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Brexit uncertainty results in fewer mergers, big business winners

The Brexit referendum and surrounding policy uncertainty has resulted in a significant drop in mergers and acquisitions (M&A) activity in the UK, according to researchers at the University of East Anglia (UEA).

In the 11 months before last June’s referendum, the average monthly number of M&A announcements was around 430. Almost a year on from the historic vote, the study’s preliminary findings estimate that M&A activity fell by 15 per cent - or by around 60 mergers a month - as a direct result of the referendum uncertainty. Since then M&A activity has failed to recover to its pre-referendum level.

The findings are at odds with initial reports that the ‘Leave’ vote had not reduced the level of business confidence, and come as UK political parties make their final push for votes ahead of this week’s General Election, with the Brexit negotiations a key issue in their campaigns.

The researchers suggest that a 15 per cent fall is a sizeable setback in terms of consumers benefiting from efficiencies that most M&A activity produces. For example, consumers will not reap the benefits of lower prices and higher quality goods or services that could have otherwise been delivered by these mergers.

However, the referendum did not affect all M&As deals in the same way, with a different effect on M&As of various sizes. In the 11 months following the referendum, the overall value of the largest 10 per cent of M&As has actually increased in relative terms - from $214m before to $250m after - an increase of more than 16 per cent, meaning the very largest mergers are now even bigger. In contrast, the overall value of the smallest 25 per cent of M&A deals has fallen in relative terms, from $5.7m pre-referendum to $4.5m post-referendum, down about 21 per cent. 

The research, which is ongoing, was led by Dr Peter Ormosi of UEA’s Norwich Business School and Centre for Competition Policy (CCP). These provisional findings are published today in an article for CCP’s competition policy blog.

Dr Ormosi, a senior lecturer in competition economics, said: “While it is widely recognised that last year’s EU referendum caused significant uncertainty for markets, some early indications were that it had not reduced the level of business confidence.

“We find that the referendum has in fact led to a significant drop in merger numbers. This is bad news. The vast majority of mergers, unless they have a significant adverse effect on competition, have the potential to contribute to social welfare, for example by reducing transaction costs, or by enhancing the efficiency of the merging businesses.

“If competition is left undisturbed, these benefits are passed on to consumers in the form of lower prices. When there is a setback in M&A activity, it means that some of these potential benefits are foregone.

“These preliminary findings also suggest that the post-referendum policy uncertainty is helping the largest M&A transactions, while hindering the smaller ones, with possible negative consequences.”

The largest businesses have become more M&A active since the referendum. The researchers suggest this is a “worrying sign” and might be to do with the largest firms being cushioned from the increased uncertainty of Brexit, perhaps as a result of being better-able to exert influence over politicians through ‘rent-seeking’ behaviour, manipulating political and economic conditions to increase profits.

Given the size of the business, it was mainly the proportionately larger deals that declined after the referendum, whereas the deals that were small in comparison to the acquiring business’ size were not significantly affected. Dr Ormosi says this makes sense, as with the perceived increased uncertainty and risk that Brexit brings, firms would be most cautious about the deals that are similar or large relative to their own size.

Dr Ormosi said: “When we find that the largest transactions and the largest businesses were not hindered, and in some cases were even spurred, by the referendum, one inevitably worries. How much of this differential effect is due to the fact that these larger businesses are cushioned from the increased uncertainty, thanks to their rent-seeking behaviour?

“Transitional periods are never good for businesses and consumers, but what makes it even worse, is that businesses do not seem to be equally exposed to the same risk from the increased policy uncertainty, and those that are more likely to have political influence seem more protected from these risks.”

To determine a link between the referendum and M&A activity, Dr Ormosi used data from countries where no referendum had taken place, against which the changes in the UK could be compared. If the countries are sufficiently similar to the UK in terms of pre-referendum M&A activity, it can be assumed that they represent how M&A activity would have evolved in the absence of the UK referendum.  

This control group - France, Netherlands, Spain and the United States - was created based on a comparison with the UK on various attributes that would be expected to affect M&A activity in any country. These include: GDP, ease of doing business index; inflation; interest rate spread; lending interest rate; research and development expenditure; tax revenue; unemployment; and total monthly value of transactions.

The researchers found that pre-referendum M&A activity in the UK and control group was almost parallel, but a clear change started taking place around the start of the referendum campaign, with UK activity dropping, while the control group’s remained roughly around the same level, implying that the monthly number of M&As dropped as a result of the uncertainty surrounding the referendum.

The article ‘Brexit uncertainty: fewer mergers, big business winners’ can be read at https://competitionpolicy.wordpress.com/.

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