Finally, a foreign deal offering a breath of fresh air to UK investors
Brexit and business haven’t been best bedfellows since the EU referendum. Uncertainty over trade, regulation and free movement has kept boardrooms on edge. Yet amongst the gloom, one fact has shone through. Investors in many UK firms have seen impressive performance, thanks to the fall in sterling.
The effects of this devaluation are well documented. For stock market listed firms, every dollar or euro of revenue earned overseas is now worth more when converted back into sterling. For some domestically focused companies who import materials from overseas, the reverse is true; cost rises lead to squeezed profit margins, increasing inflation. But most intriguingly for investors is the number of businesses which now look far more attractive as merger or acquisition targets for foreign groups.
The logic is simple. If you’re an overseas business with cash reserves held in a foreign currency, UK company shares are suddenly available at a substantial discount. And acquire they have. The biggest takeover came shortly after the vote, when Japanese conglomerate Softbank purchased microchip manufacturer ARM Holdings, and the deals have kept on coming. Payment processor Worldpay is tying the knot with US rival Vantiv and engineer WS Atkins has been snapped up by a Canadian group. The latest morsel at this buyout banquet sees French entity Schneider teaming up with Cambridge tech firm Aveva.
A successful company which provides software across a host of manufacturing sectors, Aveva was spun out of Cambridge University as Cadcentre in 1967 and became private in 1983. Its traditional forte is computer aided design, having built up a dominant position selling software to shipyards, factories and refineries. There are other major software firms which are listed on the UK stock market such as Sage, Microfocus and Fidessa, but none in the same businesses as Aveva.
This makes it a rare beast, and is why this latest deal offers a breath of fresh air. For most foreign acquisitions, UK investors tend to be offered either cash or a mixture of cash and shares in the acquiring company; which presents a thorny problem. British equity funds can often only invest in UK companies. That means some UK fund managers have to immediately sell any new foreign listed shares they receive from takeovers, as do any passive funds which aim to track the performance of our domestic stock market.
So the structure of this proposed deal, which will see Schneider injecting fresh cash and a new suite of software products into the existing business, is a welcome alternative. This so-called “reverse takeover” ensures Aveva will continue to be listed on the London Stock Exchange, allowing UK fund managers to remain invested. This is particularly pertinent given Aveva’s unique position in the market, as UK investors wouldn’t easily be able to replace their shareholding with a similar business, a key criticism levelled at the Softbank takeover of ARM. Our stock market can only benefit from offering a diverse range of investment opportunities across many industries.
It would be remiss to simply view the deal through rose-tinted lenses. Aveva’s share price has been choppy over the past few years and corporate governance at the combined firm may be called into question as the tie-up will make Schneider a majority shareholder.
The case for approving the takeover of, and investing in, the combined Aveva will come down to the analysis of individual fund managers and shareholders.
However, it’s far better for investors to have the opportunity to invest in a market that will be offering more, rather than less, diversity and choice.
This deal is a rare example of a foreign takeover which keeps our options open.
Richard Marwood is senior fund manager at Royal London Asset Management