Almost blinded by the M&A frenzy!
I cannot recollect a period of such frenzied M&A however the data says actual volume of deals dipped slightly in Q1 possibly owing to the disruptive impact of 24th February 2022, however I am sure it picked up in Q2 2022.
Source; GlobalData Thematic Data
The reasons for UK M&A are well known, i) a soft touch regulatory regime ii) a UK corporate culture that encourages changing ownership iii) a stand-offish government approach that only in very limited circumstances seeks to maintain UK control over private businesses.
We can add iv) cheap currency – when the UK voted to leave the EU in 2016, sterling experienced a predictable collapse. However even the most bearish, and I amongst them, assumed eventual recovery. Six years on sterling remains sickly. There have been brief interludes, failed rallies that resembled a chicken attempting to take flight. A cheap currency encourages M&A and in the UK’s case this has continued since Q3 2016.
But given this is a ‘good time to pick up UK corporate assets’ the question is at what price?
Typical takeover premiums are normally between 30%-50% above the undisturbed share price and represent the ‘control premium’ the buyer pays to secure the takeover target. The takeover must be attractive to both groups of shareholders, the acquirer and the target and to both boards of directors.
Control premiums in recent deals have ranged from c. 30% – 60% with most clustered in the 50% area (pls see below).
Source; CSS Investments Ltd
The takeover bids undertaken by majority owners, Caretech and Mediclinic were ‘low ball’ offers reflecting the fact that parent company majority ownership tends to put off third party counter bidders leaving the target far more vulnerable to the parent’s inclinations.
Nevertheless, in Mediclinic’s case the Remgro approach ‘significantly undervalued’ the business. The board have left the door open for Remgro, who may well opt not to take this any further.
Also relatively modest were competitor deals. Parker- Hannifin’s deal to buy Meggitt is the one of only two competitor market/share related buyouts. I do not consider Royal Bank of Canada’s move on Brewin Dolphin to count as competitor activity due to the lack of obvious geographic overlap despite them being both ‘financial’ companies. The other competitor/ market share deal is Avast/ Norton Life Lock Inc which is awaiting regulatory clearance.
UK M&A has seen significant private equity involvement – this group tends to want to pay the most to secure its targets despite having the least post -merger synergies available. A financial buyer will typically employ significant leverage / debt to acquire the target for the purposes of selling the company back to the market when valuations improve.
Whilst a clear buyer preference for i) defence co’s ii) transport co’s is evident in the last 12 months – this is unlikely to be a trend next year, as there will be a much smaller population to choose from.
Reflecting on the takeover crop there were no romantic rescues, where companies were put out of their misery by a ‘white knight’ buyer. This used to happen, these days it tends not to. The businesses being bought tended to be on the front foot post C-19.
Will rising global interest rates, and higher debt funding costs, tangibly reduce M&A? Will rising geopolitical tensions get in the way? In both cases, not. Higher financial costs/ geo-tensions/ shock events all lower valuations which increases M&A opportunities. Economic stress also lowers confidence amongst target companies.
In fact the evidence is clear; Brexit/ weak sterling/ C-19/ Russia/ Ukraine/ rising global interest rates – by making UK companies cheaper, accelerated UK M&A.
When companies are acquired, their UK listing ends, and the business moves onto the next stage of its life. Their departure can leave a sense of loss, especially when, as an analyst, you have been following them for years! From an index standpoint, the loss of these companies will lead to a higher population of investment trusts in the mid cap space. The recent targets had only two blue chips, Avast and Meggitt.
As an investor, M&A activity can make a significant impact on a diversified portfolio. It is an area that we encourage investors to focus on, preferably tapping our expertise to do so! Final note, we expect M&A activity will remain strong going into H2 2022/ 2023.