Will tax changes spark a flurry of M&A activity?


With changes to taxes and a year like no other as a backdrop, Business Leader felt it prudent to review the M&A sector.

Business Leader has covered a multitude of deals in its nine-year history and the appetite from entrepreneurs to exit or acquire a competitor never seems to wane. But if there was ever a time you could excuse caution, it was 2020.

However, the market held up well as many business owners advanced exit plans due to the pandemic and changes around capital gains tax and corporation tax forced the hand of many too.

2021 has started brightly too, explains John Farrugia, who is Managing Partner and Head of Technology M&A at finncap Group’s Cavendish.

He says: “It is not a surprise that UK transaction volumes and deal appetite have been much stronger in Q1 2021 than 2020. The obvious contributor to this is enhanced confidence and stability as the pandemic is receding, and that likely winners and losers in the post-pandemic world are emerging. Less obvious is that many entrepreneurs have had their exit plans accelerated by fears of forthcoming tax changes, which made for an exciting run-in to the recent budget.”

Busy, busy

It’s also interesting to get the perspective of Dan Franklin, who is Head of M&A at the Handl Group. The business is a collection of companies covering legal, insurance and more, that is always on the lookout for a deal.

His assessment of the market is as follows: “The start of Q1 saw a lot of M&A activity across multiple sectors, as vendors, investors and advisors looked to get deals completed ahead of potential capital gains tax changes in the Chancellor’s budget; and this followed the trend from Q4 of 2020.

“From my perspective, looking at the sectors in which Handl invests; insurance, legal and healthcare with a focus for people and technology, there has been a good, healthy level of activity with new M&A opportunities which should enable us to bring new brands into the portfolio later in the year, building on the three acquisitions we made in the latter part of 2020.”

Dan continues to say that he is also seeing some clear trends in the sector.

He continues: “What I’m seeing is that good, strong assets are taking advantage of investment market conditions insofar as private equity and institutional investors have considerable funds that they haven’t necessarily been able to deploy as they would have in a pre-COVID era, meaning shareholders are able to achieve higher valuation aspirations as investors need to still make investments.

“Furthermore, under-performing, distressed and companies still temporarily impacted by the pandemic do not really feature in the M&A landscape at present. It’s unlikely we will see a surge in this area of M&A whilst the government support packages remain in force.”

The future

Dan also does not think that the recent budget will impact the M&A sector as much as some are saying; but that tax changes likely will.

He says: “The competitive market conditions to acquire and invest in good, strong assets is likely to continue for some time to come, until investors get visibility of unlocked potential and value in under-performing or distressed opportunities. Once this happens, I expect the market to react and that will create a more balanced pipeline of opportunities.

“I don’t think the Chancellors budget will materially impact M&A activity for the foreseeable future, with the only area that potentially creates an impact is the restrictions around R&D tax credits. For early-stage businesses that are undertaking R&D activities, who often rely on the tax credit to fund either future R&D or working capital, there will be a need to source funding which could create an opening for early-stage, high-growth investors to increase M&A activity?

“I do believe that whilst capital gains tax and entrepreneurs relief remains stable there will be a whole heap of business owners who perhaps were thinking of exit strategies say five years from now will be seriously thinking about earlier exits and this, I believe, will be a key driver to increased M&A activity surrounding owner-managed businesses.”

Matt Stafford, who is Assistant Director at Momentum Corporate Finance, agrees that changes to tax will inspire deal activity going forward.

He says: “The recovery in M&A activity that was evident in the second half of 2020 has continued in the first quarter of 2021. We have seen significant demand for high-quality assets in a range of sectors from both trade and financial buyers, supported by access to plentiful capital from banks and private equity.

“There is still an element of pent-up demand with processes that were delayed by the initial uncertainty caused by Covid-19 being launched towards the end of 2020 and completed in 2021. In addition, in Q1, we have seen several deals driven by anticipated changes to capital gains tax, even though these did not materialise in the most recent budget.

“The extensive uncertainty which has impacted investment and M&A in recent years will hopefully reduce throughout 2021, due to the success of the UK vaccine rollout to date and more clarity around Brexit. As such, we expect the recent strong demand to continue as businesses recover from the pandemic, with large corporate acquirers looking for strategic diversification through acquisitions.

“This will be matched by a supply of opportunities, with processes launched as business owners reassess their risk appetites after the events of the past year, and we expect that anticipated changes to capital gains tax may also once again drive entrepreneurs to consider realising value. In addition, we expect to see further corporate divestments as more assets are deemed non-core as strategies are realigned.”