Engineering a deal

3 min read

Simon Keeling examines the current mergers and acquisitions activity in the UK — a good indicator of the state of the technology economy

Like every other sector of the economy, the engineering and technology community is eagerly awaiting any sign that the grim commercial outlook is brightening. While company turnover and profits inevitably attract the most attention, another indicator of renewed vitality would be a resurgence in the number of deals being done within the sector.

This is the first in an occasional series of assessments of the state of the market for buying and selling companies — the mergers & acquisitions or M&A market — as it applies to engineering businesses in the UK. It is based primarily on data collected and compiled by Experian Corpfin, which has monitored M&A transactions since the mid-1990s. Corbett Keeling has been particularly active since forming in 1993, advising on management buy-outs and specialising in the engineering sector.

The data under the spotlight comprises the quarterly aggregate value and number of deals in the engineering sector over the past five years and up to the recently ended first quarter of 2009. It is divided between: deals where the consideration paid for companies acquired is more than £40m; and those that are less than that sum. They include transactions where either the acquiring or selling business is UK based. The most obviously striking feature is that where the number of deals has been ticking along at around 800 per annum for the past five years, it collapsed significantly in the final quarter of 2008 and almost stopped entirely in the opening quarter of 2009. Indeed, in the first quarter of this year, Experian Corpfin recorded no deals at all where the consideration paid was more than £40m and only nine where it was less than £40m. So the close of 2008 may have seemed bad for M&A activity, but the first quarter of 2009 is even worse, being the weakest in the past five years by a long way.

But what deals have been happening since last summer and what has been driving those that have reached completion? While it does not come as a surprise in a sector such as engineering that there is a large international component in the deal-making, it is nevertheless encouraging to find that despite diminished activity in the opening quarter of this year there are still significant overseas buyers, no doubt stimulated by what has been for them an advantageous fall in the value of sterling. More of a surprise is that, for the smaller-scale transactions, there are still some instances of UK-based companies taking advantage of overseas opportunities in spite of the poor exchange rate.

For larger deals (more than £40m), the only transaction in the past six months was the disposal by private-equity owner ECI of Racal Acoustics to Esterline Technologies in the US. This was exceptional for its size — the consideration offered was £115m, making up a large part of that quarter's overall deal value. Perhaps more importantly though, it is a reminder of the relevance to the engineering sector of M&A activity by private-equity funders. This is further illustrated by data published separately by the Centre for Management Buy-out Research, focusing just on buy-outs rather than the wider M&A market and showing that in manufacturing alone 153 buy-outs took place in 2008, comprising around 25 per cent of all UK buy-out activity for the year. It is clear that manufacturing and by implication engineering are important sectors to private-equity firms.

Clearly though in 2009, lack of finance, particularly the lack of banking finance, is hampering deal activity, as it creates funding difficulties for buyers. However for vendors the reverse can be true, with funding difficulties encouraging deals, as groups look to sell peripheral subsidiaries in order to provide much needed cash for their core activities.

Over time, sellers' and buyers' price expectations come into line and, as this happens, we look forward to reviewing next quarter's results, when we will see whether any signs of a longer term recovery in M&A activity — possibly driven by some of the measures being introduced by the government to increase the availability of lending — are beginning to appear.

Simon Keeling, joint chairman of Corbett Keeling, which advises on funding management buy-outs and selling businesses in the engineering sector