Opinion: Reasons to be upbeat on UK M&A

When compared to the tumult of 2022, there seems a sense of relative calm in UK markets. Yes, the UK has problems – but the economic outlook isn’t as gloomy as 6 months ago. 

Earlier this month, it was reported that the UK economy unexpectedly grew in November, boosted by demand for services in tech and hospitality. It remains to be seen whether inflation tips the UK into recession in 2023, but most now assume this correction isn’t of the same severity as, say, the GFC. Last week, Gov. Andrew Bailey commented that the BoE was optimistic inflation could be on an "easier path”, fuelling hopes that the worst was over. 

Through my years working in private markets, I’ve viewed M&A as a frontrunner to the wider economy. Most news is priced into M&A (via valuations and multiples etc) before it hits the headlines, and whilst anecdotal, the UK stabilisation seems to be reflected by an uptick in M&A confidence. Conversations I’m having with CFOs and M&A heads have been upbeat. 

With those chats in mind, and having read many end-of-year, backwards-looking letters and forward-thinking prediction pieces (like this!), I bet UK M&A returns to ‘normal’ pre-COVID levels in Q3. Following news that US inflation might be easing, much depends on investors calling the peak of UK inflation/rates. When that happens, we could see a fast switch out of cash (PE dry powder is at record highs) into M&A, especially in the mid-market.

I’m certainly not expecting record highs like ‘20 and ‘21 – but, especially when compared to where we were a few months ago, the future looks pretty bright. Here are a few reasons why:

An economic reset, some repute restored

Whatever your politics, it’s hard to argue against the devastating impact of Liz Truss’ 44-day tenure. Economic confidence in the UK was shot. Our global reputation was in tatters. Given the level of insanity, thank goodness it was so truncated.  

By being boring and sensible, Sunak and Hunt have restored some confidence, a little faith. The UK is a place for international investors again, although outlier events, such as those involving our shaky property market, still give cause for caution. 

Private equity is standing by

Whilst the world was going to hell last year, PE was raising record levels of cash, most of which remains in cash as PE awaits the moment to open its war chest. 

When inflation tops out, markets turn, valuations settle, and sentiment becomes more positive, these cash reserves should be the key driver of an M&A recovery towards the end of 2023. 

Energy prices continue to fall

Never waste a good crisis is a good motto for hard times, and following Putin’s invasion of Ukraine, global economies enacted measures to replace Russian energy with LNG imports.

Energy prices fell and the reductions are feeding through to UK businesses and households. Like elements of the wider economy, prices do remain high and volatile, but they are not catastrophic. Renewable investment is also up, which is a significant silver and green lining. 

The benefits of the correction and the COVID fallout

COVID changed everything – and some things for the better. At a recent conference, KPMG’s Chief Economist, Yael Selvin, stated how the WFH revolution and the move by many away from London to the Midlands and the North means she expects the UK to become more regionally productive than ever before. 

Talent and resources are being distributed throughout the UK – and UK M&A no longer relies on London. M&A infrastructure is on the move too, with first-rate financial services spreading to support regional M&A activities that are growing in great cities, such as Manchester. 

UK PLC looks strong 

Many companies used the aftermath of COVID-19 to refinance at super-low rates. This means that the bulk of the $5-100 million revenue businesses, the lower-mid market, stand on firm foundations. GBP’s struggles have also given overseas investors a chance to profit.

What hasn’t changed is the UK’s location, timezone, and the propensity for English to grow as the world’s global business language. Hence, it remains attractive for international investment... Even more so now we’ve got a bit of our reputation back. 

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On the other side of short-term volatility – and it’s not going to be plain sailing – we should have confidence that order and opportunity will return to UK M&A towards the end of 2023. 

This is especially true in the lower mid-market, where price stabilisation has made bolt-ons and acquisitions that fill functional gaps more affordable than in recent years. As labour markets tighten, companies growing fast on negative cashflow are also looking increasingly attractive for acquihire, and this trend will only continue as valuations fall. Of course, quality remains a prerequisite, but the topping out of valuations in thriving sectors, such as health, tech, logistics and industrials allows acquirers to access quality opportunities at good prices. 

Corporate M&A is forward-looking, with acquirers building pipelines and plans for what’s ahead. The good news is that the UK is in better shape than many expected – and this should create opportunities for all market participants as we move through 2023.

I’d be delighted to talk with you about how you are preparing your businesses’ M&A strategy for 2023 and how our technology can help you build a deal pipeline and access a network that will make you more successful in the coming months and years. Please get in touch either on LinkedIn or feel free to send me an email. I’d love to chat. 

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