Brexit Boosting Cross Border M&A

Brexit UK flag FBN

Immediately following the monumental UK vote to leave the European Union, many in the dealmaking community thought activity involving UK-targeted firms would slow. But sometimes, distress can be a buying opportunity. Post-Brexit, the UK has witnessed 54 inbound deals worth $38b, which shows that the UK is becoming a more attractive target for overseas investors.

The pound declined sharply after Brexit, leading to two major — and opportunistic — deals involving UK-based companies: SoftBank’s acquisition of Britain’s ARM Holdings Plc and AMC Theatres’ (NYSE:AMC) acquisition of Odeon & UCI Cinemas Group. In the case of ARM, only a small percentage of its revenue comes from the UK, making it all the more advantageous. Overall, UK inbound deal value stood at $37b in July 2016, which is more than four times the value registered in July 2015 ($9b) and significantly higher than the average July value ($12b) seen for UK inbound deals over the last 10 years.

Others may soon follow. UK M&A activity in the life sciences sector, for example, has been booming — up 21% for the year — and we expect this trend to continue. In this case, the sector’s global nature insulates it from some of the more problematic effects of Brexit.

Yet, while UK valuations are attractive, valuations ultimately do not determine the expected success of a deal and shouldn’t be the primary consideration. In the UK, many of these upcoming deals will be cross-border transactions that present a unique set of challenges. So while companies can secure a better price, they must also ask better questions to best position the deal for success.

Three questions to ask when considering a cross-border deal are:

Which market are you entering, and why?

Can the acquirer hit the ground running in a market vastly different from its own? Before making any decisions, consider the geopolitical climate. Acquiring a company with operations in the UK means there may be more uncertainty around growth prospects as an exit from the EU is negotiated. A new trade agreement, for example, could have a direct impact on an organization’s profitability.

What are the cultural or legal differences?

Underestimating the power of cultural traditions in new markets can slow acquirers down. A poll taken at EY’s Strategic Growth Forum revealed that 55% of respondents believe understanding culture, product and regulatory differences is the most critical factor for a successful global expansion. For example, if a particular market is known to take a hard line on antitrust issues, executives need to adequately weigh the odds that the deal will be approved. Cross-border companies that have experienced success in other parts of Europe must consider that the UK, even more so now, has a different set of cultural and legal nuances to consider.

Where is the talent?

Without the right talent, even companies with the best strategies in place can easily fall short on execution. For cross-border companies looking to expand into the UK, it is worth considering the acquisition of a local management team with deep sector knowledge and critical expertise. Get the “people” right and organizations can thrive in new markets.

As we have seen with several failed transactions this year, breakups are expensive. While no one is saying that valuations aren’t important, executives — particularly those scoping out post-Brexit opportunities — should think carefully before rushing to close a deal in the name of price.

Bill Casey is EY Americas Vice Chair of Transaction Advisory Services (TAS). He brings more than 30 years of experience advising corporate and private equity clients across the Americas on their capital strategies and on managing complex transactions to drive growth. Bill spent more than a decade on engagements in Latin America, including serving as a partner in the São Paulo office of the EY member firm in Brazil. He has led some of the US firm’s largest client engagements, including numerous integrated cross-border transactions. Bill’s sector experience spans the beverage, automotive, telecommunications, fintech and professional services industries, among others.