Corporate and Finance – The Recovering Landscape
By Daniel Rooke, Taylor Vinters Solicitors
Much has been made – and with good reason – of the post-Lehman deal landscape over the past few years following the collapse of America’s fourth largest bank in September 2008. Private deal values across Europe from 2008 to 2010 dropped 50%, whilst in the UK deal values dropped by a staggering 80%. Of the deals that happened during this period, there was a marked increase in the sale by sellers of companies experiencing financial difficulties or sales by administrators or their equivalents. In comparison, the public sector, whilst also battered and bruised, arguably faired slightly better during this tough period. So what now? With all the hustle and bustle in the news surrounding the cuts to the public sector introduced by the Coalition Government, has the private sector managed to heal some of its wounds?
In short and from an M & A perspective, the answer is a cautious “yes”. The deal landscape, whilst not as vibrant as it was pre-recession, has started to make a recovery, especially over the past 16 months. Recent statistics show that deal values involving UK target companies for 2010 doubled compared to the deal values in 2009 and deal volumes over the same period increased a quarter. So what are the reasons for this? Will the 2011 Budget take further steps to help the private sector recover or simply prompt private companies to walk quicker to the corporate gallows?
Well first, there has been a marked increase in the activity of private equity houses in the market, both generally and in the East of England, following a restructuring of many private equity houses’ business models. Private equity houses remain major asset holders and potential buyers in the M & A market and all the indications are there that they are gearing up for more activity moving forward. Changes and improvements in the rules relating to Venture Capital Trusts (“VCT”) and Enterprise Investment Schemes (“EIS”) highlight further the emphasis placed on entrepreneurs and private equity houses to kick start the recovery. From 6th April 2011 individual investors will be entitled to income tax relief at the rate of 30% as opposed to 20% on investments made into EIS companies and from 6th April 2012 the amount of investment that can attract up front tax relief will be increased from £500,000 to £1,000,000 . In addition, from 6th April 2012 the maximum amount of EIS or VCT investment that can be made annually into a company will increase from £2,000,000 to £10,000,000. Additionally, companies employing up to 250 people with gross assets of £15,000,000 will now qualify for EIS or VCT investment. In respect of Entrepreneurs Relief, the lifetime limit with be increased from 6th April 2011 from £5,000,000 to a £10,000,000. To individuals utilising the full lifetime limit, this means a potential tax saving of around £1,800,000 – not a figure to be sniffed at.
From a lending perspective, the finance markets appear in better shape than they were in 2009. The statistics show that the cost of finance provided by banks and other lenders to investment borrowers has reduced and that some of the more stringent documentary protections required in 2009 are now falling away. Unfortunately, for some non-investment and leveraged borrowers obtaining finance is still more difficult. Whilst the Coalition Government has increased the rate of bank levies in the 2011 Budget, it remains to be seen whether the banks will try and offset these additional costs by passing them on to borrowers through higher administration or other lending costs.
Finally, business confidence appears to be growing, albeit slowly, which in turn drives companies and individuals to participate in M & A activity. Despite difficulties in obtaining finance from noninvestment and leveraged borrowers, recent research suggests that half actually belief that banks have been broadly supportive in 2010/11. In addition, legislative changes, such as the reduction of corporation tax rates (to 26% from 6th April 2011 with further reductions planned over the next few years), reductions in employment related tax rates such as the company car tax rate and recent changes to R&D relief are designed to encourage businesses to grow and give them further confidence moving forward. It remains to be seen whether, against the backdrop of public sector cuts, confidence will continue to grow and whether any of the changes made by the Coalition Government will have a positive impact on the M & A market in the upcoming years.