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London - The independence of UK multinationals could be at risk if sterling collapses after a vote for Brexit. Shares denominated in pounds would suddenly look cheap to buyers armed with a fistful of dollars.
Companies whose revenues come largely from outside the UK - and hence are less vulnerable to a post-Brexit economic shock - might well look like attractive and affordable targets.
Big currency moves can become an enabler for longstanding takeover ideas that, for whatever reason, didn't stack up previously. Sterling's negative reaction to polls pointing to an "out" result on June 23 suggest worse to come for the pound if Britons actually vote to leave. M&A bankers may spy an opportunity.
A sterling crisis wouldn't render all British stocks cheap to foreign buyers. The prospect of a post-Brexit recession would lessen the appeal of London-listed companies who make most of their sales in the UK. They'd be cheap for a reason. (A possible exception might be utilities, whose stable, inflation-linked cash flows always hold allure for infrastructure investors).
It would be a different story for UK companies with big international operations. They might be seen by overseas bidders as just plain cheap.
These forces are already at work. Just after Switzerland's Daetwyler unveiled its £792m takeover of Premier Farnell on Tuesday, its CEO said the pound's weakness amid Brexit uncertainty made the target more attractive.
Almost 68% of Premier's sales are outside the UK While the company was on Daetwyler's radar for a while, currency was clearly one reason the deal happened.
It's not hard to find lookalikes, many with even greater international exposure. Take ARM Holdings, the chip designer and standard-bearer for the British tech sector. Some 93% of its sales come from North America and Asia. Or Intercontinental Hotels, like Arm no stranger to bid speculation. Some 84% of its business is outside Europe.
Or scanner-maker Smiths Group, with 95% of its business outside the UK and 79% outside Europe, also a perennial subject of buyout talk. The list goes on. Oil services group Weir and oil explorer Tullow, private equity group 3i, building services firms Wolseley and Ashtead. There's a big crowd of sub-$20bn UK-listed global firms.
In truly efficient markets, these companies' international earnings streams would be perfectly priced regardless of base currency. In practice, shock events tend to hit share prices pretty indiscriminately.
Of course, a drop in sterling wouldn't by itself put a UK company in play. A bidder would need to have already been mulling a deal on the basis of genuine industrial logic. But where that's the case, Brexit could be a catalyst. With the UK thinking it had gained independence but its corporates losing it, this would be quick test of the openness of Britain's post-Brexit markets.
