Kevin Uphill, chairman of Avondale, explains what drove growth in M&A activity in 2015 and whether it is sustainable in 2016
Early in 2015, pre-election fears made the market nervous – while deals were being made, many sellers and acquirers sat on the fence and awaited the outcome of the poll. The Conservative party victory reignited the business community and led to buoyant growth in deal activity.
In 2015, M&A activity broke 2007 (pre-recession) levels with reported deal values totalling $3.8trn (£2.7trn). Just over $1.2trn of this involved European deals, with the UK leading the way, accounting for over 55 per cent of transactions. There was an exceptional level of international investment with UK companies being the most sought after, attracting $313bn in M&A investment from both the eurozone and overseas acquirers.
Factors driving growth in 2015
A key element was confidence in the economy – M&A is often seen as an indicator of how the economy is doing and in 2015 the barometer was set fair to good. This was not only reflected in deal volumes and values, but also in the speed of transactions. During the recession deals were taking an average of around four months from HoT (heads of terms) to completion; in 2015 this was more like 1.5 months with buyers eager to complete as soon as possible.
A slow-growth economy makes organic growth difficult. Expansion via acquisition is far easier and can be less risky. Low interest rates meant that companies and private-equity funds with cash reserves were earning negative returns and turning to acquisitions as a way to invest money in growth initiatives.
Over the past seven years the banks’ efforts, in rebuilding their balance sheets and improving risk management, have paid off. Corporate credit has recovered strongly and lending to small firms is growing, meaning that funding is more readily available.
All of these factors result in hungry buyers which, in turn, leads to higher values and multiples and sellers being happier to exit.
What lies ahead in 2016?
Listening to Bank of England governor Mark Carney, in his turn of the year speech, the UK has made steady economic progress but we still have a long way to go. The 2015 0.5 per cent growth was disappointing in comparison to the projected 0.7 per cent.
Interest rates were due to rise early in 2016. This is now forecast to happen later in the year with some economists predicting no change until 2017. Collapsing oil prices and volatility in China have caused a drop in inflation and a sluggish UK growth rate. The EU referendum and the Middle East crisis may also affect our route to recovery.
All is not doom and gloom, as Carney says the “economy is subject to unforeseen disturbances” and what is important is that we do the “right thing at the right time. The journey does not have a set timetable only an expected direction of travel”.
It is envisaged that we will continue on a path of momentum, during conducive economic conditions, and slack, during times of uncertainty and unexpected “economic disturbances” on a journey towards economic recovery. Positive drivers should outweigh the negative and with the current pace of recovery, we should be in a position to navigate around the obstacles.
Looking at M&A activity, we predict that levels will remain high. Interest rates will stay low, funding will remain readily available, the UK will continue to attract international buyers, growth by acquisition will stay the preferred route and confidence in the economy will continue to be strong – all of which points to sustainable and increased M&A deal values and volumes.
In terms of hot M&A sectors those that operate in buoyant markets will always be more desirable. In the current economy hot sectors are those that need to add scale to deal with heavy competition or are in a slow-growth industry – think telecoms, technology, healthcare and consumer (pharmaceuticals, food and beverage).
While we have no crystal ball, everything points to a positive direction in 2016. Sell or grow – whatever you do make hay while the sun shines. Most importantly, to revisit Carney’s speech, what’s essential is to do “the right thing at the right time”. Plan and make sure you get it right.
IoD members can access discounts from Avondale, the IoD’s preferred provider of business sales, mergers and acquisition services. To find out how Avondale can help you call 01737 234892, email Avondale or visit iod.com/buyandsell