For the last few months in the UK, each week the news seems to be all about takeovers – which company will be next to be bid for and what price will be paid. Most of the offers being made are below the FTSE 100 and it is being done across a variety of different sectors and companies, which has led to the UK Smaller Companies sector being one of the best performers in 2021. A lot of the offers are coming from overseas companies, who have finally seen that there is good value in the UK stockmarket. Figures out at the start of August showed the UK market was at a 14 year high for M&A with $198 billion of deals being announced. One of the most high-profile M&A announcements was for Morrison Supermarkets back in mid-June and has seen their share price soar after the firm was subject to a bidding war, seeing its price rise by 62% over the last three months, with private equity firm Clayton, Dubilier & Rice now in pole position to win the race.
In their recent commentary, Man Group said “after a significant period of underperformance since the 2016 Brexit referendum, we are seeing an increased interest in UK-listed firms being taken private. M&A deal value now represents almost 12% of UK market cap, nearly double the global average, which has provided a consistent tailwind to the country’s equity markets since the start of the year. The relative cheapness of UK-listed firms compared to other geographies is a significant factor driving M&A activity. However, it is also partly a function of record levels of private equity dry powder, as global asset allocations to private markets increase in response to persistently low interest rates. Globally, the US, Japan and Europe have also seen an uptick in their M&A rates.
In the context of market cap being subject to bid activity, we have just eclipsed the highs seen at the end of 2015. The key contrast to make today is that the bid activity is less concentrated and much more numerous. For example, the spike in 2015 was almost entirely accounted for by the bids for FTSE 100 heavyweights such as SAB Miller and BG Group. Today it is far more widespread, and there have now had over 25 deals announced so far this year.”
HSBC have reported that globally, the last week has seen another $50 billion of pending, completed or proposed deals. They also said that the number of deals is also up significantly – “in the second quarter more than 10,000 transactions were seen around the world which has never been seen before, with values steadily rising above one trillion dollars since the start of the pandemic. American targets account for about half of activity, followed by China and the UK with nine and six per cent respectively.”
They also said that “M&A matters for investors because it reflects a rising return dispersion between share prices as when valuations are bunched together, it makes less sense for companies to pounce on rivals. And when dispersion rises, there is more opportunity to outperform the overall market. Good years for M&A are also good years for stock picking.”