Corporates trump private equity in European M&A

Gail Mwamba
29 June 2010

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Private equity buyers continue to lag behind corporate buyers in the size of mergers and acquisition (M&A) deals executed in Europe, as cash-rich corporate players flex their muscles to offer both capital and synergies in the space.

The first half of this year has seen a significant pick up in M&A activity, with deal making in Europe estimated to have reached about $230bn in the first half of 2010. A significant number of these deals have been executed by corporates making acquisitions, which includes the purchase of Cognis by BASF for an estimated enterprise value of €3.1bn. According to Edward Boyce, Nomura's London-based managing director of investment banking, the top 20 largest deals seen in Europe, Middle East and Africa (EMEA) this year have been executed by corporates.

"The top deals we have seen this year, in EMEA in terms of size, have been corporates buying corporates," says Boyce. "They are situations where a trade buyer is a better solution, and a private equity investor cannot compete because it is not able to provide the same synergies."

According to Boyce, corporate players are able to sometimes win over vendors because they generally offer a longer holding period, while private equity investors tend to seek to exit within three to five years. Corporates are also able to reign in situations where the target company will require constant streams of cash to survive, which may be a disadvantage for private equity players who are generally geared to finance acquisitions. In recent times, corporates have increasingly been able to provide this kind of support, as many are sitting on large pots of money, some of which has been gained through retained earnings.

"Securing funding is not an issue for us, as we have cash flows that have been generated organically," says Swag Mukerji, chief financial officer at SafetyKleen, a London-based washing machine producer. "Fortunately, we have been recession resilient."

However, the reign in large deal execution seems to be mainly in corporate-to-corporate deal making, with corporates struggling to buy significant assets from private equity players.

According to unquote" data, although exiting via trade sales constituted about 44% of deal volume in the first half of 2010, this only amounted to 17% of total value. This is compared to secondary buyouts, where 28% of volume equated to 44% in deal value. It remains to be seen if corporates will extend their reign to this space as well.