UK M&A market softens as corporates pause to assess opportunities
- Value of inbound UK M&A fell by 3% year-on-year in second quarter of 2019
- Dealmaking environment remains robust in technology and related sectors, buoyed by global trends in technology transformation
The UK’s dealmaking environment softened in the first half of 2019, much like many of its global peers. Unsurprisingly, a protracted Brexit process continues to fuel uncertainty.
Many would-be buyers and sellers of assets are positioning themselves to take advantage of the possibility of greater certainty at the end of 2019, when the post-Brexit picture may become clearer.
Supported by strong corporate fundamentals, company boards are weighing up the likelihood of changes to the post-Brexit tax regime and a possible liberalization of regulations, while also considering political risks, such as the prospect of a Labour-led nationalization programme.
The current UK dealmaking environment is also being impacted by global trends such as high volatility, concerns about trade and protectionism, and geopolitical instability. Significant movements in the value of Sterling are also prompting a clear ‘wait and see’ approach.
Global trends underpinning UK deal activity
While uncertainty around Brexit has contributed to a softer M&A market, the UK dealmaking environment has held up better than many observers might have expected.
Dealmaking activity has centered on companies with specific fundamental reasons to acquire or sell, with the desire and need to participate in global technology transformation often being the key driver.
Corporates in the UK, like their global peers, are busy deciphering the technological codes of change that will transform both their sectors and businesses in the coming years.
It’s increasingly rare to observe a deal that is uncoupled from technology, whether that involves a FinTech or an industrial conglomerate seeking to stay relevant in the digitized global markets in which they operate.
This activity is underpinning deal activity in the UK and showing few signs of abating. In fact, we believe that there are clear signs that this trend will only accelerate in the UK in the coming months and years.
After previous false starts, the technology sector in the UK continues to thrive, supported by a culture of entrepreneurialism and a highly educated and dynamic workforce. Inbound interest in the sector comes down to a choice or either buying in talent, partnerships such as a joint venture, or the outright buying of a company.
The effect of dry powder
While a soft market in the UK has prompted a pause in public dealmaking in the first half of 2019, the trend of an increase in public to private deals (P2Ps) has continued.
This trend has been developing over the last two years, and recent P2P deals in the UK confirm that private equity has regained its appetite for large cap P2Ps, illustrated by the £3.4 billion takeover of the satellite operator Inmarsat by a consortium of private equity firms and pension funds, the £561 million takeover of listed business media group Tarsus by a private equity player, and the recent offer by a private equity consortium acquisition for Merlin Entertainments (which at nearly £6 billion would be the largest P2P since the financial crisis).
The increase in these types of deals will continue at both ends of the market, with speculation that Mifid II has resulted in liquidity in some smaller stocks drying up, narrowing the valuation gaps between the private and public markets – and making these smaller cap companies ripe targets for private equity bidders.
As private equity-led deals continue, the sector used the first half of 2019 to raise record new sources of capital in the form of new funds.
Some of this so-called ‘dry powder’ will be put to work in the short-term, yielding a moderate uptick in activity in some sectors. However, we believe that pressure for private equity to spend money, driving a surge in M&A, is overblown.
New fund investment horizons are typically three to five years in nature, so the need to make rush purchases is not apparent and given the continued uncertainty in the UK market, private equity bidders will not feel compelled to rush at deals.
Corporate distress to spur M&A in 2020
Whether they be private equity funds flush with new funds or listed entities with cash-rich balance sheets, many firms are waiting to assess the extent of any dislocation and distress amongst corporates, some of which are highly leveraged and susceptible both to a downturn and a worsening in credit conditions.
Corporate restructurings are certainly likely to increase in 2020, which may act as a catalyst to M&A in some sectors. Indeed, there is growing anecdotal evidence to suggest that distress is already impacting many firms, leading to opportunities in the M&A arena.
Preparing for greater certainty
As we look forward to the second half of the year, there are reasons to suggest the UK dealmaking environment will continue on the path it embarked on in the first half of 2019.
The UK M&A market will remain challenging, in line with the experiences being observed in many other countries. But there is no doubt that a resolution to Brexit in Q4 will provide some impetus to firms considering new processes.
As certainty increases we expect an uptick in activity, while strong underlying fundamentals coupled with a need for UK firms to buy in new technology innovation, will stir activity too.
As we end the first half of the year, we expect companies to re-assess the UK landscape and take their fingers off the pause button, readying themselves to take advantage of the opportunities that will emerge.
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