Corporate M&A Outlook: Clear Cause for Optimism; Maurice Heath, Midland Head of Corporate Banking at HSBC Bank Plc, Reports on a Renewed Appetite for Mergers and Acquisitions

Article excerpt

Byline: Maurice Heath

The economic storms that arose from the credit crunch have significantly abated, with a return to positive growth for most economies. Even so, the outlook is certainly not without some uncertainties. Recent global events underline the potential for such developments to weaken confidence and drive up key commodity prices. Particularly in the Middle East, where the ultimate medium term economic and geo-political consequences are difficult to quantify.

However more locally across the Midlands, the mood seems to be definitely more upbeat and based upon the current actions of several middle market corporates, we do appear to be seeing a renewed appetite for mergers and acquisitions, established around clearly identified synergies and scope to add shareholder value from the related investment.

During 2008-9, corporate acquisition financing declined significantly as a result of the credit crunch This resulted from some UK banks experiencing much reduced liquidity, whilet many foreign banks stopped providing new corporate lending in the UK completely.

The good news is that the outlook for Corporate M&A activity looks increasingly positive through 2011.

Improved bank liquidity, and a better corporate outlook has led to an increasing number of banks returning to the syndicated loans market. As a result of increasing revenues, generating improved cash flows against a leaner overhead/cost structure, many large corporates have been de-leveraging and those without debt have been building substantial cash balances. Such businesses are thus well positioned to take advantage of acquisition opportunities. Another feature is that cross border deals, frequently "inward investment" into the UK, are increasingly being seen. There is a strong bank funding appetite for quality, larger middle market corporates, requiring debt at sensible "corporate type" debt multiples of say around 2 times to 2.5 times EBITDA.

An example of such a transaction is the Misys acquisition of Sophis in November 2010, where we in HSBC acted as Sole Co-ordinator and Mandated Lead Arranger for the pounds 280m of acquisition facilities. In addition we were joint book runner on a successful pounds 100m convertible bond issue.

For large corporate transactions such as this, the use of capital markets debt instruments such as corporate bonds, convertible bonds, private placement etc. will be an ongoing feature of a funding mix in conjunction with traditional bank term debt support. …