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PwC reports mergers and acquisitions increase

Written by Gary Howes

Wednesday, 24 September 2008

Private equity activity cited as driving force in SME sector.

The Business Services sector is continuing to experience significant mergers and acquisitions activity even during the downturn, bucking the trend of declining deal volumes.

With price expectations slowly realigning, many investors see 2009 as a good time for buying opportunities.

However it must be noted that downturns are historically times of increased activity as some companies seek to strengthen their weakened positions through merging and selling out.

In the UK Business Services deal volumes reached a five year high with 517 transactions recorded between 1 July 2007 and 31 June 2008, compared with 480 in 2006/7, although deal values have dropped during the same period.

At £13.8 billion, the total value of transactions in 2007/8 still outstrips the aggregate value of deals recorded in both 2003/4 and 2004/5 according to Dealogic, Mergermarket and PwC analysis.

Major strategic moves have been put on hold, but smaller in-fills and bolt-ons will remain, and an increase in corporate restructuring will start to fuel deal flow, with the mid-market capturing a large proportion of this deal activity.

The ‘credit crunch’ has made life difficult for acquirers contemplating major strategic moves, however with Business Services dominated by medium-sized companies and mid-size transactions in the UK, credit availability has had less impact than in other sectors.

In addition, Business Services has remained popular with private equity (PE) investors, many of which have been executing buy-and-build strategies in the mid-market.

Simon Hawes, head of Business Services at PwC said, “private equity firms have a real opportunity to pick up some good assets. In the last major downturn in 1991/92, corporates began spinning out non-core assets following rationalisation and restructurings. If this trend is replicated it will produce attractive buying opportunities.”

The most active Business Services sub-sector in 2007/8 was Professional Advisory with 181 deals seen between 1 July 2007 and 31 June 2008. The majority of deals came from environmental consulting, testing and inspection and architectural and consulting engineering firms.

Both the environmental consulting and testing and inspection fields have seen their growth and expansion prospects boosted by the raft of rules and regulations emerging at both the UK and EU level. Companies struggling to keep abreast of the latest edicts in terms of health and safety issues or potential environmental liabilities are increasingly hiring specialists to deal with the complexities and to add value.

In the Transport, Distribution and Logistics (TDL) sector deal activity is ongoing with private equity, infrastructure funds and investments funds originating from the Middle East continuing to target cash generative assets. Trade driven consolidation also continues unabated with particular interest in 'final mile' and 'reverse logistics' driven by more stringent waste legislation.

Investors generally regard the Facilities Management sector as a relatively safe haven. Its participants provide what can be considered ‘essential services’ on long-term contracts which underpin future revenue and profit streams.

Value can also come from operational improvements and underlying market growth. With the economic downturn forcing companies to re-examine their cost bases, many are being encouraged to aggregate several Facilities Management services through one supplier and graduate from single-service to multi-service contracts, which will be a continuing driver for consolidation.

The Business Process Outsourcing sector is changing with providers seeking to move further up the value chain, particularly in regard to IT outsourcing. Outsourcers are therefore increasingly looking to acquire consultancy-type businesses to gain specific industry sector expertise, technical skill-sets and end-market experience.

PE investors have become increasingly interested in this space attracted by the cash flows that large outsourcing contracts generate, as well as the potential for them to act as consolidators in what remains a highly fragmented market.

In the Human Capital Management (HCM) sector the key areas for M&A have been recruitment, training, and education. In 2007/8 HCM sector deal volume and value increased by 22% and 40%, respectively, over 2006/7.

The sector is dominated by the recruitment companies, which have seen a reasonable level of transactions, particularly in the Recruitment Process Outsourcing (RPO) sector, resulting in greater predictability and security over future cash flows attracting private equity interest in particular. Further activity is expected in this space, with the prospect of some European consolidation.