Cadbury deal is first in an M&A boom for 2010

Kathleen Brooks
KRAFT’S takeover of Cadbury will not change our love of Dairy Milks and Creme Eggs, but it will take time before we start thinking of Cadbury as an American, rather than a British, institution. Before the year is out, though, we might have to get used to other much-loved businesses going the same way.

Market-watchers will be aware that the Cadbury deal is not the first big M&A deal of the year. Early in January, Dutch brewer Heineken snapped up Femsa, one of the largest beer companies in Mexico, for $5.5bn. More are sure to come in 2010.

One reason that M&A will be strong is that some companies will look attractively cheap. KPMG’s annual global M&A predictor has found that forward price to earnings ratios are now seven per cent higher than last year’s figure, which should fuel appetite for deal making. Net debt-to-earnings ratios are set to fall in 2010, which should also boost M&A.

All of which means that investors who can identify potential M&A targets and get in on the ground floor should be able to profit. Remember, since Kraft first made an offer for Cadbury, the chocolate-maker’s share price has jumped by 40 per cent. So what areas should investors be looking at?

The first area to look at is consumer goods companies. David Simpson, global head of M&A at KPMG says that takeovers will be driven primarily by activity and by corporations looking to expand while the economy remains sluggish. “In an environment where inflation is expected to be low and the economic recovery is fragile, companies cannot raise their prices.” Businesses like Kraft and Heineken need to buy out other companies in order to grow, he says. Others will surely be looking to follow their example.

In other sectors, consolidation could fuel M&A. Tech companies performed well during the recession and continue to have healthy balance sheets with relatively low levels of debt and, in some cases, large cash piles. This makes small tech companies with good growth prospects potential targets for their larger rivals.

We should also remember that British companies are attractive targets for takeovers. Michael Grenfell, a competition expert and partner at law firm Norton Rose, says they are easier to acquire than some of their European counterparts. “The policy position in France is that the government tries to protect national treasures if possible. The British thinking, which both the Conservatives and New Labour have adopted, is that if you start to impede the free movement of capital that is negative for UK economic growth.”

Low protection barriers make UK companies low-hanging fruit. Kraft’s success in the Cadbury deal could also encourage large foreign firms to look at British institutions. China, for example, is on the look out for good value commodity companies. Cadbury could be the tip of the iceberg.