M&A on an industrial scale

City traders are an inventive breed and not given to twiddling their thumbs, even on a quiet day in the middle of an English summer. Takeover gossip passes the time and generates business, but real merger and acquisition (M&A) activity is on the rise and well-run British industrial engineers are in the shop window.

Despite some potentially horrific macro issues, corporate activity could provide useful support for UK equities over the remainder of this year and into 2012. Foreign buyers, armed with balance sheets swollen by fundraisings and a recovery in stock market valuations, are desperate to boost market share, generate cost savings and compensate for subdued organic growth. With sterling at a five-month low against the dollar, American firms have the firepower to do it and these shores have been a happy hunting ground in the past.

Electrical components maker Laird is already a target, with a bid valued at 11.2 times forward earnings by Houston-based Cooper Industries. That’s slightly less than the multiple that Melrose applies to Charter , but the welding and cutting tools company wants more, and white knights from across the pond may oblige. Illinois Tool Works is the most likely gatecrasher, but Lincoln Electric, which tried to buy Charter in 2000, French giant Air Liquide, Germany’s Boehler, or even private equity, may try to muscle in.

Analysts from Killik Capital and Brewin Dolphin have drawn up hit lists. While GKN , Invensys , Qinetiq and perennial bid favourite Morgan Crucible are regulars in City gossip columns, Killik picks defence electronics group Cobham , pumps and valves maker Weir , and valve actuators success story Rotork , “all of which would provide an attractive add-on for an industrial conglomerate”. Brewin talks of IMI as potential prey for a major US industrial buyer - Honeywell International is often mentioned - and would not be surprised to see Umeco “reappraised as an acquisition target,” given the Formula One composites specialist has hived off its supply chain business. BMW and Volkswagen are also considering composite materials as alternatives to aluminium and steel.

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