The year 2021 saw record levels of public M&A activity in the UK and other developed public markets, continuing the surge that followed the initial drop off in activity when covid-19 first hit. The continued availability of cheap debt, PE firms sitting on plenty of dry powder and an ongoing sense that now is the time for companies to get set strategically helped provide ideal conditions for public M&A. The number of firm offers remained strong in the UK throughout 2021, with 29 offers seen in Q1/2 and 32 in Q3/4.

While we expected activity to remain strong as we entered 2022, global markets are once again being rocked due to the conflict in Ukraine, and it is unclear at this stage what the impact on public M&A activity will be.

Key market trends in the UK public M&A arena, which we discuss further below, are: the dominance of the private equity bidder; the rise of competitive situations; greater shareholder influence on bids; and a greater focus on national security.

The dominance of the private equity bidder

Private equity players continue to be extremely active in the UK public M&A market. After several slow years in which the volume of public to private bids was reduced following substantial changes to the Takeover Code in 2011, private equity bidders are once again a dominant force in the UK market.

Of the 61 offers seen in 2021, 30 came from private equity or other funds-based bidders as the UK market remained attractive for take-private acquisitions. In fact, public to private offers have risen consistently for the past three years, comprising 43 per cent of all offers in 2019, 49 per cent in 2020 and 54 per cent in 2021. This trend has in part been fuelled by the large reserves of cash that private equity bidders were sitting on coming out of the pandemic and the potential growth opportunities UK companies present in an undervalued market.

PE firms were so keen not to miss out on opportunities being afforded in the UK markets that we saw them willing to join forces to launch consortium offers for larger targets on a number of occasions in 2021, including the offer for Signature Aviation by Blackstone, Global Infrastructure and Cascade, and the offer for Proactis Holdings by Pollen Street Capital and DBAY Advisors. In both of these instances, one of the bidders first made a solo approach but subsequently joined forces with another bidder rather than lose out.

The take-private bids seen in 2021 were also some of the highest value deals across the UK public M&A market, again in contrast to the position for a number of years following the 2011 overhaul of the Takeover Code. Thirteen of the private equity offers seen in 2021 had a value of over £1 billion, representing more than a quarter of the £1 billion+ private equity bids seen since the financial crisis (2008). It is also of note that the highest offer in 2021 – the £7.1 billion offer for Wm Morrison Supermarkets – came from a private equity bidder (Clayton, Dubilier & Rice). This transaction also illustrates PE firms' increasing willingness to participate in competitive situations.

The dominance of private equity houses in the public M&A market looks set to continue for the time being, with no shortage of cash on the horizon yet. As the world continues to recover from covid and inflation or interest rates increase, we may see an end to the ‘cash is king’ market of today and a slow in private equity bids but there is no sign of it yet.

There have been some signs of a resurgence in securities exchange (share-for-share) offers already in 2022, but until borrowing becomes less affordable, private equity players are likely to remain active in the UK market and be amongst the most competitive bidders.

The rise in competitive situations

The willingness of PE bidders to participate in competitive situations, as seen, for example, in the bids for Wm Morrison Supermarkets, reflects a wider trend that we have seen over the past three years of an increasing number of competitive situations (actual or potential) in the UK public M&A market. In 2019, just 14 per cent of offers were competitive, rising to 17 per cent in 2020 and 23 per cent in 2021, more than any previous year. The willingness of private equity bidders, who traditionally avoided competitive situations, to get involved in a competitive bid has fuelled this trend further.

Where a competitive situation still exists in the later stages of an offer, the Takeover Code has an auction process built in that is designed to flush out final offers. Some of the most high-profile competitive situations in 2021 resulted in an auction process under the Takeover Code being put in place. Prior to 2021, it had only been used twice since the rules were introduced in 2015 (on the bids for Sky in 2018 and for KCOM in 2019); in 2021 it was engaged four times (on the bids for G4S, Vectura, Augean and Morrisons).

We have also seen shareholders get involved in competitive situations, with significant target shareholders influencing who the successful bidder is and, on the Augean deal, by offering to cover the losing bidder's costs during the auction process to ensure they remained in the process.

Shareholder influence on bids

The influence of shareholders on M&A is not confined to competitive situations. We see them bring influence to bear on transactions at all stages. And it is no longer just activist shareholders who seek to have an influence on M&A strategy – although activists are still very much present, other shareholders are also willing to play an active part.

We see shareholders call for M&A (for example, on the bid for Blue Prism where a number of its major shareholders encouraged the board to explore a sale) or influence it, for example, by agitating for a price increase (known as bumpitrage). Bidders may respond to this sort of pressure and increase the offer, or alternatively resist it and declare the offer price to be final. Even if it chooses to increase the offer price, it will often then declare it to be the final price, meaning the bidder is not permitted under the Takeover Code to increase it further. On the bid for Kaz Minerals by Nova Resources, the bidder switched from a scheme to an offer and increased its offer price (twice, before declaring it to be final), in order to see off the shareholder threat.

Shareholders have sometimes looked to challenge a deal at the scheme sanction hearing – most recently on the bid for William Hill by Caesars, where a shareholder raised concerns about the disclosure in the offer documentation in relation to a specific issue. While none of the challenges have yet been successful, it may just be a matter of time.

And finally, shareholders sometimes also look to block a transaction. In 2021, we saw a scheme voted down by its shareholders (on the bid for Spire Healthcare by Ramsey). This was (rightly) seen as very unusual at the time, but we have already seen another scheme voted down in February 2022 (on the offer for Playtech). It is likely that we will see more resistance by shareholders to offers that they view as not offering full value, particularly during a period of market uncertainty.

Greater focus on national security

Governments around the world have been increasing their scrutiny of, and intervention in, transactions on the grounds of national security for a number of years now, and the UK is no exception. The new National Security and Investment Act 2021 (NSI Act), which came into force in January 2022, will only make that more likely.

The UK government had the ability to intervene in transactions on the grounds of national security, media plurality and financial stability, and more recently if a transaction involves a business that is important in combating public health emergencies, under the Enterprise Act 2002. The national security regime within the Enterprise Act has now been replaced by the much wider regime in the NSI Act.

The Act gives the UK government power to call in for review, and potentially prohibit, any qualifying transaction that may give rise to UK national security concerns, including: the acquisition of ‘material influence’ in an entity (which may arise even in relation to a fairly small shareholding, potentially even below 15 per cent); an increase in an existing stake that results in the investor’s shareholding or voting rights crossing the 25, 50 or 75 per cent thresholds; the acquisition of voting rights in an entity which enables the investor to secure or prevent the passage of any class of resolution governing the affairs of the entity; and the acquisition of control over certain types of assets (including land and intellectual property).

A mandatory notification obligation (and a corresponding prohibition on completion prior to clearance being given by the government) applies to certain transactions involving target entities that carry out specified activities in the UK in 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors).

Alongside the mandatory notification obligation, the government has extensive powers to call in any transaction, regardless of sector or size. Acquirers also have the option to voluntarily notify a transaction to obtain clearance, which may be advisable in the interests of legal certainty where there is a risk the transaction may be called in.

For companies in one of the mandatory sectors, or where there is risk of a transaction being called in, parties are including clearance under the NSI Act as a condition to the offer. The Takeover Panel has acknowledged that these conditions are likely to constitute ‘material official authorisations or regulatory clearances’, meaning that a bidder on a contractual offer will be allowed to extend the offer timetable while awaiting clearance under the NSI Act if necessary.

Historically, it was very rare to see interventions on the grounds of national security but, with a greater focus on foreign direct investment, this has changed and the government has intervened in an increasing (albeit still fairly low) number of transactions in recent years, including on the bids for Inmarsat, Cobham, Meggitt and Ultra Electronics. It is likely, given the recent shift in the geo-political landscape and the Russian invasion of Ukraine, that a focus on national security will continue to grow, especially in the defence and military sectors.

Market uncertainty again

It is not yet clear what the overall impact of the Russian invasion of Ukraine will have on the public M&A market in the UK, but volatility and uncertainty have dominated stock markets around the world since the conflict began. The state of the markets is broadly similar to the uncertainty seen at the beginning of the covid-19 pandemic, which saw a significant drop in public M&A activity followed by a resurgence once conditions had stabilised.

We have seen one UK bidder (Spectris) abandon a possible takeover (of Oxford Instruments) citing the uncertainty and deteriorating market conditions created by the conflict as the principal reason for doing so. Whether that becomes a wider trend remains to be seen. It is more likely that deals where there is particular exposure to the region or to sanctions will be hit, but the wider market will adapt to the uncertainty and deals that made sense before the conflict will still do so on the whole.