Urge to merge is back with a bang

Lean and flush with cash, UK plc looks to acquisitions to lift market s hare, says Clifford German
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The recovery may have done nothing yet for the housing market, but the bellwether of business confidence, mergers and acquisitions, is back with a bang. Last year was the busiest for M&As since 1990, with 1,520 deals worth almost £25bn involving U K public and private companies, according to the specialist review Acquisitions Monthly.

And just six weeks into 1995 the current year looks poised to surpass 1994 in value terms, on the basis of just two big deals, the £9bn Glaxo bid for Wellcome and Trafalgar House's offer for Northern Electric.

We are not yet back to the days of merger frenzy, which peaked in 1989 before crashing back to earth in the recession. But if the pace is maintained 1995 will certainly be the busiest year since the boom of the late Eighties.

The pace has been quickening again in the US for a couple of years and this time merger mania is expected to spread to Continental Europe as well as Britain. The value of international mergers rose nearly 50 per cent to $238bn in 1994, and unsatisfied demand is likely to prise out even more hitherto reluctant sellers in 1995, according to Richard Agutter, head of corporate finance at KPMG.

Many companies on the worldwide acquisition trail are being driven by the increasing globalisation of world markets, a process that started in oil and is now in full swing in chemicals and pharmaceuticals. In vehicles, defence industries, telecommunications and financial services, the structure of new international alliances is just beginning to emerge, but has some considerable way to go. Rationalisation is not confined to high technology. Pet foods, soft drinks and beer are also in play.

Scores of British companies are leading global players and well placed to play their part in a worldwide process. On the domestic level, Britain is also ripe for a fresh round of rationalisation, which is attracting acquisitive companies from overseas and at home.

Any worries foreign companies may have about the long-term future of Britain in Europe have not yet had a significant impact. The economy is seen to be in good shape and attractive to overseas companies looking for an alliance or a strategic foothold. The company sector is also flexing its muscles.

The sector as a whole has been steadily rebuilding its finances and paying off the mountain of debt accumulated during the last great surge of expansion in the late Eighties, and many companies are now at their healthiest in a decade.

But in a low-inflationary environment, cash is not the best thing to be in, and inevitably companies are looking for investments that will provide a satisfactory return. Takeovers provide an obvious outlet. At the same time, many firms have made themselves lean and fit by a process of continuous cost-cutting that has left the business in need of further targets to sustain the process of rationalisation.

Inevitably acquisitions create a ready-made new field for discovering excess cost and duplication. Other companies slower to reach the same stage of financial fitness are an obvious target.

Acquisition is also a quick way to increase market share and unlock the economies of scale competitive companies must secure. Rationalisation is already at work among the providers of mortgage finance after the shocks and setbacks associated with the recession.

The DIY industry is stirring itself for a fresh surge of growth as consumer demand picks up, would-be buyers are eyeing the utilities, ready for the day the Government removes its protective hand, and shareholders are licking their lips at the prospect of a second bonanza driven by takeovers. The rationalisation in the drinks industry set off by the Monopolies Commission report is clearly not yet finished, and food retailing is in a state of continuous struggle for market share.

An M&A frenzy also requires a plentiful supply of bank finance and the willingness of large shareholders to see their investments issue fresh paper if required. It is doubtful if the stock market is strong enough to encourage large underwriting exercises, but the banks are increasingly anxious to lend. There is little doubt that a feeding frenzy has developed, in which sluggish companies still quite capable of surviving are being sought out and are liable to be put into play.

Most M&A business involving public companies is done jointly by the companies themselves in co-operation with one of the leading London-based investment banks, of which Warburg again won the prize for the most deals and the biggest turnover in 1994.

"The companies know the players, but the banks know what is do-able, the preferred structure for the deal and the probable cost," as Guy Dawson, head of corporate finance at Morgan Grenfell, puts it.

In addition to the trade in public companies there is a second tier of private deals, many involving the disposal and swapping of unwanted divisions that goes on among the ranks of companies. Such deals are usually smaller in individual value but in mostyears account for about a third of the value of all deals recorded by the Central Statistical Office - and rather more according to specialist sources such as Acqusitions Monthly.

In many cases they are driven by independent advisers including the M&A departments of the big accountancy firms.