Forecast: study shows acquisition rates are on the increase but warns planning needed


The profitability of the top City and commercial law firms - already at a record level - could rise even further after research revealed that the boom in mergers and acquisitions (M&A) activity is set to continue into 2007 and beyond.



A study conducted by DLA Piper found that one-third of European corporates and almost 40% of private equity houses expect their acquisition rate to increase over the next two years.



Bob Bishop, head of European M&A at the UK/US law firm, said confidence remained high. 'We won't see a return to what we saw in 2000 and the dot-com bubble,' he said. 'Deals are being transacted more sensibly now. They are tangible businesses.'



Mr Bishop warned that certain economic factors could affect levels of M&A activity, including steeply rising interest rates that might make leveraged deals unsustainable, or a general malaise in the economy. 'Even so, there might be a dip here and a dip there but there still won't be a significant drop in activity,' he insisted.



Tony Williams, founder of law firm management consultancy Jomati and former managing partner of Clifford Chance, agreed that 2007 was likely to be another record year for M&A.



'But as always there are uncertainties,' he added, pointing to concerns over greater exchange rate volatility and whether the US economy will enjoy a soft landing.



Mr Williams added that strategic M&A based on market share, cost elimination and the like looked set to continue even if financially engineered M&A either reduced or became more conservative.



The DLA Piper research also showed that - as competition for deals has intensified - buyers have begun looking further afield for opportunities.



A quarter of corporate buyers see Eastern Europe and the Commonwealth of Independent States as a source of acquisition targets, while 20% prefer Asia, with China and India the most favoured destinations. Western Europe, however, remains high on the priority list.



As for individual sectors, the research found that financial and business services remained especially active, with around 40% of respondents in these industries predicting increased acquisition rates.



However, the research sounded a note of caution. Only one in five corporate buyers regarded their acquisition strategy over the last three years as 'highly successful' and 40% of acquisitions by private equity firms are taking longer than anticipated.



DLA Piper's Mr Bishop said: 'Their acquisition process needs to be tweaked and streamlined. A holistic approach is required, analysing the company they want to buy and planning its integration into their business.'



Jonathan Rayner