What happened next was dramatic, as UK M&A deal value fell 99 per cent from March to April. The month saw 35 deals with a total value of £409.1 million, the lowest total since September 1985. In May, a survey of M&A professionals by Mark to Market revealed that 95 per cent of them forecast a further fall in deal volumes for the second quarter.
Despite the gloom, optimism hasn’t entirely vanished and, with economies around the world poised to reopen, experts have been weighing in on what sectors of the market might lead a recovery in dealmaking. So, what types of deals and what sectors might lead a return to normal (or a “new normal”) in the M&A market?
We are already starting to see acquisitive parties jumping on the chance to buy up distressed companies seeking a buyer. It seems likely that this will become particularly pronounced as companies stop being able to access the level of government assistance they’ve relied on thus far.
These kinds of takeovers will be common in sectors that have been heavily impacted by the COVID-19 lockdown, such as leisure, travel and hospitality. Businesses across these sectors will have suffered after being shuttered for three months and, with social distancing and reduced capacities set to be in place for the foreseeable, some won’t fare much better once lockdown is eased.
This will see buyers moving in on companies both before and after the insolvency process begins. The simple strategy is to wait out the crisis and then either sell up, or harvest profits. However, the continued impact of social distancing on businesses like restaurants, theme parks and airlines, could give buyers pause for thought as Time is the unknown variable when multiplied against Minimum Viable Operating Costs.
With that in mind, one sector that could be attractive to acquisitive parties is construction. Construction has seen a spate of administrations since COVID-19. However, unlike some other sectors, there is a considerable onus on construction to resume business and it was among the earliest that the government looked to get back up and running when easing lockdown.
According to Construction News, 35 UK firms entered administration in May (up from nine in April) as supply chain money ran dry with sites closed. In the first week of May, however, when Boris Johnson eased lockdown, he specifically named construction and manufacturing as areas where workers “should be actively encouraged to go to work.”
Furthermore, according to analysis from the government’s Infrastructure and Projects Authority (IPA), the remainder of 2020 has a pipeline of 340 procurement opportunities, representing infrastructure projects worth between £29 billion-£37 billion.
IPA chief executive Nick Smallwood said: “The wellbeing and prosperity of everyone in the UK depends on how we rebuild the economy. Project delivery, particularly in the infrastructure and construction space, plays an integral part in delivering ambition and rebuilding the economy. We wanted to, as quickly as possible, get some more certainty into the marketplace about what firm commitments will go to market.”
The in-depth publication of the pipeline has been greeted as welcome news in the construction industry and as easing the main concern for contractors moving forward: workload.
The combination here of distressed, asset-rich construction companies, an industry eager to return to work and a full pipeline of valuable, high-profile contracts to be won, could add up to an extremely enticing package for acquisitive parties. This could see the construction sector be among the first to experience a resurgence in M&A activity.
“New normal” deals
“New normal” has already become a worn-out cliché, but it has relevance for the M&A market. The multi-faceted impact of coronavirus will likely lead to increased interest in certain sectors, such as online retail, medtech and life sciences, insurance and logistics.
These aren’t new sectors and many have been increasing in popularity for years, but they have a new level of relevance in the light of coronavirus. Whether that’s increased investment in healthcare and medtech as the race to treat, or vaccinate against, COVID-19 heats up, or more of a focus on logistics and online retail as consumer behaviour shifts in the age of social distancing.
Sectors that are particularly responsive to the needs, problems and challenges presented by coronavirus, will be among the first to see green shoots of recovery in deal making.
Tech M&A in particular could be in line for a strong recovery. COVID-19 lockdowns across the world have seen more people than ever working remotely. But this isn’t a fad, merely the acceleration of an already-growing trend. Going forward, segments of tech such as video conferencing, cloud solutions and enterprise software could see considerable investment.
With a vaccine still some way off, it seems likely that even when people do return to work, it will be in a vastly different world. Artificial Intelligence was already a rapidly growing tech sector in terms of M&A, registering 279 deals in 2019 (compared to 261 AI deals in 2017 and 2018 combined) and, according to Heiko Garrelfs, Sector Principal at Hampleton Partners, this will only be boosted by COVID-19:
“On the back of record AI deal volumes in 2019 the arrival of COVID-19 is putting artificial intelligence innovators and companies further in the spotlight for strategic buyers. New norms such as health checks and social distancing at work are driving AI adoption and adaptation. Companies are having to find new ways of automating processes and drive cost-efficiency as, in many sectors, their profits are coming under pressure.”
“On the home front, if ‘stay at home’ and ‘shelter in place’ orders continue, we expect to see more language analysis, chatbot and personal assistant AI deals beyond the usual suspects of Apple, Amazon and Google.”
Garrelfs adds that “this all-round momentum for AI is set to continue, given the unwavering interest from strategic acquirers looking to capitalise on the added-value AI can bring to all processes.”
Tying-up delayed deals
Finally, an M&A resurgence could come from deals that were agreed or in advanced stages before being derailed by the pandemic. In the Mark to Market survey cited earlier, 81 per cent of respondents reported that deals they had worked had been delayed by COVID-19.
While some such deals may not be resurrected, some will doubtless be too lucrative to be abandoned, while some may merely need the i’s dotted and t’s crossed. So, as lockdown eases over the next few weeks and months, we can expect to see some previously-agreed deals revived, although potentially with new parties helping them across the line, as in the case study below.
In an insight from May, we identified the proposed merger of wealth managers Tilney and Smith & Williamson as a potential casualty of the pandemic. The deal, which had already been delayed by regulatory scrutiny from the Financial Conduct Authority (FCA), was placed in even further danger by COVID-19.
The deal, worth an estimated £625 million, would have seen the combined business manage £44 billion in assets, with estimated revenues of £530 million. However, as coronavirus set in, Smith & Williamson shareholder AGF Management said that the need to come up with a revised structure to satisfy the FCA, combined with the impact of coronavirus, meant “there can be no certainty that the transaction will proceed”.
However, with the merger looking seriously imperiled by this multitude of factors, it was revived earlier this month, as Tilney received £250 million in backing from US-based private equity firm Warburg Pincus. With this funding in place and a willingness on all sides for the deal to go through, the merger is now expected to complete in the second half of 2020.
David Cobb and Kevin Stopps, co-chief Executives of Smith & Williamson, said: "It is testament to the outcome that we have been striving for and the strong working relationship between all parties that we have been able to reach this agreement despite the COVID crisis." While Tilney CEO Chris Woodhouse spoke about how Warburg Pincus’ investment, “against the backdrop of a major global health crisis and related challenges in the economic environment”, showed the value of the deal.
Clearly, coronavirus is not behind us yet. The vast economic impact of the virus is not yet totally clear, while the spread of the virus itself remains unpredictable. However, its transformational effect on the world is likely to be reflected in a new M&A environment.
The hardships some experience will open opportunities for others, while a changed world of social distancing and remote working could see new trends in M&A emerge. All this remains to be fully seen of course, but, as the Tilney and Smith & Williamson merger shows, with the right funding and the desire to get a deal done, M&A is highly resilient.
Successful company operating for over 17 years. Provides a comprehensive range of golf equipment to satisfy all customer requirements, comprising clubs, clothing, bags, trolleys and complementary accessories. Significant scope to invest additional re...
Offers a comprehensive range of services, specialising in the project management and construction management of commercial fit-out projects. Operates from several strategically located premises in South England. Offers invited.
Provides mobile data network solutions and services to businesses operating within a wide variety of sectors. Services include data SIMs with a fixed IP address, dynamic data SIMs, integration services, VoIP and virtual numbers. Serves over 790 activ...
Sign up to receive our acquisition alert emails to get your FREE guide
Business Sale Report is your complete solution to finding great acquisition opportunities.
Join today to receive:
All this and much more, including the latest M&A news and exclusive resources