The past year may have been a difficult one for overall European M&A, but in Scotland the deal markets have been buzzing. European transaction value dropped 30% year on year in 2022 as rising interest rates, inflation, climbing energy prices and the war in Ukraine put the brakes on deal flow. In Scotland, however, the M&A numbers were moving in the opposite direction.

According to Experian’s ‘United Kingdom and Republic of Ireland M&A Review’, Scottish deal count climbed nearly 11% in 2022 to 446 deals, while deal value was up by more than a fifth (22%) at £24.88bn.

A separate study by KPMG tracking mid-market private equity activity in Scotland counted 51 buy-outs involving mid-market Scottish targets with a combined deal value of £3.5bn, up from 41 deals valued at £2bn in 2022.

Last year’s Scottish annual deal figures have been boosted by a cluster of large transactions, such as Edinburgh-based NatWest’s £4.6bn sale of its Ulster Bank tracker mortgage business to AIB Group and the $4.4bn sale of Renfrew-based industrial equipment maker Howden to US manufacturer Chart Industries. But even if these mega-deals are stripped out, there is a consensus across the country’s M&A ecosystem that 2022 was a good year for deal activity, with Scotland bucking the European trend.

“Scottish M&A figures can move significantly from year to year,” says Grant Thornton corporate finance partner Neil McInnes, “with large asset transfers between financial services companies and deals in the cyclical oil and gas sector having an outsized impact on annual numbers. We saw that play out in 2022 to some extent, but even allowing for those big deals, the deal activity has been strong.”

One of the Scottish market’s key characteristics is that no one sector is the primary driver of deal flow, allowing the market to sustain steady levels of M&A activity across the economic cycle.

“The whisky and fishing industries are key elements of an established food and drink sector; Aberdeen is a hub for oil and gas and, increasingly, renewables deals; and across the Glasgow-Edinburgh corridor there is a strong cohort of life sciences, technology, business services and industrial companies,” McInnes says. “The diversity means that when activity in one sector slows, others are there to balance things out. In a down market, Scottish M&A doesn’t drop as far as other parts of the UK, but equally in a bull market it doesn’t overheat to the same extent.”

Lee Donaldson, an LDC investment director covering Scotland, agrees: “Scotland benefits from a nice mix of diverse businesses across multiple sectors. No one sector accounts for a disproportionate amount of deal activity in any given year. It is a market less prone to forming M&A bubbles.”

Global view

M&A in Scotland has also benefitted from an increasing openness to investment and interest from dealmakers and advisers based outside the country. Local presence still matters, but inbound interest in the Scottish market has never been stronger.

“Competition in London, Manchester and beyond has intensified,” says Malcolm Kpedekpo, a Glasgow-based Panoramic Growth Equity partner. “This prompts dealmakers and advisers to look at new markets, and Scotland has been an obvious starting point for investment firms that want to expand.”

Graeme Williams, KPMG’s head of corporate finance M&A for Scotland, says COVID-19 lockdowns changed the way businesses, advisers and investors interact: “People can dial into a call from anywhere in the world and, while boots on the ground is a differentiator, it is possible to gain traction in the market if you have sector expertise or bring interesting buyers to the table.

“The market has opened up,” he continues. “The rise in coverage is a good thing for the market. There are more parties out there pushing for deals, which is to everyone’s benefit.”

Scottish Equity Partners (SEP) is a homegrown growth equity firm focused on software and tech-enabled businesses that has expanded into a pan-European player. Andrew Davidson, a director, says: “The founders and management teams of the companies we back are ambitious and have a global outlook. They want to expand into other markets and recognise the value of working with international advisers and investors that can support those ambitions.”

Richard Rainey, corporate finance and M&A director at EY, says he meets private equity firms at least once a week from outside Scotland that want to know what’s going on in the market. “Over the past 12 to 18 months, we have seen strong inbound interest in Scotland. International buyers are turning to M&A to navigate production bottlenecks and secure supply chains,” he says, noting EYs advisory roles in the sale of Central Car Auctions to Arnold Clark, and Walker Timber’s deal with Miller Homes. “Arnold Clarke wanted to expand into the used car market as the original equipment manufacturers are taking tighter control of dealerships and new vehicle production is constrained. Walker Timber produces timber mainframes for house building and Miller Homes wanted to bring that capability into its business. We expect to see more deal rationales driven by companies wanting to vertically integrate supply chains.”

Other notable inbound deals include the sale of timber pallet maker Scott Group to the UK division of Austrian integrated timber and forestry business BSW Timber, in a deal support by Grant Thornton; and energy consultancy Wood Mackenzie’s £3bn sale to US private equity house Veritas Capital.

Start-up surge

Investors have also been drawn to Scotland’s burgeoning technology scene, which has gone from strength to strength over the past 10 to 15 years thanks to a supportive fundraising ecosystem and success stories such as Edinburgh-based Skyscanner, the flight bookings engine, which received backing from SEP and went on to achieve unicorn status.

“There are excellent universities in Scotland that have invested significantly in research and development,” says SEP’s Davidson. “The University of Edinburgh’s School of Infomatics, for example, has produced remarkable AI technology, and we also have CodeBase, the UK’s largest technology incubator, in Edinburgh. Scotland has a vibrant start-up scene and is developing a stronger technology ecosystem. We’d like to see more of these early stage companies getting to the point where they can really scale. Having a pool of experienced entrepreneurs, advisers and investors who can help companies reach that stage is important.”

Kpedekpo adds that technology start-ups have also been able to rely on a sophisticated funding ecosystem to support them as they scale. “The angel and seed network is well developed, and investment from the country’s national economic development agency, Scottish Enterprise, and the recently formed Scottish National Investment Bank (SNIB), has helped to fill the equity gap for developing businesses,” he says. “There is significant capital out there to support company development.”

Looking ahead

What will happen for the rest of 2023? Dealmakers and advisers are cautiously optimistic that the fundamentals that have supported M&A during the past year will continue to drive activity, although Scotland will not be immune to the impact of sustained inflation and rising interest rates. “Interest rate rises and inflation are on the radar, and deals are taking longer to get done, but we still have a full pipeline and expect to be busy in the coming months,” LDC’s Donaldson says. “Management teams and company founders still want to grow and there is plenty to go for.”

Cities go for growth

Glasgow’s industrial heritage is still a key driver of activity, but it is now firmly established as a technology life sciences hub. Tech Nation ranks the city as one of the three fastest-growing tech hubs in the UK; Beauhurst counts at least 89 scale-up companies and more than 30 academic spin-outs, including clinical diagnostics firm Dxcover and foodtech business Enough. Investors have been quick to mine this rich seam. SEP, for example, has backed global Internet of Things connectivity platform Pelion and regulatory and financial data management software specialist Autorek.

Dundee has become one of the world’s most successful centres for computer games, and is home to the studios that produced blockbusters such as Lemmings, Minecraft and Grand Theft Auto. DC Thomson, publisher of the Beano, is also based in the city and has diversified into data centres and cloud-based hosting. In 2018, the V&A opened a waterfront design museum – the first V&A opening outside London. The thriving gaming, design and publishing scene has stimulated growth in other knowledge and tech industries, establishing the city as an important commercial centre outside of Aberdeen and the Glasgow-Edinburgh central belt.

Scotland’s financial and political centre, Edinburgh is home to big banks and asset managers and is the driver of most big-ticket financial services M&A. The capital city is also one of the most important tech hubs in Europe, providing a base for start-ups such as Skyscanner and gambling company FanDuel to scale and achieve unicorn status, with space launch vehicles start-up Skyrora also on track to become a unicorn. As the home to CodeBase, the UK’s largest technology incubator, Edinburgh has the pieces in place to continue nurturing fast-growing, innovative start-ups.

With its roots firmly in the oil and gas industry, Aberdeen has always been a deal hub with its own dynamics. UK and European private equity firms set up dedicated offices to take advantage of the boom in the oil-field services market. But as oil prices declined and clean energy became a priority, investors and advisers fell away and the Granite City was forced to open up. Now more players are ready to support the city’s renewable energy push and associated energy-tech spin-offs. The Ukraine conflict has also sparked a renaissance in the core oil sector, with more investment in North Sea oil required to offset constrained supply from Russia and shore up the UK’s domestic energy security.