Takeovers in the UK - the long-term trend

I’ve been delving into the datasets on the ONS site to pick up some evidence about the scale of takeovers and mergers involving UK businesses. Having worked in M&A during the 1990’s and early 2000’s, I remember the various short-term peaks and troughs of activity that the takeover market seemed to go through. However, I wanted to get a better sense of longer-term trends. Here’s what I found.

I’ve put some of the datasets on the same chart (below) to get a sense of just how many takeovers actually occur. Here’s the chart:

Some interesting points for students to pick up, including:

Takeovers and the Economic Cycle

I think there is pretty strong evidence that the number (and probably value) of takeovers is closely linked to the stage of the economic cycle.

In a period of economic downturn, we know that businesses tend to reduce investment and conserve cash. The credit crunch of 2008- made the cyclical link stronger since firms could no longer rely on the availability of significant cheap debt finance to help fund takeover deals. For many firms, a downturn is associated with strategies that involve taking fewer risks. Takeovers, almost by definition, are risky, so perhaps its no surprise that their number falls when the economy weakens. A downturn is associated with lower and weaker business confidence - it takes a brave (or perhaps reckless) management team to pursue an aggressive takeover programme in such circumstances.

By contrast, a period of economic boom leads to a much higher level of takeover activity. Again, you might expect this is you consider the nature of business confidence in a boom period. Senior management may be feeling pretty bullish about their growth prospects; profits, cash balances and share prices may be high (making it easier to finance takeovers). There may also be a bandwagon effect - firms see their competitors engaging in takeovers and feel some peer-pressure to do the same.

Domestic takeovers:

These are takeovers of UK firms by other UK firms. The main peak is in the mid-to-late 1980’s when there was a boom in privatisation of public sector businesses and private equity (venture capital) started to invest very heavily in privately-held UK firms. The same period was notable for the growth of quoted “conglomerate” firms (such as Hanson, Tomkins, Hillsdown Holdings and others) that went on extensive takeover sprees.

Take a look at the right hand side of the chart and you can see that the number of domestic takeovers grew rapidly between 2001 and 2007 (a period characterised by a boom in takeovers financed through cheap debt and also with private equity firms investing heavily). However, since the credit crunch and subsequent recession in 2008-210, there has been a very low number of domestic takeovers (in historical terms).

Outbound takeovers

These are takeovers by UK firms of overseas businesses. The data set was started by the ONS in 1987 (hence the gap in the chart). The chart shows a steady flow of UK firms buying up firms overseas at around 400-600 takeovers per year until 2007 when, as with domestic takeovers, the number has dropped sharply.

That’s an interesting piece of evidence for students to remember. A key consequence of the credit crunch / economic downturn has been a significant reduction in the number of takeover-related investments made by UK firms (both domestically and in international markets).

Inbound takeovers
Often in the news (particularly high-profile takeovers like Kraft Foods and Cadbury’s), “Inbound” refers to takeovers of UK firms by overseas investors. An interesting feature of the data is the convergence of the yellow (inbound) and green (outbound) lines in recent years. Prior to the last 4-5 years, firms in the UK consistently completed more takeovers than in the opposite direction. However, recently the numbers have become very similar.