Takeover boom promises to keep firms afloat in 2007

Compliance was the story of 2006 for the Big Four firms. But lurking beneath
the surface, and at least as strong an influence on the accounting firms’
results was the M&A boom. Will it sustain them in 2007?

The deal market has been booming in 2006 and the accounting firms have all
enjoyed their slice of the $263bn (£135bn) of transactions announced in 2006.

Growth in corporate finance work has been robust as a result, but the news that
will really be pleasing for corporate financiers is that the deal frenzy is
showing no signs of letting up.

In fact recent research has shown that rather than easing off, the deal
market is expected to grow even further in 2007.

A poll of European finance directors by investment bank Morgan Stanley found
that a year ago takeovers were seventh on the finance director’s list of
priorities. A year on and merger and acquisition deals have become the number
one priority for FDs.

Gavin MacDonald, vice chairman of investment banking at Morgan Stanley, said
the anticipated increase in deal activity was a result of strong corporate
balance sheets, continuing activity from private equity and the growing
influence of hedge funds in deal activity.

In a separate report credit rating agency Standard & Poor’s also
predicted that M&A volumes would increase in 2007, particularly in Europe,
as the market was still far from mature.

Clive McDonnell, chief European equity strategist at S&P, said that cash
was used as the main source of finance in 80% of transactions, which showed that
the market still had plenty of room left to grow.

‘Europe remains in the early stages of the M&A cycle. This reflects the
ready availability of cheap funding, be it from private equity, hedge fund
investors or banks. Only when we see investors switch their preference to using
equity or bonds as the initial currency to finance acquisitions can we say that
the M&A boom is entering its mature phase,’ McDonnell said.

S&P also forecast that the premiums for deals would also increase on
deals in 2007, which should result in higher fees for advisers.

The predictions of further growth in mergers and acquisitions mean that work
in transactional services, due diligence and lead advisory could more than make
up for the drop off in IFRS and Sarbanes-Oxley related work. M&A, of course,
does not only bring fees for deal origination or lead advisory. It also brings
in plenty of lucrative tax and assurance work, which is why firms are so excited
about the year ahead.

Corporate financiers, and indeed managing partners, will be hoping that this
turns out to be the case.