The global mergers and acquisitions (M&A) landscape of 2023 has been under a cloud of persistent high inflation, escalating interest rates and looming recession fears, thus significantly stifling the momentum in this sector. Yet, the vista appears to be gradually brightening for companies on the prowl for lucrative deals as we transition into the subsequent months.
The business milieu this year has largely been characterised by a trifecta of challenges: sluggish growth, escalating inflation, and heightened borrowing costs. This grim scenario has precipitated a marked downturn in the frequency and median value of M&A engagements.
Data from financial intelligence firm Dealogic reveals that the global M&A activities in the first six months of 2023 amounted to roughly £1.1 trillion, portraying a 40% nosedive compared to the figures of H1 2020. The persisting economic ambiguity continues to dissuade lenders from backing new ventures.
The slowdown in M&A pace has left hardly any market unscathed. In the UK, prominent transactions among major public limited companies have been notably scarce. Alastair Mankin, Vice President at investment bank TD Cowen, highlights a mere trio of significant deals in recent times: EQT’s acquisition of Dechra Pharmaceuticals (£4.5 billion), Brookfield’s procurement of Network International (£2.2 billion), and UnitedHealth’s purchase of EMIS Healthcare (£1.2 billion).
This is in stark contrast to the bustling activity witnessed in 2021, where investors were eager to capitalise on the opportunities spawned by the Covid-19 pandemic. The year was emblematic of a zenith in deal-making, with PwC documenting over 62,000 global M&A transactions, marking a 24% uptick from 2020.
The lingering question is whether this subdued activity will stretch into the near future. For proprietors contemplating a sale, the dilemma persists: to postpone potential deals or venture out to secure a buyer?
Resurgence of M&A Activity Projected in 2024
Despite the lacklustre performance so far, there’s a burgeoning optimism for a rebound in 2024, contingent on the mitigation of inflation, stabilisation of interest rates, and a general economic equilibrium. The UK and Ireland are particularly singled out for a robust growth in M&A activities in the forthcoming year as per the European M&A Outlook 2024 report by law firm CMS.
“The outlook seems a lot more positive in the UK. Interest rates have reached their peak and will begin to come down in the coming months,” predicts Matthew Wiseman, partner at investment bank Alantra. “As a result, buyers and sellers can more confidently predict market conditions and make more accurate business valuations, leading to more activity.”
Furthermore, the upcoming general election, mandated to occur by January 2025, adds a layer of urgency. Speculations around a potential hike in capital gains tax are prompting business magnates to expedite their M&A agendas to lock in the prevailing 20% rate.
Graham Carberry, Managing Director of Arrowpoint Advisory, an M&A consultancy specialising in deals ranging from £20 million to £200 million, envisions 2024 as a pivotal year for takeovers, driven by the anticipated political shift.
Regulatory Hurdles in the M&A Landscape
The UK’s regulatory framework, especially the enhanced oversight by the Competition and Markets Authority (CMA) post-Brexit, has been a bone of contention among deal-makers. A case in point is the stringent scrutiny of Microsoft’s proposed acquisition of Activision Blizzard, announced in January 2022. The deal faced initial roadblocks from both the CMA and the US Federal Trade Commission, although the latter retracted its objections, and the EU subsequently approved the transaction.
Harry Coghill, Corporate and M&A Partner at law firm Macfarlanes, remarks “The CMA’s stance on the deal has received widespread attention, given that it goes against the grain of the UK’s focus on becoming a tech and innovation hub,”
Nevertheless, despite the rigorous regulatory oversight, the appetite for deals appears undiminished as we step into H1 2024, with a pronounced uptick anticipated in the technology, media, and energy sectors across Europe, as delineated in the CMS report.
Gearing Up for a Takeover
As firms align themselves for either acquisition or being acquired in the upcoming year, understanding the prerequisites for an attractive takeover target is imperative. David Newns, Co-founder and Partner at Contrado Capital, underscores the allure of businesses with sturdy cash flows and solid growth trajectories, as they epitomise long-term value to prospective buyers.
Ryan Brown, Deputy Group CEO of insurance conglomerate PIB Group, emphasises the magnetic appeal of firms led by entrepreneurial spirits. He notes that post-acquisition, “its leadership will stay in place”, he stresses. “We don’t change the formula that’s made that business thrive to date.”
Emma Danks, Head of the UK Corporate/M&A Group at law firm Taylor Wessing, reiterates the pivotal role of environmental, social, and corporate governance (ESG) in modern-day acquisitions, as companies increasingly view M&A as a vehicle to swiftly achieve ESG benchmarks.
In summation, the appeal to potential acquirers hinges on robust fundamentals and apt timing in seeking a buyer amidst a backdrop of persistent economic and political ambiguities, making this endeavour more of an art than a precise science.
