Is The Appetite For M&A Activity Slowing Down In 2022?

Despite rising inflation in the UK and further afield, FTSE 250 company directors still have their sights set on growth over the coming months as business returns to normal as we exit the pandemic. 

Uncertainty Ahead

After a strong recovery in the mergers and acquisitions (M&A) market in Q1 of 2022, businesses are balancing preparations for the uncertainty that lies ahead, with setting out their investment plans for the future.

Simply, M&A activity involves the coming together of one or more trading businesses for growth or protection within the market. Often this involves one party acquiring another, or the decision of two businesses to come together to become one, to capitalise on operational and trading advantages.    

UK businesses have felt the pinch since the start of the pandemic. With many high street names going under and the hospitality industry shutting down, the UK market was shaken as lockdowns piled pressure across sectors. Despite this, restrictions across the country meant that larger businesses who continued to trade well found themselves with built-up cash reserves from their reduced costs. These reserves and the abundance of opportunities to purchase struggling businesses have put these larger companies in a position of influence when it comes to mergers and acquisitions within the market. 

Businesses with a profit of over £1,000,000 are more likely to be of interest to larger companies looking to invest. At this level, raising funding is easier, there’s more likely to be interest from institutional and trade buyers and, in the case of a larger company looking to invest in the business scale, it probably means that integration will be more straightforward. With built-up cash funds and grants from the government, many larger businesses are looking to invest in the shrinking market to protect themselves and create future opportunities. 

How Investors Are Protecting Themselves

However, current global situations are causing a sense of uncertainty within the market. Factors such as the spiralling cost of living, rising inflation, the Ukraine war, and the potential for a recession may be a cause of concern for businesses that are seeking external investment opportunities. Whilst this uncertainty hasn’t put the brakes on M&A, the rising concerns have led to an increase in diligence, with buyers spending more time investigating potential investments. In-depth analysis of assets is more important than ever as investors aim to protect themselves from discovering disadvantageous issues later in the process. On the upside, this caution from investors within the market is proving worthwhile and even with nervousness growing there seems to be plenty of opportunities for investors seeking to invest in innovative businesses, particularly SMEs, presenting themselves to the market.

Before embarking on an M&A process, investors must ensure there is proper, full-scope due diligence that is tailored to the relevant industry, the target, and is in line with the investment rationale. Factors such as customer and supplier agreements, properties, employees, IP and pension liabilities all have the potential to hinder the investment and waste time and expense if not thoroughly investigated. A tailored, in-depth approach to diligence will protect buyers whilst aiding them in making an informed decision.

When it comes to starting the procedure, buyers should be clear on headline financials and agree on any deals and deal structure before initiating the legal process. Vendors will often grant a period of exclusivity for investors to conduct full diligence as well as draft, negotiate and settle principal documents. Very rarely will a vendor grant a short period to analyse one area of diligence unless the investor is looking at this as part of its strategy. From the outset, having the right professional advisers is also key. This includes accountants who can help accurately analyse the financial and taxation position of the target business, and legal advisers who can help to manage a buyer’s risk through due diligence and protection in the legal documentation.

Although it may be assumed that the hard work ends when the deal completes, in many ways, this is simply the start of a new challenge. Culture in any business is hard to define, so the merging of two businesses where the workplaces do not align can be damaging to any growth strategy. Investors who are looking to merge companies should understand that after the deal is done, the challenge of bringing together not only physical assets but also personalities and cultures from both sides of the deal begins. Being prepared for this by properly planning the post-completion integration should help to increase the likelihood of the rationale behind the transaction being fulfilled.

Conclusion

While it may seem that the market is starting to cool down following a considerable flurry of activity in Q1, there are still plenty of good investment opportunities out there. For businesses who are looking to the future, it will be reassuring to know that opportunities for growth and investment are very much still available.

About the author: Michael Stace is a corporate partner at law firm, Shakespeare Martineau.