Mid-market M&A and cross-border transactions prove resilient in the UK

The total number of transactions in the UK has fallen throughout 2014. But why has the volume of ‘mid-market’ transactions continued to increase?

The first nine months of M&A data for 2014 make for very interesting reading. Highlights include:
 
  • the total number of transactions fell by 3%, to 3,478, when compared to the first nine months of 2013;
  • the total value of transactions increased by 9% to £220bn;
  • The average size of transaction has therefore increased, a trend continued from the first half of 2014;
  • an increase in the amount of large ticket, cross-border transaction involving UK companies;
  • the financial services sector was the most active in terms of volume of transactions, whilst manufacturing saw the largest value of total transactions.
However, once you dig into the detail of the data and analyse transactions by size, it is interesting to observe that the biggest increase in the number of transactions was in the ‘mid-market’ category with transactions between £10 – £100m rose by 19%. So why does the mid-market continue to be so resilient? Potential reasons include:
 
  • many mid-market transactions are driven by private vendor retirement or succession issues which continue despite economic conditions;
  • privately held companies constitute the largest part of UK Ltd so there is always likely to be a healthy transaction flow from these companies;
  • the valuation environment is improving for privately held companies as part of the overall recovery in valuations – and this partly explains the increase in the average M&A transaction size as noted above;
  • the tax environment for private vendors in the UK continues to be very favourable. With the right tax planning and eligibility for entrepreneur relief, vendors can enjoy capital gains tax of only 10%.
Another key feature of UK M&A in the first nine months of 2014 has been the increasing level of cross-border activity involving UK companies. There were over 400 inward acquisitions of UK companies during the period, up 2%. Likewise the number of UK companies making acquisitions overseas reached its highest level since 2008 – 390 transactions representing an increase of 6%. The USA was the largest acquirer in the UK, as well as being the largest market for UK acquisitions. The UK continues to be a very attractive country for overseas companies to make acquisitions, and likewise UK companies are feeling confident enough to further invest overseas. Both of these reflect the improving economic conditions in the UK.

So what should we expect for the next 6 months for M&A activity in the UK? There is no doubt that confidence is returning – a key driver of M&A activity – and with interest rates not expected to increase until well into the first half of 2015, there is reason to be optimistic. Ready availability of private equity and bank funding further support this outlook.

Philip Bird, Senior Director, Corporate Finance.

This article first appeared in Acquisitions International.

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