So here we are in 2018, year in which, if the deal-junkies at Citi are to be believed, portends to be a ‘monster year’ for M&A. Given the globally-synchronised economic upturn, continuing low interest rates, suppressed inflation and roaring capital markets, they could very well be right. Below Carlos Keener, Founding Partner at BTD Consulting, talks Finance Monthly through some of the most anticipated M&A activity of the year.
Indeed the deal frenzy has already begun, with the final half of 2017 witnessing GVC’s takeover of Ladbrokes Coral and the Standard Life/Aberdeen Asset Management merger among others. But a word of caution, at least for those considering acquisitions in the UK: Brexit – soft, hard, or otherwise, is now less than 13 months away, and still we’re without (at time of writing) any certainty on even the outline shape of our future relationship with Europe.
No doubt the lawyers and bankers will continue to talk up the Brexit boom, but the reality on the ground may be rather less clear. At a recent conference, a leading M&A professional representing a FTSE100 organisation disappointingly stated "I think someone in the company is looking into the likely impact of Brexit, I’m sure they’ll tell us if we need to do anything differently as soon they’re ready.” While we all can sympathise, that’s not nearly good enough.
Making a rational assessment of the likely risks UK firms may see over the coming years doesn’t require a crystal ball view of what form Brexit will ultimately take. A look at some upcoming or predicted deals for 2018 illustrates this well.
1. Prompted by its recent struggles, Capita, the outsourcing and professional services group, has just announced that it will be disposing of its less profitable and strategically-central assets and services. Firms heavily reliant on professional service revenue are typically the first to be hit hard in a downturn or in times of uncertainty, and even with a clear, decisive Brexit, lack of business certainty may extend for many years as post-Brexit regulatory and trade conditions – and how they are to be applied – crystallise and settle.
Divesting in an effort to return to core is a traditional approach when the future is relatively predictable and fairly speedy recovery is anticipated. But that’s not exactly the scenario ahead of us. Capita will need to prepare its balance sheet for an extended period of uncertainty while retaining sufficient service diversity and operational agility to accommodate new market demands, conditions, constraints (and yes, opportunities) as they emerge. It is adaptability and not strength which may win the day.
2. The global Pharma sector is likely to see significant M&A activity in 2018 as new drug pipelines soften and US corporate tax reductions take effect. One of the most prominent deals in recent years in this sector was the asset swap and joint venture creation between GlaxoSmithKline and Novartis. And last month GSK’s new CEO, Emma Walmsley, expressed an interest in acquiring Pfizer’s Consumer Health division, estimated to be valued at over $15bn.
Like any global manufacturing organisation with highly-complex supply chains in which materials may cross borders multiple times before reaching the market as a finished product, GSK will need to be extremely careful to scenario-plan the potential impact of new hard, soft or otherwise cross-border tariffs and associated regulations as they come into force.
Business cases that assumed free trade across the EU should be re-examined, and supply chains reviewed to minimise any potential increased cost. Acquisitions of EU-based manufacturing capabilities with the ability to serve local markets may help buffer the firm against any emerging trade barriers.
3. News appeared in January that Fox still wants full control of Sky, despite rejection of the deal by British regulators. The rejection shows the growing importance of political and economic nationalism which can trump investor returns, competition or corporate tax repatriation.
A report in October 2017 by Latham & Watkins describes governments and regulators taking an increasing interest in ’foreign’ acquisitions of nationally important companies in the name of national security. In a twist on this, at the time of writing GKN, the FTSE100 aerospace and automotive giant was fending off an unsolicited £7bn takeover bid by Melrose. While a ‘UK only’ deal, politicians including Vince Cable were commenting on the risk the deal may pose to the UK’s industrial strategy.
Economic nationalism begins at home. So, any UK business looking to buy or sell across borders will need to consider how the deal would look to the public and politicians, not just the shareholders.
4. One area in which everyone agrees change is upon us is FinTech. 2017 deals included Vantiv/Worldpay and JPMorgan Chase/WePay. Brexit’s impact on London’s financial sector will accelerate M&A in the coming years within a sector that’s evolving at warp speed. It will be more important than ever to predict the effects of changes. How will the financial regulatory landscape diverge between the UK and the EU post-Brexit? How will GDPR, data protection and safe haven legislation and practices impact market opportunities and operational challenges across borders? And more tactically – if the FinTech gravity moves or disperses (say to Paris), how will FinTech firms find and retain the top technical talent they need?
As ever, change provides an opportunity and a threat to businesses doing M&A. Size alone will not guarantee success. The successful organisation will pull ahead through a clear strategy and use M&A to expand or adapt their propositions and capabilities in the market. Whatever form Brexit takes, one thing is certain – interesting times lie ahead.
