Much has been written about the economy and the state of the Mergers & Acquisitions (M&A) market. I have set out below my thoughts on how businesses should navigate the market over the next year, and some insights into changes we have observed. By Jonathan Grant, Partner, DMH Stallard
Most lawyers and corporate finance professionals say the same thing when asked …”never seen a busier market”! The truth is that the current market is more complicated.
2020/21 was astonishing
The 12 months to summer 2021 really was the most buoyant market I can remember. We saw a huge number of private equity and large corporate buyers (with finance). They were actively looking to buy businesses for growth, to deliver synergies and increase speed to market, for key areas they did not already have. Deal values also rose with many more deals in the £20m+ bracket and far fewer below that.
This year, the headwinds are greater
This Autumn, we are holding the biggest pipeline we have had for many years. Expected values remain high; the CF advisors we know say the same thing. I have had two significant deals confirmed in the second week of September, where the businesses have gone to market over the summer; this indicates a positive climate.
The important difference this year, is how buyer/investor confidence will last? Some doubt over this, makes successful completion of those deals less certain. This is not a huge surprise given the economic headwinds, and perhaps explains the apparent disconnect between the economic indicators, and the deal community’s confidence.
My recommendation, for clients looking to navigate in these choppy waters, is to qualify all approaches. Ensure you are very clear on buyer/investor’s pricing assumptions/key deal drivers. It is particularly important to be clear before you enter into exclusivity or agree the letter of intent/heads of terms. An LOI is a document which is non-binding, but lays out clearly all key deal issues; whilst this can never guarantee success, it greatly reduces the risk of a deal falling down part way through.
The challenge
We normally complete a very high proportion of the deals we start to run for clients. Over the last 12 months, we have seen some high value deals ‘pulled’ by investors. In most cases the investors cite limited growth opportunities, or financial diligence not matching their investment metrics. This really comes down to lack of confidence in the market.
Despite these challenges, there remain many well-funded investors/buyers in sectors which see positive growth opportunities. This is combined with many owners looking for an exit and feeling weary of dealing with constant challenge.
The opportunity
As well as demand from buyers, there are positive signs from the economic landscape. The pound is at a record low, making acquisition of UK businesses by US and other international buyers very good value. Culturally, the UK has always been attractive to international buyers; London/home counties are a big draw for executives, there is good access to finance, a strong advisory community, and the UK is still seen as stable. While Russian oligarchs may be withdrawing, we see Middle Eastern investment, and other international investment likely to increase.
Active trade and PE buyers are still completing high value deals, but the business sector is likely to be a better indicator of deal activity. As the economy evolves and changes, with issues like supply shortages, inflation, and the war in Ukraine resolving themselves, these sectors are likely to change.
Which sectors?
Building products, engineering and architecture continued to perform strongly in 2020/21, but may be slowing. This could transition into more stable public sector/secured living providers, who give a more reliable return, as the housing market slows.
Professional services remains busy, particularly insurance brokers, where we act for two consolidators, but also wealth management, accountancy and, to a lesser extent, legal.
Travel and leisure are seeing a gradual return of deals, although it may need a little longer until clear trends can be found and real confidence returns; the pattern is simply not there yet. Hotels and food suppliers have been taking the opportunity to renew banking lines in the last 12 months.
Technology and software businesses remain popular with trade and PE, particularly SAAS, where returns, and earnings multiples are high. We also see demand for e-learning, PR and marketing businesses, to feed the demand for on-line BD, staff retention and development in a competitive market. The ‘big resignation’ is having an impact.
Higher margin/HNW consumer products are continuing to attract investment, but retail (B to C) is continuing to see pressure. This is likely to be worsened by the cost of living pressures. Some very profitable/high growth online businesses have failed to secure deals. In part, this seems to be down to the disruption faced by large businesses in that market, who would be obvious buyers.
Defence suppliers and AI businesses: defence spending is set to increase, and unmanned/tech support is increasingly necessary. Across a wider field of business, AI provides an opportunity for greater efficiencies.
MBOs/investment/shareholders agreements are increasingly in demand, as those businesses who cannot identify a trade or PE deal, look to plan for the future. A more active and receptive banking market has helped this process, so deals below £20m are increasing.
Conclusion
The market remains good, but not universally. Strong sectors, with good short/medium term growth potential will attract good offers. Strong businesses in weaker sectors could find it harder; the key for these businesses will be to demonstrate savings/efficiency/higher profit to buyers seeking to consolidate, or to extend their territory. For some, it may just be a question of biding your time.
Buyers are putting greater importance on commercial and technical diligence, but may not want to reveal their true requirements early in the negotiation.
Sellers must be willing to ask direct questions of buyers, and not get swept along with the excitement of an attractive offer. This can be hard for a business seeking to build a relationship with the buyer. Good advisors, whether corporate finance or legal, can take this responsibility.
Having ensured the offer is properly tested and qualified, a good advisory team can ensure diligence is well managed, to avoid any loss of buyer confidence.
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