Amid the height of the coronavirus pandemic, the value of domestic mergers and acquisitions (M&A) in the UK fell to just 152 deals worth £300m in Q2, the Office for National Statistics announced this week – the lowest level since 1975.
This will not come as a surprise to investors and corporate advisers who have seen companies cancel or postpone non-essential M&A investment in the face of extreme uncertainty, either to preserve cash or because planned funding sources were no longer available.
Given the turmoil in the economy since the Covid-19 outbreak began in March, this was perhaps an inevitable result. But what now? Will M&A return to help to drive growth in UK business? Is there the appetite or, indeed, the opportunity for it to recover? And perhaps most importantly of all, who will fund it?
Out of crisis comes opportunity
Ambitious and experienced boards, having survived the past nine months, are now refocusing on organic and acquisitive growth plans. As a result, M&A activity in the UK is starting to resume (a number of public companies have announced strategic acquisitions recently including Avon Rubber, Computacenter, Mpac and Panoply).
The reasons to consolidate that existed last year in sectors such as financial services, insurance and managed services are still just as valid, if not more so, and the pandemic has created a number of situations that make more companies more open to an approach.
- Firms that have weaker business models or balance sheets that have been exposed by the crisis, but nevertheless have strong products and/or customers. A strategic acquirer could be a welcome option for management teams struggling for cash, especially if there is scope for owners to retain some upside potential by joining a larger business.
- Businesses that are under pressure to sell non-core units to shore up their balance sheets.
- Public companies that are disenchanted with their share prices.
- Entrepreneurs who are nearing retirement and may have been eyeing an exit; they may have planned to push on for a few more years, but have now decided that enough is enough.
What to expect if you want to sell
Vendors will have to be prepared to face tougher conversations on valuations or to entertain share-based offers if they want to exit now, but they should still negotiate hard if their business has proven defensive in the past six months and would be of unique strategic value to an acquirer.
Even in hard-hit sectors such as retail or travel, companies that have prudently future-proofed themselves by investing in technology or unique products will now be attractive to institutional investors or larger corporates that are looking to take advantage of the current situation by consolidating.
Exit options will be limited for businesses that ignored the market trends towards online and customer experience that developed before Covid-19 and have now been accentuated. For these firms, the pandemic is likely to bring about a swifter demise than would perhaps have been the case (here, a few high-street names spring to mind).
How can I fund my acquisition?
M&A has always been a key driver of UK business, well supported by public markets, private equity and, increasingly, private debt. Public markets have started to fund M&A again and listed companies could be well placed to act now in raising equity to fund strategic transactions.
It is estimated that global private equity is sitting on more than $1tn in dry powder, and firms will be under pressure not to miss the consolidation opportunities created by Covid-19, as several did after the last financial crisis. Small and mid-market private equity firms are backing UK companies in M&A deals and have cash to deploy, so companies with a compelling story could be well placed as long as there is sufficient competition in the deal to support a reasonable valuation (a corporate finance advisor could prove cost-effective here).
The benefits of funding M&A through debt
For owners and boards less keen to raise equity at current valuations, using debt to fund an acquisition is a cost-effective option. Although banks may finance low-risk acquisitions for larger businesses, they generally avoid lending to SMEs for M&A, so alternative debt funds offer the best opportunities for these companies to implement their plans for growth.
BOOST&Co and its partner Growth Lending are investing in UK SMEs affected by Covid-19 via the Coronavirus Business Interruption Loan Scheme (CBILS) – and, yes, you can use these funds for M&A. So if you have an interesting deal but are unsure how to fund it, get in touch with us. The scheme is open for applications until 31 March 2021, and we fund fast, so if this strategy is right for you, the time to act is now.