Deal volume up, deal types changing – BCMS M&A review for 2014
2014 has shaped up to be a positive year for M&A, and commentators suggest 2015 is likely to be equally as vibrant, says Executive Director Steve Anstey. BCMS’ track record of deals certainly confirms this trend, with Q.3 2014 seeing the most successful month of dealmaking activity at BCMS since 2008, with 11 deals completed in July.
Below we outline the key dealmaking features of 2014, and the possible influences on M&A activity in 2015:
The UK remains a vibrant M&A market
The UK continues to demonstrate high levels of acquisition activity. According to Mergermarket’s H1 2014 Trend Report1, the UK and Ireland accounted for 25.9% of the £355bn of M&A transactions that took place in Europe, ahead of both Germany and France.
At a national level, domestic acquisitions between UK companies during 2014 has been vibrant, a trend which is predicted to continue well into 2015 (despite the looming shadow of a General Election, which will undoubtedly have an influence on investment confidence).
Interest from foreign investors and acquirers both in Britain, and British companies, has increased significantly, with an 8.3% increase in Foreign Direct Investment during 2013-14 compared with the same period in 2012-132.
This will continue to influence M&A transactions into 2015. To evidence this: an analysis of 50 recent BCMS transactions revealed that 30% of deals involved foreign acquirers.
Cash versus institutional lending
Despite ‘High Street’ banks continuing to take a cautious approach to funding SME and lower mid-market deals, cash rich buyers, such as large corporates, and Private Equity firms, are all actively funding company acquisitions. According to Experian’s H1 2014 Deal Review and Advisor League Table, the value of transactions in the UK was up 65% compared with the same period in 20133.
Recent BCMS deal data confirms the cash rich status of many such acquirers, with 48% of acquirers funding the purchase price from company reserves, compared with 22% who opted for a mixture of funding types. Private Equity was cited as a source of possible funding by 22% of acquirers. (Not all acquirers disclose their funding sources.)
New funding sources
Over the course of 2014, funding options have become much more diverse, with options opening up as innovative funding providers move into the space vacated by traditional banks. New deal funding sources include asset-based lending, the so-called ‘challenger banks’, and the emergent trend, peer-to-peer funding.
Appetite for acquisition
The pipeline of expected company sales at BCMS is robust, including 11 deals in July alone – the highest in a single month since before the recession. BCMS also continues to see significant buyer activity from all quarters: SMEs, private investors, private and listed corporates in the UK and overseas, private equity-backed businesses and various equity investors.
Diverse deal types
Alongside the prevalence of ‘trade sales’, typified by the purchase of 100% of the shares in a limited company, or its trade and assets, usually by an incorporated private or public company (often from within the same sector), 2014 has also seen a diverse range of deal types.
For example, to date Q.4 has seen the largest ever Management Buy-In (MBI) sale completed by BCMS and a range of other transaction types, including a part-equity sale, and the sale of a single UK domain name, which ranked within the 30 most expensive domain names ever sold.
Driving the deal
BCMS analysis suggests that acquirers remain sensitive to over exposure to risk. This can make successfully navigating due diligence challenging for owners of SMEs, and advisors especially need to exercise great care during this phase of a transaction. BCMS’ solution has been to invest, both in a world class virtual data room facility, and in deep relationships with a select panel of corporate law firms. This ensures that vendors are well prepared for due diligence, and protected as the process unfolds.
2. Inward Investment Report 2013/14, UK Trade & Investment, July 2014.