4C Associates’ Milan Panchmatia considers how businesses can look to profit from the current period of uncertainty.
Depending which media outlets you read, you might think Brexit represents the salvation or the destruction of the UK. The truth, as always, is somewhere in the middle. There are pros and cons to the country’s decision to leave the European Union and it is up to businesses to take advantage of the opportunities on offer.
In this context, it is important to consider how the referendum will affect mergers and acquisitions in the UK. While the uncertainty following the vote to leave has yet to settle and companies are less willing to take risks, there are likely to be plenty of opportunities for businesses paying attention.
Post-Brexit negotiations are likely to take a significant amount of time. Numerous stakeholders need to be consulted and the process is unprecedented, meaning there is much scope for surprises along the way. M&A is also a long-term, high-risk process and as a result, many businesses are taking a ‘wait and see’ approach.
However, that does not mean all companies should shy away from well-considered M&A. Change often sees new opportunities uncovered and it is well worth remembering that historically as soon as stability returns to the markets, M&A activity picks up. That means the potential to snare a good deal will evaporate quickly.
For the moment, one of the most obvious potential benefits of the process is linked to the currency fluctuations, which may have made UK companies more appealing to their foreign counterparts. Share price fluctuations have affected companies on both sides of the pond and opened up the possibility of bids. As always, balancing risk and reward is key when establishing timings.
Of course, organisations will need to calculate how the value of certain assets will fluctuate once the UK leaves the EU. Not easy to do given the complexity of the process, although there are ways to mitigate these risks. This can be done by introducing conditionality provisions linked to how Brexit unfolds, for example. For deals that will not be finalised until after the split, businesses have more room for flexibility regarding clauses related to currency fluctuations.
Post-referendum figures for M&A activity are not good. According to Thomson Reuters, the number of mergers and acquisitions involving UK companies that went through in the 11 weeks post-referendum dropped from 1,060 to 707. The value of these deals fell from $125.22 billion to $87.43 billion. However, that is to be expected following such a landmark decision.
The truth is that most businesses are right to be cautious, but many continue to keep an eye on the market. The fluctuating value of the pound, coupled with uncertainty over trade and free movement, have all contributed to slowing down parts of the market.
Despite this, deals are still being made – see SoftBank’s bid for British technology company ARM – and there are opportunities out there. The current situation can be ideal for businesses looking to make a sound purchase. Companies able to implement a robust risk management process and eye up potential deals in real-time are those most likely to emerge strengthened.