City recovery just 'an illusion'

CITY deal-makers may feel busier than they were after the dotcom collapse in 2000 but it‘s little more than an illusion and recovery remains some way off.

Although the value of deals being completed is holding up, the total number of transactions shows a sharp downturn, according to a major analysis of merger and acquisition (M&A) activity by the KPMG/Dealogic.

Figures show that the value of completed transactions in the first half of this year have held up at $77bn (£44bn), compared with $80bn in the same period last year. However the total number of deals completed fell 25% from 1,343 in the first half of 2003 to 1,001 so far this year.

The UK figures mirror a similar trend elsewhere. Global M&A activity was level at $557bn in the first half this year but completed deal numbers dropped 10% to 8,073.

Stephen Barrett, international chairman of KPMG Corporate Finance, said the figures show that although City deal-makers may feel confident, the markets are still not back to where they were in 2000.

'At the start of the year a more stable economic landscape and a rebound in the equity markets held the promise of increased M&A activity, but this has yet to fully materialise. Whilst it is encouraging to see no further depreciation in the value of completed activity, the UK's sizeable drop in deal numbers is a telling sign that recovery is still a way off,' said Barrett.

Although the KPMG figures are taken from completed deals, a separate survey based on announced deals does suggest an improving worldwide picture – the value of deals announced has risen 54% from the first half of 2003.

But, again, the figures are not completely representative. The numbers have been heavily influenced by the inclusion of a few very big deals, including the tie-up between drugs giant Sanofi-Synthelabo and Aventis for US$74bn, the JP Morgan Chase and Bank One deal, worth $58bn, and the Cingular and AT&T get-together, which is valued at $41bn.

The number of global announced deals is down 5% from 10,346 in the first half last year to 9,856 this time.

KPMG's Barrett added: 'A number of blockbuster deals hit the Press in January pointing to a more buoyant 2004, but the pick-up did not filter down to the broader market and many of the larger deals have yet to close. The data shows a large backlog of pending transactions worldwide, the fate of which will have a sizeable impact on the final figures for the 2004 year-end.'

The UK pipeline looks much slimmer this half with only a 5% rise in the value of announced deals and an 18% drop in announced bid numbers to 1,117 compared to the first half of 2003. Of these, 177 deals valued at US$37bn are still awaiting completion.

The largest pending UK transaction is currently Royal Bank of Scotland's bid for Charter One Financial in the US for US$10bn which was announced in May.

KPMG said that the prospect of inflation on the back of rising oil prices and other macroeconomic factors could derail potential growth in the M&A market.

Barrett added: 'M&A activity will now be further hampered by an increase in the cost of capital following a turn in the US interest rate cycle. In addition, large exchange rate moves have caused difficulties in assessing the true value of transactions. This all adds layers of uncertainty to a fragile market.'