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Factors to consider for M&A in 2024

September 27, 2023

While 2023 is far from over, we’re nearing the end of Q3 and we’re sure that in the blink of an eye, we’ll all be panic-shopping for Christmas, and wondering what 2024 will potentially bring.

The team here at Bluebox would like to suggest six key things that we believe will have an influence on the UK M&A market in the coming 12 months:

 

Access to Capital

At present, S&P Global estimates that private equity is sitting on c.$2.5 trillion of capital that is ready for deployment.  With the continued pressure for the private equity community to deploy capital, this ‘dry powder’ will inevitably stimulate activity.  Currently, we are seeing a greater emphasis from private equity on a ‘buy and build’ strategy, whereby M&A is focused on bolt-on acquisitions to their existing platforms.

 

Interest rates

The Bank of England has increased rates 14 times since December 2021, which has seen it increase from a record low of 0.1% to 5.25%. And while we are not alone in wishing that we all signed up for a 10-year fixed-rate mortgage deal in 2021, the increased cost of funding has a negative impact on M&A with many buyers looking to use debt to fund some of their acquisition. November’s decision to hold rates may provide a chink of light and this will inevitably help to calm jitters that apprehensive buyers may have.

 

Inflation

Since early mid-2021, inflation has hit both UK consumers and businesses hard.

With higher inflation, we’ve seen consumers cut back on spending and decreases in disposable income, though this has also affected many companies.  In October 2022 we saw the annual rate of inflation rise to 11.1%, but since then, we’ve seen it steadily decrease with expectations that this may fall below 5% in October.

With the decrease in inflation, comes stability. Companies can better forecast and control margins, providing stability for buyers and may encourage those, with lower appetite for risk, back into the M&A market.

 

Key Industry Trends

While there are many key trends in the M&A sector in the UK, we’ve picked a few that we feel are the most prominent.

Firstly, we have seen an increase in the percentage of deals which saw private equity involvement between H1 2022 and H1 2023 by c.2%, rising from c.37% to c.39%. While this may seem small, it does help demonstrate the continued need for private equity to invest.

Telecoms, Media and Technology (TMT) continues to be the sector with the highest level of activity in H1, with c.27% of total deals in H1 being within the sector. There is also some positive news for the consumer sector, with a total of 393 deals, which is a significant increase on previous quarters.

Moving forward, we expect that many markets will see small increases, though the likes of technology and professional services will be the largest sectors in regard to deal volumes. We also expect that companies with strong ESG credentials and secured long-term revenue models will see significant interest from a wider pool of potential acquirers.

 

2024 General Election

Historically, a key driver for M&A activity within the UK SME market has been general elections, due to the economic policies of each party.

For example, Labour has previously made comments about increasing Capital Gains Tax (CGT), although they did state in March 2023 that they had “no plans” to do so should they win the election. They have also made comments about potentially increasing dividend tax and inheritance tax.

Potential increases on the above may prove to be unpopular with SME business owners, and could again lead to an influx of new opportunities in the market, similar to the increase seen around the changes in Entrepreneurs Relief, where the lifetime limit was reduced from £10m to £1m.

 

Skills Shortage

While this may not seem like a driver for M&A, we feel it could be a critical one in the next few years.

As the UK workforce continues to age and companies adjust to the outflow in skilled labour caused by Brexit, we are forced to consider what the impact on SMEs might be.

For example, in recent years we’ve seen the demand for HGV drivers increase, whereas the number of available drivers decreased. This has led to higher salaries, with companies then looking to pass on the costs to their customers.

Now, when we consider a larger issue facing the UK workforce, such as digitisation and the growth of AI, it seems sensible to assume the effect could be greater and more damaging to those companies that are getting left behind.

This could lead to some SME business owners looking to exit, rather than adapt to the changes. It could also lead to a premium being placed on those companies with high-skilled workforces that achieve operational efficiencies through AI.

 

In conclusion, whilst there has been a slowdown in M&A market over the past two years, we feel that a mix of the above factors could see a strong return in 2024, with more buyers returning to the market and more sellers considering potential options ahead of the election.

 

Get in touch

As always, we would love to hear your thoughts on this and if you would like to discuss any of the above in more detail, please do not hesitate to reach out here.

An article written by Misha Brooks, Associate Director at Bluebox.

 

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