Cautious UK companies turn to deals to drive growth

UK executives are expecting to remain active in the deals market as they prepare their businesses for Brexit, according to EY’s 16th Global Capital Confidence Barometer.

The global accountancy firm’s CCB16 found that 51 per cent of UK companies expect to actively pursue mergers & acquisitions (M&A) in the next 12 months – up three percentage points from October 2016, but slightly lagging the 56 per cent global figure.

At the same time, there has been an 11 per cent fall in the number of businesses expecting their growth to come from organic sources since CCB15 in October. Instead, companies are putting greater emphasis on inorganic growth, especially joint ventures (JVs) and alliances, where almost a quarter of respondents (23 per cent) expect growth compared to 13 per cent just six months ago.

The appetite for deals perseveres against a backdrop of geopolitical or emerging policy concerns, which are seen as the greatest risk to economic growth for 70 per cent of UK businesses.

According to CCB16, the UK has maintained its attractiveness for deals with 23 per cent of global companies saying that clarity over the Brexit negotiations timetable, following the triggering of Article 50, has increased their chances of investing in the country. As a result, the UK has reclaimed its place as the third most attractive destination for deals, having fallen out of the top five for the first time in the CCB’s seven-year history last October following the EU referendum. The U.S. (1st), China (2nd), Germany (4th) and Canada (5th) complete the top five.

Ally Scott, EY’s head of transaction advisory services in Scotland, said: “UK companies are adjusting their strategies to maximise growth opportunities and protect margins amid changing market dynamics at home and abroad.

“Strategic deals that will help businesses access new markets, new geographies and new technologies look likely to remain high on the boardroom list of priorities. However, an increased focus on JVs and alliances suggests that in less certain times some companies are seeking a more conservative, low-risk approach to deal making.

“In Scotland, the deals market remains buoyant with recent M&A deals exceeding £1bn. These deals are evidence that the market here is as active as any in the UK outside of London.

“The UK as a whole remains attractive as a top destination for domestic and global companies to do deals. However, the UK will need to work hard to maintain this position as the Brexit negotiations unfold.”

The EY survey also discovered that 56 per cent of UK respondents expect the domestic economy to improve over the next 12 months, up from 4 per cent in the last survey. Two-thirds of UK respondents also expect the global economy to improve.

UK companies have a higher level of concern about ‘economic political instability in the EU’ than their global peers. In CCB16, 12 per cent of UK respondents chose this as one of three top risks for the next six‑to‑twelve months against 5 per cent globally.

But, UK companies are still interpreting Brexit within the broader maelstrom of economic and political change. The biggest economic risks for UK companies in the next six-to-twelve months include currency instability (15 per cent), movement of labour (13 per cent) and trade flows (13 per cent). These fit within their broader concerns over global policy-driven change alongside ‘increasing government intervention’ (14 per cent).

Mr Scott added: “The UK economy is experiencing relatively steady growth and near-term UK economic forecasts have improved in the last six months. At the same time improvements in the economies of the UK’s primary export markets, especially in Europe and the US, are mirrored in the more positive sentiment of our survey.

“Beyond the geopolitical landscape the rapid pace of change in technology could pose a greater challenge to many existing business models. The transformational potential of emerging technologies is motivating executives to engage in M&A activity. Companies must innovate to follow rapidly changing customer preferences and buying assets can be the fastest way to radically reshape their business for future growth.”