I was delighted to be invited to sit on a CASS Business School panel last week to discuss the M&A outlook. I’d like to share some of the observations here – especially in the light of the fast moving events that happened shortly after! These are uncertain social, economic and political times. But, we seem to be in a new era where uncertainty – at least not this level of uncertainty – isn’t the primary barrier to deals….even one of the biggest.
A new approach to uncertainty
In the CASS panel discussion last Thursday (16 February) we discussed uncertainty. Those present were certainly cautious about the year ahead and what it might hold. But, the prevailing view was that this this current level of uncertainty isn’t enough to stall deal making. Even for mega-deals. And that was borne out just a day later with what would have been the second biggest deal in history.
It’s not that uncertainty isn’t being factored in; but there is often a bigger, more pressing motive. Indeed, current M&A activity has drivers that are ‘immune’ and created by this upheaval. As we’ve said before here, if companies aren’t moving forward in this environment, they are moving backwards!
UK plc for sale?
Retail and consumer products (RCP) was one of the areas that was rather presciently picked out in our discussion as being the most active in 2017. Slow growth in mature markets is a central issue for many companies in this sector. But companies also need to keep pace with changing consumer needs – and new channels to market. So companies are both optimising their portfolio to boost sales and profits and looking for ways to remain relevant. A potent mix.
And one which we’d expect to be part of the bid for Unilever. Of course the falling pound could also have been a factor. In our discussion, there was a clear expectation that companies – and their advisors – would be dusting off previous analyses in the light of sterling’s fall. The 18% premium offered was close to the fall in the pound against the dollar since BREXIT. But, currency moves in and of themselves do not drive M&A – deals are primarily initiated for strategic reasons and these still need to add up.
Like many companies with significant overseas sales, Unilever’s share price has also risen as sterling fell. Not enough to offset the fall against stronger currencies, but it underlines that this isn’t a knock-down sale of UK plc. And not everything after BREXIT is about BREXIT!
Shaking the tree
That all being said, this is a different world to when Kraft bought Cadbury. SoftBank’s acquisition of Arm Holdings last year highlighted the UK governments’ need for legally binding assurances on jobs. Governments are much more aware – as the Financial Times put it –of “popular unhappiness with global capitalism’s hard edges”. In this new political environment – moulded by arguments about employment, technology and globalisation – it seems that deals based on efficiency gains will face even greater challenges. There is an argument to say that any deal should generate benefits, not just for business and shareholders – but also society. Governments may have a role to play in this.
Bids of this kind also tend to shake the tree – within and across sectors. The consumer products sector remains ripe for consolidation and portfolio adjustment and companies across this space will be aware now of the funds available for deals. UK companies have been put on further notice of overseas interest. Shareholders interest is piqued.
And, in our discussions, further sectors also came to the fore –
Technology, Media and Telecommunications (TMT) is set to be one of the hottest sectors in 2017 due to companies in and outside of the sector turning to M&A to meet the disruptive challenge. Our analysis shows that within the technology sector, deals are aimed primarily at growing market share and addressing customers’ changing digital behaviours. Companies buying from outside are looking primarily to acquire talent and new product or service innovation.
The life sciences landscape is constantly shifting in a changing political climate; but the imperative to grow market share remains a top priority. Payer pushback and more competitive pricing are leading companies to become more focused on their core competencies. More companies pursuing smaller deals that augment or fine-tune existing capabilities.
Infrastructure is rising up government agendas and the relatively loose state of debt markets – and sovereign wealth funds and insurance companies’ appetites for stable, long-term growth – should maintain demand. The increasing pressure on cities’ infrastructure – combined with technological disruption – is increasing the need for and innovation. Similarly in energy, there is also a need to grow advanced technological capabilities, as well as the need to grow market share in competitive environments.
Meanwhile, private equity activity bounced back in 2016 and our discussion concluded that we expect to see more activity in 2017. Funds have significant amounts of dry power and – as we saw last week – they’re keen to deploy this capital.