Why slashed interest rates could provide another M&A boost after Brexit

William Turvill
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Last month, Japan's SoftBank agreed a £24.3bn deal for UK chip maker Arm (Source: Getty)

UK deal activity could be boosted by the Bank of England’s interest rates cut, mergers and acquisitions (M&A) experts have suggested.

As well as cutting interest rates from 0.5 to 0.25 per cent on Thursday, the Bank’s monetary policy committee (MPC) also unleashed an extension of quantitative easing which could pump an extra £170bn of newly-printed cash into the economy.

Mark Gregory, EY’s chief economist in the UK, told City A.M.: “I think the most significant impact for M&A, at least in the short-term, has been the exchange rate shift, which is obviously Brexit related. And I think that helps UK export-orientated businesses be attractive.”

He added: “I think the interest rate move is going to reinforce that [by] keeping the pound low, maybe take the pound lower than it has been… so that, I think, is positive for inbound M&A.”

Michel Driessen, EY’s transaction advisory services markets leader, said: “Due to the weakening of the pound, it could mean certain companies in the UK have become now more attractive.”

Read more: Why UK M&A activity is on the rise despite Brexit vote fears

“The cut in interest rate can only be helpful to M&A activity,” said James Fillingham, a partner in PwC Deals.

“While relatively minor in value terms, it will help underpin the confidence critical to deal making.

“Also, the increase in quantitative easing is likely to push down interest rates on corporate bonds, making deals cheaper to finance.”

Charles Rix, a partner at law firm Hogan Lovells, said yesterday’s Bank announcements could lead to UK businesses being more attractive to overseas investors.

Sterling's further decline in the wake of yesterday's financial stimulus package from the Bank of England clearly makes UK businesses more attractive to foreign investors.

But buyers are likely to take into account other factors such as the general uncertainty over the effect of a Brexit, the effect of quantitative easing on asset prices and the broader economic picture, for example in the European banking sector.

Read more: Private equity boss predicts autumn M&A activity boost for City of London

But Richard Ufland, another partner at Hogan Lovells, suggested that the interest rate change “should have little impact on investment given that interest rates were already so low”.

He added: “Quantitative easing should push up asset prices, which balances the decline in sterling as regards investment, but also runs the risk of stoking future inflation.

"I would be surprised if these measures have a material impact on investment and the general consensus is that the monetary levers are fairly limited. Commentators appear to be hoping for fiscal stimulus from the Chancellor in the autumn and see this as a more powerful tool."

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