Why has the UK merger market declined so much recently? What does this mean for the future of deals?
The UK merger market slowed down a lot since 2021, like the rest of the world. In 2023, deals decreased by 18% compared to last year. This was a third less than in 2021. The downturn affected many sectors. But, the health sector saw more deals happening.
Big deals, especially with private equity, became less common. People waited for better times to make such moves.
Deals dropped to £83 billion in 2023 from £269 billion in 2021. Yet, there’s hope at the start of the new year. Better interest rates and lower inflation mean good news for dealmakers. Lucy Stapleton of PwC UK is positive about more deals happening.
Companies are now focusing on deals that transform their business. For example, ASDA bought EG Group UK. This shows the trend towards quicker business changes. According to Tim Allen of PwC UK, sectors like technology and energy are busier. They’re driven by new tech and the need for cleaner energy.
Introduction to the Current State of the UK Merger Market
The UK’s merger market is buzzing with activity. The Competition and Markets Authority (CMA) keeps a close eye on things. In the 2022 to 2023 financial year, they reviewed around 700 cases. They carried out 43 Phase 1 and 13 Phase 2 investigations. This shows they’re really focusing on making sure mergers are fair and don’t hurt competition.
Of these cases, only three mergers were stopped, and three more were dropped. This is a tiny fraction of all deals. Even so, the world saw about 50,000 mergers and acquisitions, thanks to data from PwC and Bloomberg. The CMA steps in when deals might harm the market, keeping prices fair and encouraging innovation.
New rules have made a big impact on mergers and acquisitions. Now, to get the CMA’s approval, a deal must meet stricter conditions. A company must have at least a 33% market share and a big presence in the UK, with over £350 million in turnover. This change means the CMA can watch over more deals, but small companies won’t get bogged down in red tape.
Breaking the rules now leads to bigger fines, up to 1% of a company’s global revenue. The CMA can also interview people remotely and penalise those who tamper with evidence. These steps have made the UK’s market decisions even more respected worldwide. They show a commitment to fairness, without government meddling.
Businesses and investors are feeling hopeful, thanks to lower inflation and steadier interest rates. These conditions make the merger market more attractive. Companies are ready to adapt to changes and meet new challenges head-on.
Sector-wise Analysis of Merger Activities
In 2023, the UK’s mergers scene showed different trends in various sectors. In areas like technology, media, and telecom (TMT), deals stayed strong. This was because of fast growth in cloud tech and artificial intelligence. The large Cisco purchase of Splunk for US$28bn showed how active the TMT sector is.
The energy sector also saw lots of action, with a big push for switching to cleaner energy. The number of big deals in energy, utilities, and resources nearly tripled in 2023 from the year before. This shows how vital these sectors are for mergers and acquisitions. The healthcare sector kept up its activity too, showing its importance in the face of global health issues.
But, sectors like retail, hospitality, and leisure faced challenges. They couldn’t keep their transaction numbers up. Middle-income families had less money to spend, affecting these areas. Specifically, hospitality and leisure saw fewer deals and lower values in 2023 than before. This shows investors were being careful because of economic worries.
Private Equity in the UK Merger Market
In 2023, private equity became even more important in UK mergers and acquisitions. It made up 42% of all deals and 55% in total value. Investors were especially active in technology, energy, pharma, and healthcare.
There was a drop in the number of UK deals, declining 18% from 2022. The total value of deals fell sharply to £83bn from £269bn in 2021 and £149bn in 2022. Despite this, a PwC survey found 56% of execs see deals as vital for growth. They believe 21% of companies might not survive without making strategic moves.
North American funds showed a lot of interest in the UK, signaling global faith in the market. But the push for deals comes with caution due to high costs and geopolitical uncertainty.
The CMA is watching mergers closely, particularly those that involve a lot of borrowing. CMA Chief Sarah Cardell has raised concerns about the debt levels in these deals.
By the end of 2023, the market began to stabilise. This was helped by foreign investment and companies joining together. Private equity is set to keep influencing the UK market, focusing on growing sectors like TMT and healthcare. But, success will depend on being able to adjust to new challenges.
Resilience and Challenges in the M&A Environment
In 2023, economic and geopolitical issues slowed down mergers but, there was a bounce back later. Sectors like healthcare, technology, and financial services saw more deals. This was because UK companies were cheaper than their US equivalents.
Several reasons make the UK’s M&A market strong. Good GDP growth and people feeling positive have increased confidence in making deals. Also, with low interest rates, it was easier for companies to buy others.
COVID-19 made companies focus on saving money and keeping stable at first. But as things got better, deal-making increased. This was helped by better economic conditions, new tech, and helpful government policies.
Looking globally, deal values dropped to US$2.5tn in 2023, from US$5tn in 2021. Yet, the UK’s M&A scene stayed strong, mainly in healthcare and technology. This shows how adaptable and lively the UK market is, even when it’s tough.
The future will bring more challenges for M&A, like higher financing costs and strict regulations. But, the UK market is good at changing and finding new ways to succeed. This skill is key for doing well despite these hurdles.
Regulatory and Policy Influence on UK Mergers
UK merger rules have recently changed, affecting businesses and investors. The introduction of the National Security and Investment Act is a key change. This Act sets new rules for big deals, including a share of supply rule of 33% and a turnover threshold of £350 million. It also raises the amount a business must earn before it’s reviewed to £100 million. Deals where each business earns £10 million or less in the UK are not checked by the Competition and Markets Authority (CMA).
The rules for following these regulations are stricter now. If companies don’t comply, they could be fined up to 1% of their yearly worldwide earnings. The CMA can now look into actions outside the UK and even interview people remotely not working for the company in question. This makes it easier for them to enforce the rules.
Changes in the way mergers and acquisitions (M&A) are done keep coming. The Takeover Code makes sure public buyouts are clear and fair. The Companies Act strengthens M&A’s legal basis. These changes mean that dealmakers must carefully consider regulations early on, especially after Brexit. This is because the UK and EU now review mergers separately.
The National Security and Investment Act has granted the CMA more power in reviewing mergers. It introduces new thresholds and fast-tracks certain reviews. The CMA’s approach aims to stop too much power from being held in emerging sectors. They now use judicial reviews for appeals on temporary decisions instead of merit-based reviews.
Since 2013, the CMA has only stopped 16 deals out of around 7,000. Yet, it’s paying more attention to tech and digital markets lately. In 2021, it updated its Merger Assessment Guidelines to address competition in these growing sectors. The CMA focuses on facts and economic insights, avoiding political bias. This was seen in the Microsoft/Activision case, where they did not intervene.
Future Predictions for the UK Merger Market
The UK M&A is on the brink of a boost, driven by economic stability and supportive markets. Interest rates might hold steady, making it a good time for smart buys. This could mean more activity and higher confidence among investors soon.
Buyers may need to re-think how they value deals and include more safeguards. With private equity playing a big role, financing deals could get pricier and tougher. Private credit might become key in funding these transactions.
Not all sectors will see a rise in deals though. Tech, media, and telecom are set to keep up their pace, thanks to new technologies. The energy sector also looks promising, thanks to efforts in energy transition. But, consumer markets might not do as well because of low spending and high loan costs.
A survey by PwC points out, one in five CEOs fears their business might not survive the next decade without big changes. More than half of them think that mergers and acquisitions are critical to keep up with the times.
Even though UK deals dipped in 2023, the health sector saw more action. Despite the decreases, there’s hope. Good strategies for putting money to work and wise investments might keep the market’s spirits up.
Strategies for Successful Mergers
Creating value in mergers is key for a solid M&A plan, as firms tackle the detailed world of combining businesses. They often choose between selling, merging, or closing down. Many prefer growth through merging, even though it’s tough. This process is important for both big and small companies.
A recent trend is moving towards creative deal making. One real estate company saw big growth by acquiring another company. They expected their investment to pay off in four years, increasing their earnings through mergers. This shows the benefits of smart deal planning and choosing the right company to merge with. In fact, a Deloitte survey showed that 55% of a deal’s success comes from these steps.
Mergers often use share deals or swaps, which might not need cash upfront. This can be a good approach. It’s useful to look for merger partners actively, not just those up for sale. This increases the chances of a good deal. Reaching a wide range of potential partners is key to success.
Shareholder activism also impacts M&A strategies. With pressures mounting, companies must be forward-thinking and flexible. McKinsey predicts new products will make up 30% of earnings by 2023. So, it’s crucial for businesses to check financials and ensure their accounting systems talk to each other well during mergers. This makes financial transfers smooth and strengthens the financial check-up process.
Working together across teams, especially HR, is crucial when merging. A team that knows their stuff increases chances of merging success. Including plans for a possible exit in M&A deals gives clear future options. This is helpful if the owner wants to leave the business later.
In the end, careful planning and managing finances, strategic integration, and promoting teamwork are essential. These steps boost the success rate of mergiles and acquisitions. They help companies move through the UK’s complex environment and grab new chances.
Case Studies of Notable UK Mergers
In 2023, the UK saw exciting merger activities. Such activities include cross-border deals and sector growth. Abcam’s takeover by Danaher Corporation is a key example. It united their strengths and expanded their market influence.
Norsk Hydro’s deal with Glencore made it top in alumina refining. This shows global teamwork in recent mergers. Lithia Motors and Pendragon joined to create a major UK car sales group. It points to the industry’s move towards joining forces for better market visibility.
These mergers touch on various industries like Recreation, Energy, and Finance. Their results range from easy approvals to tough blocks. The Vodafone/Mannesmann case was a massive international deal. It underlines the impact of well-planned mergers.
There were 2,368 merger cases reviewed in the UK. They spanned sectors like Electronics, Healthcare, and Pharmaceuticals. From Skyscanner’s buyout by Ctrip to BAT’s deal with Reynold American, each case showed the complexity and global theme of modern mergers.
Companies like Worcester Bosch and those in the cloud services market were also examined. Their stories add to the UK’s rich merger narrative. Royal Dutch Shell’s merger set a high bar in the energy sector. It became the biggest global LNG supplier, marking a significant strategic move.
Conclusion
The UK merger market faced tough challenges in 2023, with a big drop in deal value. Deal values plunged from £191 billion in 2022 to £109 billion in 2023. Still, the number of deals stayed strong, with 2,634 completed. This shows a market adjusting well, even in hard times.
One key trend is the increase in UK take-private transactions. These deals made up 53% of all transactions, a rise from 46% in 2022. Big deals, like Abcam’s buyout by Danaher Corporation for $5.7 billion, stood out. Also, Lithia Motors teamed up with Pendragon, creating a massive car dealer group. These moves show the strategy of joining forces to grow and transform.
Regulatory bodies, like the NSI Act and the CMA, have played a critical role. They approved 93% of deals quickly, within 30 days. Out of about 700 cases, the CMA only stopped 3. This shows they’re fair and based on solid evidence. Their work also links up with regulators worldwide, making the review process better for everyone.
Even though there was a drop in the value of UK mergers, the number of deals remains steady. The market is evolving, focusing on smart, transformative deals. With careful planning and the right strategies, businesses can make the most of new chances. The future looks promising for UK mergers, with a focus on growth and transformation.
