British political uncertainty risks slowing M&A, dealmakers say

[LONDON] The political shock of Prime Minister Theresa May's failure to win a majority in a national election could put the brakes on takeover activity in Britain, dealmakers told Reuters on Monday. "So long as uncertainty is there I don't see that as particularly positive for M&A in the short term," Karen Cook, chair of investment banking at Goldman Sachs, said at the Reuters Global M&A summit.

"I think the problem is there is a government with different views amongst the Tory (Conservative) party, who are not all aligned to hard Brexit."

A failed gamble on a snap election has weakened Britain's hand just days before formal talks on leaving the European Union. It has also emboldened those within Ms May's own Conservative ranks and beyond who object to her plan to leave the European single market and customs union.

Hernan Cristerna, co-head of global M&A at JPMorgan, said that dealmaking would likely be driven by what happens in the currency markets. "What I follow more than hard or soft Brexit is what happens to sterling and post-election there is renewed weakness in sterling," said Mr Cristerna, noting a weaker pound could spark deals as happened after last year's Brexit vote. "There is an opportunistic situation when companies happen to be valued in sterling but most of their assets are global."

Going by past elections, dealmaking should in theory rise.

More M&A deals involving a UK target company were announced immediately after the last two elections than immediately before, Thomson Reuters data shows.

In 2015, when the Conservatives won a small majority, four per cent more deals were announced during the 90 day period after the election than in the same period before.

In 2010, when the election spawned a Conservative-Liberal Democrat coalition, there was an eight per cent increase.

An increase in the number of UK Outbound M&A deals was also seen after the last three UK general elections, with an increase of 47 per cent in 2015. "It's far too early to call what the consequences of last week are. The UK has had a relatively open environment for M&A,"said William Rucker, Chief Executive of Lazard UK. "It's certainly more protectionist compared with 12 months ago but a lot of these things haven't been tested yet."

Ms May had promised to make it harder for foreign firms to take over British ones, when she set out pre-election plans to give the state more influence over corporate Britain.

To protect jobs, Ms May said her government would tighten the rules around takeovers, especially in infrastructure deals where a foreign owner could also raise security concerns.

However, the Conservatives will need the help of the small Democratic Unionist Party to govern, meaning parts of their manifesto may have to be dropped or modified.

"There clearly is increased protectionism in the UK and the US," said Ms Cook. "If this government wants to have more protectionism they ought to do it through legislation not through the back door on takeover rules because I think the takeover rules broadly work." The Takeover Panel administers Britain's code on takeovers and regulates deals to ensure fair treatment for investors.

Despite political upheaval around the world, with the new US administration under President Donald Trump also promoting an America-first agenda, dealmaking has remained robust.

Worldwide M&A is up 3 per cent so far this year to total US$1.4 trillion, compared to the same period in 2016, Thomson Reuters data shows.

European M&A is up 44 per cent this year to total US$393 billion, whilst M&A in the United States is down 14 per cent to total US$499 billion, compared to the same period a year ago.

M&A in Britain is up 89 per cent year-to-date, totalling US$81 billion, compared to this time last year. "US companies are still very interested in Europe and European companies in the US, " said Steve Baronoff, chairman of global M&A at Bank of America Merrill Lynch said. "The special relationship between the UK and the US - that special relationship comes from the bottom up....It may ebb and flow a bit depending on who is running the country but that is the bedrock and that doesn't get changed depending on the president."

REUTERS