Merger activity in the UK’s engineering sector has reached record levels over the past year. Some £73bn worth of deals went through in the year to October, a 50% increase on last year and 10 times the level of five years ago.
The question now is whether this level of activity can be sustained if there are now fewer companies to be acquired.
The highest-profile deals of the year were BTR and Siebe’s merger to form Invensys, and Rolls-Royce’s takeover of Vickers. Both are examples of companies from the same country and similar sectors merging in an attempt to stay competitive on a global scale.
But if these two mergers paint a picture of UK companies ganging up to take on the world, it is a misleading one. A look at the top 10 deals for the past year shows no fewer than six which span the Atlantic – evenly split between US companies buying in the UK and the other way round.
The high proportion of international deals could mean even more merger activity, as the pool of available partners expands overseas. John Nutton, partner at accountant RSM Robson Rhodes, says: `It is increasingly likely that future deals will be cross-border. Customers are becoming global, and they want their suppliers to be global as well.’
US companies are the most likely partners for UK engineers for a number of reasons. The two countries have a long-term trading relationship, they speak the same language, and of course the US is still by far the largest economy in the world.
But the EU is likely to become a more important source of partners as trade barriers are removed and national champions try to become continental players. Vodafone Airtouch’s hostile bid for German giant Mannesmann shows that even the largest industrial company can be a potential target.
The weakness of the euro may have hit the UK’s exports, but it also means that euro-zone companies are less expensive to acquire. Rising confidence among UK manufacturers means they will be more willing to spend, according to Nutton. `At the moment, UK engineering companies benefit from a cheap shopping list,’ he says. `If the pound gets stronger they may lose some of that, but better exports will improve confidence even more.’
Accelerating takeover activity does not automatically mean the stock of available companies will decline. In growth areas where new technology is constantly being developed, there will always be more companies to buy. For example, GEC’s transformation from an engineering giant into Marconi, the communications company, has involved heavy spending as it has bought up telecommunications and internet switching companies.
In lower-growth sectors, merger activity will be driven by the need to get bigger, according to Richard Williams, corporate finance partner at Arthur Andersen. `I see this as continuing to be a tough sector. With little prospect of organic growth, companies will take each other over,’ he says.
Williams predicts the aerospace industry will will be busy over the next few years. `There is a great deal of pressure on the aerospace supply chain, with opportunities for companies to get together,’ he says.
RSM’s Nutton says the electronics sector is likely to be one of the hottest areas for mergers in the next few years. A lot of small and medium-sized firms are working on similar products, and savings could be made by merging research and development activities. `To have leading edge development is quite expensive. Companies could save money by merging their research and development activities,’ he says.
And the automotive sector could be set for more consolidation. BMW is now being discussed as a takeover target, less than 10 years after swallowing most of the UK’s domestically owned motor industry.