It was the turn of UK Index giant Reckitt Benckiser (RB) to defy the laws of M&A this week, its shares rising 4% on news of a big acquisition. It’s difficult to know whether M&A optimism or dividend hopes (more so this) really drove Tesco (TSCO) shares 9% higher last week. But the situation with Reckitt is much clearer. As explained last week, an acquirer’s share price would be expected to fall to reflect cash being cash spent and/or additional debt taken on to make an acquisition. There is also the risk that the deal simply fails to deliver. After all, there can be no guarantees.

For the shares to rise, however, implies shareholder faith in the acquisition enhancing the group, providing access to better growth and hopefully higher profit margins. And for companies as big as Tesco and Reckitt (£16bn and £50bn market caps respectively) this can make all the difference as, over time, sheer size can end up being a hindrance.

Think of these blue-chip giants like oil tankers, taking an age to get going, turn around and of course stop. The same is true with their operations and strategy. As they grow ever larger and less nimble, the ‘investment story’ can become less exciting. So any potential for a behemoth that is perhaps ‘stuck in a rut’ to be given a new lease of life can easily revive investor interest. Even if it needs to be via an acquisition, which costs and carries integration risk.

It’s been no secret that both Tesco and Reckitt have faced challenging macro-economic conditions with increasingly price conscious consumers, stiff competition and FX volatility. Tesco is on the comeback from a 2014 accounting scandal and fierce supermarket competition. Acquiring Booker for £3.7bn could see it go from #1 UK grocer to #1 UK food retailer.

Reckitt has been on a downer since last July, a string of acquisitions over the last five years unable to prevent a brace of recent profit warnings linked to slowing growth in the key consumer health division. A $16.7bn acquisition of US-based Mead Johnson could secure enhanced access to the higher-margin consumer health foods/nutritional segment, more importantly in faster-growing emerging markets. A new lease of life for its key Consumer health division appears just what investors needed to hear to inspire fresh hope that the company can revive flat sales and profits and, like Tesco, improve dividends which are a key attraction for long-term shareholders and traders alike.

So despite what they tell us in the textbooks, the acquirer’s shares can rise in spite of acquisition risk. There are times when a fresh driver is all that’s needed to revive shareholder interest, even if it does cost. It’s analysis like this that sets Accendo Markets research apart from what peers have to offer. Rather than just regurgitating company press releases, we filter and read between the lines. To help you understand what’s going on and interpret whether the outlook for a company and its shares is good or bad. Get access to our research now and sample it for yourself.

If we’ve said it once we’ve said it a million times. It’s all about the future; almost nothing to do with the past. Just like with company results, a consensus beat of revenues and profits is worth precious little if the outlook is poor. After all you can’t buy into past growth, only into future prospects. And the aforementioned share price reactions of this and last week suggest the outlook for this pair of UK Index major is positive. Even though they are having to take a punt and buy it in from outside.

Enjoy your weekend!

Mike van Dulken, Head of Research, 3 Feb 2017