US companies take advantage of weak pound to buy UK firms

03 October 2018

While interest from EU buyers is low, UK companies are now more likely to be purchased by US corporations, as a favourable exchange rate makes Britain’s top companies increasingly attractive. Global professional services firm Moore Stephens believes that the spate of purchases shows American business bosses are keen to make the most of the pound’s deflated value to invest in innovative and well-run businesses.

Since the 2016 referendum result which saw the UK begin preparations to leave the European Union, the value of Britain’s currency has been plagued by a succession of serious falls. This has made it more difficult for many businesses in the UK to import materials, and is cited as having resulted in a number of high-street and restaurant chain collapses – however it has also led to a boom in other industries due to the increasing currency movements the pound’s performance provoked.

The weakened pound played a significant role in boosting the UK media and entertainment sector’s year-on-year revenues by £10 billion. Elsewhere, China began investing heavily in the London real estate market. In the first half of 2017 alone, £5 billion in Chinese capital was sunk into Britain’s capital city, as the low pound continues to make the present financial hub of Europe an attractive prospect, despite an uncertain future for links with the continent.

US companies take advantage of weak pound to buy UK firms

Now, following another succession of financial drubbings, as the EU and UK continue to butt heads over the negotiating table regarding the border of Northern Ireland, among other issues, the pound remains low, attracting further interest from overseas. This time, the interest is coming from the other side of the Atlantic, to be precise, with US firms now becoming the ones to take advantage of the cheap pound, snapping up a number of Britain’s most successful businesses at bargain basement prices.

Music app Shazam, which was bought by Apple for £299 million, was among the many fast-growing UK-based firms already purchased. Other firms bought up include UK-based social business network Huddle, which was acquired by private equity firm Turn/River Capital for £284 million, and investment software provider Fidessa, which was taken over by Temenos Group AG for £1.3 billion.

Growing M&A activity

On top of that, merger and acquisition figures for the current year are likely to show another rise in activity following the plan by Coca-Cola to spend £3.9 billion purchasing coffee business Costa Coffee from Whitbread and the announcement that US insurance broker Marsh & McLennan will buy UK insurance company Jardine Lloyd Thompson in a £4.3 billion deal.

According to London-headquartered audit and advisory firm Moore Stephens, US firms, unlike their European counterparts, have shrugged off Brexit concerns. The value of deals involving US companies buying UK businesses more than doubled to £79 billion in 2017-18 from £36.8 billion in the previous year, in stark contrast to interest from companies on the continent. A 5% fall in the value of deals from EU companies for UK entities in the last 12 months saw total value shrink to £13.3 billion from £14.1 billion.

“This has been in part due to the devaluation of sterling since 2014, making British businesses comparatively cheaper than many of their foreign competitors,” Moore Stephens said in a statement. The firm added, “Brexit has also been perceived more negatively on the continent by politicians, business groups and the media than in the US, making European businesses more cautious about acquiring UK companies.”

Previously, cash held outside the US had been used to fund overseas mergers and acquisitions, however new rules had been established to encourage US firms to repatriate cash they hold overseas, while offering incentives to buy and invest in domestic firms. As a result, many analysts had expected US firms to scale back interest in foreign buyouts following tax reforms brought in by the Trump administration last year, however Moore Stephens said the large number of US buyers eyeing UK firms revealed that American business bosses were still on the hunt for innovative and well-run businesses.

The firm concluded, “The confidence that US investors have placed in the UK is indicative of the underlying strength of UK businesses and the openness of its economy.”

The pound is edging higher against the US dollar at time of writing, alongside the majority of its other peers this morning, but remains in a precarious position, having nosedived by over two cents against the dollar earlier in September. That represented the largest single day loss so far in 2018, following a breakdown in Brexit negotiations between the UK and EU at a summit of leaders in Salzburg. This fall was later exacerbated by a statement from Prime Minister Theresa May, in which she suggested that "no deal is better than a bad deal", reigniting suspicions that the UK is headed for a ‘cliff-edge’ scenario, where it will exit the EU without a deal in place.

Related: Moore Stephens administrates indebted night-club chain.


8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.