M&A in the time of Brexit
Michelmores' Partner, Henry Taylor surveys the landscape.
Looking at deal volumes over the last year, the inevitable slowdown in deal activity in the lead up to, and immediate aftermath of, the Brexit vote is now looking more like a 'blip' than a precursor to a sustained period of reduced deal flow. Indeed, the value of UK M&A activity so far for 2017 is already 28% higher than for the whole of 2016. Undoubtedly, the general view from the corporate finance and deal community is one of cautious optimism, at least during the limbo period in which we currently find ourselves – with no-one quite knowing where we will be when Brexit actually happens.
As mergers and acquisitions are closely tied to longer-term strategy, it is natural that many decision makers are greeting the protracted uncertainties of the Brexit process with a higher than average degree of caution. We are certainly seeing evidence of decisions either being delayed, or placed on hold, pending greater clarity.
Fifteen months in, the extended hiatus and absence of comfort factors have encouraged the braver corporate deal makers to press ahead in the face of mixed messages and political prevarication. Indeed, the unique circumstances of a defined 'end date' for the UK to leave the EU, volatility in exchange rates and an apparent strengthening of the key European economies, may be seen to offer unparalleled M&A opportunities – often from unexpected quarters.
The UK, with its familiar language and culture, has traditionally been seen as a 'safe' stepping stone for foreign corporates and investors to the wider EU markets, and this has definitely been the case for US buyers. Unquestionably, in the aftermath of the referendum, there is evidence of a change in the appetite of US purchasers to invest here. Conversely, the increase in the number of European buyers shows how the drop in the value of Sterling since the referendum has made UK businesses more attractive for some markets.
Similarly, much post-referendum M&A activity has become more modular, with sales and purchases being broken down into smaller, more incremental, steps. The theory being that these can be managed and completed whilst discussions continue on the wider Brexit question without making an all-or-nothing commitment.
Advice on the legal and commercial implications of Brexit is now a standard feature of the due diligence process for both UK-based corporates and institutions, as well as for non-UK businesses looking to make investments, acquisitions and disposals in the UK. The landscape is essentially dynamic, and changes which may affect parties to a deal often mean that transactions are taking longer to complete.
The rules of strategic planning are effectively being re-written due to the want of predictable outcomes. It is tempting just to ignore Brexit and wait for the mists to clear, or to be mesmerised by the sheer magnitude of the problem. Neither approach cuts much ice, so businesses are starting to use three-dimensional analysis tools which push the boundaries of the SWOT approach by reviewing multiple scenarios against a greater number of 'environmental' variables, such as politics, legislation and economics. This, in turn, is driving more flexible strategic planning and much shorter reaction and decision times.
How quickly the period of uncertainty which has pervaded the last 15 months gives way to some semblance of 'normality' is anyone's guess. However, given how well deal activity has held up so far, confidence is justified.