- Deal activity expected to resume in the summer after vote
- Even Chinese buyers are avoiding targets in the U.K.
As Europe holds its breath over whether or not the U.K. will stay in the union, companies are holding on to their cash.
Coming off of an eight-year record for mergers and acquisitions, the U.K. just had its worst quarter for deals since 2010, according to data compiled by Bloomberg. First-quarter M&A spending on and by companies in the country is down 39 percent from a year ago.
Blame Brexit. Critics have warned that the loss of trade and immigration agreements could cause economic instability and push some businesses out of the country. With its large banking hub in London, the U.K. has been in many respects the financial capital of the European Union. The slowdown in dealmaking activity is poised to continue until June when Britons will vote to stay or quit the bloc.
“Brexit is having a negative impact on deals, especially those with a cross-border angle,” Stefan Brunnschweiler, Zurich-based partner and head of corporate M&A at law firm CMS, said in a phone interview. “We have seen a number of companies and investors who have postponed their investment decisions until after the vote takes place.”
Beyond the potential economic impact to the U.K., leaving the EU could mean changes to the regulations that govern a number of industries, said Ben Higson, head of the corporate practice for Hogan Lovells in London.
Highly regulated sectors, like automotive, energy and finance “will likely be hit harder than others when it comes to M&A,” Higson said. “Because a lot of our regulation originates in Brussels, it is unclear what will be renegotiated if the U.K. were to leave the EU, but we expect a long period of reworking a number of treaties.”
The risk of Britain exiting the EU has also weighed on the country’s currency. The pound just finished its worst quarter since 2008 versus the euro amid concern about the vote.
Beyond Brexit, uncertainty around everything from volatile stocks and commodities prices to the Chinese economy and central bank policies have made deals more difficult this year. Global M&A activity in the first three months dropped about 10 percent from a year earlier to $623 billion, according to Bloomberg data.
Still, dealmaking in the rest of Europe is faring well. Excluding the U.K., the value of deals announced last quarter rose 48 percent from a year ago. That’s being driven by Chinese companies, which are spending more in Europe than anywhere else outside their own borders. The biggest deal announced globally this year was China National Chemical Corp.’s agreement to buy Swiss pesticide and seeds maker Syngenta AG for $43 billion.
But even Chinese buyers are avoiding the U.K. While total spending in western Europe is up more than fivefold so far this year, deals in the U.K. are down 93 percent, according to the data.
“Many Chinese investors are interested in the energy, services and financial sectors, which means investment for such assets will be more profitable with a wider free market,” said Ying Zhang, an associate dean specializing in business relations with China at the Rotterdam School of Management. The threat of the U.K. leaving the EU and its trade agreements has had “a significant negative impact on Chinese investment.”
To be sure, there’s still some appetite for U.K.-based assets. In March, Deutsche Boerse AG agreed to acquire London Stock Exchange Group Plc, a deal that may kick off a bidding war as rival Intercontinental Exchange Inc. contemplates a counter offer. Deutsche Boerse’s Chief Executive Officer Carsten Kengeter said this month that Brexit won’t affect the transaction.
The British government is working to counteract fears and make the country a more attractive place to invest. Chancellor of the Exchequer George Osborne announced in March plans to cut corporation tax to 17 percent by 2020 from 20 percent, bringing the U.K. rate to the second lowest among developed countries after Ireland.
An EU exit’s long-term dangers to the economy may also be overblown. Ultimately, the currency markets may be the biggest risk, which, while an important consideration, won’t undo strategic rationale for deals, said Ferdinand Mason, a partner at law firm Jones Day in London.
“Even if the U.K. leaves the EU, the U.K. is not going to be shut out of international markets,” Mason said. “In the event of Brexit, the U.K. will probably have an EU relationship similar to either Norway, Switzerland, or the U.S., and those relationships have proven not to be an impediment for M&A.”
Dealmakers are also hopeful that activity will pick up this summer, said Gareth McCartney, head of Equity Syndicate for Europe, the Middle East and Africa at UBS Group AG.
“We are likely to see a busier than usual summer, both in terms of equity capital markets and M&A activity as companies try to get deals done in what may prove to be a politically more stable environment, ahead of the U.S. elections later in the year,” McCartney said.