Mergers and Acquisitions in the United Kingdom

Gaining a Top Spot in the Market

The economies of our contemporary world are a direct product of globalisation, and most companies struggle for a place in both domestic and international markets. In the United Kingdom, the market economy is defined by capitalism. This means that most firms, regardless of their size, aim to grow in a market bound by competition and accelerated economic activity. Most businesses want a piece of the market share pie and will work tirelessly to develop resources and profits, eliminating competitors in the process.

It takes years to establish financial stability and a top spot in the market. So, to be a big fish in a colossal pond, corporate companies restructure themselves through mergers and acquisitions (M&A). Although both terms have different meanings, they are increasingly blended in corporate dialogue to account for unique and specific circumstances of various transactions. M&A is a general term that covers the process of mergers and consolidations, acquisitions, tender offers, and asset purchases.

Acquiring high-value businesses is an effective strategy to make your mark in a competitive marketplace. Studies suggest that effective integration, economic certainty, and accurately valuing your target are the vehicles to a successful M&A journey. A valuation can refine your range of targets and provide granular insights on the business of interest.

For the purpose of this guide, mergers and acquisitions will be discussed separately. However, it is important to note that the end goal for both transactions is to gain a competitive advantage in a shared market, and ultimately grow into a major market player.

Acquisitions Explained

Negative connotations are commonly attached to acquisitions, also referred to as takeovers. An acquisition is when a company takes over another company (usually a lot smaller) and establishes itself as the owner. The acquirer absorbs the smaller company and takes over its operational management, stock and/or assets. Hostile acquisitions happen when the target company does not consent to the acquisition, so the acquirer forces the acquisition by purchasing large stakes of the target company to gain control. However, friendly acquisitions are most common. This is when the board of directors and shareholders of the target company agree to be acquired. Someone looking to sell their business can also be acquired by another company that has the resources to develop it further.

Acquisition Types:

Stock acquisition:

In this type of purchase, the priority is for the acquirer to purchase shares from the target company’s shareholders. A stock acquisition will put the target company under new ownership, and the acquiring company will own all the assets and liabilities of the seller. The advantage of this type of acquisition is that daily operations are not disrupted, and the seller can continue managing the company’s operations. The disadvantage is that the acquirer will have to deal with the company’s liabilities, which may turn out to be an unforeseen headache in the future.

Asset acquisition:

As the heading suggests, this acquisition is concerned with the target company’s assets. This is an advantageous option for buyers because you can select which assets and liabilities you want to acquire. You can also decide to ignore all the liabilities and purchase selected assets. This type of acquisition is implemented when a buyer seeks a specific division of a company.

The Reasons for Acquisitions

There are multiple reasons companies acquire another company. Essentially, it is to establish an advantage in a competitive market and increase the scale of operations. Here are some of the most common reasons, which naturally fall under the benefits of an acquisition:

• Improve market share and take corporate control of markets, ultimately gaining a competitive advantage
• Purchase the supplier to gain an advantage in the supply chain. This improves economies of scale by dividing resources and services
• Reduce costs and increase the value of a company
• Expand into new, unique product lines that will increase recognition
• Obtain appealing elements of a company, like unique technologies or ideas. This helps save capital and research development costs
• Tax benefits that will be specific to the transaction

The Downsides

There are always pros and cons to business transactions, including M&A. Disadvantages of acquisitions should always be anticipated, so ensure you have solutions to problems.

• Internal friction and competition
• Communication barriers if an acquired company is from a different culture
• A hostile acquisition can lead to a company eliminating excess or underperforming assets, including the jobs of employees
• Duplication, which can lead to retrenchments
• This can result in losing experienced employees that have strong operational knowledge
• You may need to retrain and reskill employees from the acquired firm

Examples of Acquisitions

There are thousands of examples of acquisitions in the United Kingdom. However, hostile takeovers are not very common in the UK M&A market. If the acquisition does start off hostile, it is common for the takeover to gain cooperation and agreement amongst the target board. To level the playing field, target companies also have codes offering protection, known as the City Code on Takeovers and Mergers, which requires early disclosure and intentions of the acquisition.

Here are some familiar UK companies that exited the private market through an acquisition:

Skyscanner and Ctrip International

Ctrip International, a Chinese-based international travel agency, acquired Skyscanner for £1.40 billion. Skyscanner is a well-known online travel comparison website. According to data platform Beauhurst, this deal was the most significant technology acquisition in Europe in 2021. Acquiring companies often allow the target company to continue operating under its own brand, so Skyscanner still operates independently, is available in multiple languages and accepts over 70 currencies.

Miller Homes and Bridgepoint Development Capital

Miller Homes, one of the UK’s largest house construction companies, was acquired by Bridgepoint Development Capital for £655 million. Bridgepoint is a European middle-market private equity group. This allowed the Miller family to end its involvement in the company and cash out. Reiterating that acquisitions are not always hostile; this acquisition was welcomed and favourable for both parties involved. Miller Homes still operates under its own brand.

How do You Finance Acquisitions?

Acquisition finance is not a cheap pursuit. Companies are often acquired for millions – even billions - of pounds. The method you choose to fund the acquisition will be specific to your transaction.

You could choose to use your own funds, but it is not common for an acquisition to be solely financed through savings or upfront cash. Often, individual funding is combined with loans or seller financing. If you consider a bank loan, ensure that you have substantial assets and strong credit history. Seller financing can be beneficial as it is easier to obtain and can be a lot cheaper. With seller financing, the seller will provide you with a loan that you will be amortised through a timeline you will both agree on.

Mergers Explained

By definition, a merger is when two companies combine forces to create a new entity. But an acquiring company and target company combining can also be defined as a merger. Usually, mergers are considered friendly, and the board of directors for each company agrees to the merger. But mergers can also become sour; while combining forces can lead to a fresh business model, new markets, and increased profits, it also requires the joining of different CEOs, employees, and a balance of authority that can lead to misunderstandings, clashes, and disconnection. Each transaction is different and will have specific goals. Therefore, the term M&A often overlaps.

Types of Mergers

There are multiple ways a merger can be structured, and it will depend on the sector of the companies involved, amongst other elements.

Horizontal merger:

This is when two companies that share the same product lines and market – and are therefore in direct competition – merge.

Vertical merger:

When a customer or supplier and a company merge to consolidate their position in the supply chain and ultimately in the industry. For example, the BBC is a company that incorporates vertical integration. To consolidate its position as a top broadcasting entity, it has multiple products and services (BBC Radio, BBC Worldwide, BBC News) that work together in a vertical model.

Conglomeration:

This is when two companies that have no common areas or are entirely unrelated merge. The main reason for this type of merger is diversification, which allows a company to enter a non-cyclical industry and diversify its cash flow. Markets are always at risk, so this is an effective way to anticipate significant losses.

Advantages and Disadvantages of Mergers

Fusing two companies can result in a lot of benefits. Mergers are often executed to gain a larger market share and be a competitive leader. Efficiency and reduced costs are also an advantage of mergers, as companies can achieve economies of scale by sharing resources. If a company that produces similar products and services merge, this can avoid duplication and reduce prices. Keep in mind that if a company does not face much competition and becomes a monopoly, it can also raise prices on products and services. While this is advantageous for the business, it may annoy customers and consumers.

Companies looking to expand their business into new geographic terrain will often merge. If a company faces financial distress, such as bankruptcy, a merger is an effective option to save the company.

Of course, there are disadvantages to all things related to business transactions. An evaluation of mergers is vital to anticipate disadvantages. As a precautionary measure, it would be wise to study possible advantages before pursuing the transaction. These are some common disadvantages of mergers:

Communication Barriers

It is common for merging companies to have employees with different cultural backgrounds, skills, industry knowledge and values. If not correctly managed, this can lead to unwanted clashes. If two companies that don’t have much in common merge, there is a risk that the board will struggle to maintain control, and employees can become demotivated, and their efficiency can reduce.

Unemployment

Mergers can be aggressive. If one of the companies decides to reduce underperforming assets to reduce costs, employees can lose their jobs. Unemployment is a self-explanatory disadvantage.

Notable Mergers in the UK

Mitie Group and Interserve

Mitie Group (strategic outsourcing company) and Interserve (multinational construction company) are two of the UK’s most prominent government outsourcers, and both serve the NHS and Ministry of Defence. The British Government has relied heavily on external companies for support during the COVID19 pandemic, so both companies saw this as an opportunity to cut costs, transform, expand and accelerate long-term goals. Mitie Group bought the facilities management sector of Interserve for £271 million. These companies were involved in building the NHS Nightingale hospital, constructed to accommodate an influx of COVID19 patients.

Brewer Marston and Carlsberg

Britons undoubtedly love a pint, so news of Carlsberg Marstons Brewery Company was received well. The synergy between Brewer Marstons and Carlsberg was valued at £780 million, and the deal involved Marston’s breweries and depots. This merger will allow the companies to market a more extensive beer portfolio of regional, national, and international brands.

Merger and Acquisition Document Checklist

There are many phases of an M&A deal, and it requires meticulous financial, legal and corporate planning. A skilled M&A lawyer is advisable. Hiring an investment banker that understands the parameters of M&A law is also wise. There will be a buy-side of M&A and a sell-side of M&A, so you will need to vet specific professional advisors depending on the side you are on.

Some standard documentation that will be required in the M&A transaction include:

Articles of incorporation

This will include a new class of shares, any company brand changes, and details on the development.

Letter of Intent

This document will outline the commencement of the transaction. Although this document is non-binding, there may be clauses within it that are. Your financial and legal team should be aware of this.

Acquisition Agreement

The companies involved in the transaction will come into a binding agreement. This will include the terms of deal and primary clauses like conditions, descriptions, contracts, and warranties. This document should be drafted with intricacies to avoid conflict.

If you are unfamiliar with this documentation and you’re not sure where to start, a financial and legal analyst can support you. These documents will form the financial and legal basis of your transaction, so they must be carefully drafted, understood, and audited.

Closing Points

Mergers and acquisitions are a way for companies to establish growth and gain a competitive advantage in an economy that is difficult to make a mark in. It is an effective way to promote efficiency, profitability and power in the marketplace, but it also has disadvantages that you should consider before executing the transaction.

According to the Institute of Mergers, Acquisitions and Alliances (IMAA), the UK has seen more than 103 070 mergers and acquisitions since 1985, with a value of £5688 billion. While M&A deals between UK firms have decreased since the pandemic, it is still a powerful way to stabilise companies and eliminate competition – if it’s done correctly!

If you have further questions, feel free to contact our dedicated team.