Chancellor Jeremy Hunt is set to present the Autumn Statement later this month where it is expected he will seek to cut £33 billion from public spending while raising taxes by approximately £21 billion. After the Bank of England announced its biggest hike of interest rates in three decades last week – from 2.25% to 3% – and news of the UK potentially facing its longest recession since records began, industry leaders and investors with high stakes in the British economy face a potentially distressing period as the markets already begin to react to potential inclusions in the Autumn Statement.
Following the well-publicised mini-budget chaos which caused the value of the pound to plummet and ended the tenure of Lizz Truss as prime minister, it is crucial for Rishi Sunak to set out a comprehensive pipeline that will see the UK combat recession. The IPO market will have a particularly close eye on the Autumn Statement after experiencing a drastic decline since the beginning of the year. Reports state the Chancellor’s bid to plug the £35 bn fiscal shortfall will include tax increases across the board, including a dividend tax rate increase which will sway investors towards alternative investment routes as a way to shied capital and combat inflation.
CEO/Founder of business advisory firm, Trachet,Claire Trachet – who’s helped to facilitate over $500m worth of transactions in the past three years – states that a weakened sterling, combined with renewed optimism surrounding new PM Rishi Sunak’s ability to manage the nation’s finances, could result in both the deals market and investment remaining strong in the UK.
This is due to the fact that as the pound falls against the dollar, British companies become increasingly cheaper for foreign firms to either invest in, or take over. “For US investors, if things continue the way they are going, it could become something like a garage sale – but one with real value,” explains Trachet. However, whilst it will come as welcome news for UK startups that deep-pocketed overseas investors will be eyeing up opportunities, this also come with a number of drawbacks.
Firstly, many industry leaders are calling for changes to local M&A rules for UK transactions – which is governed by a 433-page code and enforced by the Takeover Panel – which has resulted in many unsuccessful deals and can deter foreign investment. In addition to this, announcing a potential M&A can have a positive effect on a company’s valuation, such as the recent announcement from Made.com of a number of potential acquirers interested in buying the company, resulting in a 24% increase in their share price.
However, if the deal falls through, the impact on a company’s valuation can be detrimental and cause serious harm to their chances as a prospect to other buyers. Serving as testament to this, one of the world’s largest PE firms, Thoma Bravo, announced intent to purchase cyber-security giant – Darktrace – earlier this year, however Darktrace lost 33% of its value after Thoma Bravo ditched their bid. This means UK firms must ensure they are deal or investment ready, in order to avoid suffering the same fate.
Claire Trachet, CEO and founder of business advisory, Trachet, comments on the current state of investment and deals in the UK following the Bank of England’s announcement and ahead of the budget:
“The Bank of England’s announcement generated mass concern from industry leaders and the investment sector following a drop in the value of the pound sterling coupled with the surge in the country’s borrowing costs. In addition, there are now renewed concerns in terms of the effect the Autumn Statement will have on the markets – especially after the chaos that ensued following the last high-profile government announcement in the form of the mini-budget. Reports stipulating the Autumn Statement will consider increasing taxes on dividends in a bid to raise funds could potentially lead an already gloomy IPO market to deteriorate as investors see an impact on the feasibility of such transactions. However, British firms will still continue to receive interest from a flurry of overseas buyers looking to capitalise on a weaker pound and deteriorating valuations.
“This has its positives and negatives, as on the one side it will attract a great deal of foreign investment to the UK, alongside new tax incentives and favourable regulatory conditions. However, low valuations mean UK companies entering potential M&As may get less than they bargain for, so it is a critical moment for the sector here to show resilience.
“I always stress to my clients the importance of being deal ready before heading into any potential transaction. The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly and a failed transaction doesn’t impact the company’s valuation.
“This has never been more important than in the current deals market where the environment can dramatically change over the course of just a few weeks. Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”
