2011: The year of the takeover?

Date: Thursday, January 20, 2011
Author: Nikhil Kumar, The Independent

Merger mania has gripped the City again, with nearly £2bn worth of deals unveiled in just a fortnight

The new year has barely begun but already investors have witnessed a flurry of deal announcements covering sectors as varied as fund management and health care.

In the UK, 45 deals worth more than $3bn (£1.9bn) have been announced since the start of the month. Globally, the figure swells like a target's share price, with predators announcing more than 1,350 deals worth – wait for it – more than $139bn over the last couple of weeks.

The numbers, from the research firm Dealogic, leave out the recent array of bid rumours. Spurred on by the uptick in mergers and acquisitions (M&A), speculators have been reheating their choicest bits of takeover gossip.

The way they tell it, any one of Apple, Intel or Microsoft is set to pounce upon ARM, the Cambridge-based chip designer; the Qatar Investment Authority is readying a bid for Sainsbury's or, failing that, Marks & Spencer; while a continental buyer is running its slide rule over RSA Insurance, to name just three rumours doing the rounds in the markets.

Andrew Lapthorne, the global head of quantitative strategy at Société Générale, believes the market gossips are drawing their own conclusions from companies' cash piles. "You've still got a difficult growth picture out there, but there is a lot of cash sitting on balance sheets and the market is looking at that cash and thinking that it is going to be put to work," he says.

Although Mr Lapthorne argues that the present spate of M&A activity is down to the current availability of cheap debt throughthe corporate bond markets, he acknowledges that companies have been raising "a lot of capital".

"That money has to go somewhere," he says. "And whether it leads to takeovers really depends on corporate appetite... Are they just building a cushion? Possibly, but that would be quite rare given the aggressive appetite of corporates."

The list of recent deals is certainly impressive. Just yesterday, Royal Bank of Scotland finally sold the healthcare provider the Priory Group to the private equity firm Advent in a £925m deal – and last week the fund manager Henderson scooped up its troubled peerGartmore. There was also themuch-publicised share-swap between BP and Russia's Rosneft.

All the while, investors have been keeping a close eye on signs of activity around the likes of the troubled bank-note printer De La Rue, the engineering firm Smiths Group and Smith & Nephew (S&N), Europe's leading manufacturer of artificial hips and knees.

Every morning seems to bring new rumours of Oberthur, the French group which has until the beginning of February to make a firm bid forDe La Rue, preparing a higher offer, or that Johnson & Johnson, the US healthcare group which reportedly approached S&N with a 750p per share proposal last month, is readying a revised 800p per share bid for the FTSE 100-listed group.

S&N has also been linked to the private US firm Biomet. A statement to the Stock Exchange last week that S&N "is not engaged in any discussions which could lead to a merger or a takeover" failed to quell the speculation buoying up its shares.

Its fellow blue-chip Smiths has also been attracting attention after revealing that it rejected a £2.5bn cash offer for its medical unit, which accounts for more than 30 per cent of its sales. Though Smiths failed to name the suitor, reports pointed to Apax, the private equity firm which recently failed to buy the Danish outsourcing giant ISS. Analysts are already predicting bids for other Smiths units.

Promisingly, the recent evidence from the markets chimes with the experience of corporate finance specialists, the deal makers of the City.

Stuart McKee, the head of mergers and acquisitions at PricewaterhouseCoopers, for instance, reports that his firm has entered 2011 with a "strong order book in terms of M&A mandates".

"We experienced quite an uptick in activity in the run-up to Christmas," he said. "The M&A markets usually have two completion cycles, one going into the summer and one into Christmas. And we certainly saw a deal bubble in the run-up to the Christmas period."

But is there much prospect of this uptick persisting over the coming months, or are markets working themselves into a froth over nothing?

At SocGen, Mr Lapthorne thinks much will depend on the cost of funding on the bond markets, which remains cheap for now, but which may change if central banks begin to raise interest rates.

PwC's Mr McKee, while acknowledging the risk, is cautiously optimistic, highlighting past experience. The UK saw about 4,900 deals in 2000, according to figures from PwC. The number of deals fell to about 3,000 in 2002, but then began a steady ascent, climbing to about 4,400 in 2007.

The onset of the credit crisis triggered a predictable reversal, with the figures sliding to around 3,600 in 2008 and 2,500 in 2009. But the number of deals rose to about 2,700 last year, hinting at a recovery.

"The direction of travel and the mood music out in the marketplace suggests that we will see some growth on that figure this year," Mr McKee said, striking a hopeful note. "There is a bit more economic stability around, which creates confidence."

Recent rumours

* Market gossips love Arm. Apple is frequently said to be keen to mount a bid, as are Microsoft and the semiconductors giant Intel. But the stock is pricey, and being owned by any one of the three could muddy Arm's relationship with other customers, according to analysts.

Chances of a bid: 1/5

* The growth in online shopping has proved a boon for Asos. It has also triggered rumours, with speculators naming everyone from the Danish fashion group Bestseller to the mighty Amazon as possible suitors. Though Bestseller did wade in, building a stake in Asos last year, the online retailer's shares are not cheap.

Chances of a bid: 2/5

* TalkTalk Telecom has attracted takeover rumours ever since it was spun out of Carphone Warehouse last year. Gossips received a boost the other day, when Evolution Securities suggested that TalkTalk's 4.25 million-strong broadband customer base could be an attractive target for one of the major mobile operators "and potentially for BSkyB".

Chances of a bid: 2/5

* The online grocer Ocado was linked to the supermarket group Wm Morrison late last year. The chatter suggested a cash offer may be in the works, but market sources poured cold water on the idea, particularly as Ocado is currently loss-making.

Chances of a bid: 1/5