17/08/2015
By Jeremy Furniss, Partner, Livingstone
The worldwide spate of mega-deals may take the headlines but the heat in the mid-market is just as intense. Not since before the 2008/9 financial crisis have there been as many transactions as in the past quarter. Across all our main geographic markets, it’s been hectic: 12 transactions in eight weeks in deals from specialist consultancies to shower tray manufacturers, media brand owners and healthcare providers.
To understand this bout of activity in the mid-market, just remember the mood among business owners in the second half of last year.
At that time there was mounting confidence in the UK economic recovery. Sellers were able to see that they could get better value for their businesses. Purchasers were more confident in the quality and sustainability of the earnings of their target companies. The debt markets had materially improved. So, last autumn, more business owners started to talk serious turkey. And these results have now flowed through.
However, the pre-election period earlier this year created an abrupt hiatus in the UK at least. The business community, spooked by uncertainty surrounding the outcome of the general election, held off making further decisions about M&A transactions. The intentions were certainly there, but fingers were firmly on the pause button.
The General Election result has ushered in a new phase. Fresh momentum is returning to the market. The UK looks set for a vigorous period of buying and selling mid-market companies. Indeed, the UK may just turn out to be the best arena in the world for M&A in 2015.
It’s not hard to see why.
Although the UK referendum on membership of the EU remains a cloud on the horizon, the domestic political and fiscal outlook looks settled. Business owners have the confidence to plan ahead. Tax measures such as entrepreneurs’ relief remain in place. The debt market continues to improve. The UK remains open to foreign direct investment and its stock of entrepreneurial, growing and often very international businesses will be attractive to overseas acquirers.
The markets also appear to have taken in their stride the serious risks to the global economy - such as the Federal Reserve raising US interest rates, China’s stock market turbulence, and the interminable Grexit crisis.
So the deal activity that we have witnessed in the past few weeks has been the first wave. We expect to see a larger, more dramatic wave before the end of 2015.
In the mid-market, deals are driven by changing market dynamics. The digital revolution continues to change profoundly the economics of many industry sectors. Britain’s love affair with e-commerce - we spend £1 in every £5 on the internet and that is increasing - is driving massive change across sectors such as retail, travel and media. We expect to see plenty of deals in established markets where consolidators swallow up smaller, specialist players.
Over the past few years, a surfeit of capital has chased after a scarcity of high-quality businesses. Today, with more companies putting up “for sale” signs, buyers can - and will - become more selective. As basic supply-and-demand economics kick in, we expect to see buyers start to drive harder bargains.
