UK well positioned for an upturn in M&A activity, global outlook remains cautious
March 13, 2012

Merger and acquisition activity in the UK has been sluggish since 2008, but this year could be the year all that turns around, even amid the challenges posed by Europe's current economic climate, The Wall Street Journal reports.

While the world isn't set for a massive surge in M&A in 2012, London still shows signs of becoming a leader in activity, recent market reports show. Adam Avigdori, co-manager of BlackRock UK's Income Fund, noted that many British companies currently have deep pockets of cash and are being pressured by shareholders to spend it. To Avigdori, the corporate scene in the UK holds much more promise than some analysts are predicting.

"The outlook for the U.K. market in 2012 is very attractive, with many companies trading on low earnings multiples," he said. "Coupled with a staggering £180 billion ($282 billion) being held on corporate balance sheets, this will likely lead to an increase in M&A activity, corporate investment and increased dividends, as confidence gradually returns to the global economy."

Small- and medium-sized companies are also in a firm position for M&A, says Mark Martin, fund manager at the U.K.'s Neptune Investment Management, as they are exposed to smaller, niche industries.

"These smaller-cap companies offer top-line growth in a world where top-line growth is pretty scarce," he said. "But perhaps most importantly they are bite-sized. Given the lack of financing, buying a midcap or small-cap company is a lot more achievable than a mega cap."

According to the Journal, several interesting deals are in the works in the UK.  Financial software and services group Misys PLC has recently been in discussions with Temenos Group AG about a possible merge, while Vodophone Group PLC is currently deciding whether to make a bid for telecom provider Cable & Wireless Worldwide PLC.

However, the positive M&A sentiment isn't quite the same around the world, as many industries remain cautious about deal-making.

According to The Financial Times, a new report from PricewaterhouseCoopers shows 2011 turned out to be a lackluster year for deals, as many were proposed but either failed or suffered from poor post-merger integration. Sam Yildirim, U.S. asset management M&A leader at PwC, says that 2012 should see increased deal activity in the U.S., but that 2011's results should encourage companies to proceed with caution.

"I am seeing more deals this year than last," she said, but went on to warn that "the same happened last year, then deals broke down."

But despite this uncertainty, deal activity is still under way, the news source stated. Deutsche Bank's decision to shed its asset management business - worth about 2 billion euros - is expected to be one of the largest deals in the financial services industry this year, if it succeeds. Currently, the German bank is talking exclusively with Guggenheim Partners of the U.S., chosen from a laundry list of potential buyers that has grown lengthy in the last few months.

But banks may have company in the decision to divest asset management operations. Companies in the insurance industry could also start to mull whether fund management is an integral aspect of their operation, M&A experts say.

But amid all this talk, Amin Rajan, chief executive of consultancy Create Research, remains cautious. He warns such activity could merely be consolidation, and aside from a few big deals, much activity has consisted of selling or swapping business facets.

"[Real] consolidation involves rationalization and getting the dross out of the system," he said. "And this is not happening."