Activity stopped in its tracks - but not for long

Publication Date12 February 2021
Publication titleBusiness Insider
They had entered the year with high hopes after advising on a bumper £80bn worth of transactions in 2019, but the lockdowns stopped transactions dead in their tracks.

"Dealmaking went into paralysis," recalls deals veteran Graham Cunning, head of corporate finance with accountancy firm Azets.

"Cash was king and liquidity and survival were the priority."

Mark Ellis, head of corporate finance at Burness Paull, says it initially felt "like the deals world stopped turning". He says: "The majority of transactions went on hold and everyone's focus was on immediate operational challenges."

However, shored up by the confidence provided by government financial support schemes, activity levels recovered "far quicker" than he anticipated.

Despite the challenges posed, by the end of 2020 some significant transactions had made it over the line, including Scotland's first IPO in two years.

Private equity buyers were particularly visible, moving quickly to take advantage of opportunities to add to their portfolios in the changed landscape, and Scotland's active angel community completed a flurry of

deals to provide backing to highgrowth tech and life sciences firms.

Although another clutch of home-grown businesses went to overseas buyers, Scottish firms hit the acquisition trail at home and abroad.

The Scottish National Investment Bank - seen as key in the nation's recovery from the pandemic - also marked its official launch with a deal

to provide £12.5m of backing for Glasgow's M Squared Lasers.

Graeme Bruce, corporate partner at CMS, says 2020 proved to be a surprisingly busy year for M&A in Scotland.

"Whilst activity initially fell during the first lockdown in March, it picked up consistently until the end of the year, but also leftplenty of scope for growth in 2021."

Although David Beveridge, managing director at Macdonald Henderson, says a number of deals inevitably fell away earlier in the year, many returned "Lazarus-like, but with amended buyer deal terms" to reflect the changed market.

"The sellers in each case were still happy to proceed as the deal fundamentals remained persuasive in the context of a chaotic and

unpredictable economic horizon," he reports.

Danny Lee, corporate finance partner at Burges Salmon, has also seen the uncertainty which still pervades lead to changes in the way deals are being structured.

"Earn-out mechanisms have long been features of M&A deals, but no more so than over the past six months. Such is the level of uncertainty regarding when markets and consumer demand will return to 'normal', purchasers are depressing front-end payments and elongating the period over which earn-outs are measured," he says.

Although relatively small in financial terms, the £42m listing of Calnex Solutions on AIM was a welcome transaction after a dearth of Scottish IPOs in recent years.

As well as providing the Linlithgow firm with a platform for growth, the deal enabled shareholders - including Scottish Enterprise, the Maven-managed Scottish Loan Fund and various angel investors - with an exit opportunity.

Chris Gotts at Burness Paull, who worked on the deal, said it was an "excellent example of how raising funds via capital markets can deliver a great result for all stakeholders".

"There is pent-up demand from investors looking for good homes for their cash, so hopefully more Scottish companies will consider the markets as part of their growth strategies."

A significant rise in fundraising activity on the London stock markets in the final quarter of the year also bodes well for 2021, says Mike Timmins, EY's IPO leader in Scotland. Timmins argues Calnex "is a great example for other Scottish businesses to follow".

"An uptick in IPO activity may well intensify the competition for investors' attention, placing greater emphasis on preparing early for IPO and strategic profile raising with investors. Confidence is expected to continue building with the Brexit deal now giving clarity around the future relationship with Europe and the roll out of vaccinations."

However, the sale of tech veteran IndigoVision to US-headquartered Motorola - advised on by Shepherd and Wedderburn - and of Collagen

Solutions to shareholder RDI has seen the total of Scottish quoted companies continue to fall.

Specialist textiles firm Low & Bonar, which has its roots in Dundee, also leftthe market after being acquired by German firm Freudenberg. That deal, advised on by Harper Macleod, was the first Scottish scheme of arrangement to be sanctioned by a conference call as court buildings remained closed.

Continuing the trend seen for many years, a sizeable number of Scottish firms fell prey to overseas buyers, notably in the technology...

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