Private Company Price Index (PCPI)

It has been a busy last six months for mergers and acquisitions and early indications at the start of 2006 are that corporates expect activity levels to be sustained throughout the year ahead.

Increasing confidence levels against the backdrop of a stabilising international stage have helped to drive the market forward. With this momentum comes the increasing dominance of private equity in the market, a trend which is bolstered by continuing low interest rates and the leverage they facilitate. This increased activity is also reflected in the Private Company Price Index (PCPI), which has risen to 14.5 over the three months to December 2005, from 13.1 in the previous quarter. A notable exception to this is the UK retail sector which has seen the value of deals done in 2005 fall 30 per cent from 2004 levels due to the fall in consumer confidence and the knock-on effect on spending.


The economic outlook

In spite of the optimistic M&A conditions the latest indications are that whilst the UK economy is stable, it may be entering a gentle cooling period. Towards the end of 2005 the trend in rising unemployment continued, as did the fall in consumer confidence. On top of this, the manufacturing sector has had three successive monthly falls in exports, and consumer debt is at an all time high. Finally, oil prices remain high, and deteriorating relations between Iran and the West is likely to result in continued high oil prices causing inevitable inflationary pressures.

The combination of these factors would suggest an interest rate cut in early 2006 but the inflationary pressure from oil prices may limit the downside for interest rates. So far this year a rate cut has looked unlikely. In addition to a wary approach to inflation, the continued recovery in the housing market and solid growth in the global economy are the probable causes for static interest rates in the face of these other factors. Minutes of the Monetary Policy Committee's January meeting showed only one member voted for a rate cut with the remaining eight confident the economy would move forward at a reasonable pace with on-target inflation. Interest rates across Europe however, are more likely to drop in the face of a weakening eurozone economy.


Deal activity

In terms of deal activity, 2005 saw a return to the heady days of 2000 with the total value of deals in Europe rising over 50 per cent on 2004 levels to £549bn. 2005 also saw the return to popularity of cross border transactions with UK companies spending nearly £62bn on acquiring foreign companies. Our forecast for 2006 is that activity levels will be very similar to 2005, but there is scope for a broadening of activity away from domination by the private equity industry to include, where there is clear evidence of strategic logic and value creation, more activity by quoted trade buyers.

Despite economic fears, the M&A and buyout markets are demonstrating their resilience and we are confident of further strong activity as the rest of the year progresses.


Jon Breach, Editor, PCPI
BDO Stoy Hayward

How does the PCPI work

The PCPI tracks the relationship between the current four month rolling average FTSE Non-Financials price earnings ratio (p/e) and the p/es currently being paid on the sale of private companies. The FTSE Non-Financials p/e is calculated from the p/es published in the FT. The private company p/e is calculated from publicly available financial information on deals that complete in the quarter. At the moment, the PCPI indicates that, on average, private companies are being sold for 14.5 times their historic after tax profits.

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