SME merger activity in the downturn |
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| Finance | |
| Written by Simon W. Holden corporate law associate at Faegre & Benson LLP | |
| Tuesday, 14 July 2009 | |
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Given the economic malaise of the last 18 months, you could be forgiven for thinking that the M&A market would be non-existent. However, with share prices falling to some historic lows, there are plenty of opportunities for cash-rich companies to acquire targets for a fraction of the cost of what they would have had to pay in the boom years. The general consensus was that M&A activity would pick up sharply this year, given the continued depression in share prices across a broad range of sectors. This has yet to happen. Despite some, albeit relatively muted, activity at the top end of the market, the story remains an unhappy one at the smaller end of the market with the number of takeovers announced so far this year being less than the first four months of 2008. The UK’s recession-hit small and medium enterprises (SMEs) appear to have shut the door on takeovers. The picture is even more gloomy when viewed specifically in relation to the level of overseas takeover activity by UK companies. According to figures published by the Office for National Statistics, UK companies embarked on just 18 overseas takeovers during the first quarter of this year, compared with 86 acquisitions during the same period last year. This is the lowest rate of takeover activity since official records began in 1987. The problems affecting SMEs are numerous and range from depleted cash reserves (which arise from having incentivised management and staff too well during the good times and the purchasing power and habits of customers having been significantly curtailed during the recession) and the lack of a robust business model to poor management decisions and a lack of quality control. The strain on cash reserves is probably the most fundamental reason why there is a lack of activity at the smaller end of the market from the perspective of SMEs acquiring other SMEs. SME companies quoted on the junior market of the London Stock Exchange, AIM, have seen their market capitalisations decimated in recent times (although there has been a slight pick-up in the share prices of some sector-focused companies particularly in the mining and natural resources sectors). One wonders if the movements in share prices will spark a flurry of takeover activity. It is easy to agree with the notion that a decrease in share prices, and the resultant market capitalisation of companies, should lead to increased takeover activity. Acquisition hungry SMEs should be able to get more 'bang for their buck', especially given the abundance of publicly traded companies whose current market value is well below their actual net asset value. A recent example is the launch by Conygar Investment Company, an AIM-quoted property fund, of an all-share takeover offer for Main Market-quoted The Advantage Income Property Trust, which could see it acquire approximately £193 million of assets for as little as £31 million. Analysts have suggested that if the attempt is successful, there will be a flurry of similar deals in the small and mid-cap listed property sector. However, the notion that cheaper company valuations will result in increased takeover activity ignores the psyche that has pervaded the market in recent times. Given the precipitous fall in global markets, coupled with the collapse of several blue chip names, buyers are a lot more wary of the facts and figures which they are able to gather on potential targets. This is not to say that buyers are shying away from takeovers because they don’t believe what they’re seeing, but there is a very tangible fear factor prevalent in today’s marketplace. This is due, in large part, to the almost overnight demise of a number of global investment banks; i.e. 'If it happened to them, it could just as easily happen to us.' But what of increasing share prices? Based on a simple theory of economics, you would expect that the more expensive a company becomes to buy, the less interested acquiring parties would be. In the current climate, where cash is king and companies employ a multitude of measures to preserve their cash balances, this would presumably result in a dearth of takeovers. Indeed, the number of takeovers completed so far this year suggest this is the case. However, with share prices increasing for publicly quoted SMEs, investor confidence should be restored. Investor confidence is the main ingredient which the market requires in order to see an uptick in activity. Money is a lot harder to come by these days; whilst bank lending is returning to some sense of normalcy, we are far from the levels last seen in 2007. Unless SMEs have access to relatively cheap forms of capital – through equity or debt financing or by employing their own liquid assets – it is highly probable that takeover activity will, at best, remain muted. This will be the case regardless of the low valuations attributable to other SMEs quoted on AIM. Takeovers at the smaller end of the market are not a thing of the past but, for now, remain very much a goal for the future. Simon W. Holden is an associate at Faegre & Benson LLP, where he specialises in corporate law. Comments (0)
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