mergers & acquisitions 53 Steadying the ship


In the wake of a resounding Conservative victory in the UK general election, on the backdrop of a Greek creditor resolution, and with recent confirmation that the Federal Reserve will not be raising interest rates (for now); it would feel appropriate to think that much of what was recently uncertain has now been answered, at least temporarily, writes Kirsty Sandwell, head of southern corporate finance, Baker Tilly


Indeed the outlook was looking reasonably good, until late July when the world’s second largest economy suffered its most severe stock market decline in eight years and unavoidably dragged everything else down with it. Uncertainty around the Chinese equity market led to five days of straight losses for the FTSE100, but this was reversed before the end of July – largely due to UK M&A appetite and activity.


UK technology companies are expected to lead a UK merger mania in the near future, with London touted as the ”start-up hub of Europe” by a Mergermarket/Pinsent Masons survey earlier this year. The insurance sector is also tipped for an M&A boom with fresh EU solvency rules, incoming in January, likely to hit capital reserves.


The fiscal environment


More generally, the UK fiscal policy is supportive towards deals. Last March, George Osborne promised to deliver a ”budget for business.” On July 8, he delivered such a budget. Corporation tax is to be reduced to 19% by 2017 (to 18% by 2020) and tax on dividends will effectively increase as the dividend tax credit is being scrapped in April 2016. Capital gains tax (CGT) and the golden haven that is entrepreneurs relief (ER) both remain untouched.


On the face of it, business goes on as usual for the average small and medium-sized enterprise (SME) owner. Drops in corporation tax will likely largely balance out the additional cost of taking dividends, so what is there to shout about?


Well . . . ER is costing the Exchequer a fortune, and it is widely known that the chancellor needs to make further savings. ER, which allows sellers a reduction in CGT on the disposal of all or part of a business, is unofficially tipped to rise in order to achieve public savings – business owners considering a sale may want to take advantage of the current tax break before it is too late.


The buy-side


While it is currently looking rather rosy for those on the sell-side, the budget has thrown a few fiscal spanners the buy-sides’ way. The July budget confirmed that private equity houses ’carried interest’ would be subject to a full rate of 28% capital gains tax, as opposed to 18% or less they may have previously paid. While this will ultimately affect investors’ returns, it will not affect their appetite. Some key positives include:


* Private equity and venture capital firms are holding record levels of un-invested capital; these firms are under pressure to deploy this capital to make a return on it. This has led to a competitive investor market – pushing company valuations upwards


* The Bank of England’s monetary policy has kept base THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2015 www.businessmag.co.uk


interest rates at 0.5%, meaning banks are able to lend money at lower rates and thus:


• structured financing/acquisition financing (a bank’s provision of debt as part of a private-equity investment) is affordable for both the private-equity owners and also management teams seeking management buyouts/buyins; and,


• companies are able to take on debt at cheaper rates, which leads to an increase in capital expenditure on new buildings (commercial mortgages recently hit a 60- year low) and machinery, leading to company growth. Growth is good – as more companies approach the necessary size and stability to be an acquisition target, there are inevitably more deals.


* Low interests rates on bank deposits mean corporates in the UK and abroad are increasingly deploying their surplus cash into acquisitions with the intention of achieving superior returns.


Overall, this means there is currently a very strong acquisition appetite from both trade buyers and private equity investors. We are seeing a strong seller’s market here at Baker Tilly. Below is a brief list of some of the deals our southern M&A and due diligence teams have been involved with so far in 2015:


Capita’s £30 million acquisition of GL Hearn Channel 4’s acquisition of Voltage TV Production The sale of Covertherm to Advanced Insulation The £26m Synbra UK MBO backed by Mobeus Equity Partners Capita’s £167m acquisition of Avocis The sale of Paul Jones Insurance to Finch Insurance.


Details: Kirsty Sandwell 01293-591737 kirsty.sandwell@bakertilly.co.uk www.bakertilly.co.uk


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