Mergers & Acquisitions: Peaks, Troughs and Government Intervention

05 December 2016
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As with most markets, Mergers and Acquisitions (M&A) activity tends to be cyclical and highly dependent on general business confidence and the state of the capital markets. In times of economic depression and uncertainty, M&A activity is often therefore one of the first things to suffer.

The impacts have been particularly apparent during the current recession. This has largely been due to both the depth of the slump we have been suffering since the collapse of Northern Rock and Lehman’s, and the height of the record breaking M&A boom that immediately preceded it between 2003 and 2008.

The UK has long been a welcoming environment for buyers, given the relative lack of restrictions for foreign purchasers, the stability of the economic and political landscape and the recent tax breaks for vendors. Add to this the huge and readily available quantities of cheap debt, together with the unprecedented success of equity fund raising between 2004 and 2007, and it is easy to see why M&A activity levels reached new peaks during this period.

However, this all came to a shuddering halt in 2008, as the seriousness of the debt crisis became more apparent. Confidence disappeared along with many potential vendors who preferred to wait for the markets and company valuations to improve. Private Equity companies were suddenly facing investment portfolios bulging with un-saleable companies. And the fact that there were significant quantities of Private Equity dealrelated debt, wrapped up in the sub-prime disaster, also impacted their ability to raise new equity funds. As a result, a major driver of UK M&A activity was halted.

For cash rich buyers the last few years have presented opportunities to acquire quality assets at suppressed prices and with relatively little competition. For example Virgin Active’s £180 million acquisition of Esporta Health & Leisure went uncontested and Kraft Foods’ approach and subsequent £10.2 billion acquisition of Cadbury’s was unsolicited.

However, due to a high number of job losses caused by takeovers, in particular Cadbury’s where 400 jobs were lost as a factory in the South West was closed down, an increase in government interest in the behaviours and intentions of buyers has been triggered. As a result changes have been made to the UK Takeover Code and increased political involvement in larger deals. Furthermore, in the recent Kay Review, the government confirmed its plans to play a more active role in company takeovers in the UK to “promote investment which benefits the UK economy”.

For the time being however, reports indicate that a minority of businesses are looking to expand geographically in 2013. All signs therefore indicate that, in the UK, Mergers and Acquisition activity is unlikely to increase in the short term. Job and business opportunities within investment banks, M&A advisory teams and corporate law firms are likely to remain thin on the ground for the time being. However, for companies that are brave enough and have the capital available, the UK will still offer some excellent opportunities for strategic acquisitions of quality businesses.

Posted on: 05/12/16