Wave of merger activity expected in 2010

Following the £11.5 billion takeover of British confectioner Cadbury by the American food giant Kraft, City analysts are predicting a wave of mergers and acquisitions over the coming months. The opening weeks of the year also witnessed the £4.8 billion purchase of Femsa - one of Mexico's biggest beer companies - by Dutch brewer Heineken.

Similar takeover activity is to be expected as overseas corporate giants consider potential targets in the UK leading to more large firms being bought as has happened to Abbey National, Rover, Corus and Cadbury.

Reports say that KPMG predicts a wave of M&A activity as overseas firms, with strong balance sheets and stronger currency than sterling, consider potential prospects in the UK. KPMG also highlights that forward price-to-earnings ratios now stand seven per cent higher than last year, suggesting an increase in corporate appetite for deals.

Furthermore, it is expected that corporate net debt compared to EBITDA will decline in the coming months, leaving corporates with more capacity to do deals even though debt remains tight.

David Simpson, global M&A head at KPMG, has noted that analysts overestimated corporate earnings in 2009 by some 20 per cent and thereby skewed views of the market. After revisions of what he deems "over-optimistic earnings expectations" last year, he agrees that the global and UK M&A market looks re-set for growth: "With feet firmly planted back on terra firma and earnings forecasts reset to sensible levels, the M&A market is set to make a modest return in 2010."

It is important to highlight, however, that KPMG's figures are very much about the corporate market, he adds: "The private equity market is much more dependent upon high levels of debt, putting it at a disadvantage until bank lending picks up."

KPMG's predictor also forecasts the M&A market by industry sector, singling out technology companies for their strong performance during the recession, continued healthy balance sheets, relatively low debt levels and - in some instances - large cash reserves. Small tech firms with positive growth prospects are therefore mooted as potential targets for their larger rivals in 2010.

Jonathan Stankler, KPMG's technology partner, points out that adjusted forward price-to-earnings ratios in the tech sector have increased by 20 per cent: "It would not be at all surprising to see the technology sector lead the way in driving forward mergers and acquisitions activity on a global basis. Equally, to the extent that the IPO pipeline materialises, technology companies are likely to feature strongly."

Consumer goods firms are another one to watch, with takeover activity spurred on by corporations looking to expand while the economy makes its sluggish emergence from recession. Companies like Kraft and Heineken need to buy out other businesses so that they can grow, says David Simpson, predicting that other firms will follow their lead this year.

A further British sector identified as ripe for more deal-making is that of utilities, though rumours of a link between energy firms EDF and International Power have recently been dismissed by the latter.

In a recent research note from Deutsche Bank analysts, potential M&A "ones to watch" ranged from medical-devices maker Smith & Nephew and airport-scanner manufacturer Smiths Group to media group Aegis and technology company Logica.

The media sector has also been singled out for a return to increased M&A activity by PricewaterhouseCoopers LLP, whose analysts predict an array of deals stimulated by "the transformation of traditional media companies", a continuing reduction of debt levels and a steadily strengthening economy.

UK media M&A deals hit their lowest levels last year since the dot.com crash of 2002. Data from the professional services firm highlight that last year's deal volume in the media sector fell 36 per cent on 2008's figures as cost cutting and capital restructuring projects took priority over acquisitive expansion.

Commenting that there is "considerable unfinished business" in terms of consolidation in media, PricewaterhouseCoopers partner Nick George has observed that traditional advertising revenues are still eroding and old media companies must transform to survive: "This could include buying new companies that offer digital services or products, or swapping assets to become more efficient and gain ground in a particular field."

Another bullish player is Simon Tilley of Close Brothers Corporate Finance who expects many more deals to be struck this year. "An important factor is that there is more stability and credibility in the credit markets", he said. Tilley forecasts that trade sales will also increase, as this route gives shareholders an outright exit.

The chances are slim, then, that the Cadbury sale, the CPA Global takeover and the acquisition of Xafinity will be the only big deals to dominate headlines in the first quarter of the new decade. It must be remembered that British companies are often easier to acquire than some of their European counterparts too. This is mainly due to the fact that European laws allow the employees' representatives a stronger say in any deal. This inevitably means a more complex process and as such higher associated costs.

Whereas the policy position of France, for example, is to protect national treasures where possible, British governments of late have made it clear they consider it detrimental to the UK's economic growth if the free movement of capital is impeded.

Share this article

Latest Businesses for Sale

View more businesses for sale