León Fernando Del Canto, managing partner at Del Canto Chambers, reviews what the near future is looking like for M&A activity in wider Europe as a result of Brexit.
You would be forgiven for assuming that following the UK’s historic vote to leave the European Union on June 23, many UK M&A deals would have been stalled and activity would be trailing. It has been a point of discussion throughout the referendum campaign that uncertainty is generally not good for business. The fact that in the run-up to the referendum vote the UK saw M&A activity slow down as a direct result of the looming uncertainty surrounding the possibility of Brexit, combined with reports from financial analysts claiming that the UK could lose up to £250bn worth of deals post-referendum, further supports this assumption. However, recently released figures by Thomson Reuters have actually shown that any fear concerning M&A slowdown in the wake of Brexit has so far been very much unfounded.
The past six weeks have in reality proved that Non-EEA overseas investors still see British companies as attractive acquisition prospects, and in the short term the reason for this should hardly be surprising. As the markets responded to the referendum result and the British Pound plunged to its lowest value since 1985, British businesses become cheaper investment prospects for foreign buyers. Since the 23rd June, data reports that almost 60 deals have been completed, amounting to nearly $34.5bn. This is an increase of almost eight times the value of deals signed in the preceding month.
Given a beneficial exchange rate, comparatively cheap equity markets and at least some certainty that the UK is definitely leaving the EU (as opposed to not knowing where the UK was headed before the vote), has proved to be enough of an incentive for overseas investors to begin making decisions about their next investment moves and to get the ball rolling on merger and acquisition deals.
It is important to note that the US$32bn for Arm Holdings has contributed to the M&A figures for the last month, but in spite of this single deal, activity remains strong, particularly coming from the Middle East, Asia and the Americas. For example, the Wolverhampton Warriors club has been acquired by Chinese investment conglomerate Fosun International Ltd in the last month. There has also notably been an increase in interest for international funds in the City, particularly from the Gulf Corporation Council, a regional intergovernmental political and economic union between the Arab states, excluding only Iraq.
It makes sense that people will want to push deals through before the UK economy potentially recovers after the shock of Brexit has subsided, and while the UK’s currency is depressed (down 10% against the euro and dollar.) Deals are, at the moment, perhaps much more viable for those buyers who are looking for a cheap deal, in the knowledge that UK business owners will be in fear of their future as a result of the uncertainties surrounding Brexit and what it may mean for their businesses.
Furthermore the fact that there is still at least a two year wait before the UK officially leaves the EU and before there are any definite next steps in place, investors still have a good amount of time to assess the market and feel that any decisions that are made are likely safe for the moment.
Of course it is notable that European businesses and investors are evidently less enthused about seizing the opportunity to invest in the UK at the moment. This is understandable given that many Europeans will likely see the Brexit result as a British decision to turn their backs on their continental neighbours, provoking a lack of trust. However M&A activity is known to go through phases of highs and lows, and it may not take too long for the shock and anger of the UK’s vote to leave the EU to subside, and for European investors to slowly return their gaze to British companies. What we can say for now is that the rest of the world have not been driven away by Brexit, meaning Britain remains an attractive bet for merger and acquisition deals, at least for the moment.