For a few dollars more

Fifteen years ago, when the chief executive of an American utility giant decided he fancied expanding into Europe, he called a London banker and announced: "We want to buy a Limey water company."

Recalls the banker: "He then started with the company whose name began with A, which was Anglian Water, and wheeled everybody else in from there."

The directness was common, after all American companies had it all - size, strength and self-assurance.

Another chief executive, David Farr of American engineering giant Emerson Electric, could have taken the same approach towards Chloride, the £537 million British minnow he's been eyeing in recent months. Instead, he quietly approached Chloride's chairman Norman Broadhurst and suggested a meeting in a London hotel before making an offer.

But it's not so much the change of style that surprises City observers but the fact that the Americans made a bid at all.

Troubles in global finance have poured cold water on the rampant deal appetite in all markets, and America in particular. A crippling combination of the credit crisis, economic downturn and of course the weak dollar has been hampering the international ambitions of most American firms.

But in recent weeks, investment bankers have been surprised by a flurry of US offers for European businesses. Last week Chloride, the staid former battery manufacturer, rejected Emerson Electric's 255 pence-a-share approach, sending its shares up 30 per cent. The previous week Best Buy injected £1.1 billion into Carphone Warehouse.

Research from Thomson Financial shows that this year American corporations (excluding private equity firms) have bought 112 British businesses worth $12.4 billion - almost half of last year's $21.4 billion total.

It is a quiet trend that is baffling many in finance.

One banker says: "With the falling dollar, this is the last thing we'd expect. They seem to be saying: Ignore the odds, we want to do a deal. It's the same old arrogance back again and it's great to see.''

So, is this a revival of the American corporate bidder in Britain?

"I don't think this is a new trend; I think it is the continuation of a long-term trend,'' says Justin Manson, a managing director at Morgan Stanley. "It is worth noting that in seven of the last 10 years, the UK has been the top destination for US multinational corporates looking to expand''.

But others believe there are new factors at work.

American firms have long held an interest in British firms. As well as the language and time zone advantages, the Anglo-Saxon regulatory framework has always been an attraction.

The first large-scale American corporate shopping spree in Britain was prompted by the Big Bang in 1986. With the deregulation of the City, US financial institutions feasted on the newly available British brokers and merchant banks. Names like Smith New Court fell to US banking behemoth Merrill Lynch and Robert Fleming to Chase Manhattan (now JP Morgan).

The American thirst for deals continued to grow and reached its peak during the dotcom boom in 1998, when US companies spent a total of $41 billion on 481 UK-based businesses, according to Thomson Financial.

But during the recent credit-fuelled mergers and acquisitions boom, many American businesses have been eclipsed by corporate acquirers from emerging market economies and continental Europe.

Meanwhile, international private equity firms (many of them based in the US) have got their hands on some of Britain's largest high street retailers and branded goods businesses, while global infrastructure funds have snapped up several of our largest water and electricity distribution assets.

Plunging volumes

But this year, as the credit crisis has worsened, global deal volumes have plunged by about 25 per cent - and Britain itself has seen a sharp fall in deal-making activity.

Yet American corporations have still been buying.

Recently, for example, Manitowoc made an offer for Enodis, which makes kitchen equipment for McDonald's.

But the offer from Manitowoc was trumped by its American rival Illinois Tool Works.

Other recent deals involving US bidders include Halliburton's possible £1.8 billion offer for Expro International.

Some of these American buyers are now even prepared to go hostile to get hold of their British targets.

Last week, Mentor Graphics Corporation, an $850 million Nasdaq-listed company, submitted an offer directly to Aim-listed Flomerics' shareholders after having its first approach rejected by the company.

And it is not just large, public companies that are being targeted by US corporations.

Paul Herman, a partner at Cavendish Corporate Finance, who recently advised on the sale of Card Connection to American Greetings, says: "US buyers have become an increasingly common feature in the mid-market. It is now rare to advise on a transaction where there is a complete lack of interest from the US. American buyers are also competing aggressively on price against those bidders from Continental Europe and Asia.''

So what is driving this mini-revival? Sebastian Grigg, head of UK investment banking at Credit Suisse, says: "It is all about finding growth outside the US. American companies that have previously focused on domestic expansion are coming under pressure to find growth from their shareholders as their own economy slows, so they are looking to expand internationally.''

But it is precisely the international nature of some of these British-based businesses that makes them such attractive targets for these US bidders.

Take, for example, the oil services group Expro International, which has drawn predatory interest from Halliburton.

Although it is listed in Britain, it operates in 50 countries, including Cameroon, Indonesia and Australia.

Still, with the dollar hitting all-time lows against the pound, the sudden burst of activity from the US buyers seems counter-intuitive. Yet experts point out that it is the exchange rate that has sparked some of these deals.

One British investment banker advising a US bidder says: "It is this currency situation that is driving Americans to do deals over here. The dollar looks like it will be weak for a while, so many American companies want to lock in non-US dollar denominated earnings through acquisitions.

"While currency weakness would suggest that prices are high for US purchasers, the sterling returns from such acquisitions are clearly more attractive than dollar denominated profits. So, US buyers are paying more for businesses that will return cash profits in sterling. It is a currency hedge that is attractive to these types of buyer,'' adds Paul Herman.

Oddly, the credit crisis has also spurred American multi-national corporations into decisive action. Says another City banker: "Many of these American bidders have decided to launch an offer now because they know there is less likelihood of them being trumped by private equity rivals.''

Corporate advisers believe Britain's specialist engineering businesses are likely to be some of the most attractive to US predators.

A banker who has worked on many transatlantic deals concludes: "Over the past three years some of these American industrial groups have built up huge cash balances and are desperate to spend it on growth businesses. I would expect them to be looking at several British targets.''

One potential target could be Morgan Crucible, which could be of interest to US graphite materials maker GrafTech.