UK public M&A activity 'surprisingly buoyant' heading into 2018

The figures showed that market participants were beginning to adjust to a "new normal", ahead of a "healthy" pipeline of potential new deals in the coming months, according to markets expert Adam Cain of Pinsent Masons, the law firm behind Out-Law.com, who contributed to the report.

The report (63-page / 9.85MB PDF), published by LexisNexis, was based on 47 firm and 43 possible offers for UK listed companies announced in 2017. These numbers were slightly lower than deals tracked in the same report in 2016, when 51 firm offers were announced; while the total value of announced deals fell by around one third over the same period, from £67.3 billion to £45bn.

The report anticipates fewer 'mega-value' deals in 2018 due to the UK's looming departure from the EU and the lack of clarity on transitional arrangements and the nature of the UK and EU's future trading relationship. However, expectations of a "relatively buoyant" start to the year have already borne out, based on the number of offers announced to date, according to the report.

Some of 2017's biggest offers were delayed or lapsed as a result of political uncertainty caused by the surprise general election in April or by competition concerns, according to the report. The UK has also been consulting on giving the government more powers to intervene in potential mergers on national security grounds, which would "focus on adequate scrutiny of whether significant foreign investment in the UK's most critical businesses raises any national security concerns and providing the ability to act in circumstances where this might be the case".

"Clearly, opportunities in the sphere of public M&A have been created by the current market conditions and those bidders that have identified strategic acquisition opportunities have not been deterred by the wider economic and geopolitical outlook," said Cain.

"Although there was a slight decline in the number of bids announced in 2017 when compared to 2016, deal pipelines look healthy for the second quarter of 2018, which bodes well for increased public M&A activity in the latter part of 2018," he said.

Unlike in previous years, deals were not concentrated in any one business sector in 2017, according to the report. Firm offers were divided relatively equally among financial services, professional services, computing and IT businesses, engineering and manufacturing businesses, mining, metals and extraction businesses and in the property sector, among other sectors, according to the report.

UK bidders accounted for 36% of aggregate deal value in 2017 in contrast with only 4% in 2016, according to the report. This was "a little surprising" to the authors given recent currency fluctuations and the historically low value of UK sterling, so it was not clear whether this trend would continue into 2018.

The majority of acquisitions, particularly the larger deals, in 2017 proceeded by way of schemes of arrangement, according to the report. However, there was some fluctuation at the beginning of the year, which was perhaps attributable to a number of hostile and mandatory offers made during that period. The report also found an increase in the number of deals proceeding for 'shares only' consideration, as well as an increasing number of 'mix and match' deals for cash and shares.

Cain said that the continuing popularity of schemes of arrangement was "clearly attributable to the fact that a bidder which elects to implement a transaction by way of scheme of arrangement can obtain 100% control of the target company despite only having received 75% approval from the target company's shareholders".

"Proceeding down the scheme route also obviates the need to undertake a 'squeeze-out' procedure, which leads to a lengthening of the timetable in the context of a contractual offer and can result in dissenting shareholders holding an acquisition up even further," he said.