The wave of merger and acquisition activity at present in the UK market is to be welcomed by investors in the short-term, but poses a longer term challenge, according to Duncan Lamont, head of strategic research at Schroders.
He says: “In the near term, UK equity investors should welcome renewed M&A interest in UK-listed companies. It could help narrow the valuation discount which has dogged the market in recent years.
"Longer term the bigger losers from a drip, drip, drip of UK-listed companies to overseas buyers are not likely to be investors, but the UK economy at large, something that policymakers and politicians should not lose focus of.
“A third of the major companies on the UK stock market a decade ago have since vanished, with more than half going to overseas buyers.
"Almost all were bought by or merged with another company. This in itself is not unusual – our previous analysis of the US stock market came to a similar conclusion, albeit over a slightly different timescale.
"But what is striking for the UK is that it’s been overseas buyers who have been snapping them up - 54 per cent by number and almost 70 per cent by value have gone overseas, mostly to foreign public companies. These include famous companies such as SABMiller, Shire, Sky, and ARM Holdings.
"The biggest buyers by far have been US public companies, followed by Canadians. This is in stark contrast to the US where the biggest buyers have been other US public companies. US stock market investors have retained an interest in their ongoing prospects, only as part of another public company, just not on a stand-alone basis. Not so, for the UK.
"It is also different to what has happened in continental European markets. Only 30 per cent of French companies to delist, and 25 per cent of German ones, were bought by an overseas company (mostly other European ones).”
He adds: “A thriving UK stock market is important, not just for investors and companies, but also for the UK economy and society. From the companies it finances, to the people working in the markets directly, to the companies and services which support them, to the taxes the industry contributes, which pay for vital public services.
"While this covers much more than the stock market alone, it is an important piece of the jigsaw. And when the number of companies on the UK main market has fallen in 23 of the last 25 years, and stands at only 42 per cent of its level from 25 years ago, then this has the potential to be a worrying development. Companies being bought isn’t a bad thing as such."
Lamont adds "It can be a sign of a healthy and dynamic market and economy. But too few companies have sought to join the UK stock market, to replace the ones departing These takeovers may be cutting off potential future corporate success stories at the knees. When people ask, why there are not more world-beating companies being built in the UK and listed in London (don’t get me wrong they do exist, just fewer than we might want), one answer may be that they sell out too soon.”