What Brexit means for UK M&A: Experts expect further drop in activity

William Turvill
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Figures from Dealogic and MergerMarket suggest UK-targeted M&A has fallen significantly so far this year (Source: Getty)

Deal activity in the UK is expected to fall further in the second half of 2016 following the Brexit vote.

Mergers and acquisitions (M&A) activity has already slowed this year following a record 2015. Data released yesterday from MergerMarket and Dealogic showed that UK-targeted activity slowed in the first half of the year, and more so in the second quarter.

And M&A experts from accountancy firms PwC and EY have both today said they expect this trend to continue.

Brexit Britain: What you need to know

“UK M&A has been subdued by value in 2016 against 2015 although the number of deals has held up until now,” said Michel Driessen, EY’s transaction advisory services markets leader. This pace is likely to fall in the second half of the year as companies digest the result and work through the possible implications of life outside the EU.”

Companies still face the same imperatives to do deals, from slow growth to disruptive completion.

But, sterling’s fall will put UK companies at a disadvantage in terms of outbound acquisitions and, although a weaker pound makes UK valuations seem more attractive, the uncertainty surrounding trade negotiations could deter external investors.

Read more: The UK's share of the global M&A market is at a record low ahead of EU vote

Stuart McKee, PwC’s head of corporate finance, said: "The long-term ramifications of today’s vote are largely unknown. Understanding the impact on individual businesses post-exit is going to take time, and this will reduce deal activity in the short to medium term.”

While our recent report on behalf of the CBI suggested a decline in GDP versus a remain scenario, this in itself is unlikely to have a major impact on mergers and acquisitions. Our report also pointed to the pricing of “uncertainty” and estimated there the cost of debt is likely to rise as risk is priced in, and this would then reduce the price a buyer could pay.

We will be working closely with our clients – including those in Asia and the US – to prepare for possible changes to business strategies that may come from the UK’s new position following this historic vote.

Kirsty Wilson, MergerMarket's global research editor, told City A.M.:

There is likely to be a cool-down during the divorce period, which will quite possibly lead to a continued stall for UK M&A in the short to mid-term. The negotiation process will hopefully settle nerves, and industries where UK firms have become experts, such as tech, business and financial services, will continue to lead our growth while the UK finds it way alone.

Not everyone will be convinced a Brexit is bad news for M&A activity. Simon Borrows, the chief executive of private equity company 3i, told City A.M. last month that he expected deal levels to pick up in the second half of the year no matter what the result of the referendum.

And others were not convinced the looming referendum was behind the drop in activity. Writing for City A.M. last month, Tim Gee and Nick O’Donnell of law firm Baker & McKenzie suggested the EU vote was being used as a “scapegoat” to explain falling activity.

“When it comes to M&A, while UK deal numbers have certainly dropped, the argument that this is due to the looming referendum doesn’t bear scrutiny,” they said.

“Based on our own experience, general macroeconomic concerns such as the state of China’s economy and declining commodities prices have a greater impact on M&A deals than individual political events.”

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