SME mergers and acquisitions activity poised to boom but risks remain, says Azets

Corporate finance expert Azets is predicting the strongest mergers and acquisitions market in more than a decade in 2022, with current deal activity at a 15-year high and investment in SMEs poised to boom.

Dan Nixon, head of transaction services, corporate finance for London and the South East, points to a greater variety and volume of equity than ever before focused on the SME market as a driver for increased activity.

More investment is expected in Covid-19-impacted markets as the UK continues its recovery from the pandemic.

The prediction follows the publication of Experian’s latest M&A Review for 2021, which ranks Azets as the UK’s sixth most active M&A adviser by deal volume, having advised on a total of 109 transactions worth almost £700 million in 2021.

Almost a third (32) of the deals Azets advised on were in London and the South East.

According to Experian, M&A activity surged at the beginning of 2021. Quarterly transaction volume was up by more than 1,000 in Q1 2021 compared with the middle part of 2020.

Whilst the UK’s busiest ever opening to a year was not sustained, the total 6,917 deals involving a UK company in 2021 represented a 14.3 per cent upturn on the 6,053 transactions announced the previous year, with close to every region of the country returning double-digit year on year growth.

Dan says an even stronger start to 2022 can be sustained throughout the year, with the traditionally attractive leisure and hospitality sectors returning to a degree of normality after two years of volatility, and the UK still considered a safe haven for overseas investors despite some ongoing economic uncertainty.

“The M&A market is the strongest it has been for 15 years," he said.

"Debt remains cheap – albeit with a degree of uncertainty as to for how long – and there is a greater variety and volume of equity than ever focused on the SME market.

"New funds are continually being raised and we are seeing significant growth in family offices and businesses that traded well during the pandemic.

"As a result, deal values have been driven up considerably in sectors such as software & IT services, building products, manufacturing, and logistics.

“Unlike at the start of 2021, which preceded another national lockdown and further Covid restrictions, this year we expect the M&A market to be much more sustained and to maintain high levels of activity. As the hospitality sector returns to being a safer sector to invest in, we can expect to see some normalisation of pricing and deal values in this and other sectors.”

Despite the positive outlook, Dan warns that several high-profile risks still remain and underlines the value in SME business owners seeking professional advice when considering future transactions.

“Brexit challenges haven’t gone away entirely, albeit overseas acquirers remain focused on the UK," he added.

"Despite deal inflation in comparison to other markets, UK pricing of high-quality SMEs is still considered competitive. However, significant risks still remain and will do so well into 2023. These include energy supply and pricing, supply chain issues, anticipated rises to Corporate Gains Tax, the permanent threat of new Covid variants and the economic impact of any further lockdowns.

“Whilst the pandemic technically created a recession, there has been no re-setting of the economy or asset values, most notably in property, which remain historically high. As such, now is the time for any SME business owners to seek sound advice when considering their financial position and making plans for the short- and long-term future.”