23 May 2024
Investors should be cautious of the recent increase in mergers and acquisitions (M&A) in the UK, according to Stuart Clark, portfolio manager at Quilter Investors.
Companies listed in the UK have seen an increase in takeover interest, with high profile names being floated as acquisition targets. Just in recent months we have had bids for high profile companies such as Anglo American, Darktrace and International Distribution Services, the owner of Royal Mail.
News of bids often brings about a rise in share prices of the target company, but Clark believes the UK has more compelling arguments for investors rather than the short-term boost M&A brings to portfolios.
“M&A has certainly picked up, not confined just to the mid-cap space, and this can provide a comforting short-term boost to investors portfolio,” Clark said.
“However, M&A is a double-edged sword and may just bring about a sugar rush for investors, causing a lot of short-termism to creep in and not thinking about the bigger picture.
“It is certainly the case that the UK market overall looks cheaper than many international peers and also relative to its own history it does not look expensive. Naturally this will bring about companies that wish to either look for bargains and consolidate the competition, or buyout those smaller companies that are successfully growing and can help larger companies that wish to accelerate.”
Clark believes boards have a big role to play here, and as such it is important that asset managers and investors are engaging with them to ensure shareholder interests are properly considered.
“We have to consider whether the price is right relative to the long-term value of the business being acquired. One would hope that boards would rebuff offers that undervalue the prospects of the independent entity, as we have seen in the battle between Anglo American and BHP.
“For investors this is crucial, especially in companies that may be cheap but have good prospects. We don’t want to see boards give up on longer term gains simply because part of the competition wants to take advantage of a difficult period for the UK market.
“The UK has a lot going for it from a valuation perspective, and with interest rate cuts seemingly on the horizon and the economic picture clearing slightly, one could argue you do not need the M&A activity to help generate returns.
Clark also questions whether this flurry of M&A activity could actually harm investors in the long term.
“Another issue to ponder is the ongoing de-equitisation of the UK market, which might ultimately question the relevance to international investors and to future businesses looking to IPO,” he added.
“While it brings attention to the value on offer, and at some very high premiums to current share prices in some instances, this does not address the issue of why our market has become so cheap in the first place. Celebrating the level of dealmaking feels a little bit like cutting off one’s nose to spite one’s face.
“Instead, there needs to be a renewed focus on improving the competitive landscape for UK business and the UK stock market. This, combined with an upturn in economic activity, will do far more to investor returns than the sugar rush of acquisitions.”
