EU referendum has hit M&A activity – but not equally, shows research from University of East Anglia

Dr Ormosi, a senior lecturer in competition economics at UEA�s Norwich Business School and Centre fo

Dr Ormosi, a senior lecturer in competition economics at UEA�s Norwich Business School and Centre for Competition Policy. Picture: UEA. - Credit: Archant

Activity in the UK's mergers and acquisitions has dipped significantly since last summer's EU referendum, with big business emerging the winner, new research from the University of East Anglia shows.

The findings from the Norwich Business School also suggest that while the volume of overall monthly deals have fallen by 15% - from 430 to 370 a month - the average value of the biggest transactions has grown and the small have got smaller.

The research, which is ongoing and will ultimately include the impact of the general election, suggests that consumers are losing out from the efficiencies which most M&A activity produces, such as lower prices or higher quality goods.

Lead researcher Dr Peter Ormosi, a senior lecturer in competition economics, said the preliminary findings undermined a perception that business confidence had not been affected by the referendum result.

'These preliminary findings also suggest that the post-referendum policy uncertainty is helping the largest M&A transactions, while hindering the smaller ones, with possible negative consequences,' he said.


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In the 11 months following the referendum, the overall value of the largest 10% of M&A has increased in relative terms, from $214m to $250m (up 16%), while the smallest 25% of deals has fallen from $5.7m to $4.5m (down 21%).

Researchers also flagged the 'worrying sign' that the largest businesses have become more M&A active since the referendum.

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They suggest that could be down to bigger business being cushioned from the increased uncertainty of Brexit, perhaps because it is better able to exert influence over politicians through 'rent-seeking' behaviour, manipulating political and economic conditions to increase profits.

Dr Ormosi said: 'When we find that the largest transactions and the largest businesses were not hindered, and in some cases were even spurred, by the referendum, one inevitably worries. How much of this differential effect is due to the fact that these larger businesses are cushioned from the increased uncertainty, thanks to their rent-seeking behaviour?'

Methodology

To determine a link between the referendum and M&A activity, Dr Ormosi used data from countries where no referendum had taken place, against which the changes in the UK could be compared.

If the other countries' pre-referendum M&A activity was sufficiently similar, the researchers reasoned, they could represent how M&A activity in the UK would have evolved without a referendum.

This control group – France, Netherlands, Spain and the United States – was created based on a comparison with the UK on attributes that would be expected to affect M&A activity in any country, including GDP, ease of doing business index; inflation; interest rate spread; lending interest rate; research and development expenditure; tax revenue; unemployment; and total monthly value of transactions.

The researchers found that pre-referendum M&A activity in the UK and control group was almost parallel, but a clear change started taking place around the start of the referendum campaign, with UK activity dropping, while the control group's remained roughly around the same level, implying that the monthly number of M&As dropped as a result of the uncertainty surrounding the referendum.

A bad deal for consumers?

Dr Ormosi said the significant drop in merger numbers was 'bad news', both for business and consumers.

'The vast majority of mergers, unless they have a significant adverse effect on competition, have the potential to contribute to social welfare, for example by reducing transaction costs, or by enhancing the efficiency of the merging businesses,' he said.

'If competition is left undisturbed, these benefits are passed on to consumers in the form of lower prices. When there is a setback in M&A activity, it means that some of these potential benefits are foregone.

'These preliminary findings also suggest that the post-referendum policy uncertainty is helping the largest M&A transactions, while hindering the smaller ones, with possible negative consequences.'

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