Rising interest rate fears prompts aggressive acquisition strategies

Set against the seemingly positive backdrop of an improving UK economy, there has been a number of recent reports that suggest SMEs are actually struggling in the current climate.

The latest quarterly Red Flag Alert report by Begbies Traynor stated that there were 237,000 companies currently in ‘significant’ financial distress, a rise of more than 60,000 from Q2 2013. The vast majority of these – 217,855 – were SMEs, a 40 per cent increase on 12 months ago.

The plot thickens; with the Bank of England’s governor Mark Carney suggesting a one per cent interest rate hike could be introduced as early as November this year, there are fears that a huge number of SMEs could suffer. This is symbolic of what are known as ‘zombie businesses’, a term applied to companies that cling to survival at times of little economic progression, propped up by easy forbearance from the banks and low interest rates, allowing them to continue to trade despite fundamental problems within the business.

Yet it would seem that such firms cannot linger on for much longer. A recent survey of 500 businesses by insolvency trade body R3 found that six per cent would “seriously struggle” with the rise in interest rates, while a further 16 per cent admitted they would expect “some difficulty”.

It is unsurprising, therefore, that despite the purported upturn in Britain’s economic situation, there is still a lack of confidence among SMEs when it comes to their own futures. Indeed, according to research by asset-based lender Close Brothers Invoice Finance, 21 per cent of Britain’s smaller firms believe that business is tougher than ever before. Furthermore, of the 700 SME owners questioned, 79 per cent said they were not confident in the steady recovery of the economy, with more than half (53 per cent) saying they do not expect their business to grow over the next year.

When you bring all three studies together, it paints a somewhat gloomy picture. However, these increasingly prominent distress signals from flailing businesses could be a welcome sight for those with a more predatory instinct. As companies fall by the wayside of the road to economic recovery, the chance is there for the healthier ones to capitalise – now is the time to adopt an active and aggressive approach to business acquisitions.

The economic recovery and its accompanying interest rate rises are separating the weak from the strong; for the latter there are significant opportunities for inorganic growth. The window of opportunity is short though, the long awaited – and feared, for many – interest rate rise is nearly upon us, meaning the number of SMEs in financial distress is likely to spike. Those with the resources and courage to push for growth rather than simply hang on for dear life can benefit - now is the time for acquisition strategies to start taking shape. Those that don’t push for growth may well find themselves the prey of an increasing number of acquisition hunters.

This is reflected in Thomson Reuters’ data, which showed that merger and acquisition figures recently reached the pre-recession highs of 2007. The numbers illustrate that risk aversion and organic expansion, both of which were embraced during the financial crisis, are now being pushed aside as the belief returns that growth can be more easily bought than built.

There has been a swathe of news stories of late illustrating the success of this approach. One such example is the data hosting and processing firm Alphadex, which was bought out of administration by Manchester-based iRack. Alphadex had fallen on hard times as a result of a sustained cyber-attack to its servers, but iRack recognised that with an investment in software there was an easy way to benefit from the hardware and infrastructure that the distressed business had among its assets.

Meanwhile, in the leisure industry, Gwent Investments recently purchased the Maes Manor Hotel in Blackwood from its original owner Manor Pursuits, which went into administration in March this year. Gwent paid £520,000 for the business, £495,000 of which went on the freehold hotel property. With Manor Pursuits heavily in debt to its creditor Barclays, this luxury 220-guest-capacity manor house dating back to 1890 was acquired at a knockdown price.

Changing sector again, earlier this year Ecotricity bought Evance, a Loughborough-based wind turbine manufacturer that had been placed in administration. Before it ran into financial difficulties due to Government funding cuts, Evance had revealed it was working on a new "innovative windmill design". Ecotricity took over the company with the view to taking this patented design to market within a year, thereby breathing new life into the business with predictions of a sizable return on investment.

What all these stories clearly illustrate is that keeping a close eye on businesses being hit with winding-up orders, placed in liquidation or entering administration is an extremely worthwhile tactic. Distressed companies and their assets represent great value when it comes to acquisition opportunities – with the UK’s economy evidently improving, now is the ideal time for healthy businesses with access to the necessary funding to pursue an aggressive acquisition strategy.

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