Experian recently published their UK and Ireland 2020 M&A Review, outlining the resilience of the UK’s M&A market, with dealmakers seemingly quick to adapt to completing transactions in the COVID-19 era – a trend that we noted at Smith Cooper Corporate Finance (SCCF).

Deal making during 2020 was a very mixed bag with volumes down by 15% on 2019, but 79% up in terms of value – albeit driven by £120bn of big-ticket deals in November and December.

Sector played a big part too; technology, media and telecoms represented around 28% of deals but, save for brisk business in professional services, most sectors recorded lower volume – sometimes much lower – than in 2019.

“The recovery of M&A activity, although variable between sectors, began in May, gaining notable traction in late Q3 early Q4 – driven by the unpredictability of the pandemic, fears of adverse changes to capital gains tax, and steady demand for quality businesses from buyers, especially those with funding. As a result, annual transaction volumes were better than feared given the temporary stagnation earlier in the year” says John Farnsworth, Head of Corporate Finance at SCCF, which retained its Experian Financial adviser top-10 ranking for 2020, rising to 8th place.

“As ever, there have been good and bad sectors – although many businesses, even in sectors detrimentally affected by COVID-19, have restarted with spirit, fuelled by prospects of pent-up consumer demand following lockdown, low interest rates, easy finance and an early budget; and this has led to increased deal activity.”
Although the Midlands remained the busiest region outside of London and the South East, representing 14% of total UK deals by volume, its performance was worse than in most regions in 2020 – it registered a 17% fall in volume and, against the UK trend, a precipitous 57% drop in value compared to 2019.

Surprisingly, the most severe decline occurred in the small deals market, whilst large deal numbers soared by 23%. Contrary to this, our experience at SCCF was quite the opposite, as Dan Bowtell, Corporate Finance Partner at SCCF explains: “Although we at SCCF have seen fewer large transactions complete this year – which has naturally led to a fall in total deal value – there has been a surge in small-medium sized deals, particularly where the companies involved benefit from strong management which reacted decisively and innovatively to the pandemic. From what we have seen, the small-mid market has recovered much quicker than the report suggests.”

“For many of our local clients, particularly those in retail or with international businesses, our central geographic location with its road, air and rail and distribution hubs allowed them to benefit from changing trends, such as the shift towards online shopping, by plugging directly into the UK’s transport networks – as a result, the Midlands recorded 189 deals in Wholesale and Retail.”

“Manufacturing remained the region’s most active sector in 2020 (223 deals) and, in our experience, remained virtually unaffected. For example, one of our clients who imports raw materials from the continent and UAE to make heavy-gauge metal infrastructure parts quickly adopted stock-building, rigorous social distancing and cleaning policies and a shift in market emphasis and, despite reported issues in importing from some supplier countries, traded very robustly and surpassed profitability budgets.”

Changing deal structures enabled continuity for deal making activity in the region

Darren Hodson, Corporate Finance Partner at SCCF notes “In the Midlands, we also saw a real change in the type of deal structures, which rapidly adapted to the risks implicit in the severe restrictions introduced by the Government to combat the spread of COVID-19.”

“During the uncertainty of 2020, many buyers were keen to defer part of the purchase price and make it contingent upon future performance. This increase in the use of performance-based earn-outs, bridges valuation gaps and mitigates the risk of profitability being damaged by the effects of the pandemic.”

In summary, whilst 2020 has been a challenging year, deals are still taking place. Many businesses believe that these deals are bottom of the market “distressed deals”, but this is contrary to what SCCF has experienced. We are seeing normal deal making activities resuming with premia being paid for good quality assets.