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The four hottest mid-market M&A sectors for 2014

Globally most forecasters predict a strong upturn in M&A in 2014, with Thompson Reuters, for instance, predicting a 17% rise in deal volume this year. A host of factors make it likely that this trend will be reflected in the UK mid-market M&A too.

These include baby boomers who have delayed selling during the downturn now looking to exit, cash rich international companies seeking a foothold in the UKs expanding economy, domestic mid-market companies looking to merge to give them a better chance of capitalising on the opportunities recovery presents and more readily available funding to help finance deals.

Which sectors will be the main beneficiaries of this anticipated upturn in mid-market UK M&A” Below we review four that we believe are likely to see the most activity this year.

Financial Services as the industrys recovery accelerates many analysts expect deal volumes to jump Reuters forecasts a 30% rise in 2014 global deal volumes. In the UK mid-market, we believe sub-sectors in the midst of major regulatory and technology change present some of the biggest opportunities. 

The Retail Distribution Review is driving a wave of consolidation in wealth management: almost half of all deals worldwide last year worth around $4bn involved UK firms.

Another area to watch is online payments, currently undergoing a regulatory overhaul and a hotbed innovation, which has encouraged new competition and consolidation. Last year, Ebays 500 million acquisition of Braintree Payment Solutions caught the headlines, but the mid-market sector in the UK was very active too, and at the end of last year we brokered the sale of leading forex and international payments provider World First UK to US-based growth investor FTV Capital.

TMT – Figures from MergerMarket show that global volumes in the sector jumped 54 % last year, to more than 300 billion its highest level since 2006. The overarching M&A theme in the sector is continual innovation, such as the emergence of new products and services, including cloud and tablet computing, IT security, and a greater variety of SaaS offerings, which is prompting consolidation and acquisition. 

Other factors likely to drive M&A in the UK mid-market include, US tech firms, awash with cash, looking for strategic bolt-ons, emerging markets TMT companies, likely to be principally from Asia, looking for synergistic UK platforms to enable the enhancement of existing services capabilities and financial buyers, such as PE houses, which are showing a strong appetite for principally SaaS and cloud related businesses. 

Recruitment – Over the last couple of years, global M&A activity in the recruitment industry has recovered strongly to its highest level since the 2007 financial downturn. The driving force has been strategic buy-outs, making up almost 90 per cent of deal flow since 2010. 

There has been consolidation at the international level as well as the local level. Big global firms have been acquiring local firms in new markets, while more domestic firms have been consolidating, partly to ward off bids from global players. 

The projected strongest pockets of recovery in the economy is also helping to direct activity, with specialists in technology, media and telecommunications, oil and gas, healthcare and education particularly in demand as potentially areas that will offer a better return on investment as their underlying sectors continue to expand.

Business Services While we believe there will be strong M&A activity in this broad sector, specifically we think property-related business services, including homebuilders, estate agents and property development companies are particularly likely to be the focus of M&A deals buoyed by recovering fundamentals. 

The UK Commercial Property Index generated a near double-digit total return last year with commercial construction rising at the fastest pace in eight years. UK mid-market M&A activity in the building products and real estate and construction sectors doubled in 2013 and should continue to be strong this year. 

The rebound has been supported by the more encouraging macroeconomic outlook, an upturn in demand and government initiatives such as the Help to Buy Scheme, which should continue to lift the industry in 2014. 

The promising outlook overall suggests a welcome and hotly anticipated turnaround in mid-market UK M&A and, particularly in the sectors that Ive reviewed, growing deal volumes and resurgent markets present probably the clearest opportunities for UK firms since the crisis to either merge or sell their businesses.

Caroline Belcher is a partner at Cavendish Corporate Finance

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