Is M&A back? It certainly looks that way, if the past few days are anything to go by.
Warren Buffett, with his 3G partners, has just spent some serious beans on HeinzPhoto: PA
By Telegraph staff
9:28PM GMT 14 Feb 2013
Warren Buffett, with his 3G partners, has just spent some serious beans on Heinz – $28bn ($18bn)-worth to be exact. And the Sage of Omaha’s in good company.
This month has already seen John Malone’s Liberty Global agree a $15.7bn cash and shares deal for Virgin Media and Michael Dell put $24.4bn on the table to take private the computer company he founded.
That’s close to $70bn in three quick deals. At this rate, we’re in for the biggest M&A bonanza ever, driven by a worldwide glut of cheap debt as governments everywhere keep interest rates nailed to the floor.
Add in those glimmers of improved confidence – with the eurozone proving less troublesome, America drawing back from the fiscal cliff and China avoiding a hard-landing – and the ingredients are there for some M&A action, as the rip-roaring stock markets this year have already anticipated.
But there’s also a danger of getting carried away. Each of the trio of mega-deals share two characteristics: a big personality and dollar signs.
None is a conventional corporate deal, where a management team with no great stake in a company has to persuade a disparate group of institutional shareholders to back their planned acquisition.
And the big bucks being spent are American – though that could just be further proof that US economic recovery is a fair bit ahead of anything on this side of the Atlantic.
Indeed, given that leverage on some deals is now approaching six or seven times earnings before interest, tax, depreciation and amortisation, some big tests are yet to come. That’s close to the level at which deals were getting done before the 2008 financial crisis – enough to test the nerve of most chief executives and their shareholders.
There’s an argument, of course, that with interest rates so low nowadays the debt ratios aren’t as bad as they look. That’s plausible enough – until rates start to rise. There’s also something in the fact that major corporates on both sides of the pond have warchests of cash sitting idle – increasingly they will come under pressure either to hand the cash straight to their shareholders or to get spending. Apple, for one, is already feeling the pressure.
Buffett may just have demonstrated that Beanz Meanz Heinz. But to claim that his deal also means an M&A boom looks a theory less than fully baked.
Cameron will be taking the right people this time
The last time David Cameron embarked on a trade mission to India, a little more than two years ago, it generated plenty of headlines, but relatively little business.
Next week’s trip, which is being described as one of Britain’s largest ever trade delegations, could be different. But it will have nothing to do with the number of delegates. What could decisive this time is that the Prime Minister appears to be taking the right people.
Rather than surrounding himself with 100 captains of industry, delegates will be split equally between large firms and the bosses of Britain’s smaller companies.
Just as it is nimble, fast-growing businesses that deliver most of the job creation at home, these are also the firms that have the potential finally to kick-start the long-promised “export-led recovery”.
To date, these companies have been curiously reticent about dipping their toes into overseas markets – and when they do, they typically opt for the crisis-hit eurozone rather than far-flung but fast-growing markets.
Bringing a bigger group of these firms, along with some of the big boys, to meet potential trading partners suggests the Government has acknowledged that it needs to do more to help entrepreneurs take their first tentative steps abroad.
After all, the point of these trips is to boost Britain’s flagging trade performance – and there’s plenty of work to do on that front. The UK has run consistent trade deficits since 1998. Record highs were recorded last year.
Although there have been modest improvements in the export figures in recent months, the Government’s aim of doubling UK exports to £1 trillion by 2020 is beginning to look like mission impossible.
In the past 13 years, the UK’s share of global exports has fallen from 5.3pc to 4.1pc. By comparison, China’s has rocketed from 3.5pc to 9.2pc; Germany has increased its share; Sweden’s share has declined only marginally.
India is a case in point.
Emerging markets remain the key target, which makes perfect sense, given the way the trade winds are blowing. Foreign Secretary William Hague has made it his mission to re-focus the role of embassies in these countries, making them more responsive to the needs of British firms.
UK Trade & Investment, the Government’s export agency, does some fine work for smaller businesses but far too few even know that it exists, let alone what it could do for them. Lord Green, the trade minister, has admitted as much and promises steps are being taken to tackle the “awareness problem”.
In India, there are some inspiring examples of British enterprise. A consortium of 32 further education colleges is negotiating joint ventures to help India plug its skills gap, providing vocational trading for plumbers and engineers. A4E has won contracts to train labourers for skilled jobs in healthcare.
Businesses will also need crucial support when they secure that all-important first deal – not least when it comes to getting paid. Small businesses are already suffering from big customers extending payment terms in Britain – throw a few thousand miles in the mix and the going could get even tougher. They will need sound advice and practical support in areas such as accessing credit guarantees.
A handful of giant orders by huge firms next week won’t move the dial but proving that an army of small businesses has a genuine chance of securing tens of thousands of smaller ones certainly could.