UK M&A: Dealing with Brexit

It’s hard to look at any UK data these days without filtering it through the lens of Brexit, even if we don’t know what it will look like yet. The start of negotiations between the UK and the rest of the EU is just the end of the beginning. But, life goes on for UK companies and so do deals. Uncertainty has taken some of the shine off the UK as an investment destination, but UK companies aren’t standing still. This week we look at the latest M&A data to try and get a read on how UK companies are responding to Brexit.

A year on…and it’s still not all about you know what…

Brexit, Brexit. Brexit…There was news from the continent this week that the rest of the EU has Brexit fatigue – and we’ve only just begun! There’s no escaping from the fact that leaving the EU is a complex process and this will dominate the UK’s news agenda for the next two years and beyond. What UK companies have to balance is the need to adapt to the on-going uncertainties and eventual changes associated with this process, whilst keeping a maelstrom of other macro and sector trends in mind.

 The problem for many companies is that the need to respond to disruption, digital, sector convergence and changing customer behaviours means that standing still means falling behind. As one of our clients said very soon after the referendum “I can’t spend all my time worrying about Brexit, because in two years’ time I might find that some digital innovator has developed technology which might completely change or destroy my business model”. This is as true now as it was then.

 In, out, in out, shake it all about…

So how are UK companies responding? There is anecdotal and survey evidence that many are delaying what might be termed discretionary investment. According to the SMMT, investment in the UK automotive sector fell by 30% to £1.66b in 2016 as companies delayed non-essential decisions. This figure dropped again to £322m in the first half of 2017, a startling figure given the current sector transformation . A CBI recent report found four out of ten UK companies surveyed said that the on-going uncertainty of Brexit has negatively affected their investment decisions.

In terms of external investment into the UK, EY’s recent survey on FDI into Europe showed a mixed performance. At a headline level, the UK’s performance securing FDI in 2016 was solid. It remained Europe’s number one recipient of projects ahead of Germany. But, the rise in projects was far outpaced by the increase across Europe as a whole, with FDI projects into Europe rising 15%. This meant the UK’s market share of all projects in Europe fell from 21% to 19%.

Dealing with uncertainty

So, that’s a mixed picture on investment, but what about deals? We’ve said here before that companies are increasingly looking to deals – acquisitions, JVs and alliances – to transform their business and respond to the need to find growth and adapt their business models. The latest M&A data suggests that UK companies are still active – and attractive – but the picture isn’t crystal clear.

Overall, first half M&A jumped by 60% in US$ terms, from US$68b to US$109b, with a significant boost in outbound M&A offsetting a drop in inbound deal value. Even considering the depreciation in sterling post-referendum this is a large uptick in funds committed to M&A. Domestic combinations also showed a healthy uptick in value (US$42b vs US$17b). So, that looks like a clear focus on UK-based mergers to reduce costs and an outward investment policy to offset slower growth and uncertainties at home.  The problem is that M&A value totals can be highly cyclical and prone to distortion by larger deals. Looking at volume we see a slight uptick in both in- and outbound deals and a market slowdown in domestic.

Broad horizons…

What we need to do is to stand back and look back further and broader to get a better idea of where UK deal data stands globally and historically. When we do that, we see the UK still holding its own. Globally, in 1H17 the UK still ranked 4th by acquisition total, and 3rd as targeted nation. Looking at longer term data (since 1995, which is when M&A data started to get robust enough to trust) the UK still punches far above its weight. Second behind the US on both buy and sell side, the UK has been involved in 11.5% of all deals announced by volume and 14.8% by value. China has certainly taken the mantle of second pole of global M&A in recent years, but the UK is still holding on to that 3rd position, when considering all deal involvement.

H1 2017 M&A (Source: EY, Dealogic)

H1 M&A for CAB

And it is this strong UK involvement in global M&A that points to one likely outcome post-Brexit. Whatever happens, UK companies will continue to look abroad for deals and the UK companies will continue to be an attractive for inbound acquirers. The outlook for the UK economy and UK’s trading relationships may be uncertain – which our FDI survey suggests may limit inbound deals, certainly our respondents were less bullish than they were on outbound M&A. But many UK companies also possess attractive qualities – innovation, technologies, global presence etc. Four of the announced top ten inbound deals since Brexit involve UK technology companies.

We see evidence of the UK’s attractiveness elsewhere. EY’s Capital Confidence Barometer in April showed the UK rebounding to 3rd most attractive destination after falling to 7th at the back end of 2016. And a key bilateral relationship will be that between the UK and US. The two countries have been at the forefront of cross-border deal making throughout M&A history. And recent deals bear this out. Five of the top ten inbound since June 2016 have been by US companies, and seven of the top ten outbound have been into the US. There is less of a relationship with Europe and it will be interesting to see where this goes next in M&A.

 It’s all about disruption…

Of course – to go back to the start – we’ve only just begun in Brexit terms. We can’t be sure how companies will react further down the line when the shape of Brexit becomes clearer. But, I also  go back to what I said at the top. Brexit is still just one of a number of factors for UK companies. Even as we see the signs of an upturn in the global economy, companies are focused on new challenges and risks. They are gazing into the future to secure their own relevance. Technology and digital disruption are set to remain the major drivers of the M&A market. Changing customer behaviours and disruption of the existing business models are making it imperative for executives to reassess and reinvent their portfolios continually to future-proof the business….and for that they’ll need deals.