British companies are increasingly becoming the target of overseas buyers, as inward M&A activity steadily builds back up towards the high levels of five years ago.

The latest figures show that a rise in foreign acquisitions of UK firms every year since 2009 has been partly spurred by the buying of small and mid-sized companies. There is good reason to expect this trend to continue – factors include sterling weakness, a glut of cash on the balance sheets of emerging-markets corporates, the UK’s stable (albeit pedestrian) economic outlook and the country’s favourable legal and business environment.

In the first five months of this year there was more than £26 billion of UK acquisitions announced by overseas buyers, according to the deal and acquisition data provider Mergermarket. This puts activity on track to likely at least match 2011’s full-year figure of £54.2 billion, which itself was up 19.8 per cent on the previous year. The 2011 total built on a strong 2010, in which activity was up significantly, by 83.4 per cent.

The jump in the deal value of UK companies with turnover of less than £50m was even higher in 2010, (85.6 per cent), with the total hitting £2.6 billion. In 2011, deal value was roughly stable and although deal activity was hurt at the beginning of this year largely by economic uncertainty resulting from the Eurozone crisis, recent months have been strong.

Activity in the sub-£50 million bracket in the second quarter of this year is already up by 86 per cent on the same period in 2011. For the first time in four years, the UK, over the first five months of this year, has seen a net inflow of M&A funds

Strength in weakness

There are several reasons for the present attractiveness of British companies to foreign corporates. For one, the current weakness of sterling against other currencies – despite being viewed as a safe haven from European risk – makes UK companies relatively inexpensive for outside buyers. Continued talk about the prospect of quantitative easing has kept pressure on the currency, and an economic performance that has ranged from sluggish to recessionary, has also kept the pound down.

This cash is coming from new sources. While the US remains a stalwart of inward acquisition funds, Mergermarket’s data shows that it now accounts for much less than in the past – in the first five months of this year the US made up for 32.4 per cent of deal value, down from 54.7 per cent over the same period last year. That difference is largely made up for by the entry of markets in Asia, as well as increased activity from other countries, such as South Africa.

Companies in Asian markets have continued to enjoy robust growth while those of their Western counterparts have stalled. They have cash on their balance sheets that they are keen to use and investing in British assets provides useful diversification away from their own economies.

Japan’s involvement in incoming UK takeovers as a proportion of number of deals done has risen by nearly a third for the year to date. And India’s activity as a proportion of total deals value is five times greater than a year ago.

Buyers are attracted to the UK because, although growth has been poor, the financial and industrial climate is viewed as stable and investors can be confident in strong contract law and a robust business framework.

Middle filling

Mid-sized companies represent a significant portion of the UK economy: accounting for 1.37 per cent of total UK companies but generating 32 per cent of private sector GDP and more than one in three jobs. Those in the mid market also appear to have been weathering the recent economic storms rather better than larger corporate counterparts: between 2007-2010 26,000 new jobs were created while larger firms shed 692,000 jobs.

It’s no wonder, then, that small and medium-sized businesses are attracting foreign buyers. Some sectors are particularly whetting appetites as a new generation of entrepreneurs create fresh and thriving new businesses. For example, innovative small British engineering and industrial firms are drawing interest.

We recently advised on the sale of a number of them to overseas buyers – the racing car manufacturer Radical Cars; the tennis and cricket electronic arbiter Hawk-Eye, bought by Sony; Spaldings, a leading UK national distributor of replacement and consumable parts for the land management sector, to Japan’s Marubeni Corporation and the iconic Raleigh Bicycle Company, maker of the emblem of the 1970s, the Chopper.

Other sectors where we have seen strong activity include healthcare. In June we sold Double Helix, a provider of market research and market access services to the pharmaceutical and medical device industries to McCann Health, the UK subsidiary of Interpublic Group. Also business services, with April seeing the sale of Cert Octavian to Germany’s Muller foods group.

A recent survey by RBS showed that UK firms are increasingly open to selling themselves to foreign buyers – the percentage of companies looking to merge with an overseas competitor doubled on the previous year, up to 28 per cent.

Notably, it was medium-sized businesses that were more keen to merge with a larger business, some 50 per cent more inclined to do so than small business and ten times more receptive to the idea than companies with annual turnover of more than £100 million.

We see overseas buying of UK SMEs as a trend that will continue to strengthen, as foreign firms, particularly from emerging markets, put their cash to use to buy the skill and innovation of British industry and entrepreneurs, which helps them fuel their own fast-paced growth.