Yorkshire’s deals market – still waving not drowning
BACK in 2007 it seemed that the good times would never stop. Business growth was strong, economic output was at record levels, and deals activity was high thanks to a plentiful supply of cash and opportunity.
As the sun follows the moon so busts follow booms but no one expected the UK’s run of good fortune to end quite so abruptly.
Yet even as the bad news kept on coming confidence was still resilient in quarter three. That confidence has now firmly waned thanks to the unimaginable and unprecedented financial disasters of last month.
Armageddon it seems is here despite the desperate efforts of politicians, banks, economists and governments.
But that doesn’t mean that things will grind to a halt however. The economic landscape will continue to be shaped albeit at a slower rate and differently. Sector consolidation will accelerate, business collaboration will increase, and opportunities will be created in embryonic industries just waiting for their evolutionary deliverance.
So just what does that mean for the region’s deals table? According to business advisory firm Deloitte the need for “lean and mean” portfolios will help drive deals activity as public companies and those in private equity ownership look to deliver cost reductions either through performance improvements or further mergers.
Analysis of 150 transactions showed that overhead savings of 17% can be made. The greatest overhead savings can be achieved by removing costs in the IT (average cost synergies of 30%) and finance (25%) functions, primarily through the elimination of duplicate roles, harmonisation of IT platforms and elimination of duplicated projects. sales and marketing and research and development tend to offer the least potential for overhead cost reduction.
Asset intensive sectors, such as manufacturing or telecoms can also exhibit potentially high overhead synergies of over 15% with savings in their core business of around 5%. These core synergies however are highly dependent on the release of any excess asset capacity in the combined company.
These synergies do not come for free however. Up-front minimum investment is required, normally of £1-£1.50 of one-off implementation cost for every £1 of annualised synergy, while full achievement of the run rate savings typically takes three years to deliver.
And it’s not for everyone as Richard Bell, head of transaction services for the North at Deloitte, explains.
“Integration synergies must be prepared for in a proper and robust manner with a dedicated and highly visible programme. Companies which are too eager to trim overheads commonly encounter difficulties such as staff retention and labour issues, disruption of operational performance and organisational confusion.
“These companies quickly lose experience and then often need to rehire. Equally, ill-planned IT integration programmes can lead to major back office disruption resulting in the need to bring in expensive consultants to deal with issues caused by a lack of thorough planning and testing.”
However, most corporate finance professionals agree that “survival” deals and a flight to quality will keep them in work. Read on for their individual thoughts.
Phil Whaley, a senior manger in corporate finance at Grant Thornton in Leeds.
“Yorkshire’s strong M&A performance, in my view, is in the short term coming to an end as there can be no doubt that deal volumes in Yorkshire have been slowing with fewer completions in the third quarter of the year than in the previous quarter. A great deal of uncertainty remains in the wider economy that is likely to continue to see low volumes of deals being completed between now and into the first part of 2009, due to both continued restrictions on access to finance, and buyers waiting for value multiples to fall further. Private equity buyers in particular believe there will be even greater discounts on businesses to come and as such many are simply sitting on their hands.
“Although there is a diverse range and size of businesses in Yorkshire, it is probable that most will be focusing on keeping their own house in order to ride out the current climate. For those entities with ambition and vision, this turbulent market can create M&A opportunities, and I’ve no doubt many of these will be within a distressed environment that won’t necessarily deliver the value to shareholders that they once aspired to. However, quality businesses with real curb appeal will still stand out from the crowd and be in demand, although activity is unlikely to recover until the second half of 2009”
Steven Gash, managing partner of Yorkshire accountancy firm Clough & Company
“Gone are the times when deals could be completed without a second thought. The lack of appetite for lending by Banks coupled with those looking to buy only wanting to pay the lowest price with sellers holding out for a better deal, inevitably means there will be a slow down in volume and value.
“However, there will be deals for essential reasons – for example survival deals – where organisations will join forces to create stronger units. Removing the competition and economies of scale often cut costs which in today’s market may be a wise move.
“In conclusion, despite there being a number of deals that are out there, survival deals will not counteract the downturn in expansion deals and unavoidably the value of the region’s historically strong M&A performance will very likely suffer.”
James Turner, corporate finance director at PKF in Leeds
“We expect the level of transactions will be limited for the next 12 months due to the current economic climate and the continual changes within the financial market. This situation is making acquisition funding increasingly more difficult, which in turn is leading buyers to become more cautious.
However, within the SME market there is always a degree of movement and there are still some sectors which are still active. The energy sector, for example, provides some key opportunities as companies continue to explore new innovative methods to generate energy, to reduce the impact on natural resources and climate change. There are still opportunities out there and we have clients that are completing deals in the UK and overseas now, as part of longer term strategies.
Regarding larger M&A deals, I expect activity levels will be low. However, if the economic slowdown continues we may see a number of large scale acquisitions of distressed businesses from buyers in the UK and internationally.
At this time it is vital that Yorkshire management teams focus their attention on the external environment as well as dealing with the internal pressures within their businesses, so they are in a position to capitalise on any opportunities that may arise.
I would agree with the Deloitte research that suggests that M&A is a great way of reducing costs, but it also offers other advantages such as limiting risk by increasing the portfolio of customers, utilising potential capacity and resources, and strengthening a business through size. All these elements may prove to be the deciding factor in the survival of a business in a difficult market.
Raising funds is becoming increasingly more difficult, which places private equity in a strong position to secure deals. I believe now is a good time for private equity houses to focus on buy and build within their portfolio of companies.”
Rod Wilkinson, head of corporate finance, KPMG
“M&A is certainly continuing albeit the market has changed recently meaning we will see transactions in the next 12 months of a fundamentally different nature to those of the last two years. I expect to see a very significant rise in non-core disposals by corporates, accounting for about 50% of transactions, while 25% will be the sale of stressed or distressed assets with shades of grey between the two, leaving just about 25% of transactions of a traditional M&A nature.
Our current experience is that for corporates looking to buy, incumbent banks are tending to be supportive of their customers but in defending those customers’ market position rather than funding growth. The debt market is without a doubt difficult but not unmanageable if you are talking to the right people with the right proposition in the right way.
More deals are requiring a “club” of banks rather than a single bank providing the entire funding – this in some ways means that there are more moving parts but the major banking players in the Yorkshire market are comfortable working together and have established a strong recent track record of so doing.”
Dave Harris, regional director of corporate and structured finance at RBS in Yorkshire
“Deal activity in the Yorkshire between July and September 2008 is down however the value of the actual transactions has increased. The challenging economic climate during this period has reduced the number of deals within the £10m – £100m bracket. While deal volumes are down the quality and value of individual transactions has undoubtedly risen. For example during the last quarter RBS provided funding for one of the largest transactions to take place in Yorkshire this year – the £162m MBO of software company SSP Holdings.
M&A activity may rise in the current economic climate as companies look to consolidate and make cost savings and there are signs this is happening already. In challenging economic times it makes commercial sense for companies to make cost savings and achieve synergies where possible and undertaking a merger or acquisition can achieve this.
Earlier this month RBS, together with a syndicate of other banks, provided Oval Insurance Group with a £115m funding package to support its acquisition strategy. Oval is looking to grow by purchasing brokers around the country and recently made acquisitions in Wrexham and Liverpool. This growth strategy will bring cost savings and will boost the group’s economies of scale.
While Yorkshire’s economy is smaller than that of the North West, the region more than punches its weight when it comes to mergers and acquisitions. You only have to look at some of the deals completed this year to see the strength of Yorkshire’s deal market. Transactions such as the buyout of Tunstall by Charterhouse Capital for in excess of £500m, and the £162m MBO of SSP Holdings, show that deals of all value and size are undertaken in Yorkshire.”
Tim Clarke, corporate finance partner, BDO Stoy Hayward in Leeds.
“Yorkshire may be harder hit than other regions during the economic downturn because of the size of its financial and professional services sector. Also, a number of big retailers have their head offices up here as do food manufacturers.
I don’t agree that M&A should be seen as a way of cutting costs but it is not a unreasonable statement. This current market means that M&A is a very real corporate strategy to pursue. Whereas in better times corporates may well have kept on to under performing subsidiaries or operations that weren’t “problem children” today they are left little choice when reducing their debt.
I think there will certainly be more consolidation across all sectors. When companies are not growing on their own or cannot support overhead costs merging with another organisation makes sense. It’s the old 2 + 2 = 5 factor. Two businesses together have more resilience in a down turn.
As a result, I don’t think the problems usually associated with M&A such as who gets the best jobs will be an issue. People will just get on with it. However, M&A activity at the moment is very much down as are transaction values. There are pockets of activity such as in oil and gas and environmental, but investors are being very selective as returns are not as high as they once were.”
