So far this year, demand for mergers and acquisitions has been dampened. Everyone in the community has noticed it, with the number of deals involving the UK down 22 per cent, year-over-year. This is down to a variety of factors – from rising interest rates to market volatility and geopolitical tensions. Yet, this doesn’t tell the full story.
In fact, there are signs of M&A green shoots. According to Datasite, which facilitates more than 14,000 new deals annually, the pace of dealmaking is picking up. This is especially true for industrials, where a spike of deal kickoffs in June are expected to close in late in the third quarter of this year or early in the fourth. Improvements in the healthcare and consumer sectors, which are slowly, but steadily, coming back from 2022 doldrums, and in technology, media and telecom (TMT), with high kickoff volumes through this summer, suggest a rosier M&A picture for the end of this year and early 2024.
While the UK has been less attractive for both domestic and foreign buyers, especially with the tightening regulatory grip of the Competitions and Markets Authority (CMA) which has challenged and blocked several deals this year, private equity firms, largely from overseas, still find UK-listed companies attractive and are putting their dry powder to work in another sign that more activity is taking place. At Datasite, sale kick offs are up 13 per cent this summer, signalling a busier time ahead, especially in the low-to-mid market. Of course, scrutiny by the CMA will continue, which may increase deal time, and, if needed, pause steps in the deal making process.
There is also likely to be some consolidation, at the end of this year and into 2024. For example, Rishi Sunak’s November AI Summit should play a part in solidifying the UK’s AI footprint, which may drive some M&A investment in the TMT sector, while also enticing more companies to be listed in the country. In fact, some reports suggest there are likely to be more UK listings in this second half of the year, especially with the recent interest rate freeze, which may bring some level of stability to the market and a more stable business environment.
To be sure, long-term trends born from the pandemic, a potential recession and consecutive interest rate hikes have raised the cost of borrowing and reduced the availability of cheap debt financing for deals, fundamentally changing how dealmakers are doing deals for the long-term. With these factors at play, dealmakers have become more risk-averse and cautious.
We’ve seen deal completion rates shrink to 47 per cent in the first half of 2023. Globally, this meant six fewer sell-side kickoffs out of every 100 completed, a clear sign that more buyers and sellers are walking away post-kickoff rather than risk a bad deal, reflecting the M&A industry’s focus on quality not quantity.
Additionally, there have been fewer and smaller mega-deals, or ones worth more than US$5bn (or £4bn GBP) in 2023. This suggests tighter financing and regulatory conditions are taking a toll on large cap dealmaking.
Ultimately, while the focus of dealmakers has shifted and investors may have to look a little harder for good assets, there are opportunities and dealmakers are acting on them.
Merlin Piscitelli is Chief Revenue Officer at Datasite