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It is 9 o’clock Wednesday, the 11th of May 2016, and some 180 attendees have gathered at the venerable ‘Institute of Directors’ just off London’s Trafalgar Square in order to debate, network and share their views on the current state of Mergers & Acquisitions in the context of an increasingly risky economic outlook. The event, jointly hosted by ICAEW and JCRA, featured a panel discussion moderated by David Petrie (Head of Corporate Finance at ICAEW) which touched on a broad set of topics affecting global, and in particular European, M&A activity.
In order to set the scene for the panel discussion, Scott Corfe, Senior Economist at the Centre for Economics & Business Research, provided an overview of the current macroeconomic environment: Global growth is slowing, Brazil and Venezuela are in crisis, China is a cause for concern and then there is of course the risk of a “Brexit” looming, with “Grexit” potentially not that much further down the road.
Jackie Bowie, CEO of JCRA, remarked that against this backdrop deal flow in Private Equity for 2016 has notably decreased compared to the previous year and that with regards to the British referendum on the 23rd of June the high number of client enquiries around hedging the British Pound exchange rate risk suggest that it is indeed the possibility of a Brexit that weighs particularly on UK activity. The facts seem to support this view. As Scott Corfe added, UK deal-making measured by volume has dropped to its lowest level in eight years and, according to the Deloitte CFO Q1 2016 survey, the referendum on Britain’s EU membership is perceived to pose the greatest risk to UK businesses.
But it is not just the risk of a Brexit which one ought to worry about. Nic Humphries, Managing Partner at Private Equity Fund HgCapital, was right to point out that it had indeed been a while since we last saw a recession. While people might have battened down the hatches against a weaker Pound post the referendum, he wondered whether companies were prepared if a recession were to hit. He also urged caution in relation to financing costs, stating that, with leverage being historically cheap, there will be a time where credit will become more expensive again.
After a series of comments which moderator David Petrie referred to as “gloomy”, Mark Pacitti, Global Leader for Corporate Finance at Deloitte and Chairman of the Corporate Finance Faculty, struck a more positive tone stressing that overarching M&A drivers are still intact, in particular if one turns the view away from crisis-mired Europe to a more global outlook. According to his read of the situation, it is mostly “business as usual” – however without any mega deals.
Jackie Bowie, CEO of JCRA, shared some of the optimism, saying that despite the threat of Brexit, deal pipelines seem strong. Indeed, she drew gasps from some quarters as she suggested that a Remain vote would lead to such a surge in deal activity that people would be forced to cancel summer holidays. She also highlighted the role Sovereign Wealth Funds and international Pension Funds are going to play for future private equity deal activity, as low-yielding bonds and richly-valued, listed stocks make the higher potential returns of private capital assets more attractive.
Overall, the panellists’ comments were reflective of this hard-to-grasp environment we are in: While short-term risks are clearly mounting and it is all too easy to point towards the numerous economic headwinds out there, it is not all doom and gloom if one looks a little further ahead. Jackie Bowie finished on the positive note that a young, tech-savvy generation in conjunction with new technologies is bound to drive change, while Mark Pacitti reiterated his rather optimistic outlook for M&A: He stressed that it is the corporate strategy that ultimately drives a company’s actions and in order to access new markets, grow revenues and generate returns for shareholders, M&A will always remain an important part of the corporate strategy toolkit. That is not to say that business cycles and the economic tides do not matter, but they won’t stop M&A from happening over the longer term.
Moritz Sterzinger, Associate
All views expressed in this blog are the author's own and are based on information available at the time of writing.
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