The news that confectionary giant Mars had agreed to acquire Britain’s Hotel Chocolat in a $660 million transaction in November led analysts to debate whether Mars or Hotel Chocolat's shareholders had secured the better early Black Friday deal. The transaction was also seen as a welcome sign of confidence from U.S. investors in strategic U.K. assets.

The U.S.-U.K. corridor for M&A investment has quietened in 2023, in tandem with a slowdown in the global M&A market. According to Pitchbook data, from January to October there were approximately 600 majority acquisitions involving U.S. acquirers, both corporate or private equity. This compares to approximately 800 in 2022, and over 900 in 2021.

In the mid-market space, one of the more robust areas of the U.S.-U.K. M&A corridor has been portfolio companies’ bolt-on acquisitions. With interest rates rising and internal rates of return being squeezed in the current environment, the potential arbitrage opportunity for investors has proved compelling.

Despite a slow start in 2023, U.S. deal activity appears to be stabilizing more recently on the back of stronger than expected economic indicators. Mid-market volumes continue to rise, underpinned by high levels of undeployed cash stored up by PE funds alongside strong M&A appetite from corporate acquirors, which are looking to bolster growth or add tech capabilities, including through cross-border transactions.

As we head into 2024, the U.S. market will continue to offer an attractive pool of potential investors and acquirors for U.K. businesses. It is worth noting that 2024 has the potential quirk of a U.S. presidential election and a U.K. general election being held in the same year for the first time since 1992. Dealmaking in the U.S. has typically slowed in the months leading up to a presidential election, which is worth considering in when approaching potential U.S. targets.

For mid-market companies considering the U.S. as an investment or exit route in the near to medium term, based on our experience of working in the U.S. M&A market and selling several U.K.- based assets to U.S. investors, here are some initial questions to be considering.

What is the rationale for a U.S. acquiror?

In assessing the likelihood of attracting a U.S. acquiror, potential sellers need to consider the investment story being written by the counterparty and whether that will provide an attractive outcome versus domestic or European investors.

As a broad rule, U.S. investors prefer U.K. assets that have a U.S. growth story, with U.S. expansion playing a significant role in the overall forecast growth. Digging a bit deeper, the broader rationale for international M&A may vary depending on the type of investor (if corporate or PE):

• U.S. PE fund: Funds with mandate to engage primarily in the U.S. will typically seek to find opportunities where the U.S. growth story represents a significant part of the plan.

• U.S. PE fund with U.K. presence: There is a large number of U.S.-based PE funds with U.K. and European offices and specific European mandates. For these funds, having U.S. presence is a less relevant factor.

• U.S. corporate acquiror: These will typically be seeking acquisitions that fit into a broader strategic plan, whether that is international expansion, product expansion or acquisition of a new technology/service. Often this will involve acquiring a product, technology or skillset that can be deployed in the U.S. to complement current offerings.

Do you know the investor audience?

Understanding the investor audience ahead of the process is key to designing an appropriate outreach program. Therefore, sellers will require an advisor that understands the strategic direction of potential investors. The U.S. market is a vast one with large corporates having complicated organizational structures, so understanding the right entry routes are critical to harnessing stakeholder buy-in.

When to engage with potential investors?

Early engagement, particularly with U.S. investors, is imperative for the success of a transaction process. An information memorandum or teaser received cold alongside a formal process letter is unlikely to warm up the investor for the deal.

As you approach a potential equity event, consider your presence at trade shows or industry events in the U.S., to start to socialize your proposition with a targeted network of investors. It is common for businesses to host 10 to 20 potential investor meetings over the course of a conference or industry event. Hosting a number of these meetings can help sharpen the eventual investment pitch in a more informal environment.

As you move closer to a formal M&A process, consider an early roadshow visit to the U.S. to further deepen relationships with potential investors. Meeting face-to-face and allowing for a more in-depth conversation show a commitment to deepening the relationship. This investment in the relationship also seeks to build trust at the outset that can be critical to the success of the transaction when deal-related issues need to be addressed. Often there is a time-cost trade-off in integrating these interactions into an already busy schedule, but in an environment where deals are taking longer to complete, an investment in the preparation phase is likely to produce a return at the deal stage.