Interest of US buyers in acquiring UK companies grows

Adam Cain of Pinsent Masons was commenting after new data highlighted the growing overseas interest in mergers and acquisitions involving UK public companies.

According to LexisNexis’ latest market tracker report, there were 110 transactions subject to the UK’s Takeover Code during 2021 involving companies listed on the Main Market of the London Stock Exchange (LSE) or the Alternative Investment Market (AIM), which is the junior market of the LSE. Of the 110 transactions, there were 53 firm offers – up from 42 in 2020 – and 20 of those firm offers were valued at over £1 billion.

LexisNexis said that 70% of the firm offers in 2021 involved overseas bidders – up from 62% the year before. The total value of the firm offers involving overseas bidders rose too, from £29.8bn in 2020 to £60.1bn in 2021. US bidders specifically were involved in 27 of the 53 firm offers made in the UK market by overseas bidders in 2021, and those prospective deals had an aggregate value of £51.3bn. In 2020, US bidders were involved in 19 of the 42 firm offers announced, and those deals had an aggregate value of £13.1bn.

Cain said: “The current boom in UK public M&A activity will continue throughout the course of 2022. The differential in valuations between the UK stock market and exchanges in countries such as the US continues to grow and an increasing number of overseas purchasers are identifying a large number of undervalued but extremely attractive UK listed companies that are trading at very low multiples. When this is combined with the relative weakness of sterling, it is clear that prevailing market conditions will continue to provide real opportunities for overseas acquirers to successfully execute Code compliant bids.”

“Strategic buyers will also remain a key component of the UK public M&A landscape given they have large reserves of cash to deploy and are very focused on capitalising on a number of acquisition opportunities in the UK’s public markets,” he said.

Cain said that prospective purchasers have “an increasing willingness” to “pursue a hostile takeover” of UK-listed companies and said this could manifest itself in 2022. 

“I see an increase in hostile activity taking place throughout the course of 2022 as a number of target boards and prospective purchasers may be unable to reconcile differences in valuation, with strategic bidders seeking to make their case directly to shareholders if management teams elect not to engage in a constructive manner on the grounds of an insufficient premium being offered to the company’s prevailing share price,” Cain said.

The LexisNexis report also highlighted that most of the deal activity in the UK M&A market involves private prospective purchasers, such as private equity houses, financial investors and individuals or family offices. Almost two-thirds of the firm offers announced in 2021 were from such sources. A similar proportion of public to private transactions was recorded in 2020.

Cain said: “Public to private transactions have remained an integral feature of the UK public M&A market during 2021, continuing the momentum from the previous year. I see this trend continuing throughout 2022, with private equity funds demonstrating their ability to successfully navigate the requirements of the Code and forensically searching for the right opportunities in the UK’s public markets.”

“Private equity funds have demonstrated a strong desire to successfully execute transactions involving well managed UK listed companies which may have depressed share prices or be considered to be undervalued, thus negating the requirement for a significant premium to be paid. With an abundance of dry powder at their disposal, private equity funds are very well positioned to extract significant value from a large number of UK listed companies throughout 2022,” he said.

There were five announcements of formal sale processes (FSPs) and/or strategic reviews in 2021, according to LexisNexis. An FSP effectively enables a target company to announce that it is actively seeking one or more potential bidders prior to receiving an offer.

Cain said: “The flexibility that an FSP affords both a target company and a prospective purchaser in the context of key dispensations from the requirements of the Code means that they are a valuable mechanism for companies to utilise when considering their future strategic direction. There is no specified procedure or timeline for conducting an FSP under the auspices of the Code. The fact that a target company has the ability to conduct the process in a way in which best suits its needs is one of the key advantages of using an FSP.”

“I am seeing particular interest in FSPs from those companies that are seeking to ensure that there is a significant degree of competitive tension amongst prospective purchasers. The continued mismatch in terms of the current performance of a company’s share price and the expectations of a management team as to the underlying worth of the business may lead to significant differences in valuation with interested counterparties. This could result in a number of approaches and/or offers from interested purchasers, which may be perceived to be highly opportunistic by the target company’s directors,” he said.