In an October 2017 EY report¹, 60% of the UK executives surveyed said they intended to pursue a merger or acquisition in the next 12 months, up 9% from April. The UK remains third on the global M&A destination list, which is perhaps a measure of the attractiveness of the UK’s open economy and the eye-catching intellectual property held by some smaller companies.

Feeding this demand, more owner-managers are considering selling. According to Jeremy Furniss, Partner at M&A advisory firm Livingstone, there is a concern that any new left leaning government could review capital gains tax reliefs such as Entrepreneur’s Relief. Couple this with hungry buyers he says, and “why wouldn’t you look to try and monetise your most important asset now if it’s something that is on your agenda for the next few years?”

Jeremy explains: “My confident prediction going into 2017 was that we would start to see the great momentum in the M&A market grind to a halt a little as we got closer to Brexit. But a wall of capital seeking superior returns in a low interest rate environment (globally) has resulted in high levels of deal volume, and pricing, if anything, getting slightly more attractive for sellers.”

While the most buoyant sectors for the acquisition of medium-sized businesses in the UK² are business services, including the financial services; energy; media and technology; consumer; and industrial; there are several sub-sectors that are particularly ‘hot’:

1. Fintech: Financial heavyweights using M&A to access latest technologies

Many banks, insurers and wealth managers are acquiring smaller, tech-savvy businesses. In a study³ of 400 2016/17 acquisitions of UK SMEs by large businesses, Womble Bond Dickenson found that 30% of deals were in financial services. Managing Partner, Jonathan Blair, describes these deals as “bringing together the power and operational excellence of multinational giants with the drive and dexterity of smaller innovators”.

In some cases, businesses that are less than two years old, with little or no revenue, are being acquired. These tend to have very distinctive intellectual property.

2. Software as a service (SAAS): Recurring revenue commands a premium valuation  

SAAS businesses – such as on-line accounting systems - charge clients a subscription fee to access software via the ‘cloud’. Lawrence Price, of Rockworth Management Partners, describes SAAS businesses as “the flavour of the month for the past few years and they remain incredibly attractive”.

But he caveats this view, saying: “There are a million businesses claiming this SAAS title but to hit the stratospheric valuations, you‘ve got to meet specific criteria that investors value – such as low customer acquisition cost and high customer lifetime value – that make it a true SAAS business.”

Jeremy of Livingston describes recurring business – such as a subscription-based model – as a hedge against the uncertainty of today’s environment.

3. Marketing services: Unexpected acquirers emerge in the digital era

The marketing, advertising and PR world has experienced high levels of M&A for years with consolidators such as WPP and Omnicom continuing to be active. It is common for entrepreneurs – in their relative youth – to build businesses quickly, sell them and build a second or third business.

But a newer phenomenon highlighted by Lawrence is that the shift towards digital marketing has resulted in other professional services firms taking an interest in the sector: “You get into the realms of analysis of large amounts of data. This has traditionally been done by different organisations, such as accountancy firms, which have now become very significant acquirers of marketing services businesses.”

4. Insurance broking: Consolidation continuing with private equity prominent

Large multinationals continue to acquire medium-sized brokers. The acquisitions of Jelf and Bluefin by Marsh, and Henderson by Aon, are intended to help these large brokers sell to and service the UK SME market.

Medium-sized brokers are, in turn, pursuing acquisitions of smaller companies. Some, such as PIB – backed by private equity giant, Carlyle Group – are particularly aggressive, recently announcing its 12^th acquisition within 19 months.

5. Manufacturing and distribution: International sales attracting foreign buyers

The weak pound has benefitted manufacturing and distribution businesses with international sales and, according to Lawrence: “International corporates have been showing much more interest in those types of businesses based in the UK than they have done previously.” 

The recovery in the oil price is also a stimulant for growing M&A in the oil and gas sector. Manufacturers of component parts and machines, as well as services companies supplying the sector, are seeing interest from international, particularly US, buyers.