2020 has been both a bumpy and bumper year for dealmakers. There was a significant slowdown in transaction activity in the spring after the first lockdown came into effect and the economy came to a near standstill. But, once restrictions started to ease in the summer, we saw the market really bounce back, with the fourth quarter for M&A activity in the UK ending very strong.
In particular, we’ve seen some headline-grabbing deals in the life sciences sector, coupled with mega deals in the telecoms and tech sectors, as well as swathes of activity across financial services and energy. And of course, we also saw distressed M&A activity rise in the wake of a wave of restructurings and insolvencies.
We are predicting the current tide of deal activity will continue into the first half 2021, for a number of reasons:
- COVID-19 as a catalyst: Many businesses have been waiting for a few years now for the perfect opportunity to bring in investment or sell. For a lot of business leaders, it was a case of riding out the various macro-economic or geo-political changes that happened – whether that was Brexit, a new government or a General Election – before pushing the button. Perhaps surprisingly, COVID-19 has been the catalyst to put those plans into place. The pandemic has focused minds on the here-and-now for those who might otherwise have delayed their plans until further in the future.
- Potential tax changes: Many firms are anticipating a chillier climate for deals after the 2021 Budget, with the prospect of changes to the capital gains tax regime.
- Private equity appetite: With substantial dry powder in reserve, private equity appetite remains strong, which will lead many to consider mergers and acquisitions, management buyouts and bringing on board investors to bolster defences during an uncertain period.
- Continuing M&A trends including: A weaker sterling encouraging strong interest in UK businesses from overseas investors; larger corporates looking to sell off non-core assets to support their balance sheets; & public to private transactions remaining strong with a number of listed assets looking undervalued.
- Attractive sectors: Key sectors that have underpinned the economy in 2020 - including healthcare, technology, business services, energy and differentiated businesses that are tech-enabled and disruptive – will continue to experience increased levels of M&A activity. We also predict that companies with a clear ESG proposition will attract strong investment.
A key question, however, is what impact the proposed UK National Security and Investment Bill will have on deal activity in 2021 and beyond. As it stands, the draft legislation requires clarity regarding what foreign investment will be accepted in ‘sensitive’ sectors – from defence, energy and transport to computing hardware and artificial intelligence. We await further guidance.
Despite this, all signs show that deal activity in H1 of 2021 has the potential to be record breaking. The deals pipeline is very strong and for many companies who have showed resilience through COVID-19, it will be considered a great time to get deals done.
Head of Corporate Finance, UK