The M&A market is coming back to life

By Ian Leaman, September 21, 2010

I recently sat in Amsterdam with colleagues from across Europe discussing the world of mergers & acquisitions. The mood was upbeat. Consensus among this group of senior deal-makers was that confidence levels amongst both buyers and sellers is markedly higher than it has been for the last couple of years.

So what's behind this turn-around in corporate sentiment? Pent-up demand must be a key factor; two years of inactivity has resulted in as yet unfulfilled plans. A slight loosening of the very tight credit conditions in the banking market opens the opportunity to act on some of the acquisition plans.

Although the pricing of deals has declined since the seismic events of the credit crunch, the appetite amongst buyers to acquire growing business is selective. But in the right circumstances it is present and strong.

So what attributes are buyers looking for? Whether from an industrial or financial perspective, the answers remain perennial: Growing and defensible market share, high-quality management and industry-beating margins top the list. Meet at least two of these three and you have today's winning formula.

Through the recent tough times, enterprising business owners have had their heads down, taking the decisive and tough actions needed to manage their assets. Top-line growth was elusive, so cost-control became the major theme. With sales growth finally coming through in certain sectors, the bottom line benefit is immediate and visible. The resulting profitability creates an objective measure. Buyers and sellers can establish a value range, delivering much more favourable conditions for negotiations leading to completed transactions.

So, which side of the buy/sell fence is the best place to sit in today's market? The fall in the headline values of private companies by a factor of up to 50 per cent suggests that it's a buyer's market. However, as ever, the picture is less clear if you dig a little deeper. What you will find is that businesses displaying the strengths I mentioned above will be attracting interest from many well qualified and financed strategic buyers, thereby commanding valuations which can be high enough to persuade sellers to commit.

Is competitive interest deterring these strategic buyers? It seems not. Taking the long view of growth prospects, the opportunity to grow by acquisition is perceived as a big win when compared to the long slog of organic growth.

Ian Leaman is a Director of Buckingham Corporate Finance.

Last updated: 11:40am, September 21 2010