Print
	Email
	Text size
	Comment

A spate of large deals, including the proposed merger of British Airways and Iberia, bodes well for the M&A market, says Craig Harrison, a principal at law firm Matthew Arnold & Baldwin

British Airways looks set to merge with Spanish airline Iberia in late 2010, ending more than a year of talks. This merger is the latest in a number of recent high-profile transactions such as Walt Disney's agreement to buy Marvel Entertainment for $4 billion (£2.4 billion) and Xerox's acquisition of Affiliated Computer Services for $6.4 billion; then there is Kraft Foods £10.2 billion hostile bid for Cadbury. All of this activity raises the question: will we be seeing more large corporate mergers as we come out of the recession?

The recent activity would seem to signal increasing confidence among executives, which may indicate a thaw in the market. Neverthelss, during such times buyers, hunting for a bargain, will be cautious about overpaying while sellers, looking for reasonable prices, will be wary of short-changing themselves.

If the economy is improving, potential buyers may be concerned that targets will become more expensive if they delay. What is clear is that we are not presently seeing the return of the private equity firms that fuelled much of the merger mania prior to the credit crunch. The large deals announced recently are strategic, in that they involve one company buying another to make it an integral part of its business.

In contrast, many of the pre-credit crunch takeovers involved the buyer taking on mountains of new debt to pay for the acquisition, which left many companies struggling to make interest payments. The lack of access to loans following the seizure of the credit markets makes the early return of these transactions difficult to envisage.

So what about the BA/Iberia merger? The recession has eroded travel demand and punished airlines to the extent that the global airline industry is set to post total losses in 2009 exceeding $11 billion. Mergers present the only option available to airlines to execute signifcant rationalisation to combat over capacity and governments (who have strict control or influence over airlines) are realising that, in the long term, access to foreign capital and a more rational use of airline assets through international alliances and mergers, is the way forward.

It is clear that, for some sectors at least, confidence is returning and big-ticket, strategic (but not private equity-backed) mergers and acquisitions are back on the agenda. In other sectors (most notably the airline industry), the final repercussions of the recent disruptions in the world economy have yet to be felt and in those sectors we might be seeing some more mergers of necessity to effect rationalisation. In both cases, increased M&A activity seems inevitable.

Craig Harrison is a principal at Matthew Arnold & Baldwin LLP

Comments [1] 

Users comment

Comment by Dan Johnson at 3:49pm, 01 Dec 2009

Laugable - Presumably Matthew Arnold & Baldwin have soem knowledge of the deal(s) referredto from the major UK financial centre that is Watford?