It’s safe to say that things have been pretty unsettled in the UK over the last two years.
Not only have businesses had to cope with the unprecedented economic disruption caused by the Covid pandemic, together with the increase in barriers to trade, investment and movement of people between the UK and EU following Brexit, but they’re now faced with rapidly rising inflation and the impact of the recent political turmoil on the value of the pound.
Given these challenging times, what has the impact been on M&A activity in the UK? We asked Wendy Hart, Partner at HMT LLP for her views on the market.
So, what is your general take on the M&A market?
- Uncertainty is new certainty so the M&A market is getting used to making decisions against a backdrop of instability. We normally see a slight pause in activity before acquirers and investors adjust and things return to “normal”
How do you feel Brexit has affected the market?
- We are seeing much less interest in UK businesses as a “bridgehead to Europe” since Brexit. That said, M&A activity will continue because in a low organic growth environment it is a clear way to create value arbitrage and growth. At the moment, Brexit is just one factor in a range of supply chain and inflationary issues which are impacting some businesses quite seriously.
Do rising interest rates affect the valuation of businesses?
- The rising cost of debt is likely to have an impact on private equity pricing, and debt multiples are likely to be pulled back to post Financial Crash levels of 2-2.5x where we had seen them creep up over recent years in the face of very low interest rates. Equally the need to refinance debt structures is likely to drive some deal activity and potential Private Equity investments or semi-distressed exits over the coming months.
And will the weakened pound increase the amount of inbound investment?
- The weak pound will make UK assets cheaper for overseas acquirers, but history shows that it doesn’t change their behaviour. Acquirers are increasingly strategic and are not bargain hunting, however, they may pay more for the right business than if the pound was strong.
With such uncertainty, do you see M&A activity reducing in the foreseeable future?
- There is a huge amount of private equity capital in the UK market that needs to find a meaningful home and while corporates will be circumspect with their cash, there is still a strong focus on acquisition as a way to create value quickly. This, coupled with a population of business owners who are tired of one crisis after another and want “out”, will continue to create deal opportunities.
And are there any particular trends that you’ve seen?
- The well-documented big drop off in technology valuations in the US is having some knock on effect in the UK market but only a normalising one. Earlier stage funding rounds are proving very difficult at the moment and we are seeing some of these businesses thinking about exit instead. Overall I would expect there to be an increase in accelerated processes as businesses run out of cash.
Are there any recommendations for those businesses looking for further investment or to sell?
- Those who want to sell or raise money need to prepare very thoroughly and pragmatically for a transaction process. They will need to be able to evidence the sustainability of their profit streams under fairly intense scrutiny and an evolving market backdrop. Getting good, honest advice before they start would be sensible!
It would be good to hear about your experiences of M&A activity, any challenges faced together with your thoughts on how the market will react in the near future.
Savant Recruitment Experts has a dedicated team of Finance specialists, backed by market research, possessing extensive experience and expertise in talent solutions. If you are looking to build or expand, we can offer you our support with the best talent in the industry and market-leading onboarding advice and consultation. To know more about how we can assist you, please reach out to us at - finance@savantrecruitment.com
