Uncertainty and major mergers and acquisitions are reluctant bedfellows, according to 4C Associates’ Milan Panchmatia – but there are reasons for optimism.
The long-term implication of Britain’s vote to leave the European Union is difficult to predict. The initial reaction, at least from the stock markets, was a loss in confidence and whilst this has been reversed with the FTSE reaching all time highs, sterling remains almost at its lowest point for thirty years driven by a lack of certainty over the options for Brexit. The current period of uncertainty is far from ideal for businesses in general, let alone for mergers and acquisitions (M&A). Despite this, there are reasons for optimism and a number of challenges and opportunities will undoubtedly emerge over time.
Whether to remain or leave the EU was – and still is – a hotly debated topic. One where each argument had a counter-argument. A weaker pound may well render British businesses more attractive on an international market, however, a lack of stability could stunt growth prospects. Conversely, British based businesses may well be considering investing in building a presence outside of the UK, to preserve access to EU markets and vice-versa.
So how have businesses reacted so far?
A downward trend
At first glance, M&A activity in 2016 appears to be relatively healthy. The recent $32 billion bid by Japan’s SoftBank for British technology firm ARM, for example, seems to be evidence of a thriving market. This coupled with a number of other monster deals including AB InBev’s $101bn takeover of SAB Miller, Shell’s takeover of BG Group for $69bn, Visa’s reacquisition of Visa Europe for $21bn, and BT’s acquisition of EE for $19bn shows that 2016 was thriving. Despite this and Prime Minister Theresa May’s claims that all is well, the data hints at a slowdown.
In terms of volume, the number of mergers and acquisitions that went through in the 11 weeks post-referendum fell to 707 from 1,060 – a drop of 34%. In terms of value, deals involving UK companies dropped from $125.22 billion to $87.43 billion, according to Thomson Reuters. Removing the SoftBank deal from the equation sees the value of M&A activity linked to UK firms, drop to levels close to those seen around the 2008 financial crisis. This data is further backed by a recent report from law firm Baker McKenzie who estimates that the total value of M&A activity in the UK will reach just $125bn in 2017
Early days yet, but a sure sign that some certainty would be welcome.
A changing world
The year 2016 saw a number of seismic and unexpected events take place. From Britain deciding to leave the EU, to Donald Trump winning the US Presidential Election, experts were left shocked by how the year unfolded. In this context, 2017 may yet hold more surprises, including the French Presidential Election, Italy’s predicted banking crisis and more. These factors all make it difficult to predict how M&A activity will unfold.
Whilst the figures mentioned above are indicative of an uncertain economic environment, it is too soon to predict what 2017 will bring for M&A activity. Volatile environments are not an ideal breeding ground for large-scale transactions, particularly those which comprise a high level of risk. However, change often uncovers opportunity and a number of businesses are poised to seize any opening that may arise.