Brexit: UK merger and acquisitions to drop sharply due to uncertainty over the terms of EU deal

Baker McKenzie predicts that the total value of M&A activity in the UK will reach just $125bn in 2017, a more than 60% slump from the $340bn of deals seen in 2016

Activity in the UK in 2016 was largely propped up by a slew of mega deals, including Softbank’s acquisition of ARM Holdings for $32bn (Reuters)

Merger and acquisition activity in the UK is likely to slip dramatically this year as a result of Brexit-induced uncertainty, a report published by Baker McKenzie shows.

The law firm predicts that the total value of M&A activity in the UK will reach just $125bn in 2017, a more than 60 per cent slump from the $340bn of deals seen in 2016.

Activity in the UK in 2016 was largely propped up by a slew of mega deals, including AB InBev’s $101bn takeover of SAB Miller, Shell’s takeover of BG Group for $69bn, Softbank’s acquisition of ARM Holdings for $32bn, Visa’s reacquisition of Visa Europe for $21bn, and BT’s acquisition of EE for $19bn.

But looking ahead, Baker McKenzie says that the pace and size of transactions will slacken — mostly as a result of uncertainty around Brexit.

"We expect weaker economic growth in the UK and uncertainty about the relationship UK companies will have with the rest of Europe to dampen M&A activity," experts write in the report.

"The UK government plans to activate Article 50 by March, triggering negotiations with the EU on the terms of Brexit that could last up to two years," they add.

The firm says that M&A activity in sectors such as finance and industrials are most at risk in the event of difficult Brexit negotiations. Volumes in those sectors will likely remain low for all of 2017.

Monday’s predictions mark a sharp revision from Baker McKenzie’s previous forecasts.

In June, the group anticipated that UK M&A activity would peak at $265bn in 2017 and reach $202bn in 2020.

For the broader Eurozone, Baker McKenzie is more confident.

European M&A activity fell to $319bn in 2016, down sharply from US$736bn in 2015.

“The UK’s vote to leave the EU hurt investor confidence, along with other concerns about the Eurozone’s stability, including the fragility of the Italian banking system,” they write.

“However, the Eurozone recovery appears to be on firmer footing moving into 2017, and barring a disorderly Brexit or further political shocks during the presidential elections in France and Germany, growth looks strong,” they add.

The firm expects M&A deal making in non UK-Europe to rise to $459bn in 2017, and peak at $613bn in 2018, “aided by the European Central Bank’s low interest rates and further weakening of the euro/dollar exchange rate, which will boost manufacturing competitiveness.”