Macro Moments Weekly: UK for Sale—The World Wants a Slice

Key takeaways:

• Foreign buyers are driving a UK takeover boom: Overseas acquirers, particularly from the US, are capitalising on opportunities in the UK market, with foreign buyers accounting for the vast majority of announced deal value.
• Valuation alone does not explain the surge in bids: While UK companies may look inexpensive on traditional metrics, the appeal also lies in the UK's predictable takeover rules, diverse shareholder bases, and the potential for acquirers to unlock greater growth.
• Takeovers create opportunities for active investors: The steady removal of high-quality listed companies can distort indices and widen the gap between large and smaller stocks, but it also highlights the depth of attractive businesses still available in the UK market.
   

It feels as if the UK is for sale and the world wants a slice. What is behind the takeover mania in UK equities?

Let’s look at some numbers. According to Clifford Chance, it’s bonanza time for selling. They reckon that by mid-May, US$231 billion of deals involving a UK target had been announced. Of those, foreign buyers were driving an estimated US$197 billion.¹ US companies accounted for half of that. Add to that, this week’s bid by ABB for Rotork.

Are all these bids driven by the low UK valuations? This is the standard response; low valuations elicit bids from more highly valued competitors. But that’s hardly satisfying. Investors in the UK are fully aware of the differentials and, more often than not, are determined to get a price that reflects the value of the business in another market, such as in the US.

So, if it’s not just value, it must be a combination of other factors. The UK’s clear legal structure around takeovers helps—the process is well defined and always leads to a fairly swift conclusion. Very rarely do politicians get involved; in fact, current UK politicians are more interested in adding to the list of mergers and acquisitions by nationalising assets.

Large and diverse ownership structures also help, as does the pressure of performance on those funds. I wonder how many of those fund managers regret selling ARM in 2016 for £24 billion to Softbank, only to see it relisted in 2023 and with a current value of £208 billion.

The counterargument is, of course, they could always have re-vested in 2023 in the US at a mere £41 billion.

There is something more. No one buys a business, at whatever premium, unless they think they can create more value than the current management team can. Perhaps they believe they can accelerate investment—to grow market share through deeper pockets. Or that there is a combination of intellectual property that could create a uniquely strong and new business.

There are always some duplicate functions that will lead to some cost-cutting, but that’s nice to have. It’s really about growth. One acquisition-driven CEO once said to me, ”when you buy a good business, you may overpay a little, but you are always surprised how easy and quick it is to integrate and grow.” Perhaps that is why the queue of overseas buyers keep getting longer. The UK continues to produce businesses with the talent, ideas and ambition that others are willing to pay a premium to own.

So, are we looking at the UK selling its best and its brightest, leaving the market full of low growth but often high-yield stocks? Or do these acquisition targets merely outstrip the ability of domestic managers to grow them?

But what of the cash? Where do the managers reinvest? As most will be tracking a benchmark, they will have to reinvest somewhere within it. A replacement company will have to be added to the index, presumably smaller than the one exiting. The gap between large-cap index dominators and the smaller companies will grow.

This is where the index distorts investors’ reality and gives an opportunity to the active manager. There is clearly no shortage of great businesses in the UK, as bidders are voting with their cash. Others can see the opportunity, and we should not be averse to learning from their vision.  

Parting Shot

Only once before have two teams that spoke the same language competed against each other in a World Cup final. That was the very first, in 1930 when Uruguay beat Argentina 4-2.