Our clients have historically engaged in mergers and acquisitions (M&A) activity as a means of creating value for shareholders by capitalising on synergies, securing access to new markets and increasing marketshare in those jurisdictions where they are already operating. The UK has traditionally been a dynamic market from which to carry out such activity due to its reliable regulatory framework, consistent application of law and professional advisers well versed in domestic and international mergers and acquisitions. However, M&A activity is confidence driven. It is no secret that there was a noticeable slowdown in M&A activity prior to the referendum as businesses waited for the results on June 23. Since the ‘leave vote’ there are now understandably concerns regarding the future of the UK economy and level of corporate activity pre and post the implementation of Brexit.
Prior to Brexit, London was arguably the European hub for these transactions. In the absence of favourable trade agreements between the UK and the EU, it has been voiced that corporates looking to access European markets will not see London as the obvious city to set up headquarters. London’s relevance in terms of the centre from which to carry out European M&A may deplenish, potentially making way for another city in the EU to claim that title. Are we really going to see a large number of financial institutions and businesses exit London completely in favour of Frankfurt or Paris (for example) as a result of Brexit? It would seem that businesses will first need to understand whether one option is better or worse than the other and, for that to happen, the dust needs to settle.
So what is the issue that is concerning businesses at the moment with Brexit? Current EU legislation provides for a fairly uniform regulatory environment such as merger regulation, employment rights on business acquisitions and, of course, the prospectus rules and the exemptions that apply to the same when corporates seek to raise capital across a number of member states. In addition, a number of authorised financial firms can carry out services across the EU as a result of the regulatory framework offered by the EU – otherwise known as ‘passporting’. Following Brexit, and in the absence of any other arrangement with the EU, such activity for institutions based in London will no longer be available. For a period of time, there is also going to be a lack of clarity as to which EU regulations will continue to apply in the UK and for how long.
There are a number of other countries, such as Norway, that have successfully managed their relationship with the EU through trade agreements. Such negotiations for the UK may, of course, be more sensitive and potentially harder to achieve given it is approaching the relationship as a past member which has decided it no longer wishes to participate.
There is no doubt that financial institutions will be figuring out how best to access the single market. The other issue that boards of directors across the UK will be considering is – what will the EU look like two years from now? What if other countries decide they also want to exit the EU? For a number of businesses life will go on in the UK given its historically stable framework and market, the large number of funds and institutions based here, access to the London Stock Exchange and the opportunities that will emerge with other countries outside the EU. Currently the British pound is weak against the U.S. dollar making UK based businesses attractive as targets although much thought will be given to the geographies from which the revenue is generated. A weak British pound will also assist UK based manufacturers and exporters to flourish and encouraging others to start competing in this market.
The UK government will need to play its part to ensure the UK remains an attractive place from which to carry out business.
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