Half of the year has passed, what happened to the UK’s M&A?
Updated: Jul 19, 2020
What is it about?
According to LexisNexis’ recent Market Tracker trend report, there were only 12 firm offers in H1 2020. This can be compared with 33 firm offers in both each of H1 2019 and H2 2019. The aggregate deal value for H1 2020 was £2.6bn, which is the lowest half-yearly value since H1 2009. This clearly shows the disruption Covid-19 has caused to M&A activities in the UK.
Pinsent Masons Out-Law’s recent article (link below) provides a helpful analysis of both the current and future M&A trends. Let me summarise here what they think about the UK’s M&A market (with the addition of some of my thoughts too).
According to Julian Stanier, a partner at Pinsent Masons, the social distancing rules have led to an increase in activities in the healthcare, pharmaceuticals, biotechnology, computing, IT and media and telecommunication sectors. The LexisNexis report states that 54% of possible and firm offers were in the healthcare, pharmaceutical and TMT sectors. Among the firm offers, three were in the Media & Telecommunication sector and two were in the Computing & IT sector. A “firm offer” is made where if the offer is accepted within a certain period of time, the offeror is obliged to perform the offer. In contrast, a “possible offer” does not involve a commitment to make an offer and the offeror will have a certain period in which to either announce a firm offer or withdraw the possible offer. As the new ways of working gets more widely adopted and the need for digital infrastructure increases to comply with the new normal post-pandemic, this trend is likely to continue for some time. This means law firms like Pinsent Masons that have particular strength in the technology sector are likely to enjoy a surge in M&A deals in the sector.
What will be the next trend?
Adam Cain, Legal Director at Pinsent Masons provide possible trends we may see in the coming months. Firstly, there is likely to be an increase in P2P (public-to-private) transactions. P2P transactions are where private equity (PE) firms take over public companies. This is because market disruption has caused a fall in valuations of listed companies and fall in sterling, which made it cheaper to acquire them. Also, PE funds currently have a huge amount of dry powder, which allows them to make huge investments. Dry powder refers to the amount of capital a company has. Some well-known private equity-focused law firms like Latham Watkins and White & Case will benefit if PE-led acquisition increases.
Secondly, due to the uncertainties caused by Covid-19, bidders will tend to prefer “all-stock deals”. All-stock deals are where a target company will receive shares in the acquiring company as payment. Managing liquidity is crucial to prepare for unexpected loss or expenditures in uncertain economic situations, so companies will try to maintain their cash reserves and look for alternative payments for their acquisitions.
In addition to the comments made by Adam and Julian, I would like to comment on another possible trend in M&A. Early this month, Mitsubishi Corporation announced that it will be carrying out a “one-in, one-out” policy towards acquisitions due to Covid-19. This means that every time it buys a new asset, it will sell another it owns that are no longer competitive. By implementing this policy, it is trying to maintain a strong balance sheet to prepare for a possible prolonged pandemic. Mitsubishi has been an active dealmaker and has been engaged in 49 deals in the last five years. This kind of shift in M&A strategy by one of the most active dealmakers in the world might be suggesting that many other conglomerates may take a similarly cautious approach trying to match investments with divestments during the pandemic.
See Pinsent Masons’ article: https://www.pinsentmasons.com/out-law/news/coronavirus-crisis-hits-uk-public-ma