2006 has been a record year for global M&A, and the latest reports from financial institutions show that this is set to continue well into 2007.
Equity research by credit agency Standard & Poor's predicts that the volume of European mergers and acquisitions will increase 12 per cent on the €1.3 trillion generated by the end of 2006. Meanwhile, a survey of European finance directors by investment bank Morgan Stanley found that mergers and acquisitions are now the number one priority for companies, compared to seventh place at this time last year.
Both companies agree that Europe has led the way in the M&A stakes this year, and that Britain will continue to hold its dominant position in the industry. However, Standard and Poor's warns that "acquiring companies will have to pay a rising premium to gain control and will find it increasingly challenging to repeat the rate of return achieved on previous deals in 2007. Nevertheless, the company found that premiums in Europe are still highly attractive compared to the US, where the average premium paid on a deal is almost 10 percent higher.
Private equity will continue to be an influential force in deal making, but experts are also noting the rise of hedge funds in the M&A sector. Morgan Stanley warns dealmakers to expect more similarities in the roles of hedge funds and private equity, with hedge funds taking bigger stakes in companies as their power increases, while private equity will be looking for more liquid assets.
Bankers have dismissed the idea that there is a bubble in European M&A, and have been keen to point out differences between today's market and the dotcom boom. "The pricing is not silly and also deals are spread across industry rather than concentrated in telecommunications, media and technology" says Gavin MacDonald, vice-chairman of investment banking at Morgan Stanley. There is strategic logic in the deals too. There has been a big increase in cross-border deals with real synergies being found - for instance, the impact of the euro is coming through".
This is certainly the case in Britain, where 2006 has been the year for foreign takeovers, with BAA, House of Fraser and Hilton International all falling into foreign hands. Takeover index Zephyr reported that the number of foreign buyers of UK companies exceeded the number of UK buyers for foreign companies by 25 percent, an increase of 10 per cent on 2005. Of the foreign acquirers, America is leading the way, with UK acquisitions worth £20.3bn for the first nine months of the year. Meanwhile, Standard & Poors have highlighted the influence of emerging markets such as Russia and China, who are expected to target European companies much more aggressively during 2007.
Finally, confidence in the market has also been demonstrated by the recruitment trends of large M&A corporations. In November, Accountancy Age reported that the Big Four were looking to dramatically increase their recruitment of dealmakers, particularly in the lead advisory, transaction services, private equity and tax role, in anticipation of record levels continuing well into the new year. The current M&A boom clearly has had a profound impact on practice firms and the demands that are being placed on their corporate finance departments, said John Hunter, chairman of regional recruitment index ECHM.
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