Ask the Expert with Steve Plaskitt – The mergers and acquisitions (M&A) deal market

Steve Plaskitt, Head of our Corporate Finance team, looks ahead to growth and changes in the deal market in 2022, the hot sectors and the implications for deals.

The Mergers and Acquisitions (M&A) deal market is expected to continue to surge in 2022

The increase in activity will put pressure on the company directors to make sure that the deals can happen to a timetable and with the right degree of due diligence before the transaction.

This should encourage the well prepared buyer / seller to utilise corporate finance advisers and external board support to assist their transaction teams in order to keep the deals to a timetable and ensure a smooth process with minimal disruption to their day to day matters.

The speed of deal doing, and the time and effort required to prepare and respond to quality due diligence is going to be essential for vendors.

The ill prepared buyer may be happy with the concept of rolling with the ups and downs of a deal and the process, but this may prove difficult in practice.  With inflation already topping 5% the fight for sourcing talent and supplies will prove enough of a management headache that many will find it enormously challenging to run an M&A process at the same time.

One likelihood for 2022 is that the buying management team will need to make sure that their due diligence is sufficiently robust and detailed to identify the difference between permanently sustainable financial performance and that which is due to recent, Covid impacted, temporary market circumstances.  Greater scrutiny will be placed on the supply chain resilience and contractual terms that may restrict the target company passing on inflationary price pressures to ensure that volumes and margins can be maintained.

Another impact for 2022 would be to see more deals structured with higher levels of deferred consideration and earn out.  It is not unusual for earn out valuations to represent half of the deal value and so it is vital for the selling shareholders to make sure that their management teams can hit targets and not be further distracted by a deal process.  This would naturally shift more risk to the sellers.

2021 was one of the busiest years in M&A activity UK wide, and at MHA Tait Walker it was certainly our busiest and best ever year.  There will continue to be growth in deal volumes in 2022.

Recent surveys and my own discussions with many lawyers, advisers, clients, and funders show that some sectors will continue to be hot in 2022.  Deal volumes will be driven by software and technology deals, logistics, financial and medical/biotech and niche construction services.  In fact, any sector which has fared relatively well during the pandemic and is proving to be mission critical for businesses or consumers will be attractive to buyers.

There will also be more distressed M&A deals with volume growth driven by both the excess supply of private equity money available and the many problems facing some SMEs caused by changes such as Brexit, Covid, uncertainty and supply chain disruption.

Such changes do create positive positions though – and the UK remains an attractive venue for inbound foreign investment especially since Britain has left the EU.

Deals will also face some legislative changes as the new National Security and Investment Act (“NSIA”) will mean an extra layer of process that must be followed otherwise a deal may be voided and there could be criminal penalties for buyers and their directors.

From 4 January 2022, the NSIA will mean buyers must submit a compulsory pre-closing notification if they are buying over 25% of the shares in a target business which operates in one of 17 sensitive sectors from a national security perspective.

Private equity acquirers will also need to consider whether to make a voluntary notification even if the target isn’t in one of these sectors or risk a UK government for up to five years after the deal has been completed.  Penalties for non-compliance include not just voiding the transaction but also criminal penalties for buyers and directors.

So, in summary, whilst the introduction of the NSIA represents a short term negative impact to the way in which M&A activity will be done within the UK it will not slow the growth of deal volumes in 2022 and nor will it reduce the importance of quality transaction support advice from corporate finance and legal teams to both vendors and buyers. 

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Source: Insider