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M&A, he’s making eyes at me

Is merger and acquisition activity making a real comeback? We have seen some meaty deals recently – and not generated by distressed sellers either.

Kraft’s sally at Cadbury shows that company managers believe that something approaching normality has returned and that opportunities need to be sought out. It happens that that particular bid appears to make good commercial logic. It is probably only the price that can be argued against.

There is, though, an aspect of an increase in takeover activity that needs to be borne in mind. As one report remarked recently, there is an elephant in the room when it comes to mergers and acquisitions.

The elephant is the pension deficit. Quite how this might impinge on a willingness to mount a bid for a rival is far from clear and will vary but it is well not to lose sight of the fact that many schemes are underfunded.

In the past, bids have foundered because of the acquisitor discovering that the resources needed to properly fund the company pension scheme would add significantly to the cost of the transaction. But there are some areas where concern is perhaps being overstated. Accounting standards and pensions regulation are now more embracing than used to be the case but there is a limit to the powers, both of the regulator and of the trustees of a pension scheme.

For example, the regulator cannot block a deal. The Competition Commission has that power but all the regulator can do is to highlight any areas of concern.

Similarly, pension scheme trustees have no power to order a company to act in a particular way. True, they can demand money for the scheme under certain circumstances, but they are not in a position to block a deal from going ahead.

The rise in the stockmarket has taken some pressure off company final-salary schemes – and the fact that these are less common than used to be the case also means that pension deficits are less likely to be a barrier to a bid than once might have been the case.

However, we know from recent reports that many companies are not yet out of the woods when it comes to funding their pensions. It would be disappointing if a nascent bull market, cheered on by mounting activity in the M&A field, suddenly came to a dead halt because of pension concerns.

But I have no wish to look for reasons to be cautious. The rise in the market since the dark days of March means shares are now discounting a sustained economic recovery. Corporate profits have held up better than many feared but even though emerging markets are building their consumerism, we still need the developed world to start to spend again.

We will be getting evidence soon on whether the green shoots are sustainable. Much of the rise in shares so far is because companies appear to have come through the recession in better shape than many feared. A second downward leg to economic activity may find companies less well placed to cope. Pension deficits may again be in the news and M&A deals could become harder to complete.

It may not happen, but investors who base their optimism on takeover activity are running big risks.

Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership

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