3 minute read 5 Nov 2018

UK M&A intentions fall to a four-year low

3 minute read 5 Nov 2018

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Global Capital Confidence Barometer - Edition 19 (pdf)

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UK companies increase their focus on existing operations as policy uncertainties grow, likely slowing down M&A activity in the next 12 months.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

The UK respondents to the 19th Capital Confidence Barometer (CCB19) remain confident in the economic outlook. But this confidence looks less likely to translate into merger and activity in the next 12 months, as their focus shifts to existing operations. UK companies are maintaining their deal pipelines, but the emphasis has shifted to operational fitness as trade and regulatory headwinds grow.

Macro and external environment

47%

see regulation and political uncertainty as the biggest potential risk to dealmaking in the next 12 months

Disruptive forces and uncertainty present biggest risks to growth

Matching their response of six months ago, 86% of UK respondents said the global outlook was improving. In terms of the UK economy, 63% saw improvement, compared with 68% in the last EY survey.

Nevertheless, just 49% of UK executives say domestic earnings are improving, compared with 84% who are feeling more positive about global earnings. Lower domestic growth, combined with rising UK wage costs, Brexit-related disruption and the impact of a weaker pound on import prices, could be behind the disparity.

A third of UK respondents said “disruptive forces” (including technology and competition from non-traditional players) presented the biggest risk to their core business growth. This compares with a quarter of UK executives who ranked “regulatory, geopolitical and policy uncertainty” as their biggest threat. New trade, tariff and anti-trust policies present new challenges; but, companies cannot afford to take their eyes off the horizon.

What do you believe to be the greatest near-term risk to the growth of your core business?

UK executives seek familiar post-Brexit landscape

Increasing regulatory intervention and protectionism are creating the strongest deal headwinds, according to UK respondents. Brexit is the most pertinent example of a changing trading landscape for UK companies, with long-standing policies likely to be replaced by new arrangements – whatever the final deal.

EY’s survey shows that UK executives’ preference is for known trading models that most closely resemble existing frameworks. There is a much lower preference for the unknown outcome of a second referendum, for as-yet untested models or for reverting to WTO rules.

Overall, UK executives are more positive about the impact of Brexit on a range of financial and operational issues than respondents from the rest of the world. It’s possible that UK businesses may feel more prepared because they have lived with Brexit more closely in the last two years, factoring it more fully into their operational planning.

What do you think should be the preferred outcome of the UK and EU Brexit negotiations? — *The Norway model — the European Economic Area option: access to single market for most goods and services; power to strike free-trade deals; UK must accept free movement of people and make EU contributions

***The Switzerland model*** — the Economic Free-Trade Agreement option: bilateral agreement with EU affording UK select access to single market for goods but not services; UK must accept free movement of people and make specific EU contributions

***The Canada and Japan model*** *— the Free-Trade Agreement option: tariff-free access for most goods — services not necessarily included — but custom controls in place; UK does not need to accept free movement of people*

***The UK White Paper option*** — UK part of a free-trade area for goods but different rules for services; shared EU-UK customs border but with right to diverge on tariffs and strike own FTAs; free movement of people to be replaced by a mobility scheme with preferential access for EU citizens

***Revert to WTO rules*** *— acceptance of EU tariffs on goods exported to single market; UK halts EU contributions and free movement of people*

**A second referendum in the UK —** Article 50 to be halted

A deal pause?

In this more testing environment, UK respondents are focusing most of their resources and attention on “investment in existing operations” (30%) and “improving working capital management” (29%) ahead of “acquisitions, JV’s and alliances” (7%). Unpredictable environments put more pressure on cash flows, increasing corporate focus on operational fitness.

This greater internal focus is underlined by the sharp fall, from 65% to 45%, of UK respondents actively seeking to pursue M&A in the next 12 months. This is still a relatively robust figure, which brings the UK in line with global M&A expectations; but it does represent the lowest level since October 2014.

While some executives look to pause dealmaking, for others, M&A remains an imperative.

UK companies expect to be less active themselves, but they haven’t significantly downgraded their expectations for deal markets as a whole. Neither have they significantly reduced their deal pipelines. Thus, it looks like more of a pause to consolidate, rather than an active retreat from deals. Companies may be minded to take a more measured approach to M&A, since over half of UK companies failed to meet the synergy targets they set on their most recent deal. In the survey, 61% said that they expected to prepare for post-deal integration earlier in the deal life cycle.

Integration and synergies

51%

achieved lower synergies than they identified

Explore the Global Capital Confidence Barometer

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Summary

Companies may be minded to take a more measured approach to M&A, since over half of UK companies failed to meet the synergy targets they set on their most recent deal. Companies may be less active but are still confident in the economic outlook. Download the full report (pdf).

About this article

Steve Ivermee

EY UK & Ireland Transaction Advisory Services Leader

Transactions leader working with multi-disciplinary teams to advise and support clients on the whole transaction life cycle from strategy to execution. Budding racing driver and opera lover.

Related topics Capital confidence barometer Transaction advisory services Strategy

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UK M&A intentions fall to a four-year low

Steve Ivermee

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