After a record breaking year for M&A in 2015, Reuters
figures have shown that merger activity over the first three
quarters of 2016 has slowed significantly.
This year has been characterised by political and (linked)
economic uncertainty, with key events such as the presidential
election campaign in the US and volatility across markets created
by the UK's decision to leave the EU – and M&A
activity has been impacted because of it.
It is dangerous to speculate how markets will respond to the US
presidential election result and much may depend on whether the new
president can command the support of Congress. Interestingly,
records show that markets perform less well under a Republican
president; since Truman came to power towards the end of WWII the
Dow Jones Industrial Average (DJIA) has posted greater returns
under the Democrats – just a fact UK firms should keep in
mind. It is possible that rules limiting tax inversions have
dampened US M&A activity, as well as the anti-trust and EU
state aid action. But, in the US it would appear that, whilst
M&A activity has slowed, foreign investors are less spooked by
the election drama than domestic players.
In Europe, M&A deal value in H1 2016 was down 19.3 per cent
on H1 2015, there were only 3,110 deals, with an aggregate value of
$342.8bn: setting us back to 2013 levels. And unsurprisingly, UK
activity slowed significantly as well. In the lead up to the
referendum on EU membership, many firms postponed deals, cautious
of the impact the vote would have on the value of the currency and
exchange rates. Foreign investors held back, with Q1 2016 inbound
deals crashing 60.1 per cent from Q1 2015, as investors waited to
see what kind of market they would be buying into. Those who have
done so and then acted quickly, such as Softbank, have benefitted from a major
exchange saving, acquiring sterling denominated assets which
deliver non-sterling revenue streams.
Despite the sluggish first half, deals began to pick up after
the referendum. In H1 2016 only 20 firm offers were announced
against nine in the two months after the referendum vote. The
aggregate deal value of those deals exceeded deal value in H1 2016
and in Q3 M&A volume reached $62.1bn, the highest Q3 result
since 2008, principally on the back of SoftBank's $31.6bn bid for ARM Holdings in
Some will inevitably claim the upswing in activity to be a
demonstration of Britain's resilience in the wake of the
referendum result. However, a closer inspection of the bidders'
motivations suggests that the spike in deals might be attributed to
a number of factors: (1) bidders adopting a "wait and
see" approach to the referendum result; (2) foreign investors
swooping opportunistically to benefit from the devaluation of
sterling; and (3) a need to act swiftly before the UK enters a
period of major uncertainty.
Unlike many other EU member states, the UK has long maintained
deep and active capital markets. The emerging trend for buyers to
subject to post-offer undertakings demonstrates confidence in UK
M&A markets, at least from foreign investors, who can
capitalise on the weaker pound. This is evidenced by the stock
market, with the FTSE 100 recoding all-time-high share prices as
the pound continues to slide. In the US, whilst trends are less
bullish than in 2015, the decline in M&A value is offset by the
steady number, displaying the trend for a greater spread of smaller
deals as investors behave cautiously in an uncertain geopolitical
Originally published in Real Business on 19 October
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