M&A flurry and IPO drought spark fears for UK stock market

The UK stock market has been hit by a flurry of acquisitions and a collapse in initial public offerings, which are on course for their weakest year in more than two decades.

UK companies valued at more than £41bn have been acquired so far this year, while new businesses have managed to raise just £574mn in the past nine months, according to data from Dealogic.

The poor pipeline of new companies coupled with acquisitions of existing public companies by overseas rivals have added to fears about the health of the UK market.

The last time IPOs fell to near this level during the full year was 2009 — when just £1bn was raised.

Corporate advisers say that not only will there be very few IPOs in the last quarter of 2022 but deals lined up for the first half of 2023 were also now being pulled. They cited additional uncertainty over market conditions since prime minister Liz Truss’s promise of tax cuts sparked fears over inflation and surging interest rates.

Meanwhile, UK companies valued at £41.2bn have been acquired or taken private since the start of the year, including household names from Homeserve and Go-Ahead to Stagecoach and Ted Baker that have been bought by overseas groups.

Waste management firm Biffa agreed to be taken over by US private equity firm Energy Capital Partners in a deal valued at about £1.3bn on Tuesday.

Bankers predict a further wave of M&A activity as overseas buyers seek to take advantage of weakening sterling, and in particular for many of the companies on the FTSE 350 that earn the majority of their profits in dollars.

These more international businesses are seen as cheap for overseas buyers given the slide in sterling — down 20 per cent against the dollar this year — according to Mark Kelly, managing director of Cowen, the US investment bank. The pound has sunk further since Truss’s “growth” plan on Friday.

The UK-focused FTSE 250 is down 28 per cent this year, while the FTSE 100 is down 7 per cent.

Kelly cited companies such as Morgan Advanced Materials, with 40 per cent of revenue in North America, and Smith & Nephew, which generates more than half of its revenues from North America and is down 39 per cent in dollar terms so far this year.

Other companies that generate more than half their revenues from the US include Smiths Group, Indivior and Bunzl.

“It isn’t hugely surprising that there has been market rumour and speculation of M&A in all these names in recent weeks,” he said.

Other bankers point to potential targets in the telecoms sector, where French billionaires Patrick Drahi and Xavier Niel are amassing stakes in BT and Vodafone.

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Government officials are already worried about the disappearance of UK tech-focused companies, with Aveva Group the latest in a series of large tech companies to agree to a takeover last week.

There have been no major new tech IPOs this year and the 2021 crop, including companies such as Deliveroo and Made.com, have incurred losses.

The vulnerability of British companies to overseas takeovers highlights the challenge to the UK government as it sets out to revive the moribund markets with an ambitious package of tax cuts and regulatory reforms.

Chancellor Kwasi Kwarteng will reveal new plans for reforms to the financial service sector in October, which are expected to be focused on an overhaul of Solvency II regulations. The UK government has already attempted to make it easier and more attractive to float in London with a series of reforms set out in the review of capital markets by Lord Hill.