Deal fever is becoming contagious

Chris Stott, deal advisory partner, KPMG
Chris Stott, deal advisory partner, KPMG
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You don’t need to watch much David Attenborough to know that herding together is often one of the best forms of defence for animals. When it comes to business, the principle is much the same. We just call it market consolidation.

Deal fever is gripping the corporate kingdom right now. Firms are looking to mergers and acquisitions (M&A) to maintain growth, but also provide product diversity, investment, scale or geographic reach to protect and insulate themselves against changes in trading conditions.

We’ve seen this consolidation reach the front pages, not just the business section. And when some of the UK’s largest retailers in Sainsbury’s and Asda are making noises about a merger and others, such as Tesco and Booker have already completed a landmark deal this year, the rest of the business world should take note. Businesses in Yorkshire included.

For retail, the threat of discounters is clearly very real. The natural order of the sector is being disrupted and M&A is an answer to that challenge. There is now speculation that others will follow closely behind. And this is before the major e-commerce giants have fully hit their stride in the sector.

But it isn’t just the retailers that are after scale. Less trodden paths for consolidation are rapidly emerging.

Don’t be surprised if, over the coming months, the most active M&A sectors locally in Yorkshire will be the likes of vets, dental practices, holiday parks, manufacturers and insurance brokers.

And for good reason. There is a common theme that threads these sectors together - they are all highly fragmented sectors that are dominated by independent and often multi-site operations.

Built up by owner-managers, businesses in these sectors have been out of the M&A spotlight for some time. They now provide an ideal and timely opportunity for a savvy investor or ambitious leader.

But, why have they been thrust into the spotlight? A confluence of factors has ushered in this new wave of interest, not least; inflationary pressures, technological development demands, an increasingly price conscious consumer base and a relentless drive for efficiency.

These challenges have encouraged business leaders in these areas to look beyond an organic growth plan. By coming together with other providers, management is taking the opportunity to benefit from being part of an organisation with scale to increase profitability, boost potential revenues, diversify risk and access to financial resources, and collate the assets they need to become bigger market players.

For business owners, buy and build is, for some, an effective way to drive growth in a much shorter timescale than the alternative of organic growth. On top of the synergies and operational benefits, it is also a great way to increase the value of a business.

This approach can scale organisations quickly and make them attractive to a wider pool of buyers, and therefore more valuable. By acquiring a competitor, a business owner looking to court the interest of a corporate, or potential buyer from overseas, has the potential to make their company larger, more profitable and ultimately more attractive.

Of course, there are also challenges with this strategy too, such as the need to ensure smooth integration – both operationally and technically – and managing culture assimilation of staff. For owner managers, it can be a big ask, but there are big rewards for those that take the time to get it right.

That said, just as some businesses are looking to build up, others are considering selling non-core assets. In contrast, they see future challenges as a signal to get leaner and more agile. Local examples include businesses such as Cranswick and Kelda.

Their objective is to streamline and stick to what they do best, so they can focus on creating a fit and healthy business that remains responsive in the most tumultuous of times.

In either case, market conditions are driving deal activity. The gap between supply and demand for quality businesses has made this a seller’s market. With strong competition among international buyers, family offices, private equity investors and debt funds, it is a great time to be selling a business, which is further accelerating these trends I’ve outlined.

The prospect of a downturn in trading conditions is encouraging leaders to consider their future strategy. For Yorkshire’s business leaders, just as in the animal kingdom, they will each have to play to their own strengths and qualities and assess how they can best survive, evolve and thrive.