The sharp fall in the value of the pound and scrapping of banker bonuses may lead to a flurry of foreign takeovers of UK startups from the US and beyond, analysts have said.
The pound’s drop followed Chancellor Kwasi Kwarteng’s mini-budget, which included unfunded tax cuts and caused sterling to dip as low as $1.03 against the dollar on 26 September.
While the pound has since recovered following a £65bn intervention from Bank of England, historically it remains in a weakened state. It is down by 16% since this time last year, when it was worth $1.36, and has been on a downward trajectory since May 2021.
The recent and historic strengthening of the dollar against a weak pound makes it more attractive for US companies to acquire UK startups. Faced with a takeover offer, founders may be more likely to opt for an earlier exit than take the company up to an initial public offering (IPO).
The UK government has been trying to encourage the country’s most promising tech companies to continue to grow domestically and eventually list publicly on the London Stock Exchange.
“This situation (as a rule) will make the UK’s tech companies more likely to be potential acquisition targets,” said Tania Wilson, research director at TechMarketView.
“We have seen this already with a number of big names subject to takeover discussions in recent months, although currency weakness is not the only factor at play.”
Data from Beauhurst published in January found the number of US takeovers of British tech companies had risen to a record-breaking 130 firms.
“If I were a US company that saw a good IP base or a good opportunity to spread my footprint into the UK right now, I’d probably be looking at it thinking it’s a good time to strike,” Stuart Bedford, corporate partner at London-based law firm Linklaters, told Sifted. “You’d be nuts not to if you are cash-rich.”
Richard Bernstein, the founder of the asset management firm Crystal Amber, told the Guardian: “We can expect to see a wave of bids from overseas buyers for UK businesses. Their profits obviously won’t be worth as much in dollars, so asset-backed situations and brands are most valuable.”
The scrapping of banker bonuses, announced by Kwarteng in the mini-budget, could further encourage UK merger and acquisition (M&A) activity.
Last year City bankers earned total fees of $3.5bn (£2.6bn), according to research by financial data provider Refinitiv. That sum was the largest since Refinitiv began collecting data in 2000. Without a cap on banker bonuses, combined with undervalued publicly listed UK companies, could create the perfect storm for foreign takeovers.
Arm takeover came amid weak pound
One of the most high-profile foreign acquisitions in UK tech came in 2016 when semiconductor designer Arm, which had long been the crown jewel of UK startups, was bought by Japanese conglomerate SoftBank. That year also saw a dramatic fall in the value of the pound following the decision to leave the European Union.
According to data from Statista, foreign acquisitions of UK companies jumped to 262 cases in 2016, up from 145 in 2015.
The UK government is still attempting to convince SoftBank to list Arm on the London Stock Exchange.
Patrick Kavanagh, co-founder of Atlantic Money, told UKTN that foreign companies had already started taking advantage of the situation.
“We’ve already seen European investors take advantage of this, buying up significant stakes in Vodafone and Aveva, and could expect to see more as the pound continues its journey downwards,” Kavanagh said.
He added that fintech, Britain’s biggest tech sector, is being particularly targeted as they grapple with slumping private valuations.
“Declining public market valuations and the poor performance of IPOs have dampened the optimism that drove valuations during Covid-19,” said Kavanagh. “Fintechs are now quite literally paying for their previous stratospheric valuations, rapid expansions, and loss of focus.”
On the flip side, a weakened pound against the dollar could encourage more US investors to back UK startups.
Martin Hartley, managing director of Emagine Consulting, suggested the situation could lead to spur a new wave of UK fintech innovation.
“This could also, in theory at least, create an interesting dynamic to the UK’s finance landscape,” Hartley said. “At the last pound drop and over the last 10 years, we saw the challenger banks – the likes of Monzo, Starling, METRO – sweep in and compete against the traditional banks for customers.
“I expect hungry US and foreign investors will spur on a new generation of innovative tech-based banks and financial services – the challengers may become the challenged.”