If you said that the current climate in the mergers and acquisitions market
was fairly positive it would be like saying that you’d get a fairly deep suntan
on a jaunt to the sun. Not to push the analogy too far, but the M&A market
is red-hot right now. So what is driving the boom and can the market sustain its
incredible level of activity without the bottom falling out?
David Brooks, head of M&A at Grant Thornton, puts the buoyancy of the
market down to a bullish feeling of confidence among corporates, lenders and
investors after a long period of political and regulatory upheaval.
‘In 2002-03, corporates were very quiet in a post-9/11 landscape coupled with
worries about Sarbanes-Oxley compliance,’ he explains. ‘The world is a much
smaller place due to globalisation, and companies are saying, “What’s the best
way to get exposure to new markets like China and India? Do we do a Tesco’s and
roll out our own sites, or do we get into M&A and buy someone with exposure
to these markets?”
‘Also, there are a lot of private companies that couldn’t sell when the
markets were quiet but still want to sell. Corporate bad debt has been quite low
and banks are making cash readily available to companies. There are enough banks
keen to lend, so it’s fuelling M&A activity and driving up deal prices.’
John Cole, corporate finance partner at Ernst & Young, says M&A
activity has spiked at levels not seen since the dotcom boom, but with one key
difference. ‘The bulk of activity is in companies with real people doing real
jobs,’ he says.
Cole identifies a sentiment change from corporates as they benefit from a
benign economic environment and stable inflation. ‘Before, dividends and share
buybacks were in vogue, but shareholders are now saying, “Do something with this
He also says that the assets on offer for deals dwarf the investment
opportunities available. ‘There are fewer investment opportunities than there is
capital chasing them. You’re seeing a scramble for these assets, leading to
fairly huge prices.’
One of the major deals in the frame at the moment is the possible acquisition
of J Sainsbury. The UK’s third largest supermarket chain is currently staving
off the advances of private equity players CVC, Kohlberg Kravis Roberts and
Blackstone. The speculation has seen Sainsbury’s share price rocket – a valuable
side-effect of an M&A approach – but opinion is split about whether private
equity influence is a scourge or a springboard for the UK economy.
‘Private equity players have raised major amounts of cash by clubbing
together for deals,’ says Brooks. ‘They’re acting more and more like a trade
buyer. Nowadays they want to secure 80-90% of the equity. They’re ruthless
deliverers of strategy, especially when it comes to aligning management. It’s
not that it’s a bad thing, but they ought to be more accountable.’
Cole offers a slightly different perspective. ‘In a well-balanced market you
need a mixture of public and private sources. Private equity groups have got a
good focus on cash, which, as much as corporates would like to disagree, is a
strength they’d like to have. Also, radical restructuring is hard to do in the
face of public expectation when you have to answer to analysts. It would be a
one-dimensional world without them, but they are not the answer to everything.’
IFRS compliance has been a bone of contention since its introduction for many
listed companies in 2005, and the bulk of the AIM market is bracing itself to
produce interims in accordance with IFRS requirements this year. With M&A,
the awesome spectre of IFRS3 – Business Combinations still looms large,
especially with the controversial issues of quantifying goodwill and
Corporate finance advisers have come under pressure from auditors to sift
through looking for intangibles and it has now become a significant part of
IFRS3 valuation work, says Cole. ‘There’s definitely a pressure to demonstrate
that you’ve looked for all the intangibles,’ he adds.
Brooks says that the boom has had knock on-effects on the corporate finance
advisory sphere. ‘There’s a war for talent. At the moment, the acquirers are
looking for more and more talented advisers – there’s increased demand for the
most talented staff with the requisite sector knowledge plus the geographical
and cultural expertise to know whether the buyer and target will be compatible.
These days this means that corporate advisory operations are having to work
harder to recruit and retain the best staff.’
No merger or acquisition deal can ever be called a cast-iron certainty to go
ahead until both companies have put pen to paper – and even when they do, the
new organisation may not pan out exactly as the prophets forecasted.
‘Of course, there’s frustration when a deal goes south,’ says Brooks.
‘Reputations are tarnished and investment banks are far from happy because this
is an expensive process. These days, reputation is a more important factor than
it has ever been. We all talk about our success stories, but we all get asked,
“What went wrong in the failures?” The people who suffer, though, are the
employees and the suppliers.’
Brooks predicts that the AIM support services sector will see a surge in
activity this year as businesses shed divisions they don’t need to operate
themselves by outsourcing the services they provide. In general, M&A
activity in the food and steel sectors is set to continue and the care homes
sector is particularly active due to good multiples, but the M&A boom has
generated major deals across a wide spectrum of sectors.
But the question remains, can this purple patch continue unabated or will the
wheels come off in spectacular fashion, bringing the market to a halt?
‘I think there will be some tears,’ says Brooks. ‘Some of the deals will not
work out as planned.
‘The second half of 2007 and the beginning of 2008 feel a bit more
challenging than where we are today. Interest rates and corporate profitability
all have an effect, but it’s the lack of confidence that really destroys the
markets. 2002 to 2003 was a really difficult period but it will be a less bumpy
ride than last time.’
Putting yourself in the M&A shop window with an IPO
The initial public offering (IPO) is an increasingly common route for listing
companies – and, more to the point, a lucrative one. There are two types: public
A public dual-tracking is where a company’s IPO and sell-out occur over a
short period of time. One notable example was PayPal, which made a killing on
its float when it was snapped up by eBay. The online shopping giant was in
negotiation to acquire PayPal so it could boost its payments settled online and
enhance its systems with PayPal’s antifraud capabilities. At the time, PayPal
was privately held, and the two parties were unable to agree on price. PayPal
went public, the equity market certified the value that the company claimed it
was worth, and eBay completed the acquisition for $1.5bn (£760m) a few months
later – at a20%premium.
Private dual-tracking IPOs have become increasingly frequent and involve
companies filing to go public but selling out before the equity offering takes
place. Recent examples include Noveon, Advertising.com, Borden Chemical and
Brightmail. Sports World completed a successful IPO recently – but what does the
future hold for this jewel in the crown?
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