In an environment where so many factors appeared to provide tailwinds to M&A activity through much of 2023, the strong headwinds generated by a lack of clarity on future interest rates and associated economic uncertainty kept UK plc takeover volumes steady. However, the final weeks of 2023 provided a glimpse of the coiled spring that could release to launch a new wave of higher volume, higher value activity in 2024 as the outlook for financing costs becomes more certain.
As we enter the new year, we expect to see the following trends in 2024:
- Focus of activity to remain on small and mid cap opportunities
Takeover volumes will continue to be focused in the small and mid cap segments of the UK market. The structural challenges facing smaller listed companies and their institutional investors remain, and we expect these to sustain a valuation gap with overseas peers. This will be accompanied by an appetite for UK management teams to explore alternative ownership options, fuelling engagement with potential acquirers. While large cap takeovers were largely absent in 2023, we expect to see more of these in 2024 as major global financial sponsors and strategic acquirers become more active.
- Financial sponsors becoming more active, with increasing scope to extend to larger take-privates
For financial sponsors, greater certainty over future interest rates lends itself to more robust returns modelling and more confident investment decisions. Combined with building pressure to deploy record levels of dry powder and to emerge as a winner in an industry under greater scrutiny, we expect the intensive desktop activity of the past 12-24 months to evolve into public bid activity with greater frequency over 2024.
- Strategic acquisitions by UK and overseas corporates back on the agenda
While the operating environment for many companies remains tough, boardroom confidence in the outlook and therefore front-footed, strategic M&A as a scarce source of growth is strengthening. We expect this greater confidence to translate to (i) elevated merger activity amongst UK listed companies to create businesses of greater scale and relevance, and (ii) a recovery of inbound bid interest from North American corporates in their lower valued UK peers.
- Continued shareholder activism where valuation expectations diverge
In a listed context, a bidder typically seeks to agree an offer price with both the target company board and vendor shareholders. Threading the needle in a market where share prices are perceived to be dislocated from fundamental value is more difficult, and has led to higher premiums and more frequent shareholder dissent, both in public and behind the scenes. We expect that the confluence of increasing demand for UK assets and UK institutional investors seeking to price-in an improving outlook will create greater tension between buyers and sellers, and between target boards and their shareholders, further increasing the shareholder risk around UK takeovers.
- Full or partial share alternatives used to bridge valuation gaps
Providing the option for vendor shareholders to participate in future value creation opportunities through a rolled-over shareholding is one route to easing pricing tension in bid situations. Private equity firms have become more flexible in their approach to partnering with target shareholders or providing an alternative to an all-cash offer, and we expect this to continue. Likewise, where the strategic and financial rationales stack up, all or partial share mergers amongst corporates we believe are likely to become more prevalent in the year ahead.