‘I think everyone in the industry was expecting more M&A activity than there has been,’ says Stuart Skinner, a corporate finance director at AIM broker and nominated adviser Numis Securities. ‘It’s been an ideal buyer’s market.’

As valuations plunged there was an expectation that those who put cash on the table would have their hands bitten off by cash-hungry shareholders and embattled institutional investors. But now, with valuations creeping upwards, it seems that potential acquirers may have missed the boat.

Skinner thinks otherwise. ‘With small-caps, it takes a lot longer for investors to cotton on to the true value of a company. There are still price anomalies on AIM and company reratings to come. But paper is becoming more acceptable again as currency.

‘Plenty of companies are very keen to buy. I don’t think we’re seeing a new dawn or anything like that, but we are currently working on half a dozen deals that are of a size that will change these companies, and around a third of our client base is actively looking for deals.’

Tip of the iceberg

Our unique research has found that in the 12 months from September last year, 152 acquisitions worth £817 million were made on AIM. Some £283 million of disposals were also completed, which totals £1.1 billion worth of M&A transactions among AIM companies (not including a further 29 deals of an undisclosed size). Excluding the undisclosed deals, the median price that AIM companies paid for their purchases was £2.2 million, while the median disposal was £1.2 million.

Stephen Bayfield, a corporate finance partner at accountancy firm PKF, whose clients have completed seven acquisitions and two disposals, and which has advised on a mandatory offer for one AIM company, also believes that deal flow will increase if the financial institutions embrace risk again. ‘The biggest impact on M&A is the continuing lack of cash and bank lending. I think there are a lot of people who want to do deals but are getting quite frustrated. There is a pent-up demand for M&A but it will take bank lending to free it up.’

Cash is king

Indeed, as companies have been largely unable to do deals with their paper due to their sunken valuations, only those with plenty of cash have been snapping up the bargains. A number of these fortunate entities are investment companies, such as London & Stamford, a property fund that has completed three of the largest deals in the period for a total of £118 million.

Its deals were overshadowed only by the reverse takeover of Daisy Communications (now Daisy Group) by AIM-listed Freedom4 for £81 million, with a simultaneous purchase of telecoms services provider Vialtus for another £32 million. Daisy has since also bought the main operating subsidiary of AIM peer AT Communications for £12.45 million as well as the telecoms subsidiary of troubled Redstone for £17 million.

Robert Forrester, chief executive of Vertu Motors, a chain of car dealerships that raised £30 million from the market and has already spent ‘about a third’ of that sum on two acquisitions, says: ‘We identified that with motor dealerships, due to the recession and the fall in property values, there would be more opportunities to buy at cheaper prices.’

Two years ago an acquisition in this sector ‘would cost around £2.3 million for the freehold property and £300,000 for goodwill’. Now, with the property market ravaged, ‘you could buy the same place for £1.6 million and no goodwill’, claims Forrester.

He adds that in recent months valuations ‘have hardened a little’, but notes that ‘people are not averse to taking shares now’.

Distressed call

Inevitably, the recession has brought about plenty of distressed deals, where beleaguered companies teeter into the arms of an acquisitive saviour for a bargain price. One such deal was made by recruiter Penna Consulting, which bought recruitment marketing agency Barkers for £8.6 million in cash from the administrators in a pre-pack deal on the day its administration was announced to the market.

‘The administrators effectively played the role of M&A broker,’ says Aleen Gulvanessian, corporate partner at law firm Eversheds, which advised Penna. Though these pre-pack deals are criticised for disadvantaging unsecured creditors – and this one has seen many redundant staff unhappy to be denied a promised pay-off – Penna is delighted to ensure continuity of the business with ‘no disruption of services to clients’.

‘The main difference with pre-pack deals,’ says Gulvanessian, ‘is that you don’t get warranties confirming the accounts are all accurate or that major clients are still in place from the target company, so there’s a large amount of risk. But we might go back and say, “This is a big risk, but we’ll take on the risk if you knock so much off the price.”’

Calling it quits

Many of AIM’s own distressed businesses have exited the junior market. Our research finds that 273 companies delisted from AIM in the 12 months in question. Although, as mentioned, 43 of these were due to takeovers or mergers, the majority cancelled their listing due to the untenability of being a small, listed entity in a recession, with high costs, lack of liquidity and the inability to raise finance all frequently quoted as reasons for leaving. Moreover, 30 companies left AIM due to insolvency or administration and 62 were disqualified for not publishing results or because their advisers quit.

Although this trend has decelerated in September, Numis’s Skinner thinks there are ‘a lot more’ delistings to come due to concerns about the suitability of the market for certain companies. ‘If you look at AIM now, most of the companies are very small indeed. One has to question the cost efficiency of those companies having a listing, especially as the market’s appetite for micro-cap companies is not really there any more.’

Hot deals

As September saw a tailing-off in the number of companies exiting the market, it has also seen a continuation of the good deal momentum that built up in the early summer. June and July saw 38 deals, totalling £360 million, which is more than the entirety of last October, November and December, when there were 31 deals valued at a combined £141 million.

Bayfield says PKF’s specialisation in the media and mining sectors leads him to believe that both those sectors are ripe for continued consolidation. ‘We’ve got a couple of deals on at the moment, mainly share offers for other companies. I see that type of thing continuing,’ he says. ‘In media, companies are looking very devalued, and this might spark some bargain hunting. And I think we’ll see more on the mining side as there are a lot of exploration companies out there, and those with better prospects are going to get snapped up by those with cash.’

When it comes to pricing, Angus MacSween, chief executive of web hosting group Iomart, observes that expectations have come down during the past six months as there is ‘the realisation that for some time to come there won’t be debt support’.

Over time, he argues that the market will readjust and there will be sensible company valuations: ‘I think what has happened is that there’s a lag as the market readjusts itself in regard to multiples. Banks only want to provide leverage for good businesses; they don’t want to put debt into already distressed situations. You just can’t get the same amount of debt that you could get two years ago.’