Cross-border dealmaking between the US and UK

Richard Lane and Simon Ward were invited to discuss trends in cross-border M&A between the US and UK by Financier Worldwide. Their reflections are recorded below. A link to the article can be found here.

FW: Could you provide an overview of recent cross-border M&A between the US and the UK? What trends have you observed in deal flow?

Lane: Despite the economic uncertainties seen throughout 2023, cross-border M&A activity between the UK and the US continued to be strong across a wide range of sectors. Deal flow remained solid, and the US continues to be the lead overseas acquirer of UK companies. As in previous years, this is attributable to favourable regulatory conditions in both jurisdictions – which helps to facilitate smooth transactions – and the fact that both the UK and US have proven themselves able to quickly adapt to changing economic conditions. In addition to these synergies, the strong US dollar and more conservative valuations in UK public markets means that the UK is likely to remain an attractive marketplace for US buyers and investors.

FW: What are the key drivers of transatlantic deal activity? What sectors and geographical hot spots are experiencing higher levels of interest?

Ward: The key drivers of US interest in the UK continue to be threefold. First, the return of economic stability following the fall of two prime ministers in quick succession. Second, the ability of the UK still to be an inviting initial staging post in a wider European expansion strategy. Brexit has not stopped this, although it has made investors more circumspect and wanting much more information than previously. And third, value. The relative weakness of sterling against the dollar continues to be a significant factor. Looking at sectors that are most investable, technology-related businesses dominate. We see businesses that are capable of fast scale-up being of most interest – especially those with an existing broad client base that will offer buyers the opportunity to upsell additional services. On the other side, the huge US market remains an attractive draw for acquirers whose deal value is predicated on the growth of their own earnings before interest, taxes, depreciation and amortisation (EBITDA) over the short to medium term and who can sell their products and services to a domestic market. Finally, in terms of UK geography, it is fair to say that although London continues to be the starting point for US investors, regional hubs such as Manchester, Birmingham and Cambridge are attracting much more attention. The key for these rising stars will be to increase their profile and improve their infrastructure.

FW: How would you characterise and compare the appetite of strategic and financial buyers for cross-border transactions?

Lane: Appetite very much depends on the sector and the buyer. Strategic buyers with strong corporate balance sheets supporting them have been able to move relatively quickly, while financial and private equity (PE) acquirers have had to look at alternative sources of funding or buyout structures while interest rates remain high. The UK technology, energy and infrastructure sectors have been particularly active for strategic buyers, whether through full acquisitions or joint ventures and strategic partnerships. There has also been continuing activity in the financial services industry, particularly within the wealth management and asset management sectors, where both established North American industry acquirers and PE are active as they see greater consolidation and synergies in the industries.

FW: What trends are you seeing in terms of valuations and transaction multiples? To what extent are you seeing gaps in price expectations between buyers and sellers?

Ward: Transaction multiples continue to vary greatly by sector, with technology and healthcare continuing to perform well and deliver strong returns. In light of this, careful consideration of relevant sectors, along with effective marketing, can be a helpful way of enabling sellers to achieve maximum value. In terms of pricing, while gaps in expectations between buyers and sellers have not necessarily been more significant as that has been sector dependent, we have seen deals being structured in a way that seeks to mitigate the risks associated with recent market conditions and uncertainty. So buyers are paying a greater portion of consideration on an earn-out basis along with deferred and roll over or ‘stub equity’ consideration being utilised. This can be attributed to the market volatility in 2023, which resulted in buyers being less confident when predicating a target’s future performance and success post-acquisition.

FW: What regulatory challenges are cross-border dealmakers likely to encounter, especially in terms of antitrust and merger control regimes? What advice would you offer on assessing the potential foreign investment and national security implications of pending transactions?

Lane: Transatlantic dealmakers need to be aware of increased regulatory scrutiny on both sides of the Atlantic. In the UK, parties are becoming more familiar with the National Security and Investment Act 2021, the UK’s foreign direct investment regime which came into force in January 2022. The Act requires mandatory pre-notification of acquisitions and consolidations of control in defined sensitive sectors of the UK economy, as well as optional voluntary notification and potential government call-in where national security could be impacted outside of those sectors. Significantly, there are no exemptions relating either to the size of the transaction or the jurisdiction of the acquirer, although the UK government appears to be making good on its pledge to deal with straightforward notifications swiftly and pragmatically. In many ways, this new legislation brings the UK more into line with the US and its well-established Committee on Foreign Investment in the United States regime. However, the novelty of the UK regime, alongside its very broad scope, continues to present challenges for dealmakers with a UK nexus. The last year has also seen significant developments in antitrust and merger control. The UK’s Digital Markets, Competition and Consumers Bill proposes to introduce significant amendments to UK competition law, including new provisions targeting ‘killer acquisitions’ of emerging technologies, by removing the requirement for an overlap between merging parties’ UK activities in such cases. The Department of Justice and the Federal Trade Commission have also been active, consulting on proposed new merger guidelines which showcase a more front-foot posture toward merger enforcement.

FW: Could you highlight some of the principal differences between how US and UK acquirers approach M&A transactions? Are there typical variations in custom and practice?

Ward: The different approaches result more from market practice rather than the law in these jurisdictions. The UK is perceived to be more seller-friendly, with the US more in favour of the buyer. A key difference is the transfer of risk from seller to buyer – typically in the UK buyers are expected to take the risk on signing, but in the US it transfers at completion. There are often more conditions to completion in the US than in the UK, where they are usually limited to legal or regulatory matters. It is much harder to bring a claim against a material adverse change clause in the UK. Pricing mechanics and retention accounts can also be treated differently. In the US it is common for parties to agree a completion accounts mechanism with funds sitting in escrow as a source of recovery for a buyer. Both completion accounts and locked box mechanisms are used in the UK, but buyers rely more often on direct recourse against sellers in the US.

FW: Looking ahead, what are your predictions for future deal flow in the transatlantic corridor? What factors are likely to determine aggregate deal value and volume?

Lane: US to UK deal flow will continue strongly, and PE will continue to be active acquirers. There will also be strategic acquirers and investors, particularly in the technology sector with the acceleration of artificial intelligence and other data-led developments, and within the energy and renewables sectors – whether these transactions are structured as pure investment, joint ventures or infrastructure projects. The factors that will determine the strength of deal flow include the timing of central banks reducing interest rates and how quickly the debt markets respond to those rate changes, regulatory and political changes, and the overall global outlook and market confidence as the year progresses.

This Article was first published by Financier Worldwide Magazine, view here.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2024