New Tech takeover rules won’t stop investors coming, but deal makers must be prepared.

At Avondale, we, as much as anyone, understand the value of M&A in driving business growth and wider economic expansion. For small- and medium-sized companies in particular, acquisitions provide a vital avenue for growth and a key outlet when considering an exit or succession planning.

As such, the recently announced changes to the UK laws concerning foreign-led takeovers or mergers – involving UK companies developing military and dual-use technology, computing hardware and quantum technology – are a cause for concern.

A risk to dealmaking?
Monday’s revisions allow ministers to intervene in foreign-led deals when the UK turnover of the target business exceeds £1 million, which is a significant reduction on the previous £70 million threshold.

The new rules also remove a key stipulation – namely that the government can only intervene in a merger or acquisition involving the above-mentioned industries if the deal results in an increase in the parties’ combined share of supply of relevant goods or services.

These changes come in the wake of recent tightening of the UK Takeover Code this January. Alterations to the Code are designed to prevent hostile takeovers or aggressive asset-stripping by foreign acquirers, introduced stricter requirements for bidding companies, who are now required to provide greater detail on their post-acquisition plans.

While there is a clear logic underpinning both sets of measures, the worry is that the wider impact of increased scrutiny will be to dampen inbound M&A activity into the UK, particularly at a small and mid-tier level.

British SMEs in demand
With investors facing a dearth of opportunities, Britain’s well-run, profitable companies are increasingly in demand. After slumping following the global financial crisis, the value of inbound acquisitions into the UK grew by 69.6% in 2017 to reach £277.7 billion, according to the Institute for Mergers, Acquisitions and Alliances (IMAA). In volume terms, the market is now close to its pre-downturn peak.

Increased scrutiny of foreign-led deals feels like a backward step, and SMEs may end up paying the price. Major organisations may have the time and resources to tolerate the delays and hiccups that are relatively common around ‘big-bet’, scale acquisitions. However, smaller, strategic deals thrive on opportunism and on quick, timely movements.

Increased government scrutiny will not stop foreign buyers and investors considering UK opportunities. Nevertheless, company owners seeking an exit or a potential growth investment must act proactively and prepare for potential disruptions.

Experience is crucial
Being able to call on M&A experience will be increasingly vital. Although relatively few small and medium-sized firms possess this technical expertise in house, an experienced M&A advisor can help firms navigate the regulatory complexities of overseas deals and foresee potential hurdles. They can also help assuage the fears of prospective investors by smoothing the path to deal completion.

In the current slow-growth environment, M&A has rarely been more important as a driver of economic growth and jobs, and it’s crucial that UK company owners – both buyers and sellers – continue pursuing opportunities overseas. With careful planning, there is no reason why UK firms should be denied access to international markets. Business will find a way.

At Avondale, we specialise in providing unrivalled expertise in business sales, acquisitions,
strategic advice and corporate finance for ambitious businesses – both in the UK and
internationally. Contact us to discuss your requirements.

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