on the price of oil should further damage occur to operations within the region.

Interestingly, we have seen many of the petroleum companies greatly benefit from the higher price of oil, there have been companies around the region completely blindsided by the higher price with the some of the most notable being the airlines. Naturally enough, pressure on the airlines has been a global phenomenon and not simply limited to Australia.

In a fashion quite similar to our overall equity market, it may seem unlikely that we will see a consistent move downward in the oil price. Indeed, over time it can find a more steady direction but there will be an ever present concern in the immediate future that supply levels may be threatened from any number of different sources which of course can have quite an immediate and dramatic effect.

Here’s the thing though. Many of the best traders I know fall into the category of discretionary traders but in many ways, when you watch the way in which they operate, you can see quite a part of them that is almost mechanical. By this, I mean that they have a very clear picture in mind in terms of what they are looking for when they are determining what things to buy or sell.

This type of behaviour would suggest to me that these are people who have been trading for such a long time that they know what works and what doesn’t and they trade according to what experience tells them to do which in one way means that they are acting on their own inbuilt ‘mechanical system’. In some ways you could almost short cut this experience element through backtesting which would allow you to let your computer tell you what works and what doesn’t.

So does this mean that system trading takes out the fuss and boils everything down to a simple set of rules? Perhaps – but it isn’t without its own particular type of discipline.

The one drawback that I see of system trading is that it requires complete trust in the system that you are using. Remember – buy when it says buy. Sell when it says sell. This is really easy in principle but much harder to practically apply when money is on the line. The system requires you to take every trade to be successful – but what happens if you have taken 8 or 9 losing trades in a row. All of a sudden a system may seem a lot more difficult to stomach.

So where does this leave us at the end of the day? I think it will be difficult for any individual to simply pick up and run with the methods of any other person.