Increasingly we also see an evolving trend of overseas private equity investors and family offices with the ability and desire to deploy capital in the UK, providing further competition to the already competitive investor landscape in the mid-market.
Despite the volatile geo-political backdrop experienced in recent years, the UK remains an attractive destination for inbound M&A from a cultural, linguistic, economic and innovation perspective.
This is underlined by our ongoing monitoring of inbound UK M&A activity, with 1,615 deals recorded in 2022 across both overseas corporate acquirers and investors. Unsurprisingly in the current macro-economic environment we project the 2023 figures to fall shy of this 2022 high water mark (likely around 1,350 deals). The long-term upward trend we do however foresee continuing however, particularly from 2025 onwards (Source: RM analysis, powered by Pitchbook).
Let's delve into the key factors that from our experience make UK companies particularly appealing to overseas buyers and investors.
1. Market Expansion and Access
Expanding into new markets is typically the primary driver for cross-border M&A, with buyers seeking deeper access and distribution capabilities in the lucrative and sophisticated UK market. Although Brexit has created some challenges in business, it has also acted as a driver for foreign parties to invest in the UK as its relationship with the EU has changed
Such expansion can be achieved organically but market penetration tends to be slow and the risk of failure high via such strategies. This is increasingly apparent in sectors where the UK incumbents have a high degree of brand recognition and command strong market positions.
2. Complementary Technologies, Expertise and IP
Targets that offer complementary technologies, know-how, or expertise can accelerate innovation of an acquirer, often bypassing years of internal development and investment that would be required to generate an equivalent internally.
The opportunity cost of the time taken to internally develop expertise or technology is often a main driver of a strategic acquirer paying an ‘above market’ premium. This is an area we are keen to analyse and understand when running a process. In such situations, the value for an overseas buyer of such an acquisition is broader than the current profit streams of the target, and ultimate deal pricing can be driven to reflect this.
Recent changes to UK legislation through the National Securities and Investment Act (NSI), which came into force in 2021, must however now be considered in some sectors. Specifically implemented to enable the Government to review and block acquisitions by overseas buyers that are seen to potentially impact UK national security, the type of activities that fall into this category are broader than may naturally be envisaged.
3. Talent Acquisition
Access to skilled and diverse talent pools is crucial for growth in any people-based industry. Acquiring a company with a talented workforce can address talent shortages which have stifled global technology and consultancy corporates in recent years.
The UK market is known for its world leading service industry (being the second biggest exporter of services globally according to the OECD) and overseas buyers continue to look to leverage the skilled workforce we have in the UK to help drive their inorganic growth strategy and develop certain niches.
‘Acqui-hire’ (acquiring a company for its talent ahead of its financials) is a phrase often heard in high value added service niches, and is a trend that continues to drive and we continue to see above market average valuations for companies that fit this criteria.
4. Diversification and Risk Mitigation
Targets that offer diversification across customers, products, sectors, or geographies help mitigate risks associated with economic downturns or industry-specific challenges, providing a natural hedge across an acquirers’ revenue streams.
Interestingly the conglomerate structure is back in vogue in certain sectors. This we see particularly in industrials and business services where large, often publicly listed European players with significant capital to deploy seek targets they can acquire in full but leave to run with relative autonomy post transaction.
In the case of customers, acquiring a well-established brand with a loyal client base can provide instant credibility in new markets to a level often impossible to achieve organically.