The latest developments in the M&A market

Wednesday November 29, 2023

Consistency is key

With much of 2022 and the first half of 2023 characterised by high interest rates and surging inflation, it’s been encouraging to see some stability return to the wider M&A market in recent months.

It appears that the base interest rate has at the least plateaued, while inflation has been halved in line with the government’s target, with key input costs such as energy at lower levels than this time last year.

Improving conditions

After a prolonged period of uncertainty this period of economic stability is easing pressure on margins, and encouraging more businesses to consider potential growth and, in some cases, exit strategies. Similarly, from a funding perspective, we’re seeing an increasing number of banks and institutional lenders beginning to return to the table following an understandable period of adjustment driven by the recent debt crisis on the back of the mini-budget of only 12 months ago, which set the UK economy reeling into 2023.

Vendors and investors alike will be banking on this stability continuing into the new year and will have kept a close eye on the Chancellor’s Autumn Statement, which took place just last week.

This year’s Autumn Statement largely sought to instil confidence amongst businesses and consumers, while setting the scene for a potential general election next year. Notable announcements for businesses include an extension to 75% business rates relief for retail, hospitality and leisure firms, a £4.5 billion funding package for UK manufacturers and the permanent implementation to ‘full expensing’ on capital investments in new machinery and equipment.

A minority of businesses will have one eye on the implications that a potential change in government would have for them. This includes those in the private education sector, where a prospective Labour government is likely to increase VAT to 20% on school fees, but appears less likely to make increases in capital gains tax following recent comments by the Shadow Chancellor.

In the context of recent economic pressures a changing of the guard is considered unlikely to have a major impact on operating conditions, with any government likely to want to prioritise continuity and stability to support further economic recovery.

Continuing trends

Altogether, greater business confidence, less uncertainty, weaker cost pressures and an anticipated increase in appetite and flexibility from lenders means more deal opportunities are likely to present themselves in the months ahead.

In some parts of the economy, this will be more marked. Market analysis shows that total UK deal values stood at £135 billion for the year so far by the end of Q3 2023 – a decline of 29% compared to the same period in 2022*. However, certain sectors – most notably technology and manufacturing – have continued to attract investor attention throughout this downturn, with the latter seeing deal values increase by 34% throughout the year in comparison to the same period in 2022*. With further high government spending expected in both sectors to back this up, we can expect to see this trend continue apace.

Alongside this – as is normally the case in more challenging economic times – businesses reliant on recurring revenue are proving particularly popular amongst more risk-averse investors and private equity buyers, representing a safer bet insulated from economic pressures.

In a similar vein, we’re noticing an increasing number of private equity buyers offering vendors deferred consideration mechanisms, including earnouts – a mechanism that allows a buyer to pay part of the purchase price of a business to the vendor in the future, contingent on financial performance metrics. For any stakeholders 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.

Anecdotally, a growing number of businesses are also looking to secure development capital to grow into new sectors and seize new revenue streams. For this reason, buy and build strategies will likely become increasingly popular in the coming months, with specific PE analysis of their own funds showing that companies that take this route are delivering much greater returns for shareholders.

In tandem with this, there has been an increasing number of carve outs from large corporates, indicating that stakeholders believe this period to be a necessary time to make strategic decisions over what constitutes core and non-core assets, and also where buyers believe they can acquire under-performing assets at a lower value.

International interest

A recurring theme of the past year has been international interest in UK assets, and in recent months, we’ve seen a continuation of strong international deal flow. This has been driven by a combination of favourable exchange rates and the undervaluing of UK assets compared to foreign alternatives with comparable characteristics and value drivers, and signals growing confidence in the UK economy.

We recently hosted the AICA EMEA Conference in London where 60+ delegates from across our international network gathered to discuss cross border M&A, market and sector trends, and discuss current and upcoming engagements. This sentiment was clearly mirrored in the conversations held on the day and through the panel sessions with our international representatives.

The outlook is looking brighter. But this is a relative improvement. Conditions are still very challenging. As always, it’s essential that UK investors and stakeholders position themselves with a detailed plan – and contingencies – to make the most of the coming months’ opportunities.

* Source: Experian: YTD M&A report