Merger mania takes deal-making back to the levels of dot.com boom

Along with a peppering of smaller deals also announced yesterday the value of mergers and acquisitions (M&A) announced in the UK this year has risen to more than ?90bn. The acquisition of Exel is the latest large deal in a takeover boom sweeping not just the City of London, but every major financial centre in the world.

Driven by a search for new revenues, companies are plundering cross-border opportunities buoyed by their strong cash flows and profits. Global buying and selling of companies are at levels not seen since the internet-fuelled craziness of 2000, which peaked with the eye-popping $186bn (?103bn) that Time Warner paid for America Online.

Having paid back large amounts of debt after the boom turned to bust, companies now have low levels of borrowing but access to lots of cheap debt to gear up their balance sheets and snap up companies with relatively low equity valuations.

But far from being near a peak, today's M&A boom is expected to continue for several years. As might be expected, bonus-hungry bankers and analysts believe it is all going to be different this time around, with no repetition of the previous sins of the technology, media and telecoms boom.

Yet there is evidence that chairmen and their chief executives are leaving their egos at home when spending shareholders' money, and doing more to increase shareholder value through their wheeler dealing.

James Neissa, at UBS, said: "Mergers and acquisitions as a long-term strategy for building businesses is beginning to be accepted again. In the US, hostile bids have become more viable in part due to corporate accounts having improved. Investors are also keeping a check on management excesses by demanding capital be used efficiently, including returning it to shareholders rather than on deals which are not in line with the company's strategy."

Bankers such as Mr Neissa are trying to keep a lid on the new-found euphoria, playing down talk of a boom, but the statistics speak for themselves. According to figures provided for The Independent by Dealogic, the period from 1 January through to 19 September saw 19,675 deals globally - more than in any corresponding period over the past six years, barring 2000 when in the same eight and a half months 23,357 deals were recorded. In terms of value, this year has seen $1,950bn of transactions, nearly matching 1999's $2,098bn and not far off the $2,595bn spent in 2000, when global M&A peaked for the year at $3,319bn.

In the UK, this year's 1,761 deals almost exactly matches 1999's total for the same period and, in terms of value, the period up to 19 September has created $163.5bn of deals compared with $201.7bn in 1999 and $403.7bn in the corresponding period in 2000.

Robert Swannell, the Citigroup banker who defended Marks & Spencer from Philip Green's putative bid last year, said: "People are still relatively cautious as they ought to be of large moves. Shareholders want a very convincing case. Shareholders will make their views known, even in countries where that hasn't always been the case previously. Hedge funds, which are described by some in pejorative terms, can help that as well.

"I think you have to think about the technology boom period as an aberration when people thought risks were minimal, now they remember what the risks are. That's not to say perfectly sensible moves are not happening but management is being tested by shareholders."

According to a study by Philip Isherwood, an analyst at Dresdner Kleinwort Wasserstein, prices being paid for companies are fairly reasonable. The average price-earnings ratio implied by takeover values for large companies in 2000 was 39 times, so far this year it is 31 times, still comfortably below the 10-year average of 35 times. For mid-sized companies, the 2000 price-earnings ratio on deals was 36 times compared with 25 times so far this year, although small companies seem to be selling for a similar average multiple this year, 26, as they did in 2000.

Another crucial relationship is between M&A activity and the strength of stock markets, with one feeding the other. At the moment, companies are not using their own highly rated paper to buy other companies at vastly inflated prices. In the UK, cash has accounted for 90 per cent of M&A activity so far this year, according to the equity-strategy team at Citigroup.

"This is the highest proportion of cash used in deal activity for over a decade. This is a positive sign that companies remain conservative with regards to M&A and suggests that this theme could run for some time," Citigroup said.

Yet there is a close correlation between deals and stock-market levels as management confidence tends to be buoyed by share prices. The outlook for equities remains generally positive, at least for the next 18 months.

Another important element of the M&A boom has been cross-border activity: when deals go international they tend to go big. Since the beginning of 2004, for instance, five FTSE 100 companies - Abbey National, Allied Domecq, Amersham, Exel and Safeway - have been taken over, four of them by overseas buyers.

The open stock markets of the UK and US have encouraged buyers from countries such as France, whose own markets do not necessarily reciprocate such a high level of openness. Such imbalances seem unlikely to deter the M&A boom from gaining strength as companies seek to exploit their finances in the search for expansion. "Everyone has worked hard to take costs out of their businesses ... but many still have top-line issues. If you look at the sectors where there have been deals, they tend to be sectors where growth is key to investors," Mr Neissa, of UBS, said.