• Corporate M&A set to challenge private equity

• Over half would prefer domestic deals than cross border transactions

23 July 2007, London – Over two thirds (68 per cent) of CEOs and CFOs of FTSE350 companies expect to be involved in a merger or acquisition over the next twelve months, according to new research (1) by Close Brothers, one of Europe’s leading, independent corporate finance houses.

The significant level of interest in mergers and acquisitions (M&A) activity continues despite macro-economic conditions that are leading some people to call the top of the market and warn that M&A activity is set to diminish.  The bullish rhetoric from FTSE 350 companies reflects the level of M&A these companies have initiated over the last year.  In the twelve months to the end of June 2007, FTSE 350 companies were responsible for 430 M&A deals, valued at over £75 billion.

Commenting on these findings, Richard Grainger, CEO of Close Brothers, said:
“Despite what the doom-mongers might be saying this research shows that UK corporates remain alive to M&A opportunities.  There are a lot of people out there who believe the market fundamentals remain positive.  This is a vote of confidence from an important constituency of the UK market.”

Close Brothers believes that with the debt markets becoming less buoyant and banks becoming more selective about which situations they will lend to, private equity firms will not be able to get as high a degree of leverage as they have been used to and will therefore be less competitive in auction processes.  Listed corporates are less reliant on debt for acquisitions and so are not experiencing the same ‘drag’ on their ability to do deals that their private equity counterparts are beginning to feel.

Grainger commented:
“This is good news for public companies.  With many auction processes being highly competitive and leading to significant premiums being paid for assets, the fact that private equity groups may now find it more difficult to leverage up to the levels they recently have been, might be the break that public companies need and give them the opportunity to make strategically enhancing acquisitions at prices that don’t jeopardise the rationale behind the deal. Synergy will once again outbid leverage.”

The research shows that of those FTSE 350 companies eager to do a deal in the next 12 months, 53% will be looking for domestic opportunities, with 30% also looking to EU countries and 38% also looking to the USA.  Asia was of less interest to CEOs with only 20% considering opportunities there.  India was named as a region to consider by only 10% of respondents.

Whilst India comes low on the list of destinations for FTSE 350 companies, Indian corporates are themselves acquiring more international assets than ever before.  In 2006 alone, the level of international acquisitions by Indian companies had grown to 51 deals, with a total consideration of over £9.4 billion, compared to 2002 when there were only three Indian acquisitions of overseas companies with a value of £51 million.

Richard Grainger commented:
“It does concern me that the FTSE 350 is as focused on domestic deals as this research indicates.  We see a lot of excellent opportunities elsewhere in the world, where prices are not at the premiums they are in the UK.  Combine that with the strength of Sterling and I think now is a great time for UK companies to be taking advantage of international dynamics and making acquisitions that enable them to, for example, source raw materials and manufacture products in low cost regions.  UK corporates need to start playing the international consolidators at their own game, instead of themselves being targets. It’s time to act.”

In spite of their apparent eagerness to make acquisitions, when asked what might hinder them from doing so, 64% of respondents cited high valuations; 38% stated macro-economic conditions; 27% said that competition from private equity houses was slowing their intentions; and 20% spoke to rising interest rates as hindering their ambitions for growth.

Grainger commented:
“Twelve months ago companies were saying valuations were looking high but they have continued upward.  Rising interest rates are obviously a concern for overleveraged companies but corporates have to look at the positives.  Buying strategically enhancing assets which generate significant synergies is something that their private equity counterparts are often pushed to achieve. So whilst there will always be excuses to not execute M&A deals, there are many advantages to doing so, even at this stage of the cycle.”

(1) CanvasseOpinion, part of Experian, conducted 100 telephone interviews with CEOs and CFO's of FTSE350 businesses and large UK publicly listed firms.