Many commentators have remarked positively on the UK’s strong dealmaking performance during a climate of economic and political uncertainty. This is despite Experian Market IQ figures showing the number of deals in the first half of 2018 didn’t quite match up to levels seen in the first half of last year.
Overall, the number of completed deals fell in H1 2018 compared to last year, but it was interesting to not only see a stronger Q2 compared to the previous three months but also a noticeable increase in transaction values. When the total value of UK deals during the first half of this year on the Experian Market IQ database is added up, the aggregate figure is almost 40% higher than it was in H1 2017. It’s also worth pointing out that, at £214 billion, this value is more than it has been for a decade.
The manufacturing sector as a whole continues to attract a significant amount of this M&A activity. During the first half of 2018, it was beaten only by financial services. If we look closely at the data produced by Experian, during the first six months of this year there were 697 deals in the sector, compared to 772 within the same period of 2017. This 9% fall in volume, however, contrasts significantly to a 229% rise in the value of those transactions. This trend is certainly not unique to the manufacturing sector. The data shows, for example, that during the first half of the year, average deal sizes in the UK also increased in the media, pharma, telecoms and retail industries.
This shift to larger value manufacturing-related deals is also evident outside of the UK. PwC’s Global industrial manufacturing deals insights: Q2 2018, for example, demonstrated a 68% increase in the value of international industrial manufacturing M&A compared to Q1 2018.
Interestingly, this significantly outpaced global cross-sector M&A which delivered a 7% growth in value over the same period. This study also highlighted the return of the megadeal in the manufacturing sector, with the first being recorded for over a year.
So what does the future hold for UK manufacturing M&A?
A good starting point when examining trends within the sector is to take a close look at how it’s currently performing. There is plenty of data available, and the latest IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index for September 2018, for example, revealed an improvement in growth after a disappointing dip in August. The sector has now been in growth mode for over two years, and recent results point to many companies enjoying increased levels of new business boosted by rising exports.
If we look at the most recent data from Experian for July 2017, there were 149 manufacturing-related deals compared to 145 in July this year. The total value of these deals this year stands at £12.4bn, slightly higher than the same period in 2017. The picture looks similar when August and September in 2017 are compared to the same months in 2018.
Interestingly, when we examine activity from the first three quarters of 2018 with 2017, deal numbers are lower but values are up by 25%.
Based on this data, it certainly looks like the trend for fewer but larger manufacturing-related deals will continue until at least the end of this year.
Of course, a key factor which makes the future difficult to predict with any certainty is Brexit.
We know from independent research, and through speaking to our clients, that leaving the EU is a major worry for a large number of businesses. Many have it as their number one priority and concern, whilst some view it as an opportunity along with other macro issues, such as the impact of Industry 4.0.
According to many industry experts, the digitisation and mass customisation of manufacturing will be the biggest driver of M&A in coming years, as weaker players are swallowed by stronger ones. Industry experts at the International Manufacturing Technology Show in Chicago earlier this year said that it would play a major role in deal activity over the next five years.
It will be interesting to see what the impact of Brexit and Industry 4.0 will be, and also for how long the trend for lower volume, bigger ticket manufacturing deals will go on. What looks certain, however, is that manufacturing will continue to be a highly resilient sector, and drive significant UK and overseas deal activity in the future.
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