Obviously Brexit will have a profound impact on the shape of the UK economy and its relationship with the rest of the world. Given this fundamental shift taking place in the UK’s world view, it is understandable why this topic is dominating the capital agenda. But, this week, I also want to think about other dynamics that are driving UK deal volumes. Because, there are obviously forces in play that are encouraging companies to think about deals – whatever the uncertainties in the current outlook.
Of course we can’t totally divorce a discussion of the M&A outlook from the UK’s exit from the EU. Our latest UK Capital Confidence Barometer (CCB15) highlights risks to the UK’s attractiveness to post-BREXIT, which you can also explore further in our Chief Economist’s recent blog. Our CCB15 data suggests that the UK will need to work hard to maintain its attractiveness in the wake of the vote, with the UK slipping down the global charts.
But there are also forces that transcend BREXIT and will continue to inspire deals – and it’s these I want to explore in more detail here.
What we hear is that BREXIT undoubtedly complicates and alters deal equations in many respects, but for many transactions it’s not enough to be a breaker – at least not yet. We are very aware these are early days and we do get a sense of the complexity and uncertainty of the current deal market in our survey. UK respondents are clearly concerned about BREXIT, but 91% expect to see UK deal levels remain the same. The percentage of UK respondents expecting to do deals has fallen from 59% six months ago to 48%, but this is still above average. There is slightly less confidence in closing deals, but companies expect their pipeline to increase.
If we look to how this is translating on the ground, UK M&A volumes are actually holding up against data from the last three years – albeit focused in our experience in private equity and the large caps. This might all seem a bit surprising, but the forces that were driving M&A before – sluggish growth, disruption, cross-sector convergence – are still here. In CCB15, UK respondents’ top boardroom concern is the impact of digital technology on their business model – 61% of first and second choices. And, if we look at reasons for doing deals, over half of respondents say their first or second biggest motivation for acquisitions is to ‘buy innovative start-ups’ , whilst onethird choose ‘acquiring new production & technology capabilities’ in their top two.
Companies aren’t taking their eye off organic growth. Most companies (67%) still expect most of their growth to come from organic means – as we’d expect given the dip in acquisition intentions. But, our survey doesn’t paint a picture of UK companies totally bunkering down. This isn’t the UK M&A market coming to a full stop. Many UK companies just can’t afford not to transact – growth is too slow, technology is moving too fast and they may also be looking to expand their horizons post-BREXIT.
Over a third of UK respondents expect to perform outbound deals in the next 12 months. The UK might have slipped off the global attractiveness list, but – as we’ve seen – there is still an interest in UK companies, especially those with compelling products or even all-domestic offerings.
The best laid plans…
Of course, there are still the proverbial unknowns and the picture could change again. UK respondents’ top M&A concern is domestic political stability, followed by currency volatility. Recent IPO reticence is a reminder that even the most benign looking markets can hold demons. One of the main reasons why UK companies have failed to complete or cancelled an acquisition in the last 12 months is investor or board scrutiny. It’s a good sign that all parties are engaged in getting the right deal. But it’s also a reminder of how solid a case companies need to build around acquisitions –especially in these markets. We expect more scrutiny to see if deals hold up under different scenarios.
A solid case – and a solid preparation. Almost a half of UK respondents say that their deals that failed to meet expectation did so due to their underestimate of the investment needed to grow products and revenue. Poor identification of synergies and underestimating cultural challenges follow closely after. It’s vital to get these right in a more challenging economic climate.