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Levels of UK cross border M&A expected to increase15/11/2006. Source: Grant Thornton Corporate Finance.
 Despite a drop of 42 per cent in the number of foreign companies buying UK businesses in the first three months of 2006, the amount of money being invested on UK acquisitions reached its highest ever level, according to statistics published by the UK Office of National Statistics and analysed by Grant Thornton Corporate Finance.
Following a record year for cross border M&A in 2005, Grant Thornton predicts sustained activity levels by foreign companies on UK targets for the rest of 2006.
Acquisitions in the UK by foreign companies
Expenditure on acquisitions in the UK by foreign companies increased by 25% (from £15.5 billion - £19.4 billion) between the final quarter of 2005 and the first quarter of 2006. Although this record figure of £19 billion is largely skewed by Telefonica SA's £17 billion acquisition of O2 plc, it comes off the back of a bumper year for cross border M&A, which saw £50.3 billion invested in UK companies by overseas businesses during the whole of last year. This is the highest amount that has been invested since 2000.
David Brooks, head of M&A at Grant Thornton Corporate Finance commented: "The first quarter may look quiet if we take Telefonica's acquisition of O2 out of the picture. However, it is not uncommon to have a first quarter pause for breath following high year end deal completions. In our opinion, the cross border M&A market is still buzzing, leading to expectations that the rest of 2006 will quickly pick up where 2005 left off."
Against a backdrop of sustained but static levels of activity by US acquirers, businesses from developed countries and EU member states have been on an acquisition trail in the UK. Between 2004 and 2005 the number of EU-based companies buying British companies increased by 75% (from 51 in 04 - 89 in 05) whilst the value of such deals rocketed by 77% (from £14 billion in 04 - 24 billion in 05). Likewise, the number of acquirers from developed countries (outside the US) such as Canada, increased by 66%.
Acquisitions abroad by UK companies
Looking at UK corporates' propensity to buy overseas assets, the value of UK acquisitions abroad plummeted by 51% between the final quarter of 2005 and the first quarter of 2006 (from £13.8 billion - £6.8 billion). Likewise, the volume of acquisitions abroad by UK companies decreased by 19% during the same timeframe (from 91 - 74). Despite this drop (in both volume and value terms) during the last three months, 2005 proved a strong year for acquisitions abroad by UK companies and the first quarter's statistics should be judged in a wider context and not a stand alone figure.
Acquisitions in the UK by UK companies
The overall picture of domestic M&A is of a largely resilient market. The volume of UK acquisitions by UK companies remained static between the final quarter of 2005 and the first quarter of 2006 (177 deals in Q4 05 - 178 deals in Q1 06), but there was a marginal increase of 13% in the value of such deals (£5.3 billion in Q4 05 - £6 billion during Q1 06).
Brooks continued: "UK M&A has proved itself to be resilient during the first quarter of the year, as a liquid debt market and strong levels of corporate profitability nurture an upbeat M&A market. Private equity continues to sustain upbeat levels of domestic corporate finance activity However, following some well publicised failed bids, private equity investors will increasingly be looking to join forces with trade buyers and other investors to bolster their chances of securing a winning bid."
Looking ahead, Brooks anticipates a revival in UK businesses buying assets in Europe and key growth markets.
"I expect that we will see an increasing number of UK businesses buying foreign assets in the near future to shore up their defences against potential US bidders. Expansion abroad will also ensure that UK companies are in a stronger position to attack the growth markets of China and India," he concluded.
Grant Thornton is a corporate finance firm dedicated to serving the needs of middle-market companies. For more information please visit www.grant-thornton.co.uk
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