There’s not much left to be said about 2020, a year of enormous upheaval and disruption across almost every sector. With Brexit looming, the year of course began with a degree of uncertainty, but this was perhaps tempered by the fact that the UK had a majority government after almost a decade of coalitions and hung parliament.
With a government committed to delivering both Brexit and a trade deal (so they claimed) with the EU, businesses could perhaps be forgiven for entering the year hoping for more stability than they’d grown used to. Of course, we all know what happened next. COVID-19 and its associated lockdowns and restrictions meant that even the most vague and tentative forecasts for 2020 had to be torn up.
Like any other industry, M&A in 2020 has been almost overwhelmingly shaped by the pandemic. The massive financial difficulties that lockdown posed for many businesses led to widespread administrations and distressed acquisitions. Meanwhile, on the flip side of this, sectors, industries and businesses well placed to respond to the crisis have flourished.
The Impact of COVID-19
UK companies were massively impacted by COVID-19, which saw businesses deemed non-essential shuttered for close to three months in the spring and summer. As COVID-19 began a resurgence during the Autumn, the introduction of the tier system in mid-October saw restrictions return for many businesses in tier 2 and 3 areas, before a month-long second national lockdown was enforced in early November.
With the emergence of a new strain of COVID-19, many areas of the south-east were moved to the most stringent tier 3 restrictions in December, before a rapid increase in cases lead to the imposition of new tier 4 restrictions (essentially a second lockdown) across tier 3 areas just before Christmas.
Predictably, these factors had a particular impact on brick-and-mortar businesses, such as high-street retailers and hospitality venues, while online retailers thrived. Overall, according to statistics up to the end of November 2020, there were over 1,400 company administrations across the UK, along with 11,886 company insolvencies.
While these figures are in fact down on the overall 2019 figures, this can be partly explained by the outsize impact on brick-and-mortar businesses, as well as the impact of government financial aid schemes.
It is crucial to point out that the ongoing nature of COVID-19, and the regular changes to restrictions both regionally and nationally, has left many businesses almost entirely reliant on government support. According to Begbies Traynor, close to 40,000 UK businesses were in severe financial distress prior to the introduction of more severe restrictions in December 2020, suggesting that the full impact of the second wave may not be felt until 2021.
Conversely, the COVID-19 crisis has seen some sectors take on greater importance than ever. With people confined to their homes for large parts of the year, online retail and takeaway food became necessities, not just luxuries, for many.
As a result, delivery providers, from logistics companies to food delivery apps, became cornerstones of the COVID economy. The massive increase in popularity they saw, from an already strong pre-pandemic position, has led to predictions that the change in consumer habits may be more lasting than merely a response to COVID-19.
As BSR wrote in this exclusive delivery sector insight earlier in the year: “The COVID-19 crisis has obviously had a devastating effect on many industries, but perhaps its most lasting legacy will be its radical impact on consumer habits. By tapping into tech, niche markets and the flexibility of the gig economy, companies in the delivery sector are perfectly placed to dominate the post-pandemic market. Crucially, with new startups appearing every day, it is an industry that acquisitive parties absolutely must keep a keen eye on.”
Elsewhere, with children forced to learn remotely for much of the pandemic, parents around the world were no doubt dreading having to organise their children’s education from home. Thankfully, a range of cutting-edge EdTech firms were on hand to make the process that much easier, as BSR covered in this insight.
As with the delivery sector, EdTech is an industry that many forecast to continue growing post-pandemic. As we wrote earlier in the year: “the EdTech sector is likely to be one of the few sectors to significantly benefit from the pandemic. Having said that, the issues that are driving greater take-up and demand for digital learning, educational AI-driven tools and money-saving tech for the education sector are long-established and are not going away. As a result, investors around the UK and beyond are confident that the need for EdTech will certainly outlive COVID-19.”
We would be remiss if we ended the year without discussing one of its defining features: working from home. COVID-19 prompted homeworking on an unprecedented scale and one of the challenges this posed for businesses was the massively increased cybersecurity risk.
In response, cybersecurity, which was already coming off a bumper year for dealmaking (209 deals, valued at $43.75 billion in 209), became even more vital, with companies worldwide forced into a new cycle of investment in order to protect themselves from threats. As with delivery, cybersecurity is a sector driven by both big players and disruptive startups, meaning a huge scope for M&A activity, particularly given the sector’s increased relevance.
Furthermore, there is again a widespread feeling that the switch to homeworking could become permanent for many, making cybersecurity a sector likely to see its strength growing long after COVID-19.
Here's what we wrote earlier in the year: “With its growing importance in the world taken to new levels by the pandemic, innovative new companies emerging all the time and constant competition within the sector to provide the most comprehensive service, cybersecurity is poised to be an industry that defines the “new normal” and one that could be among the most active in dealmaking for the foreseeable future.”
M&A in the UK 2020
Like every M&A market, UK dealmaking was badly hit by the uncertainty of COVID-19. Despite a relatively strong start to the year, the onset of the pandemic in spring 2020 brought M&A to a grinding halt, with domestic deals in Q2 2020 valued at just £0.3 billion, the joint-lowest since Q4 1975.
As BSR reported earlier in the year, the deal value of UK M&A fell 99 per cent from March to April 2020, with the latter month registering a near 35-year low of £409.1 million, a 92 per cent drop in value from the same month in 2019.
However, domestic M&A rebounded strongly in the third quarter, with deal value rising from £0.4 billion to £4.4 billion. This figure, driven by several large transactions, was even a sizeable increase on the £1.7 billion recorded in Q3 2019 (despite total transaction volume dropping by 162).
This rebound will have been partly driven by companies reacting to the challenges posed by social distancing and embracing technology that enables remote dealmaking. As BSR wrote in this insight, technologies such as video conferencing, virtual datarooms and even drones and VR, have all enabled companies to close deals during the pandemic.
Given the levels of business distress caused by COVID-19, this has proven vital for acquisitive, cash-rich parties. BSR wrote: “If dealmakers want to do more than just wait out the pandemic, then leveraging the latest available technology will allow deals to be done. After all, there are no shortage of potential acquisitions out there, as COVID-19 continues to impact thousands of businesses.”
“Furthermore, if acquisitive companies look at this change as more than just a reaction to COVID-19, then they could develop an edge for dealmaking in the future.”
The outlook for 2021
As we’ve mentioned, 2020 has shown that trying to make predictions can be totally futile. However, looking ahead to 2021 there are several likely occurrences that could have significant implications for business owners and dealmakers.
Firstly, the government-backed stimulus programmes that have kept many businesses afloat, such as the Coronavirus Business Interruption Loan Scheme (CBILS), the Future Fund, the Bounce Back loan scheme and the Coronavirus Job Retention Scheme (furlough), are all likely to be brought to an end this year.
While most of these packages have been extended well into the spring of 2021 as a result of the second wave, the key for businesses that have become reliant on them is whether the economy has sufficiently reopened by the time support is withdrawn in order for trading to make up for the funding shortfall.
If these programmes are ended with restrictions and social distancing still significantly in place, then many of the tens of thousands of businesses currently in financial straits are likely to collapse, creating yet more acquisition opportunities for those looking to take advantage of business distress.
Elsewhere, proposed changes to legislation could impact business acquisitions in 2021. Particularly relevant are planned changes to pre-pack acquisitions which would increase requirements on the buyer during a pre-pack deal in which they are connected to the business in administration.
Under the proposed changes, which we discussed in this insight, approval from creditors or an independent report would be required before a business could be sold in a pre-pack deal to a connected party.
Finally, as we will discuss in one of our first insight pieces of 2021, the government is mulling over proposed increases to Capital Gains Tax. Currently, CGT has a personal tax-free allowance of £12,300, after which it is charged at 10 per cent for basic rate taxpayers and 20 per cent for higher/additional rate taxpayers.
Under the proposals from the Office of Tax Simplification (OTS), the tax-free allowance would be cut to between £2,000-£4,000, while the tax itself would be brought in line with income tax, which stands at 40 or 45 per cent for higher and additional taxpayers. Should the proposals be accepted and brought in at the spring budget, the impact for those selling their businesses could be considerable.
While the development of several effective vaccines looks set to see normality return to some extent, 2021 still seems likely to be a year of considerable uncertainty. But, as 2020 has shown us, uncertainty for some means opportunities for others.
With disruptive technologies, innovative startups and business distress all rife, 2021 isn’t likely to be short of acquisition opportunities, even if the pandemic continues to have an impact on dealmaking.
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