M&A: Why a trend towards smaller deals means new investment opportunities for SMEs
Big acquisitions create headlines, but recently Avondale has observed a growing interest in smaller transactions across global M&A markets. With larger, “scale” deals failing to generate substantial returns over a long period, buyers are seeing the long-term potential lurking in the mid-market.
According to the Institute for Mergers, Acquisitions and Alliances (IMAA), the number of M&A transactions recorded worldwide rose by 2.9% year-on-year (y-o-y) in 2017, while the combined deal value actually fell by 2% during the year. This resulted in an average transaction value of $70.4 million (£51.1 million), down from $73.9 million (£53.7 million) in 2016 and $100.7 million (£73.1 million) in 2015.
Is big no longer best?
Increasingly, larger corporates are finding that mid-tier deals offer greater flexibility, as well as an opportunity to capitalise on industry trends and technological advancements. One managing director working with Avondale admitted to previously regarding acquisitions below £50 million as a distraction, but he now sees them as core to growth and agility.
And, while considered riskier at the outset, smaller, strategic deals typically generate higher returns, delivered over a wider time frame. The Harvard Business Review estimates that small acquisitions typically boost annual shareholder value by between 8.2% and 9.3% over a sustained period, compared with the 4.4% average increase produced by so-called “big-bet” deals.
But its not just trade buyers who are dipping their toe in the mid market. With fundraising at record levels, low interest rates and a dearth of solid investment opportunities, Private Equity (PE) and Venture Capital (VC) funds are casting their nets further afield. PE and VC buyouts now make up a substantial slice of global transactional activity, and account for around 15% of Western European M&A deals.
Growth equity investments – where expanding companies receive an injection of capital in return for a non-controlling minority stake – are also growing in popularity. In both cases, there is a demand for mature, high-potential SMEs that can offer a proven track record of growth.
Cross-border interest is hotting up
Mid-tier deals have traditionally struggled to work successfully across borders. However, this is becoming less of an issue with the onset of globalisation and improvements in communications and technology. Many companies now have the experience, data and planning models to navigate jurisdictional challenges and unearth gems in different markets.
Aided by a weak pound, British firms are in particularly high demand overseas. According to the IMAA, inbound deal flows into the UK rose by 69.6% in 2017 in value terms to £277.95 billion. Investors from China and Hong Kong alone spent £15.1 billion on Britain’s shores in 2017 – the highest amount on record, and nearly double the previous year’s total.
While sterling’s decline appears to have plateaued for now, a favourable exchange rate will continue to incentive’s international buyers over the coming months.
Striking while the iron is hot
With no shortage of courters to pick from, the present M&A environment offers significant opportunities for mid-market vendors, as well as company owners targeting scale ups or partial exit strategies. And with competition for quality investment opportunities intensifying, companies are in a strong position to achieve favourable terms.
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