Midlands' regional factors could be key to market rise
The buy-out market in the Midlands has continued to slow through the first half of the year but Matt Waddell says there is increased investor interest, mainly driven by price falls.
The Midlands buy-out market has slowed considerably over the past year but has not reached a standstill. The sustained interest in corporate investment is revealing a resilience and resourcefulness which bodes well for the future and could help get the region back on its feet more quickly once the recovery begins.
Companies at all levels are becoming more inventive in a bid to beat the recession, not least mid-tier companies that represent some of the region’s biggest employers.
Despite most mid-tier businesses being preconditioned to avoid sharing knowledge with or otherwise getting close to competitors, an increasing number of companies in the region are considering ways to work together, sometimes leading to a collaborative agreement.
While mainly contractual in nature and not usually backed by inward investment, such agreements are designed to deliver specific benefits or synergies, which may include strengthening facilities; distribution networks; supply chains or breadth of offering.
This kind of collaboration is nothing new and it is not unusual during a recession – a time when most companies are willing to consider anything that could increase stability or strengthen market position. Of course, it is also possible that when companies collaborate in this way, it could inspire them to go a step further, potentially leading to a merger or acquisition, although this is perhaps unlikely in the short term.
As deal-makers stay on the look-out for signs of recovery, it is possible that an upturn in M&A activity, driven by mid-tier businesses keeping an eye on investment opportunities, could lead the way.
Even when the recovery comes, the volume and value of deals are unlikely to be comparable with those seen prior to the onset of the credit crunch. Business valuations have fallen by about 15-20 per cent in the Midlands and the ‘mega-deal’ culture, which had seemed to be forcing values inexorably skyward, now appears to be over.
It is these low prices and a growing sense that any losses incurred to date have been largely ‘written in’ to current market values and therefore are unlikely to fall further, that will ultimately help to revive investor interest. It is significant that the Midlands’ exposure to the mega-deal culture has been less than some parts of the UK and, by comparison, valuations of mid-tier companies in the region have not had so far to fall. These factors could mean that the Midlands buy-out market is likely to bounce back more quickly.
While the recovery is not expected imminently, businesses should expect values to start to rise in the medium to longer term. The market has moved from peak to trough in about 18 months and despite the fact that further falls in value can not be ruled out, the true value of businesses in the region is probably somewhat higher than it is today.
For the remainder of 2009, the buy-out market will continue to be focused on corporate reorganisations as companies seek to diversify risk and turn non-core assets into cash. Of course, a number of deal opportunities are also arising as companies get into financial difficulties and, in some cases, these transactions are proving helpful in keeping businesses going and protecting local jobs.
Matt Waddell is head of corporate finance at PricewaterhouseCoopers in the Midlands
