Merger and acquisition (M&A) activity among small and medium-sized enterprises (SMEs) in the UK fell by 18 per cent to 580 deals from 2011 to 2012, new research from S&P Capital IQ reveals.
While none of Europe’s three major economies – the UK, France and Germany – have seen M&A transaction levels return to their 2008 high, the effects of the labouring UK economy can be seen in recent transaction data.
Over the last five years, the number of SME M&A transactions in the UK (3,264) has been roughly equal to the number in France (3,139) and more than double that in Germany (1,157). At a glance, this could be cause for optimism. However, according to S&P Capital IQ, the data from 2011 to 2012 shows France had more SME transactions than the UK (605 in France compared to 580 in the UK).
“From 2011 to 2012, SME M&A activity in France remained consistently around the 600 deal mark, and Germany experienced a 10 per cent increase, taking the overall number of M&A transactions in 2012 to 251,” says Chris Mowbray, senior modelling application specialist, S&P Capital IQ.
UK macroeconomic performance has not yet recovered the ground lost to its major European peers during its sharp GDP contraction at the start of the global financial crisis. This has been primarily attributed to overreliance on its financial sector, which has not yet shown definite signs of recovery.
However, S&P Capital IQ highlights that the UK has remained an attractive option for foreign investors, attracting the largest number of overseas buyers of the three countries considered in the report. Nevertheless, UK cross-border M&A1 activity has declined by 21 per cent from 224 deals in 2011 to 176 in 2012.
The majority of M&A deals in all three countries involved SMEs as targets; in 2012, they made up 94 per cent of all M&A targets in France, with 91 per cent in the UK and 80 per cent in Germany, according to S&P Capital IQ’s research.
“There is some positive news for the UK, with the data suggesting that, of the three countries, it remains the most attractive location for foreign buyers. But the question lingers as to whether its appeal is diminishing. Cross-border M&A deals fell from 2010 to 2011, and again the following year. Until 2011, the number of deals carried out in the UK was considerably higher than in France and Germany, with 224 deals in 2011, compared with 136 in France and 94 in Germany. Yet even in cross-border M&A, where the UK has dominated, 2012 was not a good year. The gap between the UK and France closed, almost completely, as the number of UK deals dropped by 21 per cent to 176, while France registered an increase of 6.6 per cent to 145,” says Mowbray.
S&P Capital IQ says the falling level of M&A activity among UK SMEs is not necessarily a sign of financial weakness due to the current economic environment. Analysis of more than 13,000 UK SMEs3 shows that they have consistently outperformed listed companies in terms of asset turnover, leverage factor (total assets/shareholder’s equity), and revenue growth. Highlighting this fact, revenue growth continues to be in the double digits, but has shown a decrease from 18.2 per cent in 2010 to 10.7 per cent in 2012. S&P Capital IQ suggests that this shows SMEs to be more effective at coping with the current macroeconomic environment than public companies, where revenue growth has declined from 6.6 per cent in 2010 to 5.3 per cent in 2011 and 4.6 per cent in 2012.
“While M&A activity in the UK may seem healthy, a closer examination of the trends over the last two years reveals a disconcerting weakness,” says Mowbray. “The largest drivers of M&A in the UK, SMEs, are clearly in decline relative to their continental peers. M&A activity in the SME space appears unlikely to pick up anytime soon, given the UK’s near-term economic outlook. Nevertheless, UK SMEs continue to employ shrewd financial management to remain profitable, and they seem to be succeeding despite the bleak macroeconomic backdrop.”
