THE lethargic stock market has deprived punters of all the fun and thrills of a bullish run and put a halt to virtually all fund-raising activities except one - mergers and acquisitions (M&A). The sluggish stock market is a fertile ground for M&A activities as acquisition targets look more attractive to potential buyers. 'The third to fourth-tier companies which are not doing very well and have no strategic plan for future development are good acquisition targets,' said David Seto, partner in Coopers & Lybrand. But those discussions do not always materialise in any concrete acquisitions. As vendors are still looking for high premiums and buyers are becoming more sophisticated and expect to pay less, the resultant price gap causes many deals to be called off. Looking at M&A activities in Hong Kong, the number of deals in 1993 and 1994 remained roughly the same - about 129 in 1993 and 123 in 1994. But the average size of each deal fell substantially from US$78.8 million in 1993 to $48.8 million last year. Christopher Chan, partner of Coopers & Lybrand, said: 'That is because the average deal size had been inflated by huge property deals.' The property boom in 1993 had pushed up property prices and transaction prices on all acquisition activity. In 1993, the well-publicised property deals included CDL Hotels' buying of Nikko Hotel and Henderson's acquisition of Miramar Hotels. Lai Sun also had its eyes set on the Ritz Carlton Hotel. The property and hotel markets cooled off in 1994 and the average size of the deals came down accordingly. There are many reasons for the resurgence of such activity. Mr Seto said: 'The weak level of the IPO [initial public offering] market means that companies which need to raise funds may need to look elsewhere.' Selling part of the controlling stake in order to raise capital is not an uncommon means of procuring funds. Succession is another problem. Family-owned companies established in the 1960s and 1970s may have difficulty in getting their second generations to take care of their business. Even in cases where the next generation starts to manage the companies, these executives are likely to be more receptive to the idea of using M&A as a means to grow and expand. The new funds which have mushroomed in the last two years to tap the potential of the region must start investing. 'To these funds, although Hong Kong's economy has softened, it is attractive if looking at a medium to long-term perspective,' Mr Seto said. Traditionally, Hong Kong's M&A activities are mostly confined to three sectors. Apart from property and hotels, banking, finance and insurance, together with media and telecommunications, dominate this market. Among these, foreign companies are the major buyers in the media and telecommunication fields, while the other two are battlegrounds for regional and Hong Kong players. Pearson's 10 per cent stake in TVB, News Corp's acquisition of HutchVision and Nynex's acquisition of Orient Telecom & Technology are a few examples. Going against this trend of growing M&A activities is the sunset industry - textiles and clothing. Mr Chan said: 'Two factors were behind this: the weak performance of the garment industry internationally and the continuous migration of such factories northwards into China.' There are many reasons for initiating M&A activities. Expansion is the primary reason. But rationalisation of industries where competition is intense can also lead to takeovers. Examples abound in the electronics and textiles industries, construction and engineering, and toys. Shougang's buying of Santai in 1993, China Merchants' wooing of Chun Wo this year and Harbour Ring's taking up of a stake in International Toys Management best illustrate the three fields where fierce competition prompted the search for more synergy with other companies. In some cases, the sellers may want to quit the market altogether. Inchcape's well-publicised sale of its Buying Services to Li & Fung attested to the effect of attrition in a highly competitive industry. Even the service industries did not escape the trend of increasing M&A activities. Recruitment agency Wright Co was taken over by an Australian executive search firm. Real estate consultants, engineering consultants and market research firms became targets for foreign firms eager to establish a foothold in this part of the world. Not all M&A activities are easy. Foreign companies in the food and beverage industry had been on the lookout for acquisition targets to set up a strategic base in Hong Kong with a view to tapping the China market. 'We keep on hearing requests from clients asking us to find targets for them,' Mr Seto said.