Press Release

Down but not out: UK M&A performance takes a hit in 2017 but greater clarity on Brexit allows cautious optimism for year ahead

Global M&A activity is also to face uncertainty in 2018, but deal numbers are expected to pick up as market benefits from greater US tax clarity

January 11, 2018
| United Kingdom

LONDON, Thursday 11 January, 2018 — UK M&A market performance dropped significantly at the end of 2017 with dealmakers recording their weakest quarterly results for the year in the final three months, according to M&A data published by Willis Towers Watson. UK deal volumes also dropped in 2017 to 38 completed deals over $100 million, compared to 46 in 2016.

The research shows that the UK market has struggled to sustain the resilience demonstrated in 2016 when outperforming the Index1 by 5.0pp (percentage points), with the value of deals made in 2017 down by more than half and the market’s decline most acute in the final quarter, underperforming the Index by 2.4pp.

Jana Mercereau, Head of Corporate Mergers and Acquisitions for Great Britain, said: “Deal volumes in the UK market had until recently been sustained by sellers wishing to monetise the high prices being paid for quality assets. However, as well as highlighting the difficulty of delivering successful deals in an overpriced market, the data suggests the spectre of uncertainty caused by Brexit weighed heavily on the UK M&A market and, ultimately, how well these deals performed.”

Key findings revealed by the Willis Towers Watson’s Quarterly Deal Performance Monitor, the longest continuous global study of completed M&A deal performance, in partnership with Cass Business School, include:

  • Global acquirers in 2017 underperformed the index by 1.3pp during the year, a significant drop from 2016, which saw an outperformance of 5.4pp;
  • The final quarter of 2017 proved especially challenging to deliver value, with dealmakers significantly underperforming the market by 4.9pp below the index. This is the lowest quarterly figure recorded since the QDPM research began in 2008.
  • Europe performed the strongest in 2017, posting a performance of 3.7pp above their regional index, followed by a relatively flat performance in North America of 0.7pp and a significant underperformance of Asia-Pacific acquirers of 12.0pp that drove down the overall global results.
  • Following a slow start in the number of deals completed globally in the first half of the year, Q4 saw 251 completed deals (901 in full-year for 2017), compared to 273 (942 in full-year 2016) for the same period the previous year.

While dealmakers underperformed in 2017, the analysis shows the three-year rolling average performance for global acquirers remains positive at 4.8pp, with longer-term performance since 2008 currently at 3.5pp, which indicates acquirers over the long term continue to track well above market indices, maintaining a strong return on completed deals.

2018 M&A predictions

Based on conversations with clients and colleagues, Jana Mercereau, Head of Corporate Mergers and Acquisitions for Great Britain at Willis Towers Watson has shared her predictions on the future of M&A in 2018:

  1. U.S. tax reform – how will companies spend their cash windfall?
  2. The passing of the tax reform bill last year by the U.S. Congress alleviated the uncertainty surrounding the legislation, which had created a backlog on deals postponed in 2017. In 2018, buyers and sellers will benefit from greater clarity on the legislation, enabling them to make more informed decisions on potential deals.

    In addition, corporate tax cuts and the inducements to repatriate funds parked in offshore subsidiaries could result in U.S. companies using funds to spur growth through acquisitions, and particularly within the domestic market. Our prediction is that prices will go up and therefore companies will need to be careful not to overpay – which some inevitably will!

  3. Protectionism turning the world upside down…again
  4. In 2018, the UK can expect more clarity on whether or not Brexit will be an amicable or cliff-edge separation for Britain. Either way, we should have a clearer picture by late 2018 of the future impact on the M&A market. In the meantime, despite the geopolitical uncertainty, we predict an increase in UK M&A deal activity, as organic growth remains challenging and international investors continue to capitalise on a weakening pound and the abundance of cheap financing available.

    Meanwhile, on the continent we see France facing down unions and predict that they will allow the takeover of companies previously viewed as strategic assets.

    Finally, in a strange juxtaposition, China and the U.S. are in a role reversal with China’s loosening of foreign investment restrictions and the U.S. increasing them with greater regulatory scrutiny on mega deals in similar industries. We are likely to see outbound investments from Chinese companies picking up this year, most of the deal-making will likely happen in sectors including infrastructure and natural resources, which are aligned with China’s Belt and Road Initiative. 

  5. Technology deals at any price: Damned if you do, damned if you don’t
  6. Half of M&A deals involving technology targets in the last three months of 2017 were made by non-tech acquirers. In 2018, companies will continue to buy rather than build in order to acquire needed technologies and capabilities. The rapid pace of tech acquisitions has pushed up prices, but this is unlikely to deter buyers in 2018 who will continue to see some targets as must–have assets, even if the potential for value creation in the short to medium term is lower.

    The fall out of these tech acquisitions by “old economy” companies is that it is difficult to keep the talent they buy and use an acquisition to successfully realign their business. Corporate leaders will find themselves between a rock and a hard place: damned if they do not complete strategic deals, and damned if they do but then fail to successfully implement them because key talent leaves or becomes disengaged. We can expect to see a lot more pressure placed on deal teams to simply close the deal and then get pushed to realise value from an impossible combination. We also expect to see audacious sweeps by tech companies for “old economy stalwarts”.

  7. More media deals - Europe in the crosshairs
  8. Media has long been a hot sector for M&A, with a stream of headline grabbing deals led by the US over recent years now starting to hit regulatory restrictions. The US is an increasingly difficult target market, but we can expect to see a pick-up in pace elsewhere if deals in this sector continue to make economic sense. Europe, with its fragmented media market would seem the natural place to watch. While the array of choice has been expanding, markets seem fairly saturated and a wave of consolidations seems imminent.

Mercereau said: “In 2018, deal numbers are likely to pick up as interest rates begin to rise and the market benefits from greater clarity over the direction of US tax reform and Brexit. However, in spite of improving fundamentals and low cost of capital for strategic buyers, the M&A sector will continue to face upheaval and uncertainty.

“Companies will not be able to rely on traditional ways of integrating and may need more flexibility in their approach to unleash value and retain talent. This will not only require different integration strategies but new organisational models. While our own research on talent retention shows a recent dip in retention budgets, companies may need to reverse this trend if they are to realise their investments in human capital.”

Willis Towers Watson QDPM Methodology

  • All analysis is conducted from the perspective of the acquirer.
  • Share-price performance within the quarterly study is measured as a percentage change in share price from six months prior to the announcement date to the end of the quarter.
  • All deals where the acquirer owned less than 50% of the shares of the target after the acquisition were removed, hence no minority purchases have been considered. All deals where the acquirer held more than 50% of target shares prior to the acquisition have been removed, hence no remaining purchases have been considered.
  • Only completed M&A deals with a value of at least $100 million which meet the study criteria are included in this research.
  • Deal data sourced from Thomson Reuters.

About Willis Towers Watson M&A

Willis Towers Watson’s M&A practice combines our expertise in risk and human capital to offer a full range of M&A services and solutions covering all stages of the M&A process. We have particular expertise in the areas of planning, due diligence, risk transfer and post transaction integration, areas that define the success of any transaction.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance.

1 MSCI World Index is used as default, unless stated otherwise.