M&A has long been a route into the UK and Europe for overseas companies, keen to grow their businesses and acquire local expertise. In this newsletter, we look at the current market and some of the key issues to consider before embarking on an acquisition.
How buoyant is the UK market?
Data from Mergermarket shows that activity in Q1 of 2023 was 13% up on the previous quarter and above pre-pandemic levels. However, the value of the deals is below the previous quarter, reflecting a preference for smaller deal sizes.
What about Far Eastern investment?
M&A investment in the UK from the Far East in 2022 was down from 2021, but still significant. According to data from Dealogic, Far East-backed deals in the UK totalled $112.2 billion in 2022, down from $171.9 billion in 2021. However, this was still more than double the level of Far East-backed deals in the UK in 2020.
Despite the slowdown, Far East investors remain interested in the UK market. The UK is seen as a stable and attractive destination for investment, with a strong economy and a skilled workforce. Far East investors are also attracted to the UK's technology sector, which is seen as one of the most innovative in the world.
What are some of the key issues to be considered before a UK M&A investment?
There are a number of key issues that overseas investors need to consider when making an M&A investment in the UK. These include:
- The regulatory environment: The UK has a complex regulatory environment, and overseas investors need to make sure that they are aware of the relevant laws and regulations before making an investment.
- The cultural differences: The UK has a different culture than many other countries, and overseas investors need to make sure that they understand the cultural norms and values before making an investment.
- The currency risk: Overseas investors need to consider how fluctuations in the exchange rate could affect the value of their investment.
- The economic outlook: Overseas investors need to make sure that they understand the economic outlook in the UK before making an investment.
Are there any likely trends to M&A investment in the UK in the coming 12 months?
In general terms, we would expect there to be particular investment in the technology sector. This is due to a number of factors, including the rapid pace of innovation and the rise of green M&A.
However, the UK has a diversified economy, and investment is likely across the board. Economic turbulence may create opportunities for M&A activity, as may the continued growth and available capital of private equity firms.
What legal issues do you need to be aware of?
When buying an existing business, you will need to be aware of all the legal and regulatory issues affecting that business. This will include general law, such as employment and taxation issues, and laws specific to the target, such as export controls or intellectual property law. As mentioned above, green issues in general, and ESG in particular, will be increasingly important factors in the minds of investors looking at target businesses.
As previously advised, government approval may be needed for investment in certain sectors - for further advice, please see our earlier newsletter.
Due diligence is key to understanding any risks associated with a target business and the sector in which it operates. This should cover legal, financial, accounting, taxation and commercial issues.
What things should not be, but often are, ignored in M&A investment?
As mentioned above, due diligence is key and should be as detailed as possible. However, post-merger integration can often be the key to a successful investment. This is especially so where the investment is from overseas and there may be cultural differences in working practices which need to be understood and carefully integrated in the new group. Often an overseas buyer will want to second one or more managers from head office, and simple but time-consuming matters such as immigration compliance may need to be dealt with. Harmonising employment terms can also be a sensitive and complicated matter.
Overall, M&A activity in the UK is expected to remain stable in 2023, but there are some potential drivers of growth that could see some large deals completed. The key trends to watch out for include the ongoing consolidation of the technology sector, the rise of green M&A, the continued growth of the private equity sector, the rise of strategic M&A, and the increasing focus on ESG.
How 3CS can help
For further help and advice on M&A or any other corporate or commercial legal matter, please get in touch with your usual 3CS contact.