RJH writes...

Increased merger and acquisition (M&A) activity is cited by several equity research desks in the City of London as a catalyst for positive investment returns on the London financial markets in 2006.

Indeed, in 2005 so far the purchases of O2 by Telefonica for £17.7bn and Allied Domecq by Pernod Ricard for £8bn have probably helped propel the markets. Premiums paid on such deals in addition to the reinvestment by fund managers of proceeds received are doing their part in a solid year for gains.

At the aggregate level, foreign purchases in 2005 year-to-date have been enough to make the UK a net seller of its companies to overseas investors. 2004 was also a net sale year for the UK with M&A dominated by the purchases of Abbey National by Santader Central Hispano for $15.8bn and Amersham by General Electric for $9.6bn. At end 2004, 33% of all shares listed on the London Stock Exchange were held by overseas investors. That is about the same as the combined percentage controlled by UK insurance companies and pension funds.

Long live the open economy but, without overstating the argument, as companies like these pass into foreign ownership and out of domestic bourse listing the UK investment prairie shrinks; companies smaller than those acquired become included in the main indicies such as the FTSE100; investment focus is forced upon less than large caps; management of investment risk becomes more important; and strategic/political worries about ceding control of domestic companies to foreign interests become sharper.

And at the extreme end of the argument there is the impact on the financial account of the balance of payments to consider - essentially, asset sales to help fund a persistent current account deficit. Temporary comfort but longer term difficulty.

So what has been the longer term trend of M&A in the UK?

Exhibit 1: UK abroad vs Foreign into the UK M&A, 1987-2005 ytd

It turns out that the UK is a net asset acquirer since 1987. The eleven years to 1997 saw cumulative net purchases by the UK of £20.6bn; and the next three years were dominated by a handful of monstrous deals which saw the UK become the new owner of £148.1bn of net foreign assets, most notably:

Amoco, bought by BP for $48.2bn

Airtouch, bought by Vodafone for $60.3bn
Astra, bought by Zeneca for $34.6bn

Mannesmann, bought by Vodafone-Airtouch for $202.8bn
Arco, bought by BP Arco for $27.2bn
Bestfoods, bought by Unilever for $25.1bn
Credit Commercial de France, bought by HSBC for $11.1bn

But since 2000 the UK has lost net assets of £14bn to foreign interests and, compared to the pre-1998 period, that is a sharp deterioration. It is in that context that the predictions of bonus-minded investment bankers sit: 2006 will be a bumper M&A year - deals as large as £50bn will reappear and, it is claimed, never has there been such a good time to sell. Find a credulous buyer and let the good times roll.

It will be fascinating to see how this potential cookie crumbles for the UK's net M&A position. Equally, the composition of such deals (what mix of debt, cash and equity) in what may well be a deteriorating macro-economic picture 12 months down the road may be entertaining - can you say "3G auction"?

Sources: UK's Office for National Statistics; UNCTAD World Investment Report (various years)

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  1. Andre // 12/20/2007 04:24:00 PM

    Incidentally, I think you'll find that the name of Keynes' book has no commas in it.

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