- No 'Lehman-like' crash in global activity
- UK M&A levels will take four years to recover parity with 'No Brexit' predictions as vote will cost the UK economy at least US$240 billion in lost M&A
- Significant short term impact on European activity if further political uncertainty
The post UK referendum global M&A market could face a deficit of up to US$1.6 trillion in lost merger and acquisition activity unless an orderly and swift Brexit process is followed. Baker & McKenzie's Global Transactions Forecast, based on financial modelling by Oxford Economics (OE), shows the potential scale of the damage both an orderly and disorderly exit by the UK from the EU could do to markets and deal making activity. Unsurprisingly the impact is disproportionately felt in the UK and rest of Europe.
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No Lehman Moment
What is clear is that the impact of Brexit is not as global as the Financial Crisis of 2009. Under our Central Scenario global M&A transaction activity is only modestly down for the next two years before fully recovering. And while domestic UK deals are down under either scenario there will still be plenty of London based activity.
Tim Gee, London M&A partner, says:
"Regardless of the volume and value of UK specific deals the primacy of English law for many cross-border deals, even when they don't involve UK assets or business, will continue. London will also retain a remarkable concentration of financial, legal and economic talent."
"In the last few days we have seen evidence that the M&A market in the UK won't come to a crashing halt even if it won't be at its previous pace. There are still plenty of buyers and sellers for the right deal at the right price. There are already some clear upsides - global organizations looking to acquire UK companies will find that a weaker pound makes UK valuations more attractive, although the uncertainty surrounding trade negotiations could deter the more risk averse," Tim continues.
Central Scenario - Orderly Exit
Capital markets in the UK and the rest of Europe have already been hit hard by the uncertainties surrounding the UK's relationship with the EU as the Cross Border IPO and Cross Border M&A indices Baker & McKenzie released last week highlighted, with EMEA IPO and M&A activity down by 50% and 17% respectively in the first half of 2016.
The central scenario of the Transactions Forecast suggests more of the same, even with a relatively quick and painless Brexit leaving access to the single market in place. With GDP forecasts for the UK halved to 1.1% growth in 2017, M&A transactions will also fall by 33% next year with, a cumulative drop of US$240 billion (or 24% drop) over the next five years and a recovery only by 2020 to parity with the no Brexit scenario. The picture for IPOs is equally depressed as these flows tend to be even more sensitive to confidence effects than M&A transactions, so the UK market is likely to remain relatively quiet over at least the next couple of years.
Michael DeFranco, Global Chair of M&A, says:
"An active M&A market is all about confidence and credibility. To restore that confidence the UK Government will need to get to grips with the enormous challenge of negotiating a new trading relationship with the EU as quickly as practically possible. Otherwise we move into more dangerous territory."
The central scenario assumes that spillovers to markets outside the UK are modest with M&A levels in Europe falling by 8% in both 2017 and 2018 but recovering by 2019.
Adverse Scenario - Disorderly Exit
However without a clear Brexit roadmap a more damaging cycle of political and market uncertainty could be unleashed with subsequent repercussions for transaction activity globally. In this ‘adverse Brexit scenario’, the UK vote to leave adds to the existing strength of populist mood across Europe leading to further questions about the unity and stability of both. Substantive progress on Brexit is hampered by lack of available resource and the complexity of renegotiations as well as lack of access to the single market.
Under the more adverse scenario with heightened uncertainty about the future political and economic landscape in Europe, business confidence is hit hard and near-term investment plans scaled back. Over the five years, UK M&A would be down 34% or US$340 billion and there is a significant slowdown in Eurozone GDP growth, which eases to 1.0% in 2017 and 1.2% in 2018, M&A activity in Europe (ex. UK) is predicted to be almost 40% lower in 2017 than would have been the case if the UK had voted to remain in the EU.
Under both the Central Scenario and the Brexit Adverse Scenario global M&A levels would be impacted but less dramatically and the recovery to the 'no Brexit' forecast would be quicker. That said, the forecast suggests that with an adverse Brexit scenario Global M&A levels in 2017 and 2018 would be 19% or over US$1.17 trillion lower.