Last month’s decision by British voters that the UK should exit the European Union (EU) will cost the national economy up to US$338bn in lost merger-and-acquisition (M&A) activity by 2020, while the global economy will be impacted by up to $1.6 trillion, forecasts law firm Baker & McKenzie.
The figures are based on a ‘worst case’ scenario, in which the Brexit vote triggers growing populism in mainland Europe and undermines EU support among remaining members.
In the firm’s central forecast, the impact is less severe but Brexit still reduces UK M&A activity by US$239bn over the next four years and shaves US$409bn off global volumes. In 2017 alone, UK M&A transactions are forecast to fall by one third.
“An active M&A market is all about confidence and credibility,” commented Michael DeFranco, global chair of M&A at Baker & McKenzie. “To restore that confidence the UK government will need to get to grips with the enormous challenge of negotiating a new trading relationship with the EU as quickly as practically possible. Otherwise we move into more dangerous territory.”
Colleague Tim Gee, an M&A partner at the firm, added that recent days’ trading has confirmed that the UK market won’t come to “a crashing halt” even if it slows from its pre-Brexit level.
“There are still plenty of buyers and sellers for the right deal at the right price,” said Gee. “There are already some clear upsides – global organisations looking to acquire UK companies will find that a weaker pound makes valuations more attractive, although the uncertainty surrounding trade negotiations could deter the more risk averse.”
The firm also expects Brexit to impact on the value of initial public offerings (IPOs) brought to the stock market. “he picture for IPOs is equally depressed, as these flows tend to be even more sensitive to confidence effects than M&A transactions, so the UK market is likely to remain relatively quiet over at least the next couple of years” it said.
Baker & McKenzie’s latest global cross-border M&A index shows both volume and values were subdued in the second quarter of 2016, reflecting investors’ uncertainty. An exception to the trend was the Middle East region, where both inbound and outbound cross-regional activity showed an increase in the first half of this year.
However, the overall index, which tracks quarterly deal activity using a baseline score of 100, dropped to 176 in Q2 of 2016, down 33% from the total of 263 in Q2 of 2015 and the lowest index result since Q3 2013.
Buyers announced 1,320 cross-border deals worth US$214bn, a 4% drop in volume and a 45% drop in value compared to Q2 2015. Although North America was the largest cross-regional outbound market by volume, the EU (particularly the UK) and North America experienced the largest reductions in deal values.
The fall was partly the result of fewer megadeals – those above US$5bn in value – over the first half of the year. While there were 21 megadeals struck in the first half of 2015 with a total value of US$296bn, the 18 concluded in 2016 are worth 23% less at US$228bn. Of these only three, worth US$29bn, were concluded in Q2 2016.
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