UK M&A values plummet over 65% in 2012 compared to the credit boom of 2007

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  • Global M&A volumes halved when compared to 2007
  • UK sees one of the most dramatic drops in deal value
  • UK loses its position as world’s top outbound cross border transactor, falling behind Japan and US
  • BRICs replace Eurozone countries in 2012 top 10 by deal value

The slowdown in UK M&A continued throughout 2012, with the value of deals falling 66% from the height of the M&A boom in 2007 and 36% in volume1, according to data analysis released by EY.

The Eurozone sovereign debt crisis and global volatility has undoubtedly restricted UK corporates from transacting. But such a dramatic decline also points to the once acquisitive financial services, life sciences and real estate sectors being hit much harder by the global slowdown than most.

Across the UK, total deal value reached $133.6bn, third highest in the world behind US and China, while volumes reached 2,284 – a 1% increase and 8% drop on 2011 respectively. Globally, deal value fell to half (-47%) of what it was in 2007 and was 21% down in volume1.

Jon Hughes, head of EY’s transaction advisory services practice, said, “Caution and a distinct lack of confidence underpinned M&A sentiment in 2012 and has created a bias towards risk avoidance and inertia.

“But simply sitting on cash in the hope of an upturn is a foolhardy approach. In a weakened market, there is a real opportunity for well positioned players to a steal a march on their competitors and grow inorganically by snapping up choice assets.”

Mark Gregory, EY’s chief economist and transaction partner, adds, “In the UK, M&A has traditionally been buoyed by financial services, life sciences and real estate sectors but these have been hit harder than most by the global downturn leading to a greater fall in activity.

“The UK’s past reliance on certain sectors may be a major factor in the significant fall in M&A. There is a case that says M&A could have been reached an unsustainable level prior to the crisis due to the availability of credit and the dominance of financial services in the UK economy,  hence when the credit bubble burst UK activity levels suffered  relatively more.”

UK corporates adopt more cautious approach to cross border deals

For UK businesses going on the acquisition trail cross border, the number of deals reached 900 and values hit $67.8bn, compared to 1628 deals at $362.5bn in 2007. In 2007, the UK accounted for the most outbound, cross border deals but has since fallen behind the US and Japan.

Commenting, Hughes said, “The Eurozone countries have, up until the crisis, provided happy hunting ground for UK corporates but the volatility and uncertainty has tempered their appetite to invest. This is not to say, however, that there are not good opportunities to be had and the more businesses in the UK stall investment and acquisition plans in the hope of an economic upturn, the more they will lose out to their international competitors who are being bolder and braver.”

UK open for business to overseas acquirers

In bound M&A, categorised by overseas acquirers buying businesses in the UK, accounted for 776 deals, totalling $94.4bn.

Gregory says, “Japanese corporates have perhaps developed the blue print for cross border transactions. They have shown that with little or no growth in their domestic market and a strong currency, overseas deals will help drive inorganic growth in a low growth world. UK businesses should consider a similar strategy and focus in higher growth markets where competitive advantage can be achieved.”

Top 10 - BRICs replace Eurozone

The rapid rise of M&A in the BRIC nations from 2007 to 2010 was not sustained in 2012 – but they still performed better than the Eurozone countries. In 2007, the BRIC nations accounted for just 7%4 of the global M&A market by value. In 2012 it is 15%5. The Eurozone in 2007 contributed 21% of the global value of M&A – that has now fallen to 11%6.

In 2007, five Eurozone countries were in the top ten by value and only Russia of the BRICs featured in the list. Now China (no. 2), Brazil and Russia are all in the top ten. Germany is the only top ten country left from the five Eurozone members from 2007, and only in 9th place7.

Compared to last year, the Eurozone M&A market continued to decline, down 19% in deal volume in 2012 compared to 2011 and 24% in value, whereas the BRIC nations saw a smaller decrease in activity of 15% but a rise in overall value of 19%.8

Brazil was the most resilient BRIC in 2012, with volume flat, whereas Russia saw a fall of 27%. China fell 10% and India 2%.9

Even if the rapid growth of BRICs over the previous few years wasn’t fully sustained in 2012, the transformation of the global M&A landscape is still clear: since 2007, the value of China’s M&A market has doubled, while the value of the US market has halved.10

“China’s growing global economic influence – along with the other emerging economies – has been well trailed over the past decade. Now we are really seeing a shift in the balance of M&A power as China’s dominance has accelerated since the financial crisis and it will likely become even more pronounced especially as a source of inward investment in 2013,” says Gregory.

Valuation gap a deal blocker

A growing number of global executives looking to make an acquisition see the gap between their valuation of potential assets and the prices sought by sellers as the main reason not to do a deal in 2013.12

Historically, M&A activity levels have tracked equity prices in many developed markets – such as the US and UK – but in recent years we have seen the de-coupling of those prices and M&A activity. That gap is now widening.

Gregory says: “Equity prices remain relatively buoyant and underpinned by quantitative easing (QE). The injection of liquidity into the system with interest rates at historical lows has introduced new money chasing a home. It’s setting expectations for prices of all assets among would-be sellers. However, potential buyers, their confidence sapped by prolonged economic volatility and the prospect of low or no growth in many markets, are increasingly questioning current valuations.”

Will companies shop in the new year sales?

Major companies are ending the year less confident than they started it: only 22% of believe the global economic situation is improving, down from 52% in the first half of 2012 while 78% have seen no improvement since then.19 The number of companies who report declining sentiment, increased from 20% to 31%.20

Hughes concludes: “The fundamentals are there to support increased activity.  In developed markets we see availability of cheap corporate debt and strong cash positions and in emerging markets, companies have the cash and appetite for deals

“In reality, however, M&A activity globally is likely to remain low with little sign of a significant upturn in the coming months as executives continue to exercise restraint before taking a seat at the deal table.”