Mergers and acquisitions in the UK tumbled sharply in the first three months of the year as recessionary fears and rapid rate hikes to tame inflation spooked dealmakers, official figures have revealed today.
The worst fears of a raid on UK firms failed to materialise as foreign firms spent £12.7bn snapping up British business between January and March, £4.1bn less than the same period last year, the Office for National Statistics (ONS) found today.
The deal figures did mark a £6.9bn uptick on the deal value between October and December, however, when the value of M&A activity dipped amid the volatility triggered by Liz Truss’ disastrous mini budget.
Dealmakers have been unsettled by wild market swings sparked by the wake of war in Ukraine, while rapid rate hikes by the Bank of England to tame inflation have made debt financing deals for firms more expensive.
Rob Baxter, head of corporate finance at KPMG in the UK, said that “confidence is king” and volatile economic conditions had unsettled investors.
“The perfect storm of economic and geopolitical headwinds, rising interest rates, high inflation and the cost-of-living crisis have prompted more caution,” he said. “Tighter credit conditions also mean a higher cost of debt for those seeking debt funding, and it’s driven lenders to be very selective, operating with greater scrutiny.”
Baxter added that “deals are still getting done” both domestically and across borders, however, with activity taking place predominantly in the energy, business services and technology sectors.
“While uncertainty is no friend of M&A, the building blocks for deal activity are still very much present,” he said.
The volume of deals done fell sharply on the same period last year, the ONS figures found. There were 141 transactions in January, 100 in February, and 114 in March, whereas there were more than 150 transactions in each month throughout 2022.
The official figures come after data from the London Stock Exchange Group last week showed that dealmaking had continued its dry spell up to May, with the overall five month figure falling to its lowest level since 2016.
Analysts at Hargreaves Lansdown said inflation and regulatory pressure were partly to blame, with the figures coming on the heels of the CMA’s move to block Microsoft’s £55bn takeover of gaming firm Activision Blizzard.
However, a number of foreign buyers have made moves for UK firms this year despite the lack of deals getting over the line. Swedish private equity firm EQT struck a £4.5bn deal to buy FTSE 250-listed Dechra Pharmaceuticals last week and US buyout giant Apollo has launched a slew of bids for both London-listed Wood Group and retail firm THG.
A top EY deals adviser said he expected the private equity interest to rise in the coming months.
“Although the immediate M&A outlook looks challenging, private equity activity, which has been a major driver of M&A over the last few years, is expected to improve in the coming months with a rebound likely in the second half of 2023,” Steve Ivermee, UK&I Strategy and Transactions Leader at EY, said.
“Investors are likely to wait for more stable financial conditions to gain the confidence needed to give the green light on more transformational dealmaking,” he added.