The dust has settled, a strategy has been implemented, financial markets have returned to usual trading and the outlook of the UK economy is positive. This is what many would have expected to be the state of affairs two weeks after the UK population signified, by a majority vote, an intention to leave the EU. Unfortunately, that has not transpired. The UK finds itself in a period of uncertainty, not only about whether exit from the EU is guaranteed (the legality of withdrawal is currently being challenged by Mishcon de Reya), but, more importantly, about whether the economy will be able to weather the storm of an undefined period of risk while plans are paved. If there are two things unfavourable to an active M&A market, its uncertainty and risk.
Alex Ferguson, manager of Manchester United Football Club for 27 years, retired from management in 2013. Albeit that such tenure didn’t last as long as the UK has remained a part of the EU (in its various forms), the departure presented a period of uncertainty and risk. Not only were MUFC fans apprehensive, but the football community as a whole didn’t know what would happen given the absence of something which had been a constant for decades. Would the current United players remain? Would the club still be able to attract high calibre players? Would a change of tactics and approach undo everything MUFC stood for? These were all valid questions raised in 2013 and, as we have seen, the answers have had a huge impact on the fortunes of the club since.
Fergie’s departure didn’t cause, and neither will Brexit itself cause, a crisis. Since June 23rd there have been market fluctuations in stocks, sterling has fallen to record-low levels and sovereign bond yields around the world have plunged. Even before the result of the referendum uncertainty affected the M&A market during the course of 2016 with UK-targeted M&A during the second quarter of the year already more than 50% lower against the previous quarter (according to Dealogic). Had the UK voted to remain in the UK, much the same as if Fergie had decided to stay for (let’s say) another 5 years, such reactions may not have been seen. As it happened, when Fergie’s retirement was announced, the club’s shares listed on the New York Stock Exchange dropped in value by 4.5% and immediately after Fergie’s departure, the infamous club went into chaos. Notably, United took an unfamiliar step and identified some of their targets (Gareth Bale, Arturo Vidal, Cesc Fabregas, Thiago Alcantara, Leighton Baines, Fabio Coentrao and Sami Khedira) but only ended up with Everton’s Marouane Fellaini (for £27.5m – £4m more than his buyout clause provided for).
Only two weeks after the Brexit vote, investors, banks and dealmakers aren’t able to state with any real certainty what will happen to M&A activity but it is expected that greater volatility in the coming months, together with a lack of longer term economic strategy, is likely to inhibit M&A activity further. As many UK businesses are export-orientated, with nearly half of such exports making their way to the EU, the significant time needed to conclude and adjust to new trade and investment policies is likely to result in UK companies retaining their assets rather than undertaking M&A. If Article 50 is triggered, the UK will undoubtedly lose the ability to trade under all of the existing deals and will need to renegotiate and/or enter into new arrangements with existing trade partners.
Similar volatility hit MUFC during the 2013/2014 season. The team failed to play the United way (the 2-0 loss away to Olympiacos was dubbed one of the worst MUFC performances ever), were knocked out of both domestic cup competitions in January 2014, had to pay (or were presented with having to pay) record fees for players – as a result of what many perceive to be Ed Woodward’s poor handling of the transfer process, and Moyes (less than 12 months into his 6-year contract) was ousted with just four games left. United recorded their lowest tally in the Premier League and ultimately finished in 7th place (missing out on European qualification for the first time since 1990).
United, even with what was perceived to be better management in Louis Van Gaal, failed to recover as the market (and football community) had expected. The transfer saga, which Woodward had arguably created in 2013, had paved the way for other clubs to charge a ‘premium’ if MUFC were interested. United spent around £250m under Van Gaal’s short reign. But that wasn’t the worst part. The surprise came with how MUFC played. A different philosophy and a long-term strategy was thought to be the best way for United to get back to being the United of old – successful, dominant and a powerhouse in the football arena. Instead, unwanted records were broken (first home defeat to Norwich in 26 years and a first Boxing Day defeat in 13 years), fans booed the players and the manager from the stands (after the defeat to Southampton in January 2016) and the team finished outside Champions League places again in the 2015/2016 season. Despite this, United remain one of the principal powers in football; commercially astute and successful and still (albeit probably as a result of Mourinho’s recent arrival) a club where top class players want to play.
The UK, like MUFC, will still be open for business and will remain an attractive economy in which to invest. There may be significant opportunities for strategic buyers to take advantage of the plummeting value of sterling and, in particular, Asian buyers may seize the chance to acquire more UK assets. These buyers will also be aware that the UK government will be keen to give Asian companies the impression that the UK is open for business to encourage improved trade relationships. Indeed, China already believes that the UK regulatory regime is friendlier and more predictable than the US. In addition, many UK SMEs and growth businesses have narrow EU exposure making them appear attractive for EU purchasers. This is because, subsequent to any Brexit-deal, acquiring companies will want direct exposure to the world’s fifth-largest economy, and it is believed that there will be a fairly liberal approach adopted on tax and regulation (there is already talk of the corporation tax being lowered to less than 15%).
United fans hope that Mourinho will bring much needed stability, and similarly, many of the UK population will hope that a new leader of the UK government will thwart the M&A uncertainty this autumn. With the introduction of Mourinho, we have already seen big signings in Ibrahimovic and Mkhitaryan (with the added possibility of Pogba’s arrival back to Manchester). They are all willing to play for a club without Champions League football, and there is hope that the players in the domestic and worldwide M&A market will foresee a similar long-term opportunity in the UK economy. Arguably, all the UK needs to reignite the M&A activity to the healthy 2015 levels, is good corporate strategy that looks beyond the current pandemonium and into a future commensurate with the fundamental needs of the UK economy. A significant determining factor in this will all depend on whether the new leader of the UK government leader pushes forward or delays the trigger of Article 50.
If you have enjoyed the angle of this article, or believe it hasn’t quite drawn parallels please do not hesitate to comment. In the event that you would like advice on M&A strategy, planning and/or specialist legal assistance pending and during a corporate transaction please do not hesitate to contact any member of our Corporate department.