The impact of the United Kingdom’s decision to leave the European Union will vary by industry. M&A activity will likely grind to a halt in some industries and accelerate in others.
The years leading up to the referendum were favorable. From 2014 through 2015, the UK saw high levels of M&A activity, primarily on the back of strong annual GDP growth of 2% to 3%.
This led to higher M&A valuations, with the median EBITDA multiple increasing from 10 to 11, the highest it has been since before the global financial crisis.
The immediate impact on UK businesses, however, has varied significantly so far. For example, airlines and homebuilders saw share prices fall 30% on average in the two weeks following the referendum, while mining companies saw share prices rise approximately 20%.
The types of deals to be seen in the coming years will probably change. Brexit could slow outbound M&A. Asset prices outside the UK are now comparatively high, and UK-based businesses will likely focus on managing domestic uncertainty.
It’s expected that consolidation activities in industries that have been negatively affected by Brexit, such as discretionary categories, will increase.
In the wake of Brexit, it’s likely that the mix of M&A activity by industries change. For example, the share price of most companies in aerospace and defense has been resilient, owing to their high share of foreign revenues.
Conversely, the homebuilding industry was hit hard by an expected reduction in demand following the referendum; share prices were down more than 30%.
In construction and engineering, Brexit will not trigger a large wave of M&A in the civil and structural segments but may accelerate the global trend toward consolidation.
M&A activity will probably halt in banking and consumer finance as uncertainty brought on by Brexit makes asset valuations difficult. Key drivers of uncertainty for banks include an increase in funding costs, low loan growth, an increase in nonperforming loans, and delays in base rate increases, which depress net interest margins.
The uncertainties surrounding Brexit’s impact present both opportunities and risks. Executives in UK businesses should take time to reassess their strategies by exploring questions regarding M&A, divestments, and potential takeover attempts.
Executives in non-UK companies should consider whether there is a clear strategic rationale for the deals they’re considering, or is it a case of opportunism?