Hitting the ground running: The first 100 days
Hitting the ground running: The first 100 days

Posts Tagged ‘m&a’

An enduring bond? The outlook for US investors in the UK


The United States is the United Kingdom’s single biggest source of foreign direct investment, and this relationship is growing. US FDI in the UK was $851.4bn in 2019, a 6.9% increase on 2018. The Covid-19 pandemic has, naturally, stalled that trend somewhat; the total number of private equity investments in the UK fell by 17% in the first half of 2020 on the same period last year. However, much of this downturn can be attributed to the caution of domestic investors, and there is still a clear appetite from foreign investors for UK assets. The market share of private equity investments in the UK from the US grew by 5% to 25% in the first half of 2020 in terms of the number of deals. At the same time, the rest of the world accounted for 17%, up from 14%.

The UK’s exit from the European Union could represent a significant opportunity for US investors and has the potential to boost their appetite for the UK yet further. Below, we examine some of the factors which investors are likely to consider when deciding to invest in the UK.

A natural second home?

Much is made of the Special Relationship between the UK and the US on the geopolitical stage, but the ties between the two countries run deep on the business and even the personal level, too. The UK and the US both employ a million of each other’s citizens. They share many cultural and business norms. They share a language. It is clear that they hold one another in high regard. Indeed, a survey conducted by the British Council in 2018 found that 69% of Americans rated the UK as a “global power”, placing it above all other countries except China. The UK also topped the respondents’ rankings for the most attractive places to study and, crucially, for the top partners for trade and business.

These ties – not to mention the UK’s favourable time zone between the Americas and Asia – have long made the UK an attractive base for investors seeking to expand into international markets. But the UK market itself is seen as an attractive one in which to do business. A number of surveys of market leaders have highlighted the value which investors place on the UK’s perceived pro-business environment, its transparent regulatory regime, its adaptable labour market and its stable political institutions.

These sentiments were echoed in the World Economic Forum’s Global Competitiveness Report for 2019. The UK ranked ninth globally for its competitiveness, with Singapore first and the US second. The UK scored particularly highly for its macroeconomic stability (achieving a maximum score of 100), for the strength of its infrastructure and for its highly-developed financial system. While the WEF paused its rankings for 2020 as a result of the pandemic, its “special edition” for 2020 suggested that the UK was well placed for the post-Covid recovery, particularly in terms of trust in its institutions and in rethinking labour regulations to meet the needs of the post-pandemic economy.

Relatedly, London remains by a considerable margin the most competitive financial centre in Europe according to the Global Financial Centres Index. As of March 2021, London ranks second in the Index, behind New York, with which it last traded places in 2018. For comparison, the best performing other European centres, Zurich and Frankfurt, rank ninth and tenth respectively.

The impact of Brexit

For any who have followed the machinations of the UK’s Brexit negotiations closely, it may seem somewhat counterintuitive to see the WEF rank its “stability” so highly. The political uncertainty which Brexit has caused has undoubtedly had an impact on investment decisions. Coupled with the Covid-19 pandemic taking up so much government time, recent years have seen short-term responses often come at the expense of long-term planning.

A longer-term view, however, is likely to be the more important focus for many US private equity investors than any current uncertainties and, in this context, the signs appear positive. Post-Brexit, many of the inherent advantages of the UK for US investors will remain. The UK will maintain its pro-business environment, its skilled labour force, its stable institutions, and all of these will weigh in its favour.

Indeed, Brexit does not appear to have had a significant negative impact on UK-US M&A activities, which have remained robust despite turbulent political times. While 2018/19 saw an overall global decline in both domestic and cross-border M&A activity by around 30% on 2016 levels, US investors have continued to demonstrate a clear appetite for the UK over other European destinations. Of the 333 total “inbound” deals (by US investors in Europe) in 2018, for example, 119 were in the UK, representing more than the total for France, Germany, Italy, Spain and Switzerland combined.

Technology and the UK’s traditional strengths in technological areas are likely to be key drivers in sustaining this appetite. Some 38% of UK-US M&A deal activity has been in the technology sector over recent years, with large firms like Microsoft, Salesforce and Oracle among the most active acquirers. This priority for investors aligns closely with the ambitions of the UK government. Tech skills have been identified as a clear priority by the government as part of its commitment to make the UK a “scientific superpower” with its Research and Development Roadmap, increasing R&D spending and encouraging top talent from around the world to make the UK their destination of choice.

Added to these continuing attractors, the UK’s departure from the EU presents opportunities for the UK and the US to strengthen their commercial relationship. A full UK-US trade agreement is still some time away but – as evidenced by the fact that the Prime Minister was the first European leader to receive a call from President Biden – there is an enduring appetite for close and mutually beneficial co-operation. Similarly, Trade Secretary Liz Truss and the new US Trade Representative Katherine Tai spoke in March with a view to accelerating the trade agreement process and highlighting “the importance of continuing to work together to build a closer economic relationship.”

Investors will want to monitor the details of this evolving relationship very closely, as there may be scope for incremental agreements – including, for instance, mutual recognition of professional qualifications – before a “full” free trade agreement is signed.

Of course, the benefits for building closer UK-US relationships may be rather offset in the minds of US investors if there are significant UK-EU barriers as a result of Brexit. Such obstacles could make the UK a somewhat counterintuitive prospect as a base for building pan-European operations, as compared to, say, Frankfurt or Paris. However, continuing agreements between the UK and the EU to lower commercial barriers (including an agreement on continued data sharing signed in February and a Memorandum of Understanding for co-operation in financial services to be signed shortly) are likely to help the UK remain a natural second home for US investors seeking European opportunities. As for the emerging UK-US agreements, investors will want to take a close interest in the recalibration of the UK-EU relationship as part of their decision-making process over the next few years.

The opportunity for investors

The UK’s emerging from both the pandemic and the political uncertainty of its Brexit negotiations represents an important opportunity for US investors. The UK will continue to be a stable, transparent, pro-business environment, with a convenient time zone and no language barrier. The UK government has also placed attracting foreign investment and talent alongside future-proofing the skills of its domestic labour force high on its agenda.

A full UK-US trade agreement may still be some way off, but the mood on both sides of the Atlantic for closer ties and increased co-operation could well see interim agreements and approaches put in place before then. US investors will want to pay close attention these developments if they are to take advantage of what could be a stronger and highly profitable renewed relationship.

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Under the microscope: M&A faces new post-Covid world

As most European countries appear to have passed through the peak of the coronavirus pandemic, governments have turned their attention to how to bring the economy back to life. It is becoming clear across all countries affected by the virus that one of the consequences of lockdown will be a wave of businesses entering administration or facing a fundamental restructuring of their operations.

Governments, ranging from populists in Poland and India to fiscal conservatives in Germany, are concerned that the number of businesses looking for new ownership will lead to foreign buyers acquiring assets in bulk. To tackle this, they have turned to protectionist policies to keep prospective buyers out.

Protectionist tendencies were becoming more common before the coronavirus pandemic

The economic policy response to coronavirus is likely to continue to vary significantly across the Eurozone and beyond. However, one emerging trend is the number of countries, including the UK, that are introducing legislation designed to increase scrutiny of M&A transactions on national security grounds. Primarily designed to exclude foreign buyers from purchasing assets of national importance while prices are lowered by the coronavirus pandemic, the wider effects of these laws may make cross border M&A a more complex task for all investors in the future.

The willingness of governments to intervene in M&A has been increasing in recent years. Australia and the United States have been particularly interventionist and have been hawkish on the issue of Chinese investment, both banning Huawei from helping build 5G networks. Although the UK to date has not blocked an M&A transaction on national security grounds, in recent years the Competition and Markets Authority (CMA) and UK government has scrutinised an increasing number of transactions on national security grounds involving various kinds of acquirer, including financial investors. Acquisitions of Cobham, Northern Aerospace and satellite operator Inmarsat have all been investigated by the CMA and the transactions approved. In all instances, the acquirer offered several legally binding assurances to the government before the deal was approved.

The government is taking rapid action to protect strategic industries

Here in the UK, Boris Johnson, Rishi Sunak, Alok Sharma and Dominic Raab are currently developing new legislation that would make it easier for the government to intervene in M&A transactions on national security grounds. In the short term, amendments will be put forward to protect UK assets during the coronavirus pandemic, however, a more detailed plan for a new, more interventionist takeover system is being drawn up and will be presented to Parliament before Summer recess.

Two new proposals already tabled in Parliament will make it tougher for foreign buyers to acquire any assets related to the nation’s healthcare self-sufficiency and, separately, artificial intelligence and other tech. One amendment would drop the £1 million revenue threshold currently in place for screening takeover targets in AI and other areas that pertain to national security. This would allow the government to intervene in the takeover of loss-making start-ups developing medicines or technology of national interest. The other amendment will widen the government definition of sectors critical to national security to include the food and drink sector for the first time.

Crucially, neither of these amendments specify what kinds of investors will be targeted under the new legislation. While concern may rest primarily with state-owned buyers, investors should be mindful that the CMA has instigated action against several US funds in recent years, including in the sale of Cobham and Inmarsat indicating the importance of the asset will take precedence over the nationality of the buyers.

A new long term takeover regime will change how investors should approach UK assets

The new takeover regime being devised would require UK businesses to declare when a foreign company tries to buy more than 25% of its shares, assets or intellectual property. The plans are significantly more stringent than those drawn up under a similar scheme considered by Theresa May’s government, under which companies would have been expected to notify the government of takeovers voluntarily.

Reporting will only be required for businesses where a takeover would pose a risk that it could give a foreign company or hostile state the power to undermine Britain’s national security through disruption, espionage, or by using “inappropriate leverage.” The significance of this legislation will be determined by how this risk is defined. Legislation planned under Theresa May used an incredibly broad definition, which, if replicated, would allow any secretary of state to intervene in any M&A transaction if they were concerned about the security implication.

The sectors most likely to be affected are civil nuclear, communications, defence, energy and transport, however compulsory reporting of transactions would likely have the effect of slowing the pace of deals across all sectors. Investors, whether they deal with sensitive assets or not, are likely to have to get used to greater government interest in their activities, an increased reporting burden, and potentially greater media scrutiny of their activities as the government makes its investigations public.

Change in the EU brings challenges and renewed opportunity

Countries across Europe are also acting. Margrethe Vestager, EU Competition Commissioner and Executive Vice-President of the European Commission, has encouraged EU states to take action to prevent foreign takeovers. Describing the protection of EU businesses from takeovers as a “top priority,” Vestager has effectively encouraged states to act against any takeovers deemed to be a cause for concern.  While this fear relates primarily to Chinese investors amid concerns about intellectual property and national security, the political unwillingness to single out the Chinese for special restrictions could risk creating significant collateral damage. Plans put forward by the Commission would exclude all state owned buyers, potentially eliminating some of the competition for assets created by the increasing activity of Middle Eastern and Asian funds in Europe.

Poland’s populist government is among those planning changes. Legislation is currently being drawn up to allow regulators to block non-EU companies from taking stakes of more than 10% in businesses deemed to be providing critical infrastructure, goods or services for two years. This more stringent block on foreign investment is in part due to the comparative affordability and availability of Polish businesses. 30 years on from the end of communism in Poland, those who have built successful businesses are beginning to reach retirement age, while a drop in the value of the zloty has also pushed prices lower for foreign buyers.

The issue for investors comes back to Brexit. Much of the proposed legislation would impose additional restrictions on all non-EU countries. Proposals, such as those put forward by the Dutch government, would ensure governments could halt companies from buying EU competitors at inflated prices or undercutting them with artificially low selling prices. The Spanish government, meanwhile, is proposing that non-EEA investments larger than 10% in key domestic assets in the “strategic industries” such as infrastructure, technology and media be authorised by the Spanish government. The European Commission would also have the authority to demand greater transparency in foreign companies’ accounts.

These restrictions will soon apply to the UK, with the true impact likely to be determined by the extent to which the UK chooses to diverge from EU law relating to financial services. It may be possible to negotiate the UK’s exclusion from these additional barriers to investment if the UK and EU agree to a close trading relationship for the financial services sector. This would be unlikely to be completed by the time the UK leaves the transition period on 31 December and negotiations around the full financial services future relationship are likely to take years to complete due to their complexity.

Much of the legislation remains in draft phase across the EU and the UK as politicians continue to prioritise the immediate economic and health challenges and much will depend on whether governments can pursue such ambitious regulatory change in the coming months. If these laws do make it onto statute books, investors willing to deal with the additional bureaucratic burden may find greater choice and potentially lower competition for assets in areas of “national interest.” Regardless of sector, as the size of government increases and its post-Covid appetite for intervention grows, investors will need to adapt to greater government engagement in the future.

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