Why a weaker pound could spark an M&A frenzy in the UK channel

Resellers believe the slump in the pound will be attractive to firms in the US

It's fair to say that last week was a disaster for the pound. In the wake of the chancellor's mini-budget, it slumped to a record low of $1.03 against the dollar. As a result, government borrowing costs surged and the Bank of England was even forced to step in.

While the pound has now risen to levels of around $1.14 after Kwasi Kwarteng went back on some actions from the mini-budget, it is still weaker compared to what it has been in previous years.

So this raises the question: will a weaker pound make the UK channel more attractive for US companies looking to expand across the Atlantic?

A recent example of cross-Atlantic channel consolidation is UK edtech stalwart Stone Group being snapped up by Canadian IT and cloud solutions provider Converge Technology Group.

US firm Wayside Technology Group also recently acquired its second UK distributor inside two years in the form of start-up VAD Spinnakar.

We asked several resellers for their views - and one thing that is clear is they believe the slump in the pound will be attractive to firms in the US.

"I think the UK reseller market has always been attractive to outside investors, and clearly the weakness of the pound will accelerate this," XMA CRO Andy Wright said.

Academia's Mike Bacon agreed, saying the UK is an "attractive" market.

"It's always been attractive in terms of the quality of the resellers, the quality of the channel, but now they're even more competitive and cheaper. I'd expect to see further acquisitions," he said.

Meanwhile, CTO of Logicalis Mark Benson felt people are "always going to take advantage" if they can get a foothold in the market and purchase a strong business.

"With the dollar being as it is at the moment - and I'm not seeing it going any other way at the moment in the short term - I think that there's an absolute possibility that the US companies could come in and look at good UK businesses and take advantage of the competition," he said.

And Jigsaw24 CFO Rob Hicking said that the state of the market in the UK makes it an "obvious time" for a US investor to want to "go and acquire some growth".

He added: "I would expect strong interest from trade buyers but also investors in the US.

"Clearly if a US buyer comes into a listed company, for example, with a knockout share price, they're able to spend more because their dollar is very strong against the weak pound. So I'd expect those types of investments to come in."

While the pound has dropped, interest rates have also risen since December and are currently at a nearly 40-year-high of 9.9 per cent.

So, while the weakening pound may attract investment from the US, will interest rates as they are affect firms that may have acquired debt through acquisitions?

Chief executive of acquisitive business Babble Matt Parker felt that while US investors are looking at UK assets being more attractive from a price perspective, there is a counterbalance with most M&A funded through debt.

"That's going to be more expensive, he said.

"I think it's inevitable that has to have an impact. If suddenly you're having to pay three times as much interest in your debt as you were six months ago, it's got to have an impact."

And Wright felt that as interest rates rise so too will the pressure on businesses that have acquired debt through acquisitions.

"Money has been cheap for such a long time that I am sure that, as the rates creep up, pressure will be enormous on some of these businesses," he said

"Those who remember 2E2 will remember that they were highly geared and saw margins being eroded when it collapsed in 2013. The causes of some of those difficulties were different to what we are seeing today, but the outcome was sudden failure."

Hicking also thinks firms will face a challenge with higher interest rates and borrowing costs, especially for those earlier in their cycle with large amounts of debt.

"At a time when other costs are increasing as well, that will certainly be a challenge," he said.

"I think the other impact is on new deals. While I think you will still have new deals happening, I think they will be more challenging.

"It's more difficult to manage when you're modelling a deal and modelling what the debt capacity might be and what repayments might be.

"Having that level of uncertainty around where interest rates may go makes it a lot more difficult and potentially more risky which could have an impact on prices more generally."

Benson meanwhile hopes business make a "cautious approach" in any M&A to ensure they can afford it amid high interest rates.

"I'd hope that organisations have taken a mature approach and worked out that they could actually afford to make that acquisition," he said.

Meanwhile, Infinigate CEO Klaus Schlichtherle also spoke about interest rates after the business acquired cybersecurity distributor Starlink.

Schlichtherle said that any smaller acquisition in the future will come from Infinigate's cash flow, but said that the company could be more cautious about pursuing larger M&A deals.

"Moving forward there will be maybe some second thoughts about spending big time money," he said.

"I think we did the acquisitions at the right time with the historically low rates that we have had."

"For bigger acquisitions, we would need to look at what the value proposition is… interest rates increasing will have an impact, but it won't be material."