David BurrowsWhen the true impact of Covid was realised in March 2020, many in the M&A sector feared the worst.
As stock markets plummeted, investors understandably turned their attention away from new acquisitions and focussed instead on shoring up their existing portfolio companies.
The steady pipeline of deals looked set to dry up – and who new for how long? Deal activity did drop dramatically during the second quarter of 2020 so these immediate concerns were justifiable.
However, the market began to recover and by the end of 2020 M&A activity was starting to pick up. Fast forward to 2021 and acquisition activity is positively soaring.
Globally, a record of $1.77trn (£1.25trn) in M&A transactions were announced through the first four months of 2021, according to data from Refinitiv. That’s up a staggering 124% compared to 2020, and it’s 10% higher than the first four months of any other year on record.
Frantic activity
There are several reasons for the high level of M&A action. Firstly, some corporations and many private equity firms are sitting on large piles of cash and are keen to spend it after a period of inactivity.
Interest rates are at record lows, meaning investors are looking for yield options. Stimulus funding has happened on a global level and a rising stock market has increased confidence. In addition to this, potential deals that were abandoned or put on the back burner when the pandemic first struck, are now progressing.
We have seen some major large cap deals in the last year or so, such as Morgan Stanley’s acquisition of E*TRADE for approximately $13bn and the $30bn acquisition of Willis Towers Watson by AON. But what about action in the mid-cap space?
As Jean Roche, fund manager at Schroders and a member of its Pan-European Small and Mid Cap team, explains, UK mid-cap companies are attracting a renewed level of bid interest at present. “Every morning, when I log in to my virtual workplace, I am mentally preparing myself to see a new headline about the next one to be bid for.
"In particular, renewed demand for UK-quoted companies from large and experienced foreign buyers suggests to me that other investors continue to overlook an opportunity. UK mid-cap companies are at the centre of this interest from overseas companies, private equity (PE) or PE-backed purchasers”.
Roche says it is always helpful to observe what the corporate and PE sectors are doing since, as a fund managers she shares their long-term mentality. “If the pick-up in “inbound” activity is a guide, it seems to me these bidders are currently thinking: ‘UK shares are cheap, sterling is weak, this is our opportunity to buy some prized assets outright’.”
Mid-caps, those companies in the FTSE 250 index, are often the target of choice for bidders – not too big, but sufficiently large to make a difference.
Acquisitions stall
Consider the fact that in 2019 close to 12% of the FTSE 250 was acquired. Due to COVID-19 there was a definite stall in acquisitions in early to mid-2020 but since then it has been accelerator with no brake.
As already highlighted, global dealmaking has resumed at pace as debt financing has cheapened, with policymakers slashing interest rates and monetary easing the response to the pandemic.
COVID-19 has also triggered a number of structural trends with companies looking to re-size their operations or capitalising on opportunities with the help of M&A.
Against this backdrop, could 2021 be a vintage year for mid-cap M&A? Roche thinks at present it seems very possible.
Tough battles
There has been no shortage of high-profile tussles for control of UK mid caps. There was the battle for mid-cap bookmaker William Hill, where the owner of Las Vegas’s iconic casino Caesars saw off PE group Apollo.
Meanwhile, two North American rivals (both PE backed) battled it out to take over FTSE 250 security group G4S with G4S shareholders eventually accepting a £3.8bn offer from US giant Allied Universal.
US PE groups Blackstone and Carlyle competed for control of Signature Aviation. However, the mid-cap aviation services company had recommended a bid from Global Infrastructure Partners (GIP), a US infrastructure fund manager. It got its wish and agreed a £3.4bn buyout deal from Global Infrastructure Partners (GIP) - one of Gatwick airport’s owners.
Roche says this interest from US investors is further evidence of the opportunity offered by UK shares, which remain in the doldrums.
“While UK shares have responded well to the vaccine news in early November, and then again to the Brexit trade deal, there is an awful lot of lost ground to make up after four and half years of Brexit uncertainty”.
She adds: “Bidders appear to be sensing a window of opportunity, with valuations still low but uncertainty removed by the Brexit deal. At the same time, good progress with the UK’s COV ID-19 immunisation programme gives a glimpse of sunlight at the end of the tunnel, as opposed to the headlights of a train running at full speed.
If the experience from 2019 is anything to go by, all variety of mid-cap companies could be in the frame for a bid, Roche argues.
Those snapped up last time ranged from air-to-air refuelling specialist Cobham (sold to US PE group Advent) to Suffolk brewer Greene King, which was bought by Hong Kong-based investors.
Deal volumes rise in US
It is not just in the UK that we are witnessing busy M&A dealings. The US saw a 110% year-on-year rise in deal volumes back in February, including a 221% year-on-year growth in US mid-cap deals.
Analysts at Goldman Sachs believe that with an estimated combined war chest of $530bn, large biopharma companies will continue to drive M&A activity in 2021.
The likes of Merck, Pfizer, Bristol-Myers Squibb, Sanofi, and GlaxoSmithKline are likely to be at the forefront of M&A activity.
Losses of exclusivity, essentially due to patent expirations, hurts the share valuations of big pharma so they look to acquire developers with profitable new ideas.
Companies such as Arvinas, Blueprint Medicines, Incyte, Seagen, Mirati Therapeutics, and Turning Point Therapeutics are highlighted by Goldman Sachs as attractive stocks within the oncology space. While Karuna Therapeutics and Argenx SE are picked out as compelling candidates in the fields of neurology and immunology respectively.
