Acquisitions of UK companies by foreign businesses are at record levels, which may spark fundamental changes to the domestic corporate landscape.

Acquisitions of UK companies by foreign businesses are at record levels and way ahead of British investment abroad. Daniel Parton investigates how overseas investors may spark fundamental changes to the domestic corporate landscape.

American poet Henry Wadsworth Longfellow once said perseverance is a great element of success. If you knock long enough and loud enough, you are sure to wake up somebody.” For Grupo Ferrovial, it’s a maxim that perfectly illustrates the Spanish airports operator’s takeover of UK rival BAA plc.

In the first half of 2006, Ferrovial was told in no uncertain terms by the board of BAA – which operates Heathrow, Stanstead and Gatwick airports, among others – that its offers of £8.75 billion and £9.7 billion for the company were not welcome.

Undeterred, Ferrovial returned in June with a third bid of £10 billion, which finally swayed BAA’s board into accepting a deal.

With it, another major UK company left domestic hands – and BAA is by no means the only one. Elsewhere in 2006, investment firm Dubai International Capital bought Travelodge Hotels for £675 million; German industrial company Linde AG acquired industrial gases firm BOC Group plc for £8.2 billion and French cosmetics firm L’Oreal SA paid £652.3 million for retailer The Body Shop to name a few deals.

Indeed, foreign groups spent £60.6 billion on UK businesses in the first three quarters of 2006; already exceeding the £50 billion spent during the whole of 2005 and approaching the record £64.6 billion spent in 2000, according to the Office of National Statistics.

Moreover, it’s not just the big ticket deals making the news. UK businesses of all sizes are proving attractive to overseas rivals. For example, US construction consultancy Hill International SA acquired Warrington-based rival James R Knowles (Holdings) plc for about £7 million in September 2006.

Record breakers

The trend for foreign firms to buy British has been developing for some time, according to David Brooks, head of M&A at Grant Thornton Corporate Finance. “2004 was the first year to witness a major change in international UK M&A with the amount invested by UK corporates abroad falling behind inward foreign investment for the first time,” he said.

“Since 2004, the amount invested by foreign corporates buying UK assets (£140.9 billion) has been twice the amount invested by UK companies abroad (£68.8 billion) and for 2006 so far the difference has been three times larger.”

With deals in the pipeline, such as Indian conglomerate Tata’s proposed acquisition of steelmaker Corus, there is no end in sight for the trend. “Foreign companies are currently on a rampant acquisition spree in the UK, and mercilessly snapping up prized domestic assets,” Brooks said.

For Brooks, the reasons why UK businesses prove so alluring are clear. “Foreign companies are attracted to the UK by its favourable regulatory regime, its competitiveness in the global market and its veritable lack of protectionist policies,” he said. “It is now seen as a tried and tested region for successful cross-border M&A.”

Adam Powell, a spokesman for the CBI, added that it is also a sign of how well UK companies are performing. “We are starting to see… British businesses being regarded as attractive investment opportunities by other countries, which is a sign they are doing a good job and offer shareholders good rewards,” he said. “Pension funds, hedge funds and equity houses all want to go and invest in these businesses.”

But not every company has sold out to foreign suitors. For example, The London Stock Exchange successfully rebuffed bids from US rival Nasdaq in the past year, and has recently rejected another £2.7 billion bid. At a lower scale, companies such as food equipment manufacturer and building and consumer products supplier Enodis have also seen off interest from overseas players.

Tomorrow the world

Meanwhile, UK companies have also been active in overseas deal making. The ONS reported that UK businesses acquired 86 foreign companies in the third quarter, just six fewer than in Q2, although the value of these deals more than doubled to £6.7 billion from £3.2 billion.

This jump can be partly attributed to Wolseley plc, a trade distributor of plumbing and heating products and building materials, which bought Nordic rival DT Group from CVC Capital Partners for £1.02 billion in July.

While the bigger acquisitions made the headlines, deal making activity was again underpinned by small to mid-market businesses. Deals such as machining software provider Delcam plc’s acquisition of US-based International Manufacturing Computer Services Inc for up to $4.6 million (£2.5 million) were common in 2006.

Changing landscape

But it seems that too few UK businesses are looking for cross-border acquisitions. Grant Thornton’s Brooks, for one, is concerned about the UK’s prospects if this trend continues in the long term.

Brooks: “UK companies… are arguably lacking the ambition and vision of their foreign peers and are in danger of losing out in the race to be global leaders. UK companies continue to adopt a more cautious approach to overseas investment and are clearly lacking the acquisitive drive and global vision of their foreign competitors. If foreign companies continue to acquire UK assets at this rate, we could see, over the next few years, a marked change in the UK’s corporate landscape.”

But for the CBI’s Powell, the corporate landscape has already changed, and he views acquisitions by overseas companies as nothing out of the ordinary. He added that international deals often take place with little comment by outside business bodies, unless they involve multi-million pound sums.

This influx of foreign buyers to the UK is healthy for the economy, contrary to much of public opinion, Powell says. “You’re not going to see a [overseas] firm buying something like Centrica or Corus and then running that investment into the ground,” he adds. “It’s free trade, market-led economy and that’s why we’re [the CBI] fairly relaxed about it.”

Powell is also against the idea of protecting some “national champions” from foreign takeovers, which France was accused of in the wake of the merger between state-owned utility Gaz de France and rival Suez. Some analysts believe the deal was brokered to scupper Italian firm Enel’s interest. “Ultimately, we should be looking at European champions, rather than national champions,” he said.

While Powell has concerns about foreign-owned UK companies being the first in line during a downturn for redundancies or closures, rather than operations in the parent business’ home nation, he believes globalisation is good for business.

“It is symptomatic of what’s happening now and British companies have invested their money overseas for many years and now we’re starting to see it come this way,” he said.

This echoes the government’s view, with Prime Minister Tony Blair saying recently that he had no problem with foreign takeovers such as Ferrovial’s purchase of BAA. “The test I apply is for the consumer,” Blair said at his monthly press conference in June. “And the consumer in my view benefits from there being in the private sector a free market.”

So it seems this trend has little chance of reversing, and foreign acquirers are here to stay with emerging nations also set to join the party, according to Brooks. “On the international front, I expect to see foreign companies continuing to target prized UK assets, particularly utility and infrastructure assets, which are deemed to have less risky investment profiles,” he said. “I also expect the emerging economies of China and India to target UK assets far more aggressively.”