As 2018 draws to a close, now is a good time to reflect on what has been a significant year for global mergers and acquisitions (M&A) activity.
Driven by an increase in mega-deals, transaction values were up 39% globally at September 2018 compared to the prior year. Deals of sub $500 million were largely on a par with the prior year. Despite challenging domestic macro-economic and political factors, the UK remains a buoyant part of the global M&A scene, with 162 deals completed in November alone. We are likely to see the usual rush of deal announcements pre-Christmas as deal makers try to squeeze one more into the calendar year.
Brexit uncertainty aside, the UK M&A market carries considerable momentum into 2019 and despite a drop in domestic businesses actively pursuing M&A, the UK is now in line with global M&A expectations. In addition to this, the UK has climbed from fifth to second on the global M&A destination list and 2019 is shaping up to be a very busy year for us deal makers, particularly if sterling remains weak as a result of Brexit issues. This would make UK exporters more profitable and acquisitions of UK businesses more financially attractive to overseas acquirers.
In this article, we explore M&A activity across a number of sectors below.
E-fulfilment and third-party logistics
With UK online sales exceeding £28 billion in the first half of 2018 and expected to more than treble to £93 billon by the end of the year, this continues the steep rise in e-commerce of last few years as customers have become increasingly reliant on being able to compare, buy and receive goods at the click of a button. As a result, sectors such as e-fulfilment and third-party logistics have also experienced rapid levels of growth which in turn has seen significant levels of M&A activity in the sector.
Growth in e-commerce is expected to continue and as a result supply chain companies will require significant investment in existing technological and physical infrastructure to meet the growing demands of customers. This growth will be opportune for business owners looking to exit as larger players seek to meet demand via acquisition and consolidation. We expect M&A activity in this sector to remain highly buoyant in 2019.
The manufacturing sector, and in particular, specialist engineering, continues to benefit from “Industry 4.0”, the trend of automation and data-exchange in manufacturing systems and processes. Companies that adopt this new approach reap rewards in productivity, efficiency and ultimately in profit. As a result, we are seeing a transformation of the manufacturing landscape as more and more businesses re-focus their processes to remain competitive.
This trend leads to a number of opportunities in 2019, particularly for smaller niche manufacturers who have been established for a number of years and may have a choice between investing for the next phase of growth or exit, selling to a larger industry player who is better placed to move with the times. Equally for investors, there are benefits to be had in modernising such businesses in order to maximise profits and achieve higher valuations and improved financial returns.
Accounting for approximately 10% of UK M&A activity in the past 12 months, this sector is likely to continue “steady as she goes” through 2019, particularly in the small to medium-sized enterprise space.
The UK remains a key player in the aerospace sector with a large number of suppliers into this global industry, ranging from giants such as Rolls-Royce to smaller niche players with specialist, unique and often mission-critical technological know-how.
Aerospace manufacturers such as Boeing and Airbus have new products in the market for which order books span up to nine years. This gives secure pipelines for suppliers, with visibility on orders many months, if not years, in advance. A high proportion of these companies have earned accreditations unique to the aerospace industry, meaning their supplier status is well protected.
For companies looking to grow in this sector, acquisition is therefore often the only way of achieving short-term growth, leading to opportunities for business owners looking to sell, as well as larger players looking for increased scale.
Technology and software
The relentless pace of technological change ensures this sector remains firmly in the number one spot for UK M&A activity. With the advent of artificial intelligence, the internet of things and blockchain technology, together with the further application of cloud-based services as well as the increasing reliance on digital solutions across a broad range of industry verticals, we anticipate that technology and software will remain the most active sector in 2019.
For many of these companies, maintaining the pace of rapid technological change can be best achieved by making strategic acquisitions of smaller, innovative technology players and then applying their developments to their own business offerings, rather than the lost time and cost of re-invention in-house. According to a study by Accenture, 48% of UK acquisitions were made in a quest to gain next-generation technology companies during the course of the past year.
This situation continues to represent real opportunities for innovative tech company owners, often still at an early stage of the development cycle to realise substantial value and for larger players to consolidate and differentiate their position in the marketplace.