Data released by national law firm Bond Dickinson has shown that despite the increase in deals between big business and SMEs in recent years, the last financial year has seen a substantial drop.
Bucking the Trend
Although there had been an upward trend in deals between larger companies and SMEs for the preceding three years, data shows that in 2016/17, these deals dropped by over a quarter – 28%.
Th data comes from Bond Dickinson’s report, Close Encounters: The power of collaborative innovation. The report covers collaborations between large businesses and UK SMEs in the form of mergers and acquisitions, minority stake purchases and joint ventures from April 2013 to April 2017. It shows that the deal volume rose from 1,326 during the 2013/14 tax year to a peak of 1,536 in 2015/16, before falling to 1,111 in 2016/17.
However, the amount invested in SMEs by big businesses in the last tax year reached £21bn -31% more than the £16bn they invested in R & D. This difference reflects the trend of the last 3 years, which has seen big business invest £102bn in UK SMEs but only £61bn in R & D.
Big Business and SMEs: ‘A Potent Combination’
Jonathan Blair, Managing Partner at Bond Dickinson, said: “Collaboration with SMEs has become a key strategy for delivering corporate innovation. Business leaders know that neither corporates nor SMEs are perfectly built to deliver innovation alone, but the reach and power of one, combined with the agility of the other can be a potent combination.
“With the economic uncertainty in both the UK and Europe the short-term hiatus in deals is understandable, but innovation continues to be a key priority for businesses facing disruption from all corners. On the brink of a major shift in its international trade relationships the UK has much to gain from these dynamic partnerships between PLCs and startups.”
According to ONS data, overall, business investment shrank by 1.5% in 2016 – the first contraction since 2009. In 2017, it’s continued to lag behind the recovery of GDP.
Financial Sector Sets SME Investment Standard
The report also revealed that the financial sector was way ahead in both the volume and value of its SME deals. In the last 4 years, large companies in the sector made 1,864 deals with SMEs worth more than £31bn (34% of the national deal volume) – and although deal volume in the sector fell in 2016/17, it was by 6% less than the national average.
The financial sector is also investing in a different way. 75% of its collaborations with SMEs were minority stake purchases rather than acquisitions or joint ventures, compared to the national average of 44% minority stake purchases. In 2017, this trend has continued and grown, with 81% of deals involving financial services firms in 2016/17 being minority stake purchases. The report notes the way large banks are partnering with fintech startups to push through digital transformation strategies, and that leaders from other sectors may be able to learn from this alternative to the pitfalls of attempting to integrate SMEs within a large business.
Simon Pilling, Corporate Partner, adds: “Multinationals earning in dollars are in clover right now, and borrowing costs are at an all-time low, yet we’ve still seen this fall in deals with UK SMEs. Negotiations are being strung out as corporates continue to work out how the final EU deal, or lack of one, will affect them.
“Yet fortune favours the brave, and this slowdown creates a window of opportunity for strategic acquisitions. Added to an incredibly strong startup ecosystem, first rate universities and a tech talent pool to rival Silicon Valley, there might not be a better time to secure the perfect innovation partner.”