February 27, 2020

Will the confident please stand up

Mergers and acquisitions

"If you feel more confident about the UK's economic outlook following the general election result than you did six months ago, please stand up." This was the opening from the host of a recent economic update seminar. 90% of the audience rose to their feet.

While far from scientific, this was clear evidence that with the UK's third general election in less than five years finally behind us, confidence about the UK's economic outlook has grown (in a room of a 150 or so in Bristol at least). Boris Johnson's gamble paid off and a sizeable working majority gives him the ability to pursue his Brexit strategy giving the markets the certainty craved for the past three and half years. Well, at least for the next few weeks until the UK and the EU clash over their contrasting negotiating positions!

What happened in 2019?

The back end of 2019 was full of transaction data highlighting the scale of the reduction in UK M&A activity.

It was reported that takeover deals signed by British companies reduced by more than a quarter in 2019, with Mergermarket reporting a reduction in the volume of deals from 1,657 to 1,403 and aggregate deal value from £184.1bn to £134.7bn. There were of course some notable sector exceptions, such as financial services where, despite a reduction in deal volume, aggregate deal values rose by almost £15bn, although this can largely be explained by a number of notable high value deals during the year.

In Royds Withy King's Corporate team, discussions with clients during 2019 left us in no doubt that uncertainty affected business decision making. A number of our clients chose to delay acquisition activity and other long-term spending decisions pending a more certain economic outlook. Deals that did take place saw buyers taking a more cautious view, increasing the use of earn-outs and deferred elements in consideration structures to mitigate against post-completion performance risk.

What can we expect in 2020?

Now that there is a more certain outlook in place, at least in terms of political and economic policy if not outcome, here’s what we expect to see in terms of M&A activity.

Inward investment

Inward investment presented a mixed picture in 2019. In the South West, our team saw continued confidence from foreign corporates: the attractive price of sterling and the region's strong reputation, particularly in innovative tech, contributed to the region remaining an attractive destination. Foreign investment in the UK's health and social care markets also continued to grow, with funders keen to support consolidation, particular in the care home industry.

Will this continue into 2020? We expect so, but the direction of travel of the UK's post-Brexit economic policy will play a major part in determining the sources of investment. It is unclear at present whether closer alignment to the US or the EU is the more likely outcome.

UK acquisition activity

In the short term since the election, we've seen clients reacting by releasing held back investment capital, whether by way of capex expenditure decisions or acquisition activity. The pipeline of transactions is looking strong with a number of deals coming to market and we anticipate an upturn in deal volumes in the first half of 2020.

Market uncertainty has also had a limited impact on the private equity market where there remains significant appetite from investors looking for successful businesses with an established track record and ambitious growth strategy.

This means the regional lower mid-market remains relatively strong and can only be further boosted in the year ahead as the veil of general uncertainty is lifted and strategies for growth, acquisitions and exits are back on the table once again.

Debt finance

We've already seen a significant boost in the volume of debt finance available, working on a number of lender and borrower advisory mandates. With the increased market confidence, and financiers having held back capital over the past few years, we expect a material growth in the finance available during 2020.

Entrepreneurs' Relief

The rumours regarding Entrepreneurs' Relief (ER) reform surface regularly pre-budgets. This time there is considerably more certainty given the Conservatives’ manifesto containing a pledge to review and reform the relief. This expected move has seen entrepreneurial clients in the midst of deals talking to us about accelerating the timetable to ensure transactions are completed prior to the budget and any scaling back of the relief. We’re also seeing consideration structures being reviewed to ensure gains can be crystallised prior to the budget, although steps need to be taken quickly given the limited lead time available for advice and implementation.

Overall, whilst challenges remain, our experts have an optimistic outlook for deal activity in the year ahead as confidence returns to the M&A market..


At the economic seminar mentioned, the final question the host put to the room was "Please stand up if you think Boris Johnson will secure his EU trade deal by the end of 2020".

Demonstrating the surge of market confidence… 90% of the room remained seated.

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