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UK companies’ intent to pursue M&A hits a record high

Global Capital Confidence Barometer │UK highlights │ 18th edition

Shifting geopolitical backdrop affects the direction of UK M&A

Intentions amongst UK companies to pursue M&A in the next twelve months have reached the highest levels since 2010, according to EY’s 18th Global Capital Confidence Barometer (CCB18).

After a strong Q1, that saw the overall value of UK M&A total $120b and 681 deals, activity looks set to remain high with a record 65% of UK companies expecting to actively pursue deals in the next 12 months — above the global average of 52% and up from 60% six months ago (CCB17).

Rising confidence

Strong deal intentions amongst UK firms are underpinned by exceptionally high confidence in global growth, with 86% of respondents expecting the global economy to improve, compared with 73% of executives worldwide. However, there is less confidence in the domestic economy, with 68% of UK executives surveyed expecting the domestic economy to advance. These results suggest that there could be more to come as UK executives reshape their businesses to grasp the opportunities and address the challenges of a new transformative age.

As we might expect, financial and geopolitical volatility has knocked confidence in credit availability and equity markets. Nevertheless, the vast majority of UK respondents expect capital markets to remain steady or improve from here.

Looking abroad

According to CCB18, a shifting geopolitical backdrop is affecting the direction of UK M&A. In the past six months, UK deal appetites have re-focused on Europe, with Ireland (4) and the Netherlands (5) replacing the US and India in the top five target destinations, alongside France (2) and Germany (3).

At the same time, the UK has dropped to fifth place on the global M&A destination list. According to CCB18, US (1), Brazil (2), Canada (3) and China (4) complete the list of top five investment destinations of choice amongst global executives.

Steve Ivermee, EY’s Transaction Advisory Services Managing Partner, said: “Rising confidence is seeing deal pipelines and M&A appetite shifting up a gear. We expect this trend to continue for the foreseeable future as executives regard M&A as a growth engine. Improving global growth and the need for UK companies to plan for life after Brexit, mean that UK executives still have a positive perspective on global markets — especially European destinations.”

UK businesses list their biggest near-term risk to business as political uncertainty (50%) — up by three percentage points compared to CCB17 — followed by currency movements (40%). Whilst US tax reform has the potential to change deal arithmetic; above all, deals still need to add up strategically. Most UK executives don’t think the reforms will affect global dealmaking.

Reshaping the business

Portfolio transformation — buying and selling assets to reshape portfolios for the future — is the biggest factor in driving deals over the next six months with 73% of UK respondents citing this as the most important influence. Most UK portfolio reviews have resulted in divestment, either of underperforming assets (39%) or those at risk of disruption (25%) as companies look to deploy capital more effectively.

Steve concludes: “Portfolio transformation is once again the top priority on the boardroom agenda, as companies look to remain agile, alert to new opportunities and need to quickly respond to a fast-moving market environment. Current dealmaking conditions make this an opportune moment to sell assets.”

“Digital transformation and disruption will continue to present both opportunities, in terms of new technologies, as well as threats posed by digitally savvy competitors. UK executives are well aware of this and are ahead of the curve when it comes to factoring this into their businesses’ transformation plans.”

Only 12% of UK executives said their reviews identified areas to make acquisitions, but companies will also be redeploying capital into internal projects and alliances as well as employing the right talent. In CCB18, 65% of UK respondents said they had struggled to find employees with the right skills, compared with 55% worldwide.

Walking away

UK companies aren’t getting it all their own way, with 81% expecting greater competition for assets in the next twelve months and 73% of those expecting that competition to come from private equity (PE). Corporate buyers have dominated this cycle until very recently, but we’re starting to see PE deploy its dry powder and experiment with new structures, alliances and holding periods. Increasing equity market volatility may also tip the balance back towards PE buyers. Moreover, although UK companies clearly have an exceptionally strong appetite for dealmaking, they are still prepared to walk away if the deal isn’t right. In the last 12 months, 68% of UK executives have failed to complete or have cancelled a deal. Companies are still wary of overpaying and have much more sophisticated diligence techniques available to value assets. Competition from other buyers and disagreement on price is the primary reason for cancellation (56%) followed by concern about competition or antitrust reviews (19%).