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Phoney war

Dear friend,

Markets are perverse, aren’t they?

Take this Benfield rumour — a reporter gets spun a line about how Goldman Sachs failed to make a bid for Benfield because it couldn’t raise the cash and the shares go up 10%.

Why? Because there might be a bidding war!

Well, get a load of this phoney bidding war — one with no bids in it!

Poor old Goldmans – if they couldn’t afford to knock out Benfield when it was at 270p, how will they take it out now the leaked rumour has propelled its price higher?

Meantime everyone misses the really interesting story — that over the last few days those Buffett-like value investors at Harris Associates snuck up on the market and snapped up a 6% stake in Benfield while everybody else was selling!

What are we to make of this?

Clearly lots of people see some very deep value in Benfield at around its current share price. And why shouldn’t they? It’s a generally lean and happy ship with critical mass in key areas and is run by great people who are about as high up the food chain as you can get in this business.

The recent interim results showed the firm gaining market share — but getting caned by the dollar’s weakness. Benfield was doing pretty much everything right, but the currency market wasn’t playing ball.

Value investors like Harris Associates are smart people — they know that sooner or later everything reverts to the mean. The UK pound is riding high against the dollar — no-one really knows why — our twin deficits and levels of personal debt are just as bad, if not worse than the US — and wait till you see our fantasy island housing market…

When a run on sterling starts, the market freezes and you just can’t get rid of the wretched pieces of paper with old Elizabeth II on the back fast enough — sterling is just not much use as a reserve currency any more — the nineteenth century is long gone.

So the message should be — stop worrying and be patient (or never buy UK-quoted brokers with dollar interests unless you are ready for a bit of volatility).

There’s little value in Marsh, Aon or Willis buying Benfield — staff would just leak away over the subsequent two years and low and behold, one (or a crafty combination) of JLT Re, Cooper Gay, Lockton or BMS would probably emerge as a major beneficiary and the new fourth mega-reinsurance broker on the block.

The market just needs a fourth player and that’s that.

Of course this is probably why it hasn’t happened, and why no bidding war exists or is likely to exist.

…But if I were one of these Asian or Middle Eastern sovereign funds with a few coins spare, then we really might be cooking with gas… Temasek come on down.

See how these rumours start? They begin as ideas, nothing more or less.

Use your brain and you’ll be fine. Nothing ever changes.

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