UK Prime Minister Theresa May's Brexit deal was overwhelmingly defeated in parliament yet she survived a no-confidence vote, setting the stage for a no-deal Brexit to take effect on March 29. In a new web series, Global Finance examines the impact of the Brexit vote and a no-deal scenario on M&A, corporate taxes, the Capital Markets Union (CMU), and foreign exchange.
Conventional wisdom would suggest that the uncertainty generated by Brexit would have a negative impact on UK merger and acquisition (M&A) activity. Thus far reality has proven otherwise.
According to Thomson Reuters Deal intelligence Data, a spate of mega deals contributed to a banner year for M&A deals in Europe in 2018 with a record $767 billion transacted—a 96% increase over the previous year—even while the number of deals slid by 18% to 6,201. Despite the country being two years out from its historic Brexit vote, UK companies accounted for the lion’s share of this activity, attracting $269 billion worth of investment. Furthermore, two of the biggest European deals to take in 2018 involved UK companies: Takeda Pharmaceutical’s $62 billion purchase for UK drugmaker Shire and Comcast’s $28.8 billion bid to disrupt Twenty-First Century Fox's takeover of British broadcaster Sky.
One of the reasons for an invigorated UK M&A landscape in the wake of shocking Brexit referendum vote was the cheaper pound—now down more than 10% against the U.S. dollar from pre-referendum levels—that has made UK companies more attractive to foreign buyers. Sriram Prakash, Deloitte’s Global Lead M&A Insight, also explains that many firms decided to go ahead with strategic purchases despite the uncertainty surrounding the details of Brexit.
“The fact is that M&A markets have been going on regardless of the noise because it is a long term play,” he says. “Companies will be thinking very hard about everything from their global footprint to their value potential.”
Prakash's point is echoed by Richard Cranfield, a partner with London-based law firm Allen & Overy who notes that while there has been some “diversion of investment” from the UK in the wake of Brexit, M&A markets remain strong. He adds: “I think that is because Brexit is essentially a local issue [...] and when you actually scratch the surface, it is really important to some specific sectors but not across the entire economy and people are taking a five-year view.”
However, a report published by Allen & Overy this month also notes that—deal or no deal—the UK M&A market still faces significant uncertainty. It also takes the view that many companies have been slow to prepare for the worst-case scenario, although businesses in particularly vulnerable sectors such as financial service, pharmaceuticals, and aviation are relatively well-prepared.
The report adds that few companies have fully considered how issues such as regulatory equivalence, free trade agreements, and WTO rules in a no-deal Brexit scenario would impact them. In a no-deal scenario, the report says, “companies are unlikely to have much spare management capacity to think about transactions and may even conclude that a period of increased stress is hardly the time for heroic strategic moves on the M&A front." This view is echoed by Bank of England Governor Mark Carney who said in November that UK businesses in general are “not ready” for a no-deal outcome.
The impact of a no-deal Brexit is not entirely predictable. There is a chance it will provide an opening for opportunistic buying, but if the UK plunges into recession M&A activity could go the other way as investor confidence is shaken. But even if a compromise or an extension is reached over the impending Brexit deadline of March 29, uncertainty will remain during any transition period. How much this uncertainty will dent the UK economy is anyone's guess.
“I think one thing to recognize is that the UK is always one of the most open markets for M&A,” reminds Deloitte’s Prakash, “That's the reason so many global companies are headquartered here and able to transact here. That is not going to change.”