Brexit Vote Adds More Uncertainty to Cross-Border M&A
Investors around the world reacted immediately to Britain’s vote to exit the European Union with angst, as stock markets plunged, the value of the British pound plummeted to 1985 levels, and the country’s credit rating fell. But it will take a while to gauge the true impact on M&A, which is likely to be mixed. In the short term, the U.K.'s exit from the EU may fan the flames of uncertainty present in a U.S. election year that have already singed the middle market. Some dealmakers, however, see opportunities in the news.
Assuming that Britain’s leaders follow the will of the voters, the country will have to negotiate new trade agreements with European Union countries and with countries outside the EU--a process that could take more than two years. And the new trade agreements will be less favorable to Britain than what it enjoyed with EU access. Some U.S. companies have established offices and operations in Britain to gain EU free-trade access, so as that access ends, strategic buyers—especially manufacturers-- will be exploring acquisition opportunities in other EU countries, according to Ashley Craig and Lindsay Meyer, partners at the Venable law firm. U.S.-based financial institutions and insurance companies operating in London for similar EU access will also look to move to other European financial centers, such as Dublin, Frankfurt or Paris.
Partners at some PE firms have argued that the Brexit economic uncertainty will bring prices on potential acquisitions down to more reasonable levels, which could spur M&A. But a global survey of M&A dealmakers before the Brexit vote found that 67 percent of the respondents believed that a “yes” voting result would negatively impact M&A levels across all of Europe. Also according to the survey, conducted by Intralinks, 88 percent of UK dealmakers believed that a Brexit would dampen M&A in Europe.
“There’s clearly a consensus among dealmakers that a Brexit will lead to chaos for European M&A,” says Philip Whitchelo, an Intralinks vice president. Other factors, such as national security along with new tax inversion rules may also effect cross-border M&A.
As for middle-market M&A in the U.S., companies are shielded from the Brexit volatility, for the most part, according to Lara Rhame, Franklin Square senior economist. In 2015, middle-market companies generated 87 percent of their revenues from domestic sales, compared to estimates of 52 percent and 67 percent for S&P 500 companies. And of the 13 percent of the middle-market revenues generated outside the U.S., only 3 percent came from Europe.