The UK’s mergers and acquisitions (M&A) activity could be hit again by Brexit uncertainty, according to Kirsty Sandwell, partner at national head of corporate finance at RSM.
In the first quarter of this year, domestic M&A accounted for £3.2bn compared to £0.3bn in the second quarter, according to the Office for National Statistics (ONS). Inward M&A also experienced a drop – valued at £4.6bn in Q1 and £2.1bn in Q2.
But the steep decline in UK M&A does not come as a surprise.
“There is the full impact of the global lockdown and the pandemic, where even if businesses were in the midst of doing a transaction, they would have looked at their business’s trading performance rather than doing expansive and ambitious acquisition strategy,” says Sandwell.
“They would think safety first and make sure they’re protecting their balance sheet. Uncertainty is always bad for confidence and appetite.”
Unlike 2008, Sandwell believes this year’s crisis has no shortage of capital as governments pump billions into their respective economies. There is money that remains for equity, but there is a shortage of confidence and understanding of what the future looks like.
However, the accountancy firm believes the M&A market will bounce back in the upcoming months.
“We can tell from our pipeline of work that there is already an uptick. There’s more activity and we will see different types of deals. This is a real opportunity for private equity-backed deals. They’ll be the main force for deal activity in the upcoming months,” says Sandwell.
“We will see people perhaps refocusing their business, so divesting parts of their business rather than wholesale deals and in the UK, there is a great deal of anticipation that there will be changes to the capital gains tax regime. Private entrepreneurs are definitely thinking about whether or not they should wait or look at a deal today.”
Sandwell says sectors such as technology and those connected to government spending will bounce back quickly whilst financial services remain strong. Leisure, hospitality, and retail that do not have an online presence are yet unlikely going to show signs of M&A deals, but rather restructuring or insolvency.
The M&A market’s uptick will however not last long if Brexit deal is handled badly, according to Sandwell.
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“Businesses have started to focus their attention away from the pandemic and onto Brexit. The problem with Brexit is it creates uncertainty, and uncertainty is a problem for M&A activity that requires confidence. The problem is that we’re unlikely going to have a deal or any clarity of what that deal looks like until right to the wire, making it impossible for businesses to plan,” she says.
Sandwell adds businesses will face unknown tariffs, complex supply chains, the threat of a no-trade agreement and could also face changes on commitments made on the Irish border – adding to the uncertainty caused by the pandemic.
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