Law360 – Brexit To Cause Pause For M&A, But The Gridlock Won’t Last
By Benjamin Horney
June 24, 2016
The U.K’s withdrawal from the European Union will bring mergers and acquisitions activity in and around the region to an immediate halt while increasing competition for assets in other parts of the world, but the stalemate could end sooner than many think as daring buyers try to take advantage of the chaos.
The historic decision, which saw almost 52 percent of those British citizens who voted cast their ballots in favor of leaving the EU, will weaken the value of the pound, affect the ability to get secure financing and alter regulations essential to M&A, including financial institutions’ ability to access the rest of Europe, the free movement of employees across country lines and even antitrust laws. The combination of all those factors creates an environment filled with uncertainty when it comes to M&A involving companies situated in the U.K. or elsewhere in the EU, and experts say there is no question that the short-term result will be a standstill in dealmaking activity.
“The immediate reaction in a situation like this, for most people, is to say ‘OK, put your pencils down,’ ” Paul Hastings LLP corporate partner Neil Torpey told Law360. “‘Let’s just stop and see what the repercussions are, what the ripple effects will be.’”
Even speculation that a so-called Brexit could be on the horizon had contributed to a significant dropoff in deal value during the first half of the year. As of the beginning of June, $69 billion worth of U.K.-targeted deals had been announced, compared with the $192 billion worth of U.K.-targeted deals unveiled during the same stretch of 2015, according to data tracked by Dealogic. According to experts, that’s a trend that will continue for at least the next few weeks and potentially months.
“It will have a very significant, negative effect on M&A volume in Europe, and my guess is part of that will be because buyers who would buy in that environment would presumably adjust the price to pay lower multiples than in the past,” explained Mike Kendall, a partner at Goodwin Procter LLP and co-head of the firm’s private equity group. “I would guess that sellers will say the buyers are overreacting, so therefore they would not come to pricing agreements.”
The short-term stalemate will likely lead to increased competition amongst buyers for assets in the U.S. and elsewhere in the world, including Asia, Kendall noted, as people seek out regions with a stable M&A environment they can trust.
Tim Gee, a London-based Baker & McKenzie LLP corporate partner, said, “The result will be a decline in announced M&A over the next period, before confidence reasserts itself.”
But even before confidence has completely returned, the dealmaking landscape in the U.K. and EU could pick up again sooner than many expect — as soon as within a few weeks, Torpey noted — because potential buyers, including private equity firms, corporates and others, won’t wait long to try and exploit the turmoil.
“Volatility of that nature can actually be very good for activity,” Torpey said.
That’s because the tumultuous environment will “create new deal opportunities,” according to Peter Watts and Ben Higson, both Hogan Lovells partners working out of the firm’s London office.
Opportunities will arise due to a confluence of factors, including the potential fall in value of British currency, according to an emailed statement from Watts and Higson. In addition, numerous assets could come up for grabs as U.K.-based companies look to sell off business units or facilities that are located elsewhere in the EU, or vice versa, Torpey explained.
“If the U.K. is out on its own, some people will want to move their business out of the U.K.,” he said. “Some people will want to move to the U.K.”
Companies within industries that are highly regulated, such as energy and pharmaceutical companies, are likely to be early dealers as they grapple with the fact that business units in the U.K. will no longer be forced to adhere to EU regulations, nor will they be able to benefit from EU-sponsored support or incentive programs.
“You’re likely to see deal activity in those spaces,” Torpey said.
Private equity could be an industry that leads the charge, especially those firms that have already raised funds earmarked for the U.K. and EU region, according to Jeff Eaton, a partner at placement agent Eaton Partners, which raises capital for private equity firms, hedge funds, real estate funds and other alternative investments.
“If you’re a fund manager that has already raised money, there can be some real opportunities,” he told Law360. “We will see private equity take some advantage. It will benefit the ones who already have money raised.”
Private equity fundraising as it relates to the region, however, will stall, he said.
“That’s going to be tough,” Eaton noted.
But while private equity and other buyers will scour the landscape to see how they can benefit from the situation, Kendall cautioned that those pioneers will not be the cause of an opening of the floodgates, as each M&A player will have to individually determine when and how they should go about re-entering the marketplace in the region.
“I doubt there will be a herd effect where a couple buyers and sellers manage to strike a deal and then others follow suit,” he said.
The picture will begin to become even more clear after a few months, experts say, as the markets become more stable, the U.K. starts to negotiate trade deals and the new reality sets in.
“After the initial shock wears off and people can start to think clearly about what’s likely to happen and start to make reasoned, intelligent projections about the future and the shape of things to come, I think you’ll see an increase in M&A activity,” Torpey said.
The long-term view is that there will exist uncertainty of some kind for the U.K. for at least two years, as the country negotiates the terms of its exit from the EU. It’s unclear exactly the ways in which many M&A issues, including everything from tax, employment environment and accounting matters to a shift in antitrust and competition regimes, will shake out. The truth is, however, that while the vote is a fairly stunning development, people have been preparing for the possibility for months, so no one is being caught completely off-guard.
“The fact that the vote was going to take place has been known for a long time, so people have been planning for different scenarios,” Torpey said. “It’s not like people are going to be starting from square one thinking about this today.”
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