The number of takeovers of London-listed smaller companies has surged to a 12-year high. The increase is being driven by low stock market valuations and growing economic confidence.
As a report in the Times on the race for British businesses notes, the trend has particularly benefitted American buyers, raising concerns about the future of London’s junior stock market.
Research by UHY Hacker Young shows that in the 12 months leading to June, 37 companies listed on London’s junior stock market Aim were acquired by overseas rivals and private equity firms. The increase marked a 50 percent rise in the number of businesses being bought in the previous year. Aim has become a “happy hunting ground for US private equity funds,” said Colin Wright, chairman of UHY Hacker Young.
Several notable acquisitions illustrate the changing landscape. In March, the private equity firm KKR confirmed a £1.3bn takeover of Smart Metering Systems, a Glasgow-based energy infrastructure company. In January, Miami-based HIG Capital completed its acquisition of the logistics business DX Group for £307m.
The driving force behind the takeovers is the relatively low valuations of London-listed companies, compared to their American counterparts. The UK economy and political instability have caused British valuations to lag. This market volatility has further discouraged private companies from listing their shares in London.
“There’s a risk that US private equity funds will pick the best fruit from the tree but nothing will grow to replace it,” warns Colin Wright.
In April, Charles Hall, head of research at Peel Hunt, sounded the alarm about the future of the FTSE SmallCap index, a more senior marketplace to Aim. Hall warned that if the current takeover “feeding frenzy” and lack of stock market floats continues, the FTSE SmallCap index might “cease to exist” within about four years.
This takeover surge presents opportunities and challenges for London’s junior stock market. With US and other overseas buyers capitalising on undervalued UK companies, there is an urgent need to revitalise the market with new IPOs to ensure its long-term viability.