UK M&A activity remained resilient during 2022 despite inflation, rising interest rates, geopolitical uncertainty, disrupted supply chains and pressure on consumer spending.
The market changed significantly during the year. Strong transaction activity continued through the first half, supported by momentum from 2021, before higher financing costs reduced deal volumes and valuation multiples.
Polestar CF’s 2022 M&A Review and Sector Outlook 2023 examines the economic conditions and investment themes affecting dealmaking across Software and Technology, Business Services, Manufacturing and Industrial, Healthcare and Education, and Food and Leisure.
Global growth was expected to slow to 1.8% during 2023 as monetary tightening, China’s Covid-19 restrictions, higher energy costs and the Russia-Ukraine war affected economic activity.
The UK faced additional pressure from Brexit-related trade friction, rising costs and greater uncertainty. Interest rates were expected to remain elevated, while restricted access to debt could affect transaction activity in the short term.
Private equity was nevertheless expected to remain active. Businesses with resilient recurring cash flows were likely to attract interest, alongside recession-resistant industries such as enterprise software, defensive healthcare equipment, cybersecurity, climate technology and environmental consultancy.
ESG was becoming increasingly important as governments introduced stronger regulatory and reporting requirements and companies faced greater scrutiny of their environmental and social impact.
COP27 estimated that between $4 trillion and $6 trillion would need to be invested in renewable energy and decarbonisation solutions every year until 2030 to achieve net-zero emissions by 2050.
The US Inflation Reduction Act also included $369 billion of spending on climate and energy policies, creating opportunities for companies providing supporting technology and infrastructure.
The ability to collect data was becoming widespread, placing greater value on businesses capable of managing, analysing and converting that information into commercially useful insight.
AI capabilities were expected to develop quickly as technologies processed larger datasets and improved their own learning.
Microsoft’s reported additional $10 billion investment in OpenAI demonstrated the value being placed on advanced AI. Smaller companies needed to consider when and how to adopt these technologies to remain competitive.
Health Technology activity remained strong after the pandemic accelerated changes to healthcare delivery.
Opportunities extended from venture-capital fundraising through to consolidation as specialist providers developed market positions and larger businesses acquired technology to protect or expand their services.
Brexit and the pandemic affected labour availability, increasing demand for services and technology capable of helping companies operate with fewer employees.
Businesses supporting automation and operational efficiency were expected to attract interest. This included software, technology and specialist professional-services providers.
Further telecommunications consolidation was expected as larger providers acquired customer bases and pursued economies of scale.
Significant investment was also required to upgrade national infrastructure and extend fibre connectivity to individual premises. This created opportunities throughout the supply chain and for infrastructure investors as networks reached sufficient scale.
Global equity markets experienced substantial losses during the first nine months of 2022. However, lower valuations improved the long-term return outlook entering 2023.
Vanguard’s model projected annualised ten-year returns of approximately 4.6%-6.6% for UK equities. Emerging markets were also expected to become more attractive following sell-offs during 2021 and 2022.
The UK M&A market experienced two distinct halves during 2022.
Activity remained strong through June, supported by momentum from 2021. Rising inflation, higher energy costs and subsequent interest-rate increases then reduced transaction activity and affected valuation multiples.
Despite these pressures, acquisitions and divestments remained important parts of corporate strategy. Companies continued to use M&A to gain scale, add new capabilities and support growth.
Businesses also needed to consider internal transformation, including changes to working-capital policies, organisational structures, costs and cash-management strategies.
FinTech, HealthTech, ClimateTech, DeepTech, artificial intelligence, augmented reality, machine learning and the Internet of Things continued to disrupt established markets during 2022.
Growth was supported by 5G, fibre infrastructure, cloud services, cybersecurity and digital consultancy. Emerging areas included social commerce, gaming, digital services and eSports.
Technology valuations corrected as inflation, geopolitical uncertainty and disrupted supply chains affected investor confidence. However, productivity, efficiency, digitalisation and sustainability continued to support the sector’s longer-term outlook.
Businesses with software-as-a-service models were expected to remain attractive to venture capital and other investors.
The subsector breakdown included:
Transaction volumes declined from the record activity recorded during 2021. Financial and strategic buyers prioritised cash-flow security and pursued less transformative acquisitions.
However, private equity and corporate buyers continued to have capital available for businesses with well-developed and differentiated value propositions.
Valuations and transaction activity were expected to moderate, but continued innovation was expected to support investor demand.
Technology capable of improving efficiency, supporting decarbonisation or helping businesses use data more effectively was likely to remain strategically important.
Business Services activity benefited from the return towards normal operating conditions after the pandemic and from work postponed during Covid-19.
Reoccupation and repurposing of commercial property supported areas such as commercial renting and leasing. Outsourcing also continued to create opportunities across Professional Services and Business Process Outsourcing.
Consolidation was expected as larger companies acquired smaller providers affected by economic pressure.
Professional and technology-enabled services, including accounting, consultancy and legal services, remained attractive to investors seeking resilient businesses. Facilities-management providers supporting building automation, energy management and carbon reduction also attracted ESG-related interest.
Business Services recorded 1,552 transactions during 2022, compared with 1,804 in 2021.
Activity included:
International buyers completed 31% of Business Services transactions. US investors accounted for 42% of this overseas activity.
Recessionary pressure, inflation and the cost-of-living crisis had the potential to affect valuations.
Commercial Renting and Leasing was particularly exposed to a weaker property market. Professional Services were expected to remain in demand as businesses considered M&A, restructuring, insolvency and liquidation.
Most Business Services companies were expected to remain comparatively resilient, particularly where their services were essential to clients’ operations.
Manufacturing activity during 2022 was supported by order backlogs following the pandemic. However, slowing output and new orders created a more difficult outlook for 2023.
MAKE UK forecast a 3.2% contraction in the sector during 2023. Supply-chain disruption, labour shortages and wider economic uncertainty were expected to affect valuation multiples.
Semiconductor shortages continued as Covid-related lockdowns disrupted production. Additional UK and US trade restrictions affecting Chinese technology firms were expected to prolong the shortage until 2027.
The sector also had approximately 86,000 job vacancies, representing almost £20 million of potential lost output each day.
Manufacturing and Industrial recorded 417 transactions during 2022, compared with 451 during 2021.
Activity included:
International buyers completed 54% of transactions. US investors were particularly active in Aerospace and Defence and Industrial Technology.
Five themes were expected to influence the sector:
Manufacturers increased their investment in digital technology during the pandemic, and businesses with greater digital maturity demonstrated stronger resilience.
Workforce strategies included higher pay, training, reskilling and flexible working. Companies were also considering local production capacity, digitised supply chains, waste reduction, fleet electrification and smarter buildings.
Healthcare performed well during 2022 as providers addressed delayed treatments and pandemic-related backlogs.
Growth opportunities included private hospitals delivering NHS-funded procedures and continued development of virtual healthcare.
Staffing remained a significant challenge. Providers responded through international recruitment and by increasing the use of digital healthcare.
Telehealth, patient-education technology, care coordination and services delivered at home could help reduce costs, improve access and address workforce shortages.
Education returned towards more normal operating conditions as students resumed campus-based and face-to-face learning.
UK higher education recovered despite a 50% reduction in EU students accepting places. The UK remained the second-most-popular destination for international students after the US.
The pandemic accelerated the adoption of online learning and Education Technology. Digital platforms were expected to continue supporting and enhancing classroom and lecture-based education.
Healthcare and Education recorded 279 transactions during 2022, compared with 241 in 2021.
Activity included:
Rising costs encouraged smaller Healthcare Services, Hospital, Care Centre and Health Technology businesses to join larger consolidation platforms.
Platforms capable of delivering efficient, high-quality care attracted investor interest, while acquisitions offered opportunities to increase scale and reduce competition.
M&A activity was expected to remain relatively stable during the first half of 2023 before increasing later in the second and third quarters.
Private equity capital and competition for innovative healthcare assets were expected to support activity. The willingness of sellers to accept lower valuation ranges remained an important consideration.
Food and Leisure experienced strong post-pandemic demand during 2022 as consumers returned to restaurants, entertainment venues, shops and overseas travel.
UK consumer-card spending increased by 10.6% year on year. Festivals, sporting events and other large-scale attractions also supported activity.
However, labour shortages, supply-chain disruption and higher energy costs created significant pressure during the second half of the year. These challenges reduced valuations and encouraged some smaller operators to sell to larger businesses.
Food and Leisure recorded 190 transactions during 2022, compared with 196 during 2021.
Activity included:
Domestic buyers completed 60% of transactions.
Travel bookings remained resilient during 2022 and were expected to continue into 2023.
Some consumers were expected to choose lower-cost UK staycations instead of overseas holidays. A weaker pound could also support international tourism into the UK.
Events including the coronation of King Charles III, the British Open golf championship and Eurovision were expected to support visitor spending. The sector’s ability to rebuild airport staffing and passenger capacity remained important.
Higher financing costs and economic uncertainty were expected to affect deal volumes and valuations, but M&A remained an important route to growth and transformation.
Private equity was expected to focus on resilient companies with recurring cash flows. Corporate buyers were likely to target businesses offering specialist technology, operational efficiency, scale or access to strategically important markets.
Across the sectors covered, common themes included:
Activity remained strong during the first half of the year before inflation, higher energy costs and rising interest rates reduced deal volumes and valuation multiples during the second half.
Business Services recorded 1,552 transactions, the highest total among the five sectors covered.
The review’s subsector figures included 501 Software and Services deals, 349 Data and Analytics deals, 58 Consulting deals, 57 Telecommunications deals and 40 E-commerce deals.
International buyers completed 31% of Business Services transactions, with US investors accounting for 42% of this international activity.
International acquirers completed 54% of Manufacturing and Industrial transactions. US buyers were particularly active in Aerospace and Defence and Industrial Technology.
Yes. Healthcare and Education activity increased from 241 transactions in 2021 to 279 during 2022.
ESG, data and artificial intelligence, Health Technology, operational efficiency and telecommunications infrastructure were identified as five important themes.
Businesses with resilient and recurring cash flows were expected to be particularly attractive during uncertain economic conditions.
More expensive and less accessible debt could reduce transaction activity in the short term and place pressure on valuations. Strategic acquisitions and alternative transaction structures were nevertheless expected to remain important sources of growth.
Enterprise software, defensive healthcare equipment and services, cybersecurity, climate technology, environmental consultancy and other businesses with recurring cash flows were expected to attract investor interest.
