Merger mystery: Where have all the deals gone?

“It can feel like you’re Roman Abramovich,” says Ian Gunter, the business development director of Bouygues UK. Apparently, two companies ask him to buy them every week.

The Waterloo-based contractor is famously acquisition-hungry and its French parent has a turnover of £30bn, so the comparison with the Russian oligarch is obvious. But Gunter dismisses the idea of buying firms just because they seem to be on offer at bargain-basement prices – especially when their price may well have further to fall. The latest data from business researcher Corpfin (right) shows he is not alone.

As the graph shows, the mergers and acquisitions (M+A) market fell off a cliff in the second quarter of 2007 and there are no signs of recovery. In 2007, 407 construction deals worth £21.3bn were completed. In 2008, 309 deals worth £3.2bn were done – an 85% drop in value.

Even the most cash-rich bargain hunters remained deep in the woodwork as the downturn became a recession last month.

In January, 13 deals worth £53.2m were completed. If the same rate persists, the industry will only complete 156 deals worth £638m in 2009 – a 97% drop since 2007.

A more cautious approach

When Bouygues’ French rival Vinci bought Taylor Woodrow for £74m in September 2008, it bucked the trend, but John Stanion, Vinci’s chief executive, says this was part of a cautious strategy.

Your track record and historical numbers don’t mean anything

Michael Thirkettle, McBains Cooper

“We’ve always had deep pockets, but that has never been a motivation to acquire other businesses,” he says. “We’ve acted only when opportunities to advance our strategy have presented themselves at sensible prices. This will continue to be our policy.”

The issue of “sensible prices” is a big one at the moment. A senior figure in the M+A sector explains: “Believe it or not, valuations have not come down over the past year. Obviously, vendors want to get a good price, but buyers are waiting for reality to kick in.”

Michael Thirkettle, chief executive of £10m-turnover consultant McBains Cooper, is one of the latter. His company is looking to buy and reportedly looked at PCM, Pettifer Group’s project management business, last month.

He says: “The world has changed. Your track record and historical numbers don’t mean anything and some people are struggling to get their heads around that. Talking about your pipeline is irrelevant; you can only look at what’s committed in the order book.”

Many bosses point to the fact they need to get their own houses in order before buying others. Stanion says he doesn’t expect many purchases this year, owing to a “need for companies to be vigilant to changing market conditions and focus on control of costs and working capital”.

But some believe a crunch point will arrive this summer when businesses in distress cannot hold out any longer. As the boss of one £400m-turnover operation looking to buy says: “You could well see deals start happening in the second half of the year and that will start a domino effect.”

Another source says: “You need people who want to buy and people who want to sell. Those two things are gradually moving into alignment.”