Part 1 of 4: The State of the Market: Sentiment, Sectors & Where the Opportunity Is
The mergers and acquisitions (M&A) market continues to evolve as economic conditions, funding markets and buyer expectations shift. While activity remains healthy across many sectors, successful transactions increasingly depend on good preparation, realistic expectations and experienced advisers.
To explore what is happening on the ground, we spoke with Edward Lee from Blaser Mills about the trends they are seeing across UK deals, the challenges that commonly arise and the practical advice they would give business owners considering a sale over the coming years.
Q1. How would you describe the current UK M&A market?
Edward Lee, Blaser Mills: Market sentiment remains cautious due to factors such as higher financing costs, global economic and political uncertainty and valuation gaps between buyers and sellers. These challenges have made transactions harder to start, progress and complete. It has also shifted the balance of power towards buyers, who are pushing for greater protections and concessions from sellers. It has always been the case that SME sellers sometimes see their business through emotional eyes rather objective ones.
While deal activity has slowed this year, strategic trade buyers and private equity are still active, with a more focussed approach. That said large corporate and private equity are sitting on cash, which they have to deploy to drive value in a world where uncertainty is the new norm.
There is no doubt that for the larger deals there has been an increased complexity in deal negotiations, particularly regarding seller warranties, liability provisions and pricing mechanisms. Sellers are being asked to indemnify the buyer for not just identified risks but also contingent ones like holiday pay and GDPR, leading to more in depth negotiations over liability limitations, time limits, and disclosure standards.
Cross-border activity has been influenced by the same global economic, political and funding challenges, as domestic deals. Close to 50% of our deals have a foreign buyer or seller. Despite the current UK economic climate, we are and have remained busy. The UK is still a better place to invest than many other countries with a level of legal and financial sophistication which is hard to match globally. This genuinely gives foreign investors a real sense of comfort.
Geoff Pinder, The MGroup Corporate Finance: From where we sit, the market is active but increasingly polarised. Businesses with recurring revenue, resilient margins and a management team that isn’t wholly dependent on the owner are still attracting multiple offers, sometimes genuine competitive bidding. Businesses without those characteristics are taking considerably longer to sell, and seeing more conservative offers when they do.
Confidence has returned on both the trade and private equity side over the past twelve months, but confidence doesn’t mean speed. Buyers are doing more work before committing to a number, and they expect sellers to have done the same. Processes that comfortably ran inside six months a few years ago are now regularly taking eight to ten, largely because of how much due diligence buyers want completed before they’ll firm up an offer.
Our pipeline at The MGroup reflects that shift. We’re running fewer speculative approaches and more structured, competitive processes, because that’s what protects value when buyers have plenty of choice. Having worked on both sides of more than 500 transactions, my honest observation is that the businesses achieving the strongest outcomes right now are almost always the ones that started preparing eighteen months to two years before going to market, not the ones waiting for conditions to feel perfect.
Q2. Which sectors are seeing the strongest acquisition activity?
Edward: Certain sectors and types of deal have seen more activity than others e.g. AI, defence, portfolio reorganisations and vertical integration.
Consolidation plays are prevalent in the professional services, FCA regulated and financial services sectors. We have also seen the multiple being offered for AI businesses starting to fall and a swell of opinion growing as to the “bursting of the bubble” in relation to professional services. It’s increasingly common for independent accountancy and law firms to be approached by organisations offering senior partners an exit strategy.
The financial services sectors have consistently been active, especially in relation to wealth advisers, due to what would seem to be an undervaluation in the market.
We live in a highly regulated global environment. Doing deals and moving money domestically or globally has never been more regulated. For most deals, no matter the size, some thought will need to be given to competition, foreign direct investment and national security laws. Added to which can be the difficulties around anti money laundering and source of funds checks and the eventual potential exchange controls on moving money in and out of certain countries. Successfully delivering these transactions relies on having an exceptional global network of professional advisers, something we have built over many years.
As noted earlier, both private equity and trade buyers have a lot of “dry powder” “war chests” and unsatisfied appetite. The difference can sometime be that trade is looking for longer term and for strategic value rather than just scale and or portfolio balance. As a result, trade buyers can have greater flexibility and less of a requirement for a rollover, second tier management or longer-term support from the seller.
Looking forward 12 months in the UK I suspect we will see a high level of activity in the following sectors:
- Energy in terms of infrastructure and storage;
- Technology especially software Cyber and AI;
- Healthcare and Life sciences in terms of meditech, pharma and biotechnology.
Geoff: Compliance and regulatory services, technology and business services remain the standout sectors for us, and for the same underlying reason in each case: recurring or contracted revenue that buyers can underwrite with confidence. We’re also seeing sustained interest in manufacturing businesses with genuine specialist capability or IP, rather than manufacturers competing purely on price, alongside continued appetite around infrastructure, renewable energy and professional services.
What’s changed is how buyers behave within those sectors. Three or four years ago, being “in the right sector” was often enough to generate interest. Today it isn’t. We regularly see strong businesses in unfashionable sectors outperform average businesses in fashionable ones, simply because buyers have become far more forensic about earnings quality, customer concentration and management depth before they’ll pay a premium multiple. Sector momentum still helps bring buyers to the table more quickly, but it’s the quality behind the door that ultimately decides the price.
This is Part 1 of a four-part series with Blaser Mills on the state of UK M&A. Part 2 looks at what buyers are prioritising today, which businesses stand out in a sale process, and why transactions fall over.
How We Can Help
If you are thinking about your exit journey and would like to find out more about how The MGroup Corporate Finance and Blaser Mills can help, please contact:
Geoff Pinder, Partner, The MGroup Corporate Finance: g.pinder@themgroup.co.uk
Edward Lee, Partner, Blaser Mills: edward.lee@blasermills.co.uk