Corporate finance teams cash in on mid-market M&A recovery

THE MERGERS and acquisition (M&A) market for medium-sized companies is showing signs of recovery in the UK, although deals are taking longer to complete, corporate finance partners say.

The mid-tier firms are finally able to use their corproate finance capacity to advise on deals.  The busiest industry sectors for M&As are support services, private healthcare, media, IT, support services, and export-led manufacturers. Most of the deals are valued at between £10m and £100m.

But the market is still a long way from the boom years before the economic crisis of 2007. Corporate finance partners estimate that the overall M&A market for mid-sized deals is now probably between 40% and 50% smaller than it was in 2007.

Alex White, partner at BDO specialising in corporate finance - whose firm was the most active M&A adviser in the UK in 2011 according to data published by Experian Corpfin - says: "The mid market is less reliant on debt. We are seeing more demand from private and corporate buyers. Companies have been building up cash and private equity [firms] have unprecedented amounts of cash to invest."

Window Shopping

Despite buyers' increased cash and confidence they are more cautious than before the crisis, meaning that deals typically take longer to complete.

UK mid-market companies considered an average of eight transactions but completed only completed in the previous two years, according to a survey UK mid-market companies published last November by BDO.

Geoff Davies, head of corporate finance at Grant Thornton, says M&As that used to take between three and six months to complete are now often taking between six and nine months.

Due Diligence Demand

Accounting firms can still profit from a subdued M&A market, however. Marc Fecher, a corporate finance partner at Kingston Smith, says there is steady demand for due diligence on M&As and also for advice on streamlining operations and restructuring, particularly among retailers with of a turnover between £20m and £50m. "We're helping retailers re-organise themselves, find cash or new investment partners," he says.

Around three in four mid-sized companies questioned by BDO last year said that acquisitions were part of their strategy.

Much of the mergers and acquisitions advisers are working on are from private equity firms disposing of companies (normally after five years) and buying new ones. However, and more trade buyers are emerging after strengthening their balance sheets since 2008.

UK accounting firms have cut thousands of jobs over the past three years. Do UK firms have enough corporate finance staff to deal with any increases in demand for corporate finance?

While corporate finance staff have been shed, the bigger firms have still retained some capacity. They have redeployed corporate finance staff for business recovery and turnaround if there aren't many M&A deals to work on, says David Petrie, head of corporate finance at the ICAEW.

The market for large M&As is also well placed for more action this year, research suggests.

The UK's largest 100 companies have amassed more than £120bn in cash and this trend of building up cash reserves is being repeated across the wider business community, the Experian research also suggested.

European private equity (PE) also has some £100bn of uninvested funds.