The volume and value of deals in the the UK lower mid-market completed in the first three quarters of this year has increased year on year for the past three years.

According to Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard, a quarterly analysis of UK-headquartered private equity deals in the £10m (€11.6m) to £100m segment, 63 transactions were completed between January and the end of September this year, compared with 50 investments in the same period in 2010 and just 25 in the first nine months of 2009.

During the third quarter of this year, deal volume was higher than in the previous quarter. The combined value of those deals fell slightly – from £794m to £785m – but both volume and value of deals was still higher than the same quarter of 2010.

The drop in total deal value in the third quarter signals fewer large deal opportunities while the lower mid-market enjoys a steady inflow of new businesses seeking private equity investment.

Management buyouts and secondary buyouts were the most common types of transaction, however the number of MBOs completed in Q3 2011 fell to nine from 12 recorded in the same quarter last year.

There were nine secondary buyouts recorded in the most recent quarter, the highest number of any quarter during the last two years. Trade buyers were also prevalent in the quarter, with six companies exited to corporates, higher than the previous two quarters but lower than the eight recorded in Q3 2010.

There were two take-privates in the last quarter compared to only one in the previous two quarters.

No IPOs were recorded, continuing the trend that kicked off back at the start of 2010, and is unsurprising considering the unstable capital markets.

TMT businesses continued to dominate the lower mid-market with eight out of 22 deals this quarter and five transactions in business support services.

Retail saw three deals or more completed in every quarter since the second quarter in 2010.

This performance of the UK lower-mid market in the third quarter is in distinct contrast to the overall market when much larger deals of £100m plus are considered. That market has declined during the past two quarters and some reports show it declining dramatically in Q3 – Bloomberg, for example, this week reported a 43 per cent decline in deals with European purchasers for the overall market. Therefore, the volume of deals in the lower mid-market is encouraging in this difficult economic environment, and may prove in the next quarter to continue to be resilient. There is further evidence in our figures of a positive shift in the market with a strong mix of industries, including healthcare, which was absent last quarter and a resurgence in technology deals.

Sovereign Capital has backed the MBO of Creare Communications

The management team at digital marketing agency Creare Communications has successfully completed a management buyout of the business with funds from Sovereign Capital.

Creare Communications is one of the UK’s leading providers of Search Engine Optimisation (SEO) services and today helps over 1,000 clients. It works with its clients to improve the visibility of their websites by improving ‘organic’ search results – the non-sponsored listings shown on search engines such as Google as well as with their ‘pay per click’ campaigns and e-commerce functionality.

Founded in 2006, Creare has seen strong growth due to the excellent results it achieves for its clients of improving the visibility of their websites, through which it is able to demonstrate a clear Return on Investment.

Rockworth were retained to advise the management team and introduced the owners to a number of institutional investors prior to the transaction completing with Sovereign Capital.

Cross border m&a activity in the UK has grown during the first half of 2011, with a 14 per cent increase in the total M&A values being driven by a rise of 105 per cent in outbound buys.

Research published by investment bank Baird shows that following on from a growth year in 2010, when values recovered from a 2009 low of $127 billion (£77.8 billion) to $215 billion, the first six months of 2011 has posted figures of $104 billion.

Deal count involving outbound M&A from UK acquirers reached 366 for the year to date, a rise of 25 per cent on the same period in 2010.

While cross border M&A activity has seen an increase during 2011, domestic M&A recorded a drop off with deal count falling from 902 to 791 and value from $37 billion to $27 billion.

Looking at the rest of Europe, Jonathan Harrison, managing director of the European investment banking team at Baird, says that in-bound M&A, involving non-European acquirers, remains robust with the number of deals in the first half of 2011 exceeding that of 2007, the last peak.

Overall the number of transactions increased by 4.2 per cent, with the middle market first-half deal total increasing by 5.4 per cent year-over-year.

He adds that average deal size is back to the same level as 2007 at $186 million.

Harrison comments: ‘In the middle market sponsors still represent about one quarter of deal value, which has been fairly consistent over time.

‘With deal value still lower than cyclical peaks, it shows that sponsors are still struggling to put money to work.’

The research shows that the top three sectors for cross border activity by number of deals are services, healthcare and computer and electronics.

The UK leads the way of European target companies acquired by non-European companies, recording more than double the number achieved by second place Germany.

Harrison concludes: ‘Much of the deal activity that we have seen in the first half of the year has been negotiated deals or limited processes, however we anticipate a few more formal, wider processes will commence post summer.’

Harrison explains that decisions to launch may still depend on prevailing economic and credit mark sentiment which remains ‘somewhat fragile’.

ISIS Equity Partners (“ISIS”) has sold its investment in Getting Personal to Card Factory.

ISIS invested £4m on behalf of its clients, the Baronsmead VCTs, in Getting Personal in June 2010 acquiring a minority stake from founders, John Smith and Giles Harridge. Getting Personal is a leading internet retailer of personalised gifts. The business has grown rapidly since its launch 5 years ago and generated sales of £11.5m in the year to April 2011.  ISIS received an initial approach from Card Factory during Autumn 2010 which led to the deal completed today.

The deal value and ISIS returns have not been disclosed.

Adam Holloway of ISIS Equity Partners comments:

“John and Giles anticipated the growth of the personalised gifting market and did a brilliant job in building Getting Personal to where it is today. Over the last 12 months we have strengthened the marketing mix, launched new products including photo upload and upgraded the website. The strategic fit with Card Factory is excellent and we are sure the business will go from strength to strength. ”

John Smith, Managing Director of Getting Personal comments:

“It has been a tremendously busy and successful 12 months with 2 transactions and strong revenue and growth profit. ISIS Equity Partners has been a very supportive investor and we now look forward to joining Card Factory which is the UK’s leading card retailer.”

Inflexion Private Equity have had their FDM Group Bid Accepted

Recommended increased cash offer by ASTRA 5.0 LIMITED a company controlled by investment partnerships advised by INFLEXION PRIVATE EQUITY PARTNERS LLP for FDM GROUP Plc at 150 pence per FDM Share

Summary

The Independent Director of FDM and the board of Astra announce that they have reached agreement on the terms of a recommended increased cash offer for the entire issued and to be issued share capital of FDM.

Under the terms of the Increased Offer, FDM Shareholders will be entitled to receive 150 pence per FDM Share in cash. The Increased Offer values the entire issued and to be issued share capital of FDM at approximately £35.4 million.

The Increased Offer Price represents a premium of approximately:

51.5 per cent. to the Closing Price of 99.0 pence per FDM Share on 3 June 2009, the last business day prior to the announcement by FDM that it had received an approach from the Executive Management Team and Ivan Martin regarding a possible offer for FDM;

75.4 per cent. to the average Closing Price of 85.5 pence per FDM Share for the six month period ending on 3 June 2009; and

87.5 per cent. to the Closing Price of 99.0 pence per FDM Share on 3 June 2009, as adjusted for cash on the balance sheet as at 30 June 2009, which equates to 40.7 pence per FDM Share. The cash adjusted Offer Price is 109.3 pence (being 150.0 pence less 40.7 pence). The cash adjusted Closing Price on 3 June 2009 was 58.3 pence (being 99.0 pence less 40.7 pence).

The Increased Offer will constitute a revision of the Original Offer, and will remain subject to the conditions set out in Section A of Part III of the Original Offer Document and to the further terms to be set out in the Increased Offer Document, which will be sent to FDM Shareholders shortly.

FDM Shareholders who have already validly accepted the Original Offer need take no further action; their acceptances of the Original Offer are deemed to be acceptances of the Increased Offer from Inflexion Private Equity.

The procedure for the acceptance of the Increased Offer will be the same as for acceptance of the Original Offer. FDM Shareholders wishing to accept the Increased Offer in advance of receiving the Increased Offer Document may do so by following the procedures set out in paragraph 14 of Part II of the Original Offer Document as soon as practicable.

The Increased Offer will remain open for acceptance for at least 14 days following the posting of the Increased Offer Document, which it is intended will be issued on or before 24 December 2009.

As previously announced, Astra has received irrevocable undertakings and a non-binding letter of intent to accept the Original Offer or to procure that any other person accepts the Original Offer, and has an agreement to acquire FDM Shares under the Share Exchange Agreements in respect of a total of 12,436,221 FDM Shares (excluding Management Option Shares), representing approximately 53.56 per cent. of the existing issued share capital of FDM. Since the posting of the Offer Document, Henderson Global Investors Limited (“Henderson”) has announced that it has sold its entire holding, being 317,916 FDM Shares which were subject to the non-binding letter of intent.

Furthermore, Astra has received irrevocable undertakings to accept the Increased Offer from, Ennismore Fund Management Limited in respect of 2,102,700 FDM Shares and the Royal County of Berkshire in respect of 234,050 FDM Shares.

In addition, the Inflexion Private Equity Funds, which are acting in concert with Astra and the Management Team have acquired 1,350,891 FDM Shares at a price of 150 pence per FDM Share. Astra has entered into a sale and purchase agreement with the Inflexion Funds to acquire these FDM Shares.

In aggregate, Astra has therefore received irrevocable undertakings to accept the Increased Offer or to procure that any other person accepts the Increased Offer, has an agreement to acquire FDM Shares under the Share Exchange Agreements or is otherwise interested in 15,805,946 FDM Shares (excluding Management Option Shares), representing approximately 68.07 per cent. of the existing issued share capital of FDM.

Astra, the Inflexion Private Equity Funds, the Executive Management Team and Ivan Martin confirm that in respect of their aggregate shareholding of 3,625,148 FDM Shares (excluding Management Option Shares), representing approximately 15.61 per cent. of the existing issued share capital of FDM, and any further FDM Shares which they might acquire, they will vote against any scheme of arrangement proposed by any offeror other than Astra and will not accept any contractual offer made by any offeror other than Astra at any price (this statement ceasing to apply if that contractual offer becomes or is declared wholly unconditional or if the Increased Offer lapses).

The Independent Director of FDM, who has been so advised by Brewin Dolphin, considers the terms of the Increased Offer to be fair and reasonable. In providing its advice to the Independent Director, Brewin Dolphin has taken into account the commercial assessments of the Independent Director.

Accordingly, the Independent Director intends to recommend that FDM Shareholders accept the Increased Offer, as he has done in respect of his entire beneficial holding of 15,000 FDM Shares, representing approximately 0.06 per cent. of the existing issued share capital of FDM.

Commenting on the Increased Offer, Rod Flavell, Chief Executive Officer of FDM and member of the Management Team, said:

“The Management Team is committed to completing this transaction with Inflexion Private Equity and is delighted that a significant majority of FDM Shareholders have now thrown their weight behind the Increased Offer. I hope now that we can move things to a timely conclusion in order that we can return to managing the business on a day-to-day basis.”

“We believe the revised offer represents a compelling valuation for the business and is a substantial 87.5% premium to the cash-adjusted price on 3 June 2009, the last day before offer talks were announced. Against the background of challenging sector and stock-market conditions, investors in FDM are achieving a full price for their shares.” said John Hartz, Managing Partner of Inflexion Private Equity.

U.S. stocks have enjoyed a steady advance this year, with particularly spectacular performance during the month of December. The month’s equity gains have been driven by a slew of positive news–including the unexpected decline in jobless claims.

The Labor Department’s first-time jobless claims reports continue to improve and show a promising downward trend, pointing to a slowing in layoffs. The unemployment data is very important; it’s further confirmation that the labor market is on the mend. If people really are going back to work, the current spending in the malls will continue long after this holiday season is over. That’s all the economy needs to give it the boost that will drive the Standard & Poor’s 500 Index to even higher levels in 2011.

Add to that the positive data on manufacturing and housing, and there’s a renewed confidence in the economy. The S&P 500 is now at a two-year high, and we have even seen one of the best barometers of consumer and business vibrancy–FedEx raising its profit forecast–give the market an additional shot of adrenaline. The bottom line is that good news is flowing and shares are rising.

This healing economic momentum is giving fuel to the accelerating growth or turnaround of many companies, from small cap to mega cap. During the recession and the months following, companies were hurt by a slowing business environment and depressed consumption. Now, the winds are in their favor and stocks look to be positioned to enjoy improved top-line growth and, thus, higher stock prices.

In looking at 2011, we should see a renewed flow of corporate mergers and acquisitions. The M&A market has already emerged from depressed levels due to the financial distress of the credit crisis, and is poised to see a wealth of deals next year. While there was certainly a lot of activity–and some big name deals–across various industry sectors in 2010, next year is when the transaction volume should really take off. In fact, a recent study from Thomson Reuters and Freeman Consulting Services concludes that the global market for M&A will surge 36% in 2011 to over $3 trillion.

Why Now
Why will 2011 be a big year for M&A? The catalysts are growth, technology, cash and the economy.

For the past years, many companies have been dealing with depressed markets and hunkered-down consumers. The bounce back in growth–coming out of this recession–is much sparser this time around. For management looking to move top-line numbers, adding new business units or customers via a transaction is a way to improve growth projections.

While many companies, particularly industry leaders, spend increasingly on R&D, more and more, innovations are coming from firms focused on particular sectors. Such companies are very attractive, as buyers are looking for technology-based competitive advantage to leapfrog competitors.

The economy has been rough on most, but a number of companies with strong cash flow have continued to see their bank accounts grow and are now sitting on huge balances. Those companies enjoy stock prices that have significantly more buying power now that their shares have recovered, and some are even trading at multi-year highs.

The Obama administration has recently been pushing for businesses to use the $1.9 trillion in untapped corporate cash to help jump-start the recovery. President Obama would like to see that money used for hiring and organic growth strategies. Excess cash, however–like the extra dollars in your wallet–often finds a way to get spent. In the case of corporations, much of it will be used for acquisitions. After the corporate cash building over the last years, many dollars will likely find a new home in 2011.

Moreover, with the economy certainly improving on numerous metrics, timing is now positive for the M&A market. Companies are more confident about the future–both their own and that of the macro economy. Those who have survived and emerged from the downturn are now poised to take advantage of opportunities. These opportunities are often in the form of strategic and value-adding deals.

“With the stock market rallying and CEO and Board confidence on the rise, I think the M&A business will be quite active in 2011,” says Steve Lipin, senior partner at the global corporate communications powerhouse, the Brunswick Group.

“We’re seeing a lot of interest from overseas acquirers closely studying their options in North America,” says Lipin, who specializes in all areas of global M&A, especially cross-border transactions. “But don’t count out the big U.S. companies using 2011 to expand their strategic and geographic footprints as well.”

Attractive Sectors
There have been a growing number of deals this past year across a number of sectors. Technology, for one, has seen a huge number of acquisitions by companies of all sizes. The largest buyer has been Google, with a whopping 25 acquisitions in 2010 alone. A number have been small “talent purchases” but not all; the largest was the $700 million cash deal for travel software firm ITA Software.

Google was far from alone in the tech sector. Oracle, for example, made nine deals, including the $7.4 billion acquisition of Sun Microsystems and the $1 billion acquisition of Art Technology Group.

International Business Machines has done 15 transactions including $1.4 billion for Sterling Commerce (from AT&T) and the $1.7 billion acquisition of Netezza. Hewlett-Packard acquired six companies including 3PAR for $2.35 billion and Palm for $1.2 billion. This activity shows no signs of slowing; indeed, technology transactions should only accelerate as tech continues to be a key component of businesses and consumers’ purchasing decisions in this renewed economy.

There have been more than 70 tech/IT acquisitions–large and small–by the major industry leaders this year, compared to 33 last year and 55 in 2008. The tech sector is certainly recovering from the recession and not shying away from deals. Some deals, in fact, have become quite competitive when there’s a uniquely desirable product, competitor or technology in the industry.

Other sectors have been getting into the act and are also likely to be active in 2011.

A recent study by AdMedia Partners shows expected activity for the advertising industry and media companies from both strategic and financial buyers interested in content and services. In fact, 62% of financial buyers expressed interest in information and database publishing and online media, and 54% in social marketing and marketing technologies. With all the cash in hand, it makes more sense to buy a social media company–particularly one that shows traction and growth potential–at a premium. Companies don’t want to waste time and invest in the human resources that are needed to develop that type of entity internally.

Other sectors that were rocked severely during the recession, like real estate and finance, are now seeing survivors move to increase market share and divest non-core assets. Industry experts are predicting high level of activity within the publicly traded REIT sector. M&A amongst REITs will jump 88% and financial sector M&A will jump 75% in 2011 vs. 2010, according to Thomson Reuters survey projections.

With new government regulations on the books or being written in as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, many of the big banks will be looking to unload certain riskier business units, like those tied to derivatives and hedge funds. Other companies will be eager to jump in and enter the lucrative areas of financing and banking. For example, in November, Fortress Investment Group acquired 80% of American General Finance with $20 billion of assets from American International Group. American General is a leading provider of consumer credit and specializes in products and services, including bill consolidation loans, home equity loans, personal loans, home improvement loans and loans to help consumers manage unexpected expenses. Earlier in the year, Fortress acquired CWCapital, a mortgage origination and special servicer company. This was the third servicer purchase by Fortress.

Health care is also certain to be in the corporate transaction news. Big pharmaceutical companies like Eli Lilly , Pfizer and Merck, along with biotech firms and those in the health care services sectors will all be on the prowl. Increasing demand from an aging population, health care legislation, and expiring patents creates the need to buy smaller biotech firms with new drug discoveries. All of this will drive more and more deal making in 2011.

Profiting from the M&A activity
What does this all mean for investors? What’s the best route for making money off of the impending deal flow? Well, Wall Street firms will certainly be a beneficiary of all this activity, as is typical during M&A booms. Firms with well established franchises and blue chip relationships will see their advisory businesses drive significant revenue. Leaders–whose stock prices don’t reflect their revenue growth potential–like Goldman Sachs, and boutiques like Evercore Partners, which has built a strong cross-border M&A franchises, stand to benefit the most. In addition, non-U.S.-based players like Barclays PLC should be a beneficiary of the advisory fees that will flow from the increasing globalization of M&A activity.

Outside of Wall Street, picking the winners becomes a bit trickier. The firms sitting on fat cash balances are more likely to be buyers in 2011. They’ll be looking for targets that are undervalued–though many firms’ stock prices have recovered in the general market upswing–or for those offering a key technology, product line or established customer base.

In many copycat type industries, a single big deal often shuffles the landscape for the remaining competitors. In the past, the health care/pharmaceutical sector has seen a number of follow-on deals after an initial shocking buyout or merger. By paying attention the sector trends, astute investors can move quickly into stocks that may be targets–hedging their bets while taking advantage, in many cases, of strong dividend yields offered by undervalued targets.

In addition to all the strategic buyers looking to accelerate growth and gain competitive advantage, the financial buyers of past years are also expected to move strongly. Corporations find themselves not only competing with industry players but increasingly fighting over attractive targets with well funded private equity firms. These so called financial buyers are also sitting on large cash balances themselves which they’re paid to invest. On the flip side, such firms have a backlog of portfolio companies from previous buyouts that they have been unable to sell during the last several years, and will now look to move those companies in better economic times.

As we enter the third year of a Democratic administration facing a now Republican-controlled House of Representatives and a less Democratic Senate, it remains to be seen what progress will be made from Washington. But be assured that outside the Beltway, from Wall Street to Silicon Valley, there’ll be plenty of dollars being spent in 2011.

The March budget provided many interesting announcements relevant to Rockworth clients.  The rate of income tax relief available to investors under the Enterprise Investment Scheme will go up from 20% to 30% and the annual investment allowed will increase from £500k to £1m (as of 2012). Coupled with the existing exemption from Capital Gains Tax after 3 yrs and Business property relief—we see this as a very strong source of potential investment for private businesses. The Entrepreneurs Relief will double from £5m to £10m as of 6 April 2011; this figure representing the life-time capital gains allowance where Capital Gains Tax is limited to 10%.  Coupled with a reduction in the main rate of corporation tax, extension of R&D tax credits and creation of an additional 50,000 apprenticeships means there is plenty to consider for private companies that may or may not be considering M&A in 2011.

Multiples for good quality private companies involved in UK M&A deals increased in 2010 and are likely to continue to rise this year, driven by interest from both trade and private equity buyers, various research shows.  One survey suggests Private equity firms on average paid 12.2 times multiples for companies in 2010, compared to 11.6 in 2009.  Meanwhile, trade buyers paid an average 11.7 times multiple for private companies last year, up from 11.2.

“Trade and private equity buyers appear to have been gearing up to make further acquisitions over the past few months and improvements in pricing are likely to tempt sellers back into the market,” said Lawrence Price, Director at Rockworth.  “Increasing stability and confidence within buyers’ businesses has meant that in the UK m&a is seen again as a route to growth.  With increased appetite for quality deals multiples are increasing.  Some estimates suggest that in the UK m&a valuations will rise between 10 and 20% this year.

Further evidence comes from Thomson Reuters who report that British companies have more than doubled their dealmaking so far in 2011 to a four-year high of $86bn (£53.6bn).

BP impact on UK M&A statistics

BP’s $9bn investment in oil and gas fields owned by India’s Reliance Industries and Ensco’s $8.6bn takeover of the American firm Pride International, to form an offshore drilling group, are among a slew of significant energy-related deals that have contributed greatly to the surge in mergers and acquisitions between January and the middle of March.

After three years of vastly reduced deal activity, companies have finally begun to spend the cash they hoarded during the downturn, while private equity firms have stepped up takeovers as they rush to meet investment deadlines.

As a result, mergers and acquisitions involving at least one UK party has increased by 164% so far in 2011 from the seven-year low of $32.5bn for the same period last year, when firms hoarded the cash they had, struggled to raise finance to make new acquisitions and held off on selling assets because valuations were low.

“There has been a significant increase in UK M&A activity as the huge number of transactions that have been bottlenecked in the past few years begin to get released,” said Henry Jackson, managing partner of OpCapita, the London-based investment firm previously known as Merchant Equity.

“Banks are more willing to lend and rising asset prices mean companies are happier to sell,” added Jackson, whose previous investments include the MFI retail chain.

UK M&A being driven in part by Private Equity funds maturing

Furthermore, private equity firms, which are typically required to return unspent cash when a fund turns five, are rushing to spend their money after a period of low activity. This is pushing up the volume and value of private equity transactions.

“Financial sponsors [private equity firms] have money burning a hole in their pocket and are being especially aggressive. There are a number of firms that are coming to an end of their investment period and have recently been bidding aggressively. We believe these deals were significantly overpriced as the bidders decided to accept lower returns to get the money out of the door,” Jackson says.

The value of private equity deals in the UK – a subset of the overall UK M&A market – has nearly tripled to $24.6bn this year, compared with the same period in 2010, according to Thomson Reuters.

Advent International’s $1.5bn takeover of the Priory care home and clinics chain and Arcus European Infrastructure’s proposed $1.34bn acquisition of Forth Ports are among the bigger private equity deals reported this year in UK m&a listings, according to Thomson Reuters.

Staffline Group plc, a national outsourcing organisation providing people and operational expertise to industry, today announces the acquisition of Ethos Recruitment Limited (“Ethos”), a Daventry-based recruitment agency. The acquisition is in line with Staffline’s business strategy of making selective bolt-on acquisitions to broaden both revenue stream and customer base.

Ethos Recruitment is a leading supplier of temporary and permanent staff in the Daventry, Rugby and Northampton areas and is an approved supplier of personnel including, skilled & unskilled basic manual & engineering labour as well as highly qualified HGV, LGV & other professional contract drivers, to many blue chip organisations in the region. Staffline will build on Ethos’ already strong customer relationships and master vendor agreements. Commenting, Andy Hogarth, Staffline’s Chairman and Chief Executive, said: “We are delighted with today’s announcement and look forward to building on Ethos’ strong regional presence.”