UK attractiveness as an M&A destination slips - EY

For the first time in the Barometer’s 7 year history the UK has fallen out of the top five global M&A destinations.

Nevertheless, 62 per cent of the executives surveyed are still positive about their UK operations. Investors in India, Russia and Europe still favour the UK, however there is negative sentiment from countries who previously treated the UK as a gateway into Europe including 82 per cent of Japanese respondents, 56 per cent from the US and 53 per cent from China.

Ally Scott, EY Partner and head of transaction advisory services in Scotland, said: “Brexit may not have created the initial economic turmoil some feared; but investment uncertainty is clouding the UK’s longer-term economic prospects. Responses to our survey highlight the size of the Government’s task as it starts to reposition the UK. For businesses, reassuring overseas investors and setting out clear trade priorities with favoured nations is a priority.

“The UK’s strong fundamentals mean that companies don’t look ready to run for the exit. Nevertheless, smaller inflows into new and existing operations are concerning in the context of falling domestic investment and the UK’s negative current account.”

EY’s Barometer shows 87 per cent of UK respondents still seeing the UK economy as stable. But, with domestic politics and currency volatility topping their list of concerns, the fallout from Brexit is clearly at the top of UK executives’ agenda. Recruitment and retention of talent emerge as the second biggest post-Brexit anxieties for UK businesses. 92 per cent of UK respondents expect Brexit to affect their ability to hire skilled workers with 69 per cent concerned about retaining skilled employees.

Mark Gregory, EY’s chief economist, said: “When we carried out the survey this summer, most companies believed sterling would recover lost ground. Companies can’t afford to be complacent. We expect recent sterling weakness to continue. In which case, we should see greater investment in import substitution by UK business to help head off high import costs and in export capability to exploit the low pound – either through capital investment or M&A.”

According to the Barometer almost a third of UK respondents said they expected their investment levels to fall by over a fifth in the next year. And yet, almost half of UK respondents said previous attempts at automation were unsuccessful and 35 per cent still duplicate manual and digital processes.

At the same time business leaders are looking to increase their focus on the exploitation of digital technology and analytics (27 per cent) to help protect and grow their businesses in this slower growth post Brexit environment.

The proportion of UK businesses looking to transact has also fallen. Of the UK executives questioned, 48 per cent intend to pursue an acquisition in the next twelve months – down from 59 per cent six months ago and below the 57 per cent of global respondents looking to transact. Nevertheless, M&A appetite remains above average due to the strong imperatives to complete deals. 40 per cent of UK respondents are looking to acquire start-ups with digital technology and 30 per cent are looking to acquire talent.

Michel Driessen, transaction advisory services markets leader for the UK & Ireland at EY, concludes: “Markets have been in a state of flux since the end of summer as they come to grips with the realities of Brexit and worries elsewhere. Companies need to remain flexible and agile and keep their operations and portfolio under constant review. M&A still provides one of the best routes to growth and financing - for those who can access it-remains cheap.

“We cannot underestimate the fundamental changes in M&A. There is now an expanding menu of deal structure options. Data and analytics are enriching the reach and depth of deal evaluation. Deal integration has shifted from driving cost synergies to value creation, now starting with the customer and not the back office. Integrating dissimilar businesses creates the need for bespoke as opposed to off-the-shelf solutions.

“Investing in digital transformation could also be the way to address some of the most pressing problems in the UK economy, from labour worries to productivity.”