There has been a flurry of M&A activity in the UK in the first few months of the year, including a number of “mega deals”. Combined with a healthy finish to 2016 that saw $245.8bn worth of deals, this has confounded concerns that uncertainty over Brexit would stall activity in the market.
These developments should not come as a surprise. After all, a period of slow economic growth limits opportunities for organic growth, while low interest rates make deals cheaper and UK companies more attractive.
Sterling’s exchange rate against the US dollar is another element to this equation and could make a number of UK businesses, including British icons previously seen as untouchable, become attractive targets. Surely most of us wouldn’t buy anything we do not want just because the price has dropped due to currency, but if it is something we have had our eyes on for a while we might. The same principle applies to investors.
It is worth noting that UK companies with high levels of overseas sales have seen their share prices rise. Ultimately, targets will be determined by relative valuations, but also performance against their peers, resilience against the likely impact of Brexit, and the composition of their boards and shareholder base.
In this new geopolitical environment, however, moulded by arguments about employment, technology and globalisation, it seems that for any deal to go ahead, it will face greater challenge and scrutiny. Ultimately, politics and a deal’s impact on society could determine its future, not pure economics. This new paradigm presents challenges to both the government’s and businesses’ approach to future deals.
The UK government has hinted at adopting a more protectionist approach to foreign takeovers. This poses the question whether there are sectors of the UK economy that constitute national champions in the eyes of the government and what the rules surrounding the assessment of foreign investment in those sectors will be.
That represents a challenge to structuring acquisitions in the future. If the government’s intention is to adopt a more French-style approach, so far it lacks the clarity of its Gallic neighbours. France has identified its national champions, but in the UK it’s still unclear what constitutes the “critical national infrastructure”, for example, that the government has promised to protect from foreign takeovers. In addition, mergers and acquisitions aren’t even mentioned in its Green Paper on building an industrial strategy published in January.
The failure of Kraft Heinz’s bid for Unilever means that the first major test of the Prime Minister’s industrial policy has been avoided. The vision “to deliver an economy that works for all”, however, points to a future less welcoming of M&A deals focused purely on creating efficiencies.
A proposal for new rules on assessing foreign investments is reported to be imminent. This will hopefully tell us what sectors will receive greater scrutiny. But as the market moves at an unpredictable pace, the government should aim to remain one step ahead rather than have decisions forced upon it.
This new approach to foreign takeovers by governments is not the only trend that deal-makers must contend with. The pervasive use of social media is a related trend and in many cases an increasing obstacle.
While the UK’s approach towards M&A will become clear over time, public opposition, informed and given voice largely by social media, will remain more difficult to predict. In cases where deals are suspected to result in substantial job losses or do not demonstrate added value for society, public pressure will be an increasingly core feature.
In future, all of us involved in potentially sensitive deals will have to think very carefully and be prepared to answer questions on whether potential cost savings and shareholder value are achievable in practice – politically and socially – and, if not, how deals may be structured differently. There will be consequences for valuations, and for finance.
There are no easy answers, but the challenge needs to be addressed rather than ignored. Those involved in M&A are going to need to be creative, because one thing is clear: future activity is going to depend on a lot more than just the numbers.