M&A activity growth potential affirmed by business owners

The coming twelve months are likely to see a significant rise in acquisition activity from larger companies seeking to expand through purchasing smaller businesses, according to new figures published by the Royal Bank of Scotland (RBS).

The bank’s survey of businesses with turnovers in excess of £25 million revealed that more than a third of the companies surveyed had plans to acquire smaller businesses. It indicated a growing confidence in bolder corporate actions, and a shedding of the caution adopted during the recession.

Growing business confidence does not appear to be geographically limited to Britain’s shores either, with more than one in ten expressing intentions to purchase an overseas company within the next year. The bulk of those businesses, however, were the ones polled that have turnovers of more than £100 million, while companies with revenues between £25 million and £100 million remained a little more cautious, with just six per cent expressing foreign acquisition intentions.

RBS’s head of structured finance, Tim Boag, called the figures a boost for British businesses and for the merger and acquisition (M&A) trade.

"These results suggest we are beginning to see confidence return to the merger and acquisition market," Mr Boag said. "This is encouraging as M&A activity helps firms expand where prospects for organic growth are limited.”

Mr Boag explained that many more prudent companies sought to protect themselves during the global economic crisis through the building up of cash reserves, which has ensured they have ready money available and with access to a broad range of funding sources. These companies – whether small or turning over more than £100 million every year – now have the resource and the market conditions to start considering making acquisitions – particularly as valuations of potential acquisitions are currently very reasonable.

The resurgent drive for expansion through acquisition has been boosted in its profile recently by a number of high-profile deals, including the purchase of the Esporta chain of fitness clubs and gyms by larger rival Virgin Active in a deal that was said to be worth around £77.6 million.

The targets for acquisitions in the RBS survey showed companies largely, but not exclusively, seeking to expand within their own sectors. Nearly half of the companies that expressed interest in acquiring a business said they were looking to purchase from within their own sector, but around one in ten said they had sufficient confidence to start branching out and would consider buying a company in a different line of work.

The same survey also revealed that eager new buyers are unlikely to find themselves short of target businesses either, with 15 per cent of the companies surveyed stating that they were fully expecting to be merged with larger companies within the next year. Mr Boag added that these smaller companies are keen to capitalise on the growth potential bigger companies can offer them, while the larger companies will only be too keen to embrace the chance to drive their sales up at a time when the continuing economic uncertainty is making unaided growth a difficult task.

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