OPINION11 March 2021

Deals on the horizon

M&A Opinion UK

As the economy rebuilds, Jon Priest reflects on the landscape for mergers and acquisitions in the market research industry in 2021.

white jigsaw pieces being stacked up

For an industry spanning insight, data, and tech delivery platforms, it has been all quiet on the UK mergers and acquisitions (M&A) front for a while.

Since Strat7’s acquisition of Crowd DNA last November, there has been but a trickle of activity as we entered 2021; in the US, Exclaimer acquired Customer Thermometer, HH Global bought the marketing sciences division of GBG and Kin + Carta bought US company Cascade Data Labs. Why the relative inactivity?

It’s the pandemic, stupid (or is it?)

There was the inevitable pause as the UK held its breath on the post-Brexit ‘Canadian-style’ trading arrangement in January, despite the fact that it did not really consider the UK business services sector (which accounts for about 67% of the UK economy) and the third pandemic lockdown created ongoing uncertainty among vendor and acquirers alike, but, notably, the underlying macro-economic conditions for the UK, European and US economies are actually pretty strong.

True, the UK has a debt position in excess of 90% of GDP, set to rise to 97% in 2024 as government borrowing totals £400bn to pay for public financing of the pandemic. But the Office for Budget Responsibility forecasts +4% economic growth this year and +7.3% in 2022 – much higher than was announced last November. This should help stimulate client research spending.

Overall, 2021 sees a ‘K-shaped’ recovery in the UK economy; as depressed sectors (airlines, fuel, tourism) recover, other parts of the economy (retail, agriculture, construction, manufacturing) continue to stagnate before an eventual and partial recovery. Research and insight falls somewhere between the two.

With Brexit ‘done’, the third national lockdown scheduled to ease from the end of March due to a highly efficient vaccine roll-out (behind only Israel and the UAE) plus a new international-friendly US president, the future definitely looks a lot brighter than six months ago.

Vendor appetite is the main problem

There is no shortage of acquirer cash – private equity, publicly quoted companies with strong balance sheets, cash surpluses and the ability to borrow cheaply means there is demand for M&A particularly in the attractive data and tech sectors and with no major liquidity concerns. Having enough bandwidth to complete deals has been the only real hindrance on the acquirer side.

However, for vendors, especially in the over-crowded small-to-medium enterprise (SME) market, many have suffered in the past 12 months with negative organic growth, margin erosion, significantly reduced investment and a much-weakened cash position. Smaller specialist agencies with a tech offering have also focused on shoring-up cash rather than investing and expanding, and larger agencies have seen turnover fall by up to -10%.

This has all adversely affected vendor valuations across the board. Placed in the invidious position of a declining profit story and huge uncertainty, sellers have been unsure whether to twist or stick; sell too cheaply and seek a safe harbour with a new owner now, or weather the storm and sell at some future date at hopefully pre-pandemic valuation multiples. There has also been uncertainty about the vendor earn-out period while the pandemic lingered far too long – a key worry for sellers.

At the same time, buyers are looking for value and there remains a lot of choice in the market at the moment – this means more discerning acquisitions rather than the floodgates opening.

Even those deals that are pending and soon-to-be announced have taken time, often much longer than normal. I expect to see some deals announced in May-June but remember, many will have had an incubation period of well over a year in some instances, as both buyer and seller took time out. So any imminent acquisitions predate current market conditions.

More deals on the horizon

Some vendors have been waiting nervously to see if capital gains tax (CGT) personal allowances will again be hit by the Treasury. Last March, the lifetime CGT personal allowance on the sale of business assets at a tax rate of 10% was reduced from £10m to £1m. That was some cut.

The March 2021 budget has not eroded the £1m allowance further and the 10% taper relief (as it is sometimes called) remains, at least until the interim budget statement in October, so vendors are not going to be over-taxed on their business asset disposal. Some vendors I know of have been holding off until this was formally announced by the chancellor. Now they can get on with it. And like me, many other brokers have been busy preparing for vendors to finally commit.

So, will we see a rush of deals? Yes, I believe so. As well as the May-June announcements as the first wave of 2020 originated deals finally completes, we will see a flurry of activity by November following the summer and before the festive period lull.

For the largest agency players, I expect to see more divisions and subsidiaries sold off as part of the necessary corporate restructuring and an attempt to boost earnings through focusing on core activities, and much less diversification. Smaller agencies may postpone a sale for 12 months in the hope of recovering profitability and growth.

A bright future

With the UK on track for some kind of normality, an economic recovery set for the next two years with good fundamentals in place and client spending returning to pre-pandemic levels, this should create a mood of optimism and confidence – and business confidence still remains the number one M&A driver.

Jon Priest is director at Capel Partners Limited