MERGERS and acquisitions activity will slow in Scotland in 2021 as uncertainty about the outlook for the economy amid the coronavirus crisis and Brexit weighs on sentiment, one of the country’s best known corporate financiers has said.
However, David Leslie said Scottish companies have shown their resilience in recent years and predicted that deals will still happen with potential buyers focused on sectors such as pharmaceuticals, technology and financial services.
“Overall mergers and acquisitions activity will be down on recent years but there still will be a flow driven by potential upcoming tax changes, some key sectors still consolidating, and restructuring deals,” said Mr Leslie.
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He forecast that bid interest will come from firms in Scotland and companies based overseas. Scottish businesses may make acquisitions in other countries.
Some firms may be encouraged to hit the acquisition trail by expectations that there will be bargains to be had amid the challenging conditions facing businesses.
These could prompt some to complete restructurings that result in them offloading what they decide are non-core assets. In sectors that remain fragmented firms may buy or merge with rivals to help them add scale.
“There will be opportunistic investors and corporates that see good opportunities they believe they can get at a reasonable price,” said Mr Leslie, who set up his own corporate finance firm after leading accountancy giant PwC’s deal-making team in Scotland.
Fears that capital gains tax changes are looming as the Government aims to ease pressure on the public finances could encourage owners of businesses to sell up.
“There are quite a lot of businesses where the family has been in for ten or 20 years and are thinking about succession management,” noted Mr Leslie.
He said vendors may find there is strong interest from private equity houses who are sitting on huge amounts of cash raised from investors that they need to put to work.
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However, the gap between the price expectations of business owners and bidders could pose big challenges for deal-makers.
Mr Leslie observed: “Some growth sectors will still maintain high multiples, but for most sectors my advice would be if you don’t need to sell [in 2021] then don’t sell. If you feel you’ve got a medium-term strategy for the company this is the time to really focus on the company and its potential.”
He added: “Right now many of the companies that I work with at Leslie Corporate Finance are concentrating on core expansion, building a strong business and the right deal will emerge when the market fully recovers.”
Mr Leslie does not think tax considerations should drive deals.
He reckons the new Scottish National Investment Bank could help to stoke activity this year.
Under the chairmanship of private equity veteran Willie Watt, the bank plans to focus on encouraging investment in infrastructure, the environment and fast growth businesses. The bank has said it will provide patient long-term capital to build a stronger, fairer, more sustainable Scotland.
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It recently completed its first deal, with a £12.5m investment in Glasgow-based M Squared Lasers.
Support from the investment bank could help firms win backing from other investors.
Businesses with good growth potential could also benefit from the fact that Scotland is home to a range of wealthy business angels who are ready to provide backing for firms, including relatively young ventures.
“Early stage fund-raising is quite active,” said Mr Leslie, adding: “Fundamentally, if you’ve got a good business you will raise the capital.”
He noted that global M&A activity has been fuelled by the fact that many corporations have cash on their balance sheets while credit availability has remained quite strong.
While the Brexit process has caused huge uncertainty for firms, globalisation remains a key trend that will encourage some to do deals.
“As demonstrated over many years, Scottish businesses have gone out there and done things on the international stage,” said Mr Leslie.
The importance of digitalisation as a driver of M&A has been underlined by the coronavirus lockdowns imposed around the world. These have required firms to find new ways of selling and distributing products.
The Edinburgh-based Menzies Distribution business launched a push for growth last month with the acquisition of a big logistics operation from family-owned Bibby Line Group.
Technological change may fuel interest in firms with intellectual property that could help businesses to compete in fast-changing markets.
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Last month the Edinburgh-based Nucleus Financial investment platforms business said it had received multiple takeover approaches. America’s Motorola Solutions paid £30m in March for video security firm Indigovision, which is also based in the city.
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