Since Britain's June 23, 2016 referendum to leave the European Union, the pound sterling has slid 12% against the U.S. dollar to a 31-year low as of July 24, 2016. The Brexit decision and a falling pound sterling are expected to make waves in merger-and-acquisition (M&A) activity, potentially boosting the number of deals in the near term while severely hurting the industry in the long run. Law firm Baker & McKenzie predicts that the Brexit vote will cost the United Kingdom upwards of $338 billion in lost M&A activity, and cost the international economy up to $1.6 trillion by 2020.
Near-Term M&A Boost
While a healthy and active M&A market is all about credibility and confidence, the fall in the pound sterling's value has made some deals much more attractive for overseas buyers. Britain's investment banks are reporting increased inquiries from Asian companies. In June, the Japanese telecommunications company SoftBank Group Corp. (OTC: SFTBY) proposed a 24.3 billion euro takeover of the British software design and semiconductor company ARM Holdings PLC (NASDAQ: ARMH), which founder Herman Hauser describes as one of the "sad and unintended consequences" of the Brexit decision. Before the referendum in June, SoftBank was already considering a takeover of the smartphone chip designer. However, a more than 10% drop in the pound sterling prompted the Japanese company to pull the trigger.
Surge in Chinese Acquisitions
AMC Entertainment Holdings Inc. (NYSE: AMC), the cinema chain owned by China's wealthiest citizen, Wang Jianlin, bought out U.K.-based Odeon & UCI Cinemas Group for 921 million euros in mid-July 2016. Lately, there has been a phenomenal surge in Chinese M&A activity. The year 2015 was the largest for Chinese cross-border deals in terms of the number of deals (364) and aggregate transaction value ($105.8 billion). For the first half of 2016, total Chinese cross-border M&A activity had already topped $80 billion and is expected to increase further with the fall of the pound sterling's value.
Decline in Total M&A Activity
Despite the immediate uptick in the amount of Chinese cross-border deals, U.K. M&A activity has so far been more than halved from the year before to $73.3 billion for 2016. Britain M&A activity enjoyed a record year in 2015, with a total transaction value of $201.5 billion. Considering that M&A activity is now on pace to reach its lowest level since 2011, the full impact of Brexit on the mindset of investors cannot be understated. Even the buyout sector, which usually takes advantage of distressed situations, is wary of attempting any big takeovers in the United Kingdom; the risks surrounding the uncertainty of the eventual outcome of the Brexit are simply too large at the moment.
Fall in Debt Financing & IPOs
In addition to the M&A industry, more than half a dozen British companies that had planned to begin debt-financing deals and initial public offerings (IPOs) must now change their plans. Dealogic data shows that the amount of capital raised by U.K. IPOs is down by almost $5 billion in 2016 compared to the same period in 2015. From January to mid-June of 2016, only $3.33 billion has been raised, down from $8.29 billion in the same period in 2015. Additionally, cross-border M&A deals in the United Kingdom are down by roughly 74% from the same span of time a year earlier. Thomson Reuters' data puts Britain's M&A activity at record lows for 2016, accounting for only 4% of international activity through mid-June. While a cheap pound sterling has certainly made some deals financially more attractive, the unforeseen consequences of Brexit have collectively put a major dent in the psyches of would-be investors, punishing Britain's M&A activity.
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