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BHP-RIO, Round 1 over for now

Posted by andyfvp on Dec 1st, 2008

For over a year BHP has been aggressively pursuing a takeover of RIO, however, it surprised the market this week by calling it off. Whilst the announcement was enough to cause a rally in the price of BHP, the same cannot be said for RIO as its shares fell around 35%. RIO has now been left to battle with its significant debt, which has brought into question whether a capital rising is likely in the near future.

Overall I think the decision was a good one as it will maintain competitive tension in commodity prices between the two players, which will potentially result in lower steel prices. That said I don’t believe BHP is finished with RIO. Rather the recent announcement is more like half time at the football, with the game likely to resume sometime in the future. Given the current share price of RIO, it is likely that BHP will reconsider the idea of a merger when the economic clouds start to clear- perhaps next time they may only need to offer 1.5 shares for each RIO share!

So what can we expect from the market this week?

After falling to lows last Friday morning (21 Nov) not seen since August 2003, the All Ordinaries recovered to close higher for the day. The recovery has continued this week with the gains providing encouragement that we may have seen the bottom but we won’t have confirmation of this for at least another month.

The hot question on most people’s lips over the past 6 months has been are we at the bottom? Trying to second guess the inevitable bottom on a share or market, for that matter, is high risk and has cost many people a lot of money over the past 6 months. Remember smart investing is not about getting the cheapest price rather it is about getting in at the safest price.

It is for this reason why I continue to say that it is better to wait for confirmation that a market or share is rising before buying. While I do believe it is possible that we may have seen the bottom last week, it is still too early to tell. That said once the bottom is confirmed, my expectation is that the market will rally for at least two months and possibly up to eight months. For now I still encourage all investors to sit tight as you will be rewarded for your patience.

This was a weekly report by Dale Gillham, a best-selling author, share market expert/educator and the chief analyst for share investment firm Wealth Within.