BusinessCorporate FinanceErring on the side of caution

Erring on the side of caution

Corporate financiers are making optimistic noises, but perhaps we shouldn't get too carried away while the market is at its lowest ebb for almost a decade.

Encouraging forecasts for the next few quarters are hardly surprising considering the depressed levels of activity seen so far this year. For example, 3i just reported a 45% fall in investment activity for the first five months to August. It invested only £187m during this period, compared with £340m for the same period last year.

Thomson Financial research backs up the real underlying figures being reported from companies involved in the sector.

It claims that the value of announced UK mergers and acquisitions fell by 30% for the first nine months of the year to £45bn – an eight-year low.

The poor performance in the UK was worse than anywhere else in Europe.

The UK’s contribution to European M&A activity fell from 33% to 22%, compared with the same period the year before.

The UK figures even negated a doubling in the level of Italian deals to $69.1bn (£41.4bn). The value of UK IPOs was also down by 26% in the first nine months to £1.8bn.

Britain seems more akin to the US where M&A activity fell 13% to $295.3bn (£177bn), while the level of IPOs was slashed from $18.4bn to $6.2bn.

It’s good news that more UK firms are considering flotations in the coming months. But no one can deny that the equity markets need to at least maintain current levels for these plans to succeed and for the momentum to continue into next year.

Judging by recent experience, there seems little to cheer about. Perceived economic weakness in the US has made traders more jumpy of late.

No one can say for sure that equity markets have bottomed out. The FTSE100 has been hovering within a whisker of the psychologically important 4,000 level. If the market ends up breaching that level over the medium term, it could be enough to take the wind out of the sails of any upturn in activity.

At this stage in the cycle, what corporate finance badly needs is confidence.

This is a precious commodity, all too susceptible to the volatility of equity markets.

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