26 September 2008

Titles that covered this article include Mail on Sunday, 5^th October 2008.

The value of private (i.e. unlisted) UK companies acquired over the last year was £19.5billion, down 19% on the £24billion worth of deals targeting private companies in the previous year reveals research by our experts (August 1 to July 31)¹ .

Our experts say that although this is a dramatic drop, it compares favourably to the effect that the credit crunch is having on M&A activity involving larger listed companies. Recent figures released from the Office for National Statistics reveal that the equivalent drop in value for all M&A deals in the UK including listed companies was 28%. Our experts say that this shows that the market for acquisitions of small and medium sized companies is proving to be more robust.

Chris Lowry, Partner at our London office, elaborates: “The credit crunch has meant that the confidence of many companies has taken a severe beating. With economic growth sliding to a halt, potential purchasers are feeling far less bullish about being able to make an acquisition work.”

“Trade buyers and private equity funds that have decided to press on with a purchase are still finding it far harder to raise the funds needed to make the deal work.”

“Although banks are still making debt available they are doing so on much more expensive and conservative terms. Buyers are having to shop around the banks and look carefully at how they can make their deals work on these new borrowing terms.”

Chris Lowry explains, however, that M&A deals involving private UK companies have been spared the worst from the credit crunch, especially the smaller deals for which banks were willing to lend.

Says Chris Lowry: “Small and medium sized private company M&A activity, however, is certainly not being as adversely impacted as listed company M&As. Acquisitions of private companies are normally made at much more conservative multiples of earnings and free cash flow so banks are more willing to fund them.”

Figures boosted by rush to sell before the abolition of taper relief

Chris Lowry adds that this year’s figures have also been boosted by entrepreneurs deciding to sell their businesses before the Government abolished “taper relief” on April 5. By selling before April 5 many private business owners were able to restrict their Capital Gains Tax to 10%.

Comments Chris Lowry: “For those entrepreneurs that had already been thinking about selling their business the increase in CGT and the mounting worries over the credit crunch will have encouraged many to call it a day and cash out.”

“The size of the tax saving made by selling before April 5 meant sellers were willing to take a reduced purchase price in order to push the deal through on time.”

Our research reveals that the total number of UK private companies that were acquired last year (including those that did not disclose the financial terms of their sale) was 2336, practically unchanged from the previous year’s figure of 2367.

Our research also shows that the average value of acquisitions of private UK companies (where terms were disclosed) has fallen from £28.7 million to £26.4million in the period.

Adds Chris Lowry: “The smaller average deal size suggests that business owners are either having to accept lower valuations for their companies or, and more likely, transactions at the smaller end of the private company arena are still capable of successful completion.”

¹ Figures based on all publicly disclosed deals that contain financial terms. Deals includes acquisitions of UK unlisted private companies. It excludes acquisitions of AIM and PLUS companies and acquisitions of corporate entities that would normally be considered commercial property transactions

Chris Lowry