AIM acquisitions dominate LSE takeovers in 2020 as buyers snap up undervalued small caps

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Acquisitions of AIM-listed companies have made up the majority of takeovers on the London Stock Exchange (LSE) over the last year, according to new research.

Accountancy firm UHY Hacker Young showed that 56% of LSE mergers & acquisitions (M&A) in the year to September 30 involved takeovers of companies listed on the junior market, a jump from 46% in 2019.

The research also noted a strong rise in acquisitions made by private equity groups, which were the bidders in 10 out of every 18 AIM takeover, up from 6 of every 22 the year before.

UHY said private equity firms have become more comfortable acquiring AIM-listed groups over the last few years as the market beefed up its governance rules following the last financial crisis.

The accountancy group also highlighted the opinion of some commentators that the advent of MiFID II, an EU legal framework that provided new governance rules for financial markets, has changed the way equity analysts are paid by institutions which has, in turn, led to a “reduction in research on smaller companies such as those on AIM”.

This lack of research, UHY said, meant a larger number of AIM companies were “undervalued – creating buying opportunities for [private equity] funds”.

“Overall the AIM market yields 1.2%, which is low compared the mature companies in the FTSE100 but shows that the time when AIM was a synonym for loss making and cash guzzling is long gone”, UHY partner Daniel Hutson said in a statement.

Looking ahead, the accountancy firm said AIM is likely to “continue to be highly attractive to buyers going into 2021” as interest in high growth targets increased, particularly within the tech and pharma sectors which outperformed other industries during the coronavirus (COVID-19) pandemic.

This sector dominance is already showing in 2020, with 42% of all AIM deals this year involving tech or pharmaceutical companies.

“Brexit will take some heat out of the market towards the end of the year as we wait to see what the new post-Brexit world looks like. However, the overall popularity of AIM companies is likely to continue as we go into 2021 and beyond”, Hutson said.

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