Well, what a topsy-turvy start we’ve seen to 2013! Hot off the back of the high profile failures of HMV, Blockbuster and Jessops, along with large IT services provider 2e2, we have news of two of the biggest deals since the financial crisis began: the $24.4bn takeover of Dell by its founder in partnership with Silver Lake, and Liberty Global’s imminent $23.3bn takeover of Virgin Media. And now we hear further rumours of European private equity houses seeking funding for a £10bn takeover of Everything Everywhere, the UK’s largest mobile phone operator.
So what’s going on?
M&A activity is driven by confidence – no surprises there. But looking back over the last few years, we’ve seen a significant lack of it. Businesses have been quite content to build their cash reserves while they wait to see which way the global economy is going. Similarly, an unwillingness to lend by the banks has restricted private equity’s ability to fund leveraged transactions.
I get the sense now that businesses and their leaders are simply fed up with being fed up. It’s been almost 4.5 years (over 1,600 days) since Lehman Brothers collapsed and yet here we are, still trundling along with the GDP 3.5% below its peak in 2007. Somebody’s got to do something.
This is where confidence comes into play.
Businesses can sense that we might be reaching a turning point. The Eurozone has been quiet for a while (well, for six months or so). Italian, Spanish and Greek long term government bond yields are at (relatively) low levels. The FTSE 100, often seen as a forward looking indicator of where the UK economy is going, had its best January since the 1980s, climbing over 6%. So I think businesses can justifiably begin to feel a little more optimistic that the end might be in sight, and as a result are beginning to make the investment needed to drive us out of the rut we’ve been stuck in.
And, whether they like it or not, now is the time for private equity to “walk the talk”. Funds they raised at the height of the 2007 boom are over halfway through their 10 year life spans. If they want to make a return on uncommitted capital, they need to invest quickly to allow sufficient time to nurture portfolio companies towards an exit in 3-4 years. So they must be bold and ambitious. Despite Dell’s struggling performance over the past few years, and while some may believe its best days are behind it, Silver Lake and Michael Dell are certainly confident they can make a return.
We’ve got it too.
Here at Livingstone, we too are seeing this return of confidence first hand, in our clients’ businesses, in investor interest in deploying capital, and in corporates engaging more enthusiastically with new acquisition opportunities. Looking forward, 2013 is shaping up to be a more active year for M&A than we have seen for quite a while.