Political risk no barrier to global M&A but more questions about the UK.

Crisis, what crisis?

In recent months, there has been a great deal written and said about increased global political uncertainty and volatility and the potential consequences for business activity levels. The accepted wisdom is that uncertainty and volatility will lead to a contraction in business investment due to increased perceptions of risk. However, there seems little sign of these concerns impacting global Merger & Acquisition (M&A) activity.  US$734bn of deals were announced in 1Q17: the second highest start to the year in both value and volume terms since the financial crisis.

This picture is reinforced by the findings of EY’s latest Global Capital Confidence Barometer which finds global businesses in good spirits. 64% of respondents see the global economy improving and 56% expect their company to seek to execute M&A in the next 12 months.

1Q M&A by year:

globalM&A

 Source: Dealogic & EY analysis; excludes real estate asset acquisitions 
*volume based on announced deals US$100m+

Certainly not in the Eurozone…

Further doubt is cast on the hypothesis that political risk hampers business activity when we look at the Eurozone. Despite the recent election in the Netherlands and ongoing campaigns in France and Germany, first quarter M&A activity in the currency bloc was the highest since the global financial crisis.

Eurozone M&A Q1 

Eurozonema

 Source: Dealogic & EY analysis; excludes real estate asset acquisitions
Based on Eurozone companies as either acquirer or target

This performance comes against what appears to be a very challenging political backdrop that goes beyond the elections mentioned above. There are concerns over the rise of populism and migration, Brexit is adding another level of complexity and the region has suffered several terrible terrorist attacks. It appears that with an improving economic environment, the Eurozone could well be on course this year for its strongest growth since 2008, and stronger earnings expectations have been enough to offset any increased perception of political risk so far.

…as cross-border activity increases…

Another feature casting doubt on the strength of the impact of political risk and uncertainty is the rise in cross-border deal-making. Over 40% of value was allocated to such deals in 1Q17, well above the post financial crisis average of 32%. Again it appears that businesses are taking the uncertain political environment in their stride and making the moves they deem necessary to move forward.

Cross-border as a share of global M&A:

crossborder

 Source: Dealogic & EY analysis; excludes real estate asset acquisitions

…but a different picture in the UK… 

The trends in the UK are different to those we have seen in the global economy. In a buoyant global market, the UK had its third lowest quarter for M&A since 2013. (The other two being the first two quarters of 2016 in the run up to the referendum on EU membership). Nevertheless, on first pass, the UK appears to remain one of the more attractive M&A markets globally with purchases of UK companies the third highest in the world in the first quarter.

Image 4_Table

However, the UK’s reasonably strong performance for M&A masks a significant fall in deals originated outside of the country. Over $30bn of the $38bn of deals involving a UK target were by domestic businesses – UK companies buying another UK company. By contrast international purchases of UK companies slumped to one fifth of the quarterly average in 2016 and were the second lowest level in the last 5 years.

It appears that, despite the low value of sterling which should increase the attractiveness of UK assets, foreign investors are wary of the UK. By contrast, domestic investors are making deals. This may reflect opportunism to an extent in the absence of international competition for assets, but it may also signal a drive to consolidate and capture synergies in the light of concerns over future growth prospects. Certainly when we analyse the sector profile of the domestic activity, defensive motives could well be playing a role. The most active sectors for domestic deal-making were consumer goods, real estate and financial services. These sectors have typically under-performed in the market since the Brexit vote, reflecting investor concerns over future prospects post-Brexit.

One quarter’s data is not enough to draw firm conclusions but this is an issue we will monitor in the coming months. The UK economy is changing and M&A will be an important lens on the speed and direction of this change.

Find out more and download the EY Global Capital Confidence Barometer


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