M&A Monitor UK&I H1-2021

Introduction

Thank you for taking the time to read this H1-2021 version of the UK&I M&A Monitor. This report consolidates research performed by Dealsuite, the leading UK&I and international platform for M&A transactions. It contains statistics and trends for the UK&I M&A mid-market (enterprises with a revenue between £1 million and £200 million) over the first half of 2021.

Dealsuite surveyed 318 M&A advisory firms operating in the UK&I M&A mid-market.

The aim of this study is to create periodic insights that improve the UK&I market’s transparency and to serve as a benchmark for M&A professionals. We are convinced that sharing information within our network leads to an improved quality and volume of deals.

I Transactions
Strong growth in number of transactions. Market well underway to pre-covid-19-levels.

The advisors that took part in this research were involved in the following numbers of transactions in the first half of 2021:

Some of the businesses sold involved a respondent on both the sell- and buy- side. Therefore, we cannot sum up the sell- and buy-side transactions to arrive at a total number of transactions.

The year 2020 was marked by Covid-19, the government’s restrictive measures and their impact on the economy and society. The impact on the M&A market in UK&I was visible in a substantial decrease in both buy- and sell-side transactions in 2020. The first half of 2021 was marked by recovery and growth in the M&A market in the United Kingdom and Ireland.

In H2-2020 the number of buy-side transactions decreased by 10%, and the sell-side transactions by 11%. With the increases in the first half of 2021, the recovery to the pre-covid-19 situation is well under way. Remarkably, the average number of sell-side transactions per advisor even increased by 59% compared to H2-2020. This increase bodes well for the number of transactions to be expected in the coming months.

Steep increase in transactions within sectors Industrial & Manufacturing and Construction & Engineering.

The distribution of transactions in H1-2021 across the sectors is illustrated in Figure 2. As in previous periods, the Business Services sector reported the most transactions in the past six months. The dominant sector IT Services & Software Development fell from 16% in H2-2020 to 11% in H1-2021.

The recovery from the Covid-19 crisis and the pick-up in the economy had a positive effect on the number of transactions within the sectors Industrial & Manufacturing, which increased from 12% in H2-2020 to 18% in H1-2021, and Construction & Engineering which increased from 11% to 18% respectively.

Following a period of stability in the share of transactions within the sector Hospitality & Tourism, uncertainty in this sector still seems to be suppressing the number of transactions. This sector is now decreasing from 8% in H2-2020 to 3% in H1-2021.

Over half of all transactions accompanied by an advisor during H2-2020 had a sales price above £2.5 million (53%). A sales price of £5 million was exceeded in 35% of the cases.

II Assignments
Three out of four advisors report an increase in their assignments of more than 10%.

The results are explained in more detail in Figure 4 below. These are assignments received in H1-2021 and completed in H1-2021, but they may also take till H2-2021 to close or be aborted altogether.

In H1-2021, three out of four advisors (75%) report growth in assignments, with 42% reporting a sharp increase. The number of firms reporting a decrease drops from 31% in H2-2020 to 8% in H1-2021, showing that the market has picked up considerably. Not a single respondent reported a significant decrease in their assignment portfolio.

III Sector Multiples
The average multiple increased to 5.50 with increases in IT Services & Software Development, Healthcare & Pharmaceuticals and E-commerce & Webshops.

In our previous research, sell-side advisors defined the average EBITDA multiple by industry. The average EBITDA multiple which is paid for a company within a specific industry. In this edition, we asked to revise the industry multiples from H2-2020. The results are shown in Figure 6.

The average multiple for all sectors increased from 5.40 in H2-2020 to 5.50 in H1-2021. Multiples vary between 3.65 (Hospitality & Tourism) and 8.65 (IT Services & Software Development). This means that the average price of an SME varies by more than double, depending on the industry.

In H2-2020, we saw a clear K-shaped recovery with increases in IT Services & Software Development, Healthcare & Pharmaceuticals and E-commerce, and decreases in the other sectors. In H1-2021 this development continues with another decline in the Retail Trade and Hospitality and Tourism sectors. The other sectors stabilised or increased. The sectors IT Services & Software Development and Healthcare & Pharmaceuticals increased the most with 0.30.

IV Multiples in relation to company size
Price differences in multiple up to 89%.

In this monitor we researched what influence company size had on the multiple paid in the UK&I SME market. The objective was to quantify the impact of the Small Firm Premium on SMEs in the region. More specifically for companies with an EBITDA ranging from £250,000 to £5,000,000. These are EBITDA ranges which are realistic for SMEs. The EBITDA is therefore used to express the size of the company.

Scientific research has shown that the smaller a company is, the greater the chance that the expected cash flows will not be realised (Damodaran, 2011; Grabowski and Pratt, 2013). Consider, for example, the dependency on certain customers or suppliers, or the dependency on specific technical know-how that can quickly diminish when staff leave. This can have a significant impact on the returns and thus on the value of a company. The higher risk premium that applies to smaller companies (the so-called Small Firm Premium) causes a value-reducing effect. As a result, the EBITDA multiples paid for larger companies are on average higher than the multiples paid for smaller companies.

The results of this monitor survey confirm that companies with a low EBITDA have a lower multiple than companies with a high EBITDA. The influence of company size on EBITDA multiples paid is presented in Figures 6A and 6B.

The difference in the EBITDA multiple between companies with a normalised EBITDA of £250,000 and £5,000,000 is 3.35 (3.75 compared to 7.10). That is a difference of 89%.

V Control premium
In 69% of all transactions, the party with a controlling interest changes. A buyer on average pays 17% more for a company if the buyer acquires a controlling interest.

This edition of the monitor included research on the ‘control premium’. A control premium is the amount a buyer is willing to pay to acquire a controlling interest in a company. More specifically: The amount above the market value of the shares if no controlling interest is acquired. Control is understood here as the acquisition of a majority of voting rights, giving control over the company’s finances, day-to-day operations and strategy. The buyer considers such a majority to be of added value because the buyer can then determine the direction of the company and act efficiently and effectively.

In this study, the following situation was used to determine the control premium:

• Voting rights are 1:1 equal to the equity rights
• Regular conditions with regard to protection of minority shareholders
• The value of acquiring control, excluding the value of buyer-specific synergies

Research in this monitor shows that 69% of the SME transactions involve a ‘control’ transaction; in other words, a transaction in which control is passed over to the buyer. We determined the control premium by asking what additional price a new shareholder would be willing to pay for acquiring a 50.01% stake versus a 49.99% stake. This additional price (the premium) turns out to be 17% on average. The added value of obtaining a majority interest in an SME in UK&I has thus been quantified at 17%.

VI Relevance of ESG for SMEs
Nearly seven out of ten advisors (69%) recognise the relevance of ESG for the SME M&A market. 11% Already see an effect on valuations. 84% Expect future impact on valuations.

ESG (Environmental, Social & Governance) is having a growing impact on virtually all sectors, including M&A. ESG is becoming an increasingly important topic within companies’ strategies and thus also with regard to their acquisition and investment decisions. When assessing acquisition and investment targets, the social purpose and environmental footprint of those companies is mapped and assessed. Non- financial or intangible assets such as brand value and reputation influence the company value. Originally managed alongside normal business operations, ESG is now intrinsically linked to them. Whereas until now ESG has mainly been dealt with at the level of listed companies and large corporations, the attention for this subject and its relevance for SMEs is rapidly increasing.

In this edition of the M&A Monitor we examined the relevance of ESG to the investment decision and the effect on valuation in the SME M&A market for the first time. According to the respondents, ESG is a formal part of the investment decision in 13% of cases, although it weighs heavily or even decisively in only 2%. Over half of the advisors (56%) do consider ESG but it is not a formal subject of the investment decision. 31% of the respondents indicated that ESG is not part of the investment decision at all. This data supports the conclusion that ESG is becoming a relevant topic for SMEs within the UK&I.

95% of respondents expect ESG to have an impact on the valuations of SMEs. More than one in ten advisors (11%) already notice this causality. 84% do not see that link yet, but expect this influence in the future. Only 5% expect ESG to have no impact on SME valuations in the future.

VII OUTLOOK
Outlook for the second half of 2021 is positive.

Assessing the performance of the UK&I M&A mid-market is based on many factors, including willingness of entrepreneurs to sell their businesses, availability of funding, macroeconomic developments etc. A complex interpretation of these factors is needed to determine how the market will develop. The survey included both assessments of the M&A mid-market in H1-2021 (retrospective) and H2-2021 (projection).

In H2-2020 almost half of the respondents expressed a negative sentiment about the previous half year (46%). This view has tilted to a far more positive reflection on H1-2021 where 91% reported a positive reflection on the previous half year. The respondents were also very positive on the outlook for H2-2021. 92% look ahead with optimism, out of which 25% were very positive.

VIII Method

The majority of M&A transactions take place in the mid-market. This M&A Monitor uses the definition of a mid-market company as having a revenue between 1 and 200 million pounds. The survey that was the basis for this M&A Monitor was sent to 318 M&A advisory firms. Considering their combined input, they represent an essential part of the M&A mid-market in the UK&I. Out of the total of 318 advisory firms, we received 92 respondents (29% response rate).

Sources used:

• 92 survey responses from senior managers of UK&I M&A advisory firms
• Damodaran (2011). Equity Risk Premiums (ERP).
• Dealsuite M&A Monitors 2015 - 2021
• Dealsuite transaction data 2015-2021
• Field, A. (2011) Discovering Statistics SPSS. Third edition, SAGE publications, London. 1 -822
• Grabowski and Pratt (2013). Cost of Capital: Applications and Examples.

This research was carried out under the direction of Tariq Mooseajee. If you have any questions related to the results, please do not hesitate to reach out.

David Kiernan
M&A Business Development Manager UK
T +44 758 868 0202
E David.Kiernan@dealsuite.com