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Cheap valuations are encouraging more corporate activity

One of the factors undoubtedly helping lift the UK stock market to new highs this year is an upturn in M&A (merger and acquisition) activity.

According to Dealogic, the value of UK takeovers so far in 2024 is more than $78 billion, the highest level since 2018, as overseas buyers in particular home in on the undervaluation of the market.

‘The UK has become structurally very attractive for M&A. There’s a lot of frustration behind the scenes with valuations and the sense that the market is not properly rewarding UK companies,’ observes Bank of America’s head of UK Investment banking Peter Luck in an interview with the Financial Times.

Luck believes the lowly valuation of London-listed firms together with an improving economic picture and the prospect of lower interest rates later in the year could lead to yet more M&A activity.

Not only have deal volumes hit 2018 levels, the median takeover premium of 34% so far this year is almost back to that year’s record level of 37% according to data from Bloomberg.

Rather than suggesting UK companies are being greedy or bidders are becoming more generous, the premium reflects depressed valuations says Cannacord Genuity’s head of Quest Research Graham Simpson.

Corporate buyers seem to be leading the way in terms of deal size, with BHP Group (BHP) pursuing rival Anglo American (AAL) in a potential $38 billion deal and International Paper (IP:NYSE) seeing off rival Mondi (MNDI) with an agreed takeover of DS Smith (SMDS) for an enterprise value of $9.75 billion.

Private buyers have generally been chasing smaller targets, for example US firm Thoma Bravo clinched UK cyber security specialist Darktrace (DARK) for just £4.2 billion or $5.25 billion, while Czech billionaire Daniel Kretinsky offered £4.5 billion for Royal Mail-owner IDS (IDS), with talks said to be ongoing despite the UK firm’s initial opposition, and Nationwide snapped up Virgin Money (VMUK) for £2.9 billion.

Private capital’s reluctance to engage in bigger deals is part of a wider trend and not just a UK phenomenon according to M&A experts.

Pitchbook reports the deal value for North American and European take-private deals shrank 50% in the first quarter of 2024 compared with the final quarter of 2023 to just $12.5 billion, as rising valuations have encouraged buyers to look for smaller targets.

Private buyers’ share of global M&A deal volume dropped to below 40% last year from 44% in 2022, reversing a trend of eight years of increases. 

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