Investors are betting that large takeovers may be cancelled in the wake of the terrorist attacks on the US and the subsequent drop in stock markets around the world.

While most companies' share prices fell when the US equity markets reopened on Monday, those which are the subject of takeover bids were harder hit than most as shareholders factored in the increased risk of the deal failing.

Shares in Compaq, the computer group which has agreed to a $20bn takeover by its rival Hewlett-Packard, were particularly hit. In mid-afternoon on Tuesday Compaq shares were trading 17 per cent below the value implied by HP's all-share offer. This is double the spread between the two prices before last week's attacks.

Other deals where spreads have widened include Cendant's acquisition of Galileo, the airline reservation group which is likely to suffer from the crisis in the US airline industry.

The widening of spreads is a further setback for merger arbitrageurs, the investors who exploit the spreads on M&A deals to generate returns on their funds. The industry had already been hit by the failure of General Electric's bid for Honeywell, which was blocked by the European Commission earlier this year.

However, arbitrageurs said most funds were protected because the absence of large deals has prompted them to keep a large proportion of their funds in cash. "I don't think there is any one deal that will cause problems because most funds are so underinvested," said the head of one large firm.

Investors said that the economic turmoil of the past week had raised the risk that Hewlett-Packard might abandon its deal with Compaq, which had already received a frosty reception from shareholders. However, the two companies have insisted that the deal will go ahead.

Most merger agreements include a clause that allows the buyer to pull out if its target's business suffers a serious setback.

Last week Telefónica Moviles, the Spanish mobile phone operator, cited market turmoil in the wake of last week's attacks to cancel its buyout of Brazilian rival CRT.

And on Monday Berkshire Hathaway, Warren Buffett's investment vehicle, invoked a clause relating to the closure of stock markets to cancel a $500m tender offer which is part of its takeover of Finova, the bankrupt commercial lender.

However, M&A lawyers said the clauses which allow companies to walk away from a deal had been tightened up in recent years, and most do not allow the agreement to be cancelled if the downturn in the business affects the entire industry.

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