Why the UK stock market continues to be takeover central

There is an undeniable trend in UK markets for takeovers of listed companies, and it is easy to see why. Of the roughly 800 UK stocks with a positive EBITDA, the median EV/EBITDA is 10 versus 15 for the 3000 such companies in the US market. There are some fundamental reasons for this mismatch in valuation. Pension Fund Flows One of the biggest reasons for this disparity is a dramatic shift away from UK Equities being owned by UK Pension funds. The Capital Markets Industry Taskforce (CMIT) reports that this is due to two trends. Firstly, UK pension funds have shifted away from owning equities into bonds, as this chart from CMIT shows: This is primarily because Defined Benefit pension funds, almost all of which are now closed to further accrual, have been de-risking, which involves selling equities and buying bonds. Secondly, pension funds have increasingly been given a global mandate when investing in all assets, including equities. Defined contribution schemes, which are now the norm, tend to offer their members global trackers rather than UK trackers. This makes logical sense for clients. However, the knock-on impact on UK equity allocation is stark. With the proportion of…