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London - The UK dropped out of businesses’ top five locations for investments for the first time in seven years as fears about the country’s plans to exit the European Union added complexity to international deals, consultants Ernst & Young LLP said in a survey of executives.
British businesses rank behind investments in the US, China, Germany, Canada and France, which make up the top destinations for deals activity, EY said Monday in its Global Capital Confidence Barometer report, which is based on a survey of more than 1 700 executives in 45 countries in August and September.
Business leaders are concerned about geopolitical issues, such as the rise of nationalist governments worldwide and currency fluctuations, that make cross-border mergers and acquisitions more difficult, EY said.
On top of the UK’s Brexit vote in June, uncertainty around the U.S. interest rate and upcoming elections in a number of countries added to perceived risks to deals.
“Brexit is a prominent example of the rise of geopolitical changes that are adding complexity to cross-border investments,” according to Steve Krouskos, EY’s global vice chair of transaction advisory services.
“In the longer term, we would expect the UK to bounce back as a top M&A destination of choice, but the short-term uncertainty is giving investors pause for thought.”
There’s been about $208bn in M&A involving UK companies announced this year, according to data compiled by Bloomberg. That’s down 55% from the same period a year ago. Worldwide, M&A spending has reached $2.2trn, down about 20% from last year’s record, according to the data.
Still, 57% of the companies expect to pursue deals in the next 12 months, pointing to an uptick in volume next year, EY said. A fragile economic environment may push companies to turn to M&A to produce growth, the survey said.
“Political uncertainty is an impediment not a barrier to M&A,” Krouskos said in an email. “Companies continue to take a long-term strategic view on investments.”
More than 90% of executives surveyed expect the M&A market to improve or remain stable in the next year, with a focus on smaller deals in consumer and retail, industrial products, life sciences, technology, automotive and oil and gas industries, according to the report.
Two of the UK’s three largest deals of 2016 were announced in the second half of the year.
In July, Japan’s SoftBank agreed to buy Cambridge, England-based chip designer ARM for £24.3bn in cash. Newbury, England-based Micro Focus International Plc agreed to merge with some assets spun off from Hewlett Packard Enterprise in September in a deal valued at about $8.8bn.
“The uncertainty created by Brexit has undoubtedly affected investment into the UK,” said Charles Rix, a partner and London head of M&A at law firm Hogan Lovells.
“Looking ahead, the question is how investors will weigh up Brexit uncertainty, which is going to be with us for some time, against factors such as sterling’s weakness and M&A opportunities in the UK.”
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