M&A Life in 2021

Newsletter Lead article – March 2021

It’s been an exciting start to the year for Morphose, advising on the acquisition of Borland Insurance by AssuredPartners and fundraising for sector innovators, ‘EdTech’, Sherpa Online, and corporate well-being and mental health expert, Imagine Health.

While the past 12 months has been exceptionally tough for many businesses, we believe 2021 will bring opportunity. Rebuilding and regrowth will happen, and technology will be a key driver for many businesses to come out the other side. Pent up demand in PE combined with all-time low interest rates foster a fertile lending environment.

Nick Atherton, MD at Morphose, explains why he sees reason for optimism.

The pandemic has reshaped rather than halted the M&A landscape.  While activity faltered at the height of the first wave, it had, by the end of the year, started back in full, compensatory swing, with a notable resurgence of M&A activity in December.

Over the past 12 months organisations have had to rapidly morph to operate under the new norm.  Nationwide lockdowns have accelerated the integration of technology into business processes, which has been key to many organisation’s survival.  The pandemic has exposed gaps in capability, opening the way for strategic acquisitions and divestitures of underperforming or non-core components.

Unsurprisingly, M&A in the technology sector has proved to be Coronavirus resistant, with a steady flow of M&A activity throughout 2020.  Global tech M&A deals amounted to $634 billion in 2020 according to GlobalData with Europe accounting for $85,61bn and US $121.92bn in Q4.  Notable hot zones within the tech sector being collaborative software and innovations, with cybersecurity, identity management, social listening platform organisations high up on PE short lists.

Businesses less impacted by the pandemic have been the most sought after to date.  Additionally, companies with demonstrable versatility and staying power that have weathered previous recessions have become attractive targets.  There are also industry safe havens, with strong past performance and attractive recurring revenues such as insurance, that will always attract investment.

Meanwhile, PE coffers are burgeoning, some with dedicated funds allocated for distress sales.  But this window of opportunity looks to be narrowing.  With a seemingly successful vaccine roll out in the UK, gradual lifting of lockdowns, Brexit over, and generally more market optimism, we could see this focus quite quickly shift.

And the icing on the cake for those business owners and investors with exit routes in sight, was Richi Sunak’s budget, which was considerably less punitive than feared.  With increases to Capital Gains Tax or curtailing of favourable government backed investment schemes such as SEIS or EIS left off the table for now.  That said, one can’t be too complacent, as this benevolence could be short-lived when faced with the enormity of clawing back pandemic expenditure in the next budget.

Nonetheless, unchanged CGT and investment schemes for now provide a critical springboard for an uptick in M&A activity particularly at the SME end of the market.

So while the M&A landscape has changed, it is certainly not without opportunity, rebuilding and regrowth will happen, just not quite how we had envisaged it 12 months ago.