The Outlook for M&A Following the First Wave

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Following his panel appearance on Business Leader Magazine’s recent virtual round table debate about the M&A landscape, Myles Hamilton consolidates his thoughts in his latest blog. To view the full debate, please click here.

As we entered the national lock down back in March 2020, company management teams were faced with a host of issues to deal with including closing offices, accessing government backed emergency funding schemes to protect against a worst-case scenario and furloughing employees.

Many M&A projects that were in preparation were put on hold. This in turn created a lull in deal activity that lasted a couple of months before it became clear to many that the impact of lock down was going to be less severe than initially feared and the rationale for the M&A deals in question remained sound.

In many cases businesses had been able to secure loans from the Coronavirus Business Interruption Loan Scheme (CBILS) that gave management additional confidence to press on with their pre-lock down plans. A good proportion of the M&A projects put on hold were quickly re-started – before lock down ended – with the result that many corporate financiers are now busy and, bar a further national lock down, there should be a flurry of deal completions in the final quarter of 2020.

A number of M&A trends have also emerged that can be linked to the pandemic. Firstly, business owners appear to have a greater perception of risk than before and are therefore more open to approaches from a potential purchaser. If an unsolicited offer drops into the inbox, a business owner must balance the riskier option of continuing to grow the business and its value against cashing in his/her equity now. With everything that has happened this year it is no surprise that the balance has tipped towards taking the cash today.

Another factor driving this trend is the spectre of a possible change to the capital gains tax (‘CGT’) regime in the Chancellor’s Autumn statement. The lifetime allowance for entrepreneur’s relief (CGT at 10%) has already been reduced from £10m to £1m with effect from 11 March 2020 and there is speculation that the 20% rate of CGT may now be increased.

Certainly, the Chancellor will have to increase tax somehow to help pay for the much-increased public debt because of the pandemic. Whether or not CGT changes in the coming months is anybody’s guess but the very possibility is incentive enough for business owners that are looking to exit, to get the deal done as soon as possible. Watch this space for a further article if CGT is increased later this year.

Turning to the buyers rather than sellers, it seems that private equity owners are as focused as ever on searching for bolt-on acquisitions for companies already in their portfolio. ‘Buy and build’ is a well-trodden strategy to grow the value of a private equity backed business but this is especially true when economic conditions are tough and organic growth hard to deliver. Many of the aforementioned approaches to business owners are therefore being initiated by private equity investors helping to drive M&A activity.

Finally, it would remiss not to mention the impact of the pandemic on the appetite of foreign buyers to acquire UK businesses. This appetite has been strong – for some perhaps too strong – for many years with leading UK companies being snapped up by overseas buyers, from the US and Europe in particular. Although deal volumes are down, the attractiveness of the UK to overseas buyers remains, with the strengths of the UK economy and the Brexit related fall in the value of Sterling seemingly more than offsetting the on-going uncertainty caused by the possibility of no agreement being reached on a free trade deal.

Myles Hamilton, Director – M&A, Shaw & Co

Myles is a M&A Director at Bristol-based Shaw & Co. He is part of one of the largest corporate finance advisory teams in the South West. On the transactions he typically works on, Myles provides technical expertise in deal negotiation and structuring, financial modelling and company valuation. Since his time at Shaw & Co, Myles has completed 15 deals – the largest of which was a £47m trade sale – and was instrumental in the sales of People Source to Manpower, VoucherCloud to Groupon and Nanopharm to Aptar.