The coming year will see a rash of mergers and acquisitions in the engineering sector but not all will be in the best interests of shareholders, City analysts warned this month.
Tony Lancelott, an engineering analyst with Albert E Sharp, said the automotive sector would remain out of favour this year, but numerous companies stood out as potential consolidators or targets.
These include Adwest Automotive, AIM, Avon Rubber, Firth Rixson, Hall Engineering, Hampson, Laird Group Industries, Wagon and Ultra Electronics.
But a report on the sector by Sharp warns that mergers may not be effective unless the objective is more than achieving greater size and eking out cost savings.
Analyst David Larkam said large, generalist groups tend to get a lower market rating than small specialists. ‘Large mergers can create many conflicts. These factors can erode shareholder value.’
The underperformance of many engineering shares during 1997 has increased pressure on directors to boost shareholder value.
‘I wonder how many mergers have been done simply because management had few other options. In the short term, the deal may be good for cutting some costs, but what about in five years’ time?’
Larkam admitted that the automotive and aerospace sectors would see a lot of consolidation this year, but warned: ‘Engineering companies are all very different. There are many risks in putting together two medium-sized firms to make one bigger company. Parts may not fit well together.’