On June 23, 2016, Britons will be heading to the polls to determine whether or not the UK should remain a member of the EU. Given the stakes involved, the referendum is likely to have an impact on M&A activity in the UK, both before and after the vote.
The referendum
This is not the first time the UK has held a referendum on this question. In 1975, the British electorate voted in favour of the UK remaining a member of the European Economic Community (the predecessor of the EU) by a majority of 67%.
However, this time the results are expected to be much closer. Recent opinion polls suggest that both sides are neck and neck, with those in favour of a British exit from the EU (commonly referred to as “Brexit”) taking the lead for the first time on June 6th.
Impact on M&A
The referendum will likely impact the timing of deals in the short-mid term. For example, some prospective buyers of UK targets may be holding off on M&A activity until after the vote or, in the event of the UK voting in favour of Brexit, after the terms of the new relationship with the EU are finalized (negotiations with the EU are predicted to last several years). In the meantime, economic and political uncertainty could create a hostile deal environment for UK M&A.
This uncertainty is exacerbated by the high stakes involved, as Brexit would mark a major change from the status quo. Laws and regulations will need to be amended. Prime Minister Cameron could resign. London could lose its role as a hub for European deal-making. Most significantly, the British economy will likely be impacted – according to a recent major survey, nine out of ten of UK’s top economists believe that the British economy will be harmed by Brexit.
In addition, some analysts believe that sterling is at risk of falling 15-20% in the event the UK votes in favour of Brexit. The expected movement of that sterling is supported by its recent volatility – it dropped on June 6th when the Brexit camp first took the lead in the opinion polls. While a weakened sterling could potentially present bargain M&A opportunities to foreign buyers of UK targets, such currency swings could significantly change the economics of the deal if the risks are not properly hedged.
In fact, the uncertainty surrounding the referendum and Brexit is reflected in the recent slowdown of UK M&A. According to a recent report by Intralinks, early-stage M&A activity in the UK only grew by 3% in the first quarter of 2016. In comparison, the previous quarter (which was prior to a date being set for the referendum) saw M&A grow by 15%.
This slowdown is consistent with the Scottish experience during Scotland’s referendum for independence from the UK in September 2014. In the quarter leading up to the vote, the total value of UK M&A deals was 60% lower than the previous quarter.
It is important to keep in mind, however, that businesses are attracted to the UK because of the country’s stable financial, regulatory and legal systems, and low corporate tax rates, and not because of its membership in the EU. Assuming that the UK is able to successfully adapt to a post-Brexit environment, any impact on M&A caused by Brexit is likely to be limited to the short-mid term while the UK irons out the details of its new relationship with the EU.
For more information on Brexit and its potential consequences, please see here.
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