In a rapidly changing and globalised environment, mergers and acquisitions have become one of the most important strategic initiatives. In this context, cross-border Mergers and Acquisitions (‘M&A’) are increasingly popular. Global M&A volume in 2016 continued to be robust, reaching USD3.7 trillion, approximately 40% of which involved cross-border deals, as compared to one-third in 2015. Five out of the ten largest deals of the year were cross-border transactions.
The UK has been one of the best-performing developed economies in the last few years, with only the U.S. being able to rival its growth. This strength has translated into more deals in recent years. Indeed, 2015 became one of the UK’s biggest years for M&A in terms of both volume and value, cementing the country’s status as an attractive business destination. However, 2016 brought new challenges – both macro-based and self-inflicted – that could define the future of British business and M&A. Turmoil in markets across Europe, as well as a general global slowdown in emerging economies linked to commodity price fluctuations, has led to a drop-off in investment worldwide. On top of this, the referendum on the UK’s membership of the European Union (EU) led to speculation about what impact ‘Brexit’ will have on investment into the UK. This has hurt deal making with total spending on UK M&A falling 51% in the first quarter of 2016 compared with 2015, and so the trend continues in 2017.
What does this all mean for the future of British deal making, particularly once the ‘Brexit’ process is finished?
Research by Meghraj Capital, revealed three main trends predicted by financial analysts for UK companies:
When we examine who has been acquiring UK assets, we typically find that this is being led by demand from the US, but increasingly so from Asia, namely Chinese, Japanese and Indian investors / buyers (see further below). The UK remains a very attractive and open country to acquire growth, established brands and talent.
Asian acquirers – Asian outbound M&A is expected to continue strongly going forwards as businesses look for sources of growth and products and services to add value to the fast-growing middle class. This is being led by China and Japan, both of whom have differing needs for outbound investment.
China – is on a journey of transformation and there is a continued flow of cash outbound across the world. The UK continues to welcome Chinese investment as has been demonstrated when the UK Government gave the go-ahead for the new power station at Hinckley Point. Generally, China is now seen as a more sophisticated acquirer and more capable of closing transactions. However, its government is very concerned with capital outflows and has announced restrictions in an attempt to relieve downward pressure on Yuan and draining foreign exchange reserves. A slowdown in the outflow of Chinese investment would have an impact on M&A in the UK and across other geographies.
India – It was announced that in 2015 India became the third largest source of foreign direct investment into the UK after the US and France. During 2016 the number of Indian companies in the UK has nearly doubled from 36 to 62 firms.
The top five Indian firms operating in the UK include Bharti Airtel, HCL Technologies, Tata, Emcure Pharma and Apollo Tyres. Of the 62 firms, 30 are small and medium-sized enterprises with a turnover between GBP5m and 25m, 27 are mid-sized (turnover between GBP25 – 250m) and five are large corporates (turnover of above GBP250m) counted above.
As an example of increasing M&A activity of Indian companies in the UK, in March 2017 IGL Holdings, part of the India-based Indsur Group, finalised its acquisition of the UK-based Western Thermal, an established player in the thermal insulation market. Indsur Group is a global business, with operations in three continents, mainly engaged in the manufacturing of infrastructure castings, high precision automotive gears and providing logistics services. This acquisition will help Indsur Group in accessing the UK thermal engineering market and facilitate Western Thermal’s exports to India.
Meghraj Capital was appointed by Indsur Group as financial advisor on the transaction and advised on both the cross-border acquisition and on raising the acquisition financing.
Japan – a country where domestic markets are mature and saturated with very little or no real growth opportunities. As a result, there is a continued push to secure growth through outbound M&A. Europe remains a popular destination for Japanese money, and within Europe the UK remains one of the preferred locations. Now that a number of acquisitions of UK businesses by Japanese companies have completed following the Brexit announcement (Softbank acquired ARM Holdings PLC for GBP24m in September 2016, M3 Inc. acquired Axio Medical Holdings for GBP85m in December 2016, Sumitomo Rubber Industries acquired Micheldever Group for GBP215m in February 2017), other Japanese companies will undoubtedly follow suit. Japanese acquirers are generally welcomed as they have a long history of reinvesting profits rather than repatriating them and growing industries outside of Japan like the automotive sector in the UK.
Overall, there are certainly challenging times ahead, but for the UK the deal flow continues apace and the country remains an open and welcoming place for investment. While a number of acquisitions around the world have been prevented by protectionist minded governments, Theresa May, the UK’s Prime Minister, has demonstrated with the approval of Hinckley Point, that the UK will remain an open market. It is expected that the openness of the UK to direct foreign investment will continue to differentiate it from its European neighbours when international acquirers are considering investing in Europe.
For further information concerning Meghraj Capital and the role Meghraj can play in cross-border mergers and acquisitions please email Murray Robertson, Managing Director of Meghraj Capital LLP or telephone +44 (0)20 3411 9080.
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