Download UK businesses investing for growth — will your investment strategy

UK businesses
investing for
growth — will
your investment
strategy keep
you ahead of
the pack?
UK Plc is investing in their existing businesses …
The last few months may have been characterised by gloomy news on the global economy but the UK corporate sector is in rude health
if capital deployment is any guide. Over the past few years, there has been a widespread perception that the UK economy has been
performing relatively poorly in terms of business investment. The EY ITEM Club Special Report on Business Investment clearly shows
that this is not the case: UK business investment has been outpacing other economic indicators since 2010 to reach its highest level as a
share of GDP since 20001.
UK: Business investment
UK: Consumer and corporate spending on tech
Q1 2008=100, real terms
12.0
11.5
11.0
10.5
50
350
% of real GDP (LHS)
45
300
£bn, real terms (RHS)
40
10.0
35
9.5
30
9.0
25
8.5
20
8.0
15
7.5
10
7.0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: EY ITEM Club/Haver Analytics & OBR
1
Household spending on information processing equipment
Investment by information and communications sector
250
200
150
100
50
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: EY ITEM Club/Haver Analytics
EY ITEM Club Special Report on Business Investment, September 2015
EY | 1
… and buying new ones …
M&A activity is on the rise, with both volumes and values increasing. Most striking is the increase in domestic activity. In the year to
September 2015, deals between UK companies are up almost 20% year on year in value terms, even after excluding 2 potentially
distorting megadeals. Inbound deals to the UK are up 13% by volume and more than double by value. By contrast outbound deals from
the UK are down by around 12% in volume terms.
With the global economy slowing while the UK recovery continues, it is unsurprising that UK assets look relatively attractive. The growth
in deal volumes shows us that this is not a narrowly based phenomenon concentrated on a few large deals but an increase in activity
across the economy. This is consistent with trends globally, deals are increasing in the recovering US economy as businesses chase
sustainable growth.
Regional M&A
RTM value (US$mn)
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
8000,000
600,000
400,000
200,000
US
Western Europe
2015*
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Asia-Pac
Source: Dealogic and EY Analysis
UK M&A Data
Value (US$mn)
Volume
800,000
5,000
700,000
4,500
4,000
600,000
3,500
500,000
3,000
400,000
2,500
300,000
2,000
1,500
200,000
1,000
100,000
Source: Dealogic and EY Analysis
*2015 is extrapolated from 1 Jan 2015 — 31 Aug 2015
EY | 2
Total UK volume
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Total UK value (US$mn)
2015*
5,00
0
0
... as are its competitors
The UK’s level of capital investment still lags some way behind its international competitors — with only Italy among the G7 having
investment account for a smaller share of GDP. The flexible labour market in the UK has meant labour has been cheaper relative to
capital in recent years and hence capital investment as fallen as a share of inputs relative to labour costs. While this may be a sensible
short-term strategy, in a dynamic world there is a risk UK business is still not investing at the rate necessary to remain competitive on a
global basis.
G7: Business investment
UK: Real cost of capital goods and labour
Q1 2008=100
% of real GDP
15
14
Japan
Germany
US
UK
France
Canada
Italy
115
Capital goods
110
Labour
13
105
12
100
11
95
10
90
9
85
8
1997 1999 2001 2003 2005 2007 2009 2011 2013
80
2001 2003 2005 2007 2009 2011 2013 2015
Source: EY ITEM Club/Haver Analytics
Source: EY ITEM Club/Haver Analytics
As a consequence of higher investment by businesses in other countries, the UK is the leading destination in Europe for Foreign Direct
Investment (FDI). While FDI does offer potential economic benefits it can also signal competitive entry into the UK market. UK based
businesses must be prepared to respond to increased competition for a share of the UK’s growing economy.
EY | 3
Where is the money going?
There are significant differences in the level of investment across sectors and geographies. In the case of capital investment, the
Services sector has been leading the charge in recent years. Manufacturing is starting to increase spending but utilities, probably as a
result of regulatory and policy uncertainty have cut expenditure dramatically in the last 12 months. The fall in commodity prices explains
the decline in spend by the extractive industries.
UK: Business investment
% year
15
10
5
0
Services
Electricity, gas & water
–5
Mining & quarrying
–10
Manufacturing
–15
Other
–20
2007 2008 2009 2010 2011 2012 2013 2014 2015
Total
Source: EY ITEM Club/Haver Analytics
M&A activity provides us with an even more granular view of UK sector activity. As shown below, over the last year investment has been
driven by consumer and retail and knowledge centric industries such as life sciences, media, telecoms and technology. There is a dividing
line in the UK between a set of fast moving and increasingly technology enabled sectors and those capital heavy industries that are
either more reliant on public spending or are heavily regulated sectors.
UK M&A 2014
Volume of deals
500
Technology
400
Consumer
products & Retail
300
Diversified industrial products
200
Wealth & Asset
Management
Automotive & Transportation
Life sciences
Power & utilities
Oil & Gas
Insurance
Mining &
Banking & Capital Markets
Metals
Provider care
Government & Public Sector
Aerospace & Defense
100
0
Real estate
Media & Entertainment
0
10,000
20,000
Telecommunications
30,000
40,000
50,000
60,000
70,000
Value of deals (US$mn)
Source: Dealogic and EY Analysis
EY | 4
Outside of the UK, there is a significant shift in geographic focus. As the analysis of M&A in the 12 months to end of September 2015
shows, deal activity in both value and volume terms is dominated by North America and Western Europe. Just as we see investment
flowing into the UK as its relative economic performance strengthens, we can identify a pivot back to developed markets more generally.
The recovery in the USA remains on track and Europe has started to grow more strongly while risks in the rest of the global economy
have increased at the same time as growth has slowed. UK businesses should consider their full geographic portfolio in the light of
changed macro-economic conditions.
Global M&A by destination (LTM to September 2015 — based on target asset location)
N Asia
US$699bn (17.6%)
5,030 (13.7%)
Europe
US$841bn (21.2%)
11,461 (31.2%)
Japan
US$55bn (1.4%)
2,282 (6.2%)
SE Asia
US$41bn (1.0%)
1,441 (3.9%)
North America
US$2,039bn (51.4%)
11,755 (32.0%)
India
US$46bn (1.1%)
1,142 (3.1%)
South America
US$82bn (2.1%)
1,347 (3.7%)
Oceania
US$97bn (2.4%)
1,346 (3.7%)
Africa & Middle East
US$65bn (1.6%)
966 (2.6%)
Source: Dealogic & EY Analysis — numbers in brackets represent share of global total
The UK’s recent performance in attracting FDI paints a similar picture. Technology and service sector businesses dominate FDI but
there is more manufacturing investment than is the case with M&A with both automotive and machinery & equipment putting in
strong performances. The UK attracted more manufacturing FDI projects than Germany in 2014 further illustrating the strength and
attractiveness of the UK market. The UK was the leading destination for FDI in Europe in 2014 confirming that corporates are deploying
their capital in the UK.
2014 FDI projects by sector
Sectors
Software
199
Business services
88
Financial intermediation
64
Automotive Assembly
52
Machinery & Equipment
51
Food
33
Other transport services
30
Retail
29
Pharmaceuticals
26
Publishing
20
0
50
100
150
200
Source: EY European Attractiveness Monitor 2015
EY | 5
Are you investing enough in the right assets?
What does this mean for UK business? Businesses have to
ask themselves, have we been investing enough to remain
competitive and support our growth ambitions?
Given the widely held but erroneous view that investment has
been low in the UK, it is possible that businesses have been
assuming there was less investment going on than has actually
been the case. The reality is that both UK and international
businesses have been investing, with investment in capital
equipment at decade wide highs, M&A activity increasing
year on year and record levels of foreign direct investment
into the UK.
In analysing the adequacy of their investment, businesses
should start by assessing if their historic level of investment has
been sufficient to lay down a platform for sustained growth in
the UK. UK growth is solid and likely to be sustained. Businesses
that have under-invested may find capacity constraints starting
to emerge and competitors potentially better placed to step into
any gap created.
It is also important for businesses to reassess their investment
plans in the context of the changing sector dynamics
highlighted in this document. Examples include the increasing
role played by consumer technology in sales processes and the
rising incidence of sharing in certain areas of the value chain,
enabling businesses to share investment and effectively boost
returns. It may well be that the level of effective assets available
to competitors or new entrants is higher than might have
previously been assumed.
available for businesses to exploit than traditional analysis
would suggest (e.g., smart phone sales) but it may also mean
that businesses need to invest now to head off the disruptive
threat from technological change. The growth in technology
sector M&A does not just reflect deals that will impact that
sector alone, in many cases technology is being acquired to
disrupt other sectors.
Finally on the domestic front, there is a need to consider the
potential impact of the introduction of the National Living Wage
from 2016. As the EY ITEM Club business investment report
highlights, the relative costs of capital versus labour have
changed in recent years as labour has become relatively more
competitive. For some sectors, the NLW will reverse this trend
and business investment may therefore become both more
attractive and necessary to offset increased labour costs.
Beyond the UK it is clear there is a re-balancing of the global
economy taking place. In recent years much of the focus of
UK corporate international activity has been on the emerging
markets. Globally we can see a clear shift to investment in the
developed markets of North America and Western Europe in
particular. Now is the time for UK businesses to evaluate their
existing and desired future geographic portfolios.
Overall, the brighter picture for business investment revealed
by this analysis is good news for the UK economy. But
challenges and questions remain and businesses do need to
move quickly to reassess their plans to ensure their capital is on
the right agenda.
The impact of investment in technology has at least two
dimensions. Firstly, it might mean that there is more capacity
Contacts
Mark Gregory
Michel Driessen
Partner
Chief Economist
Partner
Transaction Advisory Services
T: + 44 20 7951 5890
E:[email protected]
T: + 44 20 7951 8792
E:[email protected]
EY Economics for Business provides knowledge, analysis and insight to help businesses understand the
economic environments in which they operate, both in the UK and within the Global economy.
EY | 6
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