Mergers and acquisitions set to rise ‘before end of year’

Merger and acquisition activity is likely to increase before the end of the year, a Midland expert has predicted.

That could precipitate banks into pushing through a spate of forced sales, suggests Malcolm Cook, corporate finance partner with PKF Accountants and business advisers in the region.

Meanwhile, overseas companies are on the prowl, looking to pick up bargains.

His comments came as a UK-wide survey by the firm showed mergers and acquisitions activity in the first half of the year continuing to suffer in the wake of the global financial crisis.

The first six months saw 257 transactions worth £21.1 billion come to the market, a 66 per cent reduction in terms of deal volumes and a 61 per cent fall in valuations compared with the first half of 2008.

Mr Cook said activity continued to wane in the Midlands too – although the survey revealed that 80 per cent of the few deals which had happened were worth less than £100 million, the sort of sector where the region has traditionally been strong.

“There has been a notable lack of new situations coming to the market and this is likely to continue over the course of the summer months,” said Mr Cook.

Warning of a continuing lack of realism among sellers, he added: “I would have thought that the deal-making environment in the region and indeed the rest of the UK would have improved more than it has done.

“However, looking forward, a marked rise in regional mergers and acquisition activity is likely around the fourth quarter. Once there is a perception that things cannot get worse and that the economy is on the road to recovery I would expect buyers to become more confident and start actively looking.

“Distress-driven transactions are not as prevalent in the Midlands as elsewhere in the UK, as lenders have been reluctant to pressurise disposals from struggling companies. But increased interest on the buy-side could change that as banks may become more willing to force asset disposals from debtor firms.”

Mr Cook continued: “With sterling remaining relatively weak against the euro and the dollar, cross-border acquirers continue to eye regional companies.

“Indeed, with valuations falling, the current economic climate represents a good opportunity for stable, cash-rich corporates in the United States, mainland Europe and beyond to establish a foothold in the UK market.

“In benign economic times, typically ten per cent of the deals we work on would be cross-border. However, the figure is now closer to 50 per cent as we are seeing more foreign acquirers looking to take advantage of low valuations and a still favourable exchange rate.”

The overall picture was actually probably worse – the two largest mergers and acquisitions in the first half were the Government bailouts of Royal Bank of Scotland and Lloyds TSB.

But the survey says green shoots are there – resilient mid-market activity, lenders beginning to provide acquisition finance again and global financial markets starting to stabilise.

While the hotels and leisure sector had seen precipitous declines, there were tentative signs of a turnaround.

There were hopes for a pick-up in business services, the food sector was “back on the menu”, hard-hit real estate was showing “plentiful value-for-money opportunities for firms with cash” while even with manufacturing the worst trading conditions were probably over.