M&A activity and business confidence to tumble further

M&A activity will continue to fall for at least another year before bottoming out and climbing again, according to financial advisors Grant Thornton.

The consultancy firm has made the gloomy prediction following a study looking at M&A trends over the last two decades including the effects of the early nineties recession and the dotcom crash in 2000.

Both the number and value of deals peaked last in the first half of 2000 as the dotcom crash was first being felt. From this position deals reached their lowest ebb in he second half of 2002 aside from a value dip in the wake of September 11.

During the last slide, deal numbers dropped from 723 in Q1 2000 to just 404 in Q4 2002 – a fall of 44%.

Values dropped from a peak of £92bn in Q1 2000 to just £7.7bn in Q3 2002 – a drop of 92%

Both the volume and value of domestic M&A deals has never reached the same heights. A similar pattern occurred in the early 90s, where the deal drop off was even faster.

Deals reached their most recent peak in Q2 2007, almost five years after dropping to their lowest level.

Since reaching this high of 607 deals, deal volumes and values have again been declining at a pace similar to that experienced in the first part of the decade, with just 398 deals announced last quarter.

In fact, the value of merger and acquisition (M&A) activity between UK companies in the first six months of 2008 has dropped to its lowest half-year level since 2001, with total announced deals dropping to £17bn in the past six months from £37bn in the first half of 2007.

Ian Marwood, head of Grant Thornton’s corporate finance team in Yorkshire, said that extreme caution in the lending environment was setting up a similar environment to that experienced around the time of the dotcom crash, where value multiples fell, sellers sat on their hands and deals dried up.

“If present conditions continue, it could take some years to climb back to the M&A peaks we saw mid way through last year, as it did after what was a comparatively mild economic shock post dotcom,” he said.

“Unfortunately it seems increasingly likely this is best case scenario, and the recovery could take even longer this time.”

Acquisitions abroad by UK firms have also followed this long term trend. From a peak of 402 deals in Q1 2000, deal numbers dropped to 201 in Q2 2002. They reached their peak again, 430, in Q2 2007.

However, despite now dropping back again to 302 deals in Q2 2008, UK companies are now spending more offshore than at home, with a total of £41bn spent by UK firms internationally in the first half of 2008.

Conversely, the level of foreign acquisition in the UK remains reasonably steady, with £29bn spent by overseas companies on UK firms in the first half of the year, and major deals in the pipeline, such as the announcement of Santander’s intention to buy Alliance and Leicester.

Meanwhile, tougher economic conditions are taking their toll on business confidence across Yorkshire, as company profits continue to decline, according to the latest Business in Britain survey from Lloyds TSB Commercial.

Firms’ optimism about prospects for the coming six months has hit its lowest level since the survey began.

The Business Confidence Index for July shows that the balance of firms expecting better rather than worse order books, profits and sales, over the next six months plunged to -11% from 23% in January, below the national average of -8%.

Taking order book levels alone, the balance of companies expecting higher rather than lower levels in the coming six months, dropped to -3% from 27% in January.

In addition a balance of -2% of firms is predicting higher rather than lower sales, compared to 39% six months ago, while the balance of companies expecting higher rather than lower profits has fallen from four per cent to -27%, also below the national average of -25%.

The report also shows that, during the first six months of 2008, a balance of just three per cent of companies reported rising, rather than falling sales.

Nationally this trend of falling profits, sales and order books is reflected across all sectors, especially in construction and retail, where the balance of firms expecting higher sales for the first half of the year hit -19% and -22% respectively.

The least affected sectors were transport and communications, in which 21% of companies reported a rise rather than a fall in sales, down marginally from 28% six months ago.

John Robson, regional director, Lloyds TSB Commercial in the North, said:

“The challenging economic climate is putting businesses in Yorkshire to the test. And with sales and profits squeezed, it’s no surprise that so many firms are suffering a lack of confidence.

“But the reality is that many firms will be able to weather this storm. And with the right support and financial help, there’s every reason for strong businesses to continue growing.”