The most discussed topic in the corporate finance community continues to be the level of deal activity and whether or not the banks are open for business. Both seem to go hand in hand but the reality is that the landscape is more complex.
Over the last year, evidence suggests that the UK has seen SME M&A activity fall further, albeit large corporate deals continue to be more buoyant. With the vast majority of our economy dependent on SMEs and with most of the deal volume coming from these companies, it continues to be a challenging environment for those involved in deal making.
This is against a backdrop of many businesses being profitable and shrewdly managed with solid balance sheets. Some of the highest levels of cash deposits are being recorded by the banks and interest rates remain low. Many of the deals that I have advised on recently involve foreign investors taking advantage of some struggling companies but more often they involve opportunistic acquisitions from overseas of good businesses with strong balance sheets.
My recent discussions with clients and colleagues in the banking sector suggest that the banks and financial institutions are more actively “open for business” and there are improved credit conditions. There also seems to be more appetite for deal doing with some realignment between sellers and buyers on valuation gaps. With several years of a depressed M&A market, many are realising that valuations are not returning to the multiples of five or six years ago. Recent surveys support this indicating an improvement in acquisition plans, with an increasing number of acquisition opportunities, presumably driven by the more fertile M&A conditions, enhanced credit opportunities, continued low interest rates and realignment of values.
The question is… does this mean a return to a boom in M&A activity? Alas, caution and lack of confidence still appear to prevail. There is still a focus towards organic growth and lower risk strategies amongst many of the clients and companies I talk to. A continued bleak macro-economic backdrop is countering the equilibrium between buyers and sellers on price and the increased availability of funding. Although all the signs point towards improved deal flows during the next year, there appears to be no imminent return to the boom years!
Banks have cash to lend but are forced to actively chase opportunities to make lending targets. Private equity and venture capital providers are sitting on funds they simply cannot get out of the door quickly. So, what does this mean for corporate lawyers and the deal making community?
Firstly, the due diligence process is being taken more seriously. Gone are the days when a deal was pushed through because it may be lost to those waiting in the wings. The deal process is longer and the structure biased towards earnouts and deferred payment mechanisms. I see this trend continuing.
With such a conservative attitude to risk, and with commercial management teams now having little or no immediate deal experience, I have noticed a tendency to focus on isolated issues with an inability to take a step back and take strategic risk based on an informed view. It takes experience to see the wood for the trees.
The challenge for legal advisers is to keep the deal on track and to help management teams to see the bigger picture and to focus on what matters. That requires time being spent understanding clients’ business needs and objectives. Good corporate lawyers need, more than ever, to know their law but they also need the experience and the ability to apply it to provide informed advice in context.