Author: Tim Stead
The next 12 months present a landscape shaped by evolving trends and critical factors influencing deal-making. From the increasing focus on technology and Artificial Intelligence (AI) to the strategic importance of exit planning, deal structures, and earn-outs, the M&A environment is witnessing noteworthy shifts. Additionally, the emphasis on environmental, social, and governance (ESG) compliance, alongside the impact of the UK economy and international growth, is playing a substantial role in shaping deal flow.
As we delve into the intricacies of the M&A landscape for 2024, it becomes evident that businesses are navigating a complex terrain where factors such as interest rates, inflation, and international expansion are key determinants of transaction volume and strategy. Gallagher spoke to Tim Stead at law firm Squires Patton Boggs to ask for his view on the current M&A landscape and the trends and forces driving the market in 2024.
Technology & AI
Technology generally, and AI in particular, is a particular area of focus. Many businesses see digital transformation as the opportunity to gain ‘first-mover’ advantage on competitors. Others seek to realise operational efficiency and cost-control to improve margins. We’ve seen significant AI-focussed transactional activity over the last 12 months, and we expect this to continue. Technology-driven businesses have consistently attracted the highest multiples, attracting shareholders and management to explore investment and exit strategies.
Health, Financial and Technology Consolidation
Certain UK sectors are considered to be particularly fragmented and see significant acquisition by reason of consolidation. Given the continued, and growing, reliance of UK public services on private sector support, the healthcare sector continues to consolidate with significant deal flow for profitable care providers. The financial services industry has consistently attracted investors to make 'platform' acquisitions with a business plan dependent on a pipeline of bolt-on acquisitions – this continues to be the case in 2024. For the reasons outlined above, technology has been one of the most active sectors and that trend is expected to continue.
Environmental, Social & Governance Compliance
Bidders and acquirers are focussing on Environment Social and Governance (ESG) factors when evaluating investment and acquisition opportunities. Private equity sponsors and institutional acquirers recognise the importance of ESG credentials not just for the purposes of future fundraising activities, but also see strong ESG compliance as contributing to long-term value creation and with a view to their own exit strategies. Businesses which exhibit genuine strength in ESG often create a strong independent culture, which supports low staff churn and sustainable growth, together with an enhanced brand and reputation. Whilst ESG due diligence has not yet become a mainstream independent due diligence workstream in its own right, ESG is becoming increasingly important within the existing legal, commercial and financial due diligence frameworks.
International Growth
Deal volume for cross-border M&A continues to be strong, with acquirers and investors eager to expand quickly into new markets without reliance on organic growth. Businesses that have become dominant in a particular territory can quickly scale a business through acquisition and subsequent roll-out of technology or operating model. The challenges with cross-border M&A remain, particularly around integration and culture. However, if carefully planned and done well, a cross-border acquisition has the ability to diversify and de-risk supply chains, hedge against localised economic challenges and accelerate access to new markets.
Exit Planning
Whilst exit planning has always been important, we are seeing sellers invest more time and resource than ever before in this phase of the process. There is a recognition that a successful exit is completely dependent on all facets of planning and preparation including: market-positioning, risk mitigation, tax optimisation, addressing people dependency issues, building a robust financial modelling and reporting process.
Deal Structures & Earn-Outs
A result of differences in opinion on valuations is that performance-based deal consideration structures have become increasingly common to bridge pricing expectations. Earn-outs have become more sophisticated – measuring not just financial output to support return on investment, but also designed to validate broader assumptions on which the investment case was based and the benefits to the wider buyer group. These may include cost savings, product development and staff retention. Despite the increased challenges for integration presented by earn-outs, deferred consideration pricing models are increasingly measuring a longer period, and making up a greater part of the enterprise value.
Exits positioned as a strategic solution
Corporate acquirers are increasingly discerning, focussing not just on market share but principally on niche, strategic acquisitions which can be presented internally as adding value beyond simply adding revenue or profitability to the acquirer P&L. We are seeing acquirers seeking out opportunities for vertical integration, allowing a purchaser to gain control over its supply chain, removing costs and improving technology. Acquirers are also keen to acquire immediate access to proprietary technologies, patents or innovative processes that strengthen the acquirer’s competitive edge.
UK Economy
Wider UK economic indicators continue to have a significant bearing on deal flow:
- Interest Rates – Bank of England base rates, held at 5.25%, result in challenges for creation of an acquisition or investment business case and mean that the cost of acquisition finance remains high. Higher interest rates can therefore result in lower valuations and result in more cautious sellers.
- Inflation – UK inflation shows a gradual decrease, but still above the Bank of England’s 2% target. Inflation creates margin strain within businesses and erodes underlying EBITDA. This too has a direct impact on valuation and results in sellers more reluctant to bring opportunities to market.
For the remainder of 2024 the expectation is that there will be a gradual easing of both inflation and interest rates, resulting in more transaction volume in the second half of the year.
Whether you are planning for growth or succession/exit planning, there is clearly much to consider. As businesses navigate through these complexities, it’s evident that the M&A environment is continually evolving, presenting both challenges and opportunities for deal-making. The interplay of international expansion, economic trends, and industry consolidation further underscores the fluid nature of the market.
Looking ahead, stakeholders must remain vigilant and adaptable, recognising the influence of these trends and factors on their M&A strategies. By staying attuned to these dynamics, and managing the associated risks, businesses can position themselves to capitalise on emerging opportunities in the ever-changing M&A landscape.
Webinar: Is a merger or acquisition your route to strategic growth?
Join us on 3rd July at 12pm, where Tim will be discussing what he's currently witnessing in the M&A market and factors to consider in your own corporate transactional plans.
