LEGAL
Much has been written about the economy and the state of the Mergers & Acquisitions (M&A) market. I have set out below my thoughts on how businesses should navigate the market over the next year, and some insights into changes we have observed. By Jonathan Grant, Partner, DMH Stallard
How can the M&A market be active, while economic headwinds increase? Most lawyers and corporate finance professionals say the same thing when asked …”never seen a busier market”! The truth is that the current market is more complicated.
2020/21 WAS ASTONISHING
The 12 months to summer 2021 really was the most buoyant market I can remember. We saw a huge number of private equity and large corporate buyers (with finance). They were actively looking to buy businesses for growth, to deliver synergies and increase speed to market, for key areas they did not already have. Deal values also rose with many more deals in the £20m+ bracket and far fewer below that.
THIS YEAR, THE HEADWINDS ARE GREATER
This Autumn, we are holding the biggest pipeline we have had for many years. Expected values remain high; the CF advisors we know say the same thing. I have had two significant deals confirmed in the second week of September, where the businesses have gone to market over the summer; this indicates a positive climate. The important difference this year, is how buyer/investor confidence will last? Some doubt over this, makes successful completion of those deals less certain. This is not a huge surprise given the economic headwinds, and perhaps explains the apparent disconnect between the
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economic indicators, and the deal community’s confidence. My recommendation, for clients looking to navigate in these choppy waters, is to qualify all approaches. Ensure you are very clear on buyer/investor’s pricing assumptions/key deal drivers. It is particularly important to be clear before you enter into exclusivity or agree the letter of intent/heads of terms. An LOI is a document which is non-binding, but lays out clearly all key deal issues; whilst this can never guarantee success, it greatly reduces the risk of a deal falling down part way through.
THE CHALLENGE
We normally complete a very high proportion of the deals we start to run for clients. Over the last 12 months, we have seen some high value deals ‘pulled’ by investors. In most cases the investors cite limited growth opportunities,
or financial diligence not matching their investment metrics. This really comes down to lack of confidence in the market. Despite these challenges, there remain many well-funded investors/buyers in sectors which see positive growth opportunities. This is combined with many owners looking for an exit and feeling weary of dealing with constant challenge.
THE OPPORTUNITY
As well as demand from buyers, there are positive signs from the economic landscape. The pound is at a record low, making acquisition of UK businesses by US and other international buyers very good value. Culturally, the UK has always been attractive to international buyers; London/home counties are a big draw for executives, there is good access to finance, a strong advisory community, and the UK is still seen as stable. While Russian oligarchs may be withdrawing, we see Middle Eastern investment, and other international investment likely to increase. Active trade and PE buyers are still completing high value deals, but the business sector is likely to be a better indicator of deal activity. As the economy evolves and changes, with issues like supply shortages, inflation, and the war in Ukraine resolving themselves, these sectors are likely to change.
