• Equities
  • UK Equity
  • Economic Research

UK investment: outward bound

Uncertainty surrounding the UK economy is potentially driving a new wave of outward merger and acquisition activity.

6 minute read

airplane taking off above the clouds

With the outlook for domestic economic activity in the UK clouded by the country’s negotiations to exit the European Union and heightened political uncertainty, it is unsurprising the government is stepping up its efforts to encourage outward investment in new markets.

To that end, the Department for International Trade (DIT) in September launched a new policy to “help companies invest abroad with confidence”1.

While outward direct investment may once have been “seen as a fig leaf for outsourcing jobs and cutting costs at the expense of domestic investment and jobs for British workers”, according to Liam Fox, Secretary of State for International Trade, he believes expanding into new markets will be vital if the UK is to exploit the “unprecedented economic opportunity” provided by Brexit.

Increased investment goes hand-in-hand with increased trade, according to the DIT, which says companies with investments and operations in more than one country account for 80 per cent of all world trade. British firms who take ownership of foreign assets can also integrate the UK supply chain into large international projects, creating more export opportunities, adds Fox.

Moreover, investing abroad helps turn British companies into global brands, and there is “clear evidence UK companies that invest overseas become more competitive and productive” through the acquisition of new technologies and local business know-how that is transferred back to Britain1.

Brave new world

There certainly appears to be a greater focus among UK small and medium-sized enterprises (SMEs) on overseas expansion following the Brexit vote. A recent report by the Dubai Multi Commodities Centre (DMCC) found that 42 per cent of UK SMEs are interested in expanding their operations abroad to leverage new opportunities2.

According to the report, the key drivers of this trend include the attractiveness of emerging markets, the growing need for a global presence, and the availability and wealth of overseas talent and resources. DMCC argues the uncertainty caused by Brexit is leading UK companies “to take greater risks than they ordinarily would, and to take the leap into geographical diversification”.

Thirty six per cent of respondents believe the UK has too much uncertainty surrounding it now and is no longer an attractive option for investment.

Although early days, there is hard data to support the view UK companies are becoming increasingly outward looking. UK companies spent US$109 billion on overseas acquisitions in the first half of 2017, an annual increase of 60 per cent3. These figures run counter to the theory UK companies are more likely to end up as prey than predators because of the weaker pound. British companies appear to be using local currency debt to counter the impact of sterling weakness4.

Ramping up

Professional services firm EY believes merger and acquisition (M&A) activity by UK companies is set to increase in 2018. A report released by EY in November found that 60 per cent of UK companies are planning acquisitions over the next 12 months, up nine percentage points since April 20175

The US remains the top-outbound destination for UK acquirers, followed by France, Germany and India. Around 63 per cent of UK respondents said they are reorganising their geographic operations in response to “potential changes in trade policies or an increase in protectionism”, much higher than the global figure of 41 per cent and a response to the issues raised by Brexit.

Trevor Green, Head of UK Equities at Aviva Investors, points to recent examples of UK companies acquiring overseas companies as indicative of this theme. They include Reckitt Benckiser’s £14bn takeover of Mead Johnson6, DS Smith’s £722m takeover of the US paper and packaging business Interstate Resources7, while Sage8 and UDG Healthcare9 have also made acquisitions on the other side of the Atlantic. All have been completed in the second half of 2017. 

Other UK companies, including Melrose and Sherborne, have said they are looking for acquisitions. Green would be “very surprised, in the current environment, if these proved to be totally UK- focused businesses”.

Labour concerns

Workforce issues, particularly where companies employ large numbers of EU staff, are a key factor driving companies to consider their operations, says Green. As recently as August, Sir Martin Sorrell, CEO of the global advertising and marketing services giant WPP, summed up the predicament facing UK companies.

"The migration issue or the fluidity of people is really important to us,” he said. “About 17 per cent of the 14,000 or 15,000 people we have in the UK come from the EU. If there are severe restrictions on their movement - inward or outward - in future, that obviously impacts our business in the UK. Our response to that has been actually to increase our investment in France, Germany, Italy, and Spain because those are four of our top ten markets and we can't afford to lose influence in those markets.”

Multinational slow burn

Overall, however, Tim Sarson, value change management partner and “Brexpert” at KPMG, believes multinationals are reacting slowly to the prospect of Brexit.

“Some of the more forward-thinking companies are using Brexit as an opportunity to reconsider their overall global operating model,” explains Sarson, who has spent his career advising multinationals. “But most companies are simply focused on keeping the wheels turning on day one, asking what should we do before March 2019 rather than taking long-term strategic decisions.”

Sector by sector

Brexit will have a differing impact on individual economic sectors and this is informing investment decisions. Companies reliant on government contracts in Europe are building up their presence in continental Europe. This is particularly true of the aerospace and defence sectors, says Sarson, adding that many of these companies have been doing this in the US for years.

Heavily-regulated sectors such as banking and life sciences, which includes pharmaceuticals and medical equipment, are transferring certain activities to other EU countries to ensure they remain compliant. This could lead to tens of thousands of jobs moving to Europe in the banking sector, whereas the figures will more likely be in the thousands overall in the pharmaceutical sector. 

The same is true of airlines such as EasyJet, says Green. The airline had no option but to apply for a new air operator’s certificate in the euro-zone, unveiling Vienna as its new EU hub with some staff moving from Luton to Austria.

The pharmaceutical sector, like the food industry, is also characterised by just-in-time product deliveries and that too is informing the short-term measures being put in place to maintain service levels after Brexit. Hospitals, for example, rely on temperature-controlled vaccines with a short shelf life, while much of the perishable food supplied to retailers is imported from continental Europe. Companies in both sectors, says Sarson, are focusing on logistics and building stockpiles on this side of the Channel to ensure they can easily deliver.

Meanwhile, other industrial sectors, such as autos, are highly interconnected. Many UK companies produce components for other industrial groups and there are multiple movements of parts and products and components across the Channel before the finished good appears. Hence, industry’s oft-quoted desire for a “frictionless” trade deal with the EU.

Businesses are just starting to look at measures that could mitigate Brexit’s impact on consumers, “mapping out their supply chains in great detail to identify pinch points and create solutions”, says Sarson. 

There are various consumer goods sectors with similarities to the industrial and food retailing sector, where companies are also adapting; albeit on a small scale and at a slow pace for now.

The major expenditure over the next 12 months will be in logistics and building up stock levels. That means the working capital position at some of these businesses is going to become “quite difficult”, says Sarson.

“Banks are aware that some companies will have a lot more cash locked up in stock and they have been talking to KPMG about how they can plan for and predict the working capital requirements of their customers,” Sarson adds.

Thinking strategically

Sarson believes multinationals tend to be highly bureaucratic, where change happens slowly. Once they have the crisis management plans in place, they will start to take a strategic view of the post-Brexit world. “But they will also be looking at other long-term issues such as automation, ageing populations and skill shortages to name a few,” he adds.

Meanwhile, EY’s chief economist Mark Gregory believes companies will wait to see what trade deal the UK signs with Europe before they act decisively. “At some point you have to make a decision on where you are going to site a factory, but until that point arrives business will wait for more information on whether the UK opts for a soft or hard Brexit,” he explains.

In the 1950s, President de Gaulle rejected the UK’s application to join the then European Economic Community; arguing if Britain had to choose between Europe and the open sea, it would always choose the latter. In the coming years it will become clear whether UK companies have no option but to head out once again into the open sea. If so, Green believes the implications for long-term earnings and stock selection could prove profound.


  Supporting overseas investment by British companies can bring vast benefits to the UK,  Brexit Central, 19 September 2017

2  DMCC Freezones: Brexit Security for British SMEs

3  UK companies defy political uncertainty with dealmaking uptick, The Telegraph, 31 July 2017

4  Predictions were wrong: Brexit is not hurting the UK’s M&A market, fn London, 05 December 2017

5   Pick up in M&A points to UK companies defying uncertainty, EY, 06 November 2017

6  Reckitt Benckiser: Expensive Defensive Or High-Debt, Low-Growth Time Bomb?,  Seeking Alpha,  24 November 2017

7  DS Smith enters U.S. with $920 million buy, reports higher FY profit, Reuters, 29 June 2017

8  Sage completes the acquisition of Intacct,  Sage,  03 August 2017

9  UDG Healthcare announces the acquisition of US-based healthcare communications agency for up to $75.8m, UDG Healthcare plc, 14 September 2017


Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.