Low UK company valuations are set to see foreign takeovers of UK companies increase during the second half of the year, according to a new analysis. As UK companies continue to suffer from headwinds including rising costs, inflation and other economic/geopolitical disruption, takeovers by foreign firms capitalising on a weaker pound and low valuations are becoming more prominent.
Commenting on increasing foreign interest in UK businesses, Trachet CEO Claire Trachet said that, while it was positive that foreign firms viewed the UK as an attractive investment opportunity, this also posed “difficulties for UK-based investors who appear unable to compete financially, as a result of foreign firms benefitting from low pound valuations.”
2022 saw an overall slowdown in M&A activity, following a post-COVID burst of activity that saw record breaking figures in 2021. In terms of inbound M&A deal value, an analysis of Dealogic data by IFLR showed that the value of M&A deals involving foreign buyers acquiring UK companies fell by 34.7 per cent from 2021 to 2022.
However, despite this sharp drop in value, the volume of inbound M&A deals only declined slightly, with 1,020 deals in 2021 falling to 988 in 2022. This indicates that, while deal volume remained relatively resilient, the value of the deals that were being struck by foreign buyers fell significantly.
This was further reflected in ONS data for Q4 2022, the period during which the UK economy was reeling from the fallout of Liz Truss and Kwasi Kwarteng’s mini-budget. During the fourth quarter, the value of inward M&A deals into the UK plummeted from £21.2 billion in Q3 2022 to £5.3 billion (which was also £11 billion lower than the same quarter a year earlier). However, once again, deal volume remained steady, with 170 deals in Q4 compared to 171 in Q3.
According to Claire Trachet, foreign investors will be attracted to the opportunities presented by the UK market, particularly in growing industries such as cybersecurity and AI, as well as in the value that can be unlocked through distressed M&A, as potentially viable companies continue to struggle and owners seek an exit.
Trachet said: “In this sense, acquirers know they will be getting a bargain from low valuations, potentially leading to a flurry of M&A deals, presenting a more positive outlook for M&A activity in the UK. However, this poses an issue for companies getting less than they bargained for.”
Trachet added that the overall slowdown in activity seen during 2022 also means that many investors will be sitting on significant piles of dry powder that they could seek to deploy during 2023. She concluded: “This means there are significant opportunities on the horizon, and now is the moment to prepare and get deal-ready as optionality will increase in H2 of this year.”
Read more about inbound M&A:
UK the most attractive destination in Europe for M&A investment
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