UK mid-market M&A set to spring back to life

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After a seemingly long period in which the UK’s M&A market has been becalmed by uncertainty surrounding Brexit, it is set to come back to life according to an optimistic new survey by the leading professional services company EY.

EY’s latest Capital Confidence Barometer expects there to be a: “dynamic M&A market in the UK going into 2018.” Indeed 60% of EY’s respondents in the UK say that they intend actively to pursue M&A in the next 12 months, compared to only 56% globally. Underscoring the sense of optimism, 57% of executives say that they expect the local M&A market to improve over the next year.

The majority of these deals are likely to be in mid-markets, with most transactions of below US$250m in value. This reflects the need to adjust portfolios to rapidly changing markets, recognising that new skills often need to be acquired inorganically,  and also that non-core parts of portfolios cannot be passively managed when change is so rapid.

Indeed the abiding sense which emerges from the report is the increasingly urgent need to respond to change.  63% of UK respondents say that they are reorganising their geographic operations in response to potential changes in trade policies or an increase in protectionism. This is much higher than the global average,

Clearly uncertainty about the deal that the UK will manage to negotiate on Brexit is at the heart of this, the increasing signs of external governments becoming more active in protecting what they see as strategic assets from foreign hands are also an influence. Executives clearly recognise that they need to make a decisive response to these developments, with 50% of respondents saying that they are reviewing their portfolios: ‘continuously or quarterly.” Rising costs also seem to be a growing concern for many.

Almost equally powerful a theme is sector convergence driven by digital transformation. 27% of respondents say that the need to: “acquire innovation” is a strategic priority, with he need to meet customer needs, especially where it is driven by technology, a must. This affects more or less all sectors, with the majority of telecoms and media companies most strikingly saying that this is a leading influence on their strategy.

What also emerges from the report is that the UK remains high on the list of favoured destinations despite the short-term uncertainty of Brexit. The global survey suggests that it the third most favoured destination for overseas acquirers after the US and China. EY points points to the openness of its markets and the quality of its intellectual property as abiding strengths which outweigh short-term tactical considerations for many foreign companies.

A final message which emerges with clarity from the report is the resurgence of private equity, and the growing competitive threat that it poses for corporate dealmakers. Half of those surveyed say that they expect competition for assets to increase, with 60% of them pointing to private equity to the chief source of it. Meanwhile companies are trying to respond by taking advantage of the techniques that private equity uses, with as many as 68% of those surveyed saying that they intend to engage in corporate venture capital by making equity investments in high-growth or start-up companies.


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