Across Europe a populist groundswell, bolstered by Brexit, The US election and voters’ rejection in Italy.
A multitude of so-called movements, such as Podemos in Spain, Five Star Movement in Italy, National Front in France, The Freedom Party in the Netherlands and Austria, Alternative for Germany - have found a voice and are energized by the momentum recent events. These movements, right, wrong or indifferent, all have potentially economic impacting philosophies such as being against the EU, the Eurozone and austerity.
So, while we can’t predict 2017’s outcomes, we have certainly learned from experience that the outcomes are anything but predictable.
The question then – is how will these various geopolitical events impact M&A activity going forward?
In a recent discussion with hundreds of global dealmakers, the overwhelming conclusion is that while recent events create alarming headlines, they may in fact be a good thing for Private Equity firms trying to raise money in the coming year. 41% of those surveyed felt that, specifically, a President Trump will help PE firms raise capital globally.
Disruption Creates Opportunities
The point was emphasized by one of our panelists, Ron Hopkinson, Partner Cooley LLP, who noted that “…there is an absolute general consensus that, and again because of what Trump is doing – as in control of the House and Senate – the next two years we are likely to see a number of changes and many of those changes are going to be disruptive to a variety of industries.
Ron continued, “And so, what does that mean? In my experience, most funds figure they can figure this out and where there is disruption, they can be on the positive side.”
Today, we face pessimistic headlines in both mainstream and alternative media, where people now assume that the anti-establishment vote will prevail, cooling the global M&A fever of the past couple years of frenzied deal making. There is a feeling that investors have paused to assess economic fundamental and growth strategies, especially regarding cross-border M&A.
This opinion is supported by the feedback we received from the audience - 48% of those surveyed predicted that recent geopolitical events would keep deal volume and values flat next year with only 28% noting that volumes and values would increase.
However, there is another way to look at opportunity next year and that is through the lens of “micro-trends.”
Micro Trends “Trump” Major Geopolitical Events
Charlie Johnstone, Partner ECI Partner LLP, commented “I’d think that one of the advantages of focusing in the smaller end of the middle market is that businesses tend to operate in small micro niches.” He further made the argument that micro niches are “long term, they face long term trends that a lot of these macro events don’t really knock off course.”
Charlie gave a great example of what he has seen in practice. “An example is, we’ve invested in a natural pet food business. That is human quality pet food.”
As an aside, I must commend Charlie’s due diligence (maybe extreme “due diligence”) – he has apparently tasted several of the flavors, noting the tuna and mackerel were “particularly flavorsome”
Charlie continued, “the trend to humanization of pets and people wanting to feed their pets human quality pet food doesn’t change because of Brexit and Trump. Yes, the trade environment of us being able to source the product, to continue to expand into the US – that becomes a little more challenging, but ultimately the big trend in that business, the reason is it growing at 40 – 50 % per annum doesn’t change because of these macro events.”
A very important perspective and paints a potentially positive picture for next year.
We asked about the effects of the “Brexit” vote on potentially acquisitions in the UK. A clear majority (43%) responded that there would be a negative impact on buying UK based companies
However, our panel differed in their opinion and experience.
25 – 30% Price Haircut
In fact, the numbers suggest a potential boom in cross-border M&A, particularly from a US standpoint if a company is sitting on cash that ready to be deployed.
The point was made that an interesting trend is occurring where the US Federal Reserve is moving toward tightening interest rates, while President Trump’s likely use of tax cuts together with infrastructure spending will continue to boost the dollar.
Wayne Rapozo pointed out these events “coincide with the uncertainty of Brexit putting pressure on the pound.”
He continued “…you’re going to find there a European price haircut that is extremely noticeable to anyone looking at the world in terms of US dollars…there now bargains to be had, in the case of the sterling, US companies are seeing uncertainty with respect to trade negotiations but a 30% price reduction and maybe a 25% price reduction when looking at the world in Euros.”
Let’s Just Get On With It
Charlie Johnstone made the point “…after a little bit a pause post the Brexit vote, a lot of people [were] scratching their heads deciding what to do and then decided the world wasn’t ending and let’s just get on with it.”
It was noted that one of the major impacts on UK M&A is the current dominance of the dollar, something the Trump presidency has accelerated.
Charlie continued, “…for the foreseeable future we’ve got a weak sterling and strong dollar and people will take advantage of it…we’ve seen a huge uptick across the whole of the middle market from US coming in, not just US buyers but other buyers.”
Ron noted “in my view what we are certainly going to see is deal volumes increase in the United States, and just commenting on the US perspective, I’ve already seen it.”
Don’t believe the Hype
Negative headlines often product positive returns. The very idea of investing right now may be enough to turn one’s stomach and there is an understandable urge to “wait and see”. However, as we’ve pointed out, disruption often creates opportunity, Industry trends are often unaffected by politics and there is great value to be had as a result of currency fluctuations. Businesses will carry on – it was noted that France, for example, remains a fantastic place to do private equity – one of the most efficient, productive countries in the world, despite their politicians.
So, despite negative, panic inducing headlines, documenting political uncertainty, opportunities exists and 2017 may be a good year for global M&A.