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Gresham predicts M&A upturn

Managers of the UK’s middle market companies are more likely be involved in merger and acquisition transactions this year than in 2001, according to the Gresham Monitor, a survey commissioned by private equity house, the Gresham Trust.

The survey of 100 directors of middle market companies was aimed at assessing the level of transaction activity in the sector. Half of the companies surveyed expect to undertake a transaction in 2002, a third expect to raise external finance and more than a quarter anticipate making an acquisition. Two-thirds of private companies, compared to one third of public companies, are likely to undertake a transaction.

Gresham believes the slowdown in the number and value of mid-market private equity deals, caused by unrealistic vendor price expectations, has created a pent-up demand for financing. Large technology deals have also diverted attention away the traditional core of the PE market, namely businesses in less fashionable sectors with ambitious management teams.

Gresham states that with more realistic prices there is scope for substantial private equity growth. Paul Thomas, finance director of the Gresham Trust, says: “Vendor price expectations are always slow to fall, the owners of businesses tend to cling on to the perceived value. It takes a while to flow through to a more realistic view, which is necessary for any upturn in the market.”

The study also revealed that the government initiative to reduce or exempt capital gains tax on business asset disposals is starting to have an effect, as 28% of the companies asked feel the changes will influence their decision to do a deal this year.

The economic picture still appears bleak as a quarter of the companies reported a fall in turnover and 28% are planning job cuts in the next 12 months. Levels of optimism about business prospects remain the same as in June 2001, ending a 12-month period of increased pessimism.

Manufacturing firms, 27% of which expect lower turnover, are more likely to do a deal this year than service companies, fewer of which expect a drop in turnover. Although 40% of manufacturers are building their plans based on economic growth they are generally more pessimistic about growth prospects for their businesses than service companies.