Clive Hatchard explores the outlook for M&A as stability returns

Thursday September 14, 2023

The latest developments in the M&A market

The first half of 2023 was dominated by rising interest rates, inflation and reverberating uncertainty following the UK mini-budget last Autumn.

Coupled with the debt crisis in March, it has been a challenging time for UK M&A, but there are signs that confidence is returning. Early indications that would be expected if the economic landscape was worsening – such as widespread redundancies – have not come to fruition, and dealmakers are upbeat that the outlook is brightening.

We continue to see healthy appetite from investors for quality businesses that are underpinned by robust financial forecasts, and those that have skilled leadership teams at the helm. Mandates that are valued between £50 million and £150 million are also proving popular in the current climate, and we expect this to strengthen in the months ahead.

While deal volumes are down this year when compared to 2022, certain sectors remain resilient to market pressures. Technology accounted for 27% of transactions in the first half of the year, and industrials was another important driver. Interestingly, the healthcare sector – which has historically been a mainstay for UK M&A – has seen deal volumes dip by 32%, though this could be attributed to the rush of healthcare transactions following the pandemic.

In the current market, investors are particularly interested in backing businesses that offer a recurring income model. The accountancy industry is a great example of this, with investors attracted to firms that have customer longevity as a form of protection against economic uncertainty.

Public market transactions remain relatively flat overall, but there were 17 sub-£350 million transactions in H1 compared to 11 last year, so there is evidence the lower end of the market is bouncing back. It’s a long-held view that public market activity drives the private markets, so it’s a positive bellwether that the former is gaining traction.

Perhaps most notable is the impact that the current macroeconomic landscape has had on deal valuations. We’re seeing lenders and banks offering lower values, and we’re seeing a discord between vendor pricing – which typically takes longer to adjust – and buyer pricing, which has, in turn, hampered deal flow so far this year.

Banks undoubtedly still have a lending appetite. Now that there has been a period of adjustment, and following the headwinds in the US debt market, we’re likely to see more banks and lenders returning to the table in the months to come.

Investors are also beginning to approach opportunities with structures that allow for the base interest rate of 6%. As a result, we’re seeing more stability return to the market. We’re likely to see more stakeholders looking to bridge the valuation gap in pricing by offering vendors deferred consideration mechanisms, including earnouts. This is otherwise understood as the mechanism that allows a buyer to pay part of the purchase price of a business to the vendor in the future. For any vendors looking to sell their business in the coming months, it’s important to consider that they may need to be more flexible in terms of structures, or when it comes to pricing conversations to negotiate successfully.

Creativity will continue to define the UK M&A market as the transaction pipeline grows in the months ahead. Private equity investors have a considerable amount of dry powder that they are looking to deploy, and many will be behind the investment curve. We’re already seeing strong investor appetite for quality transactions that involve robust businesses with strong management teams. This will only gather pace as the market stabilises, with inflation expected to fall.

Looking ahead to 2024 and beyond, investment activity will increasingly be driven by the upcoming general election. On the one hand, this could cause many vendors to usher deals through before a change in Government. Conversely, cross-border deal activity may dip slightly, with overseas investors potentially delaying investment decisions until there is more political and fiscal certainty.