Dealers hope for mergers and acquisitions boom
Many City players are convinced we are on the verge of a mergers and acquisitions revival, writes Geoff Foster.
Deal hunger: Revival in M&A would be welcomed by investment banks and other advisers who rake in millions in fees
It's been happening across the pond and in continental Europe. But so far, Britain has been missing out on the expected flurry of bids and deals creating excitement elsewhere.
Dealers in London are getting impatient as the expected mergers and acquisitions boom is yet to take off in the UK despite conditions that should provide fertile ground for deals.
The resilient FTSE 100 index continues to trade within easy reach of 6,000 level because many fund managers remain convinced that the M&A touch paper could be lit at any time in the near future and spark hefty gains in blue chip share prices.
Premier Inns hotel giant Whitbread, engineering and technology group Smiths and business software firm Sage have all recently been subjected to intense speculation that private equity buyers are waiting to pounce.
The prospect of a deal frenzy as the UK economy still struggles to haul itself out of recession may seem counter-intuitive. The credit crunch caused a crisis of confidence among many executives, leading them to batten down the hatches and keep their expansionist urges in check.
But large corporates are now sitting on mountains of cash and have enjoyed the fruits of rockbottom interest rates which appear to be sticking around for some time to come.
Private equity firms are under pressure to use their buy-out cash and to find exits from investments in their own existing portfolios.
And a number of companies that cut costs throughout the downturn are now discovering that acquisitions may be their only option for growth when confronted with a stubbornly slow economic recovery.
They have shifted focus from survival to growth.
Strategists at investment bank Morgan Stanley forecast a significant pick-up in mergers and acquisitions activity in the second half of this year.
The US broker cites improving corporate profitability, the slowing pace of earnings growth, robust balance sheets and strong cash generation as reasons to be bullish.
M&A activity troughed in the first quarter of 2010 to the lowest level in more than 15 years. It has risen over the last year yet still remains below average.
Since early last year, M&A volumes have increased by 73%. In the most recent 12-month period, aggregate M&A involving European targets amounted to £482bn.
Global M&A activity in the first quarter of 2011 topped £497bn, the most since 2007's pre-crash frenzy. The 2007 all-time record total was £2.7 trillion.
Some 130 deals have either already been closed in 2011 or are currently pending. Analysts have predicted more than £1.9 trillion in takeover activity for the current year.
Morgan Stanley's Matthew Garman reckons the sectors which could see most corporate activity are Diversified Financials, Clean Energy, Mining, Capital Goods, Luxury Goods, Business Services, Technology and Utilities.
Its interesting that diversified financials are on Garman's radar as the London Stock Exchange now finds itself at the centre of intense speculation about its future.
It could easily become the first major takeover target in the second half of 2011. The LSE's hopes of forging a transatlantic alliance with Canada's TMX suffered a potentially fatal blow recently when a consortium of Canadian banks and pension funds tabled a £2.3bn cash and stock offer for TMX - trumping a politically unpopular £1.9bn offer from the LSE.
US technology rival Nasdaq then dramatically pulled out of the race for the New York Stock Exchange. The LSE's share price immediately shot up amid gossip that Nasdaq will soon turn its attentions on the LSE should it be left without a partner if its TMX deal does eventually founder.
Nasdaq's boss Bob Greifeld had two takeover bids for the LSE repelled in 2007 so it could be third time lucky.
Broker UBS suggests there is a chance of a 'friendly' deal with Nasdaq, which would be difficult to defend given the management is selling a transatlantic deal to shareholders.
Long-term shareholders of the LSE would tell you that the UK bourse should have bought Nasdaq years ago but former boss Dame Clara Furse was not up to the task. Shame, as LSE's shares were then trading a lot higher than they are now.
Speculation also surrounds the future of miner Xstrata. Commodities giant Glencore, which recently floated on the London stock market, already owns 34%. Its listing is widely viewed as a precursor to a bid.
A revival in deals would certainly be welcomed by investment banks and other advisers who would be in line for hundreds of millions of pounds in fees.
Whether shareholders should be so happy is open to question, as studies suggest many fail to create value.
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