Drivers of M&A in the UK
Acquirers and investors seem unperturbed by these unusually uncertain times, shrugging off concerns about a slowdown in China, the success of radical politicians and parties across the UK, Europe and in the US, the risk of Brexit, unconventional monetary policy and so on.
There’s a lot of talk of risk, and yet a lot of transactions being completed. Why the disconnect? What’s driving these deals?
The China question
Firstly, what’s not driving them? Inbound buyers from China. Actually, of more than 500 inbound UK M&A transactions in 2015, only seven involved Chinese counterparties. The wave will come – China is the world’s second-largest economy, after all – but it isn’t here yet.
Going beyond ego
So, if it isn’t China, what is driving M&A volumes in the UK? Well, inbound interest from the US (50 percent in 2015) and Europe (25 percent) remains a major factor. Acqusitive corporates are very clear on what fits their strategies, and therefore on what targets to pursue. They are not wasting time on tangential opportunities merely because there is a process.
Evolving transaction structures
Earn-outs are not as common as they used to be. Instead, buyers are working out what the target is worth, on a standalone basis today, then comparing this to the value it can bring to their own organisation. They are then sharing this synergy value in a highly-compelling valuation for the sellers, paid all in cash at completion.
Private Equity investors
And what about private equity (PE) investors? PE investors remain under consistent pressure to deploy the funds they have raised. There is a lot of ‘dry powder’ unspent, and for a time-limited fund keen to make acquisitions in the first three or four years of a 10-year life, the clock is ticking.
The future looks bright
We are seeing these drivers of M&A transaction values and volumes pretty consistently across the economy as a whole. Despite – or because of – all the talk of risk and uncertainty, these drivers of transaction activity are unlikely to decline in the medium term. Until the economy returns to steady growth, capital will remain cheap and acquirers and investors will continue to seek high-quality, fast-growing business – and will pay good value for them.
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