What’s the outlook for M&A in the UK?

I’m sure I speak for most of those that work in and around M&A transactions when I say that the 18 months leading up to March 2022 were probably amongst the busiest we’ve seen in a long time.

A pent up demand from buyers from Brexit and Covid (and therefore a lot of dry powder), along with changes in business owners’ perceptions of what was important to them meant that we were (as I’m sure others were) extremely busy during this period.

When discussing M&A with a number of colleagues in the first quarter of this year, I for one was of the view that this wave of deals would continue for another 12-18 months at least, especially with the amount of cash out there, and with the recovery from Covid continuing.

There were and are naturally a few things in the market that could/can threaten the M&A market – generally, anything that causes uncertainty amongst business owners, banks, and investors, usually originating from international or political issues. However, there were few of these risks on the horizon at the start of this year. We (and I’m sure many others) did not predict how quickly those risks would appear, with the Russian invasion of Ukraine, inflationary pressures and material cost of living issues and the resignation of our prime minister all creating significant uncertainty in financial markets.

Since the outbreak of war in Ukraine, the market has definitely cooled, both at the larger end of the spectrum and also at the smaller end (where we tend to operate). Compared to the same period last year, deal volumes and values decreased in H1 2022, down 19% and 16% respectively. Though M&A in H1 2022 remains above pre-pandemic levels, following the 2021 surge of activity.

Combined with all of the above, we are in the middle of the first “proper” Summer that we have had in three years, and therefore we have seen a slow down because of that (something that we didn’t see in the last two years because most people couldn’t or wouldn’t travel).

So, what do we think will happen from September?

Well, inflationary pressures are having a significant impact on margins for many businesses and thus potentially reducing valuations. Inflation is also impacting real wages for consumers which will naturally reduce spending, impacting demand for many businesses. Combined with these factors, rising interest rates will make debt more expensive, and thus impact the private equity leveraged buyout model.

So, all in all, we are expecting to see the level of deal activity continue to be lower than 2021 and potentially at reduced valuations, which would be the typical trend we would expect as we potentially head into a recession.

However, the dry powder and availability of cash that I mentioned before are still there – there is a material amount of cash out there, and we, therefore, expect that the trough of this M&A cycle to be nowhere near as deep as it has been in previous economic cycles, and we expect the M&A market to remain resilient over the coming 18 months. M&A still remains an exceptional way for businesses to grow and scale quickly, and despite the Summer period and market conditions, we have seen this in the last few weeks with a significant appetite from both buyers and sellers still there.

At Gerald Edelman, our Deal Advisory team has had an exceptionally busy 24 months, working on many transactions (many of which were cross border) across many different sectors, and with a very strong pipeline, we expect that to continue into 2022 and 2023, despite the economic challenges that we are facing.