2023: the year that failed to deliver for UK M&A
December 2023 | SPOTLIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
December 2023 Issue
UK M&A activity in 2023 has been subdued, with 1902 deals in H1, compared with 2408 in the same period last year, a 21 percent decline. The total value of deals in H1 2023 was £43bn, compared with £95bn in H1 2022, a 55 percent decline. Therefore, there have been fewer deals and at a significantly reduced average value. This was despite optimism at the start of the year that activity would rebound following a reduction in activity in the second half of 2022.
There were several factors that contributed to the decline in M&A activity in 2023. These included the continuation of the war in Ukraine, rising inflation and regular interest rate hikes by central banks, all of which made dealmaking more challenging.
Despite the decline in overall activity, there were several bright spots in the UK M&A market in 2023. For example, there was strong activity in the technology and healthcare sectors. There was also a rise in bolt-on acquisitions, as private equity (PE) firms looked to expand their portfolios and invest in new capabilities.
Overall, the outlook for UK M&A activity in 2024 remains cautious. However, there are a number of factors that could positively drive activity in the coming months, including a healthy pipeline of deals that were put on hold in 2023 due to market volatility, the availability of significant amounts of ‘dry powder’ from PE funds, the potential for distressed M&A as companies struggle to cope with rising costs and inflation, a continued rise of bolt-on acquisitions, and an increased focus on environmental, social and governance (ESG) factors, in particular as global economies look to transition to net zero.
Factors that contributed to the decline in M&A activity in 2023
The war in Ukraine was one of the most significant factors that contributed to the decline in M&A activity in 2023. The war has created uncertainty and volatility in the markets. It has also led to supply chain disruptions and increased costs, which have made it more difficult for businesses to invest and grow.
Rising inflation was another major factor that weighed on M&A activity in 2023. Inflation eroded the value of assets and made it more difficult for buyers to finance deals. Inflation also led to increased uncertainty about the future, which made businesses more cautious about making major investments.
Interest rate hikes were also a factor that contributed to the decline in M&A activity in 2023. Higher interest rates made it more expensive to borrow money, which made it more difficult for buyers to finance deals.
These factors created an uncertain dealmaking environment. As investors looked to price in these risks, the gap between buyer and seller valuations could not be bridged. Many processes failed or, more commonly, simply failed to get off the ground.
In addition, deals that did take place took a lot longer to effect as due diligence investigations became more thorough to identify and address the broader level of underlying risk.
Bright spots in the UK M&A market in 2023
Despite the decline in overall activity, there were several bright spots in the UK M&A market in 2023. One such area was the technology sector. The technology sector is a key driver of UK economic growth, and there is strong demand for technology assets from both domestic and international buyers.
Another bright spot was the healthcare sector, a key driver of UK economic growth, particularly in ‘health-tech’ as healthcare providers strive for an increasing level of efficiency in the face of unprecedented demand for services. This has therefore seen strong demand for healthcare assets from both PE firms and strategic buyers.
Bolt-on acquisitions were also a bright spot in the UK M&A market in 2023. Bolt-on acquisitions are generally less risky than new platform deals for PE. Two thirds of 2023 M&A in mid-market deals were bolt-ons for existing portfolio companies. These deals have facilitated value creation in existing portfolios, providing a great way of acquiring new technology and other capabilities, increasing market share or entering new markets.
Outlook for UK M&A activity in 2024
The outlook for UK M&A activity in 2024 is cautious. Economic headwinds and the potential for recession undoubtedly remain, exacerbated by the ongoing war in Ukraine and the more recent conflict in the Middle East. However, the recent downward trend in inflation and the consensus that interest rates are at or near their peak could provide some macro-stability that is conducive to an increased level of dealmaking in the coming months.
“The current absence of large-value deals is expected to continue, with mid-market deals, ESG-driven assets and continued bolt-on acquisitions helping to maintain overall activity levels.”
There is a healthy pipeline of deals that were put on hold in 2023 due to the market volatility. These deals are likely to come back to the market in 2024 as conditions stabilise and, relative to 2023, improve. In addition, the availability of dry powder from PE funds, as they have a record amount of capital to invest, is likely to be a positive factor.
Furthermore, valuations of UK companies have fallen in recent months, making them more attractive to buyers. Once the gap between buyer and seller valuations is narrowed, deal activity is expected to increase.
Another potentially favourable M&A factor resulting from the challenging economic environment is the increased number of distressed assets on the market. Companies that are struggling financially may be forced to sell assets to raise cash. With many investors specifically focusing on this asset class, activity here is likely to increase.
It should also be noted that while the current UK government is supportive of M&A, the likely change of government in 2024 could have a distortive impact on M&A activity. Labour has indicated that PE firms could be required to have their profits taxed as income (45 percent) whereas currently they are taxed as capital gains (28 percent). If such pledges (or any other capital gains tax increase) are made in their manifesto, asset owners would likely look to crystalise gains before the more punitive tax regime comes into effect, as was seen in 2021 when rumoured changes to capital gains tax drove a short-term spike in M&A activity. A similar spike in 2024 could therefore be seen.
It is also impossible to consider the M&A outlook without considering ESG and the long-term transition to net zero by economies around the world. The increased level of funding available for sustainable investment, together with investor scrutiny and reporting requirements, means the level of deal activity in companies that have strong sustainability credentials will undoubtedly increase. Companies with proven ESG practices and metrics help underpin long term value creation, making them more attractive to PE and M&A in general.
Therefore, 2024 looks to be a mixed year for the UK, with a combination of positive and negative factors likely to weigh heavily on overall deal activity. The current absence of large-value deals is expected to continue, with mid-market deals, ESG-driven assets and continued bolt-on acquisitions helping to maintain overall activity levels. The core resilient sectors of technology and healthcare will continue to lead the way, although certain other subsectors are expected to do well, including luxury, FinTech and consumer staples.
Christy Howard is a partner at Accuracy. He can be contacted on +44 (0)20 3861 4653 or by email: christy.howard@accuracy.com.
Christy Howard is a partner at Accuracy. He acquired his deal advisory experience while working at PwC in London, before joining Accuracy in 2023. With more than 20 years of deal experience, Mr Howard specialises in financial due diligence for M&A transactions. He has experience of over 200 transactions for a wide range of private equity funds and corporates. Mr Howard’s work includes both buy-side and sell-side support along with wider deal advisory services such as sale & purchase agreement reviews, refinancing reviews, financial modelling and deal readiness assessments.
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