4:00 AM 14th January 2022
Can 2022 Be A Record Year For M&A In The UK?Chris Biggs, Partner at consultancy and accounting disruptor, Theta Global Advisors, discusses how UK financial services firms such as his have pivoted to offer flexible resource and the impact of this on UK deal markets.
With Brexit unresolved and Covid continuing to depress economic growth, it seems that 2022 could be a challenging year for many sectors.
On the 6th of January, the FT reported that UK households face a cost of living jump more than anything seen in a generation. Rising inflation is likely to limit the UK’s growth prospects this year by squeezing firms’ profit margins and their ability to invest.
During the Christmas period, more than 35,000 British retailers and 20,000 bars and restaurants were facing significant financial distress, with shoppers spending almost a quarter less in physical stores than before the pandemic.
Meanwhile, data showed the perilous financial position of 20,000 bars and restaurants across the UK amid reduced footfall and cancellations during what was supposed to be one of the busiest times of the year.
It is fair to say that the wider economy is facing some bumps in the road this year, but one sector which is bucking this trend is M&A. 2021 was a record year for M&A globally as it soared to its highest levels since records began, with deals worth more than $5.8tn agreed worldwide in 2021 as reported by the FT.
90% of dealmakers expect stronger activity over the next 12 months, new research has indicated, with the Tech and Telecoms sectors being some of the most sought-after industries – and accounting for one fifth of global M&A investment, according to figures.
This is driven in large part by investors holding cash deposits due to low interest rates, combined with companies seeking through acquisitions to regain their footing after months of lockdowns and persistent supply chain disruptions. At Theta, we expect this to continue in 2022 and the UK to take a significant share given the speed of its recovery from Covid and continued interest from foreign investors.
Coming in third after the US and China respectively, the UK has been a significant player when it comes to M&A, with its companies having been the target for 7% of all global deals, with the market being back to what it was before the financial crisis, reaching a new high of $630 billion in deals.
The strong UK performance has been the result of a combination of factors; an undervalued currency since the Brexit referendum in 2016, record low interest rates due to global central bank intervention, companies looking for quick growth opportunities as the pandemic 'winners' emerge stronger as the threat of the virus recedes.
Since Brexit, UK companies have been significantly undervalued compared to global markets, on average by around 30% according to research from Schroders. This has kept international investor appetite high, as they identify opportunities in undervalued UK stocks.
Although the Bank of England recently raised interest rates for the first time in three years and markets expect a second rise in rates next month from 0.25pc to 0.5pc, they remain the lowest by historic standards, promoting a dynamic economy and cheap financing for those involved in M&A.
Investors are identifying companies that were specifically hit by Covid such as airlines, hospitality, entertainment, and commercial real estate purchasing stocks at record lows with the expectation that their business models will bounce back to pre-pandemic levels over the next 12 months.
This year investors and businesses are faced with new uncertainties such as the introduction of the National Security and Investment Act. The Act came into full force last Tuesday, giving the UK government greater powers to block foreign takeovers of British firms that could pose a threat to national security. It identifies 17 sectors of the economy that are sensitive to falling into the hands of overseas investors, with deals taking one to two months longer to complete while they get cleared.
However, competition for assets remains fierce and acquirers are beginning to realise that a trusted adviser is an important advantage to win competitive auctions. While traditionally the 'big four' accountancy firms have dominated, conflicts of interest as well as other well publicised difficulties among the larger players have shown the importance of tailored, more personalised advice from a different type of provider. It is easy to get lost in a sea of big clients if your firm is not a key account, but when working with smaller accountancy practices that take the time to know your business, your needs are prioritised no matter how big you are.
From our experience at Theta, we have been able to recognise the importance of taking the time and space to get to know our clients’ businesses in order to build strong relationships. Our clients consistently tell us that working with more agile accountancy practices can be a major advantage in the highly competitive acquisition environment of today. Working with the same team, prioritising your needs and responding quickly are all critical elements for our clients.
As such, this is an opportunity for smaller firms to further expand their service offering to both buyers and sellers in the private sector to ensure neither party falls flat at a time of rapid deals. This has come into increased focus throughout the pandemic and will continue long beyond it.
That’s why we at Theta are very optimistic that our tailored service offering will be in great demand during 2022 and for years to come, as clients realise that the full-service model of the big four does not meet the demands of today’s hyper competitive M&A market.