Sluggish UK number disguises rapidly changing market

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The speed of change in the UK’s M&A market is again underlined by a new report by the global professional services giant EY. Its review of M&A suggests that the UK market has recently been going through a slow patch, but that the underlying picture contains many vibrant areas.

As Steve Ivermee, EY’s Managing Partner of UKI Transaction Advisory Services, underlines, the headline figure of a fall in both values and volumes in Q3 disguises a complex picture, in which some parts of the market are persistently strong, but others are clearly being affected by external forces, notably Brexit and geopolitical uncertainty.

In any case one quarter, especially over the summer holiday season, is too short to make any strong judgments about the health of the market, and the picture for the whole year so far is not so sluggish. While volumes for the UK as a whole are down by 11%, values are actually up by 9%. That gives a clearer indication of the market.

However, the value figure disguises a sharp dichotomy between the domestic market and inbound deal flow. Domestic values are more than double what they were in the first three quarters of 2016, with £60bn of deals so far in 2017 compared to only £23.6bn at the same point in 2016. But the value of inbound M&A from overseas has fallen and, more unexpectedly to EY, so has the number of overseas acquisitions being undertaken by UK companies.

The authors posit that the fall in sterling in the immediate aftermath of the Brexit referendum may have been a catalyst for overseas companies to buy assets that they were already interested in but felt were a little too expensive: but that the fall in the currency has not been large enough to encourage foreigners to look afresh at buying up UK assets which were not previously in their sights.

With regard to the slowdown in buying overseas assets, EY does not mention the currency as a major issue, and suggests that it is likely to be a blip caused by temporary gepolitical and other uncertainties. EY emphasises that in its view the imperative to buy into growth markets is still there.

The authors stress that the world is “a different place with different M&A drivers” from even the recent past, with the fallout from Brexit; rising populism; greater geopolitical risk: but also improving global growth; and increasing digital disruption increasingly powerful sources of activity.

But, EY says, there remains an abiding factor that seems to be an unchanging constant is so fast changing a world. The M&A relationship between the UK and the US remains strikingly healthy. The percentage of inbound deals into the UK undertaken by US companies, always higher than from other countries, has expanded sharply again since Brexit. US acquirers now again account for 40% of acquisitions of UK companies from overseas.

UK companies, perhaps mindful of the US’ technological leadership in many areas, have also been looking to the US to a greater extent than more some years.  US companies are making up a higher proportion of UK deals than they have since 2011. EY says that trust and understanding remain abiding constants, which become even more important in an uncertain world.

Indeed EY says that trust and reciprocity remain vital to healthy M&A levels, and although regulatory and protectionist uncertainties have grown, there are signs of more companies beginning to find ways of dealing with them. While this is not yet translating into markedly higher deal flow, EY does at least see signs of a greater willingness to rethink some aspects of regulation to meet the demands of globalisation, new technologies and technological convergence. This is likely to mean that deal flow will strengthen again once the temporary uncertainties are resolved.

 

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