Despite mega-deals involving the London Stock Exchange, Arm Holdings, Sky and a big takeover approach from British American Tobacco (BAT), even the most optimistic M&A banker would concede it’s been a somewhat subdued year for UK deals.
After a record 2015, a year in which Megabrew was finally agreed and Anglo-Dutch oil major Shell tied up a deal for BG Group, 2016 has been a comparatively quiet – at least at the top end of the market.
While the number of deals involving UK companies has fallen only slightly – from 3,793 to 3,645 – the total value of them has nearly halved, from $605bn in 2015 to $340bn this year, according to the latest figures from Dealogic.
Globally, the number of deals has fallen, from 40,379 to 35,770, but the fall in total value has been less steep – from $4.7 trillion to $3.7 trillion.
On an international scale, M&A bankers remain upbeat. “It’s been a great 12 months for deal activity globally,” says Dwayne Lysaght, head of UK M&A at JP Morgan. “And it looks like it’ll end up being the third busiest year ever.”
Severin Brizay, head of Europe, Middle East and Africa (EMEA) M&A at UBS, agrees: “The market is still active. Overall, volumes will be close to $4 trillion this year, compared with $5 trillion last year. So 2016 is still – on a historical basis – a very active year.”
Geopolitics enters boardroom, Trump enters White House
That’s not to say it hasn’t been without its challenges.
“I think 2016 was the year where geopolitics firmly got into the boardroom,” says Luca Ferrari, head of EMEA M&A at Bank of America Merrill Lynch (BAML).
“In most of the discussions that we’ve had, it would be impossible to address a particular deal situation without putting it in the context of certain political outcomes.”
And things might not get much easier on that front in 2017. There are elections coming up in France, Germany and the Netherlands. And there is also the small matter of Donald Trump taking over as president of the United States.
“The impact of Trump’s victory on commerce and capital markets will be the main determinant of global M&A activity next year,” says Bob Bishop co-chair of M&A at law firm DLA Piper.
Trying to look through the mists of all the uncertainty this result has created and make bold prognostications is the domain of wild-eyed theoreticians. In terms of global economic impact, a lot will depend on whether his utterances on foreign policy and trade protectionism will truly manifest themselves or whether pragmatism will prevail.
China looks fragile
One of the big global M&A stories of the past few years has been the level of outbound activity from China.
In February, ChemChina agreed a $43bn deal to buy Switzerland’s Syngenta, the biggest outbound deal in the country’s history. Closer to home, Chinese firms have agreed high-profile takeovers of West Bromwich Albion Football Club and Skyscanner.
It’s been a record year for outbound Chinese M&A. But there are some doubts this can continue into next year.
In addition to apparent opposition to Chinese takeovers in the UK, US and Germany, the Chinese government itself appears poised to crack down on the high levels of outbound activity. Officials are said to be planning rules to block external acquisitions worth more than $10bn, deals worth more than $1bn or more in areas that are not core to buyers, and they also want to stop state-owned enterprises investing more than $1bn in overseas real estate.
“The new rules will put a significant filter on the Chinese ability to make outbound investments,” says BAML’s Ferrari.
“We’re still trying to get to grips with exactly how these will be used, but conceptually it feels a lot more difficult to reach 2016 levels of outbound investment from China as you look into 2017.”
Gilberto Pozzi, co-head of global M&A at Goldman Sachs, says: “It’s very difficult to tell the impact. Certainly, boards of companies which are on the receiving end of a Chinese approach would be more cautious about the risk of announcing the deal and not close the deal.”
UBS’ Brizay says:
In the last 18 to 24 months, there have been very few processes on the sell-side which have not involved Chinese bidders. Our clients were asking if we can ensure they are involved.
Now, we’re seeing a reverse of that trend. Our clients are asking if we can do a deal without Chinese bidders, because of the more stringent requirements they face at home.
UK poised to reassert itself after Brexit slowdown
There’s no doubt UK M&A activity, particularly at the high end of the market, has been subdued. And there can be no escaping the fact that uncertainty around the EU referendum, and then further confusion about what the Brexit vote will mean, has played a major part in this.
But M&A bankers believe the UK will bounce back, perhaps boosted by the devaluation of sterling in recent months.
“The value of UK M&A is down significantly this year, curtailed by Brexit and other global uncertainties,” says Lysaght at JP Morgan.
It’s not yet clear what Brexit will look like, but sterling’s relative weakness could encourage opportunistic buyers to bid for domestic companies, and particularly those with a global footprint.
Goldman Sachs’ Pozzi is also optimistic.
“The UK market has been a bit subdued,” he says. “We would expect M&A outflow to come back to a pretty healthy level in the UK pretty quickly, as soon as people get clarity on Brexit.”