MOON News

The good news is that corporate finance deals are still happening. The total value of Merger & Acquisition activity in the UK increased by 11% in 2011 to £229 billion. The trend was one of stable transaction volumes and increased average prices. Admittedly the increase was from a low base, but the UK outlook is encouraging, given that the M&A figures for all Europe and the USA fell in 2011. [Source: Experian Corpfin]

The appetite is there for doing deals. A recent Royal Bank of Scotland survey found that 50% of medium and large UK companies are actively considering acquiring a smaller business in 2012. This is up from 30% at the start of 2011.

The problem that is stopping corporate finance work from firing ahead remains a lack of confidence.
A lot of larger corporates have cash reserves and access to further funding. They are however, being cautious about what to spend. There is little desire for risk taking, with acquirers looking at established businesses rather than turnaround or start up opportunities. However, once the right business is found, the price paid can still be surprisingly high, countering the popular opinion that the only deals available are bargains.

The lack of risk taking by buyers means that sellers need to think carefully before running an auction process. This standard method of selling a business - forcing acquirers into a race to increase the price and complete a deal as quickly as possible - worked in a sellers market. But now buyers are much more cautious. Relationship building with a smaller pool of potential acquirers is proving the more successful route for selling a business. If a seller spends more time with a potential buyer, it allows him to articulate the full opportunities available and de-risks the acquisition for the buyer. Although it may mean that the process of selling a business takes longer, it can lead to a higher price being paid.

The private equity market, funding management buyouts and similar transactions, is unlikely to return to its peak in the short to medium term. However, a number of mid market private equity funds remain highly active. Deals are being structured differently. Gone are the days of high prices driven by the easy availability of debt. Transactions now are more conservatively structured with debt typically asset backed, rather than based on a multiple of cash flow. Private equity funds are putting in more of the funding themselves, in the form of debt or loan notes, and accepting lower rates of return as a result. It is also now less likely that a private equity fund can trump a corporate buyer in a bidding war because of the reduced availability of leveraged finance.

The conservative trend in private equity also means that management teams are once again the critical success factor in deals of this nature. Funders are unlikely to back an unproven team from outside in a management buy in (MBI) transaction, preferring safer, established teams.

It is unlikely that 2012 will surprise us greatly with a surge in deal activity, but the signs are that it could build on the steady improvement of 2011. Lack of confidence in the global economy remains the big issue, and this will not improve quickly as Eurozone problems continue and the Presidential election leaves the USA in fiscal limbo for a year.

Jonathan Williams is Corporate Finance Partner at Bishop Fleming Chartered Accountants