Is the Brexit Bad for Banking?

Is the Brexit Bad for Banking?

The results are in, the British are out! Last week, in an historic vote, the citizens of the United Kingdom voted to leave the European Union. As the world waits for the UK to pull the trigger on Article 50 of the Lisbon Treaty – beginning the irreversible separation process – we are left to consider what the potential effects of this are on M&A activity. Back in May, the Deutsche Börse/LSE Group merger claimed their deal was “Brexit Proof”, but is that necessarily the case for other deals in the region or deals to come?

Obviously, anything that shakes up the status quo on a scale as large as this referendum injects a considerable amount of uncertainty into the markets of the affected area. Unfortunately, uncertainty and large business decisions – like mergers or acquisitions – are anathema to one another. This is clearly illustrated by the fact that in the months leading up to the vote, global deal volume was down around 20%, while in the UK they were down a whopping 64%. It appears even the idea of a potential Brexit was spooking dealmakers in the United Kingdom throughout the first half of 2016. With this in mind, it seems obvious that the real thing would only serve to considerably magnify this effect. In fact, in the days leading up to the referendum and immediately after, we’ve already been seeing essentially ceased activity in British deals. With the UK’s ability to trade with neighboring nations – or large unified nation blocs – and years of domestic uncertainty practically a given, M&A activity should grind unceremoniously to a halt. After all, if you can’t be sure about what tomorrow’s environment will look like, why make such a large move?

This, of course, isn’t just limited to the United Kingdom. Dealmaking in the whole of Europe will suffer from this development for a host of reasons. Marine Le Pen in France, the Party for Freedom in the Netherlands, and their Eurosceptic counterparts in other countries have all been gaining traction lately. The Brexit vote appears to have boosted their appeal among their respective country’s voters, which could drive schisms across Europe. Given the strains continental Europe has been under for the past decade, ranging from resentment over immigration to economic recession to debt crises, the growth of these divisions seems increasingly likely. This effectively back-doors the same Brexit jitters that sunk UK M&A numbers in the first half of 2016 into the rest of Europe, making for a fairly bleak outlook on deal activity for the immediate future.

Uncertainty isn’t the only thing that will be hindering UK deals. The EU has made it very clear that “passporting” of financial firms will no longer be available. In essence this means that UK financial firms will require separate regulatory oversight if operating with EU countries. If this occurs, companies both in and out of the EU stand to suffer on the dealmaking front. It is no secret that London is the biggest financial center in Europe. Potentially cutting off or hindering this major source of funds for EU companies looking to raise money for M&A activity would be devastating. The reverse is also true – removing continental Europe as a source of funds for UK companies looking to raise money would deal a blow to their already struggling M&A environment. Fewer sources of funding inevitably leads to less funding for the market as a whole and generally raises the cost of capital for all businesses involved. This will inherently serve to make M&A less attractive for all players in Europe, both continental and otherwise.

The aftermath of the Brexit referendum does not paint the rosiest of pictures for M&A activity in Europe and the UK. There are plenty of challenges – both economic and political – that seem to be spooking dealmakers in the region, and rightfully so. Only time will tell what the actual fallout of the Brexit will be. Regardless, companies and investors should be on the lookout for opportunities and be ready to pull the trigger if the fit is right and the environment begins to turn.