Mixed messages for M&A

There have been some mixed messages for M&A in the first months of 2011. Global M&A had its best quarterly results since 2007, with just over US$700 billion of deals being announced according to statistics released by Thomson Reuters. This figure is 58% higher than the corresponding period in 2010. However, the UK mid-market has not been anywhere near as active: in the sub £500 million range the number of announced deals fell from 588 to 502, albeit aggregate deal value grew from £7.6 billion to £9.4 billion.
 
Laurence Whitehead, corporate finance principal, comments: “It would appear that the recovery in M&A deals has slowed again in recent months as prospective buyers have become more cautious in the face of negative macro-economic trends globally. For vendors, business valuations do now appear to be higher than they were in 2009 and, for those businesses with clear unique selling points, strong management teams and healthy balance sheets, there is keen interest from overseas bidders, strategic bidders and private equity houses. However, generally speaking, we are getting mixed messages.”

Greater confidence in the economy

On a more positive note, Ernst & Young’s Capital Confidence Barometer reports that the number of businesses expecting to embark on the acquisition trail in the next six months has increased to one-third. Business owners reported greater confidence in the economic outlook, with 57% expecting the financial crisis to last less than one year. However, M&A confidence beyond the next twelve months is not so strong, with only 44% expecting to make acquisitions after this timescale, compared to 54% in the previous survey. The study canvassed the opinions of more than 1,000 senior executives from over 60 countries. Key findings were that 50% of UK respondents said that financing would be available to fund acquisitions within the next six months because these companies have completed refinancing and are now in a position to make such acquisitions.

Laurence adds: “We are seeing signs that confidence is getting back on track but global events lead to continuing negative sentiment. Examples of this include ongoing unrest in certain Middle East countries and the devastating earthquake in Japan. Closer to home a stubbornly high level of inflation, worries about potentially increased interest rates and the government’s impending austerity measures also serve to heighten the levels of caution amongst business owners. Access to capital is one issue affecting growth but not the only one. Organic growth per se is proving difficult for some businesses in the current economic climate, so acquisitions are the obvious solution. However, despite evidence that business owners have a greater appetite to do deals, executing and closing them is another matter. One of the big problems continues to be the valuation gap between buyer and seller. Until there is some converging of views in this area, concluding transactions may still prove to be problematic. So although we should see increased levels of M&A in 2011, there are a number of domestic and global issues which could prompt business owners to rein in their plans until 2012.”

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