Year: 2024

The U.K’s M&A activity nose-dived in 2023 falling by an estimated c20% over the previous year. There were a number of reasons for this decline including increasing political risk, flat-lining economic activity, rising interest rates and inflation. All these factors made acquisitions more difficult to value and finance.

As we start the new year inflation and interest rates have stabilised – but political risk has not gone away. Indeed, for the U.K the near certainty of an in-coming Labour government has complicated matters further.

While many here on Linkedin have reported a upswing in business sale enquiries, it remains to be seen if this will translate into an increase in closed transactions. Given the evident increase in deal closures at the end of 2023 there are reasons to be hopeful.

Here are some of the trends and factors that we see as impacting the volume and value of transactions completed over the coming year:

1. Interest Rates: Should interest rates decline, this will increase the scope for debt funding and help bridge the valuation gap between sellers and buyers. In the smaller-cap market a more creative approach to earn-out or deferred consideration structures may further bring sellers and buyers together.
2. Low PE multiples: The U.K market trades on a low valuation – both historically and compared to other markets. Well capitalised strategic buyers can exploit this even with higher deal premia or valuation multiples.
3. Private Equity: PE is well funded with capital to employ. Bolt-on acquisitions for existing portfolio companies may be a particularly interesting application of funds. Additionally, Labours threat to tax PE profits as income rather than capital gains may prompt the crystallisation of gains before any new tax regime comes into force.
4. Technology: The TMT sector was the best performing sector for M&A in 2023. Continuing rapid development in technology will likely underpin further growth in tech M&A in 2024.
5. Distressed Sales: The effect of trading in a low-growth and relatively high inflation/interest rate environment is cumulative for smaller companies. The problems for business operating in areas facing rapid technological, regulatory or market changes (e.g automotive, power-gen components) can be particularly acute. The coming year may see more of these firms exiting/consolidating.

Overall, reasons to be cautiously optimistic?

When I was last involved in venture capital investment some thirty years ago most VC funds were quite small – £10m was considered an OK size in the UK. Today the average fund raise is probably around £100m. The investment focus has changed dramatically. In the 1990’s investment was focussed on early-stage start ups with promising technologies and it was accepted that it took time for these business to gestate. Today investments are overwhelming targeted towards “software”. Many funded businesses are simply “me-too” endeavours that may be interesting applications but are not really viable long-term stand alone businesses – at least not in the context of the costs incurred in “growing them at any cost”.

The question is why has this happened. For a good part, the answer lies in the excess of funding that has flowed into the start-up scene. Driven by zero interest rates and the lack of return on traditional investments, a lot of funding has flowed into venture capital from non-traditional sources. Living off this funding presents an enviable lifestyle for GPs. Funds no longer make “investments” but rather place a series of “bets” on what they think will be the next leader in the beauty parade and are encouraged to pump up valuations so they can trade their asset at a profit. Not surprisingly as the ponzi bubble collapses we have seen a massive reduction in the valuation once given to rising stars.

As times get tougher for VC-backed companies they may well find that their investors may have less interest in supporting them than finding another runner on which they hope to place a winning bet.

Founders will discover that they are Sardines for trading – not for eating.

If you find yourself in this situation give us a call – we may be able to help.

In 2024, the landscape for mergers and acquisitions (M&A) has become increasingly challenging, with rising interest rates, persistent inflation, supply chain uncertainties, expectations of a recession and geopolitical instability creating a complex environment for dealmakers. Seller expectations have yet to adjust to to these realities and as a result, buyers and sellers face difficulties in bridging the valuation gap and closing successful deals. To square the circle between buyer skepticism over valuations and sellers expectations anchored in the pre-existing market conditions, parties need to be prepared to more complex deal structures.

1. Earn-Outs: An earn-out can help both parties agree on a deal despite differences in valuation expectations. However, earn-outs require careful structuring and drafting to avoid post-transaction disputes. Key considerations include the benchmark for calculations, the period for earning additional consideration, payment structures, the need for security, and the method of determining the earn-out.
2. Vendor Financing Structures: Rising interest rates have made acquisition financing challenging, leading many buyers to seek vendor financing in smaller and mid-sized M&A transactions. Sellers are rightly cautious in accepting vendor financing and must consider the buyer’s solvency, and secure appropriate forms of collateral. These financing arrangements often come with subordinate positions to the buyer’s financing banks.
3. Majority Acquisitions: Buyers may opt to acquire an initial majority stake in a company, along with put and call options for the minority shares in the future. This arrangement allows buyers to share risks while offering sellers less funds upfront, no immediate break from the divested business, and a period of minority ownership. The structure of put and call options will be unique to each business, requiring careful considerations such as pricing, period of exercise, independent valuation, and governance arrangements for the seller as a minority shareholder. In practice, such arrangement are rarely satisfactory to both buyers and sellers.
4. Complexity in Transaction Documents: The use of earn-outs, vendor financing, and majority acquisitions can lead to more complex transaction documents. These structures must be aligned with seller warranties and remedies to avoid overlapping protections. Majority acquisitions will necessitate supporting shareholders’ agreements, while vendor financing usually involves a linked security package. Additionally, a deep understanding of the business plan is vital when translating commercial terms into the Sale and Purchase Agreement (SPA). Due diligence will be intensified. All these issues will add time, cost and complexity to concluding a transaction.

Overall, the present challenging conditions for M&A deals, highlights the importance of engaging experienced and creative support for the transaction process for both buyers and sellers.

A proactive acquisition strategy can offer many benefits for a business. Here are some key advantages:

1. Market Expansion: Acquisitions allow a business to quickly expand its market presence by gaining access to new geographies, customer segments, or product lines. This strategic move can help the company reach new customers, increase market share, and diversify its revenue streams.
2. Increased Competitive Advantage: Acquiring complementary businesses or technologies can enhance a company’s competitive advantage by adding new capabilities, resources, or expertise. It can help the business stay ahead of competitors or even disrupt the market by gaining access to innovative technologies or intellectual property.
3. Accelerated Growth: Acquisitions can provide a faster path to growth compared to organic expansion. Instead of building from scratch, a company can acquire established businesses that are already generating revenue and have an existing customer base. This allows for rapid scaling and can significantly shorten the time it takes to achieve growth targets.
4. Synergy and Cost Savings: By acquiring businesses that have synergies with their existing operations, companies can achieve cost savings and operational efficiencies. Synergies can arise from various factors such as economies of scale, shared distribution networks, consolidated back-office functions, or streamlined supply chains. These synergies can lead to reduced costs and improved profitability.
5. Talent Acquisition: Acquiring a business often means gaining access to its skilled workforce, management team, or key personnel. This can be particularly valuable in industries where talent is scarce or highly specialized. Acquiring skilled employees or experienced executives can bring fresh perspectives, domain knowledge, and valuable expertise to the acquiring company.
6. Risk Diversification: Diversification through acquisitions can help reduce business risks by expanding into new markets or industries. This strategy can provide a hedge against economic downturns or changing market conditions. By diversifying its revenue streams and customer base, a company can become more resilient and less dependent on a single market or product line.
7. Enhanced Innovation and R&D: Acquiring innovative startups or technology companies can fuel a company’s internal research and development efforts. It allows the acquiring company to access new ideas, patents, and research capabilities, which can drive product innovation and maintain relevance in a rapidly evolving marketplace.
8. Capitalizing on Market Opportunities: Proactive acquisitions enable a company to seize market opportunities as they arise. By monitoring the market and identifying potential targets in advance, a business can position itself to capitalize on favorable market conditions, strategic partnerships, or emerging trends.

It is worth noting that a proactive acquisition strategy also comes with risks and challenges, such as integration complexities, cultural clashes, financial implications, and potential overvaluation of target companies. Therefore, it is crucial for a business to carefully assess each acquisition opportunity and develop a well-defined strategy that aligns with its long-term goals and capabilities.

ACS Partners have over 25 years of experience in helping clients successfully manage acquisition plans and post acquisition management. Contact us for a free consultation.