In association with Avondale
Kevin Uphill, chairman of Avondale, explains what drove growth in M&A activity in 2016 and whether it is sustainable in 2017.
Only a savant could truly have foreseen the geo-political turmoil of the past year. However, after a shaky start, the robust performance of the global M&A market in the latter half of 2016 shouldn’t come as a major surprise.
Down by more than a quarter on 2015 on first-half levels, worldwide deal volumes battled back, growing more than eight per cent, quarter on quarter, in Q3 to around £940bn..
UK M&A performed surprisingly well. Third-quarter deal volumes defied predictions of Brexit malaise to reach almost £50bn – the highest Q3 result since 2008 – with a weakened pound providing opportunities that corporations found hard to resist.
While large-cap deals stole headlines, there was robust activity at small and mid-cap level too – with the UK lower mid-market posting its best half-year result (to end of September) since 2008.
So, the big question is what has driven this recent surge in activity and is it sustainable in 2017?
Acquisitions – a rare path to growth
When viewed over a wider timeframe, it’s clear that the momentum gained by the global M&A market over recent months is part of a longer-term trend.
After the debt-fuelled expansions of recent decades, the global economy is suffering with the after effects of having been on the capitalist fast track for so long. Faced with slowing economic activity and low interest rates, we’re seeing companies with strong cash reserves turning increasingly to acquisitions as a conduit for investing in growth initiatives.
Put simply, M&A has become one of the few remaining routes to the top.
It also means that competition for assets is growing, with dealmakers having to venture increasingly outside of domestic and regional markets in the hunt for growth opportunities.
As China’s economy cools, outbound Chinese acquisitions reached a record £110 billion through 9M 2016; this compares with just under £87 billion during the entirety of 2015.
What does 2017 hold for M&A?
Once again, we’re journeying into the unknown with regards to what Brexit and a Donald Trump presidency might bring. However, come what may, I believe that M&A will remain high on the agenda in boardrooms across the world.
A slow-growth economy makes organic growth extremely difficult, and starting and building a business will prove an increasing challenge. Companies will need to become more agile and adaptable; their leaders more innovative and outwards thinking.
Acquisitions will remain a critical strategic resource. They will no longer be based purely on financial modelling, but also on the combination of synergy, economies of scale and shareholder value, with the need to disrupt and gain competitive advantage in consolidating markets.
I also believe the UK M&A market will continue its recent growth run. Britain enjoys enduring appeal as a global investment destination – one that goes beyond the country’s relationship with the EU.
Reasons to be positive
It may be early days, but I can see 2017 shaping up to be another difficult year for the global economy.
Putting politics aside, today’s business climate is more complex and ambiguous than ever. The world’s major developed economies are struggling with debt hangovers from the 1990s and 2000s, and many also find themselves saddled with ageing and risk-adverse populations.
All signs are pointing to multi-year economic slowdown that could persist well into the next decade and beyond.
While the UK will remain a step ahead of its neighbours, it is not immune to these major socio-economic headwinds, and company directors will need to act shrewdly to continue delivering value to shareholders.
However, for the M&A market at least, I am confident that the next 12 months will reveal themselves as a period of opportunity, rather than challenge.
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The views expressed in blogs such as the above are those of the author and do not represent the views of the Institute of Directors.