What does the Chancellors Budget mean for the M&A market prospects?
Posted on: March 8th 2021 · read
MHA Corporate Finance Director, Stephen Gregson, considers this question below:
When it comes to levels of M&A activity the Budget is often one of those situations where the effects do not follow the cause, but they precede what is anticipated to be the cause.
What I mean is that concerns regarding a possible reduction in Capital Gains Tax (CGT) reliefs for selling owner managed businesses drove a significant increase in disposals activity (particularly of OMBs which is the focus of our client base and hence this blog) and an acceleration of transactions to enable them to complete prior to 3rd March. As we found out on 3 March, these fears of an increase in CGT were unfounded - for now.
But that doesn’t mean that the answer to our question is ‘Not very much in the end’. In many ways far from it because the Chancellor outlined a series of measures which the Treasury hopes will facilitate future economic growth and recovery (at minimal cost to the public finances); and if they are right in that judgement this would have a very profoundly positive impact on the prospects for M&A activity in the OMB sector over the coming 12 to 24 months. Why? Because a stronger macroeconomic background is better for the businesses operating in that economy, hence is better for their growth and profitability and it lifts confidence generally and amongst potential acquirers specifically thus making a disposal of a business not ‘a given’ but substantially more likely than if we are in the throes of an economic downturn or sense that one is rolling over the horizon towards us.
Another important factor is that if the wider macro-economic landscape is looking healthier then that would usually result in debt funders having a stronger appetite to fund potential acquirers - including acquirers who are perhaps new to that bank and switching from another funder.
So, when it comes to levels of M&A activity amongst OMBs ‘Context Counts’; and if we can see a strong post covid rebound (and the OBR are anticipating we could well do so with GDP growth of potentially 7%+ in 2022) that would be very helpful for businesses trading, growth and sale prospects.
However, we need to be a little cautious in that such levels of growth, if we experience them, will very likely be and be understood by acquirers to be, a post covid one off bounce. The post 2022 GDP growth forecasts fall back to the more usual levels we have seen of late for the UK of less than 2% per annum; owners will need to factor that into their thoughts about what the likely market value of their business will be.
Although austerity has not fully been laid to rest as an element of Treasury policy with the announcement of further cuts in Governmental spending it was encouraging to hear that the Chancellor did not suggest that the sky was falling in because our National Debt to GDP ratio was forecast to climb to 97% in 2023-24. As the IMF pointed out several years ago, the best way for an advanced economy to deal with its National Debt was to ignore it. Or rather, to focus upon measures that grew the scale, resilience, performance and productivity of the economy; because get these things right and the National Debt issue will ‘sort itself out’ through a blend of inflation, greater tax revenues and greater levels of employment. This is important for M&A prospects because as we saw following the 2010 crash and the austerity policies brought in by successive Governments, these can all serve to raise uncertainty and concern amongst sellers, buyers and funders and depress levels of M&A activity.
The announcements around Corporation Tax increases but also additional reliefs for businesses which invest to improve productivity and their performance may also signal a research informed move away from reducing Corporation Tax and hoping that will lead to greater productive investment by Companies to a system which actively incentivises the business to make these investments. Businesses which take advantage of this should expect to improve their financial strength, prospects and therefore attractiveness to a potential acquirer.
We started out by considering the impact rumoured changes of CGT reliefs had on driving M&A activity in the last few months and let’s finish on a similar theme. The Chancellor has potentially signalled in this Budget that the Conservative party is prepared to raise taxes if that is required. As he said himself, the UK’s future now rests on a “…very different economic geography.” and policy is being adapted to this.
It is not clear that CGT tax rates are going to remain at the current levels indefinitely and so there may well be a concern amongst some business owners that they may be made less attractive in the next Budget. I don’t know if that is going to be the case. My crystal ball is as murky as yours. But such concerns might well be a call to action for some business owners who were considering selling their businesses and if that is the case it would be sensible to start that process sooner rather than later.
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