In a low growth world, M&A is more sensitive to the economy: the race to get on the right side of the line

Values up, volumes flat…

Uk M&A activity in 2014 shows a wide divergence between value and volume. While M&A value has increased by 68% in 2014 to $260.7 Billion, volumes are relatively flat, only growing by 5.1%. Digging further  into the data it quickly becomes clear that the headline numbers hide even wider disparities between sectors in terms of both the level and the nature of M&A activity.

…and divergence increasing…

The increase in deal volume has been driven by Consumer Products and Retail (343 deals, a 31% increase on 2013), Media & Entertainment (221 deals, 39% increase on ‘13) and Technology (412 deals, 12% increase on ’13).

Woman Shopping at a Grocery Store

These three sectors were also amongst the top 6 generating the most value and so contributing to the $105.7bn year on year increase in value. Life Sciences ($31.2bn), Real Estate ($25.1bn) and Telecommunications ($21.1bn) were the other high spending sectors.

By contrast, low volumes and values were to be found in Aerospace & Defence, Government & Public Sector, Mining & Metals and Provider care. And while volumes were slightly higher, the deal value was also low for Oil & Gas and Power & Utilities.

…as business adjusts to the new UK economic paradigm…

The UK economy is clearly playing a part in shaping M&A activity. In the pre-crisis period, when growth was relatively high, all sectors were able to benefit. Today we are in a lower growth environment but crucially, one in which prospects and challenges vary significantly by sector.

The high value, high volume acquirers are in dynamic and relatively fast sectors that are going through significant change. Companies are using M&A as a part of their moves to reposition to make sure they are on the right side of the growth line. Technology and Media & Entertainment companies are looking to acquire new skills, content and capabilities and to capture the benefits of the revival in UK consumer spending. Activity in the Life Sciences sector has been partly driven by the inversion opportunity but also by companies looking to replenish and adjust their drug portfolios to reflect their views on the appropriate segment/product mix as economic prospects, demographics and the impact of fiscal austerity impact the market.

We can see the impact of austerity and changes in government spending reflected in low volumes and values of activity in Aerospace & Defence, Government & Public Sector oriented businesses and Provider Care. With an election looming in which the view of the two largest parties on public finances is as wide as it has been for several decades, so political uncertainty has been added to the challenges created by the austerity programme.

The changing nature of demand in the world economy, especially China’s moves to rebalance its economy have reduced the demand for commodities which is a factor in the low activity recorded for Mining & Metals. Limited progress on shale gas in the UK, increase uncertainty over energy policy with the referral of the sector to the Competition & Markets Authority, and the fall in the oil price all form part of the rationale for low activity in Oil & Gas and Power & Utilities sectors.

Offshore Oil Platform Under Construction

…as well as broadening their horizons.

Overseas deals completed by UK companies saw a 16% increase in the year to November (from 641 to 766), with values increasing by nearly 60% from $44.5bn to $105.5bn – catapulting the UK to second most active overseas acquirer ahead of Germany, Japan and China, second only to the US. A recovering domestic economy and increased corporate confidence together with a strong stock market and access to financing has enabled UK business to increase its international M&A activity

To thrive and survive transaction strategies must change

Considered overall, transaction levels have been too low in the UK given the need for businesses to sustain a healthy level of deal activity to remain competitive in this rapidly changing economic and technological world. Together will relatively weak capital investment levels, this means that business is now readjusting quickly enough. Certain sectors are pushing ahead but more action is required by businesses to position themselves effectively in the new economic environment in which we find ourselves.

Follow me on Twitter to join in the debate: @MarkGregoryEY


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