How will the change of government impact on M&A in the UK?

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. M2M dataMore 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.

Experian Data

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.

IoD Data

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?  

Indepedent Schools Data

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.


There are still deals to be done even in "difficult" sectors

Its often said that the reason lots of deals are still happening in uncertain times is down to the liquidity in the system, and those companies being in good sectors. Conversely if asked many investors and advisors will tell you the retail and construction are "difficult". So it's heartening to report that there's always cream at the top of the milk bottle and that deals are still to be done in "difficult" sectors provided you're working with really good businesses.

Specifically I'm pleased to look back on two recent deals we've completed over the summer at PEM Corporate Finance, the sale of English Architectural Glazing and the sale of ATP Architects + Surveyors.

We acted as lead advisers to the shareholders of English Architectural Glazing.  Based in Mildenhall in Suffolk and Attleborough in Norfolk, this is one of the UK's leading contracting businesses providing envelope cladding packages for project such as Great Ormond Street Hospital, Wimbledon Centre Court, DLR Station City Airport and the BBC TV Centre conversion. Their clients include the great and the good of UK construction such as Kier, BAM and Skanska. The business was sold to Irish Private Equity Fund Elaghmore LLP. This deal closed in August.

A couple of months later we were pleased to announce the sale of ATP Architects + Surveyors to RSK. ATP, which is based in Ilford in Greater London,  is a multi-disciplinary professional consulting firm, and its purchase was RSK's 7th deal so far this year. ATK, which was established in 1966 provides the complementary services of landscape design, interior design, space planning, employers’ agent, and health and safety. It works with a broad range of clients such as Barratt London, Sanctuary Housing Association and Hollybrook Homes.

We've not done anything in retail recently - but are always keen to speak with good businesses and to help shape their exit plans.

More on our website  about the EAG and ATP transactions.

 

 


More Potential Buyers than Willing Sellers - M&A Activity set to increase in 2010

Can one plus one ever equal three?  Yes it can.  If you are selling your business - find a strategic buyer which will enjoy synergies from combining the businesses and which knows it is in competition to buy and you can maximise value and share in the marriage value. 

One plus one equals three What are the chances of pulling this off in the current climate?  Most recent surveys of corporate opinion show that firms are far more likely to engage in M&A activity over the coming year.  E&Y found 57% were more likely to make an acquisition while within BDO’s rather more “gung-ho” sample 80% felt the same.  Regardless of numbers it’s quite clear that there is a much greater appetite for deals this year.

Deals will be concluded by strong businesses with clear strategic intent, although some of those surveyed did admit to opportunism as a motivator and to being on the look out for bargains.  The biggest hurdle is likely to be discrepancies between buyer and seller valuation expectations – however as the market improves, and the volume of transactions increases, this is likely to even out.

There is evidence that strategic acquirers who have been deferring M&A activity while profitability recovers are now sitting on their largest cash reserves in recent years.  Add to this Private Equity investors who also have cash to burn before the time expiry of funds with a finite end date and you have a much better prognosis for those seeking to sell their business than for many months.  The return of strategic buyers and increased competition should drive an increase in activity and valuations.

The ability of purchasers to fund deals from their own cash resources is still a key factor – for example Corpfin found that the majority of UK deals in April 2010 were funded by buyers existing cash resources.  However they also found that the second largest source of funding for such deals was bank debt.  So liquidity is once again available for the right deals.

Owner managers who have been planning an exit but have had to put their plans on hold during the financial crisis can now start planning for exit.  Now is the time to consider grooming the business for sale in the short or medium term.  Now is the time to give consideration to the preparation of an exit strategy – which should cover the following issues:

· What are the personal or corporate objectives of the owners?

· What’s the business worth now?

· At what valuation would the owners be prepared to sell?

· What are the prospects for the business?

· What drives value in the business?

· What will a likely potential buyer for the business look like?

· How must the business look to maximise sale value in the future?

· What could get in the way of an exit or reduce future value?

At PEM Corporate Finance we have seen a marked increase in the number of enquiries from businesses planning for exit.  And there is also plenty of appetite from local businesses to make acquisitions – we have recently advised the purchaser in transactions such as the purchase of ISIS Fertility by Bourn Hall Clinic, the acquisition of Elmy Landscapes by Flora-tec and the MBO from Stratech Scientific of Molecular Dimensions.   

If you are exit planning it’s worth getting an outside opinion on the valuation of the business, and on opportunities to groom it in order to increase exit value.  Grooming is aimed at closing the gap between the current value of the business and the target exit valuation.  It should avoid the risk of a sale at undervalue.