Headline-grabbing deals such as the £24 billion (€27.7 billion) bid by Japan’s SoftBank for the British technology company ARM Holdings might make it appear that all is well in the world of mergers and acquisitions. However, merger and acquisitions activity in the United Kingdom is expected to drop sharply in 2017 due to uncertainty over the terms of its exit from the European Union, law firm Baker McKenzie predicted recently.
Britain avoided a collapse in mergers and acquisitions activity in 2016 as foreign companies used sterling’s spectacular devaluation against the US dollar to snap up British companies, Thomson Reuters data shows.
Baker McKenzie said that while M&A activity would have only a modest impact on European transactions if there was an amicable divorce, the lack of clarity over Brexit could hurt activity in the United Kingdom.
“Given Brexit’s impact on business confidence, we expect M&A values to fall by two-thirds in 2017 after numerous large deals in the first half of last year boosted 2016.”
There is still a reasonable amount of activity by outside investors buying into the UK, but there is very little UK to UK activity, according to the law firm’s report. The decline in sterling has made it cheaper for foreign companies to snap up British targets, making UK assets vulnerable to international takeovers because of the impact of the 20 per cent currency depreciation.
Economic confidence
Despite warnings before the vote that Brexit would shatter economic confidence, some positive data since the vote has encouraged the perception that the British economy could prosper.
The Confederation of British Industry said this month that the economy had largely avoided a big hit from the Brexit vote, but ratings agency Standard & Poor’s said that signs of a recovery may prove to be a “mirage”.
Tim Gee, London M&A partner at Baker McKenzie, said. “Similarly, the potential for market volatility during the UK’s exit from the EU is likely to impact the number of cross-border IPOs coming to market in London during 2017.” Baker McKenzie and Oxford Economics said they forecast UK M&A values would fall to $125 billion in 2017 from the record $340 billion in 2016.
UK prime minister Theresa May has said she will trigger formal Brexit divorce talks with the EU by the end of March. She then has two years to negotiate an exit. Baker McKenzie said it forecast global dealmaking would drop slightly in 2017 but would rise in 2018.
– Additional reporting Reuters