SINCE EARLY 2010, the recovery in UK mid-market mergers and acquisitions (M&A) activity following the fall of Lehman Brothers has been steady, as businesses’ performances have slowly improved and confidence has gradually returned to the deal-making community.
Vendor and acquirer’s pricing expectations are slowly realigning, private equity has returned to the market and companies have better visibility over profitability.
The escalation in the European sovereign debt and banking crises, and the lowering of expectations surrounding UK economic growth, have seen an air of uncertainty looming over the large deals space in particular, with activity having slowed in recent months. However, mid-market M&A, buoyed by foreign acquirers’ interest in UK corporates, continues to hold its own at present.
This period of gradual recovery in the mid-market has accelerated the adoption of a number of noteworthy strategies to shake up UK corporate finance.
Many large corporates de-leveraged their balance sheets during the downturn, and are now cash rich and keen to build scale in the post-recessionary environment. This puts these trade acquirers in a strong position to compete with private equity firms, who are being impacted by pressure on the leveraged debt markets.
Keen to diversify their propositions and geographical reach, and take advantage of the weakened sterling, overseas buyers are also making their mark on the UK mid-market. At KPMG, we are seeing notable interest in UK assets from the US and south-east Asia in particular, and are increasingly working with our international affiliates to identify and originate opportunities.
Vendors and their corporate finance advisers are becoming even more targeted in their approach. The challenging environment has given rise to narrowing sales processes, a trend which is benefiting the industry as a whole.
A culture previously based on competitive negotiations between buyer and vendor is gradually being replaced by one of collaboration. For the vendor, a narrow process is also a valuable insurance policy. While discrete interaction with potential acquirers ensures sales remain generally under wraps, large-scale auctions can quickly send word out to the wider market and the media. Against this backdrop, a failed sale process can seriously damage a vendor’s future exit or investment prospects.
Having identified that there are buyers who will pay a sensible price, the vendor does still have the option of widening the sale process to test that they have spoken to all the likely buyers. If they decide to do this, the narrow ‘pre-marketing’ will have de-risked their position, given that they know there are buyers willing to meet their valuation. In our experience, this widening is usually not necessary though.
Progress in an uncertain environment
While the mid-market is holding up reasonably well at present, the medium-term outlook for the UK M&A recovery is uncertain. The European sovereign debt and banking crises, and the slowing domestic economic recovery have the potential to halt processes in their tracks.
Nevertheless, the lessons learnt during the downturn have been valuable and are benefiting the corporate finance industry as a whole as we look forward to 2012. Deals are better quality, and carefully considered and sustainable, while competition in the form of trade acquirers is causing a stir in the market.
The scene is set for conditions to continue to improve in the mid-market – with domestic and overseas trade acquirers showing keen interest in UK assets – but much rests on wider economic growth and, in turn, improved corporate performance. Irrespective of the direction M&A takes over the coming months, the corporate finance community will continue to adapt.
Jonathan Boyers is head of corporate finance at KPMG in the North and the Institute of Chartered Accountants for England and Wales’ (ICAEW) Corporate Financier of the Year