The Brexit Effect - What impact will Brexit have on UK M&A?

The positives
There’s no denying that the uncertainty of the past year or so has had a major impact on UK businesses and, indeed, M&A has slowed down significantly as a result of this uncertainty. However, a number of analysts are taking a rather more positive view of the situation now that the deal has been done. There are several clear factors that could make the UK more attractive to foreign investors post-Brexit:

•Market certainty
Most senior executives are happy there is finally some certainty around Brexit. KPMG’s annual M&A Outlook survey found that a large majority (85%) of senior M&A executives thought that any outcome which provides more certainty or one which sees the UK leaving the EU with a deal would prompt more activity in the M&A market in 2020.

•The possibility of zero tariffs
There is an understanding, arguably, that trade between the UK and the EU will continue on a ‘zero tariffs, zero quotas’ standpoint. This is intended to keep the flow of trade as free as possible between the UK and the EU, which, many feel would be in the interests of both parties.

•Exchange rate
The value of Sterling has fallen as a result of Brexit (from $1.48 to $1.28) and, until a clear trade agreement is in place between the UK and the EU, it is unlikely to recover significantly. This means that investing in the UK is cheaper for foreign investors, which could boost inbound M&A.

One of the arguments for Brexit in the first place was to reduce the level of alignment the UK has with the EU in terms of regulations. This could result in far less ‘red tape’ for businesses in the UK, when compared to those operating in the EU, which could be another attractive prospect for anyone looking to buy a UK business.

The above factors do, on paper, make for very positive reading for outsiders looking to buy UK businesses. They also act as incentives for UK businesses to remain operating in the UK, keeping our economy healthy and further stimulating deals.

•Continuing availability of capital
Constructive financing markets, the ready availability of capital, and globally low interest rates are together very conducive to the continuation of deal-making, even in the face of political and macroeconomic uncertainty.

In fact, political events that have taken place in recent months, including the failed impeachment attempt on President Trump and Boris Johnson’s decisive win in the UK General Election leading to a Conservative majority government, once more, could also encourage M&A investment, particularly between the US and the UK. These two political figures are staunchly pro-business and could work together to create the right kind of environment for cross-border M&A.

The negative

Despite all the above, there is a fairly significant view, among some analysts, that the trend for a decline in M&A that has been establishing itself since the peak in 2015, is likely to continue into the remainder of 2020.

A notable voice is a report from Willis Towers Watson, in collaboration with the Cass Business School, which identified the fact that, not only are large deal volumes down, they are not resulting in businesses generating value as a result of the deals.

The report explains: ‘On average, firms committed to M&A campaigns have now failed to add value from deals for three consecutive years, while performance is now its worst since before the 2008 recession.’

Despite these reservations, however, Jana Mercereau, Willis Towers Watson’s Head of Corporate Mergers and Acquisitions for the UK, said that there could be prospects for an upturn in M&A and inceed, the success of those M&A deals, providing the buyers and sellers take a considered approach.

“Many investors with plenty of dry powder remain cautiously optimistic about the year ahead. Where deal volume has gone down, our analysis often reveals performance has on average improved, as seen in Europe for the last two years.

“This highlights the strengths of a more disciplined market striking well thought-out strategic deals with greater care and due diligence,” she said.

In conclusion, it is likely that the fact that Brexit has actually been actioned may have a significant positive impact on M&A in the UK, simply as a result of the element of uncertainty being removed. There are also political factors at play, which could stimulate deals between UK and US business. However, these are far from certain and continuing trade disagreements between the UK and the US, not to mention the UK and EU, could lead to a continued general slowdown in economic activity. Even so, certain industry sectors including technology, media, telecoms, financial and energy are forecast to increase M&A no matter what the macroenvironment conditions.

As ever, despite the UK having left the EU, the impact of Brexit is still very much up in the air.

UPDATE: With the latest changes to entrepreneurs’ relief announced, things are not looking so great either.

With more and more businesses impacted by the above changes and the coronavirus pandemic, we can expect the number of administrations and liquidations to rise drastically in the days to come.

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