According to recent statistics, deals for overseas companies to acquire UK businesses are still occurring at twice the rate of domestic agreements. Clearly, UK PLC remains for sale to the highest bidder, but buyers continue to be a little cautious.
The Brexit vote and painfully slow progress since has seen the United Kingdom’s unique place as a gateway to the EU single market diminish significantly. Previously, FDI into the UK was a means to set up base in the EU with its own currency, various opt outs but unfettered access to the world’s biggest market. As a deal has moved further away from reality, so demand for M&A has fallen.
Activity peaked in 2016 with deals totalling £190 billion but has since fallen by 70%. The figure would have been even lower but for a handful of mega-deals. Potential acquirers from overseas have increasingly shied away from major deals while the details of the UK’s relationship with Europe remain unclear. That said, there is still an appetite for British assets.
Domestic M&A deals have increased slightly in the latest period but remain significantly less than the interest coming from overseas. With sterling way below its recent levels, could now be the most opportune time to buy into the world’s 6th largest economy?
In our experience helping companies both foreign and domestic to find acquisition targets that matter to them, one of the questions we often get asked is “Why do we keep seeing British companies sold to overseas investors?”. Let’s explore some of the answers.
The productivity gold mine
The UK has a productivity problem and we lag behind other major economies by a considerable distance. One observable trend when new owners acquire a British company is that both productivity and profitability increase. Unfortunately, the price is often lost jobs and plant closures. New management techniques are rarely popular immediately. However, statistics show that foreign owned companies, particularly in manufacturing, add or retain more employment in their local area than domestic firms who are in decline.
Plimsoll can help any potential acquirer to find well established companies in any market that, under new ownership, could become world class.
Of course, COVID-19 has dealt something of a hammer blow to the plans of every person, company and government around the world. However, we will eventually see the back of the virus and a return to normality. Is now the time to relook at the high growth parts of the UK economy?
Before the crisis there were some industries that were going through explosive growth. Whether it was niche markets such as gin producers and CBD products or significant parts of the construction sector, there are serious pockets of growth in the UK economy that have blasted through the pandemic or are pent up ready to soar in the aftermath.
Geography (and geo-politics)
The UK has that enviable geographical advantage as an island off the mainland of Europe. While a no deal Brexit outcome could wound it, some advantages still hold true. Many industries will continue to operate with the EU regardless of trade barriers. London’s position as a financial hub will take decades to replicate in Frankfurt or Paris. Major manufacturing conglomerates such as Airbus will remain in the UK for the next decade at least regardless of Brexit.
There is an element of risk investing in a UK company at present, with so much uncertainty. However, with risk comes reward and with competition in the acquisition market so depressed, now could be the ideal time.
Losing access to the single market has certainly diminished FDI into the UK. Why not use Plimsoll’s unique ability to spot the markets that are likely to be the most resilient and the companies within them that represent the most potential.
Sterling continues to trade around the mid to low $1.20’s. News stories nudge the figure up and down a little week on week, but it is broadly stable. However, as recently as 2015 that number was $1.72.
Buying UK assets - whether equities, house or actual companies - has never been more cost effective. Look at the trend in UK equity markets - the pound goes down and the share price of UK companies goes up. The buying power of overseas investors has never been higher.
Plimsoll can help overseas companies to identify the absolute best acquisition targets for overseas markets. Whether it is a high growth company or a strategic purchase, we can help companies find the right match.
Between Brexit, COVID-19 and a general malaise in the UK economy, now may not be the optimum time for foreign companies to invest via M&A. However, there is a view that there has never been a better time. Don’t wait for the perfect conditions, there will be too much competition by then. Do your research now – Plimsoll can help you find the best targets that meet your strategic needs.