Bottom line concerns temper M&A optimism, says Gresham Monitor. Managers unimpressed by aged 70 retirement proposals.

Economic and fiscal factors which affect business performance are now top of the agenda for UK middle market managers. Faced with wide-ranging uncertainties both domestically and internationally, managers are more cautious about growth prospects for their businesses and the UK economy than six or 12 months ago. This growing caution is also reflected in their attitude to potential mergers and acquisitions activity. The percentage of middle market companies expecting to do a deal in the year ahead has fallen by 18 points since June. However 39 per cent still expect to undertake an M&A transaction.

Renewed threats of terrorism or potential war may dominate the headlines, but they are not uppermost in the minds of middle market managers. The biggest influences on their mergers and acquisitions plans are the health of the US and European economies, interest rate uncertainty, a fall in consumer spending, depressed stock markets and higher taxes - factors which affect corporate performance.

Managers are unimpressed by Government proposals to raise the retirement age to 70 with fewer than one fifth seeing it as a potentially positive move and 30 per cent seeing it as having a negative impact.

These are some of the findings in the latest Gresham Monitor. The Monitor is a twice-yearly survey of the middle market commissioned by Gresham, the private equity house specialising in investing in this key component of the UK economy. In this issue, Gresham sought a "snapshot" view of factors affecting transaction intentions and managers` economic and corporate outlook.

Highlights:

43 percent of managers are optimistic about their company’s growth prospects, down from 67 per cent in July.
29 percent are sitting on the fence about corporate growth and 28 percent are pessimistic- both the highest recorded since July 2000.
Managers have reversed their more positive view on UK economic growth from July - 29 per cent now expect it to grow while 47 per cent think it won’t.
Nearly four in every 10 managers expect to do a deal in the year ahead, but that is down from 57 per cent in July.
38 per cent reported lower margins than 12 months ago - the highest figure to date.
Fewer than a fifth of managers think Government proposals to raise the retirement age to 70 is a positive move

The survey indicates just how much harder it is for companies to grow their bottom line. Some 37 per cent say margins are unchanged - a similar percentage to those reporting lower returns. A quarter improved margins, down from 40 per cent two years ago.

Looking at potential mergers and acquisitions activity, 23 per cent of companies surveyed expect to raise external finance in the year ahead and 19 per cent to buy another business Privately-owned companies are more keen to transact - two-fifths expect to do a deal against just over a third of subsidiaries of public companies.

Gresham chief executive Paul Marson-Smith says: "Middle market companies are facing uncertainty on all fronts - from oil prices to the Chancellor’s fiscal forecasts. Small wonder that they have become more cautious. But an encouraging 39 per cent of the managers surveyed are looking to do a deal in the year ahead. This reinforces our belief that good management teams and companies will continue to seek backers and provide investors with attractive opportunities."

Manufacturing versus service Variations in corporate performance continue between manufacturers and their service counterparts. Some 45 per cent of manufacturers reported lower margins than a year ago against 30 per cent of service companies. But the gap is much narrower when it comes to those reporting higher margins - 23 per cent of manufacturers and 28 per cent of service firms.

Although manufacturers found it harder than service companies to increase turnover, slightly fewer said turnover was down (30 per cent against 33 per cent in July). The reverse is true for service companies with 15 per cent revealing lower sales, up from 11 per cent last time.

Service companies are not as gloomy as manufacturers about growth prospects for their businesses, with just 19 per cent pessimistic compared to over a third of manufacturers.