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Europe mergers and acquisitions outlook

Will the second half of 2017 be good for corporate activity? 

Goldman Sachs
Source: Bloomberg

The first half of the year was a good one for stock markets generally, but also for mergers and acquisitions (M&A) in Europe too. Investment bank Goldman Sachs has noted that 2016 had been a lacklustre year for corporate activity, but that could be about to change.

The bank has said that, in euro terms, M&A involving European firms is up 50% so far this year, and now makes up about 26% of global M&A activity, up from 17% a year ago. A rising stock market, with the EU Stocks 50 up around 6% this year, tends to be positively correlated with M&A activity, since rising stock prices are both an indicator of confidence and mean that acquirers will be able to offer more attractive terms in combined stock-cash deals.

Further helping the situation is a fall in borrowing costs for European firms, which have seen the cost of debt return to its declining trend, after a spike into the end of 2016. As a result, boards will feel more able to finance acquisitions through borrowing.

It is particularly interesting to note that the UK is heavily represented among the firms highlighted by Goldman, with companies listed on the FTSE making up around a third of those identified as potential targets. Sterling’s weakness has certainly played a part, making these firms more attractive on a relative basis to buyers from the US and Europe.      

Among the notable names highlighted from the UK, members of the FTSE 100 include Imperial Brands, Diageo and Unilever, while FTSE 250 members include Tullow Oil, Rotork and IMI.

Imperial Brands

Imperial’s share price has been in steep retreat since April, having hit its 2016 downtrend in the middle of that month. Some support is being found at £34.22, but a bigger drop will take the price to the December 2016 low at £33.27. The current descending trendline from the April high will need a break above £35.54 to suggest a turnaround is in play.

Imperial Brands chart

IMI

IMI shares hit their highest level since early 2015 in April, reaching £13.16, but since then, they have fallen back. However, a move higher from close to the recent support level of £11.79 could see a recovery towards £12.97/£13.16. A drop below £11.55 would signal that the consolidation is resolving to the downside, with further losses in the direction of the 2016 rising trend. 

IMI chart

Rotork

Having fallen back from the January high at 269p, it looks like bullish sentiment is coming into play, with a bounce off the rising trendline from the February 2016 lows. Now we look to see if the price can break the 2017 downtrend that could come into play around 250p. 

Rotork chart

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