United Kingdom / Analyst Insights
Merger and Acquisition Activity in the United Kingdom

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by Thomas Burgess, Industry Analyst
Oct 27 2020

The world of business has been volatile over the past five-year period. Society has become increasingly technologically advanced while during the current year the COVID-19 (coronavirus) pandemic has disrupted social and business habits. On top of this, the United Kingdom is facing a changing policy landscape as the transition period with the European Union draws to an end. A large number of companies have engaged in merger and acquisition (M&A) activity, seeking distressed assets across the economy that they can use as capital injections to support their operations. Companies must prepare for a future where workforce management, automation and digital offerings are key to success. By providing analysis of industries across the economy, IBISWorld reports engage business strategists’ understanding of different operating conditions and competitive climates, allowing them to plan for the path ahead.

M&A trends

The coronavirus pandemic has led to a large fall in M&A activity in the United Kingdom. Over the three months through June 2020, the number of domestic and cross-border M&As involving UK companies dropped to 152, from 463 in the previous quarter, according to the Office for National Statistics (ONS). The value of domestic M&As fell to £300 million for the quarter, the lowest value since Q4 1975. Simultaneously, the number of outward acquisitions fell from a five-year high of 88 in Q1 2020, to a five-year low of 20 in Q2. The government’s decision to lock down the country through the first quarter of 2020-21 suspended activity in many industries and sectors, resulting in a substantial number of deals being either scrapped or put on hold. International demand for UK companies did not escape unscathed, with the ONS reporting that the value of inward M&As to fell to £1.9 billion in Q2 2020, compared with £18.7 billion in the same period the year before.

During the past five years, companies are expected to have aimed to simplify internal processes, save on costs and integrate existing services. For example, engineering giant AECOM announced a new CEO and president during the pandemic, who have overseen the start of a company-wide strategy to enable greater connectivity and collaboration across its enterprise amidst the crisis. The company subsequently integrated its design and consulting services into one global organisation in early October 2020. However, demand has somewhat recovered for businesses within technology, food, retail and healthcare sectors since the start of the pandemic.

Tech sector

Strong demand for improved technology in the current year has driven a higher rate of M&A activity in the technology sector. As a result, businesses that promise new technological capabilities with a path for growth are expected to be continually sought after by larger companies. Firms that operate in industries such as fintech, martech and fleet telematics can expect strong demand.

Japanese conglomerate SoftBank Group announced the sale of the largest UK-based computer chip designer ARM Holdings to American graphics chip specialist Nvidia in September 2020. The deal has been valued at US$40 billion (£31.2 billion), but is tainted with geopolitical sensitivities. Fears that the company could be integrated within the US company, potentially losing access to Chinese markets due to the ongoing trade war between Washington and Beijing, have given rise to stakeholder criticism. The business sells licensing to hundreds of companies around the world, some of which compete directly with Nvidia. The parent company is therefore expected to gain competitive advantage through its new synergy

These sensitivities are endemic within the tech sector when considering M&A activity. The Competition and Markets Authority is responsible for vetting M&A transactions, with the European Commission, The Takeover Panel and the Foreign, Commonwealth & Development Office also playing roles in ensuring fair business practices. The UK tech sector has benefited from rising levels of venture capital year on year throughout most of the past five-year period, from US$5.5 billion (£3.4 billion) in 2015 to US$14.2 billion (£10.8 billion) in 2019, representative of growing demand for UK tech. Fintech has been in particularly high demand in the current year, with Revolut raising US$500 million (£390 million) in its first funding round in February. Fintech firms offer behavioural analytics, precise marketing and machine learning, which offer ways for firms to beat the outdated banking model, giving businesses access to an extremely lucrative market.

Food sector

Supermarkets’ dominance within the food sector has been put in the spotlight in 2020, as operators have benefited from a downturn in on-trade competition from bars and restaurants. These retail giants work on volume and dominance across the supply chain, allowing for price setting and bargaining power. EG Group agreed to purchase Asda from US owners Walmart in a £6.8 billion deal announced in October this year, the largest private equity purchase of a UK company since 2007. The EG Group has grown through a series of debt-funded acquisitions of petrol stations across Europe, Australia and the United States. The firm is expected to be seeking to strengthen the synergies between fuel and food retailing, as well as diversify its portfolio towards a sector with a brighter future than the sale of fossil fuels. The latter is facing increasing pressure from suppressed oil prices, electric vehicles and renewable energy sources and is therefore anticipated to strengthen its place in the market. Supermarkets strengthened their links with upstream markets following the EU referendum, and with downstream markets during the coronavirus pandemic. As a result, strong supply chains have put the Supermarkets industry in a strong position to tackle future obstacles in international trade, making them a strategic acquisition.

Healthcare sector

The government and the private medical sector agreed a historic deal in March 2020, to provide the NHS with private-sector resources at cost price. By opening this door to the public sector, private healthcare providers have gained trust, security and value in their services. Shareholders have recognised the growth potential within the sector, with analysis of data from Tech Nation’s Data Commons in 2020 showing that healthtech has become the second biggest subsector of the UK tech sector, behind only fintech.

Prior to the deal, opportunities in healthcare drove private equity within the sector, with weak funding for social services leaving the NHS exposed over the past five years. Technology company Cera laid out its ambition to create 10,000 jobs in social care in March 2020, with the firm acquiring care company Gemcare South West Ltd in August. Companies have also moved strategically in the direction of mental health. For example, Huma acquired mental health-focused BioBeats for US$10 million (£7.6 million) in April 2020, as well as cardiovascular specialist Tarilian Laser Technologies for an undisclosed amount, providing software, patents and hardware for the growing company.

The healthcare sector is digitalising at a fast pace. Opportunities for emerging tech start-ups have driven synergies between them and more traditional operations, with digital triage helping practitioners cope with increased waiting times. M&A activity within this sector is anticipated to continue to increase in the coming years as firms seek out modern systems and practices to help grow value and meet demand.

Conclusion

As the end of the transition period draws closer, uncertainty surrounding the future relationship between the United Kingdom and the European Union remains. This lack of certainty is expected to be partly responsible for a lull in the level of transactions taking place across borders. However, falling asset values will entice greater M&A demand to some degree. When the terms of future trade deals become clearer, IBISWorld expects a flurry of M&A activity before the end of 2020 as businesses decide where they would like to strategically place themselves.  In the long term, the technology sector is at risk of increasing regulation, whereas the importance placed on healthcare and the food sectors has risen, offering greater potential for companies to gain market share. Overall, markets will need to adapt to the new status quo, which is forecast to drive M&A activity over the coming five-year period.

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