Thu, 27 Jun 2013 | By Philip Ellis, principal, Optima Corporate FinanceAs we reach the end of H1 of 2013, a glance back over the shoulder brings a relatively small number of M&A deals into view. So what is H2 likely to hold in store?

Based on our discussions with UK companies, other professionals and some overseas recruitment businesses looking to the UK there is likely to be an upswing in activity levels. There seems to be increasingly strong appetite for deals to be done. We attribute this to the following reasons:

1. Catch up in consolidation. The UK recruitment market has traditionally seen consolidation as SMEs [small to medium-sized enterprises] look to sell to mid-level businesses, who in turn hope to exit to larger groups or private equity and large businesses positioning themselves to sell to the giants of the industry. The relatively low level of M&A in the last 2-3 years means that increased consolidation would simply be a move towards equalising the average levels of consolidation. This is not therefore a new phenomenon, just a return to equilibrium in the market.
   
   
2. While UK recruiters are looking increasingly to Asia and South America for exciting growth opportunities, we are witnessing an increasing number of US and Australasian businesses looking to the mature UK market for stable acquisitions targets. Nothing could better illustrate the globalisation of the recruitment industry.

So given these factors, will deals just happen? We have identified the following issues, which may prevent the natural acceleration in deal volumes:

1. Valuations discouraging vendors. We regularly hear potential vendors saying they want to wait until valuations improve before selling. This might prove a dangerous attitude given the number of potential sellers in the next 2-3 years, which significantly outweighs the number of acquirers. The laws of supply and demand dictate that a notional increase in valuations may be offset by acquirers having a choice of targets, enabling them to drive a hard bargain.
   
   
2. Continuing lack of debt availability. There are undoubtedly a large number of private businesses, which would be more inclined and able to make acquisitions if they had greater access to debt to help fund deals. The days of cashflow lending against future profits remain a distant memory, which is inhibiting growth.
   
   
3. Time taken to complete deals. Perhaps the biggest frustration in today’s market is how long deals are taking. Caution prevails among acquirers so due diligence is very thorough, ongoing performance of the target is scrutinised for variation and the legal process can be pedestrian, partly perhaps due to the lack of other deals driving the pace. So deals starting in H2 2013 may not necessarily complete this year.

This week there have been two non-core disposals by PLCs – Idox selling TFPL to a non-recruitment plc (on which we advised) and Work Group selling Armstrong Craven to private equity. Does this suggest a trend? We think not – just a coincidence of timing.