Fund managers are on the prowl for companies that could be caught up in the wave of mergers that is expected across Europe in the coming weeks.
Kraft’s $10.2bn offer for Cadbury earlier this month may be just the taster of further to come, say some. Near the top of their list are Aer Lingus, the Irish airline that has a market capitalisation of €350m and net cash of about €330m; Bloomsbury, the publishing company that has £37m in cash; and Man Group, the hedge fund manager that currently looks relatively cheap, trading on 14 times next year’s earnings, and offering a 9 per cent dividend yield.
AstraZeneca and GlaxoSmithKline, the pharmaceutical giants that boast strong credit ratings and balance sheets, may also be looking to acquire smaller biotech companies to bolster their drug offerings.
There are several factors fuelling the confidence that takeover activity is about to return. With deposit rates hovering near zero, takeovers tempt companies that have large cash reserves and want to improve their return on capital. But groups with less cash can also shop around as it is quite easy to raise funds in corporate debt markets at the moment, say analysts. Also, they face little competition from the private equity sector as many firms took a hit at the height of the financial downturn last year and are still struggling to meet commitments. Sterling’s current weakness also offers the chance for European and US companies to consider taking over UK rivals.
“It’s very important for companies to be able to continue to cut costs and drive earnings growth,” claims George Godber, co-fund manager of S&W Matterley’s undervalued returns fund. “If you are a cash-rich company at the moment, you can acquire a smaller or weaker competitor without the competitive threat of private equity.”
Currently, deals are more likely to be funded by companies with better balance sheets as lending by banks remains constrained, says Paras Anand, head of European equities with F&C.
“People are willing to assess more closely whether one business will add value to another one and the economies of scale that deals are likely to achieve will come under scrutiny,” he says. “Executives are looking to bolster growth in what looks like a weak year, but they want to take a disciplined approach.”
After pharmaceuticals, it is the airline, financial services and media sectors where consolidation is most anticipated.
Aer Lingus remains under hostile takeover pressure from its low-cost rival Ryanair, for example.
The fund management sector is also expected to see a spate of takeovers, following BlackRock’s purchase of BGI from Barclays and Aberdeen Asset Management’s acquisition of Credit Suisse Asset Management.
Another way to profit from the trend is to take bigger stakes in boutique finance companies and investment banks such as Goldman Sachs and Morgan Stanley – as they may well see revenues rise if business gathers pace.
A few months ago, Bruce Wasserstein, chief executive at Lazard forecast that there would be a “gradual increase” in “traditional” M&A activity that would peak in four years’ time.
So far, Wasserstein’s predictions appear to be on target as Lazard’s balance sheet looks rosier than it was a year ago.
The company’s revenues from M&A activity exceeded expectations in the second quarter, rising to $135m from $97m in the previous three months. Expecting a flurry of deals, some analysts have boosted their estimates for Lazard’s earnings next year to as high as $2.40 per share.
