M&A Activity Levels

M&A activity has been reasonably buoyant this year.  Indeed Morgan Stanley recently predicted a 50% increase this year at the big ticket end of the market as funding costs, inflation and recession concerns recede.  Overall, in the UK the rate of M&A is higher than it was in 2023, according to Idex Consulting, with over 400 deals in the UK completed in Q1 of this year.

Mark to Market’s most recent data (below) show UK deal volumes remarkably steady through out the year, although specifically comparing June 23 with June 24 shows a marked drop off in volume.   To early to form any conclusions from one month which included the election. More specifically looking at East of England data from Experian shows Q4 of 2023 and Q1 of 2024 showing a deal volume decrease, but an increase in deal value driven by a few in region mega deals, the sale of 337 Morrisons Petrol Forecourts, two AstraZeneca acquisitions, and Barclays buying Tesco’ retail banking unit.

Factors Influencing M&A Activity

Finance

Availability of funding for deals is a key factor.  Generally it remains available, although it takes longer to get hold of and prices have hardened a bit.  Private Equity should remain a driver.  Not just because of the large amounts of "dry powder" that is so often referenced, but also because many PE houses are sitting on more mature investments which must be getting closer to sale.  Pitchbook reckons that at the start of 2024 PE firms held more then 27,000 portfolio companies worldwide and approximately half of those had already been on the books for four years or more.  Expect sales. 

Price Expectations

Deals don't happen when buyers and sellers have widely differing price expectations for the target company in question.  Deals happen when the expectations gap narrows.  Anecdotally the gap may be closing as vendors and purchasers get used to the new normal of higher interest rates, and as inflation and financing costs stabilise. 

Business Confidence

Of course, confidence is always a factor in M&A, alongside money and motivation, and nothing erodes it like uncertainty. 

The IoD publishes a very useful quarterly update for members on all key aspects of the economy (another membership benefit) part of which is a confidence survey.  This shows it hitting a fourth month low in June 2024.    My money’s on confidence improving with certainty of the new government’s plans.  Although in the autumn the budget and the US election outcome may rock the boat.

So having the new government in place, and post Kings Speech a good idea of their plans will certainly help.    Perhaps in a reaction to the increasingly crazy turbulence of Johnson and Truss era Labour seem focussed on nurturing the UK as a good place to do business.  The obvious things to point to being fiscal stability (no budgets unless economic expert advice and guidance is given), infrastructure investment, improving relations with our European trading partners, and industrial strategy.

Investment

Investment should also help, in railways, and housebuilding particularly.   Other potentially positive changes are the National Wealth Fund, intended to “unlock billions of pounds of private investment” to support energy transition.

But related investment is the question of where the money comes from.  So tax remains an issue.  The government has lots of big plans, but where will the cash come from besides the already announced tax changes for non-doms and VAT on private school fees?

Private Schools

On the subject of private school fees there’s been a lot of noise about how VAT will hike fees, but in fact private school fee inflation was already pretty strong as the chart below from the Independent shows.   Will this change trigger some M&A in private education?  

Tax

A burning question for many entrepreneurs will be what is to become of Business Asset Disposal Relief (‘BADR’) which effectively gives a lifetime £100,000 of tax saving on the capital gains from business disposals.  But the bigger question is whether or not income tax and CGT rates will be equalised – that would increase the tax on company sales from 20% (once BADR used up) to 45%, a big hike.   And while Labour said they have “no plans” to increase CGT, they haven't listed CGT as one of the taxes they're committed to not increasing the rate of in their manifesto.

This might lead to a rush to the exit, as entrepreneurs seek to accelerate sales. But given that a company sale process can take between 6 and 18 months it’s only those that are well down the track that could do anything before the date of the “fiscal event”.  If the change doesn’t happen until the start of the next tax year, then expect it to drive M&A activity, and buyouts.    If CGT does end up at 45% it ought to fuel interest in Employee Ownership Trusts as a means of exit potentially allowing the vendors to pay no CGT.

Conclusion

Expect the benefits of certainty and the prospect of investment measures to be a stimulus while the disruption of tax changes and potential geopolitical worries act as a counterbalance.  My feeling overall is that M&A activity will benefit and that we’ll see a gentle rise in activity across the rest of 2024.