PwC reflects on the impact of COVID-19 on deals activity in Cambridge and the East

Pre-pandemic, UK deals activity had been at record levels across all market segments. Unsurprisingly however, most of this activity came to an abrupt halt at the end of March 2020.

From March 2020 we saw quieter months, during which our Strategy teams performed analyses of the impacts of COVID-19 on companies in each of c.20 individual industry segments, providing guidance on how such companies could transform themselves to address the challenges faced. The resulting reports, 'COVID-19: Where next?', can be downloaded for free and have specific commentary in relation to industries which have a strong foothold in Cambridge and the East, such as universities, software, healthcare and pharmaceutical.

As the lockdown began to ease over the summer period, large-scale corporate activity was one of the first out of the blocks with notable local examples being AVEVA's acquisition of OSIsoft and, more recently, Nvidia's proposed acquisition of Arm.

The pandemic has not changed the fact that there continues to be a vast pool of funds, held by both corporates and financial investors, looking for investment. Such funds can provide businesses with the opportunity to adapt and thrive through a Deals-led recovery. However, there is currently also a reduced range of immediately-attractive investment opportunities, as a lot of industries have been devastated by COVID-19 and now, unfortunately, have uncertain futures. In this unusual context, the more attractive opportunities are receiving increased bidder competition, causing multiples to be maintained or even increased.

This observation is of particular relevance to the technology-based Cambridge market, as this industry segment has been relatively unimpacted by the pandemic: indeed, the recurring/subscription revenue models often adopted by software and other technology-based companies, combined with shorter-term government support initiatives, have resulted in relatively stable revenue and reduced overheads for such companies - and the resulting increase in profitability may lead management teams to question historical cost structures and to consider whether recent increases in profitability can be maintained into the longer term.

As a result of the above, and the more usual "back to school" seasonality, we have now seen corporate and financial investor deal activity return to levels equivalent to those seen this time last year. What we haven't seen yet is a dramatic increase in work relating to more distressed businesses, such as administrations, restructurings or accelerated sale processes. This is undoubtedly due to on-going government support - but as this changes, it is an unfortunate fact that we anticipate much more activity starting to build up in this sector of the market which, whilst painful for many, may represent opportunities and life-lines for others. The decisions that business leaders take over the coming months will determine whether their business survives, thrives, or fails and even the strongest of businesses will be experiencing unprecedented challenges. They must act now to shore themselves up and/or recover.

In addition to the above, business owners should consider the possibility of forthcoming changes in Capital Gains Tax and therefore whether now is the time to be contemplating a sale. This decision will require careful balancing of potentially adverse tax changes with the need to perhaps rebuild and prepare the business for sale after the adverse effects of COVID-19 so as to get back to an acceptable (pre-tax) valuation. As alluded to above, the complexity of this equation will be dependent on the industry concerned.

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