Foreign Buyers Feast on UK Firms. Domestic Confidence Crumbles.

The numbers tell a brutal story. Foreign companies spent £27.4bn buying up British firms in the final three months of 2024, nearly £20bn more than the previous quarter and the highest level since mid-2021. Meanwhile, UK companies managed just £1.8bn in domestic deals and £1.7bn acquiring overseas targets.

The contrast couldn't be starker, or more troubling for anyone tracking the health of London's capital markets. Whilst foreign buyers, particularly American ones, see opportunity, domestic firms appear to lack either the confidence or capital to pursue deals themselves. The ONS attributes the surge to multiple transactions exceeding £1bn, but the real story lies in which companies are being swallowed and why they became targets in the first place.

The Deliveroo Debacle

Few acquisitions expose the UK valuation problem as clearly as Doordash's October purchase of Deliveroo for £2.9bn. Consider the timeline: Deliveroo went public in 2021 valued at £7.6bn, a flotation many remember for its disastrous first-day trading performance. The company never recovered investor confidence, its shares plunging more than 50 per cent post-listing.

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Doordash, by contrast, debuted in 2020 at a $71bn valuation and has largely sustained those levels. Both companies operate in identical sectors facing similar unit economics challenges. The operational differences don't justify a collapse on one side of the Atlantic and stability on the other.

That £4.7bn of shareholder value destruction whilst the American peer held firm presents an uncomfortable question for UK market advocates: was this corporate mismanagement or structural market failure?

December brought another trophy acquisition when KKR, the American private equity titan, secured Spectris for £4.8bn. The precision instruments manufacturer represents exactly the kind of specialist industrial business Britain supposedly excels at nurturing. Yet here was a foreign buyer determining that London couldn't properly value it.

The Valuation Chasm

Patrick Sarch, who heads UK public M&A at White & Case, framed the appeal bluntly for international bidders: "relative valuations and many undervalued businesses" in Britain. The data supports his assessment. Research published by McKinsey shows UK companies trading at an average EV/EBITDA multiple of 7.7, compared with 13.8 in the United States.

The McKinsey analysis attempts to qualify this disparity, arguing the American figure gets "skewed by the predominance of the biggest tech firms" whose performance massively outstrips their British counterparts. Fair enough. But this explanation only addresses why the numbers look different, not whether the British market functions properly for the companies actually listed on it.

What's interesting here is what McKinsey's caveat inadvertently reveals: the UK doesn't just lack mega-cap technology companies, it lacks "significant outliers" of any kind. The absence of breakout successes becomes self-reinforcing. Without companies that dramatically outperform, the entire market re-rates downward.

British pension funds, once major holders of domestic equities, have steadily reduced their allocations to UK stocks for two decades, dropping from roughly 50 per cent of assets in the 1990s to below 5 per cent by recent counts.

Structural factors beyond the composition of indices deserve scrutiny. International capital flows to markets where outliers exist, deepening Britain's liquidity disadvantage. Analyst coverage has thinned correspondingly. Smaller UK-listed companies often struggle to attract even a handful of research notes, whilst American peers benefit from multiple investment banks publishing regular analysis.

The Exodus Accelerates

The inward acquisition surge continues a well-established trend: Britain's public markets are shrinking as companies either get bought or choose never to list in London at all. Recent years have witnessed the departure of prominent names including defense contractor Ultra Electronics, cybersecurity firm Darktrace, and semiconductor designer Arm, which explicitly chose New York over London for its 2023 re-listing.

Domestic deal activity collapsing to £1.8bn in Q4, down from £7.1bn the previous quarter, suggests British companies see better value buying shares back or sitting on cash than pursuing acquisitions. Outward M&A falling to £1.7bn from £3.4bn indicates similar caution about deploying capital overseas. Neither pattern suggests confidence in growth prospects.

Helen Brocklebank, who leads M&A at RSM, anticipates "global geopolitical tensions and the knock-on impact on inflation" might deter major transactions through 2025. She expects sectors with recurring revenues like professional services, healthcare, technology and industrials to remain attractive targets, which rather confirms the problem: Britain has such companies, but they're attractive primarily to foreign acquirers.

The government and regulators face mounting pressure to respond, though the toolkit looks limited. Blocking foreign takeovers on national security grounds works for defense contractors, less so for food delivery platforms. Tax incentives for domestic investment compete against similar programmes in larger markets with deeper capital pools.

Whether the tide can be reversed depends partly on factors beyond any policymaker's control: US interest rates, global risk appetite, the dollar's strength. But the £27.4bn question is whether Britain's structural disadvantages prove permanent, leaving London as a market where companies are farmed for eventual harvest rather than grown for sustained independence. Britain looks set for a fresh wave of foreign takeovers after figures showed they rose to a four-year high of £65billion last year, while private equity continues to tighten its grip on the UK's brightest tech firms.

More articles by Ross Williams