Dry powder

With many corporates having underspent and left themselves with excess capital, Hunter Ruthven looks at how it could be used in 2012.


With many corporates having underspent and left themselves with excess capital, Hunter Ruthven looks at how it could be used in 2012.

The dearth of M&A activity in the market during the post credit crunch era has meant that flows of capital which are usually earmarked for acquisitions have gone largely unused.

Many businesses that have managed to maintain healthy growth now find themselves with an unusual amount of capital on their balance sheets and a quandary about how best to spend it.

Research from asset-based lender Venture Finance finds that, of 500 small and medium-sized business (SME) owners and directors surveyed, 47 per cent of SMEs are sitting on investable cash reserves. However 45 per cent say that the economy is too uncertain to invest in growth.

The study also finds that 61 per cent of SMEs are holding onto cash as a buffer in case of future financial difficulty, rather than using it to invest in expansion.

There is currently £1.9 trillion on the books of cash flush corporates in Europe, with £800 million of that residing within the UK.

Even for those with the appetite to make acquisitions, the availability of investable opportunities is limited. Alex White, partner at accountancy firm BDO, says that there currently exists a paradox in the market whereby there are more buyers than sellers.

Reluctant vendors

White explains: ‘Normally that balance rights itself as higher prices are paid and vendors are induced to come to the market. But I think vendors have a very understandable perception that now would not be a very good time to sell as they will perhaps get a higher price in a couple of years’ time.’

However, White believes vendors might be ill-advised to hold on for a better price. His reasoning is that valuations are currently being propped up by competition between private equity firms which need to deploy their own surplus cash. As that money is spent, demand will subside, exerting a downward pressure on valuations that may cancel out any upside from an improving economy.

When looking at alternative ways to utilise excess capital, White says that a share buy-back is often a difficult message to manage as it can be construed as an admission of failure. He reckons that driving profits through an injection of working capital is often a better way of utilising the idle cash whilst not taking a backward step.

Looking forward, White adds: ‘What we are seeing on an M&A side is that as a general comment corporate balance sheets are quite liquid and that is increasing the pressure to look for acquisitions. Also the M&A that corporates are more interested in is not the larger deals, instead it is actually in the smaller mid market-sized transactions.’

White adds that even for FTSE 100 companies, it is sub-£50 million deals that hold the greatest appeal; boards are still cautious about the big ‘transformational’ acquisitions.

Feeding frenzy

For AIM-listed communications company Daisy, 2011 represented a step back in M&A activity following a very busy period.

Throughout 2009 and 2010 the business made ten acquisitions as it looked to push a consolidation of the market. But in 2011 Daisy completed just two deals, both of which it had set in motion the previous year.

Steve Smith, chief financial officer at Daisy and head of M&A strategy, says: ‘We wanted to take a bit of time to have a think about the next stage of our strategy and to make sure all the deals we had completed had been bedded in.

‘People ask us constantly whether we would like to start paying a dividend, but the overriding view of our shareholders is that they would prefer us to be reinvesting the capital to grow the business rather than returning it to them.’

Daisy’s interim results announced in November made for pleasing reading, with revenues up from £120 million to £176 million for the six months to 30 September.

This trading surge meant that EBITDA rose by 65 per cent to £26.6 million, giving the business a healthy balance sheet. ‘The business will generate a very high level of cash flow which could be used to pay down debt and ultimately gives value to shareholders,’ Smith adds.

Despite not divesting as much capital on M&A activity during 2011 as Daisy had done in previous years, Smith says that the business is not over-geared and has a revolving credit facility in place which will allow it to make purchases when the opportunity presents itself.

While businesses with excess capital may be apprehensive about entering the M&A market at this stage, White says that a little momentum may push others into making the plunge. ‘At the end of the day cash as an asset is pretty worthless, in fact it reduces every day,’ he concludes. 

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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