Port cities, such as Liverpool, with their long and colourful socio-economic history, know all about globalisation and the forces that it unleashes. These are the very same forces that helped drive its growth and development.
So, we have a very real concrete example, right here on our doorstep in the city of Liverpool and its surroundings, that what happens on the global stage can, and usually does, impact what happens to the local area. That’s one of the reasons why the latest Baker Tilly International (BTI) Global Mergers and Acquisitions (M&A) Trends report, released a few weeks ago, is perhaps more relevant to businesses in our region than you might be forgiven for thinking, given the title of the report.
As a headline, BTI’s annual M&A market update, produced in conjunction with M&A intelligence firm, Mergermarket, revealed a remarkable 77% increase in the annual global cross-border deal value in 2021- despite dealmakers facing continual macro uncertainties throughout the year. As ever, the devil may be in the detail – so let’s take a deeper dive.
But before we do so we need to take a step back and remember that we have been living through extremely interesting times over the last 2 years. Just as the world was emerging from Covid, we had the ramifications of Brexit to worry about, and things suddenly got a lot more interesting (that is not meant to be flippant..) with the invasion of Ukraine. Uncertainty is probably the only real certainty in life – but let’s not forget we have been undergoing quite a lot of it of late.
Context is often everything when dealing with something which is multifaceted – and that is particularly the case with global mergers and acquisitions. So, to learn that 2021 saw an increase in deal volumes on 2020 levels (albeit somewhat lower than the pre-pandemic levels) feels like a reasonably clear signal that appetite to do deals and, importantly, for funders to provide sufficient funding to allow them to take place is strengthening. That is a good thing.
That aggregate deal value for 2021 is some 69% higher than 2020 is, for me, more of only passing interest as the aggregate values can be distorted by very large one-off mega deals. So, I think that deal volume is the more relevant metric.
But what is fuelling deal activity? Well, it will be a range of things – but one factor the survey brings out is the continued strong levels of demand from Private Equity investors for businesses to acquire and invest in. Typically, the PE model is to invest in a business, incentivise the management team to drive significant medium-term growth, and then exit within around 5 years and double the value of their investment in doing so. It is true that not all businesses will have that growth potential and so may not be suitable targets for PE acquirers. But they may be suitable as a bolt-on to other businesses which have already been acquired by PE. And with PE being highly active in M&A markets that creates entropy or ‘movement’ in the M&A ‘system’ which can have a ripple effect of making other businesses more minded to carry out M&A themselves.
We hear a lot about the potential for cross-border transactions – particularly in terms of foreign buyers looking at the UK. And that is certainly a characteristic of the global M&A stage- but it is easy to overestimate its importance. In 2021 cross border M&A only accounted for 5% of transactions. Similarly, the tech sector (and it is quite a broad church) is often cited as the driving force for M&A – and it is certainly important, but globally in 2021 it only accounted for 33% of deal values and 36% of deal volumes. There will be a lot of ‘old economy’ business models which underwent some form of M&A process in 2021 – and there will very likely be a lot more in coming years.
What is perhaps more interesting and relevant is what seems to be the themes coming out which are now driving M&A activity. And one, in particular, is climate change specifically and the Environmental Societal and Governance (“ESG”) agenda. ESG is moving much more centre stage in being a consideration for acquisitive businesses. ESG is no longer just another three letter acronym. It might now be an issue for listed company deals and very large privately owned businesses. But what is important for those businesses today is often important for much smaller businesses further along the supply chain, if not necessarily tomorrow then shortly thereafter.
Another theme is one that many businesses of all sizes have been suffering from and that is obtaining human talent. It does seem that saying ‘Our people are our greatest asset’ is becoming more than just a glib phrase for many businesses. Your people might be the reason your business is attractive to an acquirer. If so, you will want to think about how you can best retain them to preserve and hopefully increase that value.
So, what does that mean for 2022? Well, BTI’s crystal ball is as murky as yours but they do wonder if there might be more distressed M&A as some businesses struggle to repay government-funded Covid financial support packages. That is certainly possible. But perhaps the last word on this is one sentence that caught my eye. It reminded me of Harold MacMillan’s response to the question of what was the hardest thing about being prime minister and he replied, “events dear boy, events.”
As the report notes, with sublime understatement, one of the few things that the last 24m has taught us we can say with any certainty is “…challenges can arrive abruptly and upend expectations.” That’s some more entropy for us.
Stephen Gregson
Corporate Finance Director