Will a stronger pound stop flood of cross-border M&A deals from the US
Claire Trachet, CEO of business advisory firm, Trachet, comments on the new budget’s implications on the M&A market and what this will mean for British companies looking for a deal
A combination of negative international reaction, public outcry and criticism of Kwasi Kwarteng’s mini-budget has now resulted in the appointment of Jeremy Hunt as the new chancellor. The £45 billion in planned tax cuts have now been reversed by the tune of £32 billion in a bid to stabilise and strengthen the pound against the dollar after Britain’s capital markets started spiralling.
The International Monetary Fund’s (IMF) warning – which urged the UK to re-evaluate their strategy – led to a steep drop in the pound’s value. This in turn caused many foreign private buyers, particularly from the US, to turn their gaze towards British companies. Top M&A expert, Claire Trachet, CEO of business advisory Trachet says: “For US investors, if things continued the way they were going, it could have become something like a garage sale”.
However, what will the reversal mean for the UK deals market?
There are numerous factors from the deal reversal which will impact the M&A market considering the complexities and different sectors that constitute the UK’s equity markets. The budget reversal announcement from this morning has given signs of a strengthening pound sterling, and with an increase of nearly 1% to the dollar yesterday, this is likely to put the brakes on the slurry of cross-border M&A deals which have been on the table for US private investors.
However, due to the adjusted decrease in spending from the UK government, inflation is likely to drop sooner, and this should enable the Bank of England to lower interest rates sooner. If there are lower interest rates on offer – which is how most Private Equity firms finance takeovers – this will likely result in an increase of UK M&As. M&A expert, Claire Trachet, says even though the weakened pound resulted in more interest from US companies to the UK, local M&A rules for UK transactions – which is governed by a 433-page code and enforced by the Takeover Panel – has also resulted in many unsuccessful deals and deters foreign investment.
High borrowing costs and uncertainty means deals will remain very low for the remainder of 2022, with the beginning of 2023 showing little promise. There has been just over £0.5 billion raised through IPO’s in the UK this year, according to KPMG, compared to a staggering £16 billion in 2021. However, de-equitisation – the substitution of debt for equity through share buy-backs or M&A – has reached £42 billion, according to Dealogic.
What does this mean for UK companies?
Investors eyeing the divergence between the real underlying value of companies listed in the UK and their share prices has created a lot of interest, however, this can create a sharp drop in valuations for British companies if the deal is unsuccessful. Announcing a potential M&A can have a positive effect on a company’s valuation, such as this morning’s announcement from Made.com of a number of potential acquirers interested in buying the company resulting in a 24% increase in their share price.
However, if the deal falls through, the impact on a company’s valuation can be detrimental and cause serious harm to their chances as a prospect to other buyers. Serving as testament to this, one of the world’s largest PE firms, Thoma Bravo, announced intent to purchase cyber-security giant – Darktrace – earlier this year, however Darktrace lost 33% of its value after Thoma Bravo ditched their bid.
Claire Trachet, CEO and founder of business advisory, Trachet, comments on the mini-budget reversal and its implications for M&A:
“The mini-budget announcement generated mass concern from industry leaders and the investment sector following a sharp drop in the value of the pound sterling coupled with the recent surge in the country’s borrowing costs. Although the reversal of several tax cuts has calmed capital markets, we are yet to see the impacts of this, and there continues to be uncertainty in the M&A sector.
“UK firms will continue to receive interest from a flurry of overseas buyers looking to capitalise on a weaker pound sterling as valuations continue to deteriorate. This has its positives and negatives, as on the one side it will attract a great deal of foreign investment to the UK, alongside new tax incentives and favourable regulatory conditions. However, low valuations mean UK companies entering potential M&As may get less than they bargain for, so it is a critical moment for the sector here to show resilience.”
Momentum is key for UK companies, avoid hold-ups at all costs:
“I always stress to my clients the importance of being deal ready before heading into any potential transaction. The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly and a failed transaction doesn’t impact the companies valuation.
“This has never been more important than in the current deals market where the environment can dramatically change over the course of just a few weeks. Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”