The Top 5 drivers of M&A activity
M&A activity is on the up. What’s driving investor and acquirer appetites?
1. Costs are getting back to normal levels faster than revenues
It has been good to see a resumption of economic activity after lockdown. But restrictions remain and consumer spending patterns are far from normal. For some businesses, this means it’s possible to have the doors open but difficult to turn a profit. This is prompting owners to look at their options for financing their businesses.
The positive news is that government, banks, and many other funding sources have recognised the challenge and are ready to help. This may come in the form of new funds, replacing debt for equity, or even collaboration between SMEs and larger corporates with strong balance sheets – the point being that M&A and investment activity is being driven by this need and there are options available. In order to survive and progress in the most positive way, it is important to explore all options and create a choice before it is too late or the ‘gap’ becomes too big.
2. Companies are adapting to changing markets
Since the start of the year customer behaviour has changed both in B2B and B2C markets – it is well documented how many markets have been affected including increased use of digital technologies, revised business models, and ‘just in case’ as opposed to ‘just in time’ supply chain priorities.
These changes are both positive and negative for different companies. It may trigger a need to acquire or merge to adapt to a changing market, or it may generate activity to capitalise in a newly discovered strength compared to previous market positioning. Both types of driver are actively promoting increased levels of corporate M&A and investment activity at present.
3. More investors are competing for deals in sectors that have proved resilient
The UK has more Private Equity firms, angel funds, alternative lenders and forms of investor than ever before. Many of these organisations have followed a ‘generalist’ approach to different sectors, investing in individual businesses based upon their own merits rather than following a sector-based ‘thesis’.
As a result of the Covid epidemic many sectors that have traditionally been very attractive to outside investors such as restaurant chains and high street retail are suddenly found to be very much more difficult, which in turn means that other areas are comparatively attracting much more interest from investors. These include the obvious areas such as healthcare and digital businesses but also now highlighted are manufacturing, construction and consultancy businesses that previously may have been lower down on financial investors’ lists.
4. Increased focus on building and running successful cross-border businesses
Business in the UK has changed more than many of us can remember as a result of Covid and Brexit. The effects of the epidemic have been significant across many different countries, testing supply change and prompting big changes to working practices.
Whilst the adoption of the changes has been extremely difficult in many circumstances, it has also led to opportunity for greater collaboration across borders, opportunity for local providers to compete with low cost outsourced suppliers, and also corporates seeking to ensure they are best placed to benefit from wider changes over the coming years.
As a case in point, our increased collaboration (including via our partner firms in the International Corporate Finance Network) with overseas organisations has led to an even greater number of cross-border discussions on transactions where boundaries and borders are becoming less and less important when it comes to communicating and collaborating on buying, selling and investing in businesses.
5. Company owners are rethinking their priorities and plans for the future
There are of course the personal stories that we hear every day. We have all been affected by recent events as a result of the pandemic and to a greater or lesser extent will continue to be for a very long time. This has caused many individuals to ask questions about their priorities, to find the energy for a change in direction or to decide that they would prefer to take a more balanced approach to personal risk.
This reflection may be a catalyst to explore how best to address all the aims of an entrepreneur – financial and personal as well as what is best for the company that they are leading. Coupled with discussions about changing tax rates, particularly those associated with wealth such as Capital Gains Tax and Inheritance Tax, we are again seeing this as a catalyst for increasing levels of discussion about the future.
Fortunately, unlike previous downturns, this time there are more options available than ever and plenty of buyers and sellers keen to talk.