M&A activity on the rise but at what cost?

  • 25th November 2021

According to ONS data, M&A activity in the UK is on the rise. In fact, March 2021 saw record levels of activity, not seen since 2018.

This rise in M&A activity continued in Q2 2021 with ONS recording £44.3bn in deals showing strong interest in UK assets as shown in the chart below.

ONS domestic M&A transactions

Whilst we are seeing increased activity in the M&A market in the UK, we are also seeing increasing signs of the market becoming highly competitive. Transaction values – measured by the multiple paid over EBITDA (Earnings Before Interest, Taxes and Depreciation) are on the increase, as reflected in the recent UK200Group SME Valuation Index. The index also reported an increase in deal values with the average deal size in 2021 being £7.1 million as opposed to £4.1 million in 2020. The same story applies when looking at the data from the ONS results (chart below).

ONS value of domestic M&A transactions

It is interesting when looking at the ONS data how even though the number of deals in Q2 was down on Q1, the value of those deals was much higher reinforcing what we are seeing in our region in terms of the increase in deal values.

Why is the market so competitive?

The pandemic saw UK Government pull out all the stops to provide financial support for businesses to help them throughout lockdown periods. This may have actually helped some of those businesses that may have been on the cusp of a sale, propping them up for a while longer. This has led to there being fewer businesses available on the open market, hence the prices becoming more competitive. A word of warning though for anyone looking at business acquisitions– is financial support such as furlough hiding profits or losses within a business? Good due diligence on any acquisition is of paramount importance.

Valuing a business has become a lot more time-consuming and complex with advisers having to dig much deeper and ask more probing questions than ever before. One question is whether to include or exclude 2020 financial results in the valuation of a business? 2020 financial statistics could potentially be skewed either positively or negatively, this could impact a business valuation.

Impacts on valuations

When either buying or selling a business something that should be taken into consideration is the impacts of ESG (environmental, societal, and governance). What are the potential impacts of ESG factors on the bottom line of the business? This is an important question and one that needs to consider future impacts on the profitability of the business. Is it an energy-intensive business? Does it rely on overseas supplies? What about labour, is there a potential impact on labour costs? We are seeing lots of businesses struggling with recruitment and rising employment costs, all these should be factored into any M&A activity. With COP 26 and the steps towards Net zero, we can be sure that this is going to play an even bigger role in the future on climate-related taxes and business incentives. What about the impacts of Brexit? Are these factored into the business valuation?

A recent article by PWC stated “The conditions for M & A activity appear well-aligned: many businesses have a strategic need to consolidate, divest non-core businesses, or quickly acquire new capabilities and skills. And there is plenty of money available to fund deals.”

Whether you are an owner-managed business considering selling or an investor looking at potential acquisitions, make sure you have all your bases covered. Get a corporate finance expert on your side to ensure that you get the help, advice, and professional assistance that you need for a successful M&A deal.

Contact Mike Beckett, partner, and corporate finance specialist at Forrester Boyd corporatefinance@forrester-boyd.co.uk





All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.