Forecast M&A wave tempered by interest rate surge

Dealmaking in the UK has fallen to its lowest level in 14 years (in the year to date), with a predicted wave of takeovers of UK companies having failed to come to pass. Rising interest rates, market volatility and recessionary fears have been cited as contributing to slow dealmaking in the first nine months of the year.

According to new data from LSEG Deals Intelligence, M&A activity involving a UK company was valued at around £144.7 billion in the first nine months of the year - a 45 per cent drop on 2022’s levels (which were, at the time, viewed as sluggish following the booming M&A market of 2021). These were the worst figures seen since 2009, when activity was still recovering from the impact of the financial crisis.

There are numerous factors that are impacting UK M&A activity, with rising interest rates arguably the primary reason. Until the recent interest rate freeze, the Bank of England had raised rates 14 consecutive times. These surging rates have pushed the cost of M&A financing up, severely impacting activity by private equity firms and other leading buyers.

The geopolitical volatility that has occurred in the wake of Russia’s invasion of Ukraine last year has also had a severe impact on pricing expectations, while LSEG says that deal appetite has been hit by ongoing recessionary fears.

Cheap valuations of UK companies and the weakness of the pound in comparison to currencies such as the US dollar had led to expectations that UK companies would be picked off by international buyers this year.

However, headwinds have seen M&A involving a UK target fall to around £76.5 billion - just over half the value recorded during the first nine months of 2022. Domestic M&A has fallen 48 per cent, according to LSEG, while inbound deals have fallen 49 per cent.

The first quarter of the year was reported to be the lowest since 2009 in terms of deal activity and, while there was a 60 per cent increase in activity during the second quarter of the year, this was followed by a 13 per cent drop between June and September.

Despite this, the UK remains an attractive destination, with a recent report naming the UK the top destination in Europe for M&A investment for the second year running and the second worldwide (after the USA). According to LSEG, the UK ranks third so far this year, behind the USA and China.

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