Most parts of the business world have faced an unwelcome combination of weak growth, high inflation and rising borrowing costs this year. The triple whammy has led to a sharp decrease in both the number and average value of mergers and acquisitions.
Global M&A activity in the first half of this year was worth about £1.1tn, according to financial data provider Dealogic – 40% down on the total recorded for H1 2020. And, with the short-term economic outlook still looking uncertain, lenders remain largely wary of funding new deals.
Few markets have been immune to the slowdown. In the UK, notable transactions among big plcs have been few and far between of late. Alastair Mankin, vice-president at investment bank TD Cowen, reports only three substantial deals in recent months: EQT’s takeover of Dechra Pharmaceuticals (£4.5bn), Brookfield’s purchase of Network International (£2.2bn) and UnitedHealth’s acquisition of EMIS Healthcare (£1.2bn).
It’s a far cry from the flurry of acquisitions that happened in 2021, when investors were keen to snap up opportunities created by the Covid crisis. That proved to be a record year for deal-making, with PwC counting more than 62,000 M&A transactions globally – up 24% on the tally for 2020.
Should we expect the lull in activity to continue over the next year or so? For business owners seeking to sell up, might it be better to hold fire on any likely deals, or is now the time to find a buyer?
Why M&A activity could take off again in 2024
Despite what’s happened – or hasn’t happened – so far this year, there are grounds to expect a recovery in 2024 if inflation eases, interest rates plateau and the global economy stabilises as expected. Moreover, the UK and Ireland are expected to enjoy the highest growth in M&A activity next year, according to the European M&A Outlook 2024 report published by law firm CMS.
“The outlook seems a lot more positive in the UK. Interest rates have reached their peak and will begin to come down in the coming months,” predicts Matthew Wiseman, partner at investment bank Alantra. “As a result, buyers and sellers can more confidently predict market conditions and make more accurate business valuations, leading to more activity.”
Deal-makers in the UK are also keen to complete transactions before the next general election, which must be held by January 2025 at the latest. There are rumours of a potential increase in capital gains tax, which may prompt some business leaders to accelerate their M&A plans to secure the current 20% rate.
Graham Carberry is MD of Arrowpoint Advisory, an M&A consultancy that specialises in deals worth between £20m and £200m, including Hyatt’s recent purchase of hotel booking platform Mr & Mrs Smith. He reports that the consensus is that 2024 will be a big year for takeovers.
“We have the general election coming at the back end of next year, which looks very likely to result in a Labour government,” Carberry says. “We don’t know exactly how that will change the business tax environment, but people looking to sell assets will be aiming to do so sooner rather than later.”
Are regulators getting in the way of M&A deals?
Many deal-makers complain that the UK’s regulatory environment is not conducive to M&As in any case. The Competition and Markets Authority (CMA), for instance, has gained greater powers since Brexit and is scrutinising potential transactions more closely than it once did.
One instance in which the regulator has taken a tougher stance has been Microsoft’s planned purchase of Activision Blizzard, originally announced in January 2022. The deal was initially blocked by both the CMA and the US Federal Trade Commission, only for the latter to withdraw its objection and for the EU to separately clear the transaction.
“The CMA’s stance on the deal has received widespread attention, given that it goes against the grain of the UK’s focus on becoming a tech and innovation hub,” notes Harry Coghill, corporate and M&A partner at law firm Macfarlanes.
In August, Microsoft announced that it was restructuring the transaction to address the CMA’s concerns and so persuade the watchdog to end its veto. The latest indications are that the CMA might finally give the revised deal the green light.
This heightened regulatory scrutiny doesn’t seem to be deterring buyers and investors from seeking deals in H1 2024. The technology, media and energy sectors are widely expected to see the most significant surge in deal-making across Europe, according to the CMS report.
How to prepare for a takeover deal
So, as more businesses gear themselves up to acquire or be acquired over the coming year, it’s worth considering what makes a good takeover target and how firms can make themselves more attractive to potential buyers.
Businesses with robust cash flows and strong growth prospects are always obvious targets, as buyers can be confident of long-term value, notes David Newns, co-founder and partner at Contrado Capital, a consultancy that helps entrepreneurs and owner-managers to sell their businesses. He adds that companies that performed well throughout the pandemic will be seen as having proved their resilience. And, given that the cost-of-living crisis is still weighing heavily on consumers, firms with recurring revenues and a product portfolio that favours essentials over luxuries are also well placed to secure deals in the short term.
Ryan Brown, deputy group CEO of insurance firm PIB Group, which has acquired 26 businesses so far this year, says that any firm with a leader who has entrepreneurial qualities will always be attractive to his company. After it acquires such an enterprise, “its leadership will stay in place”, he stresses. “We don’t change the formula that’s made that business thrive to date.”
Companies that operate to a set of clear ethical values will also stand out. Emma Danks, head of the UK corporate/M&A group at law firm Taylor Wessing, says that environmental, social and corporate governance remains an important consideration. Many companies are looking to acquisitions as a quick way to achieve ESG objectives, so a business that enables buyers to tick such boxes is likely to be well placed in this market.
Broadly speaking, then, for a business to attract potential acquirers, it’s a case of getting the fundamentals right and choosing the right moment to seek a buyer. At a time of enduring economic and political uncertainty, doing the latter is always likely to be more of an art than a science.