M&A is a global trend but, unlike elsewhere, most UK companies have gone to overseas buyers. Duncan Lamont, Head of Strategic Research at Schroders, looks at the implications of this trend.
A third of the major companies on the UK stock market a decade ago* have since vanished, with more than half going to overseas buyers.
Almost all were bought by or merged with another company. This in itself is not unusual – our previous analysis of the US stock market came to a similar conclusion, albeit over a slightly different timescale.
But what is striking for the UK is that it’s been overseas buyers who have been snapping them up – 54% by number and almost 70% by value have gone overseas, mostly to foreign public companies. These include famous companies such as SABMiller, Shire, Sky, and ARM Holdings. The biggest buyers by far have been US public companies, followed by Canadians.
This is in stark contrast to the US where the biggest buyers have been other US public companies. US stock market investors have retained an interest in their ongoing prospects, only as part of another public company, just not on a stand-alone basis. Not so, for the UK.
It is also different to what has happened in continental European markets. Only 30% of French companies to delist, and 25% of German ones, were bought by an overseas company (mostly other European ones).
A relatively small proportion of UK companies to de-list, 11% by number and 6% by value, have fallen into private equity hands. Interestingly, private equity has played a more prominent role in German takeovers than UK ones.
All in all, of the £441 billion of companies in this cohort to depart the UK market, £326 billion, 75%, ended up overseas or under private equity ownership (which was also mostly overseas).
Only £112 billion was bought by another company on the UK stock market. And just over £1 billion by private UK businesses.
Fourteen companies departed for other reasons, mainly going into administration. Their value was typically negligible by the time they exited.
To sell or not to sell, that is the question
The need for a buyer to offer a takeover premium over the share price provides a juicy incentive for shareholders to sell. In our data set, the median company to be bought/merged returned 38% in the 12-months before de-listing (a period which would typically capture any share price-response to takeover/merger activity). It outperformed its sector by an impressive 25% over this period.
It’s not hard to see why shareholders can be tempted by an approach. But the risk is that it puts short term profit ahead of longer term potential gain. These buyers are not offering a premium out of charity. It is because they believe that ultimately the business will be worth much more to them.
Now this is often partly because of synergies – when you combine two businesses there is often potential for cost cutting as shared common functions can be consolidated e.g. finance departments.