Business owners are stirring after the widely unpredicted Conservative victory has dispelled an acute period of uncertainty that has put mid-market M&A activity ‘on pause’ during the first half of 2015.
Counter-intuitively, the perceived risks of a Labour-led coalition or majority government did not provoke a stampede of UK entrepreneurs to the exit during the second half of 2014, fearful of the consequences of a Labour victory on the UK’s relatively benign capital gains tax regime. Having experienced a definite surge in private company sales in the run-up to both previous general general elections, I struggle to put my finger on anyone reason for it not happening this time around. On the working assumption that entrepreneurs will have weighed up their options carefully, it seems likely that they saw more gross value to be created within their businesses from reaping the benefits of a sustained recovery in the UK economy. Crystallising an undervalue by exiting prematurely was simply not an option.
Having left it too late to exit even if they wanted to, the profound uncertainty surrounding the elections caused company owners to hold-off from initiating transactions, despite a strong underlying M&A market fuelled by a wall of private equity capital and a much improved debt market. Ironically, for those vendors that took the plunge during this interregnum, the shortage of good investment opportunities and surfeit of capital seeking a home have driven very healthy valuations, as Livingstone’s recent sales of Javelin and Lloyd’s Register Rail for double digit EBITDA multiples amply demonstrates.
What a difference a fortnight makes. Many of the clients whose exit strategies Livingstone has been advising on – in some cases since the financial crisis bit in 2008 – are now eager to explore pro-actively their options. Having weathered the storm and emerged leaner and fitter from the global recession, our clients’ business’s now have several years of growth under their belts providing a firm foundation for an exit process. Most importantly, and with the local distraction of the UK election receding fast, managers are looking forward with far greater certainty than at any time in the last eight years. And confidence in the next 12 to 18 months is the magic ingredient for shareholders considering a company sale. The phones have been ringing with clients now seeking to press on, and press on hard we will.
A meaningful upsurge in M&A actively in the latter part of 2015 and early 2016 is highly likely. However, this is not all good news for company owners. For a while, I have been counselling many of my clients to get ‘out there’ ahead of the bow wave of opportunity that is likely to follow. From a position of a shortage of supply – with a scarcity of high quality acquisition targets – the risk is that prospective vendors quickly find themselves wallowing in a glut of opportunity, enabling acquirers and investors to pick and choose the transactions they focus on – and pricing accordingly. There is perhaps a window of six to nine months for company owners that have resolved to exit to do so before normal M&A market conditions kick-in.