Bidding wars power up deals market
Bidding wars between cash-rich UK companies, overseas buyers and private equity firms are helping to power a strong deals market, business owners were told at our recent event.
Competition for acquisitions is intense, with technology and healthcare businesses among those in high demand and capable of attracting particularly strong multiples, HURST Corporate Finance’s Ben Bradley told company owners attending the latest webinar in our series of updates on the M&A market.
Associate partner Ben was one of four speakers at the event, which focused on acquisitions. He spoke alongside Nigel Barratt, the head of HURST Corporate Finance, Pannone Corporate partner Tom Hall and Dan Martin, a senior director in the Corporate Lending team at Shawbrook Bank.
Ben said 2021 proved to be a ‘manic’ year in terms of deals, fuelled by pent-up activity after the COVID-related disruption to business we saw in 2020 and concerns over a potential rise in capital gains tax.
While deal volumes have declined since then, the market remains strong amid fierce competition among would-be purchasers.
The average multiples being paid for acquisitions are at the highest seen in recent years, with technology, IT, ecommerce and healthcare businesses trading at premium levels.
Ben added that deals are increasingly being structured to feature earn-out payments, given that it is more difficult to assess the true underlying earnings of a company due to the disruption caused by the pandemic.
Nigel explained what the current market conditions mean for acquirers.
Plenty of funding is available to support acquisitions, such as debt and private equity capital, but proactive sellers may have a greatly enhanced view of the value of their business and buyers may end up having to pay more than they would wish.
He said valuations in the hottest sectors are ‘crazy’ due to the intense competition, adding that patience may pay off, as value expectations among sellers may recede over time if there are no buyers at higher multiples.
Nigel added that there could especially be more value to be had in ‘unloved’ sectors where there is less competition for acquisitions, such as manufacturing, hospitality, retailing and transport.
Opportunities to buy distressed businesses may also present themselves, as some companies are highly leveraged, having taken on debt or CBILS funding during the height of the pandemic or having deferred VAT or other payments to HM Revenue & Customs.
Now, as loans are having to be repaid and deferred tax payments made, some businesses may be feeling the strain.
Nigel said cold approaches to a target could prove effective, as many owners are reactive, and this could be a good route to achieving acquisition goals.
He also recommended that due diligence ahead of an acquisition should focus on ‘future proofing’ a target business, taking into consideration areas such as the impact of inflation and rising costs, supply chain issues and the ability to retain talent in a tight labour market.
Outlining some of the reasons why mergers and acquisitions should be considered, Nigel said many companies have accumulated a war chest during the pandemic after curtailing discretionary spending and building their cash balances.
However, because of the low yield on cash and as rising inflation erodes its value, M&A activity could prove a useful deployment of it.
Transactions can achieve cost synergies and create new income streams, while the opportunity to access new markets and bring more skills into a company can also form part of the strategic rationale for deals, he added.
Nigel also said the pandemic has ‘really made people think’ about with they want to do with their lives and their futures, creating a fertile environment as business owners look to de-risk their wealth through a sale.
He rounded off his presentation by saying he expects no slowdown in the deals market for at least the next 18 months.
Dan explained various funding options and structures available for M&A transactions. He emphasised the importance of businesses partnering with lenders and external specialist advisers to help present the business and support the transaction in the most effective way.
Tom gave an overview of the role that lawyers play in advising on and structuring transactions, and urged company owners to have weekly calls with their advisers with agreed milestones for the process.