2017 Outlook: M&A trends to watch out for

Patrick Groarke, partner at Livingstone, looks back at a year of unprecedented political change for the UK, and how 2016’s emerging trends in M&A and private equity investment are expected to develop in 2017.

2017 Outlook: M&A trends to watch out for

The unexpected outcome of the EU referendum vote had a noticeable impact on M&A activity. According to the Office for National Statistics (ONS) the total number of domestic and cross-border Mergers and Acquisition (M&A) transactions involving UK companies in Q3 2016 (July-September) almost halved from the previous quarter – highlighting the impact on deal activity following the decision in June to leave the EU.

M&A volumes bounced back quickly in Q4, and remain buoyant, with the UK market overall experiencing the highest volume of M&A transactions of any European country during 2016 and a healthy increase in volume over 2015 levels. One key driver of this strong performance has been international acquirers seizing the opportunity to purchase undervalued assets, as well as the plunging pound, which instantly made UK assets look much more attractive to foreign bidders and helped drive a nearly 15 per centincrease in inbound M&A.

Indeed, many acquirers see Brexit as an opportunity to complete deal-making prior to an eventual exit from the European Union in 2019 – assuming that Article 50 is indeed triggered in March 2017.

Private equity deals remain buoyant

Despite this political uncertainty, the private equity (PE) market has remained bullish and active throughout 2016, and we can expect this to continue into 2017. Livingstone saw several PE houses raise new multi-billion-pound funds last year.

Cinven, which backs upmarket shoe shop Kurt Geiger, closed its biggest-ever fund of £5.8 billion in June 2016, whilst at the same time another PE house, Ardian, announced it had raised £830 million for European buy-outs. Both firms have London offices but raise money in Euros to invest across the continent, and claimed that their funds had been oversubscribed despite investor concerning  Britain’s exit from the EU.

Another PE house continuing to raise funds post-Brexit is Livingbridge, a mid-market PE house with offices in the UK and Australia, which raised £660m after the vote.  Recently, Livingstone advised Livingbridge on the sale of portfolio company, ENRA Group, to Exponent Private Equity, which will drive the next stage of growth for the ENRA.

Indeed, the PE sector still has plenty of dry powder and several recently raised funds have been over-subscribed. Expect more activity from PE investors in 2017.

Tech boom sees M&A riding high

At the beginning of 2016, tech was tipped to be the fastest-growing sector of the year and it didn’t disappoint. A report published this year by Tech Nation highlighted that the UK’s technology industry is growing 32 percent faster than the rest of the economy.

There have been various high profile technology launches in the UK market this year and a number of disruptive technologies making significant strides forward, including virtual reality, drone and robotic technology. All businesses are feeling the pressure of disruption and many may be tempted to turn to M&A in search of solutions. According to Dealogic’s ‘Global M&A Review: First Half 2016’, Tech was the top sector for M&A activity in the first half of 2016, with a total value of $294.8bn – a substantial chunk of the $1.71 trillion generated across all sectors.

Large Tech acquisitions made up a significant proportion of this value, including the acquisition of Rackspace by Apollo Global, Oracle’s acquisition of LogFire, and the Microsoft/LinkedIn megadeal.

The factors driving M&A volumes across all sectors, including cheap money and capital availability in a low-returns environment, have been intensified in the Tech sector as buyers and investors focus their attention on this space as the surest route to growth.

A good example of this is rapid growth in the Internet of Things (IoT), with the value of IoT deals nearly tripling year-on-year. The rise of digital and smart machines has propelled IoT into homes across the world, from light bulbs to fridges, and is expected to go even more mainstream and accessible during 2017. Some key deals that highlight this trend include KAMIC Group’s divestment of Inteno Broadband Technology AB, a leading developer of innovative gateway products and related software solutions; CSL’s secondary management buy-out backed by Iconiq Capital, Norland Capital and RIT Capital; and STMicroelectronics’ acquisition of the NFC and RFID business of ams AG. Livingstone advised on all of these deals.  

As a market set for exponential growth, we can expect that this sector will continue to attract higher multiples next year.

International deals defy the Brexit storm

The decline in the value of sterling has made UK assets particularly attractive for overseas buyers. Investment from Asia has been particularly strong. China’s outbound M&A investment has grown at a record pace as more and more major European businesses are strategically snapped up by Chinese enterprises. According to Mergermarket, China had already surpassed its yearly record for outbound M&A investment by the end of August 2016, clocking up 173 deals worth $128.7 billion, and tripling its full-year acquisitions into the UK compared to 2015 levels.

Japanese investors have also been targeting UK homegrown businesses, and particularly eyeing the blossoming Tech sector. In August, Japanese investor Softbank bought ARM (the UK’s biggest tech company) for £24bn, making it the largest-ever acquisition of a European technology company. The historical significance and the unprecedented deal value suggests that there is still appetite in overseas buyers investing in high quality UK companies, and the weaker pound should help these buyers to maintain their appetite for UK assets.

The Americans have not been resting on their laurels, despite also experiencing a year of political uncertainty. As part of the global wave of M&A activity, we have seen a number of US acquirers push ahead with M&A deals.  Capitalising on a 15-20% reduction due to the dropping value of sterling, many deals have been completed. One notable deal was Steinhoff’s acquisition of Poundland, which saw the buyer pay 220p in cash for each Poundland share. This represents a bargain for the US retail giant as the price was well below the 300p Poundland floated at in 2014.

The current interest rate environment remains at historically low levels, which in turn creates continued appetite for acquisitions which have the potential to generate solid returns – and we see no reason for this to change in 2017. Interest rates may nudge upwards in the US and possibly the UK, but we can expect disruptive technology, political uncertainty and the devaluation of sterling to continue to drive further foreign interest in UK businesses as we move into 2017.

Patrick Groarke is a partner at Livingstone.

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