What can we learn from overseas buyers?
What can we learn from overseas buyers?
Overseas businesses and investors have long found Britain to be a welcoming and beneficial platform for mergers and acquisitions. But the relationship is far from one way and the UK has a lot to thank foreign buyers for, including the recent rally within the post-recessionary M&A market. But are British buyers letting their foreign counterparts take over and missing out on the chance to learn from foreign companies' approach to buying distressed businesses and their assets? We've taken a closer look at recent trends to ascertain who is making a killing in the M&A market and where domestic investors are missing out.
The heavy presence of overseas companies in the UK has long been a point of contention. While other G7 countries have kept a close reign on what foreign investors could buy and control, Britain has swung the other way and gradually removed many of the restrictions on overseas investment.
It is generally thought that this process of deregulation was kicked off in the late seventies by the then Tory Chancellor Geoffrey Howe. Years of further policies designed to stimulate business culminated in the open-door immigration policies of Tony Blair's New Labour government and foreign investors flocked to buy up British companies in order to take advantage of the UK's burgeoning economy, strong skills base and valuable research and development assets.
But much of this foreign investment took place during the boom years of the late nineties and the early 2000s when the presence of global investment banks in London's financial districts, decades of liberal takeover rules and, crucially, easy access to cheap borrowing made Britain one of the top destinations for international acquisitors. However, by the end of the decade things looked very different indeed and the bleak post-recessionary landscape left things eerily quiet on the M&A front.
On top of improvements in local M&A market conditions, the weak value of the pound has provided additional encouragement to overseas investors. Sterling has been rocked in recent years due to political uncertainty with the Coalition Government and a lack of strong economic growth in GDP figures. Moody's downgrading of the UK's AAA credit rating for the first time since the 1970s proved a further hit, and the pound hit a two-and-a-half-year low against the US dollar in February. While this is problematic for Brits looking to spend or invest abroad, overseas investors are finding bargains in the UK where their money is going a lot further.
Over the past few years much of the M&A activity in the UK has been at the higher end of the market. Now, opportunities too good to ignore in the midcap and SME markets are being exploited by foreign investors. Cue the recent acquisition of the iconic 240-year-old menswear brand Gieves & Hawkes, snapped up by the Hong Kong-based Li & Fung.
Eastern businesses have often been drawn to British firms and its clear that many of these companies know how to make the most of a distressed business. Back in 2005, China's Shanghai Automotive Corporation (SAIC) was quick to move in on troubled Rover to snap up its assets. The firm made a joint approach for the British carmaker's assets after the group declared bankruptcy. SAIC was initially in the running to enter into a joint venture agreement with Rover, but when this fell through and the British firm was forced to cease operations, the eastern company took on the role of vulture and picked through Rover's cut-price assets through the administrators.
Although currency fluctuations are currently swaying things in the favour of overseas buyers, there is no reason why flourishing domestic companies can't follow a similar M&A strategy by targeting distressed UK companies. Businesses in the science, technology and engineering sectors are finding this approach particularly effective as it offers a shortcut to expensive and time-consuming research and development (R&D) investment.
But R&D opportunities aren't the only thing bringing overseas buyers to the UK - interest in other areas has also shot up in the past couple of years. The food and beverage sector, for example, has seen the percentage of acquisitions made by overseas buyers double from just 7 per cent in 2011 to 14 per cent in 2012, according to figures from accountancy firm Grant Thornton.
Trefor Griffith, head of food and beverages with Grant Thornton, suggested the sector is likely to see even more interest from overseas buyers in the coming months.
On the one hand, overseas buyers are causing some problems for British business buyers: Currency exchange rates and market differences are allowing some foreign buyers to step in and usurp local buyers. But if we take a longer-term view on the matter, it becomes clear that overseas buyers are breathing life into the UK's M&A market, as new injections of finance start to filter down to UK-based SMEs and open up new routes of expansion on both a national and global scale. This growth could well be even faster if British buyers step up and learn from the examples of their overseas counterparts by recognising global potential and profiting from a distressed business opportunity.