Stock markets catch deal fever as M&A booms again

Korea National Oil Corporation's £1.87bn hostile bid for Dana Petroleum yesterday was just the latest in a surge of activity taking merger and acquisition (M&A) levels to a nine-month high.

Despite edgy economic data from the US, global deal-making has already topped $197bn (£127bn) so far this month, and is on course to beat the August record of $260bn set in 2006, according to Thomson Reuters. This week's $89.8bn total is the highest weekly total since early November.

Recent weeks have seen a frenzy of activity. The South Korean state oil company's offer for Dana came a day after the launch of the biggest deal this year so far: BHP Billiton's hostile $43bn attempt on Canada's Potash Corporation. The same day, the chip giant Intel put up $7.7bn for the antivirus software group McAfee. On Monday, another miner, Vedanta Resources, offered $6.6bn for Cairn India, while the insurer Aviva rejected a $5bn offer from rival RSA. Last week, the French power group GDF Suez and International Power agreed a reverse takeover worth $22bn, and yesterday rumours of an approach sent BG Group's shares soaring by nearly 6 per cent.

In a sign of growing economic confidence, there have been more than 26,000 global M&A deals with a total value of $1.7 trillion either pending or completed so far this year, compared with around 23,400 deals valued at $1.4trn in the same period of 2009, according to Dealogic.

Alongside several major international deals – such as the Swiss pharmaceutical group Novartis's $39bn approach to the US eyecare specialist Alcon, or Indian Bharti Airtel's $11bn acquisition of Zain Africa – British companies are also playing their part.

In 2020 so far, some 2,289 takeovers have either completed or are pending in the UK. Although numerically the total is not much higher than the 2,246 in the same period of 2009, in value terms this year's $253bn-worth far outstrips the $188bn last year. And the numbers do not include those deals which have not come off, notably Prudential's whopping $35.5bn bid for AIA, which was killed off by shareholder opposition and nearly cost the chief executive, Tidjane Thiam, his job.

The sudden rush of deals in the usually slow month of August in part reflects the months of work needed to put together a major takeover. Furthermore, while companies and their advisers might take advantage of a slow August in a normally busy year, in the aftermath of the global recession potential deal-makers are keen to go ahead as soon as they can.

"Corporates are feeling stronger and those with very strong balance sheets, who have weathered the storm and done what they needed to do internally, are now looking for opportunities for revenue growth," Carol MacKinnon, a partner in transaction services at Deloitte, said.

Putative deals are spread across a range of sectors, but oil and gas and mining are particularly well represented because commodity prices were quick to recover from their precipitous recessionary crash, boosted by demand from developing economies.

With M&A activity picking up and banks shown to be supportive, the current trajectory is likely to continue. "Everybody watches each other, so if one deal gets away then you often find others will follow," said Howard Wheeldon, at BGC Partners. "There is still uncertainty out there but there is also a move towards allowing risk back into the system."

But while M&A deals are on the rise, the number of initial public offerings (IPOs) remains muted. The Detroit car-maker GM – which was taken over by the US government at the height of the recession – this week announced plans to relist. But the company is so well known to investors that it is far from representative.

The only other major IPO has been last month's listing of Ocado, and the move was a tricky one. The online grocer was forced to slash its opening price to the bottom of the range, and yesterday the stock was trading about 25 per cent below its opening price.

"We will see an increase in straightforward M&A activity long before a revival in IPOs because it requires a leap of faith for a company to go to market," Mr Wheeldon said. "The current pace of M&A activity is likely to continue, but it might be another nine or 12 months before the IPO market shows a similarly strong upturn."