Keely Woodley, Head of UK Corporate Finance Advisory at Grant Thornton, discusses the current M&A market, along with the current regulatory and ESG compliance environment.
There’s still appetite to make strategic changes through M&A, and activity isn’t as slow as perhaps some commentators have been describing.Keely Woodley, Head of UK Corporate Finance Advisory, Grant Thornton
Can you describe the general mood, or atmosphere, surrounding the M&A market within the current macroeconomic climate?
Volatile is the word I would use. There are clearly a lot of factors at work – the market is still recovering from the COVID pandemic, interest rates are on the rise, and inflationary pressures are increasing due to the Russia-Ukraine crisis. This is all playing out at the moment.
What’s really interesting, from my perspective and considering my focus on the human capital and talent solutions sector, is the fact that the demand for skilled talent across the globe is driving record employment, despite these challenges.
We’re in a really unique situation where employment’s actually at a healthy level – despite the macroeconomic factors I’ve outlined, which historically have created high unemployment – leading to further wage inflation.
Against this backdrop of employment growth, it’s actually very difficult to ascertain how deep a potential recession could be. The economic data is very volatile as well in terms of growth, so from an advisory perspective, we’re seeing that businesses who are clear what their purpose is, and understand how to navigate the markets quickly, are the ones who will prosper in volatile times.
It’s really about the individual leaders within businesses, and how they navigate through the various challenges successfully.
Against this volatile backdrop are you seeing an increasing difficulty agreeing on price? How is this affecting the ability to carry out deals?
I believe it’s always possible to come to an agreement on deal pricing. You might need to put in place some creative structures, such as a deferred payments and earn-outs, but there are ways to work around any disagreement or gap in expectations between valuations.
What you typically see in times of uncertainty is vendors taking a view as to what their businesses are worth, and buyers will have their own view as to what those businesses are worth. When you get shocks in the market such as Brexit and the COVID pandemic, it takes probably 6 to 12, sometimes 18 months for those expectations to realign.
Now that the initial impact of these challenges has subsided, we are seeing pricing expectations realigning far more quickly due to pent-up demand. Firms that perhaps saw their business models fail during the pandemic are not taking anything for granted, even though they have since recovered.
What we’re seeing today is a realignment of expectations, and the ability for businesses to adapt to change. The time this takes has shortened quite considerably, and we’re seeing a lot more flexibility, with businesses more willing to come to the table more quickly. From a dealmaking perspective, there hasn’t been as large a drop off as was perhaps experienced in the upper end of the market. There’s still appetite to make strategic changes through M&A, and activity isn’t as slow as perhaps some commentators have been describing.
When the pandemic began, we didn’t see the increase in levels of distressed M&A activities and turnaround situations as was perhaps expected. Do you expect an increase in these types of deals coming down the pipeline over the next year or so?
We’re definitely seeing some of that activity pick up among smaller businesses, yet a lot remains uncertain. I think consumer and hospitality-focused businesses are particularly vulnerable, but even for more resilient businesses, rising energy costs are a real concern. In the UK, we now have an energy price cap put in place by the government, but whether that will help to stave off restructuring activity remains to be seen.
We’ve seen examples in the UK of regulators becoming more interventionist and placing greater scrutiny on foreign investments. How do you expect the regulatory environment to develop over the next few years?
We’re witnessing an increased level of government scrutiny on deals in the UK, which is creating a shift in the likelihood of certain jurisdictions being able to transact in the region.
Countering this trend is the strength of the dollar and euro. At the moment, the strength of these currencies compared to the pound still makes the UK a very attractive market to invest in. We are seeing a lot of inward investment, as UK assets are comparatively cheap and represent good value. We’ve actually seen a lot of UK businesses taken private by overseas PE firms because of this trend.
Yet the UK government hasn’t acted on that many of those transactions. Whilst they’re being referred, they’re still being allowed to continue. There is legislation, but it’s not being implemented in any meaningful way.
The other area driving behavior within the regulatory environment is the topic of diversity and inclusion, and the way that this is impacting company boards. On a daily level, there is more scrutiny around how progressive organizations are, based on the leadership team they have put in place. There is legislation coming down the track that reflects how boards are constituted, so this issue is really becoming more prevalent – either through legislation or through social activism.
How are you seeing the need to comply with ESG issues affecting cross-border deals – is there a general consensus around how to approach these issues?
Different economies are moving at different speeds. The US, for example, has gone further in producing concrete legislation. Yet Europe is catching up, and this is driving a change in behavior among organizations as to how they approach M&A transactions.
More broadly in terms of ESG, there is now a financial incentive to be able to prove positive policies on climate change within the debt markets. This can make the difference between whether a pension fund will invest in a private equity house or not. We are seeing more social impact funds being created at all levels. There’s clearly an investing agenda in terms of being able to attract capital by proving that you are investing with intent.