UK M&A market outlook

In 2022, the UK saw record volumes and values of M&A transactions, but the market hit a ten-year low in 2023. Higher interest rates increased borrowing costs, making companies cautious about financing M&A deals. Economic and tax policy uncertainties, geopolitical tensions, and disrupted global supply chains further contributed to the downturn.

The slowdown in 2023 brought notable changes to market dynamics. Private equity (PE) sponsors reduced their investment activities, focusing on managing existing portfolios due to higher financing costs and economic uncertainty. Strategic market participants became the main drivers of M&A activity, motivated by debt reduction and the opportunity to acquire businesses at attractive prices.

But despite 2023’s downturn, 2024 has so far indicated signs of recovery and optimism. The market is being shaped by several key trends.

Increasing impact of the UK government

A significant trend that has persisted over the past few years, and that we are continuing to see an increasing impact from, is the active role of the UK government and regulators in M&A transactions. Regulatory issues have become key factors in almost all UK M&A processes. Several regulatory considerations must be addressed in any share acquisition or disposal, including the UK’s National Security and Investment Act, foreign direct investment (FDI) regulations, Financial Conduct Authority (FCA) registrations, and potential competition issues.

The expanding scope and powers of UK regulatory bodies are expected to have a growing impact on the process and terms of M&A transactions. This influence is likely to extend into areas such as health and safety and data protection. As regulatory frameworks continue to evolve, companies will need to navigate these complexities carefully to ensure successful dealmaking.

Changing deal types

The trending deal types in the current M&A landscape reflect the evolving priorities of investors and acquirers. There is a growing, strong focus on technology and AI-driven businesses, particularly those that are spearheading digital transformation. Companies that leverage emerging technologies to streamline operations are highly sought after, as they promise significant growth potential and competitive advantages.

There’s also appetite for deals driven by consolidation plans, especially in the health sector and financial services. These sectors are experiencing a wave of M&As aimed at creating larger, more efficient entities capable of delivering better services and achieving economies of scale.

Businesses with strong Environmental, Social, and Governance (ESG) credentials are increasingly attractive. PE sponsors and international acquirers are now prioritising assets that demonstrate genuine strength in ESG through their corporate culture, low staff turnover, sustainable growth, and strong brand reputation. These attributes are becoming essential criteria for investment decisions, reflecting a broader shift towards responsible and sustainable business practices.

There is also a growing interest in target businesses that present opportunities for international expansion. Buyers are looking for companies that are dominant in their current markets and have the potential to be quickly scaled, either through acquisition or by rolling out their operations into new overseas territories. This strategy allows buyers to tap into new markets and drive growth on a global scale.

Market outlook

Undoubtedly, 2023 marked a low point in the UK M&A cycle, but general consensus is that it’s not something that will be repeated. With the UK election now behind us, there is hope that political stability will drive increased deal activity for the remainder of the year. For high-quality assets, such as those with strong, repeatable cash flows or those operating in trendy micro-sectors like renewable energy, electric vehicles, AI, fintech, and even insurance brokerage, it is business as usual. We expect these sectors to see exits with strong valuations, reflecting their continued lure to investors.

However, we must acknowledge that we are still operating in a higher interest rate environment than we have seen at any time in the last 15 years. Inflation remains above the Bank of England’s 2% target, which is creating margin strain and eroding underlying EBITDA for many companies. Prior to Rachel Reeves’ budget announcement, there was a cautious optimism for a gradual easing of both inflation and interest rates. This would have resulted in a reduction in the pricing gap and increased transaction volume in the second half of the year. However, with potential changes to Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR) looking likely, we now expect a surge in deal activity over the next couple of months.

Given the current political uncertainties, the UK M&A market faces additional challenges. However, strategic participants and evolving deal types still drive optimism. Navigating regulatory complexities remains crucial, but high-quality assets offer hope for increased activity. Despite higher interest rates and potential tax changes, the long-term outlook remains cautiously positive, with opportunities for growth and expansion still on the horizon.