4 minute read 3 Mar 2021
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UK M&A appetite strong as companies reshape for post-pandemic future

By Steve Ivermee

UK&I Managing Partner Strategy and Transactions, Ernst and Young LLP

Member of the UK&I Executive working with multi-disciplinary teams to advise and support clients on the transaction life cycle. Lead UK&I Diversity & Inclusiveness Sponsor. Budding racing driver.

4 minute read 3 Mar 2021

UK companies are looking forward to recovery but, under no illusion that they need to realign their strategies and operations to thrive.

In brief
  • There is a clear message of confidence coming from large UK businesses as they chart their recovery and reframe their future for the post-pandemic world. 
  • UK companies have a stronger focus than global peers on the disruptive risk of new entrants and the need to develop new products and capabilities. 
  • The valuation gap between buyers and sellers remains a sticking point, but that hasn’t translated to low M&A activity levels due to high asset demand.

The 23rd edition of the EY Global Capital Confidence Barometer (pdf) paints a dynamic picture of UK corporate strategy, with business leaders increasing investment and using transformative M&A to reposition their companies.

The pandemic has delivered a significant shock to UK businesses. In 2020, 88% of UK executives in the survey reported a decline in revenue and 92% a decline in profitability — also reflected in a record number of UK profit warnings. Most expect their companies to bounce back. Just over three quarters of respondents expect to hit pre-virus levels of sales in 2021 and profitability during 2022. But the UK C-suite also recognize that their recovery depends on their ability to reposition and adapt to rapid changes in markets that transcend or have been accelerated by the impact of COVID-19.

Reset

UK companies took rapid action to stabilize their business as the pandemic took hold, transforming their operations at speed and, in many cases, moving to a fully remote and digital environment. Some companies have struggled to adapt to the unique strategic, commercial, and operational challenges created by the pandemic. But others have successfully pivoted their operations and accelerated transformation — a process that could generate future productivity improvements. In CCB23, 65% of UK executives reported increasing investment in digital transformation and 62% in operational stability — for example, supply chain resilience, in response to COVID-19.

But there is a clear recognition from UK companies that they also need to plan beyond the pandemic and reframe their future in response to a wide range of forces driving fundamental change in their markets. CCB23 shows that UK companies have a stronger focus than their global peers on the disruptive risk of new entrants and the need to develop new products and capabilities. In contrast to global executives who rank the ongoing pandemic as their biggest external threat, non-traditional competitors are the UK C-suite’s biggest concern. Their focus for strategic growth is the digitization of the customer experience and attracting customers or developing new products as they increasingly look to innovate and enhance the digital channels that have proved vital during lockdown.

Realign

The speed of change and imperative to act is a driving force in UK companies’ exceptionally strong deal appetite. In CCB23, 57% of UK executives said that their companies actively intended to pursue M&A in the next 12 months, well ahead of the global average of 49%. Most UK executives (62%) are looking for acquisitions that increase operational capabilitiesfor example, improving distribution or efficiency, in contrast to the global focus on bolt-on deals.

M&A intentions

57%

of UK executives said that their companies actively intended to pursue M&A in the next 12 months.

Cross-border deals also continue to be an exceptionally strong UK deal driver. UK companies were involved in a third of global cross-border deals by value (35%) in 2020 — and this trend looks set to continue. Almost two-thirds (65%) of UK respondents are focusing on cross-border acquisitions, while the UK continues to rank in the top three deal destinations among global respondents.

Cross-border acquisitions

65%

of UK respondents are focusing on cross-border acquisitions.

How much of this is a response to Brexit? Almost a third (30%) of UK executives list their need to secure supply chains and respond to trade or regulatory changes as their main strategic deal driver, while the UK’s top overseas deal destinations are Germany and France. But supply chain concerns go beyond Brexit. The pandemic continues to highlight supply chain vulnerabilities, as it has an increasing focus on ethics and sustainability. Companies are also looking for adjacent deals that address the increasing blurring of boundaries between industries, with 27% of companies listing sector convergence as a driving strategic force in their acquisitions.

Refocus

In 2020 the UK M&A market initially stalled, but recovered strongly, driven by the imperative to transform and the continuing attractiveness of UK assets. The value of UK deals totaled £347b (US$428b), which was 13% of the global total and an increase of 50% against 2019, although volumes did fall compared with the previous year.

UK investors were also involved in 8% of all deals announced. This is despite around two-thirds (69%) of UK executives in the survey reporting that they’d failed to complete a deal in the last 12 months, with the majority of these halted due to valuation issues. This compares to 55% reporting deal failure globally, of which 36% stalled on price. It seems that with the UK M&A market running so hot — and UK targets being in great demand among global buyers — international buyers may be outbidding some domestic acquirors, closing the valuation gap.

The UK deal market remains exceptionally active in 2021. The pace of change that drove deals to exceptionally high levels before the pandemic has accelerated, quickened by changes in behavior and attitude that companies cannot afford to ignore. The impact of digitization, geopolitical tensions and an increasing focus on purpose and sustainability will continue to reshape our world and add to this imperative for companies to act. Companies need to be continually reassessing and refocusing their portfolios to stay on the front foot. We expect the UK C-suite to remain emboldened by this environment to continue transforming their business, constantly reviewing how they secure long-term value in an ever-changing world.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By Steve Ivermee

UK&I Managing Partner Strategy and Transactions, Ernst and Young LLP

Member of the UK&I Executive working with multi-disciplinary teams to advise and support clients on the transaction life cycle. Lead UK&I Diversity & Inclusiveness Sponsor. Budding racing driver.