Brexit has made British companies vulnerable to acquisitions

The shock verdict has led to a fall of business and investor confidence in the British economy. The fall of the pound has made the UK companies easy picking for foreign companies who have snapped up lucrative deals.

The shocking results of Britain’s June 23 referendum which could have potentially led to a collapse of the British M&A scene has been rescued by foreign companies. The sterling’s spectacular fall has led to a significant devaluation of the pound against the greenback which has emboldened U.S. companies to snap up British firms, as per Thomson Reuters data.

 

M&A activity

Whereas in 2015, the British M&A scene accumulated $394.8 billion, in 2016 it totaled $177.5 billion. However the 2015 data is skewed since it includes two of the three biggest global deals. Nonetheless, it is in line with the 5-year trend.

In the last 5 years, upto the start of 2015, the average value of the total M&A scene comes to $139.3 billion.

2016 showed a clear trend: domestic deals in the UK fell sharply while foreign companies, including Rupert Murdoch’s Twenty-First Century Fox, came shopping to pick up bargains.

“Brexit should never have been talked up as an Armageddon moment for UK M&A, especially with such a sharp devaluation in the currency which has clearly been a stimulus for overseas buyers,” said Tim Gee, a partner at law firm Baker & McKenzie.

“Much of the activity in 2016 was skewed toward foreign buyers with less UK-to-UK activity,” said Gee.

He went on to add, “Total activity levels were not really knocked that much by Brexit but who was doing the buying did shift – deal values in 2016 are very similar to the historical trend.”

Although inbound mergers & acquisition activity registered $143.7 billion, down from 2015’s figure, it was however above the $85.9 billion annual average for the last five years to 2015.

Domestic M&A grossed $33.7 billion and was down from an average of $53.4 billion, over the same period.

As per Thomson Reuters data, the 1,355 domestic deals was the lowest figure in nearly two decades.

Following the referendum when Theresa May replaced David Cameron as British’s next Prime Minister, Masayoshi Son, Softbank’s founder, made a $30.7 billion move for ARM Holdings, a UK-based chip designer.

“I am one of the first people to bet with a big size on the UK after Brexit,” said Son, who has been ranked by Forbes as Japan’s second richest man. “Talking is easy. I am proving it . . . This is my big bet.”

The next big deal came when Murdoch’s Twenty-First Century Fox acquired Sky for $14.6 billion.

According to sources familiar with the matter at hand, with the referendum sending the British pound to its 14 year low, Murdoch saw an opportunity.

“The worst predictions surrounding Brexit and its potential impact on our economy have so far failed to materialize,” said Derek Shakespeare, co-head of UK M&A at Barclays. “With the weaker pound UK businesses have become 10 to 20 percent cheaper.”

 

Devil’s in the detail

He went on to add, “But the devil is in the detail: we have several years ahead of us to understand what the trading relationship with the EU will look like. So there’s a degree of caution when looking at transactions in Britain.”

According to Thomson Reuters data, Goldman Sachs, closely followed by JPMorgan, Lazard, Deutsche Bank, UBS, Centerview Partners LLC and Morgan Stanley came shopping topped Britain’s M&A league tables.

“Geopolitical events such as Brexit have impacted CEO confidence for deal-making over the first part of the year and through the summer,” said Gilberto Pozzi, co-head of global M&A at Goldman Sachs.

“We are now seeing a rebound in M&A activity although boards remain quite cautious in reviewing the opportunities and the pros and cons of M&A transactions,” said Pozzi.

As per Barclays’ Shakespeare, many private equity funds have of late sold their assets and have cash out of high multiples; in the process they have boosted their ability to raise funds.

 

Predictions for 2017

Predictions for 2017 however remain cautious.

As per Baker & McKenzie’s Gee, it would be prudent to expect low levels of activity among basic materials and financial institutions.

M&A hot spots are likely to occur in healthcare, technology and innovation industries.

“It will be a mildly better performance next year than this years with overall uptick in deal value,” said Gee.

“There is a limit to how long you can sit on your hands.”

JPMorgan’s Dwayne Lysaght, who heads its UK M&A department said, “Investment coming into the UK is down amid uncertainty around Brexit and that uncertainty will linger into next year. That said, I think uncertainty is becoming the new norm, and the fundamentals for dealmaking remain intact.”

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