3 minute read 7 May 2019
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UK deal appetite hits 10-year high

By

Steve Ivermee

EY UK & Ireland Transaction Advisory Services Leader

Transactions leader working with multi-disciplinary teams to advise and support clients on the whole transaction life cycle from strategy to execution. Budding racing driver and opera lover.

3 minute read 7 May 2019

UK companies are actively using M&A to adapt to technological and geopolitical change.

According to the EY Global Capital Confidence Barometer (CCB20), United Kingdom (UK) companies are dramatically switching their focus back to dealmaking, while the UK also becomes the global C-suite’s most favored M&A destination for the first time in the survey’s 10-year history.

In CCB20, 67% of UK respondents said that they expect to engage in M&A in the next 12 months, compared with 45% just six months ago and 59% globally. This is well above the UK average of 46% and represents the highest level of deal appetite we’ve recorded in the history of this survey.

M&A expectations

67%

of UK respondents said that they expect to engage in M&A in the next 12 months.

The data shows UK companies using M&A to adapt to technological and geopolitical change. Both are global pressures, but the latter has been given additional UK impetus by Brexit, with a more challenging growth environment also encouraging greater domestic consolidation.

Together, these forces are compelling companies to reposition their businesses with much greater urgency than they expected even six months ago, with M&A providing greater speed and certainty than investment alone. It’s these same forces that are also generating more global interest in the UK, as we’ll explore later.

Brexit reshapes investment

UK companies aren’t alone in adapting their capital strategies to shifting geopolitical, trade and regulatory sands. But there is no doubt that the UK’s reshaping of its relationship with the EU — and heightened uncertainties around future market access — have provided a particularly strong imperative for UK companies to secure supply chains and achieve continuing regulatory alignment.

A “changing geopolitical landscape” is listed by 73% of UK respondents as “fundamental” or “very influential” to their deal strategy — which puts this equal with “technological innovation” as a motive for transacting. This trend is underlined by UK respondents listing a “response to regulatory or tariff and trade changes” as their top priority for acquisitions.

external trends influence your deal stratergy

Meanwhile, 47% of UK respondents state that they have considered, or are considering, an acquisition to secure their supply chain.

Transaction motivation

47%

of UK respondents have considered, or are considering, an acquisition to secure their supply chain.

Moreover, this impetus to reshape their portfolio isn’t just coming from within the companies themselves. CCB20 shows that 41% of UK public company respondents are being compelled to “reconfigure their operations or geographical footprint” by activist shareholders.

Activist shareholders

41%

of UK public company respondents are being compelled to reconfigure their operations or geographical footprint by activist shareholders.

Companies focus on “new”

Technological disruption remains a significant driver of UK investment. Weak official business investment data, combined with robust M&A activity — especially in digital categories — echoes the CCB20 data, which shows an increasing preference for “buy” over “build.” This may reflect the confidence companies have in their ability to execute M&A compared with the more uncertain environment for new capital investment, which offers longer payback periods.

Nevertheless, even with this increasing emphasis on M&A, CCB20 consistently shows UK respondents ahead of their global peers in terms of their commitment to investing in the development of new products. “Developing new products and services” is the growth strategy with the highest strategic priority among UK respondents, compared with the global priority of “expanding in domestic markets.” The UK C-suite’s priority for technological investment is also to focus on “new services and products” (22%), with global respondents instead prioritizing “internal efficiencies.”

The UK’s attraction

UK companies’ emphasis on innovation has no doubt contributed to the UK becoming the global C-suite’s preferred destination for M&A in CCB20. To some extent, the UK’s rise in popularity as an M&A destination may reflect slowdowns in other major economies. But it’s also a measure of UK public limited companies’ resilience and continuing attractiveness that the UK leads the way in 2019, despite the uncertainties that surround Brexit.

Consumer products and retail, industrials and financial services are named by global respondents as the top-three targeted UK sectors. As well as the UK’s focus on innovation, this may also reflect some supply chain and regulatory repositioning by global companies, as they prepare for life after Brexit.

actively persue acquisitions in next 12 months

Therefore, the year ahead could be an exceptionally busy one in the UK deal market. The UK respondents certainly envisage an active year, with two-thirds of UK companies expecting their deal pipeline to increase and 85% predicting more deal completions. Although, if the shifts in the last six months show us anything, sentiment can change remarkably quickly.

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

EY UK & Ireland Transaction Advisory Services Leader

Transactions leader working with multi-disciplinary teams to advise and support clients on the whole transaction life cycle from strategy to execution. Budding racing driver and opera lover.