This week’s blog comes from Alex Gaunt, Lead Partner in our Operational Transaction Services team.
A dramatic fall in sterling has made businesses more attractive to foreign buyers. Companies will need to think about their options – but to keep those options open, they’ll need to focus on operational efficiency and innovation.
Why are UK assets so attractive?
In the midst of the ongoing debate over Britain’s exit from the European Union, it is easy to forget that the UK remains open for business, is still the world’s fifth largest economy, and remains attractive to investors, businesses, and talent due to the quality of life, culture, education, telecommunications, and labour skills. With all of these inherent advantages, the UK has – historically – been a relatively expensive place to invest, however, as highlighted in October’s EY ITEM Club report, recent falls in the value of the pound following the vote to leave the EU will make UK goods and assets increasingly attractive to overseas buyers.
Recent falls in the pound, including October’s six-year low against the Euro and a significant slide against the dollar- will not have gone unnoticed by foreign buyers wanting to snap up a UK asset at bargain prices. Despite a cool-down after a record-breaking 2015 M&A market, this could cause a significant increase in the number of inbound deals. Prospective buyers will see the attractiveness of a UK business, particularly those where income is received in dollars or euros, as reflected in the record highs the FTSE 100 index has seen in the past weeks.
A battle on two fronts
Is it better to offload assets to a foreign buyer in the hope that there will be a continuous stream of inbound investment in the business, or should owners keep their asset base in the UK, taking advantage of the weaker pound to increase exports organically? There is enough material to leave that one for another discussion, although it is clear that to remain competitive, UK businesses must battle on two fronts: maintain or decrease the cost base in a world where imported materials, people, and infrastructure have suddenly become more expensive, whilst growing revenues to take advantage of an increasing demand for British goods and services.
Protecting the cost base
Managing the cost base is an ongoing challenge for any business, but with imports now more expensive, the cost base for any organisation buying either materials or talent from overseas will face immediate challenges due to unfavourable exchange rates. As ever, operational efficiency will be the key to navigating this climate, where all aspects of the operating model will be under intense scrutiny, particularly from a potential foreign buyer considering moving core and supporting operations overseas to realise savings, particularly with more commoditised services.
Now more than ever, it is imperative that businesses undertake assessments of their operational capabilities- the UK has vast experience, deep expertise, and significant amounts of intellectual property that has been used to develop some of the world’s most efficient and effective operating models. Despite the post-Brexit uncertainly and paralysis of activity, there is an ever increasing need to focus on mitigating challenges and recognising opportunities to realise an operational advantage.
Businesses are operating in times of unprecedented change- from macro trends to industry upheaval, social, and political scenarios, there has never been a time when there is so much opportunity to gain advantage from uncertainty. The single best way to ensure that organisations can take advantage of change is to become a disruptor- creating a new operating model to turn an industry on its head.
Innovators and governments- perhaps opposite ends of the disruptive spectrum- have both pushed for increasing levels of digitisation to maintain relevance in a new world, ensuring that the right mix of skills and talent are available when needed to deliver the best solutions for customers around the world. Again, in order to compete effectively, to increase exports advantageously with currency prices, innovation will be key.
It is imperative that businesses embrace a core set of capabilities and behaviours to embed agility and evolve both culture and capability through restructuring into an agile organisation. Alternatively, buying the relevant skills and expertise through acquisition can reach the bottom-line quickly, whilst providing opportunities to remain relevant in times of industry upheaval.
Becoming masters of our destiny
Increasingly, the business need to make a step change in performance as traditional operating models are being turned on their heads by the need to respond to macro-economic and industry trends- the taxi industry is quickly becoming a classic example following the success of Uber. Capital events are becoming ever more important to force changes where either new skills are in short supply, or where an operating model is better acquired than built from the ground up.
In times of change, doing nothing, or continuing on a path of marginal improvements becomes an increasingly unattractive strategy where competitors and disruptors may already be getting a step ahead. It has become imperative for businesses to look at all options available to optimise performance, and allocate capital where it is most needed. Acquisitions, divestments, and restructuring are all going to be key drivers behind performance in the near future, which can already be seen in many industries where acquiring digital skills through acquisitions is becoming key to maintaining relevance in today’s environment.
Is it enough?
Focusing on allocating capital to the most vulnerable parts of a business is now key to protecting against an uncertain macroeconomic climate, and to maintain competitiveness in an environment where UK assets and IP are increasingly attractive to overseas investors. By reducing the cost base through lowest-cost sourcing and operational efficiency, and by embracing change through technology and disruptive trends, a business can go a long way towards maintaining values relative to competitors, even when the price of the pound has dropped significantly.
Over the coming months we might see more overseas bids for UK businesses- it’s clear that there are bargains to be had, but those businesses that can prove operational efficiency and innovation will have a number of options, whereas the rest might leave their fate in somebody else’s hands.