Brexit may mean Brexit, but what does it mean for M&A?

December 2017 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

December 2017 Issue

According to data from Mergermarket, transaction numbers in the first half of 2017 are down 12 percent on the same period last year, which may seem to confirm some of the dire warnings issued by Britain’s ‘remainers’. However, a closer look at the numbers shows that both confidence and interest in the UK are actually very strong.

Firstly, it is worth noting that the UK remains easily the M&A leader in Europe – and indeed anywhere outside the US, with 662 deals recorded in the first half of the year, compared to 399 in Germany, for instance.

Secondly, in the 12 months following the referendum, international acquisitions into the UK actually rose – up 11 percent over their 2015 full-year level. In the first half of this year, overseas buyers accounted for 46 percent of acquisitions, while the number of international transactions into the UK is only down 5 percent. As such, a strong second half could easily see the full-year number overtake 2016’s total.

Moreover, the UK still has broad appeal. Buyers from the Americas, mostly the US, continue to flock to the country, with 134 deals over six months – 44 percent of all inbound acquisitions from abroad. While that number is down slightly on last year, buyers from the EU have been picking up any slack.

In fact, as the back and forth between the British and EU negotiators has continued, European buyers have been investing heavily in the UK. In the first six months of 2017, the number of acquisitions by European buyers in the UK increased compared to the first six months of 2016. As a proportion of all international deals into the UK, European buyers’ contribution rose from 34 percent to 37 percent. We know from other data, too, that the value of these deals has increased massively on last year.

Both for US buyers seeking a foothold in Europe, and for Europeans looking to expand, the UK clearly retains a strong attraction for buyers.

In it together

Much of the market’s strength remains in business services, where the UK is among the world leaders. And that does not just mean financial and professional services; among the big deals recorded in the first half of the year was the acquisition of laundry services business Berendsen by French competitor Ellis.

Overall, the number of inbound deals in the business services sector in the first half of the year was only marginally down on last year, from 123 to 120, and is still well over half the full year totals from any of the previous three years.

Media and technology, with 67 deals, has seen a more substantial drop this year, down 20 percent, but again, it is not far off the pace from 2016 overall. The total for the first six months is exactly half the number for the last calendar year. Industrial deals with overseas buyers are down too, but modestly, with 53, against 58 in H1 2016, and the number of consumer deals is up at 50. Seventeen deals in pharmaceuticals, meanwhile, is a 40 percent increase on the same period last year.

There is little in any of this to suggest a massive impact on buyers caused by Brexit uncertainty. Not surprisingly, then, there is also little evidence that other European countries are benefiting from a surge in interest as global buyers look elsewhere. In fact, Germany, the UK’s closest rival when it comes to the volume of deals, is experiencing similar trends.

There, too, domestic deals are down – by a quarter, from 216 in the first half of last year to 160 in 2017 – while inbound deals have essentially held steady, up just one at 239, and still well below the 307 seen in the UK. Sweden, too, has seen a drop in domestic deals, down 13 percent, which is matched by a decline in inbound deals, and Spain has also seen a drop in inbound deals, although Spanish domestic deals have held up better than elsewhere, aided by the continued and long-awaited recovery in the Spanish economy.

Nowhere is really reporting a radically different story to the UK, though.

A question of confidence

Nevertheless, it would be hasty to say Brexit has had no effect on dealmaking. First, it is obviously contributing to the uncertainty that has hit domestic deal activity. It is worth noting that, were it not for the resilience of international buyers, overall M&A activity in the UK would have slowed more markedly; the number of domestic deals in the first half is down 17 percent on last year, from 429 to 355.

The continued lack of clarity around the future trading relationship between the UK and EU is also probably playing a part in the slowdown in domestic activity in Germany, for which the UK remains a key export market, as well as elsewhere.

In addition, it may be early days, but it will be worth watching what US buyers do. At the moment, the increase in contribution of European buyers to overall inbound activity in the UK reflects not just their resilience, but a slowdown from the US. At the same time, American acquisitions in Germany increased by 22 percent and in Spain by 24 percent in H1 2017 – even if the overall numbers in the former remain less than half those in the UK. The UK’s status as a gateway to the EU is inevitably open to question.

Overall, though, these impacts are modest, and the most striking aspect this year has been the resilience of inbound activity, and all the more so in comparison to domestic M&A. If anything, the impact of Brexit to date has been to increase the role of foreign buyers in Britain’s dealmaking. In 2015, these deals accounted for 39 percent of all M&A activity. In the first half of this year, foreign buyers made up 46 percent.

This leads us to a second and final surprising conclusion about the impact of Brexit on UK M&A – so far, it seems like the rest of the world has more confidence in the UK than we do in ourselves.

Daniel Domberger is a partner at Livingstone Partners. He can be contacted on +44 (0)20 7484 4731 or by email: domberger@livingstonepartners.co.uk.

Daniel Domberger

Livingstone Partners