Financials sector to drive M&A in 2014

Analysing M&A statistics both regionally and cross-sector, the financials sector currently leads in both TTV (total transaction value) and deal volume – in terms of the former, financials make up more than a quarter (25.2 per cent) of total M&A activity.

Combined with consumer discretionary and industrials, these sectors represent approximately 50 per cent of total deal value.

But while the research suggests financials could be the standout sector going forward, historical data shows utilities led pre-crisis growth. M&A activity in the utilities sector grew from 383 deals in 2004 to 977 deals during 2007, a quarter-on-quarter growth rate of 345 per cent. Moving into the post-crisis era, it appears that utilities continues to grow, but at a much slower pace than its financials counterpart.

All sectors experienced solid growth pre-crisis. However, telecommunication services experienced the most significant contraction as the number of deals plummeted from a pre-crisis peak of 196 deals to a low of only 87 deals during the second quarter of 2009. As this is a low volume sector, it has struggled to recover as appetite and funding for mega deals evaporated, as noted from the period of inactivity in mega deals between December 4 2008 and December 3 2009.

In terms of asset value, the data shows that telecommunication services leads the way, with significantly higher transaction values than all other sectors – the average transaction value is €696m (£582.3m) pre-crisis and €800m post-crisis, representing a minimum €200m premium over all other sectors.

The gap appears to widen significantly post-crisis. Utilities is the next highest value sector, during both periods, followed by energy.

The range in valuation between utilities and energy narrows markedly during the post-crisis period from ¤184m to ¤30m.

Compared with pre-crisis activity post 2008, the relative attractiveness of consumer staples and healthcare appears to have shifted these sectors above financials and materials. However, with the exception of mega deals completed within telecommunication services, all sectors have experienced a 25 per cent decrease in average total transaction value.

North America and Western Europe dominate M&A activity globally for the period of 2004-13, while Brazil, Russia, India & China (Brics) in total represent 11 per cent and 9 per cent of total deal volume and total transaction value, respectively.

Europe represents 33 per cent of global deal volume in aggregate, outpacing the US. The UK, France and Germany account for more than 50 per cent of European deals and 15 per cent of global TTV.

The long-term global picture indicates a mixed view given that 2011 data suggests deal growth above the previous market peak, while 2012 data is showing a small decline on 2011.

As it is, China is showing growth 2.5 times greater than its peers while the short term view highlights an interesting group of countries with two emerging market economies – Brazil and China – coming to the fore.

Vickesh Mistry is senior modelling specialist at S&P Capital IQ

Mergers and acquisitions: expert view

Adrian Lowcock, senior investment manager, Hargreaves Lansdown:

“M&A activity has been subdued since the financial crisis. However, there are signs this is changing. Fund managers we have spoken to are seeing a change in sentiment among businesses as confidence returns and M&A activity is set for a strong 2014.

“The potential to benefit from an extra return on your investment will appeal to investors and a return of M&A activity is good news. However, trying to pick the next takeover target is not easy and this is where a fund manager can help.

“Certain managers are more likely to benefit than others. Those who invest in turnaround situations and managers who invest in undervalued businesses are most likely to benefit from an increase in takeovers.”

Lowcock’s fund picks

This is a theme investors can access as there are several funds and investment strategies that benefit from M&A activity, says Mr Lowcock.

M&G Recovery –Tom Dobell

M&A activity has historically been beneficial for the fund. Given the focus on undervalued recovery companies the fund is well positioned to benefit from an increase in M&A activity.

However, investors should only consider this fund for the medium to longer term because the manager is typically investing in companies for roughly five to seven years.

Old Mutual UK Alpha - Richard Buxton

This fund has been a beneficiary of M&A in the past 10 years, with an average of 8 per cent of the portfolio being subject to a takeover or merger, according to research by Hargreaves Lansdown.

Ashton Bradbury, head of equities at Old Mutual, believes that there will be more shareholder-friendly action in the next 12 months, be it good dividend growth, special dividends or M&A.