Tasty deals await hungry players

Conditions favour mergers and acquisitions as European equities hold bargains for strong firms, which - despite fears of a double dip - should be less inhibited about spending cash reserves.

ADRIAN BIGNELL manages the Invesco Perpetual European Opportunities fund

The backdrop for M&A looks positive. Valuations of target companies look attractive and firms have the firepower to do deals. Cash-financing deals is also likely to significantly enhance a company’s profits. The interest generated on cash is negligible, making its redeployment into another company’s growth story and cost savings likely to be a profitable endeavour.

While the conditions for M&A are favourable, the clouded macroeconomic outlook has seen deal activity remain subdued. Economic data remains mixed, and there are widespread concerns that the only thing keeping the western developed markets afloat is government-sponsored stimulus. The rebuilding of confidence required to bring boardrooms to rubber-stamp large spending projects will be a function of stabilising macroeconomic news, and global reassurance that a double-dip recession is an unlikely outcome. A few high-profile deals would send a signal that valuations are cheap and that the outlook has improved sufficiently for companies to start redeploying their increasing cash piles. Everything is in place except the appetite.