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Strategy outweighs cheap debt as next year's deal driver says bullish European M&A industry

The UK will dominate European M&A activity in the coming year but Germany is the focus of greatest optimism, finds the M&A Monitor conducted for IntraLinks, provider of On-Demand Workspaces, by ICM Research.

The survey respondents were 427 M&A professionals focusing on Europe, including corporates, bankers, lawyers and advisors.

Among the key findings:

  • IntraLinks M&A Monitor finds 93% of 427 European M&A professionals optimistic about next 12 months
  • 'Strategic considerations' to top cash surpluses and cheap debt as M&A driver
  • Russia most important emerging market
  • US private equity houses expected to struggle in Europe.

In the second biannual IntraLinks' M&A Monitor optimism remains high with little change during 2006 - 93% of respondents compared with 94% in April. Those focusing on Germany are considerably more optimistic (97%) than the UK (87%), despite the UK having the lion share of Europe's M&A activity in recent years. While 45% of respondents from across Europe expected the UK to lead again next year, nearly one quarter of those in the UK expected deal activity to be lower in 2006 than in 2005. Germany's positive outlook has strengthened with an increase from 4% to 15% describing themselves as very optimistic about M&A and a third of participants expecting this country to lead deal activity, while France was only picked by 9%.

Energy is the sector expected to lead activity (28%), followed by financial services (16%), which is highly rated by the most senior level respondents. Among the emerging markets, Russia is by far the strongest, selected by 51%, followed by Poland (18%), Middle East (11%) and Czech Republic (9%). Interestingly, China (3%) and India (2%) barely registered in respondents' choices.

In terms of factors influencing M&A, 'strategic reasons' (74%) are given as the major influence overall, particularly among corporates (83%) but less so among banks (70%). Strategic reasons were also most likely to be identified as significant in France (78%) but not in the UK (64%).

Cash surpluses (63%) and cheap debt (58%) were the second and third most important factors. Cheap debt was seen as significant by bankers (67%) and in France (66%) but less so by lawyers (54%) and corporates (53%).

Despite the record funds raised by US private equity firms, the survey predicted they could be facing a tough year in Europe. In terms of deal type, most M&A is expected to be dominated by cross-border consolidation with both European private equity firms and Asian corporates more likely to win European assets ahead of US private equity firms.

The expectation that Asian buyers will snap up European assets is strong in Germany, appearing ahead of all other deal types other than cross-border consolidation. Despite some high profile transactions, the influence of Asian corporates buying European assets is least significant in the UK.

There is a strong sense among corporates that growth will not come from domestic markets, with 45% identifying this as the least significant type of deal in the next 12 months. The only country still expected overall to see any level of domestic M&A activity is France (12%). 

As with April's survey, the biggest potential deal breaker remains the bursting of the loan bubble. However, this is a much higher profile risk to the banking and legal community than other types of respondent.  'Private equity is driving almost a third of European M&A and is heavily dependent on loan financing. Credits are being stretched with increased leverage and all it will need is a handful of defaults in prominent LBOs to remove banks' risk appetite.' - UK investment banker.

Among corporates the topic of pension valuations is as important (22%) as the loan bubble bursting (23%): 'The 'European disease' - underfunded pension liabilities - will be a serious issue.' - French banker.

On the impact of hedge funds, banks have the strongest views - both positive and negative - with just 14% not declaring a view either way. Corporates are the most split with 41% citing the influence as positive, 34% no view and 25% negative. The UK is most likely to see their influence as positive (70%). Comments given on their impact include:

'New asset class filling certain gaps left by more traditional debt and equity providers. Impact therefore positive on getting deals done, albeit to the detriment of existing players.' - French advisor.

'Hedge funds tend to introduce a degree of volatility into already fragile M&A situations and can negatively influence the level of confidence required by bother sellers and buyers to enter into the risk and cost of potential transactions.' - UK advisor.

It is clear that there is strong trend towards the creation of internal M&A teams within corporates. Corporates themselves are most likely to recognise this (77%) against the average of 62%.

On bonuses, bankers and advisors are the most bullish with 79% and 77% respectively expecting a higher bonus than last year. Across all levels of the industry there are high expectations, with some 70% of senior M&A participants expecting a higher bonus and 8% bullish enough to be looking for a rise of 50% or over but the UK strikes a more cautious tone than the rest of Europe. 

Job creation is likely to be high with 75% expecting their firm to hire this year, particularly in the UK (81%) and Germany (86%). One third expects hiring at the most senior positions, up from 28% expecting senior hires in April.

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