Mark Spinner of law firm Eversheds sees an increased appetite for M&A, despite significant hurdles to dealmaking.
Mark Spinner, head of the corporate team at international law firm, Eversheds, looks at the impact of low business confidence on deal making activity and sheds light on the sectors that are likely to succeed on the acquisition trail.
Business confidence is in a fragile state as the world waits to see if fears of a double dip recession become a reality. While this fear is currently more pronounced in the US than in Europe, history shows that it’s only a matter of time before the feeling spreads. This lack of confidence is having an adverse effect on the opportunities for business growth, leaving some businesses with sound expansion plans hamstrung by weak market sentiment and severely limited access to funding.
Eversheds recently conducted a global study looking at the steps that businesses have taken to combat the impact of the credit crunch and also the plans they have for the next twelve months. In terms of corporate deal making activity, there was a noticeable increase in the appetite for acquisitions and joint ventures, most notably in the energy and natural resources sector. Just 13 per cent of the 1,000 senior executives who took part in the study said they had looked at potential acquisitions during the last 18 months, but a significantly higher percentage (22 per cent) said that acquisitions were in their plans for the year ahead. In particular, businesses based in Russia and Italy confirmed they were the most focussed on the acquisition trail.
Despite the increased appetite for acquisitions, many businesses are finding that the will to do a deal is simply not enough. Anecdotal evidence suggests that many businesses, in strong financial shape and with sound acquisition targets, are frustrated by the unwillingness among banks to deploy capital. There is certainly a feeling of unease around banking facilities not only in relation to acquisition finance facilities, but also operating facilities. This is particularly pertinent now as there are likely to be a large number of facilities due for renewal in the next 12 months, three to four years after the peak activity levels of 2007/8, and with limited capacity in the market, the majority view suggests that casualties are likely, with businesses either having facilities reduced or, at worst, withdrawn. Ambitious businesses need access to capital to grow. Improving operational performance and underlying profitability should make them more attractive in terms of securing debt but this does not appear to be the case. In such circumstances, instead of being the acquirer, many are looking over their shoulder should they themselves become the subject of a predatory bid and the UK market has certainly seen an upturn in public company takeovers.
On the positive side, it’s not surprising that energy and natural resources are the sectors most focussed on the acquisition trail. The strong commitment to the green agenda is all pervasive and is fuelling growth opportunities for businesses operating in this market. In natural resources, there are big opportunities for businesses with a keen eye on the growth and infrastructure development in developing countries as demand continues to outstrip supply.
Across all sectors, there are good businesses, with well thought out expansion plans, but the current lacklustre market is putting obstacles in their way. Inevitably this leads to many facing the frustration of playing a waiting game, patiently awaiting an upturn in deal flow with the mood in which we enter 2011 being critical. All businesses are keeping a watchful eye on the economic data emerging in the final weeks of the year, which will undoubtedly shape confidence levels for the year ahead and, as is clear, the level of commitment to supporting sound businesses in their expansion plans.