The Desire to Acquire
You would have thought that Brexit would have made the M&A market jittery, wouldn’t you? But that does not seem to be the case at all.
Far from the UK preparing to fall off an economic cliff, according to many sources, the outlook seems remarkably bullish.
EY recently reported a number of key M&A trends in respect of the UK’s performance in Q1 2018:
- The value of inward mergers and acquisitions (M&A) over Quarter 1 (Jan to Mar) 2018 reached £21.7 billion, £18.2 billion higher than over Quarter 4 (Oct to Dec) 2017.
- The value of inward divestment (disposals) was £6.9 billion in Quarter 1 2018, the highest value recorded since Office for National Statistics (ONS) first published this data series in 1987.
- The value of domestic M&A was £5.9 billion in Quarter 1 2018, that is, £0.7 billion higher than the previous quarter.
So, what is going on? There are a number of factors at play here, I think.
Buy and build on the rise – We are seeing a move towards more buy and build strategies – acquiring an initial ‘platform company’ followed by one or more strategic ‘bolt-on’ acquisitions – this enables the platform entity to scale rapidly as well as creating value.
Consolidation – There is a strategic desire to consolidate industries, particularly where businesses are complementary. We have seen this in our own client base. Flamefast Group is the UK market leader in the design and build of gas detection systems and engineering workshops for schools, colleges and universities. Flamefast actively sought acquisition funding to purchase Futuris, a complementary group of businesses, in order to facilitate its long-term growth strategy.
Protection – Whilst market volatility typically dampens M&A activity, for some deals it may make sellers more willing to transact to protect shareholder value or consider merging to create a larger, more stable company.
Speed – Buying a company may be a faster way to build the business than organic growth.
But the desire to acquire is always a function of the availability of money to make it happen. However, that does not seem to be a barrier at the moment. We have seen the growth of the close working relationship between Private Equity and Asset Based Lending (ABL) that has been game changing for many companies looking to acquire. So why do PE houses find ABL attractive?
Asset based lenders have an appetite to lend against strong businesses with focused and adaptable management teams. ABL is less susceptible to volatility as it is primarily concerned with the performance of the assets being pledged as collateral. They are frequently able to lend at higher Loan to Values (LTVs) than might otherwise be available and at attractive pricing.
The acquired business typically comes with assets. These assets can be used to increase the combined ABL line together with a cash flow loan, providing a larger injection of working capital and working capital to run the larger business.
So the ABL portion of the deal supports the post-deal phase as well as the initial acquisition, providing seamless working capital. It creates a perfect marriage and something of a matchmaking speciality at Praetura Commercial Finance.
For many businesses, the desire to acquire has never been greater.