- Sharp drop in M&A activity last quarter
- No sign of a recovery so far this year
- More companies likely to experience a slowdown
Financial advisory firm DSW Capital (DSW:AIM) upset the applecart with an unexpected warning earnings would be below market expectations due to a freeze in corporate deal-making.
The shares, which had traded in a narrow range between 100p and 130p since listing just over a year ago, plunged as much as 25% from last night’s close to a new low of 89p before steadying at 93p for a loss of 21%.
WHY DID THE COMPANY WARN?
Just a month ago, the firm released its first-half results showing a 35% jump in network revenues to just under £10 million and confirmed it would meet the market’s expectations for the full year to March.
In just over six weeks, however, the company has had to scrap its guidance due to ‘the wider macro-economic conditions and uncertainties’ which have caused corporate takeover activity to stall.
The company specialises in corporate finance and due diligence, and the widespread turmoil caused by the government’s disastrous ‘mini-budget’ last September has led to many deals being put on hold.
There was a slight resumption of activity in November, but December - traditionally a key month for transactions to complete - saw ‘continued deal slippage and caution in the market’ meaning revenues were ‘significantly lower than expected’.
As a result, the firm has lowered its full-year forecast to roughly flat network activity revenues compared to last year, in a range between £2.8 million and £3.1 million, and EBITDA (earnings before interest, taxes, depreciation and amortization) of between £1.4 million and £1.7 million compared to £2.2 million last year.
‘Following a very strong first half of the year, the board is extremely frustrated by this recent confluence of events which has stuttered the previous excellent growth experienced by the group since our flotation’, said chief executive James Dow.
WHAT ARE THE WIDER IMPLICATIONS?
DSW’s problems are unlikely to be company-specific, and indeed legal and professional services firm Gateley (GTLY) recently told Shares it had seen a similar pause in activity since September with clients ‘putting their foot on the ball’ in terms of transactions as chief executive Rod Waldie put it.
Unlike DSW, Gateley has a broad spread of businesses and while it faces the same headwinds in corporate deal-making it is better-insulated, while its solid first half performance provides a ‘good foundation for the full year’ according to Waldie.
Professional services group RBG Holdings (RGBP:AIM) revealed in early December its Convex Capital corporate finance subsidiary had seen the completion of some of its deals delayed to the first quarter of 2023, with revenues expected to be included in its next financial year.
Analysts at Peel Hunt expect deal-making this year to be driven by companies wanting to consolidate and achieve efficiencies of scale, as well as securing supply through vertical integration, rather than making deals to expand aggressively.
While UK companies may look cheap when taking into account the weakness of sterling, the weak economy and rising cost of debt could make overseas buyers think twice about making acquisitions.
