The Deals Lens – Brexit: good news, bad news or no news for UK M&A?
April 07, 2016
You cannot have missed the debate around Brexit over recent months. There has been non-stop commentary on the implications for GDP, migration, employment, regulation and more. But, so far, not much on what it means for deal activity. I’ve been discussing this with clients and various experts and have reached for my crystal ball…
In the first quarter of 2016 we have seen a slowdown in transactions, be those private mergers and acquisitions (M&A) or public debt or equity raises. Some are levelling this at Brexit, but I think it’s more likely to be some combination of taking a breath after a peaky late 2015, China’s ongoing softness and contagion from US debt markets. Deals that were being done in early 2016 were initiated in late 2015 or earlier when Brexit was not the issue it is now.
Confidence in confidence needed
My hypothesis is that a healthy deals market needs confidence in the economic direction of travel. We saw this at the outset of the 2008 recession (hardly surprising) and again in the second Euro crisis of 2011-12 (more surprising). In 2011-12 the market even lacked confidence in its confidence; buyers and sellers shut up shop for fear of looking silly if values halved or doubled 12 months later. That malaise did not truly pass until 2015. The reaction of foreign exchange markets to the Brexit debate is one of a marked weakening of Sterling– that feels like one measure of reducing confidence.
The economic impact that is estimated to attach to Brexit varies widely. Our recent survey on behalf of the CBI suggests a GDP impact of -3% to -6% by 2020 versus the status quo. Whilst that is measured in many billions, it’s 1 percentage point per annum, unlikely to make or break a valuation model. This, in itself, is unlikely to move the dial on M&A. However, our research did point to the pricing of “uncertainty” and estimated that there would be a 50 bps (basis points) risk premium on debt – now that would hurt a deal and would reduce the price a buyer could pay. And for uncertainty, read also “confidence”. I see a hiatus in deal doing if Brexit sees a yes vote, one that could persist for a number of years until we all understand what the terms of Brexit really look like.
Shrinking deals ecosystems in Brexit?
The longer term issue that I worry about is the relevance of the UK and London in particular as a hub for deal doing in Europe. Many corporate and financial investors have their European headquarters in London. Supporting them is a well-developed ecosystem of financial markets and advisors. Dependent on the Brexit position the UK negotiates, if it is no longer a stepping-off point into Europe in terms of legal framework, a “right to do business” and employability, then that ecosystem can only shrink. The best talent could leave the UK and move to a new European hub. Would a sovereign wealth fund looking to invest into Europe any longer choose London as its base or would Paris now make more sense?
In summary, uncertainty is never good for business and I could see some temporary slowdown for a few months as we run up to the referendum. However, with a yes to Brexit vote, this uncertainty will only persist leading to the potential for several years of hiatus plus the more worrying long term diminution of the UK’s relevance to European M&A.
To what extent do you think the deals market will slow down in the lead up to the referendum? In the event of a yes vote, how relevant will the UK remain within the European deal doing hub? Share your thoughts below.