Destination Maternity's £266m offer for Mothercare, the struggling babywear merchant, looks like a rounding error in a footnote to the league tables of deals during the past six months. For merger and acquisition activity is booming, say the statisticians. The value of deals in first half of 2014 has risen 70 per cent to $1.8 trillion compared with last year, says Thomson Reuters. In the UK alone, the value of offers is up 90 per cent to $77bn. Nonetheless, Nasdaq-listed Destination Maternity’s approach last month is telling. It is small enough to make bankers weep at the prospect of fees teensier than the tinies that Mothercare aims to serve. But its boldness is interesting for three reasons, each suggesting a market peaking.
The first is that the deal is cross-border. Small-cap cross-border deals are more often a feature of late-stage M&A when the big groups have surveyed the horizon and done – or failed to do – the deals they believe will transform their businesses, and advisers are casting their nets more widely.
Second, Destination Maternity is mimicking bigger US companies that have been acquisitively eyeing UK companies in part to cash in on the UK's more favourable tax treatment. But it is not a big company looking for bolt-ons. Its market value is even less than Mothercare’s, and it says it wants a strategic partnership. Destination’s investors must hope management’s nose for an opportunity is as impressive as its ambition.
Third, even though Mothercare’s performance is inducive to investor tantrums, the group still felt confident enough to rebuff an approach that included hard cash. That suggests some underlying belief that the markets, equity and babywear, are moving in its favour.
Equity strategists argue the pick up in M&A activity in Europe has only just begun. Economies are more buoyant, business confidence is rising, credit is generally available and borrowing costs are low. It just needs earnings to gain more oomph for deals to fly, says Morgan Stanley. It advises investors to switch out of small-caps, which have performed well, into large-caps that are on the verge of strategic and transformational deals. However, the conditions for M&A are surely beneficial for all businesses, regardless of size. Destination Maternity may be just the advance party. That is all the more reason for small companies to start practising defence tactics.
Mar City boxes clever
Few companies use a routine trading update to launch an assault on an entire industry, writes Andy Sharman. But last week, Mar City announced its intention to “change the way that new homes are constructed and bring housebuilding into the 21st century”.
The Aim-quoted developer has come up with what it believes is the future: prêt-à-porter steel-braced boxes kitted out in factories that can be dropped into place in hours. In this, Mar City is doing what small companies do best – taking risks that larger organisations can’t or won’t; disrupting and forcing change on industries stuck in the mud.
Pop-up, prefabricated housing is not new. Off-site construction is used for hotels, classrooms, offices, shops, even prisons and army billets. But established housebuilders are wary of modular construction.
However, times are changing. Bricks and brickies are in short supply and building costs are rising. Modular construction looks increasingly competitive. Builders are under pressure to build new homes fast. And Mar City’s hot-rolled steel containers can be put up in a fraction of the time taken by traditional building. It has erected and sold several “pods” on a site in Barnet, North London, and put up two semi-detached homes in Walsall in three days, to prove the point.
“We’re trying to bring housebuilding up to date with the help of technology,” says Tony Ryan, Mar City’s chief executive who has a crusading glint in his eye. “And we will.”
He may be happy for the light to dawn on the rest of the industry over the next decade. His investors will be working to shorter timescales, hoping Mar City’s rivals will see it as a short-cut to innovation, and buy it.
Mar City: firstname.lastname@example.org
Get alerts on Mergers & Acquisitions when a new story is published