With merger and acquisition activity booming around the world acquisitive companies tend to be the ones to steal the limelight. In the US some of the largest telecommunications companies in the world - WorldCom, GTE, and British Telecommunications - were involved in a $50 billion (£33.2 billion) bid for MCI, a leading supplier of telecoms services in the US. A key feature of the deal is that the winner of the contest - WorldCom - is using its own shares to pay for the purchase as opposed to cash. WordCom trades on a forecasted 1998 P/E ratio of 37 and with such a high rating it's not hard to see why it's using its highly rated shares to grow by acquisition.
Many successful Irish quoted companies have grown by acquisition. While some mistakes have been made the acquisition strategies pursued by Irish Plc's has proved rewarding for shareholders. However, as stock markets rise to higher and higher peaks the takeout prices of companies rises in tandem. The potential to squeeze higher returns from merger and acquisition activity becomes very difficult to achieve. It is interesting to read the comments of DCC's chief executive, Mr Jim Flavin, who has recently been quoted as saying that acquisitions are now pricey and therefore DCC is currently focusing on organic growth. Two smaller Irish companies are currently engaged in major organic investment programmes to grow their businesses: Arnotts and Ardagh (formerly the Irish Glass Bottle Co.). Both of these companies share the unenviable distinction of underperforming the market substantially over the past five years.
Ardagh's current share price is barely above the level that it traded at during 1993. Arnott's share price has produced a much better return, but one that is still somewhat below the market average. Ardagh has recently announced that it is to invest £25 million in upgrading its facilities in Dublin including reducing the workforce from 390 people to 150. This will bring the Ardagh facility into line with the most cost efficient plants in Europe. The new investment will bring capacity from its current 125,000 tonnes per annum to 170,000 tonnes. However, the big issue is whether Ardagh will be able to sell this extra production at attractive margins. Demand in Ireland only totals 140,000 tonnes annually and Mr Sean Quinn is building a new 170,000 tonne plant in Northern Ireland. Therefore, exports will have to fill the gap and unfortunately the European market already suffers from overcapacity.
While Ardagh has a long history in the industry, building market share will inevitably take time. The share price responded positively to the announced investment programme by rising to 135p which is around the company's net asset value. Although Ardagh is on a very low price-earnings ratio of 8.3 the shares are not worth chasing until the investment programme is well under way.
In contrast, Arnotts has just completed its £34 million redevelopment of its Henry Street facility and will be able to benefit from the busy Christmas and New Year shopping period.
Although competition is intense in the retail sector the underlying growth of the economy should enable Arnotts to achieve an attractive return on its investment.
At their current price of just over 400p the shares offer an attractive dividend yield of 4 per cent and of course they enjoy very strong asset backing. With the Irish Celtic Tiger continuing to power ahead the company should be capable of achieving healthy and sustained dividend growth in the medium term.
With stock markets continuing to trade in a very volatile fashion Arnotts should be capable of rewarding investors with attractive and relatively stable returns.
