Since the June 23, 2016 vote, speculation has run rampant as to how the Brexit vote will affect the country in terms of the economy, immigration and the UK’s visibility on the world stage. The UK’s exit from the EU will be a long process, at least two years past the initial start per declaration by Prime Minister Theresa May. Dealmakers opinions when predicting the future M&A outlook are mixed, much like the vote. Brexiters succeeded by a relatively small margin, with 52% in favor of the exit and 48% voting to stay in the EU.

It seems most of the UK, and the world for that matter, are in a “wait and see” mode, with nothing catastrophic happening to the UK economy but nothing super stellar happening either. Overall M&A deals are slowing and year-over-year numbers are on the down side. Reuters reports that the volume of deals including UK companies fell in the amount of $87.43 billion in the 11 weeks post referendum vote. However, this landscape presents both challenges and opportunities for UK M&A.

Negatives of Brexit for M&A Outlook

Dealmakers saw the devaluation of the pound sterling as a golden opportunity for UK mergers and acquisitions. Companies being acquired are indeed coming at a discount when compared to the price prior to the sterling devaluation, but the flip side to that is that once those deals are done, the landscape gets pretty quiet.

In fact, the Financial Times reports that deals are at approximately half the value they were year-over-year, the lowest number since 2011. Forbes reveals that in a survey done by Intralink, dealmakers are wary about the upside of Brexit and had a relatively negative outlook when queried, noting that 65% of those surveyed expected the decline of EU asset values, and 87% of UK dealmakers and 92% of EU dealmakers chose “negative” when assessing if Brexit would be positive or negative for the economic climate overall.

Positives of Brexit for UK Mergers and Acquisitions

Post vote, the UK currency and European stocks took a dip, which when looked at alone is not very positive, but when looked at through the lens of market opportunities can provide fertile ground for mergers and acquisitions. In fact, a Deloitte poll reveals that more dealmakers are thinking about M&A opportunities in the UK after the Brexit vote than prior.

The devaluation of the sterling prompted action for some companies when deals considered pre-Brexit suddenly became a bargain post-Brexit. This devaluation is the perfect opportunity for foreign investors to to make a move and acquire UK companies. The biggest news of such action in this post-Brexit world was that of Japan’s Softbank making a bid for UK technology company ARM. Other deals of note include Steinhoff’s, a south African retail company, acquisition of Poundland, News Corp’s purchase of Wireless Group (owner of Talksport) and Chinese businessman Wan Jianlin’s deal to acquire the UK’s Odeon & UCI Cinemas Group.

Of course, the swoop and scoop strategy is not a long term fix for the UK M&A landscape, but it does provide unique market opportunities, inspire confidence and provide leadership during a time of great uncertainty. In fact, in September 2016, when addressing Parliament, Prime Minister May singled out the Softbank bid by saying, “The single biggest vote of confidence on investment in the United Kingdom since we had the vote to leave ​the European Union came, of course, from a Japanese company – from SoftBank with its 24 billion pound takeover of ARM.”

Until a more structured framework is in place for the UK’s actual exit from the EU, waters will continue to be murky and uncertainties will exist. But there are opportunities in the current UK M&A landscape. Paul Ehrlichman, Managing Director, Portfolio Manager of ClearBridge Investments says, “We believe small and mid-sized UK companies will experience a surge in merger and acquisition interest. Paradoxically, for patient and disciplined firms Brexit is providing the best opportunity in the past 20 years to invest in a leading global financial and trading hub.”

Cornfield & Partners is able to provide you with information on the current UK market situation in this time of uncertainty. For information, contact info@cornfieldpartners.com or call us on +44 (0) 20 7692 0873.

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