Is Scotland’s deal flow ready for take off in 2025 ?

After a period of relatively slim pickings for legal advisers in Scotland, a flurry of merger and acquisition (M&A) activity in the final quarter bodes well for the sector in 2025 and beyond. 

With indications that inflation has been tamed alongside falling interest rates, evidence of growing business confidence is being reflected in deal activity.  

As we go to press, total transaction values in Scotland have seen double-digit gains compared to last year with more than £6.3bn worth of deals completed during the first nine months of 2024. 

The data from Experian also shows that the momentum on deal value has continued to build. Although the number of transactions has remained broadly flat compared to last year, final figures are likely to benefit from a sizeable uplift due to activity around the UK budget measures which reduced tax breaks for entrepreneurs and investors prompting some business owners to initiate sale processes. 

Headline deals which have helped boost fee income for Scottish advisers this year have included Nationwide’s £2.9bn deal for Clydesdale Bank-owner Virgin Money, private equity giant KKR’s £1.4bn move for Glasgow-headquartered Smart Metering Systems, and France’s Vinci Airports acquisition of a majority stake in Edinburgh Airport for £1.27bn, with Shepherd and Wedderburn acting on behalf of Global Infrastructure Partners. 

A number of significant fundraisings have also been closed by Scottish firms, including Edinburgh-based gaming company Build A Rocket Boy’s £86m Series D fundraising round. 

Advisers have benefitted from increased activity from the Scottish National Investment Bank which backed fund raisings by the likes of Aberdeen-based on-street electric vehicle charging specialist Trojan Energy and dental decay technology firm Calcivis. 

Our experience is that there is appetite to do deals and there is capital available to be deployed’ – Paul Scullion

Paul Scullion, head of corporate finance at Burness Paull, says that after a challenging 18 months for the deals market, 2024 has seen strong levels of M&A activity. 

“Our experience is that there is appetite to do deals and there is capital available to be deployed,” he says. 

However, buyers remain cautious which is reflected in the way deals are being structured. 

“In many cases, deferred consideration has been used to bridge valuation gaps and to provide additional security for buyers, particularly with less mature companies where there is less clarity around value,” explains Scullion. 

“This is particularly the case among private equity firms, for whom bolt-on acquisitions remain a priority as they focus on consolidating existing investments and leveraging creative deal structures and sector-specific strategies to sustain deal activity.” 

Simon Brown, who heads Anderson Strathern’s M&A team, reports that buyers often now acquire 70-80 per cent of target companies with a call option to purchase the remainder over two to five years and existing management being retained and incentivised. 

Brown, whose team expects to complete more than 100 deals by year end, says activity has picked up “markedly” over the past 12 months, driven by falling inflation, increased activity by private equity firms and improved investor confidence.  

Although transaction numbers in the energy industry – for many years the key driver of the deals market in Scotland – continue to be impacted by the windfall tax on profits, the appetite of overseas buyers and investors for Scottish assets in the wider economy is making up for some of the lost ground. 

High-profile deals have included the acquisition of Aberdeen-based remote operator vehicles specialist ROVOP by US group Chouest and the sale of East Kilbride travel software business Traveltek to Canadian-owned Juniper Group. 

Tracey Ginn, who heads up MBM Commercial’s Corporate and US teams, says American investors and acquirers in particular continue to be attracted to targets such as data and AI technology businesses which have their roots in Scottish universities. 

“We certainly see that as a real growth area and helped by an attractive exchange rate. If a client is looking at a range of potential acquirers probably more than half of those are going to be from the US or are US-funded but with a UK arm,” says Ginn, whose firm has been involved in many of the spinouts from Scottish universities in recent years. 

The high growth and tech companies sector is one which Ginn says has also attracted increasing interest from other law firms. 

“It was probably seen as a fairly niche market in the past, but I think a lot more firms have realised it is a very attractive sector with some real gems in there.” 

David Beveridge of Macdonald Henderson, which was named as the most active legal adviser in Scotland in the third quarter of 2024 in Experian’s latest MarketIQ report, also highlights a shift in the make-up of the market for legal services on deals in Scotland, partly driven by technological advances. 

“You’ve got your global players, the big UK regionals and then the big Scottish independents but then there are also really able smaller firms picking up work with relationship-led advice which clients are really responding to. 

“Technology has been a real leveller because in the past you would have had squads of lawyers churning through pages and pages of diligence but now you’ve got developments like virtual data rooms, and document generation is happening on a much slicker basis. 

“I still think there’s a tremendous requirement for experienced lead advisers negotiating the share purchase agreements and I don’t think that’ll ever go away, but the other bits are real levellers. You don’t need 50 people copied into emails on a deal any more.” 

With interest rates heading down, inflation stabilising and greater political clarity, legal advisers are cautiously optimistic that the current positive momentum in the deals market will continue into next year. 

“Uncertainty does definitely have a chilling effect on the appetite of businesses to do deals and invest so with the election and first Budget out of the way, 2025 will hopefully prove more stable,” says Ginn. 

Alison Gilson, corporate partner and head of Shoosmiths’ Edinburgh office, is also optimistic although argues that it is difficult to be sure quite how the Budget changes will impact on businesses’ strategic M&A plans.  

“There is quite a lot of detail for business owners, investors, companies and advisers to get their head around but early indications seem to be that the M&A market will remain buoyant as we move into 2025.” 

David Anderson, head of corporate in Scotland at Addleshaw Goddard, says there was a “huge push from some sellers to get deals done in the run up the Budget”.  

He addd: “One thing that became clear to our team is that the focus on what the Budget might deliver has made a lot of business owners take stock of where they are at and contemplate whether a transaction might be right for them – something that may not have been on their agenda before, or indeed at all. Time will tell whether that leads to some unanticipated deals coming forward down the line.” 

Donnie Munro, head of corporate, commercial and regulatory at Harper Macleod, says although the capital gains tax (CGT) rates did not rise to the levels some had feared, the change will be enough to prompt some business owners in particular to take action. 

“This feeling is perhaps more prevalent among smaller family-owned enterprises or SMEs which will feel the increases more sharply, and for whom the protection of assets for future generations is much more of a concern.” 

Although the tax changes have been criticised in some quarters for stifling entrepreneurial activity, David Beveridge at Macdonald Henderson believes that they could also prove to be a positive for business activity. 

“Sometimes the founders or owners of a business do need something of a gentle nudge for them to take the next step and let the next generation take over,” he says. 

“Changing the fiscal rules may just give certain businesses the push they needed.”