Why Mergers and Acquisitions Are Back on the Table; MONDAY VIEW
Byline: Ewen Stewart Head of research at Arden Partners
THERE is a bright spot amidst the gloom - M&A is back. We read constantly about the risks of the double-dip recession, the sovereign debt crisis and the lack of availability of credit.
Perhaps it seems strange in such a troubled environment to be talking about that barometer of the good times: an upsurge in mergers and acquisitions activity.
But there are sound reasons to think that corporate deal-making is seeing a genuine come-back.
Let's be clear on a couple of things. The government's new Office for Budgetary Responsibility's growth forecasts look too optimistic at 2.6pc for 2011.
Our own forecast is for a very modest rate of growth of 0.75pc.
Furthermore, consumers remain highly indebted and the legacy of huge increases in public spending over the past few decades needs to be unwound. The international environment is no better.
However, there are some bright spots. The consumer may be heavily indebted - as is the government - but Corporate UK is not.
As the recession bit, UK corporates cut costs very quickly, which has helped preserve profitability while also paying down debt.
Indeed, although corporate profitability fell, in aggregate, by around 46pc in 2009 it is expected to rebound by 26pc this year, with a further improvement of 14pc in 2011.
This growth has been largely achieved by costcutting, reduced inventories and a stabilisation of the global economy.
The result is that corporate balance sheets have been greatly strengthened.
A key City measure for indebtedness is net debt/EBITDA: this is effectively a rough-and-ready calculation of the amount of debt a company has relative to the cash generation of the business.
The higher the number, the greater the leverage. In 2009 the average non-financial UK company was leveraged at around 1.8x net debt/EBITDA.
By the end of 2011 we forecast that number will have nearly halved.
A number of industry sectors will actually have net cash balances by 2011. …