2023 saw a distinct downturn in merger and acquisition activity globally with a stark decrease in both deal volume and deal size compared to those seen in 2022 (and even more so when compared against the record number of deals seen in post-pandemic 2021), which can in part be attributed to rising interest rates, geopolitical unrest across the world and a general sense of economic uneasiness prompting caution amongst potential buyers (together with the increased cost and availability of finance for acquisitions).
This turbulent outlook looks set to continue as we head into 2024 – locally, this is in particular due to the upcoming UK general election, which is expected to take place in the second half of the year. News of this election, as expected, results in continued economic uncertainty in the run-up to the vote, as the outcome has the potential to cause a significant impact on deals and the appetite to do them as a result of the parties’ varied policies. For example, there are concerns that the Labour Party (who are widely predicted to win the election) may increase the rates of Capital Gains Tax (“CGT”), which would be likely to reduce the net value of the proceeds of any business sales. This may lead to a spike in deal volumes in the short-term with a drive to push deals through ahead of any potential changes, but overall deal activity is looking to be slower than in previous years.
However, despite the continued somewhat difficult corporate landscape facing those involved in M&A deals this year, the ability to acquire and dispose of (all or part of) businesses to drive business growth is and will continue to be an important part of company strategy – therefore, there are still deals to be done. Indeed, here at Boyes Turner we have seen a very strong start to the year with a number of new M&A instructions looking to kick off over the next few months. Here are some of the themes we expect to see flowing into transactions this year:
Analysis has shown that the average time taken for deals to complete from the start of the instruction of legal advisers was longer in 2023 compared to previous years, and this trend is likely to continue whilst buyers (rightly) insist on conducting thorough due diligence to ensure any potential risks relating to the target company are identified and mitigated, and alternative payment structures are utilised (see below).
The difficulties posed by the current uncertain economic forecasts and their impact on target valuations has been somewhat mitigated to date through the use of flexible (and often contingent) payment structures. For example, the buyer and seller may make use of an “earn out provision,” whereby the buyer withholds a certain proportion of the consideration and only pays it if and when certain financial metrics are achieved by the target company in the period after completion. This type of structure obviously requires a greater level of negotiation (and therefore can impact on the deal timelines), as the parties need to agree on, for example, the period of the earn-out and the level of control and oversight that the seller has over the business after it has been sold.
Use of AI in M&A deals
As was discussed by Aimee Gaston in a previous AI article, artificial intelligence has had an increasing part to play in M&A transactions in recent years due to its clear benefits for improving efficiency during the life cycle of a transaction, as well as the ability to provide enhanced insights into a target company (as well as the market generally) and to assist with accurate deal valuations. Despite some concerns over the accuracy and regulatory risks of this emerging technology, we expect the use of AI in M&A to continue and increase over the coming year.
Use of insurance
In addition to the trend above regarding flexible deal structures, and linked to the need of buyers to fully understand the risks involved in acquiring a particular target business and negotiate a full suite of warranties into the purchase contract, we have increasingly seen the use of warranty and indemnity (“W&I”) insurance as part of M&A transactions. This product is purchased to offset the risk of potential claims brought under a warranty or indemnity in an acquisition contract. These policies can be taken out by either the buyer or the seller and were previously used primarily in relation to businesses attracting a large valuation, but are now increasingly seen in transactions of all sizes.
There has recently been increased scrutiny on environmental, social and governance (“ESG”) factors within companies, and this comes to the fore particularly during transactions. These credentials are seen as increasingly important by potential buyers, and those target companies with strong track records in these areas are often seen as more desirable prospects and are likely to enjoy a competitive advantage in the market.
Whilst last year saw a subdued approach to M&A deals both in the UK and globally, and 2024 set to start off in a similar vein, with interest rates stabilising we can be cautiously optimistic for a slow up tick in M&A activity over the coming year, particularly in certain sectors, and have already been instructed to assist businesses on an encouraging number of M&A transactions since the start of 2024.