M&A market set to recover as vendor confidence returns

LAST year the number of announced merger and acquisition transactions (M&A) involving all UK targets dropped by 23% to 2,086 deals.


This was the lowest M&A volume since 1994, with the total value of M&A deals dropping by 33% to £97.6bn.


Yet, while 2009 was about repairing balance sheets with a strong focus on cashflow and profitability, 2010 is set to see vendor confidence return and a recovery in the M&A market.


With the seller/buyer stand-off in M&A beginning to thaw, this year looks set to be more active with a number of key contributing factors:


1. Increased interest from private equity funds to invest, combined with the re-entry of trade buyers with capital access into the M&A market, the opportunities for completing transactions are beginning to improve.


However, despite strong businesses getting special attention and good prices in recent times, they exist amidst a mixed supply of companies that have resulted from postponed sales throughout the past 18 months, many of which have not fully recovered from the recession.


2. There is an increasing supply of companies for sale, both in terms of previously postponed disposals, but also where those business owners that held off making strategic decisions since the economic downturn have realised that the medium term economic landscape does not suggest a quick reversal of fortunes.


This supply, coupled with increasing interest rates and fiscal constraints, mean that it is highly unlikely that we will see much growth in earnings multiples over the forthcoming period.


Therefore continuing the “wait and see” approach to the market would not be wise.


3. Even in the unlikely event of increased earnings multiples, it is likely to be the case that any such recovery will be out-balanced or negated by tax increases. It is believed that the unsustainable differential between capital gains tax and income tax will be corrected by either an unlikely decrease in income tax or via an increase in capital gains tax to protect income tax revenues. This is likely to significantly affect the amount of net proceeds that vendors will receive.


4. With economic growth likely to remain subdued over the medium term, companies will seek to supplement organic growth with acquisitions to strengthen their industry position and generate synergistic benefits.


So, although there’s no set rule on when to sell, with the current surplus in demand for deals, good pricing and earnings multiples and the likelihood of adverse tax changes in the near future, 2010 is looking a good year for sellers.


2010 will, however, see transactions taking longer to complete, with buyers taking more time to find the best deals. When they do lock in on a potential acquisition, prudence will prevail and buyers will spend more time examining the operations and financial information and placing greater emphasis on due diligence. As a result, it will take longer to close a deal, so although M&A activity is set to improve, with deals taking longer to complete we may not see volumes comparable to those seen before the recession.


We can conclude grounds to be cautiously optimistic about M&A for 2010, and with recent results showing a 20.5% increase on Q1 2009, the figures agree.


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