A deal pause?

This week’s post comes from Steve Ivermee, Managing Partner, UKI Transaction Advisory Services at EY.

UK M&A intentions hit a four-year low in EY’s 19th Capital Confidence Barometer (CCB19). It’s an eye catching figure, but what does this mean on the ground for UK deal activity and how UK companies allocate their capital?

If we combine UK CCB19 results with our other survey data, I think we begin to see a new picture emerge. There’s no doubt that UK companies still intend to transact – just not at the extraordinary levels we’ve seen in the last two years, as they consolidate their position and put their house in order in preparation for whatever comes next.

This week’s blog explores those changing priorities.

A return to the norm?

We’re reaching the end of what looks set to be a near-record year for global M&A and an exceptional year for UK deals, with transaction values at their highest level since 2015. But is this the last M&A hurrah? Not quite – although there is every indication that we’ll see the pace of UK deals slow from these recent peaks in the next 12 months.


In our latest Capital Confidence Barometer (CCB19), 45% of UK respondents said that they “actively intended to pursue M&A in the next 12 months”, down from 65% six months ago. On the one hand, this is a dramatic 20 percentage point fall. On the other, this puts UK M&A intentions back in line with their eight-year UK average (45%) and almost in-line with global deal intentions (46%).

Thus, whilst it seems that the exceptional period of deal activity we’ve seen in the last few years is coming to a close, UK companies still expect to transact and certainly haven’t switched off from M&A altogether. To underline this fact, CCB19 also shows that just 3% of UK companies expect their deal pipelines to shrink in the next year.

Deal rationales remain

So, UK companies still expect and arguably need to do deals. A third of UK respondents said “disruptive forces” (including technology and competition from non-traditional players) presented the biggest risk to their core business growth. In CCB19, 40% of respondents had identified an asset at risk of disruption to divest – capital that we expect to see recycled back into the business.

This need to buy in technology and expertise have been prevalent in making ‘inbound’ the biggest UK M&A story in 2018. The UK’s open economy and IP-rich assets are still attracting buyers looking to meet the disruptive threat.

CCB19 growth risks

The continuing popularity of UK assets is reflected in the UK’s rise to second place (from fifth) in CCB19’s global investment destination list. Brexit uncertainties are a short term deal head wind. But, any increase in trade barriers could stimulate some inbound and outbound activity – if companies need to invest to retain access to markets.

Whilst 16% of UK and global respondents said that changes in trade and tariff policies had halted an acquisition; almost 20% of global and 23% of UK respondents said that the changes had focused more of their attention on cross-border opportunities.

Dealing with uncertainty

So, in looking at why some UK companies taking a step back from actively pursuing M&A , I don’t think we can explain this decline entirely by citing ‘uncertainty’ – which has been a constant for many years now. I wrote here three months ago about the almost perfect alignment of means, motive and opportunity that were keeping UK deal markets so active – including rapid change in their markets that required companies to act. But, I also pondered what could upset this alignment.

“…less liquid markets are more volatile, with instability amplified by geopolitical tensions. If markets and earnings fall, this will affect the ability and confidence of companies to transact. Riskier mega deals could be the first to drop.

Trade is another complex factor. Further trade war and Brexit uncertainty could hit confidence and limit visibility. Although, investment could still flow out of necessity, if companies need to change their operating structures to adapt to new trade conditions.”

The last three months has seen much of this come to pass. October brought a significant correction in global equity markets. In CCB19, just 49% of UK companies expect domestic earnings to rise in the next 12 months – compared with 59% at the same point last year. The latest EY Profit Warnings Report shows the highest percentage of UK quoted companies issuing a warning since 2016. The latest EY ITEM Club forecast predicts sluggish GDP growth for the next three years with the UK economy growing by just 1.3% in 2018 and 1.5% in 2019. The murkier outlook is also effecting the ease of doing deals. In CCB19, 47% of UK respondents think that regulation and political uncertainty were the biggest risks to deal making.

New priorities

With the UK’s M&A stars less perfectly aligned, it seems that more companies are taking a step back to consider and consolidate their position. The clear capital allocation priorities in the chart below are investing in existing operations, improving working capital and creating an efficient capital structure – all of which rank well above M&A. Companies aren’t quite battening down the hatches, but they are making sure they are shipshape for whatever lies around the corner.

CCB19 growth risks

Investors also seem to be preparing for increasing stress, with profit warnings triggering record share price falls in the third quarter. Shareholders are clearly positioning their capital in what appear to be the strongest companies. In this more febrile environment it clearly makes sense for companies to focus on operational fitness. But, I also believe that companies need to keep their eyes on the horizon. By, which I mean that companies cannot afford to lose sight of how quickly their sector is changing and converging in response to new technologies and changing behaviours.

I expect UK deals to slow from their peak whilst companies face increasing headwinds and adjust to new realities. But, ultimately businesses and their executives should regain their deal appetites. Fundamentally companies need to find a way to take clear and calculated risks to ensure that they emerge as winners. M&A will remain a big part of that process.