There they were - the bosses of these two groups - all sweetness and light as they purred about the potential to create a market-leading construction group. The next moment - well seven days later, actually - they were at each other's throats as each side blamed the other for the breakdown of talks.
Neither side emerges looking good. Arguably, however, the bosses of Balfour Beatty look slightly the dimmer since the patience of their group's shareholders has been tested more than Carillion's these past few years, so they have less goodwill. That's easy to quantify. At its current 240p, Balfour's share price is 52 per cent below its all-time high whereas Carillion's - at 330p - is 24 per cent below. Recall also that Balfour is without a chief executive; the former boss, Andrew McNaughton, having been sacked in May when the group made a profit warning. Temporarily stepping into Mr McNaughton's role is Balfour's chairman, Steve Marshall, who had appointed Mr McNaughton just 14 months earlier.
At the same time that Mr McNaughton was fired, Balfour announced a 'strategic review' - its second in a few years - that recommended selling its US civil engineering consultancy and provider of a quarter of 2013's operating profits, Parsons Brinckerhoff. This was indeed a surprise since Parsons had only been bought five years earlier and was trading well, unlike the group's UK construction side.
That acquisition was the first big move that Balfour made under Mr Marshall's watch as chairman. Its £380m cost in 2009 was almost entirely funded by a rights issue, after which Mr Marshall declared that "we have created a model for long-term success, which has the balance and resilience to counter the economic uncertainties that remain in some of our markets". Fast forward to May 2014 and he and the board had changed their mind - "having professional services (ie, Parsons) and construction capabilities combined within one organisation has not delivered material competitive advantage", they said.
Selling the most saleable part of a group can have logic, but it's rarely a signal of confidence. Cue an opportunistic move from Carillion, which is the smaller of the two companies, although it does have a chief executive, albeit a rather inexperienced one, Richard Howson.
At first both sides agreed that the sale of Parsons could continue. Then, Carillion's bosses decided they needed "the stability and dependability" of its profits and changed their mind. Meanwhile, on 24 July, when rumours of merger talks were confirmed, the sale of Parsons was merely "already under way". Seven days later as the talks were abandoned the disposal was "well under way". Whether that means a deal is imminent, time will tell. However, "you cannot pause a major M&A transaction. We had no option but to terminate discussions", huffed Mr Marshall to the Financial Times as Balfour stormed off.
Well, clearly you can, and sometimes it's in shareholders' interests to do so. From my perspective - shares in Carillion are a holding in the Bearbull Income Portfolio - I would be happy if the M&A transaction between Carillion and Balfour is not just paused but ejected for good. Putting together Carillion, whose free cash flow on average just about covers its dividend, and Balfour Beatty, whose free cash losses have averaged 19p a share for the past five years, was not a great prospect. Combine two companies neither of which is completely convincing and what do you most likely get? A bigger company that's still not convincing.
If Carillion isn't altogether credible, what are its shares still doing in the income fund? Absence of decent alternatives is the reason/excuse. That's why shares in bookmaker Ladbrokes (LAD) are also there, yet its price fell below the stop-loss trigger some while ago, Carillion's hasn't. The stop-loss trigger was to sell at 182p, but at 130p Ladbrokes' shares remain in the fund. That decision - or we might just as well call it 'indecision' - has cost the fund about £6,000, or 2 per cent of its value; hardly terminal, but not an amount one wants to be throwing away regularly.
Superficially, I could interpret this as a punishment for brushing off the stop-loss signal - 'ignore me and you will suffer', rumbled the voice from the heavens. That's too anthropomorphic. Besides, some years ago I did detailed back-testing to calculate whether the Bearbull funds would have performed better or worse if I had ignored all the stop-loss signals that prompted me to sell holdings. On average, it would have made little difference either way. The gains and losses from share price movements after stop-loss disposals had been made pretty well cancelled each other out.
That's about what you would expect from an efficient financial market. However, I said at the time - and will repeat - that the chief benefit of using dynamic stop-loss signals that shift upwards with a rising share price is not so much to call time on losing investments, but to run the really big winners. You won't get out at the very top, but you will exit close to it. Given that long-term portfolio returns are likely to be heavily influenced by the performance of just a few very big winners, that's vital.
