SME deal making is surprisingly buoyant in the face of uncertainty over Brexit and what looks increasingly like a protectionist agenda in the US.

The expectation was that UK mergers & acquisition (M&A) deal volumes would start to fall due to Brexit-related uncertainty. And this was predicted to hit all parts of the market down from global M&A to SME deals. On top is this was the surprise Trump presidency and his promise of “America first” protectionism.

Whilst all this made it look like the UK was heading for a downturn, we have seen a continued deal flow since the middle of 2016, with no sign of decline.

Our discussions and deal pipeline suggest there is likely to be further growth in UK deals, particularly at the SME end of the market.

Four key reasons for deal making

Four main reasons that are driving deal making at the moment are:

(1) Fall in the value of sterling

The cheap pound means it is cheaper for foreign acquirers to invest in UK businesses

(2) British firms buying British

UK plcs and other larger corporates are searching for ways to hunt growth and avoid Brexit uncertainty. One way to do this is to increase their exposure to the UK, by acquiring smaller British businesses. This avoids the issues around tariffs on overseas trade in the event of a hard Brexit, and partially insulates them from the instability of sterling.

(3) US economic growth

USA corporates have always been top buyers of smaller UK businesses. The UK is still seen as a stepping stone into Europe (in spite of Brexit looming), and the common language makes it easier for Americans to do business here. Strong economic growth in the USA means that many larger businesses there are back on the acquisition trail and looking to the UK again, after a relatively quieter period. The decline in the value of sterling against the dollar also helps.

(4) Low interest rates

Low interest rates are continuing to keep the cost of debt down. This is allowing acquisitive businesses to raise their funding cheaply. Banks are being very supportive of established corporates who wish to finance a well thought-out acquisition strategy. Even in cases where the banks are not interested, there are an increasing number of alternative lenders around to fund acquisition growth.

If you would like to discuss these issues, please contact a member of our Corporate Finance team.


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