The international deals market could suffer a deficit equivalent to more than £1 trillion in lost activity in the wake of the Brexit vote if the UK government does not act quickly to ensure an “orderly and swift” departure from the EU, a study published today has found.
In its forecast of global transactions, based on financial modelling by Oxford Economics, international law firm Baker & McKenzie assessed the varying impact of orderly and disorderly Brexits on deal-making activity.
It predicted that under an orderly, central scenario, “with a relatively quick and painless Brexit, leaving access to the single market in place”, the UK economy would take a cumulative hit of at least $240 billion (£183bn) over 2016-20, when it would recover to parity with the no Brexit scenario.
In contrast, an adverse scenario “without a clear Brexit roadmap, a more damaging cycle of political and market uncertainty could be unleashed with subsequent repercussions for transaction activity globally” and could cost the UK economy up to $340bn by 2020 and the global economy up to $1.6 trillion.
Baker & McKenzie called for action to minimise negative Brexit impact, with Michael DeFranco, global chairman of M&A at the firm, saying: “An active M&A [mergers and acquisitions] market is all about confidence and credibility.
“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.”
However, the firm stressed that the impact of Brexit on M&A activity is not as global as the financial crisis of 2009, adding that while domestic UK deals are down under both scenarios modelled, London will still play a key role in international deal activity.
Tim Gee, London M&A partner at Baker & McKenzie, said: “Regardless of the volume and value of UK-specific deals, the primacy of English law for many cross-border deals, even when they don’t involve UK assets or business, will continue. London will also retain a concentration of financial, legal and economic talent.
“In the last few days we have seen evidence that the M&A market in the UK won’t come to a crashing halt even if it won’t be at its previous pace. There are still plenty of buyers and sellers for the right deal at the right price.
“There are already some clear upsides – global organisations looking to acquire UK companies will find that a weaker pound makes UK valuations more attractive, although the uncertainty surrounding trade negotiations could deter the more risk-averse.”