There has been a sharp increase in the level of deal activity since the May 1997 general election. In the manufacturing sector alone, 73% by value and 49% by number of deals undertaken since January 1994 have taken place in the past two years. This increase in activity also reflects a tendency towards larger deals.
Favourable factors like falling interest rates were in place before the election, but investors were nervous. This was fuelled by uncertainty over the future of the UK in Europe, the impact of further employment legislation from Brussels and the ability of a Labour administration to avoid power struggles with the unions.
So far, the economy has remained remarkably stable with a continuing fall in interest rates and unemployment, and little effect from the introduction of the euro and the minimum wage. Investors are confident that newly-acquired firms will perform. As funds are relatively cheap, they can expect adequate returns on their investments. Hence the increase in activity.
The other side of the coin is that continuing high exchange rates have encouraged UK-based companies to embark on foreign corporate shopping sprees.
UK-based companies which are heavily involved in exports have sought overseas buys to counter the adverse trading conditions. Recessionary fears sparked by the high pound in 1998 have abated. For now, recession has been avoided, leading to a new appetite for deals this year.
Mergers and acquisitions have also been fuelled by the giant listed companies which, facing static or declining earnings exacerbated by adverse exchange rates, have two options. One is to find a merger partner and strip out common overheads. The second is to make earnings-enhancing acquisitions of smaller public or private companies.
Quoted companies face competition from private equity houses and the finance teams of banks, most of which are flush with funds and keen to deal. These are backing management buy-out or buy-in teams, investing in non-core activities of the refocused, enlarged quoted firms.
John Nutton is a partner at Robson Rhodes and chairs its Engineering Group