Mergers and Acquisitions Under Brexit: A Look Back at 2019Author: iDeals
In June 2016, voters in the UK announced a desire to leave the European Union by a margin of 1.3 million votes. More than three years later, Brexit has yet to take place — and its shadow continues to loom over the economies of Britain and other nations.
At the time of writing, Brexit is scheduled for January 2020, following a UK general election. Understanding Brexit’s effect on M&As in 2019, however, can help businesses better predict what might happen next, regardless of whether this Brexit occurs on schedule or is postponed again.
Brexit: Where Are We Now?
Most commentators expected Brexit to fail at the polls in 2016. Instead, the measure passed by approximately 1.3 million votes, signaling the UK’s desire to exit the EU.
Then-Prime Minister David Cameron resigned the day after the Brexit vote, paving the way for Theresa May to step into the role. In a January 2017 speech, May stated an intent for a complete break from the EU, noting that a decision to remain in the EU’s customs union would subject the UK to EU laws, which “to all intents and purposes would mean not leaving the EU at all.”
On March 29, 2017, May triggered Article 50 of the Lisbon Treaty, which set the deadline for Brexit on March 29, 2019.
In December 2017, the UK and EU announced a deal that included the UK’s payment of outstanding liabilities to the EU, terms for family reunions and other citizens’ rights, and an arrangement on Northern Ireland that kept the UK beholden to the EU’s single market and customs union rules.
The final point raised considerable controversy, since it kept the UK responsible to EU rules, contrary to May’s position in her January 2017 speech. “The depth of the continuing access to the European market is set primarily by the regulatory relationship between the United Kingdom and the European Union after Brexit,” Stephen Bush, political editor of the New Statesman, wrote at the time. “What the PM is effectively agreeing is that the UK will become a ruletaker, not a rulemaker.”
On January 15, 2019, May put the Brexit deal up for a vote, only to lose 432 votes to 202. A second vote in March 2019 also failed, by 149 votes. In April 2019, the deadline for the UK’s exit from the EU was moved to October 31, 2019. In addition, the deadline required Britain to leave with or without an exit plan.
May resigned in June 2019, leaving the prime minister’s seat open for Boris Johnson, who won the Conservative party’s leadership election.
Just days after election, Boris Johnson announced that Parliament would be suspended for several weeks before the October 31 deadline, giving lawmakers opposed to a “no-deal” exit less time to pass the laws required to prevent it, BBC political editor Laura Kuenssberg reported. Despite the delay, the “no-deal” vote passed 327 to 299.
After several more attempts to pass a Brexit deal, Johnson eventually requested another delay from the EU, setting the new Brexit deadline as January 31, 2020.
M&A Activity and Brexit
Brexit was never politically or economically neutral. As the process has dragged on, its impacts on national and international politics and business continue to reverberate.
Brexit continues to split the UK electorate, making it harder for both the Conservative and Labor parties to build the coalitions they need to succeed in future parliamentary elections, reporter Tom McTague writes at Politico.
Economically, Brexit has had effects on the UK, as well. For instance, in March 2017 the UK boasted the world’s fifth-largest economy. A year later, “the post-Brexit collapse in the value of the pound against the euro has elevated France ahead of the UK,” David Frum wrote at the Atlantic.
The pound’s loss, however, was M&A’s gain, at least temporarily. When Brexit was first announced in 2016, M&A activity did not feel the impact right away. Rather, early 2016 numbers showed comparable M&A volume to pre-Brexit levels.
“Brexit should never have been talked up as an Armageddon moment for UK M&A, especially with such a sharp devaluation in the currency which has clearly been a stimulus for overseas buyers,” says Tim Gee, an M&A partner at law firm Baker & McKenzie.
This optimism, however, did not last; UK cross-border M&A deals fell in 2017, rebounded only slightly in 2018, and wrapped up 2019 at a mere fraction of what they had been in previous years.
“The US dollar value of UK-acquirer outbound cross-border mergers and acquisitions through the third quarter [of 2019] is $47.4 billion lower (47% less) than 2018,” writes Grace Maral Burnett, a legal analyst at Bloomberg Law.
Which Deals Died?
Several M&A deals involving UK companies have fallen through since 2016. But not all of them can be blamed on Brexit, says Andrew Woodman, senior financial writer at Pitchbook.
The abandoned M&As that were affected by Brexit include Deutsche Borse’s proposed takeover of the London Stock Exchange Group, a deal decades in the making that even reached a merger announcement in 2016. Post-Brexit vote, however, EU regulators announced that the deal was likely to create a de facto monopoly on some financial services, which was deemed unacceptable.
Shopping center company Intu Properties saw not one but two M&A deals fall through after Brexit. First, competitor Hammerson backed out amid fears of instability in the UK retail market. In November 2018, a consortium that included The Peel Group, Brookfield Asset Management and the Olayan Group did the same, citing the economic uncertainties created by Brexit.
An Unexpected Winner?
Although international M&A involving UK companies has decreased overall since 2016, the deals that do happen increasingly involve US companies, Burnett says. In 2019, UK companies spent $42.9 billion on mergers and acquisitions involving US companies. These deals accounted for 60.5 percent of outbound M&A in the UK in 2019.
As 2018’s M&A rebound demonstrated, the threat of Brexit alone hasn’t been enough to scuttle UK mergers and acquisitions. Much of the slowdown in UK M&A in 2019, however, has been attributed to the threat of a no-deal Brexit. A no-deal scenario, in which the UK is forced to exit the EU without a plan in place for repaying debts or maintaining trade partnerships with EU member nations, could cause economic instability that cautious companies would want to avoid.
A Look at 2020
2019 was a particularly tense year for Brexit, as deadlines came and went with no evidence that the UK was closer to completing its EU departure. With the new deadline now set for January 2020, concerns about Brexit are likely to impact M&A activity in the first part of 2020, as well.
Faced with the risk of a no-deal scenario, UK firms have slowed their pace in mergers and acquisitions. With Brexit still unresolved, these companies have maintained their wary stance.
“Many companies feel there is a lot at stake given all the uncertainty surrounding Brexit and the trade tensions between the US and China,” says Dirk Albersmeier, co-head of EMEA M&A at JPMorgan Chase & Co.
The January 31, 2020, deadline is cold comfort to businesses that still expect a no-deal Brexit to occur.
“We don’t have a deal [with the EU], we just have a divorce and let’s face it, a free trade agreement is equally fraught with problems and forks in the road,” says Sonja Laud, chief investment officer at Legal & General Investment Management. Laud says it may take the UK three or four years to reach a permanent trade agreement with the EU.
Until closure is reached on Brexit, UK M&A is likely to face an uncertain future. While many cross-border deals will continue, overall volume may remain lower as companies brace for economic downturns.