Why the EU referendum should not be used as a scapegoat to explain falling M&A activity
Barack Obama probably dealt with a wide array of important issues during his recent UK visit, but it’s doubtful anyone noticed. Only one subject dominated, and that was the US President’s views on Brexit.
So loud is the discourse surrounding the EU referendum that, as was the case with President Obama’s visit, it threatens to overwhelm everything.
One example of this is the belief that the EU referendum is already creating a drag on UK business. Whether it’s a slowdown in mergers and acquisitions (M&A), as argued in a recent comment piece in Bloomberg, or declining sales in premium London housing, as suggested by the Royal Institute of Chartered Surveyors, the uncertainty surrounding the EU referendum has become an extremely popular scapegoat.
Read more: M&A deals slow as EU referendum looms
When it comes to M&A, while UK deal numbers have certainly dropped, the argument that this is due to the looming referendum doesn’t bear scrutiny. Deal volume in the UK reached a peak of 354 deals in the fourth quarter of 2015, when the threat of Brexit was as great as it is now, falling by 15 per cent to 300 deals in the first quarter of 2016.
Viewed in isolation this might seem a significant hit, but the UK decline was less pronounced than the decline in global deal making. During the same period, the number of deals globally fell 20 per cent from 1,515 deals to 1,201 deals.
Read more: How EU referendum uncertainty is slowing UK deal activity
Based on our own experience, general macroeconomic concerns such as the state of China’s economy and declining commodities prices have a greater impact on M&A deals than individual political events.
This is backed up by the behaviour of overseas investors. A closer look at this year’s UK figures reveals that if there are concerns about the referendum and Brexit, it isn’t coming from international investors, with the percentage of UK M&A from inbound investors in fact increasing marginally from 40 per cent to 41 per cent of the total.
Read more: Dealmakers shrug their shoulders at Brexit in global M&A survey
Even if Brexit does happen, it is questionable as to what the medium to long-term impact would be on inbound M&A. The UK might historically have been a convenient gateway into the EU, particularly for US and Japanese investors in the 1980s and 1990s, but the world has moved on.
The rapid rise of China and new investment coming from Asia has altered that balance. In 2015, the Chinese invested more in France and Italy than in the UK. Come 23 June, whichever way we choose to vote, it is unlikely to dramatically alter the flow of this investment.
The UK needs to determine its position in the EU, but the amount of M&A activity it enjoys will be governed by much larger variables.