Opinion: Mark Kingston

Rolls-Royce's announcement of profits ahead of analyst estimates provides further proof of the resilience of the UK engineering sector as the British Economy negotiates the difficult path back to growth.

I was particularly struck by CEO John Rose's view that "there is some evidence of resilience now in the airline industry", surely welcome news to the UK’s aerospace engineering sector which has endured a torrid twelve months as the deferral and cancellation of aircraft orders impacted on the sector.

As one might expect, the performance of Rolls-Royce civil aerospace division is highly correlated to the aircraft delivery profile of Boeing and Airbus, who both remain relatively positive on the prospects for 2010/11. Greater trading certainty will enable businesses to transition from survival mode to growth mode and in due course, begin looking to engage in M&A to support growth strategies.

In our recent report on the engineering sector we predicted that British aerospace would continue to attract M&A interest from international trade and private equity acquirers albeit interrupted in the short term by the recession. As the economy and the aviation sector emerges from the down turn we would expect the major aerospace acquirers to reignite their interest in those businesses operating in high added value aerospace niches with strong and defendable product IP.

Whilst time will tell, the outlook for M&A in the aerospace industry may just have turned the corner…

Unsurprisingly, M&A activity in the recruitment sector has fallen dramatically in 2009 as the sector faces the most challenging business conditions for a generation. Combined with the absence of Private Equity buyers, recruitment M&A deal flow has slowed to a trickle.

However, this morning the global recruitment giant Adecco have announced they are to acquire IT recruiter Spring Group for £107m in cash. Adecco has been under significant pressure to increase its exposure to ‘white-collar’, higher margin recruitment sectors, this resulted in the ill-fated attempt to acquire Michael Page last summer. In Spring Group, they are acquiring a business which has a high margin sector focus, international footprint and scale and added-value RPO activities. These characteristics tick many of the boxes in Adecco’s strategic growth plan.

Following disappointing trading updates from Hays Plc and Michael Page Plc in July this year, there was a general consensus that conditions for recruiters couldn’t really get any worse. Assuming Adecco's offer, a premium of 47.6%, reflects close to fair value for Spring, it highlights just how heavily discounted recruitment stocks had become.

Recruitment acquirors are likely to remain cautious in their assessment of M&A opportunities, however Adecco’s willingness to make a cash offer (as opposed to a cash and shares offer) for Spring will send a strong signal to the market that they believe the worst may be over and that now is the time to prepare for the upturn, whenever it eventually materialises.