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Consolidation to drive M&A activity in 2012

Several recent studies, backed up by views from industry experts, suggest that consolidation and the desire to exploit economies of scale could be a major driver of merger and acquisitions activity in 2012.

Perhaps the most persuasive view comes from Deloitte's recent study, which found that the economies of scale that can emerge as a result of consolidation are the top reason cited for M&A activity in the UK at the moment. Canor Cahill, a consumer M&A partner at Deloitte explained that a lack of growth opportunities elsewhere could be causing this.

"Market consolidation is set to be high on the agenda in 2012, with delivering cost efficiency through economies of scale being a key driver in the absence of organic growth opportunities, particularly for those companies with a focus primarily on their domestic market," he said.

Some industries are set to be the leaders in this race to consolidate and it seems that utilities are leading the pack, with a recent Fitch Ratings report predicting an ongoing trend toward consolidation, following on from a strong year in 2011. Fitch claims that the industry’s fragmented structure is behind this desire for the creation of economies of scale. The report added that market conditions, such as low equity valuations and modest interest rates, all help to drive M&A activity in the sector.

Fitch also offered clear indications of which firms it thought were most likely to be involved in any future deals. It named 11 firms that it expected to become targets, which all had market capitalisation of less than $5 billion. Those buying are likely to be large utilities with strong earnings, financial profiles and solid cash flow, according to Fitch.

The renewables industry is a niche that could see large numbers of consolidatory M&A deals in the year to come, according to PricewaterhouseCoopers (PwC). M&A in the industry increased by 40 per cent last year and the trend is likely to carry on into 2012.

The activity is being attributed to the fact that the industry as a whole is facing major challenges, not least cost pressures and regulatory challenges from Europe and the US. Paul Nillesen, a partner at PwC renewables wrote in a paper on the subject: "The result [of these pressures] is likely to be a succession of tie-ups within and between the main manufacturing territories of the US, Germany and China, leading to a smaller number of big global players."

Meanwhile, it is quickly emerging that bankers are anticipating major M&A activity in the tech industry, but for very different reasons. Cloud computing is undeniably a growth industry and many tech firms want a slice of the pie while the market is on the up. The more established tech firms are concerned that the cloud may indeed be the future and consolidation is the only way to ensure they are not threatened. Chris McCabe, Cowen’s had of technology, media and telecoms banking, explained to Forbes: "They want to make sure their company captures that growth through M&A rather than seeing that growth go to a start-up."

The mobile sector is similar in that firms are making defensive mergers in order to ensure they don't get left behind. Stefan Jansen, Raymond James' co-head of technology investment, told Forbes: "These folks have to think about who they are and who they want to be.

"Some of them will make transformative large scale merger to get where they want to go."

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