In the days leading up to the June 23, 2016 Brexit referendum, we discussed Brexit's potential impact on the M&A market: Britain without the EU: how will Brexit affect dealmaking? Today, we take a look at how those predictions have held up five months after the historic vote.
Domestic UK M&A down 62%
As predicted, economic and political uncertainty has created a hostile deal environment for domestic UK M&A. According to Thomson Reuters, the value of deals between UK companies has dropped 62% since the vote to a 30-year low. A lack of large deals may be to blame – not a single domestic deal worth over US $1 billion has been announced since the vote.
A recent survey of executives by Ernst & Young (EY Survey) suggests that the slowdown may persist at least in the short term. The number of UK respondents who said that they are looking to transact in the next year has dropped from 59% to 48% since May. The respondents cited domestic political stability and currency volatility as their top concerns. Interestingly, the respondents did not cite Brexit per se as a top concern, which suggests that it is the effects of Brexit rather than the actual decision to leave the EU which concerns UK companies the most.
Inbound UK M&A down 69%
Immediately following the vote, sterling fell 11% as expected. It has since fallen even more. However, predictions that a weakened sterling could boost foreign acquisitions of UK targets have not held up. Rather, inbound UK M&A has fallen by 69% since the vote.
In addition, the EY Survey reveals that the UK has dropped out of the top five global M&A destinations for the first time in the survey's seven year history. The majority of respondents from countries who previously favoured the UK as a gateway into Europe, including Japan, US and China, now express a negative sentiment about investing in the UK. It is apparent that the bargain M&A opportunities presented by a weakened sterling is insufficient to overcome the fundamental concerns caused by Brexit.
Clearly, the British government faces major challenges in the upcoming months and years as the UK starts to work out its future relationship with the EU. In the meantime, M&A players will continue to evaluate whether the transition can provide enough certainty and stability for a favourable deal environment.
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