2024 is shaping up to be a stronger year for business acquisitions, as slowing inflation, an improved funding environment, and a competitive marketplace stimulate investor appetite.
Global M&A is already on the uptick, both in terms of deal volumes and deal value. And in the UK, a number of mega-deals have already been announced, including Nationwide’s acquisition of Virgin Money for £2.9bn in the retail banking sector, Compass Group’s acquisition of CH&CO in the foodservice sector, and Schroders Greencoat acquisition of c.£700m Toucan Energy Portfolio in the energy sector, amongst others.
In the mid-market, there has also been a flurry of acquisitions: in February, Signal AI acquired Social 360 in the data and tech space, cementing its position as a leader in reputation and risk intelligence, and in the motor space, DM Keith acquired car and motorcycle dealer group Colin Appleyard, signaling another step towards further consolidation in the dealership market.
Here are three reasons why small and mid-market businesses should consider growing through M&A in 2023.
Business confidence is improving, as inflation falls and interest rates peak
According to figures from the Office for Budget Responsibility (OBR), inflation is set to fall further and faster than expected, reaching its 2% target in the next few months – a year earlier than forecasted. Meanwhile, data from research company Kantar showed that UK grocery price inflation fell to 3.2% in the for weeks to mid-April – a 30-month low – in a positive sign for consumer spending power.
On the back of this, UK interest rates have now peaked and are predicted to fall to 4.5% this year.
While subdued growth is expected in 2024, EY ITEM Club Spring Forecast upgraded their 2025 GDP growth predictions from 1.8% to 2%, amidst falling inflation, higher consumer spending, and anticipated reductions in interest rates.
All of this is translating into increased business confidence: the ICAEW Chartered Accountants’ survey for Q1 2024 showed a significant improvement in overall business sentiment, with the Business Confidence Index rising some +14.4 points from +4.2 in in the previous quarter.
Domestic sales growth slowed slightly in Q1 2024, reaching 3.3% compared to 3.6% in the previous quarter. However, this remains above the historical average of 3%. Looking ahead, businesses are optimistic about future growth, expecting it to climb to 5.2%. Export sales are another bright spot. They rose from 2.1% in Q4 2023 to 2.8% in Q1 2024, nearing their historical norm.
Overall, a strengthening economy combined with a pool of stronger acquisition targets presents a strategic opportunity for companies to enhance their value through M&A.
Anticipated rate cuts and government support lay the groundwork for an improved funding environment
With stabilising inflation, credit conditions look set to improve in the near-term, with expectations of rate cuts in H2 2024 after two years of continual hikes.
The lending market in Q4 2023 already showed some signs of recovery, with £3.5 billion lent to SMEs – the first quarter not to see a fall since Q2 2022. New loan and overdraft approvals jumped by 3% and 7% respectively compared to the previous quarter – marking the highest level of new loan approvals since Q3 2022. Medium-sized businesses saw an even more significant boost in access to credit, with the value of approved overdrafts rising by nearly 20% and loan approvals increasing by 17% compared to Q3.
And in the 2024 spring budget, Jeremy Hunt pledged £200 million of funding to extend “the Growth Guarantee Scheme”, previously called the “Government’s Recovery Loan Scheme”, until March 2026. By giving the lender a 70% guarantee, it is expected to help 11,000 SMEs across Great Britain and Northern Ireland access the finance they need – whether it be for funding equipment, investment, growth or for simply improving cash flow management.
A competitive marketplace remains a key concern for businesses
Fears about a competitive marketplace is the third most widespread growing challenge facing businesses, according to the ICAEW Chartered Accountants’ survey for Q1 2024. The retail and wholesale sector, in particular, has been adversely affected by increased competition, as cash-strapped consumers turn to discount retailers and online marketplaces in search of better deals.
Other industries with low barriers to entry, such as professional, financial and business services, may also face increased competition, especially as emerging technologies such as artificial intelligence lower them further.
Against this backdrop, mergers and acquisitions are no longer just strategic moves, but an existential necessity.
Acquisitions of targets with competitive offerings and unique IP can become a lifeline, allowing companies to diversify their product lines, expand their customer base, and gain a technological edge in a cutthroat market.
For example, in April, Northern Irish business management consultant OCO Global acquired a Spanish tech firm Bizzyou in a move calculated to accelerate the digitisation of its services, while Nottingham-based Eight Days a Week Print Solutions has sought to bolster its digital marketing offering with the recent acquisition of Marketlayer.