The latest edition of Corporate World, HSBC’s magazine for mid-sized UK companies, offers some grains of comfort for businesses wanting to do transactions in the coming months.
In an article headlined, "Dead or alive ", John Mellett and Graeme Strommen, two of HSBC’s deal leaders in this sector, acknowledge that the climate was artificially fuelled by CGT changes that encouraged owner-managers to sell before April 1.
Moving forward, deals can be done – as long as business vendors are realistic about price. "It may take privately owned companies longer to change their expectations than private equity-owned companies, because they tend to have more emotional involvement in the sale. We are confident, however, that as prices do start to fall, buyers will re-enter the market."
Private equity firms will, they say, become increasingly active in the middle market – "they have relatively small portfolios and cash resources waiting for the right targets." They will be particularly pursuing "buy-and-build" strategies. Acquired management teams will be under close scrutiny, however, as the days of financially engineered "flipping" are probably over.
Potential vendors should also look out for overseas corporate acquirers, who are likely to become more active in the middle market, say Strommen and Mellett. Fuelled by rising asset prices in their own economies, "there are many companies in places suchas China, India, Brazil, the US, France or Germany who view the UK positively." Such companies may also be willing to pay a premium, as they can integrate acquired businesses into their own operations. They may, however, take longer to scrutinise targets and complete deals.
As for strong sectors, Strommen and Mellett tip outsourcing and financial services. Also oil, gas and metals should see middle-market deal activity. Watch out for deals involving UK AIM-quoted companies in such sectors.
Finally, public-to-private deals could make a comeback as management teams look to exploit depressed share prices.
As for funding structures, HSBC sees a return to more conservative packages, as banks resist highly leveraged deals. That means lower multiples and leverage; and a reappearance of amortising loans and mezzanine finance.
In conclusion, Strommen and Mellett look ahead to a "longish road" back to recovery. But, for the smart company owner, deals can still be done.