×

M&A activity plummets in UK on Brexit uncertainty

Dan Dalton | Getty Images

Deal-making in the U.K. suffered as a result of uncertainties in the lead up to, and surrounding, Britain's decision to quit the European Union (EU), according to a report.

Mergermarket's "Global and regional M&A: H1 2016" report showed merger and acquisition activity value in the U.K. dropped 50.5 percent on-quarter in the April - June period to $19.3 billion from $38.9 billion.

"Firms postponed deals, cautious of the impact [on] exchange rates and questioning what they will actually be buying into, unaware of how future negotiations will affect them," the report said.

On June 23, the U.K. voted to quit the EU that prompted many international organizations and investment banks to reduce their growth forecast for Britain. Rating agencies have also downgraded the U.K.'s credit ratings.

The British pound dropped to 31-year lows in the immediate aftermath of the vote before recovering slightly.

Companies cautious about U.K.

Second quarter inbound deals into the U.K. plummeted by more than half from the first quarter, amounting to just $13.1 billion as foreign acquirers delayed transactions.

Private equity firms also had a foot on the brakes, with buyouts of U.K. companies amounting to only $4.9 billion in the first half of 2016, down 75.4 percent compared to the first half of 2015.

One sweet spot in the deal making scene in the U.K. was the multi-billion dollar merger of the London Stock Exchange (LSE) by the Deutsche Boerse that was announced in March. On Monday, shareholders of LSE voted 99.89 percent in favor of an all-share merger with the German stock exchange operator in a deal worth $27 billion.

Deutsche Boerse shareholders have until July 12 to vote on the deal. This is the exchanges' third attempt to merge in 16 years.

Slowdown in deal-making was not just restricted to the U.K., according to Mergermarket. Global M&A activity for the first half of 2016 fell by 26.8 percent from the same period last year, totaling $1.32 trillion compared to $1.81 trillion in the first half of 2015. The U.S. saw $562.7 billion worth of deals announced in the first half, the highest among all of the regions but still down 31.5 percent on-year.

A Japanese surprise

Despite the subdued global deal making environment, M&A activity in Japan picked up by 67.8 percent on-year in the first half of 2016, with 195 deals worth $30.7 billion being announced, according to Mergermarket data.

"A surge in consolidation between Japanese companies is driving M&A activity, as businesses snap up the less efficient within a crowded market," the report said. Of the 195 deals announced, 175 were domestic while only 20 were from foreign investors buying into Japanese companies.

For example in March, Canon announced it agreed to buy Toshiba's medical equipment business for 665.5 billion yen ($5.9 billion). Another noteworthy deal was the takeover of troubled electronics maker Sharp by Taiwanese manufacturer Foxconn.

The report, however, added that the pace at which Japanese companies were investing overseas had slowed.

Chinese spending spree

Mergermarket said the spending spree of Chinese dealmakers was putting pressure on U.S. and European bidders in auction processes.

"The Chinese government selects which company it wants to bid for a non-Asian firm, but it will relax these regulations and allow multiple bidders if the foreign company is worth more than $2 billion," the report said.

Chinese deal-makers set their sights on Europe in a bid to reduce reliance on the domestic market and to acquire industrial technologies abroad, according to the report. There were 78 outbound deals from China into Europe worth $75.4 billion.

One of the biggest deals announced since January is an over $43 billion takeover of Swiss agribusiness company Syngenta by the China National Chemical Corporation.

"Chinese companies are willing to pay a higher price for quality European assets, with average premia paid for a European listed target during H1 reaching 23.5 percent, up from 13.5 percent in 2015," the report said.

Other large Chinese acquisition include multi-billion dollar bids for Finnish mobile game developer Supercell by Tencent, Strategic Hotels & Resorts by Anbang Insurance Group and Ingram Micro by Tianjin Tianhai Investment Company.

"The country has already broken all annual totals for European and U.S. acquisitions, up 156.6 percent and 179.4 percent respectively from 2015," said Mergermarket.

Follow CNBC International on Twitter and Facebook.