Four Core M&A Scenarios for the Year Ahead
In an ever-changing corporate landscape, successful leaders recognise that M&A is critical to business strategy – whether acquiring, creating shareholder value, merging or selling. Read our five core M&A scenarios, we predict for the year ahead.
1. Disruption and digital transformation to remain key strategic drivers
Companies of all levels and sectors are looking to technology to achieve competitive advantage and growth.
Technological advancement will continue to play a central role in driving M&A activity. The strong balance sheets of cash-rich tech firms will see the sector remain a hotbed of activity as larger players look to bolt on smaller disruptors. Meanwhile, as businesses become more specialised, the barriers to entry for potential competitors from across other sectors will rise. Often, the conclusion will be that if you can’t beat them, buy them. In particular, we will see a growing convergence between technology and industries such as financial services and media, as companies respond to the changing behaviours of their customers. These trends will see cross-sector deals continue to feature high on boardroom agendas.
2. British companies in the shop window
The UK M&A market will continue to thrive, attracting overseas dealmakers.
The widely predicted slowdown in UK dealmaking has not happened, nor do we expect it to. While 2017’s surprise election outcome added further complexity to an already muddied political landscape, M&A markets have so far held firm. The second half of 2017 brought a 3.1% year-on-year growth in domestic deal volumes, while the overall transaction value decreased. This indicates a healthy appetite for smaller, strategic acquisitions.
Equally, 2017’s sharp rise in UK inbound transactions (albeit partly driven by sterling’s decline) illustrates the continued global appeal of UK companies. The UK’s robust economic and regulatory fundamentals – not to mention the added attraction of a weakened currency – will ensure Britain remains a bright spot for global M&A activity going forward. As the clock ticks down on leaving the European Union, we expect to see foreign buyers retaining a keen interest in UK acquisitions and partnerships. British companies with a global footprint and world-class capabilities will be in high demand.
3. A demand for cross-border expertise
Buyers will be compelled to look overseas but will need help to do so.
2018 is seeing a continuing trend towards cross-border M&A, as major geopolitical shifts and a dearth of local opportunities drive companies outwards in search of opportunities. China’s well-capitalised buyers will continue to covet Western companies, with Chinese/Hong Kong firms spearheading more than a thousand outbound M&A deals during the first 11 months of 2017.
Amid an uncertain domestic backdrop, UK and European firms will also continue hedging their bets and looking for opportunities in new markets. With a protectionist in the White House and a growing question mark over future EU relations, British buyers will have to venture further afield and expand their emerging market footprint. A rise in cross-border deal activity will spark demand for advisers with cross-jurisdictional expertise and an understanding of the legal, tax and regulatory implications.
4. Smarter, longer-term thinking will be required
Dealmakers will need to become more innovative, and scrupulous.
We believe executives will continue to pursue deals that offer the best potential for long-term shareholder value creation. However, less dynamic companies are likely to see values, or at least deal structures, soften as economic growth weakens. By contrast, high-growth fast-track firms may find themselves in an increasingly small minority, with competitive bidding actually resulting in higher bidding as investors and companies actively seek disruptive plays in highly scalable sectors. With bank funding remaining in short supply, deal structure will be critical to realising full value.
Leaders will need to dedicate more time and resources towards planning due diligence and to preparing sound post-merger integration strategies. Innovation will drive deals – Netflix’s August 2017 acquisition of Scottish comic book publisher, Millarworld, is perhaps the most interesting reflection of this longer-term trend in recent times.
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