Covid-19 hasn’t dampened large UK corporates’ appetite for deal-making
Deal-making by large UK corporates is expected to continue at pace this year, with most executives planning mergers and acquisitions (M&A) activity in 2021, according to the 23rd EY Global Capital Confidence Barometer (CCB23).
The appetite of UK executives for M&A activity in the next 12 months is high, with 57% of UK CCB23 respondents stating an intention to do deals this year compared with 45% in the US and 49% globally. The current UK appetite for M&A is also well ahead of the 11-year global average of 47%.
Large UK corporates continue to view M&A as a tactic to accelerate strategic transformation, even in an uncertain economic environment. Three quarters (75%) of UK respondents conducted a portfolio review in the last year, which will likely produce more investment and divestment activity. Most reviews were already scheduled (60%) but 40% accelerated this activity due to the pandemic.
The sectors identified to be of greatest interest to UK executives for M&A are: automotive and transportation; telecoms and power and utilities.
Steve Ivermee, UK&I strategy and transactions managing partner at EY, comments: “UK companies are under no illusions that to thrive they must evolve and reposition their business. Investment and M&A are going be key strategic levers pulled by UK business leaders to drive future growth.”
While there was an initial pause in M&A activity at the start of the pandemic, UK deal-makers and the private equity industry had a remarkably resilient performance in 2020. Last year, the value of UK deals totalled £347b (US$428b), which was an increase of 54% against 2019 – a bigger increase than any other country, followed by China with a rise of 30%. The UK’s deal activity accounted for 13% of the global total in 2020, and UK investors were involved in 8% of all deals announced – a rank of 4th after the US (30%), China (16%) and Japan (10%).
Potential barriers to deal completion
While the UK is demonstrating a robust appetite for M&A, there are potential barriers to deal completion. In the last 12 months, more than two thirds (69%) of UK respondents reported they had failed to complete a deal, with 55% of these failing because of a disagreement on price or valuation. Globally, 55% of respondents reported failed deals with just 36% of those attributed to price or valuation.
Anna Faelten, EY partner, UK&I Corporate Finance, said: “M&A activity continues to run hot, with UK targets in demand amongst global buyers. Many key UK sectors have a global reach which means they attract international bidders who can outbid domestic acquirers. This cross-border activity was particularly important in 2020 – when there was a high valuation gap between buyers and sellers – allowing high levels of M&A activity to continue.”
UK business leaders set sights beyond Covid-19 and focus on digital transformation
The confidence of UK executives in their companies’ pace of recovery is greater than the global average. More than three-quarters (77%) of UK executives are confident that their revenue will reach pre-pandemic levels this year and 78% believe profitability will follow suit in 2022. This is more positive than the global averages with corresponding rates of 58% and 75% respectively.
Whilst global peers ranked Covid-19 as the biggest external threat to their business, UK executives bucked the trend. In a sign of the increased focus on market disruption by UK leaders, the pandemic was superseded as a priority by ‘non-traditional competitors’.
The report findings show that in response to the pandemic, corporates have made efforts to adapt, modernise and stay on the front foot, with new technologies and digital transformation a top strategic and investment priority for UK executives. This was on par with the US and globally, where digital transformation was also top of the agenda.
Steve Ivermee adds: “The pandemic has delivered a significant shock to many businesses and while extremely challenging, it does also present a unique situation for a wholescale reconfiguration to reshape and reboot for the future. The C-Suite has responded by deploying careful and critical strategic foresight with a focus on transformation, to not only survive this challenging time, but to adapt and thrive. Such a move will help secure the long-term success of their companies as they seek to emerge from Covid-19 stronger and even more resilient.”
UK execs have Brexit front of mind when considering deal activity
In a post-Brexit UK, the leading strategic driver for acquisitions (30%) according to UK executives is the change to regulations; the trading environment or; supply chain disruption, followed by consolidating a sector or buying related businesses (27%).
In terms of what UK executives are looking for, most (62%) want to make deals that expand and diversify their operations, rather than ‘bolt-on’ acquisitions of smaller companies within the same sector or area of business activity.
Executives prepare to take investment plans global
Europe has emerged as a front runner for cross-border deals for businesses around the world. Most respondents from North America, Asia-Pacific and the Middle East and Africa cited Europe as their organisation’s main focus for M&A outside their region in the next 12 months.
For the first time, and as a new entry to the top five, Germany is as the most popular destination for global deal-making in 2021 across all Global CCB respondents, with the UK falling from the top spot to third in the latest report. The US rose to second place from fifth and France dropped from second to fourth, while India (fifth) re-enters the list of top five destinations for M&A for the first time in five years.
Of UK executives, 65% say their focus will be in cross-border acquisitions and the top acquisition destinations for M&A (excluding the UK) are (in order) Germany, France, the US and Sweden.