UK M&A: a shifting landscape
Media speculation suggests UK companies are being targeted en masse by foreign rivals keen to pick up bargains after the fall in the value of the pound. The reality is more complex, writes Trevor Green.
The UK’s surprise vote to leave the European Union on June 23 had an immediate impact on the economy. The FTSE 100 and FTSE 250 indices fell precipitously in the days following the referendum, and the pound fell to a 30-year low against the dollar.
UK equities have since recovered, but the currency continues to languish far below its pre-referendum level. A cheaper pound means UK acquisitions are now more affordable for many foreign firms, and fevered media speculation has centred on which British companies may emerge as takeover targets.
The fall in the value of the currency may have smoothed the way for two big deals in July. Japanese telecoms group SoftBank agreed a £24.3 billion deal to buy Cambridge-based chip-maker ARM Holdings, while British cinema chain Odeon & UCI Cinemas Group was snapped up by AMC Entertainment Holdings, a US-listed company controlled by Chinese billionaire Wang Jianlin’s Dalian Wanda Group, for £921 million.
However, the outlook for UK M&A is complex – and the exchange rate is not the only factor. There are signs that UK companies, far from being merely passive targets for foreign rivals, are becoming more acquisitive themselves. Not long after ARM was taken over by SoftBank, another UK technology company, Micro Focus International, made a bold move to acquire a division of US tech giant Hewlett-Packard for $8.8 billion.
Moreover, the prospects for further foreign takeovers may be coloured by economic and political uncertainty. Data from the Office for National Statistics shows that M&A activity slowed significantly in the lead-up to the referendum, which suggests overseas companies may be wary of the prospects for the UK economy outside of the EU. Meanwhile, Britain’s new Prime Minister, Theresa May, has promised tougher scrutiny of foreign takeovers. It is likely that prospective buyers will have to provide more assurances over jobs and investment before obtaining government blessing for deals in the future.
So what does the future hold for UK M&A in this shifting landscape? In this Q&A, Trevor Green, Head of UK Equities at Aviva Investors, explores the possibilities.
How has the ‘Brexit’ referendum result changed the outlook for M&A activity in the UK?
The fall in the value of the pound may have expedited transactions that were already in the pipeline, such as the ARM Holdings deal. But it’s important to remember that very few management teams are opportunistic or nimble enough to react immediately to a currency devaluation with a big acquisition. The due diligence on the M&A deals completed since June would have begun long before Brexit.
The referendum result may in fact reduce the likelihood of M&A activity in certain sectors. The outlook for financial services in the UK is uncertain, with the prospect that companies may lose ‘passporting’ rights to sell services to Europe from a London base. With that in mind, larger financial firms are likely to stand back, reflect and wait to see how the negotiations pan out rather than go looking for M&A deals.
Are there any sectors in which you expect to see more M&A activity in the coming months?
Technology remains one of the key drivers of M&A. Companies that need a better online strategy – in the fiercely-competitive retail and media sectors especially – are always on the lookout for opportunities to get ahead of or catch up with the competition, and this could motivate acquisitions.
Where is the interest likely to come from?
Interest could come from the US, as was the case with NewsCorp’s takeover of Wireless Group [the British owner of digital radio stations including TalkSport], in June. Dalian Wanda’s Odeon takeover shows Chinese investors will continue to target UK-based travel, leisure and entertainment companies, as they have in recent years.
UK companies may also look to make more acquisitions as low interest rates make it easier to raise capital for M&A. And with cheap financing available, private equity is likely to play a greater role. Between 2004 and 2009, UK private-equity firms took several companies out of the FTSE 250. Low interest rates may convince these firms to become acquisitive again, although we’re unlikely to see them gear up acquisition targets with such high leverage levels as they did before the financial crisis.
How is the political context likely to affect the prospects for UK M&A?
Prime Minister Theresa May has yet to finalise her proposed industrial strategy, but the indications are that there may be more political obstacles to takeovers than under the previous administration. If foreign companies are to seal a takeover, they may have to provide assurances over jobs and investment. The ARM deal is a case in point; SoftBank has pledged to legally guarantee ARM’s headquarters will remain in Britain after discussions with the government. It has also promised to double the size of ARM’s UK workforce.
Politics in the US may also have an effect on UK M&A. American pharmaceutical companies are likely to wait for the outcome of the forthcoming presidential election before embarking on big foreign takeovers, because both candidates have hinted they may introduce more regulation to the industry.
How can investors position themselves to take advantage of potential M&A activity?
Sometimes a single deal can kick off a ‘domino effect’ in a particular sector. That was the case with UK ports, when P&O’s £3.9 billion takeover by Dubai Ports World in 2006 kicked off a wave of acquisitions that included almost every British port operator over the following decade. If investors can anticipate a wave of M&A of that sort that is the dream ticket, and we are always looking out for it.
 There were 20 completed takeovers of British firms by foreign companies in the second quarter 2016, down 61 per cent from the first quarter. ONS, September 2016
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