City feels that familiar buzz: It isn't another 1980s boom but corporate finance departments are busier than they've been in years

MENTION it quietly. But there is a confidence in the City that has not been around for three years or more. The market is strong. Interest rates are low. Investors are hungry for shares. It has the hallmark of a corporate finance boom the like of which we have not seen since the mid-1980s.

The corporate finance departments of most of the big City banks have been busy for most of this year. There has been a constant stream of flotations, rights issues and the occasional 'big' deal, such as last week's sale of Pillar to MB- Caradon for pounds 800m, the pounds 5bn restructuring of the Richemont empire and the demerger of Zeneca from ICI.

But now they sniff big game. In the words of Will Samuel, a director of corporate finance at Schroder, the City may not be restored to the heady days of 1987 and 1988, when almost every deal a merchant banker could think of would be snapped up by hungrily acquisitive companies, but we could be returning to the levels of business seen in the mid-1980s. 'I suppose we reckon that one in three deals we are working on is actually likely to happen,' Samuel said.

Anthony Beevor, head of corporate finance at Hambros, is more cautious, but he is also bullish. 'Things have been revving up for the last six months. We enter the quarter with a higher workload than we've had for two or three years.'

The reason for optimism is that, after a long recession, the conditions are now right for a large weight of bids and deals. The market is at an all-time high - which means that companies can use their highly valued shares to pay for deals - and interest rates are low, so companies can raise debt cheaply should they not wish to use shares. Companies with lots of cash on their balance sheets are finding it burning holes in their pockets, for the simple reason that low interest rates mean that money yields so little it depresses profits.

The market's strength seems to have been unaffected by a stream of rights issues and flotations that has built up through spring and summer.

'We've got a healthy pipeline of flotation work and we see this continuing for quite some time,' Richard Paine, a director of corporate finance at the stockbroker Panmure Gordon, said. His optimism is echoed by most other stockbrokers and merchant banks.

'From here on there will be quite a bit more rights issue business,' John Dear, head of corporate finance at Lazard Brothers, said. 'With the market where it is people cannot resist raising money, even if they don't need it.'

However the nature of rights issues will be different. Many of the issues in the spring were from troubled companies trying to shore up their balance sheets. The expectation is that rights issues this autumn will be along the lines of MB- Caradon's last week - allied to a deal.

Most industrialists agree that institutions are not overly happy about providing companies with war chests to go out and make acquisitions; they prefer the company to come to them with a deal on the table and say: 'This is why we need the cash.'

On the other hand, Mark Nicholls, head of UK advisory at SG Warburg, points out: 'In this market, a good company doesn't really need that good a story, because everyone is so keen to buy equities.'

The sort of deals that will be coming through are likely to be the disposals of 'non-core' divisions by companies keen to focus on their main business strengths. In many cases the companies have wanted to sell these businesses for quite some time but have been put off by the weakness of the market and the low prices that might have been achieved.

Disposals may take the form of flotations. They are often presented as 'demergers' - an increasing trend in the 1990s, with BAT, ICI, Courtaulds, Racal and Williams all having demerged businesses, and ECC Group and Pearson proposing to do so in the next few months.

The most excitement, however, will come from acquisitions. With money so cheap to raise, companies will be keen to make 'infill acquisitions' - takeovers that enhance an existing product portfolio. Many of these might be outside the UK, although merchant bankers are cautious about the US, where prices are high and where the economy, while recovering, is still weak.

Purchases in Europe were big favourites a couple of years ago, but many of these deals look pretty sad now as Germany and, to a lesser extent, France, Italy and Spain, move into recession. This makes bids from Europe unlikely.

However Peter Espenhahn, deputy head of corporate finance at Morgan Grenfell, believes there will be some exciting deals for UK companies in Europe. 'I think there are going to be more things coming free in Europe over the next 18 months to two years. Businesses will become available and British companies are well placed to take advantage.'

Is there any likelihood of a return to the giant hostile takeover bids seen in the mid to late 1980s, when Guinness took over Distillers, Hanson fought off United Biscuits to win Imperial Group, Isosceles captured Gateway and Sir James Goldsmith's Hoylake failed to win BAT Industries? Probably not, which means most of the business coming to merchant banks will not be that lucrative.

Rights issues and flotations are time-consuming; the work eats up the fees. The really fat margins come from successful bids or innovative deals, such as the Richemont restructuring, where pounds 31m in fees was divided among Hambros, SG Warburg, NM Rothschild, Schroder, Panmure Gordon and Cazenove.

The experience of the past three years, when companies such as British & Commonwealth, Coloroll and Lowndes Queensway were forced into receivership or administration due to acquisitions they made, remains fresh in the minds of potential bidders.

'There won't be that many aggressive bids around,' said Rupert Faure Walker, head of corporate finance at Samuel Montagu. 'Too many people have bought something blind and opened the cupboard to find something shocking.'

Espenhahn says that with companies recovering from recession it is difficult to work out what their earnings might be in a year or two.

Information is getting harder to clean, with strict rules from the Stock Exchange on the release of price-sensitive information, as shown by the dressing-down London International Group got for briefing market analysts about its trading performance.

The failure of Williams, Hanson and Wassall, all regarded as takeover experts, to win bids in the past year, and the sight of Owners Abroad wriggling away from Airtours, only to then issue a massive profit warning, has also put off potential bidders.

'It's much harder to win bids. The technology of bid defences has got much better and there are fewer badly run companies,' Philip Swatman of NM Rothschild said.

The toughness of new accounting standards and the increasing independence of non- executive directors may hold back many potential bidders, but the real break on bid activity is prices. The market is now valuing public companies on price-earnings ratios of nearly 20 times historic profits, while private companies and subsidiaries are valued much more cheaply. Most industrialists think that companies they might want are overpriced.

'For the first time in years, people are saying that their shares are rated too highly,' Mr Faure Walker said.

Mr Dear of Lazards is even more blunt. 'Most industrialists think the market's mad. They don't see the green shoots coming through very strongly and their businesses are still quite depressed . . .'

But, as the market settles and share prices hold up, attitudes will change. Many believe the City is in for an exciting period. 'We're in the early stage of the bull cycle,' Mr Samuel said. 'Aggressive takeovers will return.'

Even more in the City are praying he's right.

(Photograph omitted)