Tags: Britain Financial Sector, Economic Recovery, Great Britain, U.S. Unemployment

British Companies Becoming Takeover Targets for Cash-Rich U.S. Companies

By , Money Morning •

Some of the largest and most well known British companies could soon find themselves under new, American management.

While the U.S. recovery is losing momentum, the U.K. recovery is nonexistent. Companies across the pond are struggling to stay afloat and the British pound has fallen by about 25% against the dollar in the past two and a half years, leaving British firms vulnerable to American intrusion as takeover targets.

That fact was highlighted earlier this year by Kraft Foods Inc.'s (NYSE: KFT) controversial takeover of British confectioner Cadbury PLC (PINK: CDSCY).

In addition to that highly publicized takeover, several smaller transatlantic deals have already been brokered this year:

Now, Standard & Poor's Financial Services LLC says biopharmaceutical company AstraZeneca (NYSE ADR: AZN), contractor Balfour Beatty (PINK: BAFBF), and even defense, security and aerospace company BAE Systems PLC (PINK: BAESY) could be next.

"AstraZeneca and BAE are both in sectors where US groups have lots of cash and where they are looking to make acquisitions," said Mike Thompson, managing director of strategy and risk at S&P. "AstraZeneca, for example, has a value of about $65 billion [43 billion pounds], but this is no longer that daunting for U.S. firms. U.K. drug groups have a good profile for American rivals and if you consider that the likes of Johnson & Johnson (NYSE: JNJ) has a value of about $160 billion, you can see where a deal could come from."

There's also been speculation that BP PLC (NYSE ADR: BP) would be targeted. The oil giant's market value has plunged by more than 50% in the wake of the Gulf oil spill. It is reportedly seeking support from sovereign wealth funds in the Middle East and Asia to defend itself from any takeover bids.

Cautious U.S. companies have stockpiled cash throughout the economic downturn. They now have a record $1.6 trillion on deposit, in money-market funds, and in bonds and bills, The Economist reported. And the Federal Reserve's "financing gap," which measures the shortfall of corporate income relative to spending, was a minus-0.8% of gross domestic product (GDP) (a surplus) last year. While the gap closed in the first quarter of 2010, the surplus is bigger if the retained earnings of foreign subsidiaries are included.

With interest rates sitting at record lows, - and remaining there for the foreseeable future - that cash might be put to work more profitably. Especially since consumer spending so far has been stronger than feared.

Sales probably expanded at an average monthly rate of 4% in the first five months of the retail fiscal year that began Jan. 31 - the biggest gain since 2006 - the International Council of Shopping Centers trade group said in advance of its June report.

"Capital spending, inventories and jobs are too low given the level of consumption," says

David Bowers of Absolute Strategy Research.

Meanwhile, the British Institute of Directors recently quipped that the isles are in for "one L of a recovery."

"The recovery is likely to be characterized by a weak upward gradient, with a 'ratchet' effect and quarters of acceleration, deceleration, and even decline," the group said.

Additionally, the value of the pound sterling is likely to fall even further against the dollar, making British assets cheaper for U.S. buyers.

"Largely as a result of the financial crisis and the dollar's perceived position as a safe haven, the sterling's losses are not to be reversed any time soon," said Grant Lewis, head of economic research at Daiwa Securities (PINK: DSEEY). "Looking back, sterling was undoubtedly overvalued and with the rebalancing that is needed in the U.K. economy, it is difficult to see sterling rising much higher than its current level for the foreseeable future."

News & Related Story Links: