World Economy

Global M&A May Drop $1.6t

Global M&A May Drop $1.6tGlobal M&A May Drop $1.6t

Global mergers and acquisitions may drop by as much as $1.6 trillion over the next five years unless Britain quickly agrees to leave the European Union under terms that give it continued access to the single market.

While the UK's decision to leave the EU will reduce takeover activity under any scenario, a "disorderly" exit marked by difficult negotiations will result in increased political and economic uncertainty and a bigger decline in transactions, a forecast from the law firm Baker & McKenzie shows, AP reported.

The study comes just days after a gauge of business activity suggested that Britain's economy was weakening at the fastest pace since the global financial crisis in early 2009, underscoring the need for the government to swiftly negotiate a new relationship with the EU.

"An active M&A market is all about confidence and credibility," Michael DeFranco, global chair of mergers and acquisitions at Baker & McKenzie, said in a statement. "To restore that confidence, the UK government will need to get to grips with the enormous challenge of negotiating a new trading relationship with the EU as quickly as practically possible. Otherwise we move into more dangerous territory."

The fallout from so-called Brexit will be concentrated in the UK and Europe and won't lead to a crash in global takeovers like the one that followed the collapse of Lehman Brothers at the start of the financial crisis, the law firm said.

Still, it could take four years to catch up with levels of activity that were predicted if Britain had decided to stay in the 28-nation bloc.

Uncertainty Rules

The vote is likely to trigger a $240 billion, or 24%, drop in UK mergers and acquisitions over the next five years even with a relatively quick departure that preserves access to the single market, the study found. That would increase to $340 billion, or 34%, if Britain is unable to negotiate favorable terms.

"Without a clear Brexit roadmap, a more damaging cycle of political and market uncertainty could be unleashed with subsequent repercussions for transaction activity globally," Baker & McKenzie said. "In this adverse Brexit scenario, the UK vote to leave adds to the existing strength of populist mood across Europe, leading to further questions about the unity and stability of both."

Despite the declines, Baker & McKenzie said lots of activity would still take place in London because of the "primacy of English law" for cross-border deals and the fact that the city will "retain a remarkable concentration of financial, legal and economic talent."

The drop in the value of the pound since the EU referendum will also make UK assets more attractive, despite the ongoing uncertainties. Should the exit be orderly, things should recover quickly.

The data was based on financial modeling by Oxford Economics.

PMI Flashes Red

On Friday, IHS Markit released its latest purchasing managers' index, one of the first measures of how the economy responded to Britain's June 23 vote on leaving the EU.

The index fell to 47.7 points in July from 52.4 in June, the steepest drop in the history of the series. The figures, based on a survey of 600 companies, are on a 100-point scale, with the 50 threshold separating growth from contraction.

With regards to the services sector, the UK Flash Services PMI activity index fell to 47.4 in July from 52.3 in June, marking an 88-month low. A score below 50 indicates contraction in the sector.

Markit, a London-based financial services company warned that the optimism among service providers over the next 12 months had declined to a seven-and-a-half year low. The release also revealed that the Services Business Expectations Index fell by 10.4 points, the steepest decline ever recorded.