BDO corporate finance partner, John Stephan, talks about why, despite political uncertainty, businesses are still providing enticing targets for acquisition
It seems this lady is for turning. Theresa May’s surprise announcement calling a snap General Election, despite her previous assurances to the contrary, has cemented the notion that uncertainty is the new normal.
Brexit, the election of Donald Trump in the US, a potential Scottish referendum and now a UK General Election all point to the fact that political upheaval is today’s trend. Expect the unexpected is a good mantra to follow.
The reassuring point is that there are plenty of cool heads around and the pragmatism of business throughout the last twelve months has been a shining example of seeking opportunity despite uncertainty.
The low cost of Sterling since last June’s referendum result has played its part. There have been some big acquisitions in the mid-market space with Soldera Holdings acquisition of software firm Autodata for $417 million.
There has been a palpable sense of just rolling up sleeves and getting on with growth plans.
And why not? The fundamentals of the UK economy are sound, international markets are growing and now is still a good time for UK businesses to expand overseas and for foreign businesses to invest in the UK.
British mid-sized businesses have shrugged off Brexit uncertainty by growing faster than their German, French, Spanish and Italian counterparts over the last 12 months. There is no reason to assume this won’t continue despite the additional uncertainty caused by a new General Election.
The longer-term trend tells a similar story. Over the last five years, the UK’s mid-sized businesses have grown their revenues by 34.7%, a shade ahead of Germany at 34.6%.
The equivalent businesses of France, Italy and Spain grew revenues 20%, 16% and 12% respectively over the last five years. British businesses are leading the way in an environment where international counterparts are also growing. This feels like a good place to be.
British mid-sized businesses are also the most profitable across the top five EU economies, generating profits of £97 billion (profit growth of 19% in one year) compared to Germany’s £67 billion (up 2%), France’s £62bn (25%), Italy’s £35 billion (4.7%) and Spain’s £22 billion (a contraction of -10%).
Our engine of the economy – high growth and entrepreneurial mid-sized businesses – is leading the way in the UK and across Europe. Despite all the uncertainty of the past twelve months these companies have taken considered investment decisions and prospered.
How has this affected the M&A market? After a reasonably strong finish to last year, 2017 admittedly got off to a slow start with only 113 midmarket deals completed in the first quarter, the quietest period since 2009. This was no great surprise as the UK awaited the triggering of Article 50 in March.
However, the aggregate value of trade deals was 7% ahead of 2016’s first quarter confirming an increase in valuations as buyers competed for businesses that can adapt to market uncertainties.
And the outlook for the next twelve months looks positive. Global M&A is expecting a bounce-back in activity in 2017 with nearly 400 deals in pipeline – a 60% increase from last quarter’s low, indicating a return in deal-making confidence.
TMT remains the hottest sector followed by Business Services. We have witnessed a significant increase in international buyers looking to acquire UK companies as their market entry into EU and this is expected to continue throughout 2017.
Businesses across the UK are also reviewing the potential impact of Brexit on their operations and this is likely to result in more M&A activity within the region as businesses seek to secure their supply chain and competitive advantage.
It is also interesting to note the speed at which capital markets have recovered, indicating the ability of investors to adapt to uncertainty as the new norm. As companies adjust to the Brexit challenges, we anticipate that the availability of debt and equity funding will underpin M&A for remainder of 2017 but due diligence will continue to be extensive as buyers seek to assess and mitigate potential risks.
So with a general election ahead where does that leave us? Well despite all the uncertainty the UK’s economic health looks robust and mid-sized businesses are continuing to thrive as the engine of UK growth. Deal flow looks positive and the low value of Sterling means there are attractive deals to be done to mitigate the impact of Brexit.
But there are still measures we would like policymakers to take to help ensure that this momentum continues and to ensure a successful post-Brexit economy.
Our ‘New Economy’ report calls for the Government to adopt a radical simplification of the UK tax structure (aligning Income Tax with National Insurance and a moratorium until 2020 on any new tax changes unless they simplify the system) and for investment in smaller ‘shovel-ready’ infrastructure projects. Investment and simplification are important steps to take to get the UK economy Brexit-ready.
So despite all the uncertainty the growth picture looks good and the UK and its engine of growth – mid-sized businesses – are poised to weather any further uncertainty.
John Stephan is a corporate finance partner at BDO LLP