Dawn of the deal

When Kraft announced its hostile bid for Cadbury’s, the iconic Midlands
chocolate company, the financial advisory community must have been licking their
lips. The £10.2bn offer from the US food conglomerate was one of a number of
large-scale deals to be announced in the third quarter of this year, and the
corporate financiers in the accountancy firms, who have been struggling since
the financial crisis kicked in a year ago, could have been forgiven for thinking
that the sweet shop of M&A fees was open for business again.

The firms may be revving engines – certainly, there is a lot of pent up
demand for deals to be done – but the debt markets are still very difficult to
navigate and uncertainty over any potential economic recovery continues to put a
brake on over-optimistic enthusiasm. “We have seen some increase in deal
activity, which is very encouraging, but whether it is a sustainable recovery is
too early to say,” explains Tim Mahapatra, Deloitte’s UK head of transaction
services. However, Mahapatra has seen a recovery in certain sectors of the
economy, particularly where there are opportunities to consolidate and cut
costs.

Most of the deals announced recently are share-based, without big cash
components. “The debt markets are still far from recovered,” he adds. Even with
the cash piles that private equity houses are sitting on, there is still a
limited ability to leverage deals through debt supplied by the banks, which are
perhaps still more focused on rebuilding their own balance sheets.

But Mahapatra is still optimistic. “A year ago, corporates were focused on
survival but now we are out of that, there is more clarity of where the economy
is.”

Unfortunately, figures from Grant Thornton show that the number of M&A
deals announced in the third quarter of 2009 was the lowest since 1992, belying
the headline-grabbing stories. Only 303 M&A deals have been announced in the
UK since the beginning of July. This is a decrease of nearly a third compared to
the second quarter this year, when 449 M&A deals were announced. It is also
44% below the same quarter in 2008, when 546 transactions were recorded.

Despite the latest numbers, GT’s head of M&A David Brook echoes
Mahapatra’s optimistic tone. “We are seeing signs that M&A activity will
pick up, including a number of listed British firms that are currently raising
cash, not just to repair their balance sheets, but to prepare for acquisitions
in the coming months.”

Deals such as Kraft’s Cadbury bid are still in negotiations. The real proof
of the pudding will come when these deals complete, and Neil Sutton, UK head of
corporate finance at PricewaterhouseCoopers, sounds a note of caution, warning
that if they abort, confidence will be damaged. “If the transactions happen,
then there will have been a realignment,” he says.

So, if this realignment comes to fruition, will the firms begin to redeploy
their staff back into the transaction service arena and away from areas such as
corporate recovery?

“We’ve held our nerve,” says Sutton, explaining that his transaction staff
have been kept busy with public sector work and with distressed, or
“accelerated”, M&A activity. He expects to see more “mega deals” announced
before the end of the year. This will undoubtedly translate into more work for
the firms.

“Pre-2007, private equity was the growth story, we have now been re-focusing
our attention towards where we think more of the action will be, which is in the
corporate M&A space, but also a lot of the work we are doing is a
combination of transaction services work and restructuring work,” explains
Mahapatra. “There are a lot of businesses that are going through some sort of
re-organisation, and a lot of the TS teams are working on those situations.”

John Kelly, the newly appointed head of transaction services at KPMG, also
sees signs of a new style of deal-making as the M&A market begins to show s
igns of life. “If engaging transactions advisers is a gauge of life, our own
pipeline suggests the M&A market may be coming out of its coma. The
landscape is very different this time around, however, with deals being
approached from another angle… with vendors and buyers working in a more
constructive manner to get the deal done, often tapping into synergies and
future value increases.”

Simon Pearson, head of technology M&A at Ernst & Young, says that at
a grass roots level, he recently received as many enquiries about deal
possibilities in a week as he had done in the previous six months. “This is
getting more back to a feel of 12 to 18 months ago,” he says. “We have been
through a very unusual period in the market but it is now getting back to
business as normal, people are getting their confidence back, businesses have
been building their balance sheets and addressing some of their debt issues and
some of the big corporate buyers have now got access to funds. They can see a
floor of stability and have the ability to price assets.”

Of course, it is not just the large firms that have been affected by the
decline in activity – there is no doubt that the mid-tier and smaller firms have
seen a drop-off in their work load. But even here, there are signs of good news
beginning to emerge.

Aberdeen-based firm Anderson Anderson & Brown, ranked 48th in Accountancy
Age’s Top 50 survey, has just celebrated the completion of its 250th deal since
it launched its corporate finance division in 2002. The deal was the buy-out of
Prodrill Engineering from Sovereign Oilfield Group by Claymore Investments
Limited for £2.25m. Announcing the milestone, managing partner Mike Brown said:
“Each year offers up different challenges and through their exceptional talent
and expertise our team continues to rise to the occasion and deliver results
time and time again.”

AAB has completed a number of transactions in the past 12 months, including
the disposal of PI Group to Amec Group and the disposal of Walker Technical
Resources to a management buy-in team backed by Maven Capital Partners. Then
there is mid-tier firm Smith & Williamson, which recently advised on the
buy-out of the Fresh Olive Company. Brian Livingston, head of M&A at the top
ten firm, said: “The financing of Fresh Olive shows that quality companies, with
good management, in good sectors, can still attract funding even in these
difficult times.”

Activity will vary from sector to sector. “There has been less activity in
cyclical sectors – retail for example – where there has been real distress,”
says Tim Medak, head of public market M&A at E&Y. “M&A in those
sectors tend to be pretty reactive.

The less cyclical sectors perhaps have a little bit more in the way of normal
M&A – companies that have decent balance sheets are taking the pragmatic
view that now is not a bad time to be adding strategic assets if there are
quality businesses out there to be bought.”

But, Pearson adds that you only need one or two major moves to shake up a
whole sector. He cites the telecommunications sector as a good example, where a
bidding war started for T-Mobile UK before a deal was struck with rival Orange.
“That is having ripple effects, people are trying to digest what it means and
what they should be doing,” he says.

And the accountancy firms will feel the ripple effects of increased activity.
It will not only be the deal makers that will be busy – due diligence teams will
be gearing up, tax teams mobilised and, once the ink has dried on the deal, the
post-merger integration consultants will be rolling up their sleeves – KPMG’s
new TS head John Kelly was himself once such a consultant.

So will the talk of activity translate into real work, or could we be left
with a market that, like one of Cadbury’s products, ultimately only has a soft
centre?

“I am not saying that we are going to see a rebound to the heady days of 2007
but what is very positive is that we are seeing some stability and what I would
describe as a gentle pick up. I would like to see where we are at the end of
this calendar year before being foolish enough to call the market,” says
Mahapatra.

But the signs of increasing confidence will certainly have given the firms
something to chew on.

Further reading:

M&A’s rise from the
dead

Signs of hope but don’t rush
back to transactions