Mergers and acquisitions activity levels exploded in June 2015 with announced worldwide corporate deal values exceeding $540 billion, the highest level since records began in 1980. July 2015 was also a phenomenal month, albeit $100 billion lighter at $440 billion. Cheap financing, growth aspirations and bid failure tolerance are driving these mega deals. This corporate investment frenzy is also being seen in the UK with multi-billion deals led by Shell, ENOC and Equinix.
Everyone knows that most new industries are fragmented and consolidate as they mature. The phrase, “ripe for consolidation” is often trotted out and indicates that industry specific mergers and acquisitions are on the horizon as protective measures against overcapacity, diminishing and falling profitability or an opportunity to accelerate growth.
For businesses operating in this environment this means either leading the merger end game or risk being eaten by a bigger player.
Consolidation is driven by market clean up, economies of scale improvements, regional or portfolio expansion and market entry barriers.
The relevance of these M&A transactions to the midmarket is the knock on effect to the next tiers of consolidators with smaller appetites and available funds but nevertheless similar drivers to bolt-on strategic acquisitions. Investment bankers anticipate continued activity after the summer lull because of the increasing diversity of buyers and wide range of sector being pursued.
At the early stage of any consolidation strategy, the focus is on the revenue growth and this will point towards acquisitions to build greater market share. A period of concentration ensues on core capabilities, attacking under-performing competitors, clearing out weak businesses lines and recognising early stage competitors to either crush, acquire or emulate them.
Conversley, leading companies at the top of their sector must defend their positions and find new ways to grow their core business in a mature industry. They can do this by spinning off younger businesses into new industries which are themselves in early stages of consolidation.
Being alert to industry regulations and evolving legislative compliancy is paramount as long term success depends on speed of reaction to the market contest, if not anticipating it.
Companies relentlessly need to adjust their strategies and business models to compete effectively in an ever-changing world and whilst the UK landscape is improving, business here is exposed to global political and economic uncertainty. Combining this environment with disruptive technology poses a threat to established companies which fail to react and we can anticipate changing economic conditions, political uncertainty, technological advances as key drivers of transaction activity in a lower economic growth world.
There are a number of sectors where growth has shifted such as food (retail versus food services), education (government budgets, forecast declining student numbers), and renewable energy (emerging new technologies) and which could expose a number of businesses to distress. Adopting the best suited M&A strategy could be a game changer or the only escape route.
Closer to home
In the UK, corporates focused on growing market share will prevail in financial services, consumer products and Provider health-care. Consolidation and cost improvements will be a significant catalyst for M&A activity in oil and gas, aerospace and industrials whilst the acquisition of new products and services will motivate transactions in telecommunications, IT and life sciences.
Observers of the surge in deal activity are of the opinion that this is not a short term opportunistic trading boom but a fundamental surge in strategic mergers.
Targeted M&A will be a fundamental adjustment strategy as the economy shifts to business investment and exports. Those companies which embrace the changing dynamics will thrive. However, this crusade will be in vain unless the integration of new acquisitions is executed with a disciplined extraction of value.
Frank Holmes is a founder partner of Gambit Corporate Finance, a leading advisory firm specialising in mergers and acquisitions and fund raising in the UK and overseas, with offices in Cardiff and London.
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