Given all the uncertainty, leadership contests, exchange rate volatility and grim economic announcements, the last two weeks have certainly sent a shudder through the world’s economies.
Having been led to believe by many experienced economists and corporate business leaders that Brexit would lead to an immediate negative impact and long term problems for the UK, we continue to brace ourselves for the impact of this historic decision.
When the markets opened on the Friday after the vote, both Sterling and the FTSE dropped substantially, certainly seeming to confirm these predictions. However, since then the picture has changed significantly with the pound steadying against the Euro, though still low against the Dollar, and the FTSE rising past 6,600.
So, how does what we see today help us discern what may happen in future? We sought the opinion of a number of contacts of ours in the marketplace, to try to better understand the current and future sentiments and considerations for the merger and acquisitions in the UK and Europe.
The Sale Advisor Opinion
To get a point of view on the Brexit decision from the sale advisor sector of the market we have spoken with one of our professional partners, a leading mid-market sale advisor in the UK, who gave us their view and experience so far.
The view from many onlookers would be that this is bad for UK business sales due to the uncertainty which it has brought on and that this could derail a lot of deals. The contrary has happened for this sale advisor, they have actually seen an acceleration of deal progress and completions. These accelerations have mainly been within deals that are cross-border, due to the reduction in the value of the pound for European and American businesses.
European companies, for example, are finding that the businesses they are wanting to acquire are now around 5% cheaper than they were at the end of May. Representing a significant cost saving. This has meant businesses in Europe are increasingly eager to complete deals and also explore acquisition in the UK due to the reduction in cost.
For their deals that are being completed within the UK however, there has been no change in the success rate of deals nor the number of businesses signing up to sell. It seems as though they are witnessing, overall, benefits from the decision, however, they were concerned about what might happen if the negotiations proved damaging for the UK in general.
The Acquisition-side Advisor
To get the other side of the equations we spoke with one of our acquisition-side partners who believes that this historic decision
“will have a very negative impact on inward investment into the UK both in terms of money invested and acquisitions made because potentially the UK becomes a far less attractive place to do business”.
Some commentators have talked about the possibility of American companies investing more into the UK with the dollar gaining strength over the pound, however, he isn’t so sure, saying
“clearly the assets will be cheaper, but the assets are cheaper for a reason”.
The Accountant’s Point of View
We also sought the opinion of an experienced corporate accountancy firm.
Our contact there sees the major issues, especially for his clients, being centred around what will happen to EU workers in the UK after we exit.
“At present, the position on what will happen to existing EU workers in the UK is unknown and will depend on the exit terms that are negotiated between the UK and the EU.”
If the UK imposes restrictions on EU nationals living and working the UK then it is highly likely that there will be some form of threshold date whereby a set of rules apply, the date the referendum took place is an obvious choice for such a threshold. Seeing this as a central issue, he says that there are indeed certain steps you can take to ensure a smooth transition,
“…employers should be encouraged to carry out some contingency planning as soon as possible. This could be through taking steps to formalise current EU workers’ employment and making sure that there is formal paperwork in place to show that the EU workers were employed before the exit from the EU takes place.”
Leaving with us with a stark warning about the importance of getting things cleared up as soon as possible, he informs us that:
“Choosing not to formalise the employment may leave you in an uncertain position if you are unable to prove that your workers were employed pre-exit.”
So, it seems that the finance side needs more time to assess the economic impact, to judge the position overall, but certainly, the employment and legal ramifications are taking up most of their immediate attention.
Our view at Firm Gains
So what we see is the heart first, head later response.
Sentiment rules the short term. It was no surprise that just after the Sunderland vote was announced, with Brexit suddenly being favourite, that the selling of Sterling started immediately.
However, now it is just over two weeks later, there has been room for greater consideration and the market is taking a more favourable view of Brexit.
Here are some reasons we believe are behind this:
- Although leaving the EU seems certain, it is in both sides interests to make sure that Britain remains close to the EU and engage with Europe
- The new Prime Minister is already in place, negating fears of a protracted leadership battle and splits in the Conservative party
- There is an opportunity in Brexit in terms of negotiations, relationships and trading with the rest of the world
- The remain campaign’s ‘project fear’ certainly overstated the negatives and, as such, the outlook is better than expected
- Keeping the interest rate at 0.5%, again demonstrates that the economic picture is not as bad as first feared
- Whilst companies, investors and funds should hunt high and wide for the best investments, there are no easy wins at the moment and, the UK remains attractive and investible
So, perhaps that’s why the messages from our different contacts are so mixed? We are in an era of uncertainty, however, it is a place we are familiar with as we have been for the last nine years. Certainly, it will have been the same if we had remained within the EU, with recent concerns in both Italy and France giving further headaches to the Eurozone.
There will be continued volatility in uncertain times, but some will be affected more than others, particularly those with significant trading relationships with Europe, or seeking larger multi-million regional investments.
The greatest danger is paralysis, so our hope is that now that the vote has been taken, the message from leaders in both business and politics focuses on the opportunity ahead. In that way, we can win the emotional battle.