Following the twin shocks in 2016 of the UK’s Brexit vote to leave the EU and the election of US President Donald Trump, dealmakers may have thought they were due a rest from political excitement. But in Europe, 2017 will be remembered as the year of the elections, with the three largest European economies (Germany, the UK and France) all holding polls. So how is the year of the elections impacting European M&A?
According to the latest Intralinks Deal Flow Predictor report, early-stage M&A activity in Europe and the Middle East & Africa (EMEA) increased by 9% year-over-year (YOY) in Q2 2017. At the same time, according to data from Thomson Reuters and Intralinks’ analysis, the number of announced M&A deals in EMEA in Q2 2017 declined by 6% YOY, confirming EMEA as the worst performing region for the number of announced M&A deals in 2017 to date.
Despite EMEA’s weak Q2 outcome for announced deal volumes, our data on early-stage M&A activity indicates that there will be a pickup in deal announcements over the next six months. Our independently verified predictive model forecasts that the number of announced M&A deals in EMEA for the full year 2017 (FY 2017) will decline by around 1% YOY.
Over the next six months, the strongest growth in EMEA deal announcements is predicted to come from the peripheral economies of Eastern Europe, the Middle East & North Africa and Southern Europe, and from the real estate, energy & power and financials sectors. The UK, Germany and France are showing relatively subdued, or negative, growth in M&A activity. Early-stage M&A activity in Q2 2017 grew by just 2% YOY in the UK and 4% YOY in Germany, while it fell 7% YOY in France.
While elections themselves do not usually have a lasting impact on dealmaking, these are not normal times. We think that dealmakers are becoming increasingly attuned to potential political risks to M&A. Soon after the decisive victory of the centrist candidate Emmanuel Macron in the French presidential and legislative elections, dealmakers faced the prospect of increased political uncertainty in the UK. Prime Minister Theresa May’s ill-judged calling of a snap general election in June left her at the head of a minority government, reliant on the support of a right-wing party from the province of Northern Ireland for a fragile parliamentary majority. The UK government also appears beset by internal divisions over Brexit, with its leading members openly sniping at each other through media briefings. The impression of a seemingly chaotic start to the UK’s Brexit negotiations with the EU has left many businesses aghast. More than a year after the referendum result, the UK government’s positions on many key issues appear still to be unclear.
Dealmakers can also look forward to the German federal elections in the autumn. Incumbent German Chancellor Angela Merkel’s conservative party is leading the opinion polls. However, the country’s refugee influx has taken center stage in the election campaign. Mrs. Merkel recently presented plans to curb illegal migration into Europe from Libya, while simultaneously defending her decision to let one million refugees into the country in 2015. By doing so, she risks recalling a damaging crisis from which she has only recently recovered, and may reopen old wounds with voters.
Ten years after the start of the global financial crisis, worldwide M&A activity continues to set new highs, supported by buoyant asset markets, a pickup in global economic growth, subdued inflation in advanced and emerging economies and historically low-interest rates that make debt financing for acquisitions cheap and readily available.
While macroeconomic and monetary conditions are fueling M&A activity, political risks remain. An escalation of the conflict between the US and North Korea, restrictions on global trade and cross-border economic integration (including the prospect of a bad Brexit deal between the EU and the UK), or increases in nationalism or protectionism, could negatively affect dealmaking sentiment in EMEA.
To get more regional and sector insights, and to know the future of global M&A six months ahead of anybody else, download your copy of the Intralinks Deal Flow Predictor report here.