The Supper Club - Logo

M&A Trends for 2022


It’s that time of year, as November rapidly dissolves into December, which in turn will pass in a flash and hurl us into 2022, to look ahead to what next year holds. It means it's time for The Supper Club's partners at finnCap Cavendish to look ahead and make some predictions for the M&A market next year. Partners Andrew Jeffs and Peter Gray offered predictions covering six broad areas; inflation and interest rates; ESG and digital transformation; and the PE wall of money and the arrival of UK SPACs.

The market background to these specific trends remains a buoyant M&A market, with 2021 having seen a surge in deals as the March Budget approached (with rumours of an imminent rise in CGT). Supplemented by an influx of overseas buyers, this has helped to keep both the number of deals concluded and valuations high. And these trends are expected to continue into 2022.

As an indication of the influence of foreign money, eight of the last 10 finnCap Cavendish deals have been with overseas buyers, while across the whole market 65% of all deals now involve overseas buyers, coming from a total of 30 countries. This wide spread hides the fact that most of this money originates in the US (500 deals from the US, compared to the next biggest contributor country doing 50), but highlights the value of using an adviser with global reach.

Jeffs concluded that there is some good news in this trend, “Overseas deals often see an extra turn or two on the valuation, and the same goes whenever there is this wall of money chasing deals.”


1.Inflation

Despite claims that the current surge in inflation – the worst for over a decade – is a blip, caused by short-term supply side factors that will ease, Jeffs and Gray expect it to linger longer. The effect on M&A deals depends on the nature of the seller’s business, and the extent to which they are “price takers" or "price makers”. Being able to show that you set the price for your customers and can put up prices to maintain profitability – or even use the cover of inflation to boost margins – is going to help the eventual deal value.

2.Interest rates

Again, the current pressures that are leading the Bank of England to consider a rise in interest rates are likely to persist into 2022. But any rise is likely to be small and the impact – for the mid-market especially – is likely to be less significant. Most mid-market firms are not leveraged to the extent where an increase from a low base will have a big impact. And PE funds at this end of the market are also not as likely to be heavily involved in the sort of complex financial engineering where even small rate rises have a huge impact.

3.ESG

In the wake of Cop26, it is natural that there is a current focus on environmental impact and a company’s readiness for the net-zero economy. And there is a clear interest from potential buyers and investors in companies that operate in this space and help other firms address the requirements to achieve net-zero.

But when it comes to getting ready for a deal, Jeffs suggested founders look across the entire spectrum of E, S and G issues, with more of a focus on G for governance. This would include a focus on things such as how customers are treated (and, in particular, how customer data is protected). Jeffs and Gray also suggested founders at all stages of a sale do as much as they can to help with due diligence around ESG issues, providing solid evidence where possible.

More buyers will consider these factors when looking for deals to do and, as Jeffs explained “you can’t manage what you don’t measure”.

4.Digital transformation

Most companies, across most sectors, face increased pressure and expectation to update systems and processes, to digitise or automate more of their operations. Buyers are looking for companies that have either already optimised operations and maximised efficiencies, or ones where there is a significant opportunity to do so. What matters the most for buyers is clear signs that the current leadership understand the requirements and possibilities of technology in their sector and have a clear roadmap for the future.

5.Wall of money

Perhaps (again) the phrase of the year for the PE sector, there is a lot of finance available in the UK at the moment, driven mostly by interest from overseas buyers. At the last estimate, the total volume of money in the PE market was put at over $4trn. This means that, despite a rise in the number of deals done, there is still a huge amount of funding to be deployed in the market. Jeffs suggested that founders looking to take advantage of this can do some things to make themselves more attractive to prospective buyers.

These include investing now in some vendor due diligence, using an independent and respected provider. This is a way of having an investment pack ready for potential buyers. It shows you are serious, will help flush out potential problems in advance and can speed up the eventual sale process. It is also worth considering getting together a potential pipeline of target acquisitions (if the money was available). Gray suggested getting into as much detail as possible. “The more details you have on your pipeline, even including any advance agreements or heads of terms, the better.” The more concrete the pipeline is, the more weight it will carry.

6.SPACs

Until a recent change in the rule, listing regulations about shell companies in the UK made it impossible to set up a Special Purpose Acquisition Company (SPAC). But elsewhere across the financial world they are a major focus for activity. The first UK SPAC was announced this week and it seems likely that more will follow through 2022. Whether they will be as popular here and reach the same heights as they have in the US (where billions have been raised) remains to be seen, but with the rules as they are at the moment this will remain a vehicle for larger (£100m+) deals and is unlikely to have a huge impact on the mid-market.