Brexit effect exposed, M&A opportunities still abound

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The outlook for the UK M&A market in 2018 is encouraging, although the impact of Brexit in the final quarter of 2017 is laid bare in a new report.

The global advisory firm Willis Towers Watson (WTW) suggests not only that volumes have been affected by the uncertainty surrounding Brexit, but that there is also evidence that the valuation of companies completing deals is being negatively affected. The last quarter of 2017 saw only 38 completed deals of a value of more than US$100m in the UK, compared to 46 in the, itself subdued, last quarter of 2016.

More starkly, the research uncovers apparent unease at the impact of deals, in that the share prices of acquiring companies underperformed the market, as measured by the UK component of the MSCI World Index, by 2.4% in the final quarter.

This is not just a UK phenomenon, and is assuredly almost certainly not just a consequence of factors applying to the UK. Indeed, globally the under-performance of companies making US$100m+ deals in the final quarter was as high as 4.9%, much influenced by the figure in Asia-Pacific being as high as a remarkable 12%. There will be many influences at work in this, not least individual factors behind the specific deals. But rising valuations are likely also to have had some impact, and the fact that continental Europe bucked the trend, in seeing acquisitive companies outperform by 3.9%, does suggest that the specific uncertainty in the UK had some effect.

WTW says that by the end of 2018 there should be greater clarity as to whether Brexit will be “an amicable or cliff-edge separation for Britain”, and its markets will normalise as greater clarity emerges. The combination of a weak pound, cheap financing and the need to find elusive revenue growth all remain supportive.

In addition, WTW points to a number of themes, both positive and negative, which are likely to have a major influence on markets in 2018. These include the impact of tax reform passed in the US towards the end of the year. WTW surmises that uncertainty led to a backlog of deals in the US in 2017, and that the combination of corporate tax cuts and inducements to repatriate funds are likely to lead to heightened activity by American companies in 2018. Indeed they warn that this may lead to an escalation in prices and would-be acquirers will need to be disciplined to avoid overpaying accordingly.

Another warning relates to protectionism, with the US in particular likely to become more critical in its scrutiny of “mega-deals.” Although on a more positive note, they expect China to become accommodative of overseas investment, especially with regard to infrastructure investment that fits within the “Belt and Road” initiative. And WTW singles out France as being a likely beneficiary of the liberalisation of takeover rules and the reform of trade unions, which the Macron government seems set to grasp more decisively than any of its predecessors.

In terms of sectors, WTW sees continuing heavy deal flow in technology, not by any means only by technology companies. This again comes with a warning that prices have risen but seems unlikely to deter deal flow, and also a more specific concern that it is becoming more difficult to retain talent after deals. Many companies face often irreconcilable difficulties in coming under pressure to acquire technological capability but are then unable to take full advantage of the assets they have bought as the most valuable of them simply walk out of the door.

Another sector which WTW believes will continue to be “hot” is media. While sounding a cautionary note about growing regulatory resistance in the US, they believe that the fragmented market in Europe offers many opportunities and that a “wave of consolidation seems imminent.”

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