Predator or prey? UK in world of M&A

The UK has always played an important role in global deal-making, both with the quality and expertise of its banking and advisory professionals, and with UK-based companies continuing to be involved in some of the world’s largest deals.

This year has been no exception. So far in 2015, UK companies have found themselves the subject of two out of the three largest deals announced year-to-date. Anheuser-Busch InBev’s £87-billion acquisition of SABMiller is the largest announced deal by value globally, with Royal Dutch Shell’s £47-billion acquisition of BG Group in third place.

When in the role of “predatory acquirer”, UK companies have had a quieter year than 2014 in looking for cross-border acquisitions. Two sizable deals this year are the £7.6-billion acquisition of ITR Concession Company by IFM Global Infrastructure, which completed in May, and the recently announced £4.2-billion acquisition of Dyax Corporation by Shire.

Already 2015 can be classed a remarkable year for global deal activity, with announced deal values standing at £2.8 trillion

Based on absolute numbers, UK companies consistently favour domestic deals, with 62 per cent of deals in 2015 involving a UK acquirer and target. Based on value, the figure drops slightly to 56 per cent, but UK domestic mega-deals (this year’s BG & Shell deal excluded) have not really been seen since the global financial crisis.

UK companies typically look to the United States and Western Europe when on the hunt for targets, typifying cultural and language synergies that many corporations feel comfortable with.

Let’s look at the global picture. December is typically busy for M&A professionals as they work to close deals before the end of the year. Already 2015 can be classed a remarkable year for global deal activity, with announced deal values standing at £2.8 trillion, 18 per cent higher than was recorded for the whole of 2007, previously known for its record level of transactions.

The economic climate for M&A deals has been good for at least three years now, with many corporates holding significant war chests of cash for acquisitions, private equity “dry powder” (uninvested available funds) at record high levels and low interest rates fuelling debt markets.

A major difference between 2015 and 2007 is the role private equity has played in driving the overall deal levels. Back in 2007, private equity deals accounted for 20 per cent of all deals by value compared with just over 13 per cent so far this year. Dig a little deeper than the headline figures and you really begin to see how it is large multinationals that have driven deal activity via their mega-deals.

This year has seen the announcement of 34 deals with a total value of £781 billion. This compares with a total of 18 deals totalling £352 billion in 2007. In 2007 private equity buyers were responsible for seven of those mega-deals and more than a third of the total deal value, compared with only three in 2015, representing 10 per cent of the total value.

So what does this mean for activity involving UK companies in 2016?

Advisers with whom I have chatted say their deal pipeline is healthy. Interest rates are still low, fuelling the availability of cheap debt. And private equity firms still have substantial funds available to them for investment. So theoretically the outlook for 2016 in terms of UK deal activity should be good. However, the increased instability around global security could easily affect the markets and rein in buyer confidence as we have seen before.