Monitoring mid-market M&A in the UK

May 2022 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

financierworldwide.com

Undoubtedly, the global coronavirus (COVID-19) pandemic took us by storm, disrupted our lives and has made us question the future. However, as Winston Churchill once said: “difficulties mastered are opportunities won”.

Following the temporary pause at the start of the pandemic, the M&A market took off. Experian reported that the pandemic caused “a frenzy of dealmaking”, and that “5137 UK transactions were announced in the first nine months of 2021, up by more than a fifth on the 4277 recorded at the same point in 2020”, such activity being driven by a strong appetite from private equity (PE) firms and investors.

Our study, ‘Monitoring mid-market M&A in the UK’, assesses the disruptive effect of the pandemic and economic downturn on corporate growth strategies, business transformation and dealmaking to answer key questions surrounding this almost immediate uptake in M&A activity.

This study evaluated, analysed and discussed the following: (i) dealmaking sentiment and outlook across sectors; (ii) the limited impact of COVID-19; (iii) where transactions typically fall down; (iv) the impact of technology; (v) the role of communications; (vi) deal mechanics, including seller financing and warranty and indemnity insurance; (vii) what makes a good adviser; and (viii) where dealmaking stands in relation to environmental, social and governance (ESG).

What will the future of corporate deals hold?

The study found that the outlook for the next 18 months is optimistic, with a possible 80 percent more opportunities for deals, which suggests that any initial uncertainty curated by the pandemic has quickly been overturned by an appetite to recover and pursue the key period that lies ahead. This suggests that dealmaking should expand significantly, with 70 percent of respondents expecting company valuations and deal values to be higher in the next 18 months.

Our study opines that one reason for this influx of activity is down to “so many investors – including PE funds investing on set time horizons – essentially squeezing two years of activity into one”, which is also noted by James Knott, acquisitions director at Tenzing, in his statement that “people are trying to make up for 18 months of cash burning a hole in their pocket”, further representing an exciting and buoyant M&A market for the future.

The study also found that transacting is inherently tied to growth strategies and that the energy, utilities & resources (other than mining), financial services, healthcare and life sciences, manufacturing, technology, media and telecoms sectors will be leading the way. These sectors are referred to as being the ‘pandemic winners’, particularly with the healthcare and life sciences and technology sectors having organic growth. This is an interesting insight and consistent with mid-market M&A being ‘process-driven’ and about ‘proactive expansion’.

What impact does ESG have on M&A transactions?

ESG considerations have been around for some time but have certainly developed somewhat within the corporate sphere. The study shows a combined 61 percent value ESG factors when making M&A decisions and this figure is expected to rise. Similarly, it is shown in the report that only 8 percent of respondents said that ESG considerations are not at all part of the M&A decision-making process.

ESG is about adding value to companies, and it is predicted that “savvy investors will see through those businesses that treat ESG as a box-ticking exercise or otherwise lack genuine commitment”. The reports notes that experts have seen companies tend to be comfortable with the ‘S’ and ‘G’. particularly with the introduction of the Modern Slavery Act, anti-bribery and corruption laws, and diversity and inclusion initiatives.

However, it seems that the environmental considerations are still very new. A key driver of this is that now, more than ever, stakeholders are taking a specific interest in the regulation and governance of companies, particularly whether they are developing ESG-friendly products, which is further promoted by the concept of stakeholder capitalism.

Another key driver for environmental considerations came following COP26. At the COP26 conference it was announced by the International Financial Reporting Standards (IFRS) foundation trustees that there would be a creation of the International Sustainability Standards Board (ISSB) as a major step to globally align ESG reporting. This led to many businesses committing to be carbon neutral between 2030 and 2050, and with many businesses attempting to obtain B Corporation accreditation.

This certainly suggests a need for businesses to think about sophisticated ESG policies and strategies and how they will add value to their organisations. Understandably, this can be quite scary for businesses that are very new to ESG considerations, but those that “fail to monitor and measure performance are less likely to succeed”.

Social media and the advancement of technology are also driving the requirement for companies to become more ESG-compliant. The increase of political activists and a requirement to further digitalisation and connectivity between individuals in the financial world means that there is less room for companies to hide and more opportunity for them to spot red flags early on. Businesses must work actively to become trusted and ethical in order to secure popularity and loyalty with their stakeholders.

The study concludes that it is yet to be seen how the role of ESG in decision making around M&A will mature throughout 2022. But it is certain that this will be embedded into corporate thinking and strategy across the UK and will be a key consideration for investors and potential buyers, meaning that ESG adherence is likely to become inextricably linked to investment and therefore to a business’s value.

Conclusion

Mid-market M&A transactions in the UK are set for an exciting future. It seems many investors are energised and seeking substantial growth over the next 18 months. There are still many challenges ahead and businesses will need to embrace technology and think carefully about their ESG considerations to be successful in adding significant value to their organisations, as well as securing investment.

Tim Nye is a partner and Megan Hulme is a trainee solicitor at Trowers & Hamlins. Mr Nye can be contacted on +44 (0)20 7423 8061 or by email: tnye@trowers.com. Ms Hulme can be contacted on +44 (0)20 7423 8377 or by email: mhulme@trowers.com.

Tim Nye and Megan Hulme

Trowers & Hamlins