UK M&A surge highlights confidence

UK M&A began 2018 with a bang, posting a record first quarter and marking the best start to the year in more than a decade.

UK M&A reached $120bn in the first quarter, around double the level seen in the same quarter last year and the highest since Q1 2007. Deals were dominated by inbound flows, which amounted to $67bn, compared with just $11bn in the fourth quarter, with the upward shift representing a welcome vote of confidence in Europe’s third largest economy. Deal numbers were also up, reaching 177 in Q1, compared with 133 in Q4.

Domestic and outbound deals saw significant increases in both value and volume compared to the previous quarter, but it was inbound M&A that lead the way. Value for inbound transactions jumped from $11bn and 133 deals in the last quarter of 2017 to $67bn and 177 deals in Q1 this year.

Some transactions are likely to face the scrutiny of regulators, government and the public, and benefits will need to be demonstrated beyond cost savings. To maximise the chances of positive outcomes, deal makers must become ever more adept at articulating compelling stories.

US firms were the biggest investors in UK assets, accounting for almost 90% of inbound transactions by value. UK firms in turn announced 38 deals in the US, albeit for a lower total of $4bn. The US was the second most favoured overseas destination for UK companies after Switzerland and followed by Germany. France, the Netherlands and Ireland were also targeted by UK acquirers.

The trade flow between the UK and the US has always been strong and there is no sign of slowing. While early days, shifts in policy, such as the recent US tax reforms, could trigger some near-term large deals, as boardrooms reassess capital allocation between the US and non-US territories.

Sectors at the centre of first quarter action included TMT, automotive and healthcare, which saw the highest transaction values, while technology and professional services recorded the most deals.

Deal sentiment at a sector level was supported sector convergence, which has become a key narrative for the UK and global economy. Portfolio transformation is likely to be the biggest M&A story of 2018, and as platform businesses and ecosystems proliferate, and companies ramp up digital capabilities, it’s easy to imagine continuing demand for innovative partnerships.

Another trend borne out by the Q1 figures is a strong focus among buyers on companies with exposure to international markets. Companies seem to not only want to expand into adjacent sectors and business lines, but also geographically.

Amid trade policy shifts one notable exception to the M&A uptick in the first quarter was activity from China, which after a flurry of deals in 2016 has taken a back seat. That trend continued in recent months, with China ranking seventh in terms of UK inbound deal value, accounting for about $250 million of transactions.

Looking ahead, it will be interesting to see whether wider M&A activity can keep up the momentum. Large deals can have a material impact on one quarter’s data and M&A depends on many differing factors. Will we see an equally strong Q2 as businesses look to lock in more favourable financing prior to any interest rate increases? The next issue of our Capital Confidence Barometer, which will be published on 30 April, will help shed more light on investors’ plans. Watch this space!