IPO vs M&A - Has the time finally come for UK M&A?

The increase in the number of listings in the UK has been driven by a wall of available capital and some private equity owners are favouring IPOs as a way to achieve a premium valuation on their exits.

The number of listings in London this year has already exceeded the total number for 2013, demonstrating the frenzy that is occurring.  A “frothy” market has lured many companies into the process and executives have run hard to list their companies during the “boom” phase window.

Things don’t last forever

But can this IPO fever continue?  Flotation fatigue is likely to occur from this kind of IPO market saturation which will lead to investors unwilling to back certain listings.  Concerns are also building after a growing number of disappointing aftermarket performances, including Just-Eat, whose share price plummeted to 25% below its IPO price in May this year.  With a strong focus on not repeating the mistakes of 2007, if companies continue to underperform in such a manner, new issue appetite is likely to deteriorate.  This could be the perfect time for M&A to strike hard.

Make mine M&A

It has been widely forecast that 2014 is going to be M&A’s year. Thompson Reuters has predicted a 17% rise in deal volume for 2014 and executives who have been sitting on their hands throughout the recession waiting for confidence to return to the market will be keen to get things moving on the M&A front.

Corporate balance sheets are in rude health; with PLCs’ share value values recovering and management keen to grow to boost their earnings, acquisitions are an important tool to achieve this – especially at a time when funding costs are low and market consolidation is so important.

Increasing confidence levels are yet to be fully reflected in completed deal volumes, but values are increasing.  Q1 2014 saw deal volume reduce by 16.5% but deal value has risen 15% to £32.5bn, proving that it is a definite case of quality over quantity.  It also displays the appetite for companies to go beyond bolt-on acquisitions.  And, although Q1 2014 has been sluggish, larger strategic deals seem to be taking place in the background which is likely to lead to a very promising second half of the year.

Benefit the broader economy

M&A activity will significantly boost the economy and with the increased focus on growth, it is more important than ever to incorporate M&A into corporate growth strategies.  This, combined with strong balance sheets, increasing cash piles and increased confidence about the economic outlook, is likely to trigger an increase in deal numbers.

With pipelines looking positive, we look forward to a prosperous year for M&A.  We hope to see companies taking advantage of the value-add opportunities which are likely to come their way as well as a broadening of market vision beyond the IPO furore.

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