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How Brexit uncertainty may impact M&A in future

By James Donnelly

There was welcome optimism in the air at the beginning of 2016, in terms of local merger and acquisition (M&A) activity, following a period of modest economic growth.

Market analysts, Experian, had reported a surge of merger activity in Northern Ireland in the 12 months to December 2015 (up by almost 60% against Experian’s 2014 figures).

Activity had significantly increased for both transaction volume and deal values (albeit the figures may have been skewed somewhat by some particularly large transactions, including the sale of Moy Park (£946m) and the sale of the pharmaceutical distribution division of UDG Healthcare (£298m)).

This increased level of activity continued into the first part of 2016, with a string of headline deals, such as the sale of PathXL to Philips (price undisclosed), the sale of Delta Print and Packaging to Huhtamaki (£80m) and the sale of Belfast-based Hampden Group (trading as Homebase) to the Australian retailer Wesfarmers (£340m). These deals boosted confidence and reinforced the trend of international buyers seeking to invest in Northern Ireland.

The events of the second half of 2016, however, proved remarkable by any standards, and the ramifications, both nationally and internationally, will be felt for months, or more likely, years.

While positive terms like ‘export growth’, ‘foreign direct investment’ and ‘corporation tax cuts’ have been buzz words in the Northern Irish business world over the last few years, the word that has dominated headlines in recent months is ‘uncertainty’. 

We are now more than five months after the Brexit referendum and arguably not much further forward in understanding what this really means for businesses in Northern Ireland. This is frustrating for local businesses, but the picture is equally as unclear for international investors, who have previously looked to Northern Ireland for value, with the benefit of accessing a gateway to Europe.

The negatives of Brexit are already well reported, with almost all commentators reporting stalled confidence and expecting falls in turnover, profits and growth. Evidence also indicates that both recruitment and investment decisions are being put on hold.

Across the pond, the change in White House administration brings its own uncertainty.

Despite the uncertainty, however, Northern Irish businesses need to continue to innovate and with the fall in sterling, there are definitely opportunities for our exporters in the short to medium term. Looking at the positives, year-end reports are likely to conclude that merger and acquisition activity has remained at a reasonable level throughout 2016, despite the turmoil, and although some commentators believe that activity will slow in 2017, others are forecasting increased corporate activity, generated by foreign buyers taking advantage of the depreciation of sterling against the US dollar and other major currencies.

It is likely that international investors (particularly US investors), will continue to acquire and invest in Northern Ireland.

Factors such as the attractive exchange rates, reduced corporation tax and low labour costs, are of course important, but in reality, the international deals completed in Northern Ireland in recent years have been more about local companies selling specialist products, technology and expert skills.

It remains to be seen how corporate activity in Northern Ireland will perform in 2017.  However, we would expect that transactions at the lower and middle range (i.e £0.5m to £20m) will continue at a steady pace across most sectors.

*James Donnelly is a partner in the corporate department of law firm Tughans

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