2021 brought a record-breaking year for global M&A activity. The number of deals announced exceeded 63,000 globally in 2021, up 24% from 2020, while the value of transactions reached $5.9 trillion (£4.8 trillion), according to management consultancy Bain & Company. Activity in the UK was no different. However, what started as great optimism for the year ahead has tapered, with the UK M&A landscape facing numerous economic and regulatory headwinds.
2021 in review
UK M&A activity largely mirrored that on the global stage.
In 2021, the total number of outward M&A transactions – meaning UK companies acquiring foreign companies abroad – increased by 48.8% to 311 deals with a total value of £45.9 billion.
Meanwhile, the total number of inward M&A transactions – meaning foreign companies acquiring UK companies – increased by 60% to 789 deals with a total value of £76.7 billion.
Additionally, domestic M&A activity increased by 46.6% to 1,198 deals with a total value of £30.4 billion.
In 2021, favourable government stimuli, low operating costs and even lower interest rates helped companies achieve year-on-year earnings growth, propelled stock markets to record highs and spurred M&A activity. Following signs of a strong initial recovery from the COVID-19 pandemic, business confidence was at a high. The relaxation of FCA SPAC regulation such as lowering the initial capital requirement from £200 million to £100 million and additional investor safeguards, such as ringfencing the initial capital raised, is also expected to have spurred M&A activity. Low interest rates, underperforming assets, record levels of dry powder from private equity firms and the need to deploy capital consolidated private equity houses as key players in the M&A sphere.
Key areas of acquisition
Unsurprisingly, activity in the technology and Software as a Service (SaaS) space proved to be particularly strong.
According to technology investment banking firm ICON, there were over 1,070 UK technology M&A deals in 2021, a 44% increase on 2020 and 20% more than 2019.
Within the technology sector, industries such as cyber security, fintech, e-commerce and digital healthcare performed particularly well. This was supported by continued digitisation as individuals continued to work from home, with cash payments becoming something of the past and high-street footfall declining.
Activity in digital entertainment deals remained strong as 2020 lockdowns resulted in individuals turning to online social activities. According to accountancy and business accountancy firm BDO, 14 M&A deals involving UK video game makers took place in 2021, compared with nine in 2020, totalling £1.9 billion. Elsewhere, deal volumes in the retail, financial services and transport sectors also recorded an uptick in activity as firms sought to consolidate and strengthen their balance sheets.
Looking ahead
From a strong M&A outlook at the start of 2022 to greater uncertainty towards the end of Q1 2022; both UK M&A deal count and value fell compared with Q1 2021 and Q1 2020.
- 371 M&A transactions were completed in Q1 2022, 39% lower than Q1 2021 and 23.3% lower than Q1 2020.
- The total value of inward M&A stood at £11.2 billion in Q1 2022, noticeably lower than the £32.9 billion in Q1 2021.
- The value of outward M&A reached £2.6 billion in Q1 2022, marginally higher than the £2 billion in Q1 2021, but lower than the £3.9 billion seen in Q1 2020.
- The value of domestic M&A stood at £4 billion in Q1 2022, compared with £5.1 billion in Q1 2021 and £3.3 billion in Q4 2021.
Deals have contended with numerous challenges since the start of 2022. The macroeconomic landscape has shifted drastically and the risk of recession is increasing.
UK inflation reached a record high of 9.1% in May 2022, fuelled by rising energy, fuel and food prices.
Inflated prices have largely resulted from the COVID-19 pandemic and been exacerbated by supply chain bottlenecks from Russia’s invasion of Ukraine and the economic fallout of the imposition of sanctions.
As the economy began to recover from the pandemic, the UK government started to taper stimuli and VAT rates, which were initially reduced for hospitality and tourism, returned to 20% in April 2022, adding to inflationary pressures. To combat higher prices, the Bank of England has quickly moved to quantitative tightening, raising the base rate to 1.25% on 17 June 2022. A rising base rate is expected to adversely affect M&A activity by increasing financing, uncertainty and lowering valuations.
How does rising inflation and interest rates affect M&A activity?
- Debt financing acquisitions becomes more expensive
- Inflation can lower real returns on investments
- Divestment can become increasingly complex
Increasing regulatory oversight
Alongside economic pressure, the regulatory environment is also shaping M&A activity. Regulatory scrutiny is increasing and the review and approval process for M&A has become more burdensome.
Regulators such as the Competition and Markets Authority (CMA) are placing greater importance to issues beyond traditional anti-trust concerns such as national security, protecting local champions and examining M&A deals heavily subsidised by foreign powers.
The UK’s new and much broader national security regime, the National Security and Investment Act (NSI Act), came into force on 4 January 2022.
The regime requires compulsory filings for acquisitions (including minority shareholdings) concerning 17 sensitive sectors such as robotics and biotechnology, as well as the more traditional defence, transport and energy sectors. It grants the Secretary of State for Business, Energy and Industrial Strategy (BEIS) the authority to review the broad range of transactions and to block or impose conditions on deals.
The act introduces an additional hurdle for transactions, even deals with a relatively limited interest to the UK. Indeed, according to the first and latest BEIS NSI Act Report, 222 notifications were submitted in Q1 2022, highlighting the vast coverage of the new regime. Of these, 196 were mandatory, 25 voluntary and 1 retrospective.
Meanwhile, since the end of EU-UK transition period on 31 December 2020, the European Commission no longer review M&A relating to the UK. Instead, transactions are largely are at the will of the UK’s CMA, which has garnered a reputation for aggressive intervention and this trend is expected to continue through the year.
Overall, the CMA has referred more deals for an in-depth Phase 2 review and barred more transactions than the European Commission.
For example, in May 2022, the CMA found the merger of Veolia and Suez could lead to a loss of competition in the supply of several waste and water management services in the UK. The same month, the CMA blocked a proposed merger between Finnish industrial machinery firms Cargotec and Konecranes following substantial competition concerns, marking the first divergence from the European Commission which conditionally cleared the deal.
Increasing oversight is set to increase posing challenges for companies by lengthening the time from initial instruction to deal completion and adding to costs, while a strongheaded CMA adds an additional layer of risk to navigate.
Overall, while deal flow remains strong, creeping inflation, supply chain pressures and rising regulatory scrutiny mean it is difficult to anticipate if strong M&A activity seen in 2021 trend will continue over the year ahead. Nonetheless, activity levels may be driven in part by distressed deals, a consequence of the current economic environment.
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