Viewpoint: A five-point M&A plan for UK companies during Brexit

FDI is one of the pillars of the UK economy, and the UK’s ability to continue to attract international investment is a key factor in its commercial success. FDI not only creates jobs – which in turn boosts growth and raises living standards – it also helps drive competition, making companies more efficient. 

Despite the prospect of Brexit, the UK remains Europe’s top destination for FDI, with the US being the largest source of investment projects. According to the report detailing the findings of the 2017 EY Attractiveness survey, “the UK’s FDI performance has remained solid”.

Some doubters

A minority of respondents, 31%, expect the UK’s attractiveness as an FDI destination to deteriorate within the next three years, probably due to the current lack of clarity surrounding the UK’s trading arrangements and economic prospects following Brexit.

However, this period of uncertainty while negotiations continue is likely to be short-lived. In the longer term, the UK’s very attractive fundamentals of flexible, dynamic labour markets, relatively low corporate tax rates, an excellent investment ecosystem for growth business and a record of innovation should ensure FDI continues to be a strong component of the UK’s economy. 

The UK has traditionally thrived in international sectors and there is no reason this should change. Take two sectors, technology and financial services. More than 1.5 million people are employed in the UK’s digital economy and there are about 4000 startups in London alone. The city has probably the best investment infrastructure and growth company funding options of any tech ecosystem, with an array of institutions and venture capital firms, as well as early-stage funds ready to commit finance to tech businesses.

More opportunities

The financial services sector, meanwhile, employs more than 7% of the UK workforce, produces nearly 12% of total economic output, contributes £66bn in taxes and generates a trade surplus of £72bn. Foreign companies have invested around £100bn in UK financial services since 2007, more than in any other. The UK’s financial services and tech sectors are world-class and Brexit will give companies in these areas increased access to global opportunities on which they can thrive.

Freed from EU regulatory red tape, the government will be at liberty to pursue more pro-business measures and policies, tailored to the requirements of UK companies. This means it will be easier for businesses to pursue trade and business deals with businesses in faster-growing regions and to negotiate with emerging markets.

Small businesses may be concerned about their ability to hire the right people post-Brexit, but this is much more of an opportunity than a threat. Skills shortages are nothing new and this is the perfect time for the UK government to re-evaluate the visa system, so that whether from inside the EU or globally, UK businesses have access to the talent they need to help them innovate and grow

In terms of companies looking to make themselves attractive to overseas buyers against the current business backdrop, here are five key areas on which they should focus. 

- Demonstrate a post-Brexit strategy

UK companies will need to demonstrate they can function successfully in the uncertain post-Brexit landscape. Companies that only trade domestically will need to demonstrate they have the strength to survive and grow solely in the UK market. On the other hand, companies which trade internationally should be able to demonstrate that they can not only continue trade within the EU market uninterrupted, but also that they have the potential to trade with wider international markets.

- Stand in the buyer’s shoes

There several reasons an overseas buyer might consider acquiring a UK business. These include: access to the the UK market, attractive tech and intellectual property potential, or merging with the UK business to generate cost savings and efficiencies. If you can understand the foreign buyer’s motivation behind looking to acquire your business, you will be able to tailor how you present your business to make it as attractive as possible to them.

- Develop key relationships

Overseas buyers want to see a well-connected UK business, and having strong and established networks is important for sealing contracts and promoting growth. Potential buyers want reassurance that a business does not depend on any single customer and, should they buy the business, that there will be a high retention of customers, employees and suppliers.

- Prioritise due diligence

Failing at the due diligence stage can set back negotiations, or in the worst case scenario, result in discussions being terminated. Before embarking on the sales process, ensure you are clear on the information the buyer expects you to provide as this may differ depending on the choice of jurisdiction for the transaction. Under UK law, due diligence covers all aspects of the business including leases, tax liabilities, intellectual property and employment contracts.

- Appoint the right adviser  

Foreign deals require a strong understanding of cultural and legislative differences and your choice of advisor should reflect this. When appointing an advisor, you should look for genuine overseas reach, clarity regarding conflicts, understanding of cultural and legislative differences, appropriate transaction size ‘sweet spot’, commitment to personnel on the transaction, fees, and an assessment of how the personal chemistry will work.

Focusing on these five areas will not guarantee that a deal will go through, but it should significantly increase the chances of a successful completion.

Lord Leigh of Hurley is senior partner at Cavendish Corporate Finance LLP, an independent firm advising on sell-side M&A to mid-market companies.