Where’s the year of the takeover?

Several fund managers predicted in late 2004 that this would be the year of the takeover.

Following several high-profile mergers (Banco Santander’s takeover of Abbey being fresh in the mind), the guardians of investors’ cash predicted that bids would become more common, and that hostile takeovers in particular would come to the fore.

But the spate of M&A activity does not seem to have materialised. Figures from Dealogic, the data providers, show that European announced M&A activity decreased in the first quarter of 2005 by 4% to $195.5bn (£104bn), from $202.7bn in the same quarter the previous year. So why the lack of deals?

A new survey by PricewaterhouseCoopers could give some insight. The big four professional services group interviewed over 100 senior executives at UK companies about corporate confidence and M&A issues, and found that, while many were in the market to buy, very few were looking to sell.

Seven out of 10 respondents said they were confident enough to make a major acquisition over the next six months, and 96% were confident enough to make smaller, bolt-on deals.

In one respect, that is unsurprising. What company does not want to grow? And what company says it wants to get smaller?

But it did surprise Paul Rawlinson, head of transaction services at PwC, and one of the report’s authors: ‘The trend over the last few years has been to refocus on core operations,’ he says. ‘Companies should be keen, therefore, to offload non-core assets.’

Additionally, he says, it is a sellers’ market. ‘There is intense competition for deals, particularly among private equity houses, and plenty of cheap debt… it is a great time to be selling.’

With banks lending them the cash in pretty healthy numbers, corporates should be able to get a good price for their assets, he thinks.

Even so, they seem tentative at present. Perhaps they are frightened of looking silly should the buyer then strike gold. The example of Shell springs to mind, which sold its stake in a Rajasthan oil field last year, only to find the buyer, Cairn, strike black gold in huge quantities shortly after.

Whatever the situation, the market is sluggish right now. Rawlinson predicts that will change: 2005 will be a big year for M&A, he predicts.

Corporates will need to become more confident about selling, however, before he and those fund managers are to be proved right.

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