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Why the UK M&A market continues to attract overseas interest

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With mergers and acquisitions enjoying a bumper year in 2021 and strong interest from overseas, we look at the outlook for 2022 and what makes the UK a great place to invest.

After a depressed 2020, pent-up demand and strengthening economic activity saw mergers and acquisitions rebound in 2021, reaching a peak of 292 in March 20211 . “All ships rise with the tide,” says Khush Purewal, M&A Partner at KPMG. “The volume of 2021 resulted in everything being higher, including inbound M&A. And, when it comes to international M&A, it’s clear that the UK is a very attractive place to do business.”

He points to various factors driving that growth and serving to boost the attraction of the UK in the eyes of acquisitors. “The UK boasts a stable political system, a transparent corporate governance and corporate financial information system, a skilled workforce, a competitive tax environment, and so on.”

Unique attraction of the UK market

Of course, many of these strengths are shared by other Western democracies. So what differentiates the UK? “There are a number of things that make the UK more attractive,” says Khush. “Firstly, the UK is expected to accelerate out of Covid-19 more quickly than other countries and with a stronger economic recovery, thanks in part to the success of the vaccine rollout and the deep government support for businesses. That’s created a healthier base for M&A than we see in most other countries.

“But we’ve also had one of the more unique experiences in Brexit. That depressed Sterling and we’ve not yet seen it recover to pre-Brexit levels, and that makes UK companies good value for money. What we’ve got here in the UK, is the perfect Venn diagram; great recovery, great system, great backdrop.”

The volume of 2021 resulted in everything being higher, including inbound M&A. And, when it comes to international M&A, it’s clear that the UK is a very attractive place to do business.

Khush Purewal | M&A Partner, KPMG

A strong outlook

These broad macro factors, says Khush, are likely to continue to colour activity in 2022, but there are also more micro-environmental factors that are presenting a strong outlook for M&A activity – and inbound activity in particular – in 2022. “The desire for market primacy or market dominance remains strong,” he explains. “To achieve that, corporates aren’t waiting to grow organically, they’re going out and doing deals to secure technology or market share. That land grab is the equivalent of 21st century empire-building and it’s happening through corporates.”

Partly, that drive is being made possible by businesses sitting on lots of cash. Reports show that in the UK, for instance, cash and deposits held by private sector non-financial businesses increased by £221bn between September 2019 and 2021. Meanwhile, the latest PwC CEO survey shows that 21% of US CEOs consider the UK as one of the three countries most important for their growth over the next 12 months2.

Private equity houses are also sitting on capital. “Some would say we’re at the high watermark of capital raised by private equity,” says Khush. “That money is normally raised with a shelf-life, so there’s a massive pent-up need to spend the money.”

Increased firepower

He points to the US as one of the most prolific corridors for inbound M&A. “One of the hallmarks of the US is the Special Purpose Acquisition Company or SPAC market, a vehicle specifically to make acquisitions that we’ve not really seen anywhere else, although there are suggestions that European markets, particularly in Scandinavia, might try to create something similar. And that’s seen a huge amount of capital raised.

“One of the other hallmarks of the US is the dominance of private equity in M&A over recent years and they are increasingly aggressive and thematic. We’ve seen that firepower combined with this more aggressive stance in the tactical approach taken by the large US funds, for example in CD&R’s bid for Morrisons or Blackstone’s bid for St Modwen.”

‘Brand Britain’ drives activity

Although he believes that the US will continue to outperform other countries when looking at the UK, other deal corridors remain active. While the US tops the league in terms of foreign direct investment into the UK, followed by India, the EU, Canada, China, and Japan also feature in the top ten for FDI in 2020/213. Although the figures include investment other than through M&A, it underscores the attractiveness of the UK market.

Another unique strength the UK claims is ‘Brand Britain’ says Khush. “In the search for global primacy, businesses are looking to fast-growing emerging markets. Many of these are or have been part of the Commonwealth, so Brand Britain is respected and sells really well, particularly in areas such as professional services, engineering or design. Often, we’re seeing overseas money targeting British businesses that will be best placed to sell overseas.”

The most active M&A market is where people are trying to secure strategic advantage through market-leading technology or market-leading business.

Khush Purewal | M&A Partner, KPMG

Global vision

From a sector perspective, while the UK’s professional services command global recognition, there’s significant demand for innovation too. “The most active M&A market is where people are trying to secure strategic advantage through market-leading technology or market-leading business,” says Khush. “In that context, the UK has great strength in technology, across fintech, AI, industrial tech and so on, and there’s growing interest in renewable energy and innovation around climate change.”

It’s these global drivers – urbanisation, climate change, population growth – that he believes will fuel activity and success in the long-term. “While M&A activity continues to be about the fundamentals of creating value for shareholders or investors, finding businesses ripe to grow and move on, the larger corporates or funds will be increasingly focused on vision. Those businesses with greater vision, with the ambition and the desire to grow globally will be most attractive.”

To find out more about investment opportunities in the UK and how we could support, please contact your Global Relationship Manager.

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