Almost twelve months on from the Brexit referendum, newly published figures point to a slowdown in inward M&A activity.
Faced with fears over the future of the UK economy and Brexit uncertainty, overseas buyers appear to be proceeding with caution. So has the UK has lost its M&A mojo or is this just a temporary blip?
Inward M&A – the figures
At first glance, the latest figures show a huge drop in the value of inward M&A. In 2016, the average quarterly value of inward M&A transactions was £47.5billion. In the first quarter of 2017, this plunged to just £5.2billion.
Closer examination of the numbers reveal that things probably aren’t as bad as they seem. 2016 was an exceptional year for inward investment, which saw the closure of four mega deals, notably Anheuser-Busch Inbev’s £83billion acquisition of SABMiller.
The fact that no such mega deal completed in Q1 shouldn’t necessarily be seen as indicative of decreased confidence. In the M&A market this type of volatility is not uncommon.
This wasn’t just a poor quarter for the UK either. According to Mergermarket data, global M&A activity also recorded an 18% year-on-year decline in the first quarter, while there were 22% fewer deals in Europe.
This suggests that buyer appetite has softened for reasons external to the UK. The first quarter saw President Trump taking the oath of office, the Dutch elections and the looming French presidential race, as well as stricter capital flight controls being implemented in countries like China.
It’s also worth noting that domestic buyers do not seem to be shifting their focus from the UK. The number of domestic acquisitions as a proportion of the total number of acquisitions by UK companies has remained fairly stable.
So while inward M&A in the UK was down in Q1 2017, there is no need to panic just yet. It could be that Q1 was just a poor quarter and nothing more.
Change can be good
Notwithstanding the above, it would be naïve to think that the Brexit referendum and the outcome of future negotiations will not impact UK M&A activity. When the whole political and economic landscape is constantly badged under the toxic word of ‘uncertainty’, the justification of an acquisition is naturally more difficult.
In order to counter this, businesses will need some sort of certainty in order to adapt. We know that there will be change, and change can be a good thing.
Some businesses have already adapted to post-referendum opportunities. In particular, exporters are thriving, mining companies have traded well, the PMI expanded further last month and the FTSE 100 has continued to climb after closing 2016 with an all-time high. Some sectors are looking up and should continue to attract overseas buyers.
For other sectors, businesses will need to find ways to survive and thrive as they face change; this might be to reconsider their business model, target new markets, establish new supply chains or rebalance their forex management/exposure.
M&A may well be a valid solution – in times of change, M&A can enable businesses to adapt and implement change more quickly. However, in order to do any of these things, decision-makers will need some visibility on what the change will look like.
Many of us hoped that the General Election, if anything, would at least deliver some political stability and more transparency regarding Brexit negotiations.The result of a hung parliament will have delayed this and businesses will need to monitor developments closely over the next few months.
Has the UK lost its charm?
The UK has always been an attractive country to invest in for overseas businesses, predominantly due to the maturity and governance of the market, low corporation tax rates, free access to the EU labour and trade markets, and there simply being impressive businesses operating in a growing economy. As a result, many financial and corporate investors from overseas have located their European headquarters in the UK.
None of the above have changed yet, but if the reasons to invest in the UK are diminished (either as a result of Brexit negotiations or for other reasons), the UK will need to find alternative reasons to attract overseas buyers.
Both domestic and overseas buyers continue to show significant appetite for UK targets. UK businesses have demonstrated resilience and have found ways to exploit the opportunities or mitigate the risks that have resulted from the referendum; they will need to continue to do this in order to remain attractive.
Predicting the future has been a dangerous game to play over the past twelve months. Fundamentally, it’s still too early to comment on what the Q1 2017 figures mean for the future. It was a disappointing quarter, but we can’t be too dramatic about a single quarter.
However, for the UK M&A market to shrug this off as a bad quarter, an improvement in the political and economic landscape would clearly help.
The Brexit referendum has brought change, and there is more of that to come. Some businesses have done well on the back of this, while others are faced with the need to adapt.
To let them do this, the government will need to provide the key decision-makers with more visibility on what this change will actually look like.
Steven Hubbard and Umito Choji are part of RSM’s corporate finance team.